-----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, M2L4CxEEpMK3mcl21Q4a5YGjNfvMVb/0jj5shOqabwPeC/nNjXlwFiUDUtpRR7JB 2vNz/9q4UVa875I7AcXSiw== 0000950134-96-004480.txt : 19960928 0000950134-96-004480.hdr.sgml : 19960928 ACCESSION NUMBER: 0000950134-96-004480 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19960821 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAFFMARK INC CENTRAL INDEX KEY: 0001017968 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 710788538 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-07513 FILM NUMBER: 96618815 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/A 1 AMENDMENT NO. 1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 1996. REGISTRATION NO. 333-7513 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 1 TO 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. GLENN W. STURM, ESQ. WRIGHT, LINDSEY & JENNINGS NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. 200 WEST CAPITOL, SUITE 2200 400 COLONY SQUARE, SUITE 2200 LITTLE ROCK, ARKANSAS 72201 1201 PEACHTREE STREET, N.E. (501) 371-0808 (404) 817-6000 (501) 376-9442 (FAX) (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. / / 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 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 AUGUST 21, 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. Approximately $15.1 million of the proceeds of the Offering will directly benefit affiliates of the Company and a portion of the indebtedness to be repaid with proceeds of the Offering is guaranteed by affiliates of the Company. See "Certain Transactions -- Organization of the Company." Affiliates of the Company, upon completion of the Offering, will beneficially own approximately 39.4% of the Common Stock of the Company. It is currently anticipated that the initial public offering price will be between $9.00 and $11.00 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 8 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 $2,700,000. (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. LOGO] Stephens Inc. , 1996 4 [INSIDE FRONT PAGE OF PROSPECTUS] The Company has included on this page a map of the United States with eight states highlighted, including Arkansas, Colorado, Georgia, North Carolina, Oklahoma, South Carolina, Tennessee and Virginia. Below the map is a list of such states and a listing of each city in those states in which the Company has offices and identifying such office as Commercial, Specialty Medical or Professional. 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 $10.00 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, healthcare providers, professional and service organizations and governmental agencies, 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 13 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 field employees to over 2,500 clients during a typical week. Since 1993, the Founding Companies have expanded by acquiring six staffing businesses with 19 offices and by opening an additional 32 branch offices. The Company's business is organized into three divisions: Commercial, Specialty Medical, and Professional. The Commercial division provides clerical and light industrial staffing services, and generated approximately 89.9% and 88.2% of the Company's revenues and 92.1% and 91.1% of the Company's cost of services for the year ended December 31, 1995 and the six months ended June 30, 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 7.3% of the Company's revenues and 6.2% and 4.8% of the Company's cost of services for the year ended December 31, 1995 and the six months ended June 30, 1996, respectively. The Professional division provides technical, professional and information technology staffing services and generated approximately 1.8% and 4.5% of the Company's revenues and 1.7% and 4.1% of the Company's cost of services for the year ended December 31, 1995 and the six months ended June 30, 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 six staffing businesses over the past three years. 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 six months 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 10 at December 31, 1995. VOP relationships represented 9.4% and 14.6% of the Company's revenues for the year ended December 31, 1995 and the six months ended June 30, 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 FINANCIAL AND OPERATING DATA StaffMark will acquire, simultaneously with the closing of this Offering, the Founding Companies. Pursuant to the requirements of the Securities and Exchange Commission's Staff Accounting Bulletin No. 97 ("SAB 97"), which was issued and became effective July 31, 1996, Brewer Personnel Services, Inc. ("Brewer") has been designated as the acquirer, for financial reporting purposes, of Prostaff, Maxwell, HRA, First Choice and Blethen (the "Other Founding Companies"). Accordingly, the primary financial information presented below relates to Brewer. For a discussion of the pro forma combined operating results, see the Unaudited Pro Forma Combined Financial Statements of the Company and related notes thereto.
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------- ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: BREWER: Revenues................................ $6,665 $11,159 $12,313 $27,894 $ 43,874 $15,928 $30,556 Cost of services........................ 5,465 9,609 10,063 22,906 35,115 12,969 24,028 ------- ------- ------- -------- -------- ------- ------- Gross profit............................ 1,200 1,550 2,250 4,988 8,759 2,959 6,528 Operating expenses...................... 895 1,156 1,744 3,739 6,395 2,255 5,011 ------- ------- ------- -------- -------- ------- ------- Operating income........................ 305 394 506 1,249 2,364 704 1,517 Interest expense........................ 27 26 54 92 801 32 880 Net income.............................. 279 381 478 1,177 1,587 691 634 PRO FORMA(1): Revenues(2)................................................................... $171,463 $91,430 Operating income(3)........................................................... 7,603 4,286 Net income(3)(4).............................................................. 3,106 2,049 Net income per share.......................................................... 0.36 0.24 Weighted average shares outstanding(5)........................................ 8,565 8,565
AS OF JUNE 30, 1996 --------------------------------- PRO FORMA AS ADJUSTED ACTUAL (1)(6) (1)(7) ------- --------- ----------- BREWER BALANCE SHEET DATA: Working capital....................................................... $ 98 $(18,600) $14,275 Total assets.......................................................... 27,141 48,538 50,092 Long-term debt, including current maturities.......................... 18,626 23,190 -- Stockholders' equity (deficit)........................................ 3,722 (11,334) 36,971
- --------------- (1) See the Unaudited Pro Forma Combined Financial Statements of the Company for pro forma financial information relating to fiscal year 1995 and the six months ended June 30, 1996. (2) Adjusted to reflect the acquisition of the Other Founding Companies, and 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"). (3) Adjusted to reflect the acquisition of the Other Founding Companies, 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"). (4) 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. (5) 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) 1,591,751 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. (6) Gives effect to: (i) the acquisition of the Other Founding Companies at historical cost in accordance with SAB 97; (ii) the combination of the Founding Companies with StaffMark as if such combination had occurred as of June 30, 1996; (iii) 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; (iv) the transfer by the Founding Companies of certain assets to their stockholders in connection with the Mergers; (v) the additional cash to be borrowed to fund the distribution of certain Founding Companies' S Corporation Accumulated Adjustment Accounts; and (vi) the acquisition of SSI by First Choice on July 1, 1996. (7) Adjusted to reflect the sale of 5,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $10.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 5 8 SUMMARY FINANCIAL AND OPERATING DATA The following table represents summary data for each of the Other 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 YEARS ENDED DECEMBER 31,(1) JUNE 30,(2) --------------------------------- -------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- (IN THOUSANDS) PROSTAFF: Revenues........................................... $27,245 $30,608 $34,330 $16,063 $18,920 Cost of services................................... 22,858 25,456 28,234 13,239 15,384 ------- ------- ------- ------- ------- Gross profit....................................... 4,387 5,152 6,096 2,824 3,536 Operating expenses................................. 3,756 4,359 5,559 2,534 2,895 ------- ------- ------- ------- ------- Operating income................................... 631 793 537 290 641 Interest expense................................... 87 29 20 10 29 Net income......................................... 399 522 446 197 623 MAXWELL: Revenues........................................... $16,324 $21,226 $23,093 $11,533 $13,232 Cost of services................................... 11,253 16,004 17,748 8,644 9,892 ------- ------- ------- ------- ------- Gross profit....................................... 5,071 5,222 5,345 2,889 3,340 Operating expenses................................. 3,658 3,928 4,433 2,314 2,553 ------- ------- ------- ------- ------- Operating income................................... 1,413 1,294 912 575 787 Interest expense................................... 28 34 -- -- 22 Net income......................................... 1,296 1,263 920 567 820 HRA: Revenues........................................... $13,333 $16,453 $18,307 $13,174 $16,883 Cost of services................................... 10,985 13,367 14,940 10,745 13,551 ------- ------- ------- ------- ------- Gross profit....................................... 2,348 3,086 3,367 2,429 3,332 Operating expenses................................. 2,141 2,427 3,504 2,418 3,053 ------- ------- ------- ------- ------- Operating income (loss)............................ 207 659 (137) 11 279 Interest expense................................... 84 101 107 70 78 Net income (loss).................................. 85 353 (147) (35) 270 FIRST CHOICE: Revenues........................................... $10,808 $13,007 $13,703 $ 6,640 $ 7,885 Cost of services................................... 8,825 10,573 11,149 5,404 6,386 ------- ------- ------- ------- ------- Gross profit....................................... 1,983 2,434 2,554 1,236 1,499 Operating expenses................................. 1,397 2,519 2,291 1,044 1,185 ------- ------- ------- ------- ------- Operating income (loss)............................ 586 (85) 263 192 314 Interest expense................................... -- 26 20 11 14 Net income......................................... 351 59 243 181 300 BLETHEN: Revenues........................................... $11,198 $11,967 $13,380 $ 6,461 $ 7,721 Cost of services................................... 8,132 8,806 9,917 4,897 5,918 ------- ------- ------- ------- ------- Gross profit....................................... 3,066 3,161 3,463 1,564 1,803 Operating expenses................................. 3,178 2,837 3,044 1,380 1,359 ------- ------- ------- ------- ------- Operating income (loss)............................ (112) 324 419 184 444 Interest expense................................... 135 137 141 69 82 Net income (loss).................................. (91) 141 208 74 303
- --------------- (1) Amounts for HRA are reported for the fiscal years ended September 30. (2) Amounts for HRA are reported for the nine months ended June 30, 1996. 6 9 SUMMARY FINANCIAL AND OPERATING DATA
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ----------------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT SELECTED OPERATING DATA) COMBINED STATEMENT OF INCOME DATA(1)(2): Revenues: Commercial.............................. $36,734 $62,545 $80,499 $108,368 $131,840 $58,008 $79,223 Specialty Medical....................... 3,033 6,266 8,717 11,027 12,242 6,315 6,544 Professional............................ 1,920 1,852 2,005 1,761 2,605 1,234 4,087 ------- ------- ------- -------- -------- ------- ------- Total............................... 41,687 70,663 91,221 121,156 146,687 65,557 89,854 Cost of services.......................... 32,683 55,845 72,117 97,112 117,103 52,428 70,807 ------- ------- ------- -------- -------- ------- ------- Gross profit.............................. 9,004 14,818 19,104 24,044 29,584 13,129 19,047 Operating expenses........................ 7,734 12,272 15,873 19,809 25,226 11,262 15,116 ------- ------- ------- -------- -------- ------- ------- Operating income.......................... $ 1,270 $ 2,546 $ 3,231 $ 4,235 $ 4,358 $ 1,867 $ 3,931 COMBINED OPERATING DATA (AT END OF PERIOD): Branch offices: Commercial.............................. 41 45 65 78 Specialty Medical....................... 4 4 5 5 Professional............................ 2 3 4 6 ------- -------- -------- ------- Total............................... 47 52 74 89 ======= ======== ======== =======
- --------------- (1) StaffMark will acquire, simultaneously with the closing of this Offering, the Founding Companies. Based on the provisions of SAB 97, which was issued and became effective July 31, 1996, Brewer has been designated as the acquirer, for financial reporting purposes, of the Other Founding Companies. The acquisitions of the Other Founding Companies will be accounted for as combinations using historical cost. The summary information presented above represents the combination of the historical financial statements of each of the Founding Companies for all periods presented at historical cost, as if these companies had 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 subsequent to the Mergers. 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 differing tax structures, such as the provision for income taxes and net income, have been omitted. For a discussion of the combined operating results, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Amounts for HRA are reported for the fiscal years ended September 30. 7 10 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 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." 8 11 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 9 12 unemployment benefits are available. Workers' compensation costs may increase as a result of changes in the Company's experience rating or applicable laws. Each Founding Company maintains worker's compensation insurance which will remain in effect after the Mergers. The Company is evaluating various forms of worker's compensation insurance and will implement a new program at such time as, in management's judgment, a more cost-effective program is identified. 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 10 13 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 39.4% of the then outstanding shares of Common Stock (37.0%, 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. Each Founding Company will maintain its existing insurance coverage after the Mergers. The Company is evaluating various insurance options and will implement a new program at such time as, in management's judgment, a more cost-effective program is identified. 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 and have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and, therefore, may not be sold unless registered under the Securities Act or sold pursuant to an exemption from registration, such as the exemption provided by Rule 144. Furthermore, the stockholders who will receive these shares have agreed with the Company not to sell, transfer or otherwise dispose of any of these shares for two years following consummation of this Offering. However, the stockholders who will receive these shares have certain demand registration rights with respect to these shares, beginning 22 months after the closing of this Offering, as well as certain piggyback registration rights with respect to these shares. In addition, existing stockholders of StaffMark will hold, in the aggregate 1,355,000 shares of Common Stock. See "Certain Transactions -- Organization of the Company." None of these shares have been registered under the Securities Act and, accordingly, may not be sold unless registered under the Securities Act or sold pursuant to an exemption from registration, such as the exemption provided by Rule 144. The holders of these shares also have certain piggyback registration rights with respect to these shares and have agreed with StaffMark to the same two-year restriction on dispositions described above. Upon future registration, such restricted shares will be eligible for resale in the public market. 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 would be eligible for sale 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, except as described above. 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 11 14 expiration of the Lockup Period. Substantially all of these options will vest over a period of five years. The Company intends to register the shares issuable upon exercise of options granted under its 1996 Stock Option 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 conjunction with future acquisitions. These shares may be freely tradeable after their issuance, unless the sale of such shares is contractually restricted. The piggyback registration rights described above will not apply to the registration statement to be filed with respect to these 4,000,000 shares. 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 $11.0 million of such amount, representing 22.7% 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 $29.5 million, representing approximately 60.8% 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 $14.5 million of such indebtedness is guaranteed by stockholders of the Founding Companies and approximately $4.1 million of such indebtedness either has or is expected to be incurred by the Founding Companies in connection with S Corporation distributions to stockholders of the Founding Companies prior to the Mergers. 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 $8.60 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." 12 15 THE COMPANY StaffMark, a Delaware corporation, was founded in March 1996 to create a leading provider of diversified staffing services to businesses, healthcare providers, professional and service organizations and governmental agencies, primarily in growth markets 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; (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 is set forth below:
FISCAL 1995 BRANCHES OPERATING AS OF YEAR FISCAL 1995 INCOME JULY 31, COMPANY FOUNDED REVENUE (LOSS)(1) 1996 STATES SERVICES PROVIDED - -------------------------- ----------- ----------- -------- ------------ -------------------------- (IN THOUSANDS) Brewer............. 1988 $43,874 $ 2,364 27 AR, CO, GA, Commercial/Professional TN, VA Prostaff........... 1973 34,330 537 25 AR Commercial/Professional/ Specialty Medical Maxwell............ 1979 23,093 912 9 OK Commercial/Professional/ Specialty Medical HRA................ 1991 18,306 (137) 15 TN Commercial/Professional First Choice....... 1986 13,703 263 8 SC, NC Commercial/Professional Blethen............ 1981 13,380 419 7 NC Commercial/Professional/ Specialty Medical
- --------------- (1) Represents operating income before interest expense, other income or expense, and income taxes. 13 16 The aggregate consideration to be paid by StaffMark in the Mergers is approximately $72.1 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 ------------------------------- COMPANY CASH SHARES VALUE OF SHARES(1) TOTAL - ------------------------------------------------ ------- --------- ------------------ ------- (DOLLARS IN THOUSANDS) Brewer.......................................... $ 2,950 1,935,000 $ 19,350 $22,300 Prostaff........................................ 4,500 1,050,000 10,500 15,000 Maxwell......................................... 2,280 912,000 9,120 11,400 HRA............................................. 2,348 615,175 6,152 8,500 First Choice.................................... 2,075 622,500 6,225 8,300 Blethen......................................... 1,764 483,574 4,836 6,600 ------- --------- -------- ------- Total................................. $15,917 5,618,249 $ 56,183 $72,100 ======= ========= ======== =======
- --------------- (1) Represents the aggregate value of the shares of Common Stock issued as consideration, based upon an assumed initial public offering price of $10.00 per share. In conjunction with the Mergers, certain of the Founding Companies either have made or plan to make distributions totaling approximately $5.3 million to their stockholders, representing their estimated S Corporation Accumulated Adjustment Accounts as of June 30, 1996. Additionally, in conjunction with the Mergers, certain of the Founding Companies either have made or plan to make distributions of certain assets with a net book value of approximately $349,000 as of June 30, 1996. The Company maintains its principal executive offices at 302 East Millsap Road, Fayetteville, Arkansas, 72703. Its telephone number is (501) 973-6000. 14 17 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 $48.5 million ($56.1 million if the Underwriters' over-allotment option is exercised in full), after deducting underwriting discounts and other offering expenses (estimated to be approximately $2.7 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 $11.0 million, representing 22.7% 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 $29.5 million of the net proceeds, as detailed below, will be used to repay indebtedness of the Founding Companies, approximately $14.5 million of which is guaranteed by stockholders of the Founding Companies and approximately $4.1 million of which either has been or is expected to be incurred by the Founding Companies in connection with S Corporation distributions to stockholders of the Founding Companies prior to the Mergers. See "Certain Transactions -- Organization of the Company." The remaining net proceeds of approximately $3.1 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. Pending such uses, the Company plans to invest the net proceeds in short-term, interest bearing, investment grade securities. The Company has received a commitment from a major lending institution for a credit facility of $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." The following is a description of the indebtedness to be retired with the proceeds from the Offering:
WEIGHTED AVERAGE MATURITY INDEBTEDNESS OUTSTANDING AS OF JUNE 30, 1996 RATE(1) DATE(S)(2) ------------------------------------------------------------- AMOUNT -------- ----------------- -------------- (IN THOUSANDS) Brewer Line of Credit(3)..................................... $ 1,546 9.79% 6/98 Brewer Term Loan(4).......................................... 15,458 8.86 10/95 - 6/01 Brewer Note Payable(5)....................................... 3,100 8.00 6/98 - 6/01 Prostaff Line of Credit(6)................................... 1,078 8.63 On demand Maxwell Term Loan(6)......................................... 1,750 8.25 11/96 HRA Line of Credit(3)........................................ 1,020 9.31 1/97 Blethen Line of Credit(3).................................... 1,053 10.79 4/97 Indebtedness less than $500,000.............................. 1,536 8.01 On demand - 3/03 ------- 26,541 ------- PRO FORMA ADJUSTMENTS ------------------------------------------------------------- HRA Line of Credit(7)........................................ 850 9.31 1/97 First Choice Notes Payable(8)................................ 750 7.63 10/96 - 9/99 S Corporation Distributions(9)............................... 1,360 N/A N/A ------- 2,960 ------- ------ Total............................................ $29,501 8.77% ======= ======
- --------------- (1) Represents weighted average interest rate for the six months ended June 30, 1996, except for HRA, which represents the weighted average interest rate for the nine months ended June 30, 1996. Weighted average interest rates for the applicable pro forma adjustments are computed as discussed in notes (7) and (8) below. (2) Represents maturity date and range of maturity dates for indebtedness requiring periodic principal payments. (3) Amounts incurred for working capital requirements and general corporate purposes. (4) Amounts incurred in conjunction with the acquisitions of On Call and Caldwell as disclosed elsewhere in this Prospectus. 15 18 (5) Amount incurred in conjunction with the acquisition of Caldwell as disclosed elsewhere in this Prospectus. (6) Amounts incurred primarily for the distribution of certain Founding Companies' S Corporation Accumulated Adjustment Accounts as disclosed elsewhere in this Prospectus. (7) Amount borrowed on HRA's line of credit in conjunction with the acquisition of Dorothy Johnson's Career Consultants, Inc. ("Career Consultants," which provides permanent placement services) effective July 11, 1996. The amount incurred represents the entire purchase price of Career Consultants. The pro forma effects of this acquisition have been excluded from the unaudited pro forma financial information appearing elsewhere in this Prospectus as amounts are immaterial to the operations and financial position of HRA. For further discussion, see the financial statements of HRA and related notes thereto appearing elsewhere in this Prospectus. (8) Amounts incurred (representing two notes of $375,000 each, bearing interest at 8.25% and 7.00%, respectively) in conjunction with the acquisition of SSI (which provides permanent and temporary placement services of technology professionals) by First Choice effective July 1, 1996. Interest rates are fixed over the terms of the respective notes. The amounts incurred represent the entire purchase price for SSI. For further discussion, see First Choice financial statements and related notes thereto appearing elsewhere in this Prospectus. (9) Represents pro forma adjustment in conjunction with the anticipated distribution of certain Founding Companies' estimated S Corporation Accumulated Adjustment Accounts. The pro forma adjustment is based on the assumption that distributions will be funded with additional borrowings. 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. 16 19 DILUTION The pro forma deficit in net tangible book value of the Company at June 30, 1996 was ($31.1) million or ($4.46) 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 $10.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses, the pro forma net tangible book value of the Company at June 30, 1996 would have been $17.4 million or $1.40 per share, representing an immediate increase in net tangible book value of $5.86 per share to existing stockholders and an immediate dilution of $8.60 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........................... $10.00 Pro forma deficit in net tangible book value before Offering................................................... $(4.46) Increase attributable to the sale of shares offered hereby.... 5.86 ----- Pro forma net tangible book value after Offering................ 1.40 ------ Dilution in net tangible book value to new investors............ $ 8.60 ======
The following table sets forth, on a pro forma basis to give effect to the Mergers as of June 30, 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% $(11,334,000) (26.0)% $ (1.63) New investors......................... 5,500,000 44.1 55,000,000 126.0 10.00 ---------- ----- ------------ ----- Total....................... 12,473,249 100.0% $ 43,666,000 100.0% ========== ===== ============ =====
- --------------- (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." 17 20 CAPITALIZATION The following table sets forth the short-term borrowings and current portion of long-term debt and capitalization at June 30, 1996, of: (i) Brewer; (ii) the Company on a pro forma basis to give effect to the acquisition of the Other Founding Companies and Mergers; and (iii) 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 JUNE 30, 1996 -------------------------------------------- PRO AS BREWER FORMA(1) ADJUSTED(1)(2) --------- ----------- -------------- (IN THOUSANDS, EXCEPT SHARE DATA) Short-term borrowings and current portion of long-term debt................................................. $ 3,968 $ 10,843 $ -- ======= =========== ============ Long-term debt, excluding current portion.............. $16,204 $ 17,393 $ -- ------- ----------- ------------ Stockholders' equity: Preferred Stock(3)................................... -- -- -- Common Stock(3)...................................... -- 70 125 Additional paid-in capital........................... 497 514 37,071 Subscriptions receivable............................. (80) (80) (80) Retained earnings.................................... 3,305 (11,838) (145) ------- ----------- ------------ Total stockholders' equity................... 3,722 (11,334) 36,971 ------- ----------- ------------ Total capitalization.................... $19,926 $ 6,059 $ 36,971 ======= =========== ============
As of June 30, 1996 the par value, shares authorized, issued and outstanding were as follows:
AS OF JUNE 30, 1996 ------------------------------------------ PRO AS BREWER FORMA(1) ADJUSTED(1)(2) ------- ----------- -------------- Preferred Stock: Par value........................................ -- $ .01 $ .01 Shares authorized................................ -- 1,000,000 1,000,000 Shares issued and outstanding.................... -- -- -- Common Stock: Par value........................................ $ .01 $ .01 $ .01 Shares authorized................................ 10,000 26,000,000 26,000,000 Shares issued and outstanding(3)................. 132.5 6,973,249 12,473,249
- --------------- (1) Gives effect to: (i) the acquisition of the Other Founding Companies at historical cost in accordance with SAB 97; (ii) the combination of the Founding Companies with StaffMark as if such combination had occurred as of June 30, 1996; (iii) 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; (iv) the transfer by the Founding Companies of certain assets to their stockholders in connection with the Mergers; (v) the additional cash to be borrowed to fund the distribution of certain Founding Companies' S Corporation Accumulated Adjustment Accounts; and (vi) the acquisition of SSI by First Choice on July 1, 1996. (2) Adjusted to reflect the sale of 5,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $10.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." (3)As Adjusted amount 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." 18 21 SELECTED FINANCIAL AND OPERATING DATA StaffMark will acquire, simultaneously with the closing of this Offering, the Founding Companies. Pursuant to the requirements of SAB 97, which was issued and became effective July 31, 1996, Brewer has been designated, for financial reporting purposes, as the acquirer of the Other Founding Companies. Accordingly, the primary financial information presented below relates to Brewer. For a discussion of the pro forma combined operating results, see the Unaudited Pro Forma Combined Financial Statements of the Company and related notes thereto. The Selected Financial and Operating Data should be read in conjunction with the audited financial statements of Brewer and related notes thereto, the Unaudited Pro Forma Combined Financial Statements of the Company and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------- ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: BREWER: Revenues................................ $6,665 $11,159 $12,313 $27,894 $43,874 $15,928 $30,556 Cost of services........................ 5,465 9,609 10,063 22,906 35,115 12,969 24,028 ------- ------- ------- -------- -------- ------- ------- Gross profit............................ 1,200 1,550 2,250 4,988 8,759 2,959 6,528 Operating expenses: Selling, general and administrative... 797 1,043 1,623 3,483 5,804 2,119 4,445 Depreciation and amortization......... 98 113 121 256 591 136 566 ------- ------- ------- -------- -------- ------- ------- Operating income........................ 305 394 506 1,249 2,364 704 1,517 Interest expense........................ 27 26 54 92 801 32 880 Net Income.............................. 279 381 478 1,177 1,587 691 634 PRO FORMA(1): Revenues(2)................................................................... $171,463 $91,430 Operating income(3)........................................................... 7,603 4,286 Net income(3)(4).............................................................. 3,106 2,049 Net income per share.......................................................... 0.36 0.24 Weighted average shares outstanding(5)........................................ 8,565 8,565
AS OF JUNE 30, 1996 AS OF DECEMBER 31, ----------------------------------- ----------------------------------------------- PRO FORMA AS ADJUSTED 1991 1992 1993 1994 1995 ACTUAL (1)(6) (1)(7) ------ ------ ------ ------ ------- ------- --------- ----------- BREWER BALANCE SHEET DATA: Working capital............... $ 345 $ (324) $ 366 $1,157 $ 1,508 $ 98 $(18,600) $14,275 Total assets.................. 1,050 2,321 2,917 4,054 21,752 27,141 48,538 50,092 Long-term debt, incl. current maturities.................. 209 -- 1,232 224 15,986 18,626 23,190 -- Stockholders' equity (deficit)................... 494 846 1,110 2,110 2,786 3,722 (11,334) 36,971
- --------------- (1) See the Unaudited Pro Forma Combined Financial Statements of the Company for pro forma financial information relating to fiscal year 1995 and the six months ended June 30, 1996. (2) Adjusted to reflect the acquisition of the Other Founding Companies as well as the acquisitions of Caldwell, On Call and SSI. (3) Adjusted to reflect the acquisition of the Other Founding Companies, and the acquisitions of Caldwell, On Call and SSI and the Compensation Differential. (4) 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. (5) 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) 1,591,751 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. (6) Gives effect to: (i) the acquisition of the Other Founding Companies at historical cost in accordance with SAB 97; (ii) the combination of the Founding Companies with StaffMark as if such combination had occurred as of June 30, 1996; (iii) 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; (iv) the transfer by the Founding Companies of certain assets to their stockholders in connection with the Mergers; (v) the additional cash to be borrowed to fund the distribution of certain Founding Companies' S Corporation Accumulated Adjustment Accounts; and (vi) the acquisition of SSI by First Choice on July 1, 1996. (7) Adjusted to reflect the sale of 5,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $10.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 19 22 SELECTED FINANCIAL AND OPERATING DATA The following table represents selected data for each of the Other 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 YEARS ENDED DECEMBER 31,(1) JUNE 30,(2) --------------------------------- -------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- (IN THOUSANDS) PROSTAFF: Revenues........................................... $27,245 $30,608 $34,330 $16,063 $18,920 Cost of services................................... 22,858 25,456 28,234 13,239 15,384 ------- ------- ------- ------- ------- Gross profit....................................... 4,387 5,152 6,096 2,824 3,536 Operating expenses................................. 3,756 4,359 5,559 2,534 2,895 ------- ------- ------- ------- ------- Operating income................................... 631 793 537 290 641 Interest expense................................... 87 29 20 10 29 Net income......................................... 399 522 446 197 623 MAXWELL: Revenues........................................... $16,324 $21,226 $23,093 $11,533 $13,232 Cost of services................................... 11,253 16,004 17,748 8,644 9,892 ------- ------- ------- ------- ------- Gross profit....................................... 5,071 5,222 5,345 2,889 3,340 Operating expenses................................. 3,658 3,928 4,433 2,314 2,553 ------- ------- ------- ------- ------- Operating income................................... 1,413 1,294 912 575 787 Interest expense................................... 28 34 -- -- 22 Net income......................................... 1,296 1,263 920 567 820 HRA: Revenues........................................... $13,333 $16,453 $18,307 $13,174 $16,883 Cost of services................................... 10,985 13,367 14,940 10,745 13,551 ------- ------- ------- ------- ------- Gross profit....................................... 2,348 3,086 3,367 2,429 3,332 Operating expenses................................. 2,141 2,427 3,504 2,418 3,053 ------- ------- ------- ------- ------- Operating income (loss)............................ 207 659 (137) 11 279 Interest expense................................... 84 101 107 70 78 Net income (loss).................................. 85 353 (147) (35) 270 FIRST CHOICE: Revenues........................................... $10,808 $13,007 $13,703 $ 6,640 $ 7,885 Cost of services................................... 8,825 10,573 11,149 5,404 6,386 ------- ------- ------- ------- ------- Gross profit....................................... 1,983 2,434 2,554 1,236 1,499 Operating expenses................................. 1,397 2,519 2,291 1,044 1,185 ------- ------- ------- ------- ------- Operating income (loss)............................ 586 (85) 263 192 314 Interest expense................................... -- 26 20 11 14 Net income......................................... 351 59 243 181 300 BLETHEN: Revenues........................................... $11,198 $11,967 $13,380 $ 6,461 $ 7,721 Cost of services................................... 8,132 8,806 9,917 4,897 5,918 ------- ------- ------- ------- ------- Gross profit....................................... 3,066 3,161 3,463 1,564 1,803 Operating expenses................................. 3,178 2,837 3,044 1,380 1,359 ------- ------- ------- ------- ------- Operating income (loss)............................ (112) 324 419 184 444 Interest expense................................... 135 137 141 69 82 Net income (loss).................................. (91) 141 208 74 303
- --------------- (1) Amounts for HRA are reported for the fiscal years ended September 30. (2) Amounts for HRA are reported for the nine months ended June 30, 1996. 20 23 SELECTED FINANCIAL AND OPERATING DATA
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ----------------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT SELECTED OPERATING DATA) COMBINED STATEMENT OF INCOME DATA(1)(2): Revenues: Commercial............................ $36,734 $62,545 $80,499 $108,368 $131,840 $58,008 $79,223 Specialty Medical..................... 3,033 6,266 8,717 11,027 12,242 6,315 6,544 Professional.......................... 1,920 1,852 2,005 1,761 2,605 1,234 4,087 ------- ------- ------- -------- -------- ------- ------- Total............................. 41,687 70,663 91,221 121,156 146,687 65,557 89,854 Cost of services........................ 32,683 55,845 72,117 97,112 117,103 52,428 70,807 ------- ------- ------- -------- -------- ------- ------- Gross profit............................ 9,004 14,818 19,104 24,044 29,584 13,129 19,047 Operating expenses: Selling, general and administrative... 7,514 11,940 15,358 19,067 24,069 10,857 14,197 Depreciation and amortization......... 220 332 515 742 1,157 405 919 ------- ------- ------- -------- -------- ------- ------- Operating income........................ $ 1,270 $ 2,546 $ 3,231 $ 4,235 $ 4,358 $ 1,867 $ 3,931 COMBINED OPERATING DATA (AT END OF PERIOD): Branch offices: Commercial............................ 41 45 65 78 Specialty Medical..................... 4 4 5 5 Professional.......................... 2 3 4 6 ------- -------- -------- ------- Total............................. 47 52 74 89 ======= ======== ======== ======= COMBINED BALANCE SHEET DATA (AT END OF PERIOD): Working capital......................... $ 2,433 $ 2,159 $ 3,188 $ 4,992 $ 5,324 $ 1,410 Total assets............................ 5,930 10,460 15,088 18,120 37,827 46,073 Long-term debt, including current maturities............................ 1,655 1,927 2,371 862 16,438 21,080 Stockholders' equity.................... 2,095 3,089 5,141 7,624 8,616 7,418
- --------------- (1) StaffMark will acquire, simultaneously with the closing of this Offering, the Founding Companies. Based on the provisions of SAB 97, which was issued and became effective July 31, 1996, Brewer has been designated as the acquirer, for financial reporting purposes, of the Other Founding Companies. The acquisitions of the Other Founding Companies will be accounted for as combinations using historical costs. The summary information presented below represents the combination of the historical financial statements of each of the Founding Companies for all periods presented at historical costs, as if these companies had 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 subsequent to the Mergers. 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 differing tax structures, such as the provision for income taxes and net income, have been omitted. For a discussion of the combined operating results, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Amounts for HRA are reported for the fiscal years ended September 30. The selected financial information shown above as of December 31, 1994 and 1995 and June 30, 1996, and for each of the three years in the period ended December 31, 1995, and for the six months ended June 30, 1996 has been derived from financial statements audited by Arthur Andersen LLP which appear elsewhere in this Prospectus. The selected financial data as of December 31, 1991, 1992 and 1993 and for the years ended December 31, 1991 and 1992, and for the six months ended June 30, 1995 has 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. 21 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the "Selected Financial and Operating Data" and related notes thereto, and each of the Founding Companies' audited financial statements and related notes thereto appearing elsewhere in this Prospectus. INTRODUCTION StaffMark will acquire, simultaneously with the closing of this Offering, the Founding Companies. Pursuant to the requirements of SAB 97, which was issued and became effective July 31, 1996, Brewer has been designated as the acquirer of the other Founding Companies for financial reporting purposes. The information below is intended to discuss the financial condition and results of operations of Brewer, each of the Other Founding Companies and the combined Founding Companies for the first six months of 1996 as compared to the first six months of 1995, fiscal year 1995 as compared to fiscal year 1994, and fiscal year 1994 as compared to fiscal year 1993. 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 six months ended June 30, 1996, reflecting the estimated 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 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. 22 25 RESULTS OF OPERATIONS -- BREWER BREWER RESULTS FOR THE FIRST SIX MONTHS OF 1996 COMPARED TO THE FIRST SIX MONTHS OF 1995 Revenues. Revenues increased $14.6 million, or 91.8%, to $30.6 million for the first six months of 1996 compared to $15.9 million for the first six months 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 $10.2 million and $6.1 million, respectively, of the increase in revenues, which was partially offset by a decrease in Brewer's revenues, exclusive of acquisitions, of approximately $1.7 million. Cost of Services. Cost of services increased $11.1 million, or 85.3%, to $24.0 million for the first six months of 1996 compared to $13.0 million for the first six months of 1995. This increase was primarily attributable to the Caldwell and On Call acquisitions, which accounted for $8.0 million and $5.0 million, respectively, of the increase, which was partially offset by a decrease in Brewer's cost of services, exclusive of acquisitions, of approximately $2.0 million. Gross Profit. Gross profit increased $3.6 million, or 120.6%, to $6.5 million for the first six months of 1996 compared to $3.0 million for the first six months of 1995. This increase was primarily attributable to the acquisitions of Caldwell and On Call. Gross margin increased to 21.4% during the first six months of 1996 compared to 18.6% during the first six months of 1995. This increase was primarily attributable to the acquisition of Caldwell, as well as an increase in Brewer's gross margin resulting from a decrease in the Arkansas state unemployment tax rate. Operating Expenses. Selling, general and administrative expenses ("SG&A") increased $2.3 million, or 109.8%, to $4.4 million for the first six months of 1996 compared to $2.1 million for the first six months of 1995. This increase was primarily attributable to the acquisitions of Caldwell and On Call, which accounted for $1.1 million and $665,000 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 14.5% for the first six months of 1996 compared to 13.3% for the first six months of 1995. Depreciation and amortization expense increased $430,000, or 314.8%, to $566,000 for the first six months of 1996 compared to $136,000 for the first six months 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. Operating Income. Operating income increased $813,000, or 115.5%, to $1.5 million for the first six months of 1996 compared to $704,000 for the first six months of 1995. Operating income as a percentage of revenues increased to 5.0% during the first six months of 1996 compared to 4.4% during the first six months of 1995. Interest Expense. Interest expense increased $848,000 to $880,000 for the first six months of 1996 compared to $32,000 for the first six months of 1995. This increase was primarily attributable to debt incurred to finance the acquisitions of Caldwell and On Call. Net Income. Net income decreased $57,000, or 8.3%, to $634,000 for the first six months of 1996 compared to $691,000 for the first six months of 1995. Net income as a percentage of revenues decreased to 2.1% during the first six months of 1996 compared to 4.3% during the first six months 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. 23 26 Gross Profit. Gross profit increased $3.8 million, or 75.6%, to $8.8 million for 1995 compared to $5.0 million for 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% for 1995 compared to 12.5% for 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 for 1995 compared to $92,000 for 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% for 1995 compared to 4.2% for 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 for 1994 from $10.1 million for 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 for 1994 compared to $2.3 million for 1993. This increase was primarily attributable to the acquisition of Aaron. Gross margin decreased slightly to 17.9% for 1994 compared to 18.3% for 1993 because Aaron had historically lower gross margins than Brewer. Operating Expenses. SG&A increased $1.9 million, or 114.6%, to $3.5 million for 1994 compared to $1.6 million for 1993, which was primarily attributable to the acquisition of Aaron. SG&A as a percentage of revenues decreased to 12.5% for 1994 compared to 13.2% for 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% for 1994 compared to 4.1% for 1993. Interest Expense. Interest expense increased $38,000 to $92,000 for 1994 compared to $54,000 for 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% for 1994 from 3.9% for 1993. LIQUIDITY AND CAPITAL RESOURCES -- BREWER Net cash provided by operating activities was $368,000, $894,000, $1.6 million and $77,000 in 1993, 1994, 1995 and the first six months of 1996, respectively. The net cash provided by operating activities for the periods presented was primarily attributable to net income and changes in operating assets and liabilities. 24 27 Cash used in investing activities was $308,000, $345,000, $12.0 million and $3.4 million in 1993, 1994, 1995 and the first six months of 1996, respectively. Cash used in investing activities in 1993 was primarily attributable to the acquisition of Aaron and routine capital expenditures. Cash used in investing activities in 1994 was primarily attributable to routine capital expenditures. Cash used in investing activities in 1995 and the first six months 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 $3.8 million in 1993, 1994, 1995 and the first six months 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 in 1995 and the first six months 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 $459,000 in 1994, 1995 and the first six months 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 June 30, 1996, Brewer had total debt outstanding of approximately $20.2 million. While there can be no assurance, management of Brewer believes that the funds currently available on hand, funds to be provided by operations and funds available through existing credit facilities will be sufficient to meet Brewer's anticipated needs for working capital and capital expenditures into the foreseeable future. RESULTS OF OPERATIONS -- PROSTAFF PROSTAFF RESULTS FOR THE FIRST SIX MONTHS OF 1996 COMPARED TO THE FIRST SIX MONTHS OF 1995 Revenues. Revenues increased $2.9 million, or 17.8%, to $18.9 million for the first six months of 1996 compared to $16.1 million for the first six months of 1995. The increase in Prostaff's revenues was primarily attributable to the opening of several new branches during 1995 and during the first six months of 1996, a significant increase in business conducted with its largest client and the addition of a new significant client in 1996. Cost of Services. Cost of services increased $2.1 million, or 16.2%, to $15.4 million for the first six months of 1996 compared to $13.2 million for the first six months of 1995. Gross Profit. Gross profit increased $711,000, or 25.2%, to $3.5 million for the first six months of 1996 compared to $2.8 million for the first six months of 1995. Gross margin increased to 18.7% for the first six months of 1996 compared to 17.6% for the first six months of 1995, primarily attributable to a decrease in the Arkansas state unemployment tax rate. Operating Expenses. Operating expenses increased $361,000, or 14.2%, to $2.9 million for the first six months of 1996 compared to $2.5 million for the first six months of 1995. This increase was primarily attributable to the opening of several new branches in 1995 and the hiring of a significant number of new employees, partially offset by a decrease in accrued bonuses to the owners of Prostaff. Operating expenses as a percentage of revenues decreased to 15.3% for the first six months of 1996 compared to 15.8% for the first six months of 1995. This decrease was influenced by a reduction in accrued bonuses to the owners of Prostaff from $344,000 during the first six months of 1995 to $0 for the first six months of 1996. Operating Income. Operating income increased $350,000, or 120.6%, to $641,000 for the first six months of 1996 compared to $291,000 for the first six months of 1995. Operating income as a percentage of revenues increased to 3.4% for the first six months of 1996 compared to 1.8% for the first six months of 1995. 25 28 Net Income. Net income increased $426,000, or 215.6%, to $623,000 for the first six months of 1996 compared to $197,000 for the first six months of 1995. Net income as a percentage of revenues increased to 3.3% for the first six months of 1996 compared to 1.2% for the first six months of 1995. PROSTAFF RESULTS FOR 1995 COMPARED TO 1994 Revenues. Revenues increased $3.7 million, or 12.2%, to $34.3 million for 1995 compared to $30.6 million for 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 for 1995 compared to $25.5 million for 1994. Gross Profit. Gross profit increased $944,000, or 18.3%, to $6.1 million for 1995 compared to $5.2 million for 1994. Gross margin increased to 17.8% for 1995 compared to 16.8% for 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 for 1995 compared to $4.4 million for 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% for 1995 compared to 14.2% for 1994. Operating Income. Operating income decreased $256,000, or 32.3%, to $537,000 for 1995 compared to $793,000 for 1994. Operating income as a percentage of revenues decreased to 1.6% for 1995 compared to 2.6% for 1994. Net Income. Net income decreased $76,000, or 14.5%, to $446,000 for 1995 compared to $522,000 for 1994. Net income as a percentage of revenues decreased to 1.3% for 1995 compared to 1.7% for 1994. PROSTAFF RESULTS FOR 1994 COMPARED TO 1993 Revenues. Revenues increased $3.4 million, or 12.3%, to $30.6 million for 1994 compared to $27.2 million for 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 for 1994 compared to $22.9 million for 1993. Gross Profit. Gross profit increased $766,000, or 17.5%, to $5.2 million for 1994 compared to $4.4 million for 1993. Gross margin increased slightly to 16.8% for 1994 compared to 16.1% for 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 for 1994 compared to $3.8 million for 1993. Operating expenses as a percentage of revenues increased slightly to 14.2% for 1994 compared to 13.8% for 1993. Operating Income. Operating income increased $162,000, or 25.7%, to $793,000 for 1994 compared to $631,000 for 1993. Operating income as a percentage of revenues increased slightly to 2.6% for 1994 compared to 2.3% for 1993. Net Income. Net income increased $123,000, or 30.8%, to $522,000 for 1994 compared to $399,000 for 1993. Net income as a percentage of revenues increased to 1.7% for 1994 compared to 1.5% for 1993. LIQUIDITY AND CAPITAL RESOURCES -- PROSTAFF Net cash provided by operating activities was $781,000, $740,000, $986,000 and $134,000 in 1993, 1994, 1995 and the first six months of 1996, respectively. The 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 $405,000, $293,000, $514,000 and $80,000 in 1993, 1994, 1995 and the first six months of 1996, respectively. Cash used in investing activities in 1995 was primarily for capital 26 29 expenditures associated with the opening of several new branches. Cash used in investing activities for the first six months of 1996 was primarily for capital expenditures, partially offset by cash provided by the sale of certificates of deposit. Cash used in financing activities was $390,000, $261,000, $512,000 and $167,000 in 1993, 1994, 1995 and the first six months of 1996, respectively. The cash used in financing activities in 1995 was the result of additional net payments on the line of credit. The cash used in financing activities in the first six months of 1996 was for distributions made to the owners of Prostaff representing their estimated S Corporation Accumulated Adjustment Account at June 30, 1996, which were funded by significant borrowings 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 $114,000 in 1995 and in the first six months of 1996, respectively. As of June 30, 1996, Prostaff had total debt, including line of credit and current maturities of long-term debt of $1.4 million. Prostaff currently has three revolving credit facilities, with funds available under these facilities totaling approximately $623,000 at June 30, 1996. While there can be no assurance, management of Prostaff believes that the funds currently available on hand, funds to be provided by operations and funds available through existing credit facilities will be sufficient to meet Prostaff's anticipated needs for working capital and capital expenditures into the foreseeable future. RESULTS OF OPERATIONS -- MAXWELL MAXWELL RESULTS FOR THE FIRST SIX MONTHS OF 1996 COMPARED TO THE FIRST SIX MONTHS OF 1995 Revenues. Revenues increased $1.7 million, or 14.7%, to $13.2 million for the first six months of 1996 compared to $11.5 million for the first six months of 1995. This increase was primarily attributable to a significant client contract, which began 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 significant client and the result of 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 in the U.S. Cost of Services. Cost of services increased $1.2 million, or 14.4%, to $9.9 million for the first six months of 1996 compared to $8.6 million for the first six months of 1995. This increase was primarily the result of increased revenues but was partially offset by a reduction in workers' compensation expense of approximately $584,000 due to a reduction in the actuarially determined reserves. This reduction resulted primarily from the use of Maxwell's claims development experience rather than industry development factors which have been used in previous actuarial valuations. The reduction was partially offset by an increase of approximately $100,000 in compensation paid to the Company's foreign-trained therapists resulting from a change in the Company's orientation policy. Gross Profit. Gross profit increased $451,000, or 15.6%, to $3.3 million for the first six months of 1996 compared to $2.9 million for the first six months of 1995. Gross margin increased slightly to 25.2% for the first six months of 1996 compared to 25.0% for the first six months of 1995. Operating Expenses. Operating expenses increased $239,000, or 10.3%, to $2.6 million for the first six months of 1996 compared to $2.3 million for the first six months of 1995. Operating expenses as a percentage of revenues decreased to 19.3% for the first six months of 1996 compared to 20.1% for the first six months of 1995. Operating Income. Operating income increased $212,000, or 37.0%, to $787,000 for the first six months of 1996 compared to $574,000 for the first six months of 1995. Operating income as a percentage of revenues increased to 5.9% for the first six months of 1996 compared to 5.0% for the first six months of 1995. 27 30 Net Income. Net income increased $253,000, or 44.7%, to $820,000 for the first six months of 1996 compared to $567,000 for the first six months of 1995. Net income as a percentage of revenues increased to 6.2% for the first six months of 1996 compared to 4.9% for the first six months 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 for 1995 compared to $5.2 million for 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% for 1995 compared to 18.5% for 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% for 1995 compared to 6.0% for 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 during 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 for 1994 compared to $11.3 million for 1993. This increase was also primarily attributable to the addition of a significant client during 1994. Gross Profit. Gross profit increased $152,000, or 3.0%, to $5.2 million for 1994 compared to $5.1 million for 1993. Gross margin decreased to 24.6% for 1994 compared to 31.1% for 1993. This decrease was a result of 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 for 1994 compared to $1.4 million for 1993. Operating income as a percentage of revenues decreased to 6.1% for 1994 compared to 8.7% for 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% for 1994 compared to 7.9% for 1993. 28 31 LIQUIDITY AND CAPITAL RESOURCES -- MAXWELL Net cash provided by operating activities was $1.4 million, $719,000, $1.9 million and $913,000 in 1993, 1994, 1995 and the first six months 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 $268,000 in 1993, 1994, 1995 and the first six months of 1996, respectively. Cash used in investing activities in 1993, 1994 and 1995 was primarily for additions of property and equipment and purchases of investments. Cash used in investing activities in the first six months of 1996 was primarily for the acquisition of Sumner-Ray and other capital expenditures. Cash used in financing activities was $860,000, $1.0 million, $1.2 million and $1.0 million in 1993, 1994, 1995 and the first six months of 1996, respectively. Cash used in financing activities in 1993, 1994 and 1995 was primarily for dividends paid to stockholders. Cash used in financing activities in the first six months of 1996 was for a significant dividend, which represented the Company's estimated S Corporation Accumulated Adjustment Account. This dividend was partially funded by proceeds from a $1.75 million term loan issued in May 1996. As a result of the foregoing, cash and cash equivalents increased $241,000 in 1993, decreased $510,000 in 1994, increased $485,000 in 1995 and decreased $376,000 in the first six months of 1996, respectively. While there can be no assurance, management of Maxwell believes that the funds currently available on hand, funds to be provided by operations and funds available through existing credit facilities will be sufficient to meet Maxwell's anticipated needs for working capital and capital expenditures into the foreseeable future. RESULTS OF OPERATIONS -- HRA HRA RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1995 Revenues. Revenues increased $3.7 million, or 28.2% to $16.9 million for the nine months ended June 30, 1996 compared to $13.2 million for the nine months ended June 30, 1995. This increase was primarily attributable to the opening of new branches. Cost of Services. Cost of services increased $2.8 million, or 26.1%, to $13.6 million for the nine months ended June 30, 1996 compared to $10.7 million for the nine months ended June 30, 1995. This increase was primarily attributable to the opening of new branches. Gross Profit. Gross profit increased $903,000, or 37.2%, to $3.3 million for the nine months ended June 30, 1996 compared to $2.4 million for the nine months ended June 30, 1995. Gross margin increased to 19.7% for the nine months ended June 30, 1996 compared to 18.4% for the nine months ended June 30, 1995. Operating Expenses. Operating expenses increased $635,000 or 26.3%, to $3.1 million for the nine months ended June 30, 1996 compared to $2.4 million for the nine months ended June 30, 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 nine months ended June 30, 1996. Operating expenses as a percentage of revenues decreased to 18.1% for the nine months ended June 30, 1996 compared to 18.4% for the nine months ended June 30, 1995. Operating Income. Operating income increased $268,000, or 254.8%, to $279,000 for the nine months ended June 30, 1996 compared to $11,000 for the nine months ended June 30, 1995. Operating income as a percentage of revenues increased to 1.7% for the nine months ended June 30, 1996 compared to 0.1% for the nine months ended June 30, 1995. Interest and Other, Net. Interest and other increased $238,000 to $244,000 of income for the nine months ended June 30, 1996 compared to $6,000 of income for the nine months ended June 30, 1995. This increase was principally related to a legal settlement HRA received from a professional firm that had previously represented HRA in certain actions related to workers' compensation insurance. 29 32 Net Income (Loss). Net income increased $305,000 from a $35,000 net loss for the nine months ended June 30, 1995 to a net income of $270,000 for the nine months ended June 30, 1996. HRA RESULTS FOR 1995 COMPARED TO 1994 Revenues. Revenues increased $1.8 million, or 11.3%, to $18.3 million for 1995 compared to $16.5 million for 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 for 1995 compared to $13.4 million for 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 for 1995 compared to $3.1 million for 1994. Gross margin decreased to 18.4% for 1995 compared to 18.8% for 1994. Operating Expenses. Operating expenses increased $1.1 million, or 44.4%, to $3.5 million for 1995 compared to $2.4 million for 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% for 1995 compared to 14.8% for 1994. Operating Income (Loss). Operating income decreased $796,000 to an operating loss of $137,000 for 1995 compared to operating income of $659,000 for 1994. Net Income (Loss). Net income decreased $500,000 to a net loss of $147,000 for 1995 compared to net income of $353,000 for 1994. Net income as a percentage of revenues decreased to (0.8)% for 1995 compared to 2.1% for 1994. HRA RESULTS FOR 1994 COMPARED TO 1993 Revenues. Revenues increased $3.1 million, or 23.4%, to $16.5 million for 1994 compared to $13.3 million for 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 for 1994 compared to $11.0 million for 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 for 1994 compared to $2.3 million for 1993. Gross margin increased to 18.8% for 1994 compared to 17.6% for 1993. Operating Expenses. Operating expenses increased $286,000, or 13.3%, to $2.4 million for 1994 compared to $2.1 million for 1993. Operating expenses as a percentage of revenues decreased to 14.8% for 1994 compared to 16.1% for 1993. Operating Income. Operating income increased $452,000, or 219.0%, to $659,000 for 1994 compared to $207,000 for 1993. Operating income as a percentage of revenues increased to 4.0% for 1994 compared to 1.5% for 1993. Net Income. Net income increased $268,000 to $353,000 for 1994 compared to $85,000 for 1993. Net income as a percentage of revenues increased to 2.1% for 1994 compared to 0.6% for 1993. LIQUIDITY AND CAPITAL RESOURCES -- HRA Net cash provided by (used in) operating activities was $101,000, $98,000, $89,000 and ($14,000) in 1993, 1994, 1995 and the nine months ended June 30, 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). 30 33 Net cash used in investing activities was $41,000, $40,000, $152,000 and $135,000 in 1993, 1994, 1995 and the nine months ended June 30, 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, $68,000, ($146,000) and $287,000 in 1993, 1994, 1995 and the nine months ended June 30, 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. Cash provided by financing activities for the nine months ended June 30, 1996 consisted primarily of net borrowings under the line of credit. As a result of the foregoing, cash and cash equivalents increased $388,000, $126,000 and $138,000 in 1993, 1994, and the nine months ended June 30, 1996, respectively, and decreased $209,000 in 1995. HRA is obligated under certain compensation and non-compete agreements 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 the funds currently available on hand, funds to be provided by operations and funds available through existing credit facilities will be sufficient to meet HRA's anticipated needs for working capital and capital expenditures into the foreseeable future. RESULTS OF OPERATIONS -- FIRST CHOICE FIRST CHOICE RESULTS FOR THE FIRST SIX MONTHS OF 1996 COMPARED TO THE FIRST SIX MONTHS OF 1995 Revenues. Revenues increased $1.2 million, or 18.7%, to $7.9 million for the first six months of 1996 compared to $6.6 million for the first six months of 1995. This increase was primarily attributable to the opening of a new branch location during the first quarter of 1996. Cost of Services. Cost of services increased $982,000, or 18.2%, to $6.4 million for the first six months of 1996 compared to $5.4 million for the first six months of 1995. This increase, which corresponds to the increase in revenues, was primarily attributable to an increase in wages for temporary personnel which was partially offset by a decrease in workers' compensation expense. Gross Profit. Gross profit increased $262,000, or 21.2%, to $1.5 million for the first six months of 1996 compared to $1.2 million for the first six months of 1995. Gross margin increased slightly to 19.0% for the first six months of 1996 compared to 18.6% for the first six months of 1995. Operating Expenses. Operating expenses increased $140,000, or 13.4%, to $1.2 million for the first six months of 1996 compared to $1.0 million for the first six months of 1995. This increase is primarily attributable to an increase in recruiting and testing expenses, communication costs and occupancy costs. These increases were partially offset by decreases in training costs. Operating expenses as a percentage of revenues decreased slightly to 15.0% for the first six months of 1996 compared to 15.7% for the first six months of 1995. Operating Income. Operating income increased $122,000, or 63.3%, to $314,000 for the first six months of 1996 compared to $192,000 for the first six months of 1995. Operating income as percentage of revenues increased to 4.0% for the first six months of 1996 compared to 2.9% for the first six months of 1995. Net Income. Net income increased $119,000, or 65.8%, to $301,000 for the first six months of 1996 compared to $181,000 for the first six months of 1995. Net income as a percentage of revenues increased 3.8% for the first six months of 1996 compared to 2.7% for the first six months of 1995. FIRST CHOICE RESULTS FOR 1995 COMPARED TO 1994 Revenues. Revenues increased $696,000, or 5.4%, to $13.7 million for 1995 compared to $13.0 million for 1994. This increase was attributable to the opening of a new branch location as well as an overall increase in demand for temporary services. This growth was partially offset by the loss of three significant customers. 31 34 Cost of Services. Cost of services increased $576,000, or 5.4%, to $11.1 million for 1995 compared to $10.6 million for 1994. This increase, which corresponds to the increase in revenues, was primarily attributable to increases in both wages for temporary personnel and workers' compensation expense. Gross Profit. Gross profit increased $120,000, or 4.9%, to $2.6 million for 1995 compared to $2.4 million for 1994. Gross margin remained steady, however, at 18.6% for 1995 compared to 18.7% for 1994. Operating Expenses. Operating expenses decreased $228,000, or 9.0%, to $2.3 million for 1995 compared to $2.5 million for 1994. This decrease was primarily attributable to a $680,000 decrease in compensation to First Choice's president and majority stockholder. 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% for 1995 compared to 19.4% for 1994. Operating Income (Loss). Operating income increased $348,000 to $263,000 for 1995 compared to an operating loss of $85,000 for 1994. Net Income. Net income increased $184,000 to $243,000 for 1995 compared to $59,000 for 1994. Net income as a percentage of revenues increased to 1.8% for 1995 compared to 0.5% for 1994. FIRST CHOICE RESULTS FOR 1994 COMPARED TO 1993 Revenues. Revenues increased $2.2 million, or 20.3%, to $13.0 million for 1994 compared to $10.8 million for 1993. This increase was primarily attributable to a significant increase in First Choice's customer base as a result of an overall increase in demand for temporary services. Cost of Services. Cost of services increased $1.7 million, or 19.8%, to $10.6 million for 1994 compared to $8.8 million for 1993. This increase, which corresponds to the increase in revenues, was primarily attributable to increases in wages for temporary personnel and workers' compensation expense. Gross Profit. Gross profit increased $451,000, or 22.7%, to $2.4 million for 1994 compared to $2.0 million for 1993. Gross margin increased to 18.7% for 1994 compared to 18.3% for 1993. Operating Expenses. Operating expenses increased $1.1 million, or 80.4%, to $2.5 million for 1994 compared to $1.4 million for 1993. This increase was primarily attributable to a $657,000 increase in compensation to First Choice's president and majority stockholder. Operating expenses as a percentage of revenues increased to 19.4% for 1994 compared to 12.9% for 1993. Operating Income (Loss). First Choice generated an operating loss of $85,000 for 1994 compared to operating income generated for 1993 of $586,000. Net Income. Net income decreased $292,000 to $59,000 for 1994 compared to $351,000 for 1993. Net income as a percentage of revenues decreased to 0.5% for 1994 compared to 3.2% for 1993. LIQUIDITY AND CAPITAL RESOURCES -- FIRST CHOICE Net cash provided by (used in) operating activities was $208,000, $46,000, $108,000 and ($165,000) in 1993, 1994, 1995 and the first six months 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. Net cash used in investing activities was $54,000, $120,000, $164,000 and $101,000 in 1993, 1994, 1995 and the first six months 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 $10,000 in 1993, 1994, 1995 and the first six months 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 stockholder and principal payments on such instruments. 32 35 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 $256,000 in the first six months of 1996. As of June 30, 1996, First Choice had total debt of $390,000. While there can be no assurance, management of First Choice believes that the funds currently available on hand, funds to be provided by operations and funds available through existing credit facilities will be sufficient to meet First Choice's anticipated needs for working capital and capital expenditures into the foreseeable future. RESULTS OF OPERATIONS -- BLETHEN BLETHEN RESULTS FOR THE FIRST SIX MONTHS OF 1996 COMPARED TO THE FIRST SIX MONTHS OF 1995 Revenues. Revenues increased $1.3 million, or 19.5%, to $7.7 million for the first six months of 1996 compared to $6.5 million for the first six months of 1995, primarily due to increased demand for clinical trial support services. Cost of Services. Cost of services increased $1.0 million, or 20.9%, to $5.9 million for the first six months of 1996 compared to $4.9 million for the first six months of 1995. This increase, which corresponds to the increase in clinical trial support services revenues, was primarily attributable to increases in wages for temporary personnel. Gross Profit. Gross profit increased $239,000, or 15.3%, to $1.8 million for the first six months of 1996 compared to $1.6 million for the first six months of 1995. Gross margin decreased to 23.3% during the first six months of 1996 compared to 24.2% during the first six months of 1995. Operating Expenses. Operating expenses decreased $22,000, or 1.6%, for the first six months of 1996 compared to the first six months of 1995. Operating expenses as a percentage of revenues decreased to 17.6% for the first six months of 1996 compared to 21.4% for the first six months of 1995. Operating Income. Operating income increased $261,000, or 142.1%, to $444,000 for the first six months of 1996 compared to $184,000 for the first six months of 1995. Operating income as a percentage of revenues increased to 5.8% during the first six months of 1996 compared to 2.8% for the first six months of 1995. Net Income. Net income increased $228,000, or 307.3%, to $303,000 for the first six months of 1996 compared to $74,000 for the first six months of 1995. Net income as a percentage of revenues increased to 3.9% for the first six months of 1996 compared to 1.2% for the first six months of 1995. BLETHEN RESULTS FOR 1995 COMPARED TO 1994 Revenues. Revenues increased $1.4 million, or 11.8%, to $13.4 million for 1995 compared to $12.0 million for 1994. This increase was primarily attributable to the opening of a new branch location in 1995. Cost of Services. Cost of services increased $1.1 million, or 12.6%, to $9.9 million for 1995 compared to $8.8 million for 1994. This increase, which corresponds to the increase in revenues, was primarily attributable to increases in wages for temporary personnel. Gross Profit. Gross profit increased $302,000, or 9.6%, to $3.5 million for 1995 compared to $3.2 million for 1994. Gross margin decreased to 25.9% for 1995 compared to 26.4% for 1994. Operating Expenses. Operating expenses increased $207,000, or 7.3%, to $3.0 million for 1995 compared to $2.8 million for 1994. Operating expenses as a percentage of revenues decreased to 22.7% for 1995 compared to 23.7% for 1994. Operating Income. Operating income increased $95,000, or 29.3%, to $419,000 for 1995 compared to $324,000 for 1994. Operating income as a percentage of revenues increased to 3.1% for 1995 compared to 2.7% for 1994. 33 36 Net Income. Net income increased 48.2% to $208,000, or 1.6% of revenues for 1995 compared to $141,000, or 1.2% of revenues for 1994. BLETHEN RESULTS FOR 1994 COMPARED TO 1993 Revenues. Revenues increased $769,000, or 6.9%, to $12.0 million for 1994 compared to $11.2 million for 1993. This increase was primarily attributable to the opening of a new branch location in 1994. Cost of Services. Cost of services increased $674,000, or 8.3%, to $8.8 million for 1994 compared to $8.1 million for 1993. This increase, which corresponds to the increase in revenues, was primarily attributable to increases in wages for temporary personnel. Gross Profit. Gross profit increased $95,000, or 3.1%, to $3.2 million for 1994 compared to $3.1 million for 1993. Gross margin decreased to 26.4% for 1994 compared to 27.4% for 1993. Operating Expenses. Operating expenses decreased $341,000, or 10.7%, to $2.8 million for 1994 compared to $3.2 million for 1993. Operating expenses as a percentage of revenues decreased to 23.7% for 1994 compared to 28.4% for 1993. The decrease was primarily attributable to higher levels of expenses in 1993 related to growth of the business coupled with 1993 being the final year of a $50,000 payment required under a noncompete agreement. Operating Income (Loss). Operating income increased $436,000 to $324,000 for 1994 compared to a loss of $112,000 for 1993. Net Income (Loss). Net income increased $232,000 to $141,000 for 1994 compared to a loss of $91,000 for 1993. LIQUIDITY AND CAPITAL RESOURCES -- BLETHEN Net cash provided by operating activities was $67,000, $218,000, $100,000 and $207,000 in 1993, 1994, 1995 and the first six months 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 $58,000 in 1993, 1994, 1995 and the first six months of 1996, respectively. Cash used in investing activities for all periods presented was primarily for capital expenditures related to the opening of new branches. Net cash used in financing activities was $129,000, $61,000 and $74,000 in 1994, 1995 and the first six months of 1996, respectively. Cash used in financing activities during the first six months of 1996 was primarily for payments on capital lease obligations and payments to stockholders. As a result of the foregoing, cash and cash equivalents decreased $64,000 in 1993, increased $17,000 in 1994, and increased $13,000 and $75,000 in 1995 and in the first six months of 1996, respectively. As of June 30, 1996, Blethen had total debt of $1.2 million. While there can be no assurance, management of Blethen believes that the funds currently available on hand, funds to be provided by operations and funds available through existing credit facilities will be sufficient to meet Blethen's anticipated needs for working capital and capital expenditures into the foreseeable future. 34 37 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." 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:
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------- --------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Revenues: Commercial............................. 88.2% 89.4% 89.9% 88.5% 88.2% Specialty Medical...................... 9.6 9.1 8.3 9.6 7.3 Professional........................... 2.2 1.5 1.8 1.9 4.5 ----- ----- ----- ----- ----- 100.0 100.0 100.0 100.0 100.0 Cost of services......................... 79.1 80.2 79.8 80.0 78.8 ----- ----- ----- ----- ----- Gross profit margin...................... 20.9 19.8 20.2 20.0 21.2 Operating expenses: Selling, general and administrative.... 16.8 15.7 16.4 16.6 15.8 Depreciation and amortization.......... 0.6 0.6 0.8 0.6 1.0 ----- ----- ----- ----- ----- Operating income......................... 3.5% 3.5% 3.0% 2.8% 4.4% ===== ===== ===== ===== =====
COMBINED RESULTS FOR THE FIRST SIX MONTHS OF 1996 COMPARED TO THE FIRST SIX MONTHS OF 1995 Revenues. Revenues increased $24.3 million, or 37.1%, to $89.9 million for the first six months of 1996 compared to $65.6 million for the first six months of 1995. This increase was largely attributable to: (i) an increase in Brewer's revenues of $14.6 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 $2.9 million, primarily due to the opening of new branches and an increase in business conducted with a significant client; and (iii) an increase in HRA's revenues of $2.6 million, primarily attributable to the opening of several new branches. Also contributing to the increase in revenues was an increase in Maxwell's, Blethen's and First Choice's revenues of $1.7 million, $1.3 million and $1.2 million, respectively. Cost of Services. Cost of services increased $18.4 million, or 35.1%, to $70.8 million for the first six months of 1996 compared to $52.4 million for the first six months of 1995. This increase was primarily attributable to: (i) an increase in Brewer's cost of services of $11.1 million, largely due to the acquisitions of Caldwell and On Call; (ii) an increase in Prostaff's cost of services of $2.1 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 cost of services of $1.9 million, 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 $1.2 million, $1.0 million and $982,000, respectively. Gross Profit. Gross profit increased $5.9 million, or 45.0%, to $19.0 million for the first six months of 1996 compared to $13.1 million for the first six months of 1995. Gross margin increased to 21.2% during the first six months of 1996 compared to 20.0% during the first six months 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. SG&A increased $3.3 million, or 30.8%, to $14.2 million for the first six months of 1996 compared to $10.9 million for the first six months 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 $2.3 million, primarily attributable to the acquisitions of Caldwell and On Call. SG&A as a percentage of revenues decreased to 15.8% for the first six months of 1996 compared to 16.6% for the first six 35 38 months of 1995. Depreciation and amortization expense increased $513,000, or 126.8%, to $918,000 for the first six months of 1996 compared to $405,000 for the first six months of 1995. This increase was primarily attributable to an increase in Brewer's depreciation and amortization of $430,000, largely due to increased amortization of intangibles, which resulted from the acquisitions of Caldwell and On Call. Operating Income. Operating income increased $2.1 million, or 110.5%, to $3.9 million for the first six months of 1996 compared to $1.9 million for the first six months of 1995. Operating income as a percentage of revenues increased to 4.4% for the first six months of 1996 compared to 2.8% for the first six months 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 for 1995 compared to $24.0 million for 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% for 1995 compared to 15.7% for 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 for 1994 compared to $72.1 million for 1993. This increase was attributable to: (i) an increase in Brewer's cost of services of 36 39 $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 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 for 1994 compared to $19.1 million for 1993. Gross margin decreased to 19.8% for 1994 compared to 20.9% for 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% for 1994 compared to 16.8% for 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% for 1994 and 1993. LIQUIDITY AND CAPITAL RESOURCES -- COMBINED Net cash provided by combined operating activities was $2.9 million, $2.7 million, $4.8 million and $1.4 million in 1993, 1994, 1995 and the first six months 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 used in combined investing activities was $1.2 million, $985,000, $13.0 million and $4.0 million in 1993, 1994, 1995 and the first six months of 1996, respectively. Cash used in combined investing activities in 1993 was primarily attributable to the acquisition of Aaron by Brewer and significant capital expenditures. 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 in 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 six months 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 $2.9 million in 1993, 1994, 1995 and the first six months 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 six months 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, $22,000, $534,000 and $252,000 in 1993, 1994, 1995 and the first six months of 1996, respectively. As of June 30, 1996, the Company had total borrowings outstanding of $5.0 million on various lines of credit facilities. In addition, the Company had total long-term debt outstanding, including current maturities, of approximately $21.1 million as of June 30, 1996. The Company plans to repay all indebtedness with proceeds from the Offering. In conjunction with the Mergers, certain of the Founding Companies either have made or plan to make cash distributions to their stockholders which represent the companies' estimated S Corporation Accumulated Adjustment Accounts. Distributions subsequent to June 30, 1996 are estimated to total approximately $1.4 million, as follows: (i) Brewer, $300,000; (ii) Blethen, $270,000; and (iii) First Choice, $790,000. 37 40 During the first six months of 1996, certain of the Founding Companies distributed all or a portion of their estimated S Corporation Accumulated Adjustment Account, as follows: (i) Prostaff, $1.3 million; and (ii) Maxwell, $2.6 million. These distributions either were or will be funded with additional debt, which the Company plans to repay with proceeds from the Offering. See "Certain Transactions." 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 $3.1 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 commitment from a major lending institution for a credit facility of $50.0 million to be used for working capital and other general corporate purposes, including future acquisitions. The commitment includes a $20.0 million revolving credit facility and a $30.0 million acquisition facility. The maturity of the facility will be five years and interest will be computed at the Company's option at either LIBOR or the bank's prime rate and incrementally adjusted based on the Company's operating leverage ratios. The credit facility will be secured by all assets of the Company and a pledge of 100% of the stock of all subsidiaries. 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 Founding Companies believes that the funds currently available on hand, funds to be provided by operations, and funds available through the existing credit facilities, coupled with management's assessment of the Founding Companies' borrowing capacity, will be sufficient to meet the Founding Companies' anticipated needs for working capital, capital expenditures and future acquisitions into the foreseeable future. 38 41 BUSINESS StaffMark was founded in March 1996 to create a leading provider of diversified staffing services to businesses, healthcare providers, professional and service organizations and governmental agencies, primarily in growth markets in the southeastern and southwestern United States. 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 13 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 field employees to over 2,500 clients during a typical week. Since 1993, the Founding Companies have expanded by acquiring six staffing businesses with 19 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 89.9% and 88.2% of the Company's revenues for the year ended December 31, 1995 and the six months ended June 30, 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 7.3% of the Company's revenues for the year ended December 31, 1995 and the six months ended June 30, 1996, respectively. The Professional division provides technical, professional and information technology staffing services and generated approximately 1.8% and 4.5% of the Company's revenues for the year ended December 31, 1995 and the six months ended June 30, 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. 39 42 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. 40 43 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 six staffing businesses over the past three years 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............... 7/96 SSI NC Professional 1 1,200 HRA........................ 7/96 Career TN Professional 1 1,000 Consultants
- --------------- (1) Represents approximate revenues for fiscal year prior to acquisition. 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 commitment from a major lending institution to provide the Company with a credit facility of $50.0 million, some or all of which could be used in connection with future acquisitions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Combined." 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 six months 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 10 at December 31, 1995. VOP relationships represented 9.4% and 14.6% of the Company's revenues for the year ended December 31, 1995 and the six months ended June 30, 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. 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 41 44 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. 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 89.9% and 88.2% of the Company's revenues for the year ended December 31, 1995 and the six months ended June 30, 1996, respectively, provides personnel to clients with traditional clerical and light industrial needs. 42 45 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. Specialty Medical Division. The Company's Specialty Medical division accounted for 8.3% and 7.3% of the Company's revenues for the year ended December 31, 1995 and the six months ended June 30, 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. Professional Division. The Company's Professional division provides personnel for technical, information technology, legal and accounting services and accounted for 1.8% and 4.5% of the Company's revenues for the year ended December 31, 1995 and the six months ended June 30, 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. 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, as of the dates indicated:
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31, 1993 1994 1995 1996 ------------ ------------ ------------ ------------- Commercial....................... 41 45 65 78 Specialty Medical................ 4 4 5 5 Professional..................... 2 3 4 8 --- --- --- --- Total branch offices........... 47 52 74 91 === === === ===
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. 43 46 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 field employees to more than 2,500 clients during a typical week. As of June 30, 1996, the Company employed approximately 500 internal staff. None of the Company's employees, including its field employees, are represented by a collective bargaining agreement. The Company believes its employee relations are good. Hourly wages for the Company's field 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 field 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 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 44 47 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 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 45 48 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 -- Lease of Facilities." 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 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 46 49 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 the full $718,000 related to these disputed amounts, including accrued interest, during the fiscal years for 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. 47 50 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 Terry C. Bellora..................... 50 Chief Financial Officer Ted Feldman.......................... 43 Chief Operating Officer Robert H. Janes III.................. 30 Executive Vice President -- 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.(2).............. 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(2).................. 53 General Manager -- Oklahoma Region William J. Lynch..................... 53 Director R. Clayton McWhorter................. 62 Director
- --------------- (1) Jerry T. Brewer is the father of Clete T. Brewer. (2) John H. Maxwell, Jr. is the husband of Mary Sue Maxwell. 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. Terry C. Bellora became the Chief Financial Officer of StaffMark in August 1996. Prior to joining StaffMark, Mr. Bellora served as Chief Financial Officer of Pace Industries, Inc. from 1986 to August 1996. Mr. Bellora served as a director of Pace from 1988 to 1993 and as an advisory director of Pace from 1993 to 1996. Mr. Bellora is a Certified Public Accountant and was previously the audit partner for Gaddy & Co., Certified Public Accountants. 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. 48 51 Robert H. Janes III co-founded StaffMark in March 1996 and has served since then as its Executive Vice President -- Mergers and Acquisitions. 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 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. R. Clayton McWhorter will become a director of the Company upon consummation of this Offering. Mr. McWhorter is a distinguished professor of entrepreneurship at the Jack C. Massey Graduate School of Business at Belmont University. Mr. McWhorter is a member of the Board of Directors of Columbia/HCA Healthcare and served as Chairman of the Board from April 1995 to May 1996. Mr. McWhorter was Chairman and Chief Executive Officer of Healthtrust, Inc. from 1987 to April 1995 and was President of Healthtrust from 1991 to April 1995. Mr. McWhorter served as President and Chief Operating Officer of Hospital Corporation of America (HCA's predecessor) from 1985 to 1987, and as a Director of Hospital Corporation of America from 1983 to 1987. Mr. McWhorter is a director of SunTrust Bank in Nashville and Ingram Industries, Inc. and is a member of the Board of the Foundation for State Legislatures. The number of directors on the Board of Directors is currently fixed at nine. Directors of the Company are elected at the annual meeting of stockholders. Officers of the Company are appointed at the first meeting 49 52 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 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, Terry C. Bellora -- $150,000, Ted Feldman -- $145,000, W. David Bartholomew -- $125,000, Steven E. Schulte -- $125,000 (collectively, the "named executive officers"). Messrs. Brewer, Feldman, Bartholomew and Schulte will enter into employment agreements 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 for Messrs. Brewer, Feldman, Bartholomew and Schulte will provide 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 will contain a covenant not to compete with the Company for a period of two years immediately following the termination of his employment. Mr. Bellora has entered into an employment agreement with the Company providing for an annual base salary, a bonus to be determined annually pursuant to an incentive bonus plan to be established by the Company and options to purchase 150,000 shares of Common Stock at the initial public offering price, exercisable over a period of five years. The employment agreement is for a term of five years. The agreement provides for the payment of two years' salary in the event of termination without cause. In the event of a change in control of the Company, he may elect to terminate his employment and receive the amount he would receive pursuant to a termination without cause. Mr. Bellora's employment agreement contains a covenant not to compete with the Company for a period equivalent to the longer of two years immediately following termination of employment or, in the case of a termination by the Company without cause in the 50 53 absence of a change in control, for a period of one year following termination of employment. In the event of a change in control without 15 days notice, such non-competition provisions would not apply. 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 ("NQSOs"). 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 initial non-employee directors), a non-employee director will receive an NQSO 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. 51 54 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 Common Stock upon completion of this Offering at the initial public offering price. In addition and in accordance with the Mergers, options to purchase an aggregate of one share of Brewer's common stock 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 and Mr. Bellora, 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. 52 55 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........................................................ 1,067,954 8.5 Terry C. Bellora(2).................................................... 25,000 * Chad J. Brewer(3)...................................................... 680,022 5.4 Ted Feldman............................................................ 302,611 2.3 W. David Bartholomew(4)................................................ 282,437 2.3 Steven E. Schulte(5)................................................... 455,925 3.7 John H. Maxwell, Jr.(6)................................................ 719,623 5.8 Mary Sue Maxwell(7).................................................... 719,623 5.8 Janice Blethen(8)...................................................... 476,478 3.8 William T. Gregory..................................................... 435,750 3.5 William J. Lynch(9).................................................... 139,375 1.1 R. Clayton McWhorter(10)............................................... 3,333 * All directors and executive officers as a group (13 persons)........... 4,930,065 39.4
- --------------- * Less than 1%. (1) Includes 225,000 shares held by Mr. Brewer's spouse, as to which Mr. Brewer disclaims beneficial ownership. (2) Includes 25,000 shares subject to options which are exercisable within 60 days of the Offering. (3) Includes 66,044 shares held by the Chad Brewer Irrevocable Trust for the benefit of Chad Brewer and for which Chad Brewer is the trustee. Chad J. Brewer is the son of Jerry T. Brewer and the brother of Clete T. Brewer. (4) These shares are held by Bartfund I Limited Partnership, of which Mr. Bartholomew is the general partner. (5) Includes 437,025 shares held by the Steven E. Schulte Revocable Trust for which Mr. Schulte is a trustee. (6) 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. (7) 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. (8) Includes 71,905 shares held by Blethen Family Investments Limited Partnership, the general partner of which is a corporation controlled by Ms. Blethen. (9) Includes 136,042 shares held by Capstone Partners LLC, of which Mr. Lynch is a manager and 3,333 shares subject to options which are exercisable within 60 days of the Offering. (10) Includes 3,333 shares subject to options which are exercisable within 60 days of the Offering. 53 56 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 June 30, 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 54 57 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. 55 58 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 $72.1 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 $4.1 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 ------------------------------- COMPANY CASH SHARES VALUE OF SHARES(1) TOTAL - ------------------------------------------------ ------- --------- ------------------ ------- (DOLLARS IN THOUSANDS) Brewer.......................................... $ 2,950 1,935,000 $ 19,350 $22,300 Prostaff........................................ 4,500 1,050,000 10,500 15,000 Maxwell......................................... 2,280 912,000 9,120 11,400 HRA............................................. 2,348 615,175 6,152 8,500 First Choice.................................... 2,075 622,500 6,225 8,300 Blethen......................................... 1,764 483,574 4,836 6,600 ------- --------- ------- ------- Total...................................... $15,917 5,618,249 $ 56,183 $72,100 ======= ========= ======= =======
- --------------- (1) Represents the aggregate value of the shares of Common Stock issued as consideration, based upon an assumed initial public offering price of $10.00 per share. 56 59 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 Chad J. Brewer.................................... 600 361,000 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................................... $11,027 4,152,756 ======= =========
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 $29.5 million of indebtedness of the Founding Companies with certain of the net proceeds of this Offering, of which approximately $14.5 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; Chad J. Brewer -- approximately $3.0 million; Janice Blethen -- approximately $1.1 million; Steven E. Schulte -- approximately $1.3 million; Ted Feldman -- approximately $510,000; W. David Bartholomew -- approximately $510,000; John H. Maxwell, Jr. -- approximately $1.8 million; Mary Sue Maxwell -- approximately $1.8 million; and William T. Gregory -- approximately $250,000. In each case, such person was either a direct obligor or a guarantor of such indebtedness. See "Use of Proceeds." Further, approximately $4.1 million of such indebtedness either has been or is expected to be incurred by the Founding Companies in connection with S Corporation distributions to the stockholders of the Founding Companies prior to the Mergers. 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 the father of Clete T. Brewer and Chad J. Brewer and Kay Brewer is the mother of Clete T. Brewer and Chad J. Brewer 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 new and larger building to Brewer which will become the Company's headquarters. The total lease payments to Brewer Investments for the six months ended June 30, 1996 were $105,000. The annual rent for the building is $225,000 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 57 60 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 $61,100, $73,761 and $114,180 for fiscal years 1993, 1994 and 1995, respectively, and approximately $62,550 for the six months ended June 30, 1996. The annual rent is $88,500 and Prostaff is responsible for all real estate taxes, insurance and maintenance. 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 June 30, 1996, Mr. Marr was indebted to Brewer in the full principal amount of the note. Blethen has made advances to Janice Blethen which totaled $250,752 as of June 30, 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 $140,000 as of June 30, 1996 with interest payable semiannually at 8% per annum. 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 $80,000 to Jerry T. Brewer, $132,000 to Clete T. Brewer, $75,000 to Chad J. Brewer, and $58,000 to Kay Brewer. In November 1995, Ted Feldman and Bartfund I Limited Partnership, an affiliate of W. David Bartholomew, purchased the common stock of a former stockholder 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 stockholder. 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. 58 61 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 any of their shares for a period of two years after the closing of this Offering. These stockholders, however, 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 any such offering to exclude some or all of the shares for marketing reasons. In addition, 22 months after the closing of this Offering and upon the affirmative vote of the holders of at least 876,450 shares of the Common Stock issued in connection with the Mergers, the stockholders of the Founding Companies have certain limited demand registration rights to require the Company to register shares held by them. 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. The piggyback registration rights described above do not apply to the registration statement relating to these 4,000,000 shares. 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. 59 62 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 60 63 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 any of their shares for a period of two years after the closing of this Offering. These stockholders, however, 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 any such offering to exclude some or all of the shares for marketing reasons. In addition, 22 months after the closing of this Offering and upon the affirmative vote of the holders of at least 876,450 shares of the Common Stock issued in connection with the Mergers, the stockholders of the Founding Companies have certain limited demand registration rights to require the Company to register shares held by them. 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. Certain legal matters related to this Offering will be passed upon for the Underwriters by 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. 61 64 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. Electronic registration statements, reports, proxy and information statements and other information regarding registrants filed through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available through the Commission's Web Site (http://www.sec.gov). This Registration Statement, as well as all exhibits and amendments hereto, have been filed through EDGAR. 62 65 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-8 Unaudited Pro Forma Combined Statement of Income for the Six Months Ended June 30, 1996................................................................... F-9 Notes to Unaudited Pro Forma Combined Statement of Income for the Six Months Ended June 30, 1996................................................................... F-11 Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31, 1995............................................................................ F-13 Notes to Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31, 1995............................................................... F-15 HISTORICAL FINANCIAL STATEMENTS OF FOUNDING COMPANIES: STAFFMARK, INC. Report of Independent Public Accountants........................................... F-17 Balance Sheet...................................................................... F-18 Notes to Balance Sheet............................................................. F-19 BREWER PERSONNEL SERVICES, INC. Report of Independent Public Accountants........................................... F-21 Balance Sheets..................................................................... F-22 Statements of Income............................................................... F-23 Statements of Stockholders' Equity................................................. F-24 Statements of Cash Flows........................................................... F-25 Notes to Financial Statements...................................................... F-26 THE PROSTAFF COMPANIES Report of Independent Public Accountants........................................... F-36 Combined Balance Sheets............................................................ F-37 Combined Statements of Income...................................................... F-38 Combined Statements of Stockholders' Equity........................................ F-39 Combined Statements of Cash Flows.................................................. F-40 Notes to Combined Financial Statements............................................. F-41 THE MAXWELL COMPANIES Report of Independent Public Accountants........................................... F-48 Combined Balance Sheets............................................................ F-49 Combined Statements of Income...................................................... F-50 Combined Statements of Stockholders' Equity........................................ F-51 Combined Statements of Cash Flows.................................................. F-52 Notes to Combined Financial Statements............................................. F-53 HRA, INC. Report of Independent Public Accountants........................................... F-60 Balance Sheets..................................................................... F-61 Statements of Income (Loss)........................................................ F-62 Statements of Stockholders' Equity................................................. F-63 Statements of Cash Flows........................................................... F-64 Notes to Financial Statements...................................................... F-65
F-1 66
PAGE ----- FIRST CHOICE STAFFING, INC. Report of Independent Public Accountants........................................... F-74 Balance Sheets..................................................................... F-75 Statements of Income............................................................... F-76 Statements of Stockholders' Equity................................................. F-77 Statements of Cash Flows........................................................... F-78 Notes to Financial Statements...................................................... F-79 THE BLETHEN GROUP Report of Independent Public Accountants........................................... F-85 Combined Balance Sheets............................................................ F-86 Combined Statements of Income (Loss)............................................... F-87 Combined Statements of Stockholders' Equity........................................ F-88 Combined Statements of Cash Flows.................................................. F-89 Notes to Combined Financial Statements............................................. F-90 HISTORICAL FINANCIAL STATEMENTS OF ACQUIRED COMPANIES: E.P. ENTERPRISES CORPORATION Report of Independent Public Accountants........................................... F-98 Balance Sheets..................................................................... F-99 Statements of Income............................................................... F-100 Statements of Stockholders' Equity (Deficit)....................................... F-101 Statements of Cash Flows........................................................... F-102 Notes to Financial Statements...................................................... F-103 ON CALL EMPLOYMENT SERVICES, INC. Report of Independent Public Accountants........................................... F-107 Balance Sheets..................................................................... F-108 Statements of Income............................................................... F-109 Statements of Stockholders' Equity (Deficit)....................................... F-110 Statements of Cash Flows........................................................... F-111 Notes to Financial Statements...................................................... F-112 STRATEGIC SOURCING, INC. Report of Independent Public Accountants........................................... F-115 Balance Sheets..................................................................... F-116 Statements of Income (Loss)........................................................ F-117 Statements of Stockholders' Equity (Deficit)....................................... F-118 Statements of Cash Flows........................................................... F-119 Notes to Financial Statements...................................................... F-120
F-2 67 STAFFMARK, INC. INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS 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. Pursuant to the requirements of SAB 97, Brewer has been designated as the acquirer for financial reporting purposes, of the Other Founding Companies. Based upon the provisions of SAB 97, these acquisitions will be accounted for as combinations at historical cost because: (i) the Founding Companies' stockholders 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 stockholders of each of the Founding Companies may be considered promoters; and (iv) no former stockholder 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 following unaudited pro forma combined financial statements present Brewer combined with StaffMark and give effect to the following pro forma adjustments: (i) the acquisition of the Other Founding Companies at historical cost in accordance with the applicable provisions of SAB 97; (ii) the effect of the acquisitions of Caldwell, On Call and SSI; (iii) the adjustment to compensation expense for the Compensation Differential; (iv) the incremental provision for income taxes attributable to the income of S Corporations, net of the income tax benefits related to the Compensation Differential; (v) the liability for the cash consideration to be paid to the stockholders of the Founding Companies; (vi) the transfer of selected assets to the stockholders of certain of the Founding Companies; (vii) the additional cash to be borrowed from banks to pay S Corporation Accumulated Adjustment Account balances; (viii) the issuance of 5,618,249 shares of Common Stock to stockholders of the Founding Companies in connection with the Mergers; (ix) the issuance of 1,355,000 shares by StaffMark prior to the Offering; and (x) 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' stockholders as the assets to be distributed had substantially no effect on net income. 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. These pro forma combined financial statements should be read in conjunction with other information contained elsewhere in this Prospectus under the heading "Selected Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the historical financial statements of StaffMark, Brewer and the Other Founding Companies. See "Index to Financial Statements." F-3 68 STAFFMARK, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1996 (IN THOUSANDS) ASSETS
ACQUIRED FOUNDING COMPANIES(A) COMBINED ---------------------------------------------------- FOUNDING BREWER PROSTAFF MAXWELL HRA FIRST CHOICE BLETHEN COMPANIES ------- -------- ------- ------ ------------ ------- --------- CURRENT ASSETS: Cash and cash equivalents...................... $ 778 $ 75 $ 666 $ 506 $ 12 $ 119 $ 2,156 Restricted cash and certificates of deposit.... -- -- 109 -- -- -- 109 Accounts receivable, net of allowance for doubtful accounts............................. 6,260 3,952 2,676 2,784 1,672 1,683 19,027 Prepaid expenses and other..................... 275 150 137 775 39 16 1,392 Deferred income taxes.......................... -- -- -- 227 -- 8 235 Advances to stockholders....................... -- -- -- 340 -- -- 340 ------- ------ ------ ------ ------ ------ ------- Total current assets..................... 7,313 4,177 3,588 4,632 1,723 1,826 23,259 PROPERTY AND EQUIPMENT, net...................... 994 830 295 196 350 279 2,944 INTANGIBLE ASSETS, net........................... 18,606 -- 297 166 -- -- 19,069 DEFERRED OFFERING COSTS.......................... -- -- -- -- -- -- -- OTHER ASSETS: Advances to stockholders....................... -- -- -- -- -- 251 251 Deferred income taxes.......................... -- -- -- 57 -- -- 57 Advances to StaffMark, Inc..................... 188 31 31 31 32 31 344 Cash surrender value of officers' life insurance..................................... -- 41 -- -- -- -- 41 Other.......................................... 40 15 -- 1 50 12 118 ------- ------ ------ ------ ------ ------ ------- Total other assets....................... 228 87 31 89 82 294 811 ------- ------- ------ ------ ------ ------ ------- $27,141 $5,094 $4,211 $5,083 $2,155 $2,399 $46,083 ======= ====== ====== ====== ========= ====== =======
The accompanying notes are an integral part of this balance sheet. F-4 69 STAFFMARK, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1996 (IN THOUSANDS) ASSETS -- Continued
ACQUISITION RELATED ADJUSTMENTS COMBINED ------------------------------------ PRO FORMA FOUNDING STAFFMARK, PRO FORMA TOTAL MERGER COMPANIES INC. SSI(B) ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ---------- --------------- ------ ----------- ----------- ----------- CURRENT ASSETS: Cash and cash equivalents........... $ 2,156 $ 236 $ 68 $ (68)(c) $ -- $ 1,360(f) (1,360)(g) Restricted cash and certificates of deposit........................... 109 -- -- -- -- -- Accounts receivable, net of allowance for doubtful accounts... 19,027 -- 138 (138)(c) -- -- Prepaid expenses and other.......... 1,392 -- 7 (7)(c) -- -- Deferred income taxes............... 235 -- -- -- -- (235)(j) Advances to stockholders............ 340 -- -- -- -- -- ------- ------ ---- ----- ---- ------- Total current assets.......... 23,259 236 213 (213) -- (235) PROPERTY AND EQUIPMENT, net........... 2,944 -- 19 -- 19 (86)(h) INTANGIBLE ASSETS, net................ 19,069 -- -- 731(d) 731 -- DEFERRED OFFERING COSTS............... -- 1,888 -- -- -- -- OTHER ASSETS: Advances to stockholders............ 251 -- -- -- -- -- Deferred income taxes............... 57 -- -- -- -- (57)(j) Advances to StaffMark, Inc.......... 344 -- -- -- -- -- Cash surrender value of officers' life insurance.................... 41 -- -- -- -- (41)(h) Other............................... 118 -- 2 (2)(c) -- -- ------- ------ ---- ----- ---- ------- Total other assets............ 811 -- 2 (2) -- (98) ------- ------ ---- ----- ---- ------- $ 46,083 $ 2,124 $234 $ 516 $ 750 $ (419) ======= ====== ==== ===== ==== ======= POST MERGER PRO FORMA ADJUSTMENTS AS ADJUSTED --------- ----------- ----------- CURRENT ASSETS: Cash and cash equivalents........... $ 2,392 $ 48,450(m) $ 6,416 (28,651)(n) (15,917)(p) 142(s) Restricted cash and certificates of deposit........................... 109 109 Accounts receivable, net of allowance for doubtful accounts... 19,027 -- 19,027 Prepaid expenses and other.......... 1,392 -- 1,392 Deferred income taxes............... -- -- -- Advances to stockholders............ 340 -- 340 ------- -------- ------- Total current assets.......... 23,260 4,024 27,284 PROPERTY AND EQUIPMENT, net........... 2,877 -- 2,877 INTANGIBLE ASSETS, net................ 19,800 (238)(o) 19,562 DEFERRED OFFERING COSTS............... 1,888 (1,888)(s) -- OTHER ASSETS: Advances to stockholders............ 251 -- 251 Deferred income taxes............... -- -- -- Advances to StaffMark, Inc.......... 344 (344)(r) -- Cash surrender value of officers' life insurance.................... -- -- -- Other............................... 118 -- 118 ------- -------- ------- Total other assets............ 713 (344) 369 ------- -------- ------- $48,538 $ 1,554 $50,092 ======= ======== =======
The accompanying notes are an integral part of this balance sheet. F-5 70 STAFFMARK, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1996 (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY
ACQUIRED FOUNDING COMPANIES(A) COMBINED ---------------------------------------------------- FOUNDING BREWER PROSTAFF MAXWELL HRA FIRST CHOICE BLETHEN COMPANIES ------- -------- ------- ------ ------------ ------- --------- CURRENT LIABILITIES: Accounts payable and other accrued liabilities... $ 587 $ 98 $ 242 $ 321 $ 97 $ 107 $ 1,452 Outstanding checks............................... 342 250 -- 261 -- -- 853 Payroll and related liabilities.................. 1,569 1,233 886 710 500 506 5,404 Reserve for workers' compensation claims......... 749 638 912 1,788 50 -- 4,137 Short-term borrowings............................ 1,546 1,177 -- 1,020 250 1,053 5,046 Current maturities of notes payable to stockholders.................................... -- 30 -- -- 140 82 252 Current maturities of debt....................... 2,422 67 1,827 111 -- 10 4,437 Income taxes payable............................. -- -- -- 190 -- 78 268 Deferred income taxes............................ -- -- -- -- -- -- -- Pro forma distribution to Founding Companies' stockholders.................................... -- -- -- -- -- -- -- ------- ------- ------ ------ ------ ------ ------- Total current liabilities.................. 7,215 3,493 3,867 4,401 1,037 1,836 21,849 LONG-TERM DEBT, less current maturities............ 16,204 77 78 265 -- 19 16,643 NOTES PAYABLE TO STOCKHOLDERS...................... -- -- -- 116 -- 47 163 ADVANCES FROM FOUNDING COMPANIES................... -- -- -- -- -- -- -- DEFERRED INCOME TAXES.............................. -- -- -- -- -- 10 10 ------- ------- ------ ------ ------ ------ ------- Total liabilities.......................... 23,419 3,570 3,945 4,782 1,037 1,912 38,665 STOCKHOLDERS' EQUITY: Common stock..................................... -- 11 5 13 10 8 47 Paid-in capital.................................. 497 -- -- -- -- 9 506 Subscriptions receivable......................... (80) -- -- -- -- -- (80) Retained earnings................................ 3,305 1,513 261 288 1,108 470 6,945 ------- ------- ------ ------ ------ ------ ------- Total stockholders' equity................. 3,722 1,524 266 301 1,118 487 7,418 ------- ------- ------ ------ ------ ------ ------- $27,141 $ 5,094 $4,211 $5,083 $2,155 $2,399 $46,083 ======= ======= ====== ====== ====== ====== =======
The accompanying notes are an integral part of this balance sheet. F-6 71 STAFFMARK, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1996 (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY -- Continued
ACQUISITION RELATED ADJUSTMENTS COMBINED ------------------------------------ PRO FORMA FOUNDING STAFFMARK, PRO FORMA TOTAL MERGER COMPANIES INC. SSI(B) ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA --------- ---------- ------ ----------- ----------- ----------- --------- CURRENT LIABILITIES: Accounts payable and other accrued liabilities........................... $ 1,452 $1,746 $ 9 $ (9)(c) $ -- $ -- $ 3,198 Outstanding checks...................... 853 -- -- -- -- -- 853 Payroll and related liabilities......... 5,404 -- 25 (25)(c) -- -- 5,404 Reserve for workers' compensation claims................................ 4,137 -- -- -- -- -- 4,137 Short-term borrowings................... 5,046 -- 10 (10)(c) -- -- 5,046 Current maturities of notes payable to stockholders.......................... 252 -- 48 (48)(c) -- -- 252 Current maturities of debt.............. 4,437 -- -- -- 1,360(f) 5,797 Income taxes payable.................... 268 -- -- -- -- -- 268 Deferred income taxes................... -- -- -- -- -- 988(j) 988 Pro forma distribution to Founding Companies' stockholders............... -- -- -- -- -- 15,917(i) 15,917 ------- ------ ---- ---- ---- -------- -------- Total current liabilities......... 21,849 1,746 92 (92) -- 18,265 41,860 LONG-TERM DEBT, less current maturities... 16,643 -- -- 750(e) 750 -- 17,393 NOTES PAYABLE TO STOCKHOLDERS............................ 163 -- 60 (60)(c) -- -- 163 ADVANCES FROM FOUNDING COMPANIES.......... -- 344 -- -- -- -- 344 DEFERRED INCOME TAXES..................... 10 -- -- -- -- 102(j) 112 ------- ------ ---- ---- ---- -------- -------- Total liabilities................. 38,665 2,090 152 598 750 18,367 59,872 STOCKHOLDERS' EQUITY: Common stock............................ 47 14 3 (3)(c) -- (47)(k) 70 56(l) Paid-in capital......................... 506 17 -- -- -- 47(k) 514 (56)(l) Subscriptions receivable................ (80) -- -- -- -- -- (80) Retained earnings....................... 6,945 3 79 (79)(c) -- (1,360)(g) (11,838) (127)(h) (15,917)(i) (1,382)(j) ------- ------ ---- ---- ---- -------- -------- Total stockholders' equity........ 7,418 34 82 (82) -- (18,786) (11,334) ------- ------ ---- ---- ---- -------- -------- $46,083 $2,124 $234 $ 516 $ 750 $ (419) $ 48,538 ======= ====== ==== ==== ==== ======== ======== POST MERGER ADJUSTMENTS AS ADJUSTED ----------- ----------- CURRENT LIABILITIES: Accounts payable and other accrued liabilities........................... $ (1,746)(s) $ 1,452 Outstanding checks...................... -- 853 Payroll and related liabilities......... -- 5,404 Reserve for workers' compensation claims................................ -- 4,137 Short-term borrowings................... (5,046)(n) -- Current maturities of notes payable to stockholders.......................... (252)(n) -- Current maturities of debt.............. (5,797)(n) -- Income taxes payable.................... (93)(o) 175 Deferred income taxes................... -- 988 Pro forma distribution to Founding Companies' stockholders............... (15,917)(p) -- -------- ------- Total current liabilities......... (28,851) 13,009 LONG-TERM DEBT, less current maturities... (17,393)(n) -- NOTES PAYABLE TO STOCKHOLDERS............................ (163)(n) -- ADVANCES FROM FOUNDING COMPANIES.......... (344)(r) -- DEFERRED INCOME TAXES..................... -- 112 -------- ------- Total liabilities................. (46,751) 13,121 STOCKHOLDERS' EQUITY: Common stock............................ 55(m) 125 -- Paid-in capital......................... 48,395(m) 37,071 (11,838)(q) Subscriptions receivable................ -- (80) Retained earnings....................... 11,838(q) (145) (145)(o) -------- ------- Total stockholders' equity........ 48,305 36,971 -------- ------- $ 1,554 $50,092 ======== =======
The accompanying notes are an integral part of this balance sheet. F-7 72 STAFFMARK, INC. NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1996 (a) Based on the provisions of SAB 97, which was issued and effective July 31, 1996, Brewer has been designated as the acquirer, for financial reporting purposes, of the Other Founding Companies. The acquisitions of the Other Founding Companies will be accounted for as combinations using historical cost. The summary information presented represents the combination of the historical financial statements of each of the Founding Companies at historical cost, as if these companies had been members of the same operating group. However, 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 subsequent to the Mergers. For a discussion of the combined operating results, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Also, see "Selected Financial and Operating Data." (b) Records the unaudited balance sheet of SSI, which was purchased by First Choice on July 1, 1996. (c) Records the adjustment to remove assets and liabilities not assumed by First Choice in conjunction with their acquisition of SSI. (d) Records an estimate of the intangible assets to be recorded by First Choice in conjunction with the acquisition of SSI. (e) Records the debt to be incurred by First Choice in conjunction with the acquisition of SSI. (f) Records cash borrowed from banks to fund the distribution of certain Founding Companies' S Corporation Accumulated Adjustment Account balances. (g) Records the distribution of certain Founding Companies' S Corporation Accumulated Adjustment Account balances. (h) Records the dividend of certain automobiles, cash surrender value of life insurance policies, facilities and equipment to certain stockholders of the Founding Companies. (i) Records the liability for the cash consideration to be paid to the stockholders of the Founding Companies in connection with the Mergers. (j) 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. (k) Records the elimination of the Founding Companies' Common Stock as additional paid-in capital. (l) Records the issuance of 5,618,249 shares to be issued to the stockholders of the Founding Companies in connection with the Mergers. (m) Records the proceeds from the issuance of 5,500,000 shares of Common Stock at an assumed initial public offering price of $10.00 per share, net of estimated offering costs. Offering costs primarily consist of underwriting discounts and commissions, accounting fees, legal fees and printing expenses. (n) Records the repayment of all debt obligations with proceeds from the Offering. (o) Records the elimination of capitalized deferred financing costs, net of the applicable income tax benefit. (p) Records the distribution of the cash portion of consideration due to the Founding Companies' stockholders in connection with the Mergers. (q) Records the elimination of the retained earnings of the Founding Companies. (r) Records the elimination of the funds advanced from the Founding Companies to StaffMark to fund organizational and other costs related to the planned merger and initial public offering. (s) Records the elimination of deferred offering costs and restores cash used prior to June 30, 1996 to pay offering costs since the total estimated offering costs are considered in the pro forma adjustment discussed in note (m) above. F-8 73 STAFFMARK, INC. UNAUDITED PRO FORMA COMBINED INCOME STATEMENT FOR THE SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS)
ACQUIRED FOUNDING COMPANIES(A) COMBINED ----------------------------------------------------- FOUNDING BREWER PROSTAFF MAXWELL HRA FIRST CHOICE BLETHEN COMPANIES ------- -------- ------- ------- ------------ ------- --------- SERVICE REVENUES............................... $30,556 $18,920 $13,232 $11,540 $7,885 $7,721 $89,854 COST OF SERVICES............................... 24,028 15,384 9,892 9,199 6,386 5,918 70,807 ------- ------- ------- ------- ------ ------ ------- Gross profit........................... 6,528 3,536 3,340 2,341 1,499 1,803 19,047 OPERATING EXPENSES: Selling, general and administrative.......... 4,445 2,767 2,480 2,064 1,138 1,303 14,197 Depreciation and amortization................ 566 128 73 49 47 56 919 ------- ------- ------- ------- ------ ------ ------- Operating income....................... 1,517 641 787 228 314 444 3,931 ------- ------- ------- ------- ------ ------ ------- OTHER INCOME (EXPENSE): Interest expense............................. (880) (29) (22) (54) (14) (82) (1,081) Other, net................................... (3) 11 55 334 -- 1 398 ------- ------- ------- ------- ------ ------ ------- INCOME BEFORE INCOME TAXES..................... 634 623 820 508 300 363 3,248 INCOME TAX PROVISION........................... -- -- -- 210 -- 60 270 ------- ------- ------- ------- ------ ------ ------- Net income............................. $ 634 $ 623 $ 820 $ 298 $ 300 $ 303 $ 2,978 ======= ======= ======= ======= ====== ====== =======
The accompanying notes are an integral part of this statement. F-9 74 STAFFMARK, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS EXCEPT PER SHARE DATA)
ACQUISITION RELATED ADJUSTMENTS ----------------------------------------------------- ON CALL FOR THE COMBINED PERIOD FROM JANUARY FOUNDING STAFFMARK, 1, 1996 TO FEBRUARY PRO FORMA COMPANIES INC. 2, 1996(B) SSI(C) ADJUSTMENTS ---------- ---------- ------------------- ----------------- ----------- SERVICE REVENUES............................ $ 89,854 $ -- $ 1,127 $ 449 $ -- COST OF SERVICES............................ 70,807 -- 945 240 -- ------- ------- ------ ---- ---- Gross profit........................ 19,047 -- 182 209 -- OPERATING EXPENSES: Selling, general and administrative....... 14,197 -- 116 143 -- Depreciation and amortization............. 919 -- 3 3 16(d) 18(e) ------- ------- ------ ---- ---- Operating income.................... 3,931 -- 63 63 (34) ------- ------- ------ ---- ---- OTHER INCOME (EXPENSE): Interest expense.......................... (1,081) -- -- -- (27)(f) (28)(g) Other, net................................ 398 3 5 -- -- ------- ------- ------ ---- ---- INCOME BEFORE INCOME TAXES.................. 3,248 3 68 63 (89) INCOME TAX PROVISION........................ 270 -- -- -- -- ------- ------- ------ ---- ---- Net income (loss)................... $ 2,978 $ 3 $ 68 $ 63 $ (89) ======= ======= ====== ==== ==== PRO FORMA NET INCOME PER COMMON SHARE....... WEIGHTED AVERAGE SHARES OUTSTANDING......... PRO FORMA TOTAL MERGER ADJUSTMENTS ADJUSTMENTS PRO FORMA ----------- ----------- --------- SERVICE REVENUES............................ $ 1,576 $ -- $91,430 COST OF SERVICES............................ 1,185 -- 71,992 ------ ----- ------- Gross profit........................ 391 -- 19,438 OPERATING EXPENSES: Selling, general and administrative....... 259 (263)(h) 14,193 Depreciation and amortization............. 40 -- 959 ------ ----- ------- Operating income.................... 92 263 4,286 ------ ----- ------- OTHER INCOME (EXPENSE): Interest expense.......................... (55) -- (1,136) Other, net................................ 5 -- 406 ------ ----- ------- INCOME BEFORE INCOME TAXES.................. 42 263 3,556 INCOME TAX PROVISION........................ -- 1,237(i) 1,507 ------ ----- ------- Net income (loss)................... $ 42 $(974) $ 2,049 ====== ===== ======= PRO FORMA NET INCOME PER COMMON SHARE....... $ 0.24 ======= WEIGHTED AVERAGE SHARES OUTSTANDING......... 8,565(j) =======
The accompanying notes are an integral part of this statement. F-10 75 STAFFMARK, INC. NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 (a) Based on the provisions of SAB 97, which was issued and became effective July 31, 1996, Brewer has been designated as the acquirer, for financial reporting purposes, of the Other Founding Companies. The acquisitions of the Other Founding Companies will be accounted for as combinations using historical costs. The summary information presented represents the combination of the historical financial statements of each of the Founding Companies at historical cost, as if these companies had been members of the same operating group. However, 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 subsequent to the Mergers. For a discussion of the combined operating results, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Also, see "Selected Financial and Operating Data." (b) 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. (c) Records the unaudited financial results of SSI, which was purchased by First Choice on July 1, 1996. (d) 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. Intangible assets recorded in conjunction with this acquisition include goodwill of approximately $3.1 million which is being amortized over thirty years, a noncompete agreement of approximately $360,000 which is being amortized over five years and deferred financing fees of approximately $56,000 which are being amortized over five years. (e) Adjustment to reflect the amortization expense relating to the intangible assets to be recorded in conjunction with the acquisition of SSI. This pro forma calculation is based upon an allocation of approximately $73,000 of the SSI purchase price to a noncompete agreement which will be amortized over five years and an allocation of approximately $657,000 to goodwill which will be amortized over thirty years. (f) 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. This pro forma expense calculation is based on the $3.0 million borrowed by Brewer under a term note in conjunction with this acquisition. Pro forma interest is computed based upon the applicable variable rate in effect on the term note which, based upon the terms of the agreement, would have approximated 9.9% during the pro forma period. A variance of .125% in the interest rate on this debt would have resulted in a change in pro forma interest expense of approximately $350 and a change in pro forma net income of approximately $215. (g) Adjustment to reflect the increase in interest expense relating to debt incurred in conjunction with the acquisition of SSI. This pro forma expense allocation is based on debt totaling $750,000 incurred in conjunction with this acquisition. Of this amount, $375,000 was financed with a term note maturing from July 1996 through June 1999 which bears interest at 8.25% and $375,000 was financed with a note payable to the selling stockholder which matures from July 1997 through July 1999 and bears interest at 7.00%. F-11 76 (h) Adjusts compensation to the level the owners have agreed to receive from the Founding Companies subsequent to the Mergers as follows: Brewer........................................... $ 595 Prostaff......................................... (57,961) Maxwell.......................................... (73,860) HRA.............................................. (7,972) First Choice..................................... 922 Blethen.......................................... (124,745) --------- Total.................................. $(263,021) =========
(i) 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. (j) 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) 1,591,751 shares to be issued at an assumed initial public offering price of $10.00 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-12 77 STAFFMARK, INC. UNAUDITED PRO FORMA COMBINED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
ACQUIRED FOUNDING COMPANIES(A) -------------------------------- BREWER PROSTAFF MAXWELL HRA ------- -------- ------- ------- SERVICE REVENUES............................................................. $43,874 $34,330 $23,093 $18,307 COST OF SERVICES............................................................. 35,115 28,234 17,748 14,940 ------- ------- ------- ------- Gross profit............................................................. 8,759 6,096 5,345 3,367 OPERATING EXPENSES: Selling, general and administrative........................................ 5,804 5,339 4,297 3,438 Depreciation and amortization.............................................. 591 220 136 66 ------- ------- ------- ------- Operating Income......................................................... 2,364 537 912 (137) ------- ------- ------- ------- OTHER INCOME (EXPENSE): Interest expense........................................................... (801) (20 ) -- (107) Other, net................................................................. 24 26 8 13 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES................................................... 1,587 543 920 (231) INCOME TAX PROVISION (BENEFIT)............................................... -- 97 -- (84) ------- ------- ------- ------- Net income............................................................... $ 1,587 $ 446 $ 920 $ (147) ======= ======= ======= ======= ACQUIRED COMPANIES(A) COMBINED ------------------------ FOUNDING FIRST CHOICE BLETHEN COMPANIES ------------ ------- --------- SERVICE REVENUES............................................................. $ 13,703 $13,380 $146,687 COST OF SERVICES............................................................. 11,149 9,917 117,103 ------- ------- -------- Gross profit............................................................. 2,554 3,463 29,584 OPERATING EXPENSES: Selling, general and administrative........................................ 2,258 2,933 24,069 Depreciation and amortization.............................................. 33 111 1,157 ------- ------- -------- Operating Income......................................................... 263 419 4,358 ------- ------- -------- OTHER INCOME (EXPENSE): Interest expense........................................................... (20) (141) (1,089) Other, net................................................................. -- 11 82 ------- ------- -------- INCOME BEFORE INCOME TAXES................................................... 243 289 3,351 INCOME TAX PROVISION (BENEFIT)............................................... -- 81 94 ------- ------- -------- Net income............................................................... $ 243 $ 208 $ 3,257 ======= ======= ========
The accompanying notes are an integral part of this statement. F-13 78 STAFFMARK, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME -- (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS EXCEPT PER SHARE DATA)
ACQUISITION RELATED ADJUSTMENTS --------------------------------------------------- CALDWELL FOR THE PERIOD FROM COMBINED JANUARY 1, 1995 FOUNDING STAFFMARK, TO JULY 10, PRO FORMA COMPANIES INC. 1995(B) ON CALL(C) SSI(D) 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(e) 186(f) 37(g) -------- -------- ------- ------- ------ ------- Operating income........................... 4,358 -- 935 965 212 (516) -------- -------- ------- ------- ------ ------- OTHER INCOME (EXPENSE): Interest expense................................. (1,089 ) -- (15) -- -- (816)(h) (302)(i) (56)(j) 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................ ACQUISITION RELATED ADJUSTMENTS ----------- 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)(k) 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(l) 2,379 ------- ------- -------- Net income................................. $ 485 $ (636) $ 3,106 ======= ======= ======== PRO FORMA NET INCOME PER COMMON SHARE.............. $ 0.36 ======== WEIGHTED AVERAGE SHARES OUTSTANDING................ 8,565 (m) ========
The accompanying notes are an integral part of this statement. F-14 79 STAFFMARK, INC. NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (a) Based on the provisions of SAB 97, which was issued and became effective July 31, 1996, Brewer has been designated as the acquirer of the other Founding Companies for financial reporting purposes. The acquisitions by Brewer of the other Founding Companies will be accounted for as combinations using historical costs. The summary information presented represents the combination of the historical financial statements of each of the Founding Companies for all periods presented at historical costs, as if these companies had 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 subsequent to the Merger. For a discussion of the combined operating results, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Also, see "Selected Financial and Operating Data." (b) 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. (c) Records the 1995 audited financial results of On Call, which was purchased by Brewer on February 2, 1996. (d) Records the 1995 audited financial results of SSI, which was purchased by First Choice on July 1, 1996. (e) 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. Intangible assets recorded in conjunction with the acquisition of Caldwell include goodwill of approximately $15.3 million which is being amortized over thirty years and deferred financing fees of approximately $272,000 which are being amortized over five years. (f) Adjustment to reflect the amortization expense relating to the intangible assets recorded in conjunction with the acquisition of On Call. Intangible assets recorded in conjunction with the acquisition of On Call include goodwill of approximately $3.1 million which is being amortized over thirty years, a noncompete agreement of approximately $360,000 which is being amortized over five years and deferred financing fees of approximately $56,000 which are being amortized over five years. (g) Adjustment to reflect the amortization expense relating to the intangible assets to be recorded in conjunction with the acquisition of SSI. This pro forma calculation is based upon an allocation of approximately $73,000 of the SSI purchase price to a noncompete agreement which will be amortized over five years and an allocation of approximately $657,000 to goodwill which will be amortized over thirty years. (h) 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. This pro forma expense calculation is based on debt totaling $16.1 million incurred in conjunction with this acquisition. Of this amount, $3.1 million bears interest at a fixed rate of 8.0%. The remaining $13.0 million was borrowed under Brewer's term loan agreement with Boatmen's which bears interest at a variable rate which, based upon the terms of the agreement, would have approximated 10.1% during the pro forma period. A variance of .125% in the interest rate on this component of debt would have resulted in a change in pro forma interest expense of approximately $8,500 and a change in pro forma net income of approximately $5,200. (i) Adjustment to reflect the increase in interest expense relating to debt incurred in conjunction with the acquisition of On Call. This pro forma expense calculation is based on the $3.0 million borrowed by Brewer under a term note in conjunction with this acquisition. Pro forma interest is computed based upon the applicable variable rate in effect on the term loan which, based upon the terms of the agreement, would have approximated 9.9% during the pro forma period. A variance of .125% on the interest rate on F-15 80 this debt would have resulted in a change in pro forma interest expense of approximately $3,750 and a change in pro forma net income of approximately $2,290. (j) Adjustment to reflect the increase in interest expense relating to debt incurred in conjunction with the acquisition of SSI. This pro forma expense calculation is based on debt totaling $750,000 incurred in conjunction with this acquisition. This amount includes $375,000 which was financed with a term note maturing from July 1996 through June 1999 bearing interest at 8.25% and $375,000 which was financed with a note payable to the selling stockholder maturing from July 1997 through July 1999 which bears interest at 7.00%. (k) 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) ----------- Total................................. $(1,649,271) ===========
(l) 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. (m) 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) 1,591,751 shares to be issued at an assumed initial public offering price of $10.00 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-16 81 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 June 30, 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 June 30, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Little Rock, Arkansas, July 26, 1996. F-17 82 STAFFMARK, INC. BALANCE SHEET JUNE 30, 1996 ASSETS Cash and cash equivalents...................................................... $ 235,574 Deferred offering costs........................................................ 1,888,465 ---------- $2,124,039 ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable............................................................. $1,746,369 Advances from Founding Companies............................................. 343,750 ---------- Total liabilities.................................................... 2,090,119 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; authorized shares of 1,000,000; no shares issued or outstanding........................................... -- Common stock, $.01 par value; authorized shares of 26,000,000; shares issued and outstanding of 1,355,000................................ 13,550 Paid-in capital.............................................................. 17,710 Retained earnings............................................................ 2,660 ---------- Total stockholders' equity........................................... 33,920 ---------- $2,124,039 ==========
The accompanying notes are an integral part of this balance sheet. F-18 83 STAFFMARK, INC. NOTES TO BALANCE SHEET 1. 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. 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, Human Resources, Inc., First Choice Staffing, Inc. and The Blethen Group. Based upon an assumed IPO price of $10 per share, the aggregate consideration that will be paid by StaffMark to acquire the Founding Companies is approximately $72.1 million (unaudited) consisting of a combination of cash and common stock. As of June 30, 1996, the Company had not conducted any operations, and activities to date have related primarily to the planned acquisitions and the IPO. Accordingly, statements of operations, changes in stockholders' 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. In April 1996, the Founding Companies advanced $375,000 to the Company to help fund offering related costs. In conjunction with the withdrawal of one of the original Founding Companies, non-refundable advances to the Company of $31,250 were reflected as a component of paid-in capital in the accompanying balance sheet. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash and cash equivalents -- Cash and cash equivalents represent demand deposits with a financial institution or highly liquid money market investments with original maturities of three months or less. Deferred offering costs -- Deferred offering costs primarily represent professional fees incurred through June 30, 1996 in conjunction with the planned IPO and, for financial reporting purposes, will be netted against the offering proceeds upon completion of the public offering. 3. STOCKHOLDERS' EQUITY: In conjunction with the organization and initial capitalization of StaffMark, the Company issued 1,000 shares of common stock at a par value of $.01 per share. In June 1996, the Company's Board of Directors declared a 1,355-for-one stock split. The effect of this stock split has been reflected as a reduction of paid-in capital and an increase in common stock in the accompanying balance sheet. In June 1996, the Board of Directors approved the Company's 1996 Stock Option Plan (the "Plan") which authorizes the issuance of options to purchase up to 1,500,000 shares of the Company's common stock. As of June 30, 1996, the Company has not granted options under the Plan. The terms of the options granted under the Plan will be subject to the discretion of the Board of Directors, and subject to certain limitations specified in the Plan which include, among other requirements, that options must be granted at prices no less than market value at the date of grant. The Company plans to account for stock options granted pursuant to F-19 84 STAFFMARK, INC. NOTES TO BALANCE SHEET -- (CONTINUED) the Plan in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Based on the provisions of APB 25, management does not expect the options granted pursuant to the Plan to have a material impact on the Company's results of operations or financial position. However, pursuant to the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company will be required to include supplemental pro forma disclosures with its subsequent financial statements which reflect the recognition of compensation expense related to options granted, measured based on the estimated fair value of the options on date of grant and recognized on a straight-line basis over the vesting period of the options. 4. SUBSEQUENT EVENTS: Subsequent to June 30, 1996, the Company has incurred significant additional costs, including professional fees and travel, associated with the acquisition of the Founding Companies and the IPO which are not reflected in the accompanying balance sheet. The Company anticipates that total offering costs related to the IPO will approximate $2.7 million (unaudited). 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-20 85 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, December 31, 1995 and June 30, 1996, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and for the six months ended June 30, 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 Brewer Personnel Services, Inc. as of January 1, 1995, December 31, 1995 and June 30, 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 six months ended June 30, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Little Rock, Arkansas, July 26, 1996. F-21 86 BREWER PERSONNEL SERVICES, INC. BALANCE SHEETS ASSETS
JUNE 30, 1996 JANUARY 1, DECEMBER 31, -------------------------- 1995 1995 ACTUAL PRO FORMA ---------- ------------ ----------- ----------- (UNAUDITED) (NOTE 14) CURRENT ASSETS: Cash and cash equivalents............... $ 108,066 $ 319,159 $ 778,209 $ 778,209 Accounts receivable, net of allowance for doubtful accounts of $34,308, $214,187 and $256,603, respectively......................... 2,703,493 4,798,476 6,260,282 6,260,282 Prepaid expenses and other.............. 191,838 253,143 275,406 275,406 ---------- ----------- ----------- ----------- Total current assets............ 3,003,397 5,370,778 7,313,897 7,313,897 PROPERTY AND EQUIPMENT, net............... 486,510 796,930 993,752 993,752 INTANGIBLE ASSETS, net.................... 282,215 15,555,459 18,605,545 18,605,545 OTHER ASSETS: Related party notes receivable.......... 264,664 -- -- -- Advance to StaffMark, Inc............... -- -- 187,500 187,500 Other................................... 17,262 29,192 40,165 40,165 ---------- ----------- ----------- ----------- Total other assets.............. 281,926 29,192 227,665 227,665 ---------- ----------- ----------- ----------- $4,054,048 $ 21,752,359 $27,140,859 $27,140,859 ========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................ $ 179,063 $ 272,329 $ 355,181 $ 355,181 Outstanding checks...................... 135,020 226,307 341,652 341,652 Payroll and related liabilities......... 538,468 1,020,973 1,569,072 1,569,072 Reserve for workers' compensation claims............................... 130,991 775,801 749,397 749,397 Line of credit.......................... 725,000 309,068 1,545,862 1,545,862 Current maturities of long-term debt.... 126,584 882,487 2,421,713 2,421,713 Accrued interest and other.............. 11,565 375,777 231,692 231,692 ---------- ----------- ----------- ----------- Total current liabilities....... 1,846,691 3,862,742 7,214,569 7,214,569 LONG-TERM DEBT, less current maturities... 97,154 15,103,831 16,204,401 16,504,401 COMMITMENTS AND CONTINGENCIES (Notes 9 through 13) STOCKHOLDERS' 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 1 Paid-in capital......................... -- 98,059 497,208 497,208 Subscription receivable................. -- -- (80,000) (80,000) Retained earnings....................... 2,069,779 2,687,726 3,304,680 3,004,680 ---------- ----------- ----------- ----------- Total stockholders' equity...... 2,110,203 2,785,786 3,721,889 3,421,889 ---------- ----------- ----------- ----------- $4,054,048 $ 21,752,359 $27,140,859 $27,140,859 ========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these balance sheets. F-22 87 BREWER PERSONNEL SERVICES, INC. STATEMENTS OF INCOME
SIX MONTHS ENDED FISCAL YEARS -------------------------- ----------------------------------------- JULY 2, JUNE 30, 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) SERVICE REVENUES............ $12,313,300 $27,894,455 $43,874,246 $15,928,068 $30,556,381 COST OF SERVICES............ 10,062,704 22,906,230 35,115,355 12,968,810 24,027,885 ----------- ----------- ----------- ----------- ----------- Gross profit...... 2,250,596 4,988,225 8,758,891 2,959,258 6,528,496 OPERATING EXPENSES: Selling, general and administrative......... 1,622,737 3,483,070 5,804,348 2,118,893 4,445,462 Depreciation and amortization........... 121,395 255,895 590,066 136,463 565,974 ----------- ----------- ----------- ----------- ----------- Operating income.......... 506,464 1,249,260 2,364,477 703,902 1,517,060 OTHER INCOME (EXPENSE): Interest expense.......... (54,005) (92,132) (800,704) (32,072) (879,924) Interest and other income (expense).............. 25,150 19,653 22,765 19,204 (3,182) ----------- ----------- ----------- ----------- ----------- Net income........ $ 477,609 $ 1,176,781 $ 1,586,538 $ 691,034 $ 633,954 =========== =========== =========== =========== =========== PRO FORMA DATA (Unaudited) (Note 14): Historical income before income taxes........... $ 1,586,538 $ 633,954 Less pro forma provision for income taxes....... 724,253 363,484 ----------- ----------- PRO FORMA NET INCOME.................... $ 862,285 $ 270,470 =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-23 88 BREWER PERSONNEL SERVICES, INC. STATEMENTS OF STOCKHOLDERS' 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...................... -- -- -- -- 633,954 633,954 Dividends....................... -- -- -- -- (17,000) (17,000) Exercise of stock options....... 5.0 -- 80,000 (80,000) -- -- Shares issued in conjunction with purchase of On Call..... 10.0 -- 319,149 -- -- 319,149 ----- -------- -------- -------- ---------- ---------- BALANCE, June 30, 1996............ 132.5 $ 1 $497,208 $(80,000) $3,304,680 $3,721,889 ===== ======== ======== ======== ========== ==========
The accompanying notes to financial statements are an integral part of these statements. F-24 89 BREWER PERSONNEL SERVICES, INC. STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED FISCAL YEARS -------------------------- ---------------------------------------- JULY 2, JUNE 30, 1993 1994 1995 1995 1996 --------- ----------- ------------ ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................... $ 477,609 $ 1,176,781 $ 1,586,538 $ 691,034 $ 633,954 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................. 121,395 255,895 590,066 136,463 565,974 Provision for bad debts........................ 6,664 24,058 169,879 (111) 57,932 Net (gain) loss on sales of property and equipment.................................... (672) (5,066) 4,095 4,968 -- Change in operating assets and liabilities, net of effects of acquisitions: Restricted certificates of deposit........... 750,000 -- -- -- -- Accounts receivable.......................... (870,585) (963,971) (334,940) (684,695) (1,246,671) Prepaid expenses and other................... (86,090) (49,960) (44,025) 20,023 (22,263) Other assets................................. -- (16,152) (6,101) (4,555) (2,095) Accounts payable............................. (252,876) 88,208 21,210 (58,659) 8,644 Outstanding checks........................... 68,552 66,468 (508,117) 348,506 115,345 Payroll and related liabilities.............. 131,887 241,001 (270,377) 216,704 250,733 Reserve for workers' compensation claims..... 54,600 76,391 359,810 171,476 (26,404) Accrued interest and other................... (32,727) (112) 37,185 23,597 (257,796) --------- ---------- ------------ ----------- ----------- Net cash provided by operating activities............................... 367,757 893,541 1,605,223 864,751 77,353 --------- ---------- ------------ ----------- ----------- 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) (95,917) (234,143) Acquisition of training licenses and rights...... -- -- (65,262) (65,262) -- Proceeds from the sales of property and equipment...................................... 10,000 19,067 16,652 -- -- Advance to StaffMark, Inc........................ -- -- -- -- (187,500) Advances of notes receivable..................... (35,129) (220,445) (40,000) (73,145) -- Receipts on notes receivable..................... 48,116 110,000 -- -- -- --------- ---------- ------------ ----------- ----------- Net cash used in investing activities...... (307,678) (344,751) (12,003,179) (234,324) (3,421,643) --------- ---------- ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt................... 85,524 1,584,500 13,366,512 19,272 4,736,794 Payments on debt................................. (103,805) (1,920,296) (1,919,865) (111,642) (860,204) Cash dividends................................... (163,346) (176,271) (623,484) (572,484) (17,000) Contributions from stockholder................... 2,524 -- 57,636 57,636 -- Deferred financing costs......................... -- -- (271,750) -- (56,250) --------- ---------- ------------ ----------- ----------- Net cash provided by (used in) financing activities............................... (179,103) (512,067) 10,609,049 (607,218) 3,803,340 --------- ---------- ------------ ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (119,024) 36,723 211,093 23,209 459,050 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 $ 131,275 $ 778,209 ========= ========== ============ =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid...................................... $ 51,529 $ 107,222 $ 427,456 $ 29,183 $ 1,042,906 ========= ========== ============ =========== =========== Non-cash transactions: Notes payable issued in conjunction with acquisitions................................... $ 299,010 $ -- $ 3,100,000 $ -- $ -- ========= ========== ============ =========== =========== Distribution of notes receivable to stockholders................................... $ -- $ -- $ 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-25 90 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 June 30, 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 reporting periods end on the Sunday closest to month end. The fiscal years 1993, 1994 and 1995 each included 52 weeks. The interim periods for the six months ended July 2, 1995 (unaudited) and June 30, 1996 included in the accompanying financial statements each included 26 weeks. Interim Financial Statements -- The accompanying interim financial statements for the six months ended July 2, 1995 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 for the six months ended June 30, 1996, and include all adjustments (which were 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 $1,384,449 at January 1, 1995, December 31, 1995 and June 30, 1996, respectively. F-26 91 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. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated economic lives or the terms of the lease. The estimated useful lives of the Company's assets, by asset classification, were 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 June 30, 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-27 92 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. -- 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-28 93 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 SIX MONTHS ENDED --------------------------------------- ------------------------------ 1993 1994 1995 JULY 2, 1995 JUNE 30, 1996 ----------- ----------- ----------- ------------ ------------- (UNAUDITED) Revenues........... $55,954,122 $55,546,403 $67,406,685 $ 33,211,694 $ 31,683,472 =========== =========== =========== =========== =========== Net income......... $ 1,718,024 $ 939,446 $ 2,091,956 $ 833,362 $ 658,304 =========== =========== =========== =========== ===========
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, JUNE 30, 1995 1995 1996 ---------- ------------ ---------- Office equipment................................ $ 243,153 $ 419,606 $ 668,171 Computer equipment.............................. 382,068 687,097 756,122 Vehicles........................................ 167,678 133,722 133,722 Computer software............................... 44,880 62,653 82,478 Leasehold improvements.......................... -- 31,483 43,580 -------- ---------- ---------- 837,779 1,334,561 1,684,073 Less accumulated depreciation and amortization.................................. 351,269 537,631 690,321 -------- ---------- ---------- $ 486,510 $ 796,930 $ 993,752 ======== ========== ==========
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. Depreciation and amortization expense for the six months ended July 2, 1995 and June 30, 1996 totaled $77,986 (unaudited) and $152,690, respectively. F-29 94 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. INTANGIBLE ASSETS: Intangible assets consisted of the following:
JANUARY 1, DECEMBER 31, JUNE 30, 1995 1995 1996 ---------- ------------ ----------- Goodwill......................................... $ 25,000 $15,356,334 $18,407,351 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 19,534,623 Less accumulated amortization.................... 116,795 511,897 929,078 -------- ----------- ----------- $282,215 $15,555,459 $18,605,545 ======== =========== ===========
Amortization expense related to intangible assets totaled $53,236, $106,337 and $391,207 for fiscal years 1993, 1994 and 1995, respectively. Amortization expense related to intangible assets totaled $58,477 (unaudited) and $413,284 for the six months ended July 2, 1995 and June 30, 1996, respectively. 5. DEBT: Line of credit balances consisted of the following:
JANUARY 1, DECEMBER 31, JUNE 30, 1995 1995 1996 ---------- ------------ ----------- 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 9.5% to 10.00% and averaged 9.79% during the six months ended June 30, 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 stockholders................................... $ -- $ 309,068 $ 1,545,862 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 stockholders................................... 725,000 -- -- -------- ----------- ----------- $725,000 $ 309,068 $ 1,545,862 ======== =========== =========== Long-term debt consisted of the following: Term loan note with Boatmen's. Interest payable monthly at a variable rate which ranged from 8.75% to 9.19% and averaged 8.86% during the six months ended June 30, 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 stockholders................................... $ -- $12,750,000 $15,458,400
F-30 95 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 1, DECEMBER 31, JUNE 30, 1995 1995 1996 -------- ----------- ----------- 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 stockholders......... $ -- $ 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 stockholders..................... 197,235 97,332 44,977 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 22,737 -------- ----------- ----------- 223,738 15,986,318 18,626,114 Less current maturities.......................... 126,584 882,487 2,421,713 -------- ----------- ----------- $ 97,154 $15,103,831 $16,204,401 ======== =========== ===========
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. This rate cap agreement had no impact on interest expense during fiscal 1995 or during the six months ended June 30, 1996. 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. Under the terms of the credit agreement with Boatmen's, the Company is required, among other restrictions, to maintain certain financial ratios which are measured on a quarterly basis. As of June 30, 1996, the Company did not comply with two of these ratios, however, Boatmen's has waived all events of noncompliance and default with regard to these ratios as of that date. Accordingly, these obligations have been classified according to their originally scheduled maturity dates. Total maturities of long-term debt are as follows:
YEARS ENDING ---------------------------- DECEMBER 31, JUNE 30, ------------ ----------- 1996.............................. $ 882,487 $ -- 1997.............................. 1,444,763 2,421,613 1998.............................. 3,146,568 3,753,900 1999.............................. 3,212,500 3,838,100 2000.............................. 3,900,000 3,587,500 Thereafter........................ 3,400,000 5,025,001 ----------- ----------- $15,986,318 $18,626,114 =========== ===========
F-31 96 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 stockholders. 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 stockholders 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 to cover claims which exceeded $50,000. The Company maintains letters of credit with a bank to cover any potential unpaid claims. At June 30, 1996, these letters of credit were in the amount of $600,000 and $500,000 for Arkansas and Georgia, respectively. Workers' compensation expense totaled $405,927, $738,663 and $1,317,579 for fiscal years 1993, 1994 and 1995, respectively. Workers' compensation expense totaled $546,008 (unaudited) and $589,459 for the six months ended July 2, 1995 and June 30, 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. A summary of stock option activity follows:
WEIGHTED AVERAGE SHARES UNDER PRICE PER OPTION 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.................................................... 1.0 35,000 Exercised.................................................. (5.0) (16,000) ---- -------- Outstanding, June 30, 1996................................... 8.5 $ 31,176 ==== ======== Exercisable, December 31, 1995............................... 5.0 $ 16,000 ==== ======== Exercisable, June 30, 1996................................... 1.67 $ 30,000 ==== ========
F-32 97 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 six month period ended June 30, 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 six month period ended June 30, 1996 using the minimum value method, as discussed in SFAS 123, and based on the following weighted average assumptions used for grants:
SIX MONTHS ENDED FISCAL YEAR JUNE 30, 1995 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 six months ended June 30, 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:
SIX MONTHS ENDED FISCAL YEAR JUNE 30, 1995 1996 ----------- ---------- Net income, as reported...................................... $ 1,586,538 $633,954 =========== ======== Pro forma net income......................................... $ 1,578,367 $626,694 =========== ========
9. RELATED PARTY TRANSACTIONS: The Company rents office space from Brewer Investments, a partnership owned by certain stockholders. 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. Rent expense related to these leases was approximately $30,000 (unaudited) and $105,000 for the six months ended July 2, 1995 and June 30, 1996, respectively. Future minimum lease payments related to this lease as of June 30, 1996 approximate $1,015,000 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 stockholders 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 $72,000 for the six months ended July 2, 1995 (unaudited) and June 30, 1996. F-33 98 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 stockholders 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 are as follows:
YEARS ENDING --------------------------- DECEMBER 31, JUNE 30, ------------ ---------- 1996............................... $ 506,531 $ -- 1997............................... 449,915 502,741 1998............................... 387,285 424,299 1999............................... 383,237 391,143 2000............................... 322,667 369,815 ---------- ---------- $2,049,635 $1,687,998 ========== ==========
Rent expense totaled $100,646, $168,956 and $275,460 for fiscal years 1993, 1994 and 1995, respectively. Rent expense totaled $92,447 (unaudited) and $311,005 for the six months ended July 2, 1995 and June 30, 1996, respectively. 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. 13. PENDING BUSINESS COMBINATION: 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 have an aggregate carrying value of approximately $51,000 as of June 30, 1996. In addition, the Company plans to make cash distributions equal to the Company's S Corporation Accumulated Adjustment Account as of the merger date. As of June 30, 1996 the Company's Accumulated Adjustment Account totaled approximately $300,000. 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-34 99 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company has advanced $187,500 to StaffMark to fund organizational and other costs related to the planned merger and StaffMark's initial public offering. 14. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION (UNAUDITED): In conjunction with the planned merger with StaffMark as discussed in Note 13, the Company will change from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which will require the Company to recognize the tax consequences of operations in its statements of income. The supplemental pro forma information included in the accompanying statements of income reflect the estimated impact of recognizing income tax expense as if the Company had been a C Corporation for tax reporting purposes during the twelve months and six months ended December 31, 1995 and June 30, 1996, respectively. As discussed in Note 13, the Company intends to make distributions equal to the Company's S Corporation Accumulated Adjustment Account as of the merger date. The supplemental pro forma information included in the accompanying balance sheet reflects the estimated impact of recording these distributions as if such distributions had occurred as of June 30, 1996. The pro forma adjustments are based on the assumption that the distributions will be funded with additional borrowings. F-35 100 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 June 30, 1996, and the related combined statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 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 The Prostaff Companies as of December 31, 1994 and 1995 and the six months ended June 30, 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 and the six months ended June 30, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Little Rock, Arkansas, July 26, 1996. F-36 101 THE PROSTAFF COMPANIES COMBINED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------------- JUNE 30, 1994 1995 1996 ---------- ---------- ---------- CURRENT ASSETS: Cash and cash equivalents............................ $ 228,372 $ 188,145 $ 74,629 Certificates of deposit.............................. 152,028 155,154 -- Accounts receivable, net of allowance for doubtful accounts of $10,000, $48,500 and $65,000, respectively...................................... 2,634,108 3,020,622 3,951,580 Deferred tax asset................................... 154,601 -- -- Prepaid expenses and other........................... 86,337 135,673 150,933 ---------- ---------- ---------- Total current assets......................... 3,255,446 3,499,594 4,177,142 PROPERTY AND EQUIPMENT, net............................ 640,552 756,983 829,919 OTHER ASSETS: Cash surrender value of officer's life insurance..... 34,670 41,280 41,280 Advance to StaffMark, Inc............................ -- -- 31,250 Other................................................ 3,675 4,730 14,875 ---------- ---------- ---------- Total other assets........................... 38,345 46,010 87,405 ---------- ---------- ---------- $3,934,343 $4,302,587 $5,094,466 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit....................................... $ 417,000 $ 20,000 $1,177,300 Current maturities of long-term debt................. 61,742 64,872 66,648 Note payable to stockholder.......................... -- 30,000 30,000 Accounts payable and accrued liabilities............. 83,413 117,339 97,598 Outstanding checks................................... 109,084 -- 249,838 Payroll and related liabilities...................... 703,263 1,129,777 1,233,266 Reserve for workers' compensation claims............. 439,444 635,290 638,000 Income taxes payable................................. 54,883 -- -- ---------- ---------- ---------- Total current liabilities.................... 1,868,829 1,997,278 3,492,650 LONG-TERM DEBT, less current maturities................ 170,064 111,459 77,665 DEFERRED INCOME TAXES.................................. 57,885 -- -- COMMITMENTS AND CONTINGENCIES (Notes 6 through 10) STOCKHOLDERS' EQUITY: Common stock, (par values of $.20 to $1.00) authorized shares of 200,000 in 1994 and 201,000 in 1995 and at June 30, 1996, shares issued and outstanding of 55,000 in 1994, 55,100 in 1995 and at June 30, 1996.................................. 11,000 11,100 11,100 Retained earnings.................................... 1,826,565 2,182,750 1,513,051 ---------- ---------- ---------- Total stockholders' equity................... 1,837,565 2,193,850 1,524,151 ---------- ---------- ---------- $3,934,343 $4,302,587 $5,094,466 ========== ========== ==========
The accompanying notes to combined financial statements are an integral part of these balance sheets. F-37 102 THE PROSTAFF COMPANIES COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ----------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) SERVICE REVENUES............ $27,244,744 $30,607,744 $34,330,413 $16,063,019 $18,919,437 COST OF SERVICES............ 22,858,206 25,455,432 28,234,379 13,238,533 15,383,556 ----------- ----------- ----------- ----------- ----------- Gross profit...... 4,386,538 5,152,312 6,096,034 2,824,486 3,535,881 OPERATING EXPENSES: Selling, general and administrative......... 3,640,825 4,184,021 5,338,844 2,430,961 2,766,915 Depreciation and amortization........... 114,796 174,998 220,433 103,005 127,951 ----------- ----------- ----------- ----------- ----------- Operating income.......... 630,917 793,293 536,757 290,520 641,015 OTHER INCOME (EXPENSE): Interest expense.......... (87,181) (28,689) (20,393) (10,056) (28,953) Interest income and other.................. 60,745 10,987 26,537 13,665 10,971 ----------- ----------- ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES.............. 604,481 775,591 542,901 294,129 623,033 PROVISION FOR INCOME TAXES..................... 205,742 253,847 96,716 96,716 -- ----------- ----------- ----------- ----------- ----------- Net income........ $ 398,739 $ 521,744 $ 446,185 $ 197,413 $ 623,033 =========== =========== =========== =========== =========== PRO FORMA DATA (Unaudited) (Note 11): Historical income before income taxes........... $ 542,901 $ 623,033 Less pro forma provision for income taxes....... 211,731 242,983 ----------- ----------- PRO FORMA NET INCOME........ $ 331,170 $ 380,050 =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-38 103 THE PROSTAFF COMPANIES COMBINED STATEMENTS OF STOCKHOLDERS' 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 Resources, Inc.............................. 100 100 -- 100 Dividends...................................... -- -- (90,000) (90,000) ------ ------- ----------- ----------- BALANCE, December 31, 1995....................... 55,100 11,100 2,182,750 2,193,850 Net income..................................... -- -- 623,033 623,033 Dividends...................................... -- -- (1,292,732) (1,292,732) ------ ------- ----------- ----------- BALANCE, June 30, 1996........................... 55,100 $11,100 $ 1,513,051 $ 1,524,151 ====== ======= =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-39 104 THE PROSTAFF COMPANIES COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ----------------------------------- ------------------------ 1993 1994 1995 1995 1996 --------- --------- --------- --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................. $ 398,739 $ 521,744 $ 446,185 $ 197,413 $ 623,033 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............ 114,796 174,998 220,433 103,005 127,951 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 12,100 16,500 Loss on sale of property and equipment... -- 20,854 -- -- 2,672 Change in operating assets and liabilities, net of effects of acquisition: Restricted certificates of deposit..... 600,000 -- 152,028 -- -- Accounts receivable.................... (637,401) (143,183) (403,041) (585,986) (947,458) Prepaid expenses and other............. (38,493) (2,052) (49,336) (14,985) (15,260) Other assets........................... 2,357 (8,979) (7,665) (2,635) (10,145) Accounts payable and accrued liabilities......................... 21,229 (10,535) 33,926 (9,687) (19,741) Outstanding checks..................... -- 109,084 (109,084) (109,084) 249,838 Payroll and related liabilities........ 193,651 5,365 426,514 871,132 103,489 Reserve for workers' compensation claims.............................. 148,385 101,480 195,846 92,556 2,710 Income taxes payable................... (15,039) (19,130) (54,883) (54,883) -- --------- --------- --------- --------- ----------- Net cash provided by operating activities........................ 780,647 739,625 986,139 595,662 133,589 --------- --------- --------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Advance to StaffMark, Inc.................. -- -- -- -- (31,250) Acquisition of personnel service business................................. -- -- (30,000) -- -- Capital expenditures....................... (405,265) (293,936) (328,837) (236,228) (203,559) Purchase of certificates of deposit........ -- -- (155,154) -- -- Proceeds from the sale of property and equipment................................ -- 1,400 -- -- -- Proceeds from the sale of certificates of deposit.................................. -- -- -- -- 155,154 --------- --------- --------- --------- ----------- Net cash used in investing activities........................ (405,265) (292,536) (513,991) (236,228) (79,655) --------- --------- --------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments) borrowings under line of credit................................... $(125,000) $(158,000) $(397,000) $(417,000) $ 1,157,300 Proceeds from note payable to stockholder.............................. -- -- 30,000 -- -- Payments on note payable to stockholder.... (530,000) -- -- -- -- Proceeds from issuance of long-term debt... 290,237 -- -- -- -- Payments on long-term debt................. -- (58,431) (55,475) (24,394) (32,018) Proceeds from issuance of common stock..... -- -- 100 -- -- Dividends.................................. (25,625) (44,479) (90,000) -- (1,292,732) --------- --------- --------- --------- ----------- Net cash used in financing activities........................ (390,388) (260,910) (512,375) (441,394) (167,450) --------- --------- --------- --------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................ (15,006) 186,179 (40,227) (81,960) (113,516) 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 $ 146,412 $ 74,629 ========= ========= ========= ========= =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid.............................. $ 84,708 $ 30,549 $ 21,006 $ 10,056 $ 28,953 ========= ========= ========= ========= =========== 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-40 105 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 June 30, 1996, Prostaff operated staffing offices in 23 locations in Arkansas. Excel was incorporated in the state of Arkansas on October 25, 1990 and is engaged in providing temporary personnel services to one large 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%, 14% and 17% of combined service revenues for 1993, 1994, 1995 and the six months ended June 30, 1996, 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 for the six months ended June 30, 1995 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 for the six months ended June 30, 1996, and include all adjustments (which were 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. F-41 106 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 $869,867 at December 31, 1994, 1995 and June 30, 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. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated economic lives or the terms of the lease. The estimated useful lives of the Company's assets, by asset classification, 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 stockholder 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 stockholders. Upon election of S Corporation status, the Company wrote off net deferred tax F-42 107 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 stockholders could also change. 2. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
DECEMBER 31, ----------------------- JUNE 30, 1994 1995 1996 -------- ---------- ---------- Office equipment................................ $311,414 $ 412,661 $ 478,930 Computer equipment.............................. 382,903 477,744 518,003 Vehicles........................................ 107,900 136,859 107,510 Computer software............................... 113,884 165,635 214,587 Leasehold improvements.......................... 83,593 136,949 171,308 -------- ---------- ---------- 999,694 1,329,848 1,490,338 Less accumulated depreciation and amortization.................................. 359,142 572,865 660,419 -------- ---------- ---------- $640,552 $ 756,983 $ 829,919 ======== ========== ==========
3. DEBT: Long-term debt consisted of the following:
DECEMBER 31, ----------------------- JUNE 30, 1994 1995 1996 -------- ---------- ---------- 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 stockholders............................... $231,806 $ 176,331 $ 144,313 Less current maturities......................... 61,742 64,872 66,648 -------- ---------- ---------- $170,064 $ 111,459 $ 77,665 ======== ========== ==========
Total maturities of long-term debt are as follows:
YEARS ENDING ------------------------- DECEMBER 31, JUNE 30, ------------ -------- 1996................................. $ 64,872 $ -- 1997................................. 68,531 66,648 1998................................. 42,928 70,439 1999................................. -- 7,226 -------- -------- $176,331 $144,313 ======== ========
F-43 108 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Line of credit balances consisted of the following:
DECEMBER 31, ------------------- JUNE 30, 1994 1995 1996 -------- ------- ---------- Line of credit with Boatmen's Bank. Maximum borrowings of $1.5 million. Accrues interest at a variable rate, which ranged from 8.25% to 9.0% and averaged 8.63% during the six months ended June 30, 1996. Due upon demand. Secured by the accounts receivable of Prostaff and guaranteed by stockholders....................................... $417,000 $ -- $1,078,000 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 stockholder......... -- 20,000 21,300 Line of credit with Mercantile Bank. Maximum borrowings of $250,000. Interest payable monthly at a fixed rate of 9.25%, which changed to 10.0% in May 1996 and averaged 9.5% during the six months ended June 30, 1996. Secured by accounts receivable of Excel and guaranteed by stockholders............ -- -- 78,000 -------- ------- ---------- $417,000 $20,000 $1,177,300 ======== ======= ==========
4. NOTE PAYABLE TO STOCKHOLDER: In order to effect the acquisition made by Professional, as discussed in Note 1, Professional borrowed $30,000 from the sole stockholder 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 stockholder in 1995 and for the six months ended June 30, 1996 was $246 and $1,156, respectively. During 1993, the Company repaid a $530,000 note payable to stockholder. Total interest paid to the stockholder 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 ======== ========
F-44 109 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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 ======== ========
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 stockholders 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, up to a maximum of $2.0 million. Workers' compensation expense totaled $820,569, $728,281, $765,893 and $263,287 for 1993, 1994, 1995 and the six months ended June 30, 1996, respectively. Unaudited workers' compensation expense for the six months ended June 30, 1995 was $368,055. 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 contribu- F-45 110 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) tions made by the Company to the plan for 1995 and the six months ended June 30, 1996 were $12,448 and $8,802, respectively. 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 monthly claims in excess of an amount equal to $75.80 multiplied by the number of personnel enrolled in the plan. Total claims expense for 1995 and the six months ended June 30, 1996 was $35,550 and $40,995, respectively. 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. These payments are expensed on a monthly basis as paid. The consulting agreement also includes a covenant against competition with the Company for a five-year period. The Company also has a consulting agreement with an individual which provides for monthly minimum payments of $750, in return for assisting the Company in developing an affirmative action plan, monitoring unemployment control and consulting on other human resource issues. The Company has an employment agreement with one member of management that provides for a monthly salary of $6,833 through March 1998. The employment agreement also includes a covenant against competition with the Company, which extends through March 2000, or for two years after termination. 9. NONCANCELABLE OPERATING LEASES: The Company leases office space under noncancelable operating leases. Annual future minimum payments required under operating leases that have an initial or remaining noncancelable lease term in excess of one year are as follows:
YEARS ENDING ------------------------- DECEMBER 31, JUNE 30, 1995 1996 ------------ -------- 1996................................. $323,397 $ -- 1997................................. 264,480 314,022 1998................................. 216,665 250,926 1999................................. 106,499 183,121 2000................................. 63,424 93,392 -------- -------- $974,465 $841,461 ======== ========
Rent expense totaled $147,835, $197,243, $258,992 and $165,473 for fiscal years 1993, 1994, 1995 and the six months ended June 30, 1996, respectively. Unaudited rent expense for the six months ended June 30, 1995 was $121,942. The Company leases the office facilities of its headquarters from a limited liability corporation ("LLC") owned by the stockholders of the Company. For the fiscal years 1993, 1994, 1995 and the six months ended June 30, 1996, rent paid to the LLC totaled $61,100, $73,761, $114,180 and $62,550, respectively. Unaudited rent paid to the LLC was $56,128 for the six months ended June 30, 1995. F-46 111 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 10. PENDING BUSINESS COMBINATION: In June 1996, the stockholders 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 stockholders consisting of vehicles and the cash surrender value of an officer's life insurance policy, which had an aggregate carrying value of $76,223 as of June 30, 1996. In addition, the Company plans to make cash distributions equal to the Company's S Corporation Accumulated Adjustment Account as of the merger date. During 1996, the Company distributed $1,292,732, which represented the Company's estimated S Corporation Accumulated Adjustment Account at June 30, 1996. In conjunction with the proposed merger discussed above, certain of the stockholders 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. The Company has advanced $31,250 to StaffMark to fund organizational and other costs related to the planned merger and StaffMark's initial public offering. 11. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION (UNAUDITED): In conjunction with the planned merger with StaffMark as discussed in Note 10, the Company will change from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which will require the Company to recognize the tax consequences of operations in its statements of income. The supplemental pro forma information included in the accompanying statements of income reflect the estimated impact of recognizing income tax expense as if the Company had been a C Corporation for tax reporting purposes during the twelve months and six months ended December 31, 1995 and June 30, 1996, respectively. F-47 112 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 June 30, 1996, and the related combined statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and for the six months ended June 30, 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 The Maxwell Companies as of December 31, 1994 and 1995 and June 30, 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 and for the six months ended June 30, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Little Rock, Arkansas, July 26, 1996. F-48 113 THE MAXWELL COMPANIES COMBINED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------------ JUNE 30, 1994 1995 1996 ---------- ---------- ---------- CURRENT ASSETS: Cash and cash equivalents.............................. $ 556,544 $1,041,373 $ 665,639 Restricted cash........................................ 138,453 253,171 109,181 Investments............................................ 209,505 273,354 -- Accounts receivable, net of allowance for doubtful accounts of $75,711, $63,988 and $109,908, respectively........................................ 2,810,176 2,536,603 2,676,251 Prepaid expenses and other............................. 96,669 24,628 136,684 ---------- ---------- ---------- Total current assets........................... 3,811,347 4,129,129 3,587,755 PROPERTY AND EQUIPMENT, net.............................. 480,594 499,792 295,312 INTANGIBLE ASSETS, net................................... -- -- 297,146 ADVANCE TO STAFFMARK, INC................................ -- -- 31,250 ---------- ---------- ---------- $4,291,941 $4,628,921 $4,211,463 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable....................................... $ 167,991 $ 169,250 $ 238,036 Payroll and related liabilities........................ 653,772 570,444 885,804 Reserve for workers' compensation claims............... 476,000 1,153,000 912,000 Current maturities of long-term debt................... -- -- 1,827,361 Accrued dividends...................................... 197,500 151,000 -- Other accrued liabilities.............................. 20,728 25,462 4,127 ---------- ---------- ---------- Total current liabilities...................... 1,515,991 2,069,156 3,867,328 LONG-TERM DEBT, less current maturities.................. -- -- 77,562 COMMITMENTS AND CONTINGENCIES (Notes 8 through 12) STOCKHOLDERS' 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 gain on investments......................... -- 43,296 -- Retained earnings...................................... 2,771,950 2,512,469 261,573 ---------- ---------- ---------- Total stockholders' equity..................... 2,775,950 2,559,765 266,573 ---------- ---------- ---------- $4,291,941 $4,628,921 $4,211,463 ========== ========== ==========
The accompanying notes to combined financial statements are an integral part of these balance sheets. F-49 114 THE MAXWELL COMPANIES COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ----------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) SERVICE REVENUES............... $16,324,216 $21,225,866 $23,092,606 $11,533,102 $13,232,174 COST OF SERVICES............... 11,253,565 16,003,387 17,748,020 8,644,339 9,892,232 ----------- ----------- ----------- ----------- ----------- Gross profit......... 5,070,651 5,222,479 5,344,586 2,888,763 3,339,942 OPERATING EXPENSES: Selling, general and administrative............ 3,582,427 3,820,565 4,296,703 2,244,644 2,480,578 Depreciation and amortization.............. 75,368 107,601 136,135 69,690 72,507 ----------- ----------- ----------- ----------- ----------- Operating income..... 1,412,856 1,294,313 911,748 574,429 786,857 OTHER INCOME (EXPENSE): Interest income.............. 14,767 21,645 43,213 25,235 33,681 Interest expense............. (27,678) (33,849) -- -- (22,174) Other, net................... (104,397) (18,836) (35,396) (32,837) 21,954 ----------- ----------- ----------- ----------- ----------- Net income........... $ 1,295,548 $ 1,263,273 $ 919,565 $ 566,827 $ 820,318 =========== =========== =========== =========== =========== PRO FORMA DATA (Unaudited) (Note 15): Historical income before income taxes.............. $ 919,565 $ 820,318 Less pro forma provision for income taxes.............. 358,630 319,924 ----------- ----------- PRO FORMA NET INCOME........... $ 560,935 $ 500,394 =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-50 115 THE MAXWELL COMPANIES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK UNREALIZED ---------------- GAIN ON RETAINED SHARES AMOUNT INVESTMENTS 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............................ -- -- -- 820,318 820,318 Issuance of stock..................... 1,000 1,000 -- -- 1,000 Dividends declared: Cash............................... -- -- -- (2,620,341) (2,620,341) Investments........................ -- -- (43,296) (230,058) (273,354) Property........................... -- -- -- (220,815) (220,815) ----- ------ ------ ----------- ----------- BALANCE, June 30, 1996.................. 5,000 $5,000 $ -- $ 261,573 $ 266,573 ===== ====== ====== =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-51 116 THE MAXWELL COMPANIES COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ---------- ----------- ----------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................... $1,295,548 $ 1,263,273 $ 919,565 $ 566,827 $ 820,318 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................ 75,368 107,601 136,135 69,690 72,507 Provision for bad debts...................... 77,690 100,615 223,216 196,737 45,920 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) 28,805 143,990 Accounts receivable........................ (777,846) (1,073,300) 50,357 168,500 (185,568) Prepaid expenses and other................. 26,124 (10,457) 72,041 61,474 (112,056) Accounts payable........................... 40,808 (74,812) 1,259 54,496 68,786 Payroll and related liabilities............ 525,769 33,483 (83,328) 304,624 315,360 Reserve for workers' compensation claims... -- 476,000 677,000 444,500 (241,000) Other accrued liabilities.................. 64,574 (43,846) 4,734 (61,202) (15,592) ---------- ----------- ---------- ---------- --------- Net cash provided by operating activities............................ 1,364,617 718,558 1,884,115 1,834,451 912,665 ---------- ----------- ---------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Sumner-Ray Technical Resources, Inc.......................................... -- -- -- -- (168,000) Capital expenditures........................... (155,150) (211,595) (155,333) (51,492) (68,810) Purchase of investments........................ (109,144) (13,750) (116,526) (11,476) -- Sales of investments........................... -- -- 98,119 -- -- Advance to StaffMark, Inc...................... -- -- -- -- (31,250) ---------- ----------- ---------- ---------- --------- Net cash used in investing activities... (264,294) (225,345) (173,740) (62,968) (268,060) ---------- ----------- ---------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends................................. $ (813,409) $ (666,854) $(1,225,546) $(1,057,559) $(2,771,339) Proceeds from (payments on) long-term debt..... (46,297) (336,801) -- -- 1,750,000 Issuance of stock.............................. -- 500 -- -- 1,000 ---------- ----------- ---------- ---------- --------- Net cash used in financing activities... (859,706) (1,003,155) (1,225,546) (1,057,559) (1,020,339) ---------- ----------- ---------- ---------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... 240,617 (509,942) 484,829 713,924 (375,734) 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 $1,270,468 $ 665,639 ========== =========== ========== ========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid.................................. $ 27,678 $ 23,950 $ -- $ -- $ 18,047 ========== =========== ========== ========== ========= Non-cash transactions: Notes payable issued in conjunction with the purchase of Sumner-Ray Technical Resources, Inc.......................................... $ -- $ -- $ -- $ -- $ 149,180 ========== =========== ========== ========== ========= Transfer of investments to stockholders........ $ -- $ -- $ -- $ -- $ 273,354 ========== =========== ========== ========== ========= Transfer of property to stockholders........... $ -- $ -- $ -- $ -- $ 220,815 ========== =========== ========== ========== =========
The accompanying notes to combined financial statements are an integral part of these statements. F-52 117 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 as of June 30, 1995 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 for the six months ended June 30, 1996, and include all adjustments (which were 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-53 118 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 $623,219 at December 31, 1994, December 31, 1995 and June 30, 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 stockholders' 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 over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated economic lives or the terms of the lease. The estimated useful lives of the Company's assets, by asset classification, 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 June 30, 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 F-54 119 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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: 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, ------------------------- JUNE 30, 1994 1995 1996 ---------- ---------- -------- Building and improvements....................... $ 483,136 $ 502,130 $ -- Office equipment................................ 346,530 386,411 411,253 Computer equipment.............................. 204,268 300,265 337,639 Vehicles........................................ 25,105 27,561 27,561 Leasehold improvements.......................... -- -- 17,274 Land............................................ 13,000 13,000 -- ---------- ---------- -------- 1,072,039 1,229,367 793,727 Less accumulated depreciation and amortization.................................. 591,445 729,575 498,415 ---------- ---------- -------- $ 480,594 $ 499,792 $295,312 ========== ========== ========
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. Depreciation and amortization expense for the six months ended June 30, 1995 and 1996 totaled $69,690 (unaudited) and $67,474, respectively. F-55 120 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. 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. 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 1995, including realization of a gross gain of $2,146. The gain and losses are reflected in other income (expense) in the accompanying combined statements of income and were determined using each security's specifically identified cost. All investments were distributed to the stockholders in March 1996. The related unrealized holding gain was removed in connection with this dividend. 5. INTANGIBLE ASSETS: Intangible assets, net of amortization, at June 30, 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 $5,034 for the six months ended June 30, 1996. 6. LONG-TERM DEBT: Long-term debt as of June 30, 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. 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 and guaranteed by the Company's stockholders. 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 14. F-56 121 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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 stockholders. 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 stockholders 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 June 30, 1996, this letter of credit was in the amount of $450,000. Workers' compensation expense totaled $485,151, $918,961 and $1,089,901 for the years ended December 31, 1993, 1994 and 1995, respectively, and $532,462 (unaudited) for the six months ended June 30, 1995. A credit to workers' compensation expense totaling $51,682 was recorded for the six months ended June 30, 1996 due to a reduction in the actuarially determined reserves required which was primarily the result of using the Company's own claim development experience versus industry development factors which had been used in previous actuarial valuations. 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 matching contributions to be made by the Company to the plan for the six months ended June 30, 1996 were $26,359. No discretionary contributions were made during the six months ended June 30, 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 for individuals which exceeded $10,000, $15,000, $25,000 and $25,000 at December 31, 1993, 1994, 1995 and June 30, 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. Expenses related to this plan for the six months ended June 30, 1995 and 1996 were $146,501 (unaudited) and $129,406, respectively. F-57 122 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 10. RELATED PARTY TRANSACTIONS: The Company rents a duplex from certain stockholders 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. Rent expense totaled $8,400 (unaudited) and $8,500 for the six months ended June 30, 1995 and 1996, respectively. 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, 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 stockholders subject to the satisfaction of certain performance measures of Square One. As of June 30, 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 stockholders 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. Annual future minimum payments during each of the next five years required under such leases are as follows:
YEARS ENDING --------------------------- DECEMBER 31, JUNE 30, ------------ -------- 1996............................... $224,093 $ -- 1997............................... 67,545 186,877 1998............................... 52,132 58,087 1999............................... 43,643 47,039 2000............................... 43,643 43,643 -------- -------- $431,056 $335,646 ======== ========
Rent expense totaled $75,472, $123,099 and $134,231 for the years ended December 31, 1993, 1994 and 1995, respectively. Rent expense for the six months ended June 30, 1995 and 1996 was $32,747 (unaudited) and $66,778, respectively. F-58 123 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 13. SIGNIFICANT CUSTOMERS: The Company's sales to customers which individually account for 10% or more of service revenues were as follows:
YEARS ENDED DECEMBER SIX MONTHS ENDED 31, JUNE 30, -------------------- ------------------- 1993 1994 1995 1995 1996 ---- ---- ---- ----------- ---- (UNAUDITED) Customer 1....................................... 21% 14% 10% -- -- Customer 2....................................... -- 14% 12% 16% 13% Customer 3....................................... -- -- -- -- 11%
14. PENDING BUSINESS COMBINATION: 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. In conjunction with this proposed merger, the Company transferred certain assets to the stockholders consisting of the building in which the Company is headquartered, which had an aggregate carrying value of $220,815 as of April 1996. StaffMark plans to lease the real property distributed, as discussed above, from the owners at a market lease rate. In addition, the Company plans to make cash distributions equal to the Company's S Corporation Accumulated Adjustment Account as of the merger date. During 1996, the Company distributed cash of approximately $2.6 million, which represented the Company's estimated S Corporation Accumulated Adjustment Account at June 30, 1996. 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. The Company has advanced $31,250 to StaffMark to fund organizational and other costs related to the planned merger and StaffMark's initial public offering. 15. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION (UNAUDITED): In conjunction with the planned merger with StaffMark as discussed in Note 14, the Company will change from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which will require the Company to recognize the tax consequences of operations in its statements of income. The supplemental pro forma information included in the accompanying statements of income reflect the estimated impact of recognizing income tax expense as if the Company had been a C Corporation for tax reporting purposes during the twelve months and six months ended December 31, 1995 and June 30, 1996, respectively. F-59 124 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 June 30, 1996, and the related statements of income (loss), stockholders' equity and cash flows for each of the three years ended September 30, 1995, and the nine months ended June 30, 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 HRA, Inc. as of September 30, 1994 and 1995 and June 30, 1996, and the results of its operations and its cash flows for each of the three years ended September 30, 1995 and the nine months ended June 30, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Memphis, Tennessee, July 26, 1996. F-60 125 HRA, INC. BALANCE SHEETS ASSETS
SEPTEMBER 30, ------------------------- JUNE 30, 1994 1995 1996 ---------- ---------- ---------- CURRENT ASSETS: Cash and cash equivalents............................ $ 577,214 $ 367,978 $ 505,810 Restricted cash...................................... 60,083 50,251 -- Accounts receivable, net of allowance for doubtful accounts of $26,000............................... 1,684,052 1,998,724 2,783,617 Advances to stockholders............................. -- -- 340,089 Prepaid expenses and other........................... 12,616 467,002 775,335 Income taxes receivable.............................. -- 25,125 -- Deferred income taxes................................ 33,100 160,000 226,800 ---------- ---------- ---------- Total current assets......................... 2,367,065 3,069,080 4,631,651 PROPERTY AND EQUIPMENT, net............................ 70,261 144,179 195,952 INTANGIBLE ASSETS, net................................. -- 37,156 165,635 OTHER ASSETS: Deferred income taxes................................ 79,700 65,000 56,600 Advance to StaffMark, Inc............................ -- -- 31,250 Other................................................ 400 21,071 1,423 ---------- ---------- ---------- Total other assets........................... 80,100 86,071 89,273 ---------- ---------- ---------- $2,517,426.. $3,336,486 $5,082,511 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Borrowings under accounts receivable financing agreement......................................... $ 600,830 $ 502,512 $ -- Line of credit....................................... -- -- 1,020,000 Current portion of deferred compensation arrangements...................................... 97,898 43,699 110,709 Outstanding checks................................... -- 166,761 261,240 Accounts payable..................................... 118,906 193,096 196,024 Payroll and related liabilities...................... 493,033 621,317 710,282 Reserve for workers' compensation claims............. 475,712 1,390,351 1,787,641 Income taxes payable................................. 228,217 -- 189,648 Accrued expenses..................................... 72,084 138,416 125,149 Current portion of note payable to a stockholder..... 155,295 -- -- ---------- ---------- ---------- Total current liabilities.................... 2,241,975 3,056,152 4,400,693 DEFERRED COMPENSATION ARRANGEMENTS, less current portion.............................................. 97,824 127,332 264,937 NOTE PAYABLE TO A STOCKHOLDER.......................... -- 122,000 116,000 COMMITMENTS AND CONTINGENCIES (Notes 10, 11 and 13) STOCKHOLDERS' 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 18,402 288,281 ---------- ---------- ---------- Total stockholders' equity................... 177,627 31,002 300,881 ---------- ---------- ---------- $2,517,426 $3,336,486 $5,082,511 ========== ========== ==========
The accompanying notes are an integral part of these balance sheets. F-61 126 HRA, INC. STATEMENTS OF INCOME (LOSS)
FISCAL YEARS NINE MONTHS ENDED JUNE 30, ----------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) SERVICE REVENUES............ $13,333,022 $16,453,375 $18,306,542 $13,173,951 $16,882,905 COST OF SERVICES............ 10,985,142 13,367,561 14,939,279 10,745,155 13,550,821 ----------- ----------- ----------- ----------- ----------- Gross profit...... 2,347,880 3,085,814 3,367,263 2,428,796 3,332,084 OPERATING EXPENSES: Selling, general and administrative......... 2,107,544 2,381,168 3,438,436 2,384,437 2,985,392 Depreciation and amortization........... 33,773 45,783 65,691 33,832 67,900 ----------- ----------- ----------- ----------- ----------- Operating income (loss).......... 206,563 658,863 (136,864) 10,527 278,792 Interest expense.......... (84,448) (100,828) (107,364) (69,942) (78,401) Interest and other, net... 6,192 16,466 13,443 6,241 243,861 ----------- ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES.............. 128,307 574,501 (230,785) (53,174) 444,252 PROVISION (BENEFIT) FOR INCOME TAXES.............. 43,250 221,100 (84,160) (17,907) 174,373 ----------- ----------- ----------- ----------- ----------- Net income (loss).......... $ 85,057 $ 353,401 $ (146,625) $ (35,267) $ 269,879 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-62 127 HRA, INC. STATEMENTS OF STOCKHOLDERS' 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 income...................................... -- -- 269,879 269,879 --- ------- --------- --------- BALANCE, June 30, 1996............................ 790 $12,600 $ 288,281 $ 300,881 === ======= ========= =========
The accompanying notes are an integral part of these financial statements. F-63 128 HRA, INC. STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED FISCAL YEARS JUNE 30, --------------------------------- ------------------------ 1993 1994 1995 1995 1996 --------- --------- --------- ----------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....................................... $ 85,057 $ 353,401 $(146,625) $ (35,267) $ 269,879 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................... 33,773 45,783 65,691 33,832 67,900 Provision for bad debts............................... 45,480 4,498 2,041 1,194 25,422 Change in deferred income taxes....................... (5,700) (10,200) (112,200) (84,150) (58,400) Change in operating assets and liabilities: Accounts receivable................................. (231,286) (421,143) (316,713) (202,085) (810,315) Income taxes receivable............................. -- -- (25,125) -- 25,125 Prepaid expenses and other.......................... (15,147) 2,531 (454,386) (408,180) (308,333) Other assets........................................ 9,583 17 (20,671) (1,023) 19,648 Outstanding checks.................................. -- -- 166,761 161,573 94,479 Accounts payable.................................... (50,994) 51,940 49,190 (30,036) (2,328) Payroll and related liabilities..................... (117,269) (30,697) 128,284 11,762 88,965 Reserve for workers' compensation claims............ 285,837 (68,655) 914,639 751,652 397,290 Accrued expenses.................................... 30,053 (21,755) 66,332 27,666 (13,267) Income taxes payable................................ 31,508 192,487 (228,217) (156,010) 189,648 --------- --------- --------- --------- ---------- Net cash provided by (used in) operating activities..................................... 100,895 98,207 89,001 70,928 (14,287) --------- --------- --------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.................................... (50,834) (40,096) (135,765) (132,600) (103,259) Advance to StaffMark, Inc. ............................. -- -- -- -- (31,250) Other................................................... 10,000 -- (16,000) -- -- --------- --------- --------- --------- ---------- Net cash used in investing activities............ (40,834) (40,096) (151,765) (132,600) (134,509) --------- --------- --------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (increase) decrease in restricted cash.............. -- (60,083) 9,832 22,807 50,251 Increase in deferred compensation arrangements.......... -- 21,559 -- -- 135,596 Payments on deferred compensation arrangements.......... (24,996) -- (24,691) (19,659) (70,618) Net borrowings (payments) under an accounts receivable financing agreement................................... 500,000 100,830 (98,318) (228,075) (502,512) Net borrowings under a revolving line of credit......... -- -- -- -- 1,020,000 Principal payments on note payable to a stockholder..... (140,154) -- (33,295) (27,000) (6,000) Advances to stockholders................................ -- -- -- (25,988) (340,089) Proceeds from issuance of common stock.................. -- 11,600 -- -- -- Other................................................... (7,299) (5,749) -- -- -- --------- --------- --------- --------- ---------- Net cash provided by (used in) financing activities..................................... 327,551 68,157 (146,472) (277,915) 286,628 --------- --------- --------- --------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 387,612 126,268 (209,236) (339,587) 137,832 CASH AND CASH EQUIVALENTS, beginning of period............ 63,334 450,946 577,214 577,214 367,978 --------- --------- --------- --------- ---------- CASH AND CASH EQUIVALENTS, end of period.................. $ 450,946 $ 577,214 $ 367,978 $ 237,627 $ 505,810 ========= ========= ========= ========= ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid........................................... $ 65,444 $ 77,737 $ 106,467 $ 60,768 $ 76,866 ========= ========= ========= ========= ========== Taxes paid.............................................. $ 20,742 $ 41,813 $ 267,622 $ 206,298 $ 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 nine month period ended June 30, 1996, the Company recorded a deferred compensation arrangement liability for the purchase of a noncompete agreement with a former stockholder totaling $139,637. The accompanying notes are an integral part of these financial statements. F-64 129 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 nine month interim 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 nine month interim periods included in the accompanying financial statements each included 39 weeks. Interim Financial Statements -- The accompanying interim financial statements for the nine months ended June 30, 1995 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 for the nine months ended June 30, 1996, and include all adjustments (which were 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-65 130 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 June 30, 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 nine months ended June 30, 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 stockholder 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 stockholder and the Company's borrowing arrangements secured by accounts receivable, including the F-66 131 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Company's line of credit, 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, -------------------- JUNE 30, 1994 1995 1996 -------- -------- -------- Office equipment.................................. $ 38,689 $ 65,237 $108,564 Computer equipment................................ 80,222 141,200 163,957 Computer software................................. 34,959 76,715 88,984 Leasehold improvements............................ 11,993 17,569 42,475 -------- -------- -------- 165,863 300,721 403,980 Less accumulated depreciation and amortization.... 95,602 156,542 208,028 -------- -------- -------- $ 70,261 $144,179 $195,952 ======== ======== ========
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. Depreciation and amortization expense related to property and equipment totaled $33,832 (unaudited) and $51,486 for the nine months ended June 30, 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 nine months ended June 30, 1996 totaled approximately $1,700 and $5,300, respectively. The Company is amortizing this arrangement over the 48-month term of the agreement.
SEPTEMBER 30, JUNE 30, 1995 1996 ------------- -------- Consulting and noncompetition agreement................... $41,000 $ 41,000 Noncompete agreement with a former stockholder (Note 10)..................................................... -- 139,637 Other..................................................... -- 5,256 ------- -------- 41,000 185,893 Less accumulated amortization............................. 3,844 20,258 ------- -------- $37,156 $165,635 ======= ========
Amortization expense totaled $3,844 in fiscal year 1995 and $16,414 for the nine months ended June 30, 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-67 132 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 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 stockholders. Interest is payable monthly on outstanding borrowings at the Bank's base rate plus 1.25% (weighted average rate of 9.31% during the nine months ended June 30, 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 June 30, 1996, the Company was not in compliance with the tangible net worth ratio requirement. However, the lender has agreed to forbear from enforcing such events of noncompliance and default through maturity. As of June 30, 1996, the Company had borrowed $1,020,000 under this line of credit and principally used the proceeds to repurchase previously sold accounts receivable. As discussed in Note 15, the line of credit was amended on July 11, 1996. The amendment allows the Company to borrow an amount equal to 85% of its outstanding Eligible Accounts Receivable, as defined, not to exceed an aggregate borrowing of $2,000,000, and also extends the maturity date from November 20, 1996 to January 20, 1997. An additional provision requires that $160,000 of the amount available under the line be held in reserve until certain indebtedness of the Company is paid in full or is subordinated to the security interest of the Bank. 6. NOTE PAYABLE TO A STOCKHOLDER: As of September 30, 1994 and 1995, the Company had a note payable to a former stockholder 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 nine months ended June 30, 1995 and 1996, interest expense on this note totaled $9,075 (unaudited) and $7,069, respectively. In connection with the purchase of this stockholder's common stock in the Company by two of the remaining stockholders (Note 10), 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. F-68 133 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) As of June 30, 1996, the Company owed $116,000 pursuant to this amended note agreement. Annual maturities pursuant to this note are as follows:
YEARS ENDING YEARS ENDING SEPTEMBER 30, JUNE 30, ------------- ------------ 1996............................... $ -- $ -- 1997............................... -- -- 1998............................... 35,753 25,027 1999............................... 57,917 53,413 2000............................... 20,301 32,486 Thereafter......................... 2,029 5,074 -------- -------- $116,000 $116,000 ======== ========
7. INCOME TAXES: Components of the provision for income taxes were as follows:
NINE MONTHS ENDED FISCAL YEARS JUNE 30, ------------------------------- ----------------------- 1993 1994 1995 1995 1996 ------- -------- -------- ----------- -------- (UNAUDITED) Current: Federal........................ $39,550 $194,600 $ 10,180 $ 55,644 $195,973 State.......................... 9,400 36,700 4,100 10,599 36,800 Deferred......................... (5,700) (10,200) (98,440) (84,150) (58,400) ------- -------- -------- -------- -------- $43,250 $221,100 $(84,160) $(17,907) $174,373 ======= ======== ======== ======== ========
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:
NINE MONTHS ENDED FISCAL YEARS JUNE 30, -------------------------------- ----------------------- 1993 1994 1995 1995 1996 -------- -------- -------- ----------- -------- (UNAUDITED) Taxes at statutory U.S. income tax rate...................... $43,624 $201,075 $(80,775) $(18,611) $155,488 Increase (decrease) resulting from: Tax penalties................. 4,281 846 -- -- -- State income taxes, net of federal benefit............ 6,204 23,855 2,666 1,840 23,920 Effect of graduated federal income tax rate............ (13,112) (7,672) (9,933) (3,236) -- Meals and entertainment and other...................... 2,253 2,996 3,882 2,100 (5,035) ------- -------- -------- -------- -------- $43,250 $221,100 $(84,160) $(17,907) $174,373 ======= ======== ======== ======== ========
F-69 134 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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, --------------------- JUNE 30, 1994 1995 1996 -------- -------- -------- Compensation agreements............................. $ 76,600 $ 65,000 $ 89,800 Vacation and workers' compensation reserves......... 36,200 160,000 193,600 -------- -------- -------- $112,800 $225,000 $283,400 ======== ======== ========
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. 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 prepaid expenses and other in the accompanying balance sheets are deposits to fund workers' compensation claims totaling $451,617 and $684,615 as of September 30, 1995 and June 30, 1996, respectively. Workers' compensation expense totaled $527,077, $664,468 and $1,270,271 for the fiscal years ended September 30, 1993, 1994 and 1995, respectively. For the nine months ended June 30, 1995 and 1996, workers' compensation expense totaled $950,334 (unaudited) and $937,126, respectively. 9. RELATED PARTY TRANSACTIONS: Stockholder Transaction -- During November 1995, two of the Company's stockholders purchased the entire common stock interest in the Company (approximately 32%) from another stockholder. In conjunction with this transaction, the Company acted as guarantor on the notes payable issued by the acquiring stockholders 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 stockholder (Note 10). Advances to Stockholders -- In conjunction with the stockholder transaction described above and other matters, the Company advanced $250,000 to two of its stockholders during November 1995. An additional $42,800 was advanced to the two stockholders subsequent to November 1995. The Company has paid $47,289 for consulting and other professional services related to the Company's participation in the merger transaction discussed in Note 14. These costs are to be repaid by the stockholders of the Company and have been reflected as advances to stockholders in the accompanying balance sheet as of June 30, 1996. F-70 135 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Other -- 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 stockholders for $90,000, which was paid by the Company. This payment was expensed in the nine months ended June 30, 1996. Included in selling, general and administrative expenses are advisor and/or director fees paid or payable to the stockholders 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 nine months ended June 30, 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 stockholder in connection with the purchase of such stockholder's common stock in the Company by two of the remaining stockholders (Note 9). Pursuant to these agreements, the Company was to pay the former stockholder, 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 nine months ended June 30, 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. The following summarizes the Company's obligations under these deferred compensation arrangements:
SEPTEMBER 30, --------------------- JUNE 30, 1994 1995 1996 -------- -------- -------- Consulting arrangement............................. $195,722 $171,031 $134,436 Severance agreement with a former stockholder...... -- -- 101,961 Noncompete agreement with a former stockholder..... -- -- 139,249 -------- -------- -------- 195,722 171,031 375,646 Less current portion............................... 97,898 43,699 110,709 -------- -------- -------- $ 97,824 $127,332 $264,937 ======== ======== ========
F-71 136 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Annual maturities pursuant to the consulting arrangement are as follows:
YEARS ENDING YEARS ENDING SEPTEMBER 30, JUNE 30, ------------- ------------ 1996............................... $ 22,050 $ -- 1997............................... 111,955 110,709 1998............................... 61,079 73,310 1999............................... 35,402 37,818 2000............................... 5,911 14,560 Thereafter......................... 139,249 139,249 -------- -------- $375,646 $375,646 ======== ========
11. NONCANCELABLE OPERATING LEASES: The Company leases office locations and certain equipment under noncancelable operating lease agreements expiring at various times through April 30, 2003. Future minimum payments required under operating leases that have an initial or remaining noncancelable lease term in excess of one year at June 30, 1996, are as follows:
YEARS ENDING YEARS SEPTEMBER 30, ENDING JUNE 30, ------------- --------------- 1996............................... $ 49,603 $ - 1997............................... 148,377 173,977 1998............................... 55,153 67,622 1999............................... 38,056 37,810 2000............................... 38,805 38,551 Thereafter......................... 65,072 76,811 -------- -------- $395,066 $394,771 ======== ========
Rent expense totaled $156,224, $143,430 and $194,096 for fiscal years 1993, 1994 and 1995, respectively. For the nine months ended June 30, 1995 and 1996, rent expense totaled $151,386 (unaudited) and $194,424, 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 for fiscal year 1995 and the nine months ended June 30, 1996, respectively. Contributions deposited into the plan are held by an unrelated third party and are registered in the name of the participants. F-72 137 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 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. 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, which is included in other income for the nine months ended June 30, 1996. 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. PENDING BUSINESS COMBINATION: 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 stockholders. 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. The Company has advanced $31,250 to StaffMark to fund organizational and other costs related to the planned merger and StaffMark's initial public offering. 15. SUBSEQUENT EVENT: On July 11, 1996, the Company completed the purchase of the assets and intellectual property of Dorothy Johnson's Career Consultants, Inc. ("Career Consultants"). Career Consultants provides permanent placement services on a fee basis to companies primarily in the Nashville, Tennessee area. The purchase price was $850,000 and included a payment for assets and a non-compete agreement with the principal stockholder of Career Consultants. The purchase was financed with borrowings under the Company's line of credit (Note 5), which was extended in contemplation of this transaction. The acquisition will be accounted for as a purchase business combination. A preliminary allocation of the related purchase price has not been made at this time. The operations of Career Consultants were not significant to the Company's historical operating results. F-73 138 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 June 30, 1996, and the related statements of income, stockholders' equity and cash flows for each of the three fiscal years in the period ended December 31, 1995, and the six months ended June 30, 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 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 June 30, 1996, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 31, 1995, and the six month period ended June 30, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Raleigh, North Carolina, July 26, 1996. F-74 139 FIRST CHOICE STAFFING, INC. BALANCE SHEETS ASSETS
FISCAL YEARS JUNE 30, 1996 ------------------------ ------------------------- 1994 1995 ACTUAL PRO FORMA ---------- ---------- ---------- ----------- (UNAUDITED) (NOTE 10) CURRENT ASSETS: Cash and cash equivalents.................. $ 194,111 $ 268,440 $ 12,028 $ 12,028 Accounts receivable, net................... 1,078,340 1,145,532 1,671,794 1,671,794 Prepaid expenses and other................. 71,100 72,171 38,972 38,972 ---------- ---------- ---------- ---------- Total current assets............... 1,343,551 1,486,143 1,722,794 1,722,794 ---------- ---------- ---------- ---------- PROPERTY AND EQUIPMENT, net.................. 196,110 327,240 350,838 350,838 ---------- ---------- ---------- ---------- OTHER ASSETS: Investment in captive insurance pool....... 36,000 36,000 36,000 36,000 Advance to StaffMark, Inc. ................ -- -- 31,250 31,250 Other...................................... -- -- 14,351 14,351 ---------- ---------- ---------- ---------- Total other assets................. 36,000 36,000 81,601 81,601 ---------- ---------- ---------- ---------- $1,575,661 $1,849,383 $2,155,233 $2,155,233 ========== ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit............................. $ -- $ 200,000 $ 250,000 $ 250,000 Accounts payable........................... 21,326 65,608 96,540 96,540 Accrued workers' compensation.............. 92,347 46,359 49,963 49,963 Payroll and related benefits............... 630,555 534,047 500,475 500,475 Other accrued expenses..................... 7,000 5,735 -- -- Note payable to stockholder................ 250,000 180,000 140,000 140,000 ---------- ---------- ---------- ---------- Total current liabilities.......... 1,001,228 1,031,749 1,036,978 1,036,978 ---------- ---------- ---------- ---------- LONG-TERM DEBT, less current maturities...... -- -- -- 790,000 ---------- ---------- ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 6, 8 and 9) STOCKHOLDERS' EQUITY: Common stock, $1 par value, 100,000 shares authorized, 10,000 shares issued and outstanding............................. 10,000 10,000 10,000 10,000 Retained earnings.......................... 564,433 807,634 1,108,255 318,255 ---------- ---------- ---------- ---------- Total stockholders' equity......... 574,433 817,634 1,118,255 328,255 ---------- ---------- ---------- ---------- $1,575,661 $1,849,383 $2,155,233 $2,155,233 ========== ========== ========== ==========
The accompanying notes to financial statements are an integral part of these balance sheets. F-75 140 FIRST CHOICE STAFFING, INC. STATEMENTS OF INCOME
SIX MONTHS ENDED FISCAL YEARS ------------------------- ----------------------------------------- JUNE 25, JUNE 30, 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ---------- (UNAUDITED) SERVICE REVENUES.............. $10,807,801 $13,007,484 $13,703,404 $6,640,485 $7,884,470 COST OF SERVICES.............. 8,825,086 10,573,111 11,149,085 5,403,659 6,385,847 ----------- ----------- ----------- ---------- ---------- Gross profit........ 1,982,715 2,434,373 2,554,319 1,236,826 1,498,623 OPERATING EXPENSES: Selling, general and administrative........... 1,361,834 2,485,029 2,258,780 1,027,890 1,137,700 Depreciation................ 34,570 34,357 32,923 16,452 46,535 ----------- ----------- ----------- ---------- ---------- Operating income (loss)............ 586,311 (85,013) 262,616 192,484 314,388 OTHER INCOME (EXPENSE): Interest expense............ (71) (26,109) (19,415) (11,227) (13,767) Other, net.................. (2,427) 2,256 -- -- -- ----------- ----------- ----------- ---------- ---------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES....................... 583,813 (108,866) 243,201 181,257 300,621 PROVISION (BENEFIT) FOR INCOME TAXES....................... 232,787 (168,251) -- -- -- ----------- ----------- ----------- ---------- ---------- Net income.......... $ 351,026 $ 59,385 $ 243,201 $ 181,257 $ 300,621 =========== =========== =========== ========== ========== PRO FORMA DATA (Unaudited) (Note 10): Historical income before income taxes............. $ 243,201 $ 300,621 Lesspro forma provision for income taxes............ 94,848 117,242 ----------- ---------- PRO FORMA NET INCOME $ 148,353 $ 183,379 =========== ==========
The accompanying notes to financial statements are an integral part of these statements. F-76 141 FIRST CHOICE STAFFING, INC. STATEMENTS OF STOCKHOLDERS' 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....................................... -- -- 300,621 300,621 ------ ------- ---------- ---------- BALANCE, June 30, 1996............................. 10,000 $10,000 $1,108,255 $1,118,255 ====== ======= ========== ==========
The accompanying notes to financial statements are an integral part of these statements. F-77 142 FIRST CHOICE STAFFING, INC. STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED FISCAL YEARS ------------------------ ----------------------------------- JUNE 25, JUNE 30, 1993 1994 1995 1995 1996 --------- --------- --------- ----------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................................... $ 351,026 $ 59,385 $ 243,201 $181,257 $ 300,621 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation................................. 34,570 34,357 32,923 16,452 46,535 Deferred income taxes........................ (3,908) 11,256 -- Change in operating assets and liabilities: Accounts receivable, net................... (311,121) (149,482) (67,192) 89,585 (526,262) Prepaid expenses and other................. (32,022) (15,485) (1,071) 39,345 33,199 Other assets............................... (158,104) -- -- -- (14,351) Accounts payable........................... 12,587 (2,923) 44,282 8,736 30,932 Accrued workers' compensation.............. 68,247 10,867 (45,988) (42,160) 3,604 Payroll and related liabilities............ 189,670 259,929 (96,508) (54,964) (33,572) 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 45,576 108,382 231,251 (165,029) --------- --------- --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................ (53,582) (120,441) (164,053) (69,622) (70,133) Advance to StaffMark, Inc....................... -- -- -- -- (31,250) --------- --------- --------- -------- --------- Net cash used in investing activities... (53,582) (120,441) (164,053) (69,622) (101,383) --------- --------- --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payments on) line of credit...... (191,038) -- 200,000 -- 50,000 Proceeds from note payable to stockholder....... 9,349 250,000 -- -- -- Payments on note payable to stockholder......... -- (9,349) (70,000) -- (40,000) --------- --------- --------- -------- --------- Net cash provided by (used in) financing activities............................ (181,689) 240,651 130,000 -- 10,000 --------- --------- --------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... (26,893) 165,786 74,329 161,629 (256,412) 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 $355,740 $ 12,028 ========= ========= ========= ======== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid................................... $ 71 $ 26,109 $ 19,415 $ 6,285 $ 13,991 ========= ========= ========= ======== ========= Taxes paid (refunded)........................... $ 189,769 $ (26,393) $ -- $ -- $ -- ========= ========= ========= ======== =========
The accompanying notes to financial statements are an integral part of these statements. F-78 143 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 and incorporated in 1986 as a Dunhill Temporary Systems franchise. In 1989, the founders bought out the Dunhill franchise contract and formed First Choice Temporary Staffing, Inc. In 1993, 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% stockholder of the other 50% stockholder'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% stockholder'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. Due to the change in control of the Company occurring upon the acquisition of the former 50% stockholder's interest in 1990, this acquisition was accounted for as a purchase resulting in the recording of certain intangible assets. See above for further discussion. 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 interim financial information as of June 30, 1996, and for the six month periods ended June 25, 1995 (unaudited), and June 30, 1996, correspond to the Company's fiscal quarters which ended on the last Sunday in June. Interim Financial Statements -- The accompanying interim financial statements and related disclosures for the six month period ended June 25, 1995 have not been audited by independent accountants. However, the interim financial statements 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 for the six months ended June 30, 1996, and include all adjustments (which were 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 the interim periods. The operating results for all 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. F-79 144 FIRST CHOICE STAFFING, INC. NOTES TO 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 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 June 30, 1996. Included in accounts receivable in the accompanying balance sheets are unbilled amounts of $188,778, $172,834 and $371,360 at December 31, 1994, December 31, 1995 and June 30, 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. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated economic lives or the terms of the lease. The estimated useful lives of the Company's assets, by asset classification, 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 is retired, the cost of the property and equipment and the related accumulated depreciation is removed from the balance sheet and any resultant gain or loss is recorded. Other Assets -- Other assets contain an investment in a captive workers' compensation insurance pool of which the Company is a member, an advance to StaffMark, Inc. (as described in Note 8) and certain expenses and payments made relating to the acquisition of Strategic Sourcing, Inc. (SSI). 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 stockholder 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. F-80 145 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 stockholders 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 stockholders could also change. 2. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
FISCAL YEAR -------------------- JUNE 30, 1994 1995 1996 -------- -------- -------- Office equipment..................................... $117,938 $171,842 $190,774 Computer equipment................................... 123,966 153,405 192,906 Vehicles............................................. 16,301 26,501 26,501 Computer software.................................... 33,531 45,775 52,620 Leasehold improvements............................... 56,009 83,248 88,103 -------- -------- -------- 347,745 480,771 550,904 Less accumulated depreciation........................ 151,635 153,531 200,066 -------- -------- -------- $196,110 $327,240 $350,838 ======== ======== ========
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 $500,000 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 (8.25% at June 30, 1996), with principal due June 17, 1997. The weighted average interest rate was approximately 8.29% for the six months ended June 30, 1996. Amounts outstanding under the line were $0, $200,000 and $250,000 as of December 31, 1994, December 31, 1995 and June 30, 1996, respectively. The line of credit is secured by a personal guaranty of the majority stockholder. In addition, the line of credit is subject to certain financial ratios and restrictions on incurring additional debt. The Company was in compliance with these covenants as of June 30, 1996. The Company intends to renew this line of credit upon F-81 146 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) its annual maturity date. The Company had approximately $250,000 available under its line of credit at June 30, 1996. 4. NOTE PAYABLE TO STOCKHOLDER: The Company has an unsecured note payable to the majority stockholder with interest payable semiannually in June and December 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) ======== =========
F-82 147 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 December 31, 1995 and June 30, 1996, including noncancelable operating leases assumed in connection with the subsequent acquisition of SSI (Note 9), are as follows:
YEARS ENDING ------------------------- DECEMBER 31, JUNE 30, ------------ -------- 1996................................. $111,000 $ -- 1997................................. 101,000 109,000 1998................................. 86,000 93,000 1999................................. 68,000 86,000 2000................................. 43,000 52,000 Thereafter........................... 78,000 95,000 -------- -------- $487,000 $435,000 ======== ========
Rental expense totaled $61,000, $82,000 and $103,000 for fiscal years 1993, 1994 and 1995, respectively, and $40,000 (unaudited) and $53,000 for the six month periods ended June 25, 1995 and June 30, 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 contributions up to 3% of the employee's salary. The Company's contribution expense was $18,000 for 1995 and $4,000 (unaudited) and $10,000 for the six month periods ended June 25, 1995 and June 30, 1996, respectively. 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 six month periods ended June 25, 1995 (unaudited) and June 30, 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. 8. PENDING BUSINESS COMBINATION: In June 1996, the stockholders 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. In April 1996, the Company advanced $31,250 to StaffMark to fund organizational and other costs related to the planned merger and StaffMark's initial public offering. In conjunction with this merger, the Company plans to make a cash distribution to the majority stockholder representing the Company's S Corporation Accumulated Adjustment Account as of the merger date. The balance of the Company's S Corporation Accumulated Adjustment Account at June 30, 1996, was approximately $790,000. In addition, prior to or coincident with the merger, the Company intends to repay the note payable to stockholder. The Company expects to incur additional debt as a primary means of funding the repayment of the note payable to stockholder and distribution of the balance of the S Corporation Accumulated Adjustment Account. F-83 148 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In conjunction with the merger discussed above, the majority stockholder 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 stockholder's employment is terminated. 9. SUBSEQUENT ACQUISITION: On July 1, 1996, the Company acquired certain of the operating assets of SSI, a provider of permanent and temporary placement services to companies in the market for information technology professionals. SSI was incorporated in May 1993 and is located in Charlotte, North Carolina. The total purchase price of $700,000 and noncompete agreement with the seller of $50,000 were financed through borrowings from a bank and execution of a promissory note payable to the seller. All financing related to this acquisition is secured by the personal guaranty of the majority stockholder. The acquisition will be accounted for using the purchase method of accounting. Based on the preliminary purchase price allocation, fixed assets acquired will be recorded at historical, depreciated cost, which approximated fair value as of the acquisition date, and the remaining purchase price of approximately $680,000 will be recorded as goodwill and amortized on a straight-line basis over its estimated economic life of 30 years. 10. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION (UNAUDITED): In conjunction with the planned merger with StaffMark as discussed in Note 8, the Company will change from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which will require the Company to recognize the tax consequences of operations in its statements of income. The supplemental pro forma information included in the accompanying statements of income reflect the estimated impact of recognizing income tax expense as if the Company had been a C Corporation for tax reporting purposes during the twelve months and six months ended December 31, 1995 and June 30, 1996, respectively. As discussed in Note 8, the Company intends to make distributions equal to the Company's S Corporation Accumulated Adjustment Account as of the merger date. The supplemental pro forma information included in the accompanying balance sheet reflects the estimated impact of recording these distributions as if such distributions had occurred as of June 30, 1996. The pro forma adjustments are based on the assumption that the distributions will be funded with additional borrowings. F-84 149 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 January 1, 1995, December 31, 1995 and June 30, 1996, and the related combined statements of income (loss), stockholders' equity and cash flows for each of the three fiscal years in the period ended December 31, 1995 and for the six months ended June 30, 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 The Blethen Group as of January 1, 1995, December 31, 1995 and June 30, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1995, and for the six months ended June 30, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Raleigh, North Carolina, July 26, 1996. F-85 150 THE BLETHEN GROUP COMBINED BALANCE SHEETS ASSETS
JUNE 30, 1996 JANUARY 1, DECEMBER 31, ------------------------- 1995 1995 ACTUAL PRO FORMA ---------- ------------ ---------- ----------- (UNAUDITED) (NOTE 9) CURRENT ASSETS: Cash and cash equivalents................. $ 31,921 $ 44,644 $ 119,312 $ 119,312 Accounts receivable....................... 1,136,081 1,377,799 1,683,071 1,683,071 Deferred tax asset........................ 5,500 11,000 8,000 8,000 Prepaid expenses and other................ 16,809 14,510 15,551 15,551 ---------- ---------- ---------- ---------- Total current assets.............. 1,190,311 1,447,953 1,825,934 1,825,934 PROPERTY AND EQUIPMENT, net................. 393,330 307,286 278,481 278,481 OTHER ASSETS: Due from stockholders..................... 185,236 194,163 250,752 250,752 Deferred tax asset........................ 24,100 20,760 -- -- Advance to StaffMark, Inc................. -- -- 31,250 31,250 Other..................................... 11,750 12,232 12,184 12,184 ---------- ---------- ---------- ---------- Total other assets................ 221,086 227,155 294,186 294,186 ---------- ---------- ---------- ---------- $1,804,727 $1,982,394 $2,398,601 $2,398,601 ========== ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Lines of credit........................... $ 764,645 $ 971,436 $1,052,767 $1,052,767 Accounts payable.......................... 220,801 105,648 64,444 64,444 Outstanding checks........................ -- 25,329 -- -- Payroll and related liabilities........... 295,472 301,258 504,570 504,570 Current maturities of long-term debt...... 25,341 10,151 10,494 10,494 Current maturities of capital lease obligations............................ 82,708 47,148 -- -- Current maturities of notes payable to related parties........................ 83,308 62,813 82,467 82,467 Income taxes payable...................... 15,783 82,583 78,811 78,811 Accrued interest and other................ 16,001 55,043 42,898 42,898 ---------- ---------- ---------- ---------- Total current liabilities......... 1,504,059 1,661,409 1,836,451 1,836,451 LONG-TERM DEBT, less current maturities..... 35,604 24,922 19,092 289,092 CAPITAL LEASE OBLIGATIONS, less current maturities................................ 67,452 22,475 -- -- NOTES PAYABLE TO RELATED PARTIES, less current maturities........................ 49,037 45,271 46,882 46,882 DEFERRED TAX LIABILITY...................... -- -- 10,000 10,000 COMMITMENTS AND CONTINGENCIES (Notes 5, 6, 7 and 8) STOCKHOLDERS' EQUITY: Common stock.............................. 8,399 8,399 8,399 8,399 Additional paid-in capital................ 8,940 8,940 8,940 8,940 Retained earnings......................... 131,236 210,978 468,837 198,837 ---------- ---------- ---------- ---------- Total stockholders' equity........ 148,575 228,317 486,176 216,176 ---------- ---------- ---------- ---------- $1,804,727 $1,982,394 $2,398,601 $2,398,601 ========== ========== ========== ==========
The accompanying notes to combined financial statements are an integral part of these balance sheets. F-86 151 THE BLETHEN GROUP COMBINED STATEMENTS OF INCOME (LOSS)
SIX MONTHS ENDED FISCAL YEARS ------------------------ --------------------------------------- JULY 2, JUNE 30, 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ---------- (UNAUDITED) SERVICE REVENUES................ $11,197,726 $11,966,633 $13,380,157 $ 6,460,825 $7,721,134 COST OF SERVICES................ 8,131,773 8,806,124 9,917,548 4,897,262 5,918,388 ----------- ----------- ----------- ----------- ---------- Gross profit.......... 3,065,953 3,160,509 3,462,609 1,563,563 1,802,746 OPERATING EXPENSES: Selling, general and administrative............. 3,042,816 2,713,376 2,931,881 1,325,851 1,302,768 Depreciation and amortization............... 134,968 122,963 111,437 54,192 55,626 ----------- ----------- ----------- ----------- ---------- Operating income (loss).............. (111,831) 324,170 419,291 183,520 444,352 OTHER INCOME (EXPENSE): Interest expense.............. (134,815) (137,448) (140,800) (68,723) (82,628) Other, net.................... 19,467 2,917 10,884 (3,471) 1,161 ----------- ----------- ----------- ----------- ---------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES.... (227,179) 189,639 289,375 111,326 362,885 PROVISION (BENEFIT) FOR INCOME TAXES......................... (136,263) 49,000 81,000 37,000 60,159 ----------- ----------- ----------- ----------- ---------- Net income (loss)..... $ (90,916) $ 140,639 $ 208,375 $ 74,326 $ 302,726 =========== =========== =========== =========== ========== PRO FORMA DATA (Unaudited) (Note 9): Historical income before income taxes............... $ 289,375 $ 362,885 Less pro forma provision for income taxes............... 112,856 141,525 ----------- ---------- PRO FORMA NET INCOME............ $ 176,519 $ 221,360 =========== ==========
The accompanying notes to combined financial statements are an integral part of these statements. F-87 152 THE BLETHEN GROUP COMBINED STATEMENTS OF STOCKHOLDERS' 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...................................... -- -- 302,726 302,726 Dividends....................................... -- -- (44,867) (44,867) ------ -------- --------- --------- BALANCE, June 30, 1996............................ $8,399 $ 8,940 $ 468,837 $ 486,176 ====== ======== ========= =========
The accompanying notes to combined financial statements are an integral part of these statements. F-88 153 THE BLETHEN GROUP COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED FISCAL YEARS ------------------------ ----------------------------------- JULY 2, JUNE 30, 1993 1994 1995 1995 1996 --------- --------- --------- ----------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).............................. $ (90,916) $ 140,639 $ 208,375 $ 74,326 $ 302,726 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............... 134,968 122,963 111,437 54,192 55,626 Provision for (benefit from) deferred income taxes..................................... (136,263) 29,898 (2,160) (900) 33,760 Change in operating assets and liabilities: Accounts receivable....................... (17,767) (54,870) (241,718) (318,847) (305,272) Prepaid expenses and other................ (14,096) 30,971 2,299 (8,669) (1,041) Other assets.............................. 21,491 5,769 (482) -- 48 Accounts payable.......................... 180,570 (97,532) (115,153) 244,187 (41,204) Outstanding checks........................ -- -- 25,329 -- (25,329) Payroll and related liabilities........... (75,190) 65,663 5,786 (6,123) 203,312 Income taxes payable (receivable)......... (13,711) 29,494 66,800 38,657 (3,772) Accrued interest and other................ 77,477 (55,306) 39,042 15,497 (12,145) --------- --------- --------- --------- --------- Net cash provided by operating activities........................... 66,563 217,689 99,555 92,320 206,709 --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures........................... (130,178) (72,119) (25,393) -- (26,821) Advance to StaffMark, Inc...................... -- -- -- -- (31,250) --------- --------- --------- --------- --------- Net cash used in investing activities........................... (130,178) (72,119) (25,393) -- (58,071) --------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from lines of credit.............. 53,773 10,681 206,791 225,613 81,331 Proceeds from issuance of long-term debt....... 12,851 54,172 -- -- -- Payments on long-term debt..................... (28,243) (10,282) (25,872) (2,907) (5,487) Payments on capital lease obligations.......... (16,213) (113,042) (80,537) (41,943) (69,623) Change in notes payable to related parties..... 34,314 73,031 (24,261) (87,074) 21,265 Cash distributions to stockholders............. (57,343) (99,474) (128,633) (62,890) (44,867) Change in due from stockholders................ 837 (44,099) (8,927) 32,791 (56,589) --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities................. (24) (129,013) (61,439) 63,590 (73,970) --------- --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... (63,639) 16,557 12,723 155,910 74,668 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 $ 187,831 $ 119,312 ========= ========= ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid.................................. $ 97,062 $ 169,227 $ 141,324 $ 68,723 $ 80,541 ========= ========= ========= ========= ========= Taxes paid..................................... $ -- $ 66 $ 41,476 $ -- $ 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-89 154 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 June 30, 1996, 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, February 7, 1992 C Corporation Inc. ......................... 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, December 20, 1985 S Corporation Ltd. ......................... 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. 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 1995 and audited 1996 interim periods end on the Sunday closest to the end of the interim period. Each of the interim periods included in the accompanying combined financial statements includes 26 weeks. Interim Financial Statements -- The accompanying interim combined financial statements and related disclosures for the six months ended July 2, 1995, have not been audited by independent accountants. However, the combined financial statements for all interim periods 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 for the six months ended June 30, 1996, and include all adjustments (which were 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 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. F-90 155 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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 (Note 6), employs and pays individuals to perform services for the licensees' customers, invoice customers, maintain professional liability insurance and support 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 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 June 30, 1996. Included in accounts receivable in the accompanying combined balance sheets are unbilled amounts of $143,515, $149,665 and $394,098 at January 1, 1995, December 31, 1995 and June 30, 1996, respectively. All unbilled amounts are normally billed 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. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated economic lives or the terms of the lease. The estimated useful lives of the Company's assets, by asset classification, 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-91 156 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 stockholders and debt obligations. Management believes that these instruments bear interest at rates which approximate prevailing market rates for instruments with similar characteristics, and accordingly, 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 bases 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 stockholders. 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 stockholders could also change. 2. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
JANUARY 1, DECEMBER 31, JUNE 30, 1995 1995 1996 ---------- ------------ -------- Office equipment................................... $ 421,890 $428,610 $440,613 Computer equipment and software.................... 336,166 352,528 367,346 Vehicles........................................... 65,118 65,118 65,118 Leasehold improvements............................. 109,926 109,926 109,926 -------- -------- -------- 933,100 956,182 983,003 Less accumulated depreciation and amortization..... 539,770 648,896 704,522 -------- -------- -------- $ 393,330 $307,286 $278,481 ======== ======== ========
F-92 157 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. DEBT: Long-term debt consisted of the following:
JANUARY 1, DECEMBER 31, JUNE 30, 1995 1995 1996 ---------- ------------ -------- 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 $ 25,261 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 9.5% and averaged 9.29% during the first six months of 1996............................................. 9,873 6,559 4,325 ------- ------- ------- 60,945 35,073 29,586 Less current maturities.......................... 25,341 10,151 10,494 ------- ------- ------- $ 35,604 $ 24,922 $ 19,092 ======= ======= =======
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 10.75% to 11.00% and averaged 10.79% during the six months ended June 30, 1996. 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 stockholder. 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 liabilities. At June 30, 1996, approximately $27,914 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 monthly positive cash flow, among other things. As of June 30, 1996, the Company did not comply with certain of these ratios, as well as certain other negative covenants. However, Lighthouse Financial Corp. has agreed to forbear from enforcing such events of noncompliance and default. Balances outstanding under these lines were $764,645, $971,436 and $1,052,767 as of January 1, 1995, December 31, 1995 and June 30, 1996, respectively. Annual maturities of debt are as follows:
YEAR ENDING --------------------------- DECEMBER 31, JUNE 30, ------------ ---------- 1996............................... $ 981,587 $ -- 1997............................... 10,262 1,063,261 1998............................... 7,773 8,140 1999............................... 6,887 8,027 2000............................... -- 2,925 2001............................... -- -- ---------- ---------- $1,006,509 $1,082,353 ========== ==========
F-93 158 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. INCOME TAXES: Provision (benefit) for income taxes consisted of the following components:
SIX MONTHS ENDED FISCAL YEARS ----------------------- ------------------------------- JULY 2, JUNE 30, 1993 1994 1995 1995 1996 --------- ------- ------- ----------- -------- (UNAUDITED) Current: Federal......................... $ -- $19,102 $69,160 $32,000 $ 23,240 State........................... -- -- 14,000 5,900 3,159 --------- ------- ------- ------- ------- -- 19,102 83,160 37,900 26,399 --------- ------- ------- ------- ------- Deferred: Federal......................... (109,263) 23,898 (1,660) (900) 29,260 State........................... (27,000) 6,000 (500) -- 4,500 --------- ------- ------- ------- ------- (136,263) 29,898 (2,160) (900) 33,760 --------- ------- ------- ------- ------- Total................... $(136,263) $49,000 $81,000 $37,000 $ 60,159 ========= ======= ======= ======= =======
Provision (benefit) for income taxes differs from the amount computed by applying the federal statutory tax rate to pretax income due to the following:
SIX MONTHS ENDED FISCAL YEARS ----------------------- --------------------------------- JULY 2, JUNE 30, 1993 1994 1995 1995 1996 --------- -------- -------- ----------- -------- (UNAUDITED) Provision (benefit) for income taxes computed at the federal statutory rate................. $ (77,000) $ 64,000 $ 98,000 $38,000 $123,000 State taxes, net of federal tax benefit........................ (12,000) 10,000 15,000 6,000 19,000 Effect of permanent differences.................... 1,000 2,000 3,000 1,000 1,000 Income of S Corporations not subject to taxation............ (43,000) (19,000) (32,000) (7,000) (82,000) Other............................ (5,263) (8,000) (3,000) (1,000) (841) --------- -------- -------- ------- -------- Provision (benefit) for income taxes.......................... $(136,263) $ 49,000 $ 81,000 $37,000 $ 60,159 ========= ======== ======== ======= ========
F-94 159 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes reflect the impact of "temporary differences" between the financial and tax bases of assets and liabilities. The temporary differences which gave rise to deferred tax assets and (liabilities) are as follows:
JANUARY 1, DECEMBER 31, JUNE 30, 1995 1995 1996 ---------- ------------ -------- 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 1,000 ------- ------- ------- 5,500 11,000 8,000 Long-term -- Net operating losses ("NOLs").................. 78,000 42,000 9,000 Accelerated depreciation for tax purposes...... (30,000) (26,000) (24,000) Alternative minimum tax and other credits...... 13,000 4,000 5,000 Change in income tax accounting method......... (37,000) -- -- Other.......................................... 100 760 -- ------- ------- ------- 24,100 20,760 (10,000) ------- ------- ------- Net deferred tax assets (liabilities)............ $ 29,600 $ 31,760 $ (2,000) ======= ======= =======
The NOL carryforward at June 30, 1996 was approximately $23,000. 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 8). However, management believes that the deferred tax asset related to the NOL carryforward is fully realizable, and therefore no valuation allowance has been recorded. 5. 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 stockholder. 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 U.S. Treasury notes (5.69% at June 30, 1996). The outstanding balances as of January 1, 1995, December 31, 1995 and June 30, 1996 were $68,694, $49,038 and $46,882, 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 $1,500 during the unaudited six month period ended July 2, 1995 and $2,000 during the six month period ended June 30, 1996. The Company had a note payable to a former stockholder which originated through the Company's purchase of the former stockholder'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 stockholders, which bear interest at variable rates ranging between 9.25% and 9.50%. Both notes are due on demand and aggregate outstanding balances as of January 1, 1995, December 31, 1995 and June 30, 1996, were $52,337, $59,046 and $82,467, respectively. Interest expense related to these notes amounted to $5,000 and $6,000 during fiscal years 1994 and 1995, respectively, and $3,000 and $4,000 during the unaudited six month period ended July 2, 1995 and the six month period ended June 30, 1996, respectively. F-95 160 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Stockholder Transactions -- The Company leases office space and a vehicle from the majority stockholder 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. Rental expense under the above agreements totaled $14,400 for each of the fiscal years 1993, 1994 and 1995 and $7,200 (unaudited) and $9,600 for the six month period ended July 2, 1995 and for the six month period ended June 30, 1996, respectively. Due from stockholders primarily represents advances to the majority stockholder. The Company rents its Henderson office facilities from a stockholder 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 $12,000 during the unaudited six month period ended July 2, 1995 and $13,700 during the six month period ended June 30, 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. 6. COMMITMENTS AND CONTINGENCIES: Distributions to Stockholders -- Blethen Temporaries, Inc. and Jaeger Personnel Services, Ltd. pay dividends to their stockholders 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 $48,290 during the six month period ended June 30, 1996. Such expense is included in selling, general and administrative expenses in the accompanying combined statements of income (loss). Capital Lease Obligations -- The Company previously leased certain assets (primarily office equipment) under capital leases. All capital lease obligations were paid in full during the six month period ended June 30, 1996. F-96 161 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. NONCANCELABLE OPERATING LEASES: The Company leases office space and a vehicle (Note 5) under noncancelable operating leases. As discussed in Note 5, 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 are as follows:
YEAR ENDING ------------------------- DECEMBER 31, JUNE 30, ------------ -------- 1996................................. $ 93,395 $ -- 1997................................. 86,317 101,883 1998................................. 88,140 103,677 1999................................. 33,932 80,958 2000................................. -- 13,572 -------- -------- $301,784 $300,090 ======== ========
Rental expense totaled $95,208, $155,230 and $157,121 for fiscal years 1993, 1994 and 1995, respectively, and $75,391 and $77,535 for the unaudited six month period ended July 2, 1995, and the six month period ended June 30, 1996, respectively. 8. PENDING BUSINESS COMBINATION: In June 1996, certain of the stockholders 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. In April 1996, the Company advanced $31,250 to StaffMark to fund organizational and other costs related to the planned merger and StaffMark's initial public offering. In conjunction with this merger, the Company plans to make a cash distribution to the majority stockholder representing the Company's S Corporation Accumulated Adjustment Account as of the merger date. The estimated balance of the Company's S Corporation Accumulated Adjustment Account at June 30, 1996, was approximately $270,000. In conjunction with the merger discussed above, the majority stockholder 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 stockholder's employment is terminated. 9. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION (UNAUDITED): In conjunction with the planned merger with StaffMark as discussed in Note 8, the Company will change from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which will require the Company to recognize the tax consequences of operations in its statements of income. The supplemental pro forma information included in the accompanying statements of income reflect the estimated impact of recognizing income tax expense as if the Company had been a C Corporation for tax reporting purposes during the twelve months and six months ended December 31, 1995 and June 30, 1996, respectively. As discussed in Note 8, the Company intends to make distributions equal to the Company's S Corporation Accumulated Adjustment Account as of the merger date. The supplemental pro forma information included in the accompanying balance sheet reflects the estimated impact of recording these distributions as if such distributions had occurred as of June 30, 1996. The pro forma adjustments are based on the assumption that the distributions will be funded with additional borrowings. F-97 162 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-98 163 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-99 164 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-100 165 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-101 166 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 Outstanding checks, net...................... -- 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-102 167 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. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated economic lives or the terms of the lease. The estimated useful lives of the Company's assets, by asset classification, 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-103 168 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-104 169 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-105 170 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-106 171 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-107 172 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-108 173 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-109 174 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-110 175 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-111 176 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-112 177 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-113 178 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-114 179 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), stockholders' 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, July 26, 1996. F-115 180 STRATEGIC SOURCING, INC. BALANCE SHEETS ASSETS
DECEMBER 31, -------------------- JUNE 30, 1994 1995 1996 -------- -------- ----------- (UNAUDITED) CURRENT ASSETS: Cash...................................................... $ 26,159 $ 13,281 $ 67,691 Accounts receivable....................................... 92,041 121,217 138,024 Prepaid expenses and other................................ -- 1,675 7,065 -------- -------- -------- Total current assets.............................. 118,200 136,173 212,780 PROPERTY AND EQUIPMENT, net................................. 13,406 21,667 18,945 OTHER ASSETS................................................ 2,435 2,347 1,845 -------- -------- -------- $134,041 $160,187 $ 233,570 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable.......................................... $ 4,038 $ 9,118 $ 9,118 Payroll and related liabilities........................... 26,869 6,325 24,465 Current portion of notes payable to stockholders.......... 55,000 6,145 47,626 Line of credit............................................ -- -- 10,000 -------- -------- -------- Total current liabilities......................... 85,907 21,588 91,209 NOTE PAYABLE TO STOCKHOLDER................................. 69,166 63,021 59,866 COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' 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 79,495 -------- -------- -------- Total stockholders' equity (deficit).............. (21,032) 75,578 82,495 -------- -------- -------- $134,041 $160,187 $ 233,570 ======== ======== ========
The accompanying notes to financial statements are an integral part of these balance sheets. F-116 181 STRATEGIC SOURCING, INC. STATEMENTS OF INCOME (LOSS)
SIX MONTHS ENDED PERIOD FROM JUNE 30, MAY 25, YEAR ENDED -------------------------- 1993 TO DECEMBER 31, 1995 1996 DECEMBER 31, ---------------------- ----------- ----------- 1993 1994 1995 ------------ -------- ---------- (UNAUDITED) (UNAUDITED) REVENUES: Service revenues................ $ 23,932 $608,030 $1,013,332 $ 627,338 $ 384,897 Permanent placement fee revenues..................... 26,407 85,068 230,166 109,763 64,209 -------- -------- ---------- -------- -------- 50,339 693,098 1,243,498 737,101 449,106 COST OF SERVICES.................. 10,236 358,228 612,197 406,632 240,040 -------- -------- ---------- -------- -------- Gross profit............ 40,103 334,870 631,301 330,469 209,066 OPERATING EXPENSES: Selling, general and administrative............... 101,920 278,603 414,254 206,675 142,529 Depreciation and amortization... 1,769 3,258 5,015 2,212 2,722 -------- -------- ---------- -------- -------- Operating income (loss)................ (63,586) 53,009 212,032 121,582 63,815 OTHER INCOME (EXPENSE), net....... (1,356) (12,099) 735 1,691 (433) -------- -------- ---------- -------- -------- Net income (loss)....... $(64,942) $ 40,910 $ 212,767 $ 123,273 $ 63,382 ======== ======== ========== ======== ========
The accompanying notes to financial statements are an integral part of these statements. F-117 182 STRATEGIC SOURCING, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
TOTAL RETAINED STOCKHOLDERS' 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 income (Unaudited).................................. -- 63,382 63,382 Dividends (Unaudited)................................... -- (56,465) (56,465) ------ --------- --------- BALANCE, June 30, 1996 (Unaudited)........................ $3,000 $ 79,495 $ 82,495 ====== ========= =========
The accompanying notes to financial statements are an integral part of these statements. F-118 183 STRATEGIC SOURCING, INC. STATEMENTS OF CASH FLOWS
PERIOD FROM MAY 25, YEAR ENDED SIX MONTHS ENDED 1993, TO DECEMBER 31, JUNE 31, DECEMBER 31, ------------------- ------------------------- 1993 1994 1995 1995 1996 ------------ -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)..................... $(64,942) $ 40,910 $212,767 $ 123,273 $ 63,382 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization...... 1,769 3,258 5,015 2,212 2,722 Change in operating assets and liabilities: Accounts receivable.............. (32,230) (59,811) (29,176) 2,815 (16,807) Prepaid expenses and other....... -- -- (1,675) -- (5,390) Other assets..................... (1,072) (1,363) 88 -- 502 Accounts payable................. 5,911 (1,873) 5,080 3,380 -- Payroll and related liabilities................... 2,099 24,770 (20,544) 12,425 18,140 --------- --------- ---------- --------- --------- Net cash provided by (used in) operating activities........ (88,465) 5,891 171,555 144,105 62,549 --------- --------- ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.................. (17,691) (742) (13,276) (7,370) -- --------- --------- ---------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock.............................. 3,000 -- -- -- -- Proceeds from (payments on) line of credit............................. 50,000 (50,000) -- -- 10,000 Proceeds from note payable to stockholder........................ 68,379 55,787 -- -- 38,326 Payments on note payable to stockholder........................ -- -- (55,000) (29,727) -- Dividends............................. -- -- (116,157) (54,158) (56,465) --------- --------- ---------- --------- --------- Net cash provided by (used in) financing activities........ 121,379 5,787 (171,157) (83,885) (8,139) --------- --------- ---------- --------- --------- NET INCREASE (DECREASE) IN CASH......... 15,223 10,936 (12,878) 52,850 54,410 CASH, beginning of period............... -- 15,223 26,159 26,159 13,281 --------- --------- ---------- --------- --------- CASH, end of period..................... $ 15,223 $ 26,159 $ 13,281 $ 79,009 $ 67,691 ========= ========= ========== ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid......................... $ 1,356 $ 2,901 $ -- $ -- $ 1,138 ========= ========= ========== ========= =========
The accompanying notes to financial statements are an integral part of these statements. F-119 184 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 (which were 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 June 30, 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 70% and 15% of total revenues for the unaudited six month period ended June 30, 1995. Revenues from four customers accounted for 48%, 17%, 14% and 11% of total revenues for the unaudited six month period ended June 30, 1996. F-120 185 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, ------------------- JUNE 30, 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) (12,764) ------- -------- -------- $13,406 $ 21,667 $ 18,945 ======= ======== ========
Depreciation and amortization expense related to property and equipment totaled $1,769, $3,258 and $5,015 for 1993, 1994 and 1995, respectively, and $2,212 and $2,722 for the unaudited six month periods ended June 30, 1995 and 1996, respectively. 3. LINE OF CREDIT: 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%. 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 stockholder. At June 30, 1996, the amount outstanding under the line was $10,000. In July 1996, the amount outstanding was repaid and the line was dissolved. F-121 186 STRATEGIC SOURCING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. NOTES PAYABLE TO STOCKHOLDERS: The Company had borrowings from a stockholder 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 these borrowings, 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 stockholder. 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 =======
In April 1996, the Company borrowed $45,000 from the remaining stockholder under an informal arrangement. The borrowing accrued interest at prime plus 1.75% and was repaid in July 1996. 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 stockholders 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 stockholders 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 $10,150 and $8,375 for the unaudited six month periods ended June 30, 1995 and 1996, respectively. F-122 187 STRATEGIC SOURCING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. STOCKHOLDER TRANSACTION: In April 1996, one of the Company's 50% stockholders (the "former stockholder") transferred 300 shares of common stock of the Company, representing the former stockholder's entire interest, to the other 50% stockholder, 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 stockholder, as discussed in Note 4. 8. SUBSEQUENT EVENT: On July 1, 1996, the remaining stockholder sold certain of the operating assets of the Company for $700,000 to First Choice Staffing, Inc. In addition, the remaining stockholder received $50,000 in conjunction with the execution of a noncompete agreement. F-123 188 =============================================================================== 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.......................... 8 The Company........................... 13 Use of Proceeds....................... 15 Dividend Policy....................... 16 Dilution.............................. 17 Capitalization........................ 18 Selected Financial and Operating Data................................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 22 Business.............................. 39 Management............................ 48 Principal Stockholders................ 53 Description of Capital Stock.......... 54 Certain Transactions.................. 56 Shares Eligible for Future Sale....... 59 Underwriting.......................... 60 Legal Matters......................... 61 Experts............................... 61 Additional Information................ 62 Index to Financial Statements......... F-1
=============================================================================== =============================================================================== 5,500,000 SHARES [STAFFMARK LOGO] COMMON STOCK --------------------------- PROSPECTUS --------------------------- [J.C. BRADFORD & CO. LOGO] Stephens Inc. , 1996 =============================================================================== 189 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........................................................ $2,700,000 ==========
- --------------- * 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-1 190 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-2 191
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 10.4 -- Employment Agreement between StaffMark, Inc. and Terry C. Bellora. 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. 23.9 -- Consent of R. Clayton McWhorter to serve as a Director. 27.1* -- Financial Data Schedule.
- --------------- * Previously filed. ** 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 II-3 192 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 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-4 193 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 August 21, 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 August 21, 1996 - --------------------------------------------- Officer and Clete T. Brewer Director (Principal Executive Officer) /s/ TERRY C. BELLORA Chief Financial Officer August 21, 1996 - --------------------------------------------- (Principal Financial Terry C. Bellora and Accounting Officer) /s/ JERRY T. BREWER Chairman of the Board August 21, 1996 - --------------------------------------------- Jerry T. Brewer
II-5 194 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 10.4 -- Employment Agreement between StaffMark, Inc. and Terry C. Bellora. 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. 23.9 -- Consent of R. Clayton McWhorter to serve as a Director. 27.1* -- Financial Data Schedule
- --------------- * Previously filed. ** To be supplied by amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 STAFFMARK, INC. 5,500,000 SHARES OF COMMON STOCK UNDERWRITING AGREEMENT _____________________ J.C. BRADFORD & CO. STEPHENS INC. As Representatives of the several Underwriters c/o J.C. Bradford & Co. J.C. Bradford Financial Center 330 Commerce Street Nashville, Tennessee 37201 Ladies and Gentlemen: StaffMark, Inc., a Delaware corporation (the "Company"), proposes to sell to the several underwriters named in Schedule I hereto (the "Underwriters") for whom you are acting as the representatives (the "Representatives") with respect to the sale by the Company of 5,500,000 shares (the "Firm Shares") of the Company's common stock, par value $0.01 per share (the "Common Stock"). The Company has also agreed to grant to you an option (the "Option") to purchase up to 825,000 additional shares of Common Stock (the "Option Shares") on the terms and for the purposes set forth in Section 1(b) hereof. The Firm Shares and the Option Shares are hereinafter collectively referred to as the "Shares." The Company confirms as follows its agreements with you. 1. AGREEMENT TO SELL AND PURCHASE; PUBLIC OFFERING. (a) On the basis of the representations, warranties and covenants herein contained, and subject to all the terms and conditions of this Agreement, the Company agrees to sell to the Underwriters an aggregate of 5,500,000 Firm Shares, and each of the Underwriters, severally and not jointly, agrees to purchase at the purchase price of $______ per share, the number of Firm Shares set forth opposite such Underwriter's name in Schedule I hereto. (b) Subject to all the terms and conditions of this Agreement, the Company also grants the Underwriters an Option to purchase, severally and not jointly, up to 825,000 Option Shares from the Company, each at the same price per share as you shall pay for the Firm Shares. The Option may be exercised only to cover over-allotments in the sale of the Firm Shares and may be exercised in whole or in part at any time (but not more than once) on or before the 30th day after the date of the Prospectus (as defined below) upon written or telegraphic notice (the "Option Shares Notice") by you to the Company no later than 12:00 noon, Nashville, Tennessee time at least two and no more than ten business days before the date and time specified for closing in the Option Shares Notice (the "Option Closing Date") setting 2 forth the aggregate number of Option Shares to be purchased. On the Option Closing Date, the Company will issue and sell to the Underwriters the number of Option Shares set forth in the Option Shares Notice, and unless otherwise adjusted by the Representatives, each of the Underwriters will purchase such percentage of the Option Shares as is equal to the percentage of Firm Shares that such Underwriter is purchasing. (c) After the Registration Statement becomes effective, upon the authorization by you of the release of the Shares, the several Underwriters propose to offer the Firm Shares and the Option Shares purchased by the Underwriters for sale initially at the price per share set forth in the Prospectus (the initial offering price) and upon the terms set forth therein. 2. DELIVERY AND PAYMENT. Delivery of the Firm Shares shall be made to you by or on behalf of the Company against payment of the purchase price by certified or official bank check payable in next day funds to the order of the Company at the offices of J.C. Bradford & Co., J.C. Bradford Financial Center, 330 Commerce Street, Nashville, Tennessee 37201, or at such other place as may be agreed upon by the Representatives and the Company, at 10:00 a.m., Nashville time, on the third full business day following the date of this Agreement (the "Closing Date"), or at such other time on such date, or at such other place, as may be agreed upon by the Company and the Representatives. To the extent the Option is exercised, delivery of the Option Shares against payment therefor (in the manner specified above) will take place at the offices specified above at the Option Closing Date (which, subject to the requirements set forth above for the Option Shares Notice, may be the Closing Date). Certificates evidencing the Shares shall be in definitive form and shall be registered in such names and in such denominations as you shall request not less than 48 hours prior to the Closing Date or the Option Closing Date, as the case may be, by written notice to the Company. For the purpose of expediting the checking and packaging of certificates for the Shares, the Company agrees to make such certificates available for inspection at least 24 hours prior to the Closing Date or the Option Closing Date, as the case may be, at a location to be designated by you, which may be in New York, New York, or elsewhere. The cost of original issue tax stamps, if any, in connection with the issuance and delivery of the Firm Shares and Option Shares by the Company to the Underwriters shall be borne by the Company. The Company will pay and save each of the Underwriters and any subsequent holder of the Shares harmless from any and all liabilities with respect to or resulting from any failure or delay in paying federal and state stamp and other transfer taxes, if any, which may be payable or determined to be payable in connection with the original issuance or sale to such Underwriter of the Firm Shares and Option Shares. 2 3 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents, warrants and covenants to each of the Underwriters that: (a) The Company has prepared and has filed with the Securities and Exchange Commission (the "Commission") a registration statement (Registration No. 333-07513) on Form S-1 relating to the Shares, including a preliminary prospectus and such amendments to such registration statement as may have been required to the date of this Agreement, under the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (collectively referred to as the "Rules and Regulations") of the Commission thereunder. The term "preliminary prospectus" as used herein means a preliminary prospectus as contemplated by Rule 430 or Rule 430A of the Rules and Regulations included at any time as part of the registration statement. Copies of such registration statement and amendments and of each related preliminary prospectus have been delivered to you. If such registration statement has not become effective, a further amendment to such registration statement, including a form of final prospectus, necessary to permit such registration statement to become effective, will be filed promptly by the Company with the Commission. If such registration statement has become effective, a final prospectus containing information permitted to be omitted at the time of effectiveness by Rule 430A of the Rules and Regulations will be filed promptly by the Company with the Commission in accordance with Rule 424(b) of the Rules and Regulations. The term "Registration Statement" means the registration statement as amended at the time it becomes or became effective (the "Effective Date"), including financial statements and all exhibits and any information deemed to be included by Rule 430A. The term "Prospectus" means the prospectus as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus included in the Registration Statement at the Effective Date. (b) On the Effective Date, the date the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if required), at all times subsequent thereto up to and including the Closing Date and, if later, the Option Closing Date and when any post-effective amendment to the Registration Statement becomes effective or any amendment or supplement to the Prospectus is filed with the Commission, the Registration Statement and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement thereto), including the financial statements included in the Prospectus, did or will comply with all applicable provisions of the Act and the Rules and Regulations and did or will contain all statements required to be stated therein in accordance with the Act and the Rules and Regulations. On the Effective Date and when any post-effective amendment to the Registration Statement becomes effective, no part of the Registration Statement, the Prospectus or any such amendment or supplement did or will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. At the Effective Date, the date the Prospectus or any amendment or supplement to the Prospectus is filed with the Commission and at the Closing Date and, if later, the Option Closing Date, the Prospectus did not or will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 3 4 The foregoing representations and warranties in this Section 3(b) do not apply to any statements or omissions made in reliance on and in conformity with information relating to the Underwriters furnished in writing to the Company by the Representatives specifically for inclusion in the Registration Statement or Prospectus or any amendment or supplement thereto. The Company acknowledges that the statements set forth under the heading "Underwriting" in the Prospectus constitute the only information relating to the Underwriters furnished in writing to the Company by the Representatives specifically for inclusion in the Registration Statement. (c) The only active subsidiaries (as defined in the Rules and Regulations) of the Company are as provided in Exhibit 21.1 of the Registration Statement (individually, a "Subsidiary" and collectively, the "Subsidiaries"). The Company and each of its Subsidiaries is, and at the Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company and each of its Subsidiaries has, and at the Closing Date will have, full power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus. The Company and each Subsidiary is, and at the Closing Date will be, duly licensed or qualified to do business and in good standing as a foreign corporation in all jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary. Except for the stock of the Subsidiaries or as disclosed in the Registration Statement, the Company does not own, and at the Closing Date will not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity. Complete and correct copies of the Certificate of Incorporation and the Bylaws of the Company and each Subsidiary and all amendments thereto have been delivered to you, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date or, if later, the Option Closing Date. (d) The outstanding shares of the Company's Common Stock have been, and the Shares to be issued and sold by the Company upon such issuance will be, duly authorized, validly issued, fully paid and nonassessable and will not be subject to any preemptive or similar right. The description of the Common Stock in the Registration Statement and the Prospectus is, and at the Closing Date will be, complete and accurate in all respects. Except as set forth in the Prospectus, the Company does not have outstanding, and at the Closing Date will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell any shares of Common Stock or any such warrants, convertible securities or obligations. (e) The financial statements and schedules included in the Registration Statement or the Prospectus present fairly the consolidated financial condition of the Company as of the respective dates thereof and the consolidated results of operations and cash flows of the Company for the respective periods covered thereby, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the entire period involved, except as otherwise disclosed in the Prospectus. The financial and statistical data set forth in the Prospectus under the captions "Prospectus Summary," "Summary Combined Founding Companies' Financial and Operating Data," "Summary Individual Founding Company 4 5 Financial Data," "Use of Proceeds," "Capitalization," "Selected Combined Founding Companies' Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Management" and "Principal Stockholders" fairly presents the information set forth therein on the basis stated in the Prospectus. No other financial statements or schedules of the Company are required by the Act, the Exchange Act (as hereinafter defined) or the Rules and Regulations to be included in the Registration Statement or the Prospectus. Arthur Andersen LLP (the "Accountants"), who have reported on such financial statements and schedules, are independent auditors with respect to the Company as required by the Act and the Rules and Regulations. (f) The Company's system of internal accounting controls taken as a whole is sufficient to meet the broad objectives of internal accounting control insofar as those objectives pertain to the prevention or detection of errors or irregularities in amounts that would be material in relation to the Company's financial statements; and, except as disclosed in the Prospectus, neither the Company nor any employee or agent of the Company has made any payment of funds of the Company or received or retained any funds in violation of any law, rule or regulation, the receipt or payment of which could have a material adverse effect on the Company. (g) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the Closing Date, except as set forth in the Registration Statement and the Prospectus, (i) there has not been and will not have been any material adverse change in the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company, arising for any reason whatsoever, (ii) the Company has not incurred nor will it incur any material liabilities or obligations, direct or contingent, except in the ordinary course of business, (iii) the Company has not and will not have paid or declared any dividends or other distributions of any kind on any class of its capital stock, and (iv) there has not been and will not have been any change in the capitalization of the Company other than pursuant to the exercise of employee stock options. (h) The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. (i) Except as set forth in the Registration Statement and the Prospectus, there are no actions, suits or proceedings pending or threatened against or affecting the Company or any Subsidiary or any of respective officers in their capacity as such, before or by any federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding would materially and adversely affect the Company or its Subsidiaries or its business, properties, business prospects, condition (financial or otherwise) or results of operations or prevent or materially hinder the consummation of this Agreement. (j) The Company and each Subsidiary has, and at the Closing Date will have, (i) all governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as contemplated in the Prospectus, (ii) complied in all material 5 6 respects with all laws, regulations and orders applicable to it or its business and (iii) performed all obligations required to be performed by it, and is not, and at the Closing Date will not be, in default, under any contract or other instrument material to it to which it is a party or by which its property is bound or affected. To the best knowledge of the Company and each Subsidiary, no other party under any contract or other instrument to which it is a party is in default in any respect thereunder. Neither the Company nor any Subsidiary is, nor at the Closing Date will any of them be, in violation of any provision of its Certificate of Incorporation. (k) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required for the consummation by the Company of the transactions on its part herein contemplated, except such as have been obtained under the Act or the Rules and Regulations and such as may be required under state securities or Blue Sky laws or the bylaws and rules of the National Association of Securities Dealers, Inc. (the "NASD") in connection with the purchase and distribution by the Underwriters of the Shares. (l) The Company has full corporate power and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company and is enforceable against the Company in accordance with the terms hereof. The performance of this Agreement and the consummation of the transactions contemplated hereby will not result in the creation or imposition of any material lien, charge or encumbrance upon any of the assets of the Company or any Subsidiary pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the Certificate of Incorporation or Bylaws of the Company or its Subsidiaries, any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, lease, contract or other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of its or their properties are bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of the Company or any Subsidiary. (m) The Company and each Subsidiary has good and marketable title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as are described in the Prospectus or are not material to the business of the Company or its Subsidiaries. The Company and each Subsidiary has valid, subsisting and enforceable leases for the properties described in the Prospectus as leased by it, with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such properties by the Company and such Subsidiaries. The Company and each Subsidiary owns or leases all such properties as are necessary to its operations as now conducted. (n) There is no document or contract of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration 6 7 Statement that is not described or filed as required. All such contracts to which the Company or any Subsidiary is a party have been duly authorized, executed and delivered by the Company or such Subsidiary constitute valid and binding agreements of the Company or such Subsidiary and are enforceable against the Company or such Subsidiary in accordance with the terms thereof. (o) No statement, representation, warranty or covenant made by the Company in this Agreement or made in any certificate or document required by this Agreement to be delivered to you was or will be, when made, inaccurate, untrue or incorrect in any material respect. (p) Neither the Company nor any of its directors, officers or controlling persons has taken, directly or indirectly, any action designed, or which might reasonably be expected, to cause or result, under the Act or otherwise, in, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares or the Common Stock. (q) No holder of securities of the Company has rights to the registration of any securities of the Company because of the filing of the Registration Statement. (r) The Company has taken such action as necessary to have the Shares authorized for trading on the National Association of Securities Dealers Automated Quotation National Market System (the "Nasdaq National Market"). (s) Other than as contemplated by this Agreement, there is no broker, finder or other party that is entitled to receive from the Company any brokerage or finder's fee or other fee or commission as a result of any of the transactions contemplated by this Agreement. 4. COVENANTS OF THE COMPANY. The Company covenants and agrees with each of the Underwriters as follows: (a) The Company will not, either prior to the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with sales of the Shares by an underwriter or dealer, file any amendment or supplement to the Registration Statement or the Prospectus, unless a copy thereof shall first have been submitted to you within a reasonable period of time prior to the filing thereof and you shall not have objected thereto in good faith. (b) The Company will use its best efforts to cause the Registration Statement to become effective, and will notify you promptly, and will confirm such advice in writing, (i) when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective, (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose or the threat thereof, (iv) of the happening 7 8 of any event during the period mentioned in the second sentence of Section 4(e) that in the judgment of the Company makes any statement made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they are made, not misleading, and (v) of receipt by the Company or any representatives or attorney of the Company of any other communication from the Commission relating to the Company, the Registration Statement, any preliminary prospectus or the Prospectus. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible moment. If the Company has omitted any information from the Registration Statement pursuant to Rule 430A of the Rules and Regulations, the Company will use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to said Rule 430A and to notify the Representatives promptly of all such filings. (c) The Company will furnish to you, without charge, two signed copies of the Registration Statement and of any post-effective amendment thereto, including financial statements and schedules, and all exhibits thereto. (d) The Company will comply with all the provisions of any undertakings contained in the Registration Statement. The Company will, from time to time, after the effective date of the Registration Statement file with the Commission such reports as are required by the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the rules and regulations thereunder (the "Exchange Act Rules and Regulations") and the Rules and Regulations, and shall also file with state securities commissions in states where the Shares have been sold by you (as you shall have advised us in writing) such reports as are required to be filed by the securities acts and the regulations of those states. (e) On the Effective Date, and thereafter from time to time until expiration of the period mentioned in the second sentence of this Section 4(e), the Company will deliver to each of you, without charge, as many copies of the Prospectus or any amendment or supplement thereto as you may reasonably request. The Company consents to the use of the Prospectus or any amendment or supplement thereto by you and by all dealers to whom the Shares may be sold, both in connection with the offering or sale of the Shares and for any period of time thereafter during which the Prospectus is required by law to be delivered in connection therewith. If during such period of time any event shall occur which in the judgment of the Company or your counsel should be set forth in the Prospectus in order to make any statement therein, in light of the circumstances under which it was made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with law, the Company will forthwith prepare and duly file with the Commission an appropriate supplement or amendment thereto, and will deliver to each of you, without charge, such number of copies thereof as you may reasonably request. (f) Prior to any public offering of the Shares by you, the Company will cooperate with you and your counsel in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you may 8 9 request; provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject. (g) During the period of three years commencing on the Effective Date, the Company will furnish to the Representatives copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock, and will furnish to you a copy of each annual or other report it shall be required to file with the Commission. During such period, the Company will promptly notify you in writing if it appears to the Company that it is likely that the Company will not in a timely manner furnish to its stockholders an annual report containing audited financial statements or a quarterly report for one of the first three quarters of the fiscal year containing unaudited financial information. (h) The Company will make generally available to holders of its securities as soon as may be practicable but in no event later than the last day of the fifteenth full calendar month following the calendar quarter in which the Effective Date falls, an earnings statement (which need not be audited but shall be in reasonable detail) for a period of 12 months ended commencing after the Effective Date, and satisfying the provisions of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations). (i) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay, or reimburse if paid by the Underwriters, all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including but not limited to costs and expenses of or relating to (i) the preparation, printing, and filing of the Registration Statement and exhibits to it, each preliminary prospectus, the Prospectus and any amendment or supplement to the Registration Statement or the Prospectus, (ii) the preparation and delivery of certificates representing the Shares, (iii) the printing of this Agreement and other underwriting documents, including Underwriter's Questionnaires, Underwriter's Powers of Attorney, Blue Sky Memorandum, Master Agreement Among Underwriters and Master Selected Dealer Agreements, (iv) furnishing (including costs of shipping and mailing) such copies of the Registration Statement, the Prospectus and any preliminary prospectus, and all amendments and supplements thereto, as may be requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold, (v) the quotation of the Shares on the Nasdaq National Market, (vi) any filings required to be made by you with the NASD, and the fees, disbursements and other charges of your counsel in connection therewith, (vii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions designated pursuant to Section 4(f), including the fees, disbursements and other charges of your counsel in connection therewith, and the preparation and printing of preliminary, supplemental and final Blue Sky memoranda (subject to a maximum fee of $30,000, assuming no unusual circumstances), and (ix) the transfer agent for the Shares. (j) If this Agreement shall be terminated by the Company or if for any reason the Company shall be unable to perform its obligations hereunder, the Company will reimburse you for all out-of-pocket expenses (including the fees, disbursements and other charges of your 9 10 counsel) reasonably incurred by them in connection herewith. If this Agreement shall be terminated by the Underwriters based upon an Act of God or other circumstances not involving a matter within the control of the Company or any fault of the Company, the Company shall have no obligation to reimburse you for any out-of-pocket expenses. (k) The Company will not at any time, directly or indirectly, take any action designed, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization of the price of the shares of Common Stock to facilitate the sale or resale of any of the Shares. (l) The Company will apply the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under "Use of Proceeds." (m) During the period of 180 days commencing at the Closing Date, the Company will not, without your prior written consent, grant options to purchase shares of Common Stock except under stock option plans previously approved by the Company's shareholders, and except at prices equal to or greater than "fair market value", as defined in the Company's 1996 Stock Option Plan. (n) The Company will not, and will cause each of its executive officers, directors and each beneficial owner of outstanding shares of Common Stock to enter into agreements with you to the effect that they will not, for a period of 180 days after the commencement of the public offering of the Shares, without your prior written consent (which shall not be unreasonably withheld), sell, contract to sell or otherwise dispose of any shares of Common Stock or rights to acquire such shares (other than pursuant to stock option plans for employees or directors or in connection with other employee incentive compensation arrangements and other than as otherwise set forth in such agreements); provided, however, that such lock-up period shall be for two years for all beneficial owners of outstanding shares of Common Stock as of the date of this Agreement. (o) If at any time during the 25 day period after the Registration Statement is declared effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which, in your opinion, the market price for the Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising it as to the effect set forth above, prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The respective obligations of the Underwriters to purchase and pay for the Shares shall be subject, in their discretion, to the accuracy of the representations and warranties of the Company herein as of the date here of and as of the Closing Date as if made on and as of the Closing Date, to the accuracy of the statements of the Company's officers made pursuant to the 10 11 provisions hereof, to the performance by the Company of all of their covenants and agreements hereunder and to the following additional conditions: (a) Notification that the Registration Statement has become effective shall be received by you not later than 5:30 p.m., Nashville, Tennessee time, on the date of this Agreement or at such later date and time as shall be consented to in writing by you and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made. (b) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending or threatened by the Commission, (ii) no order suspending the effectiveness of the Registration Statement or the qualification or registration of the Shares under the securities or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for such purpose shall be pending before or threatened or contemplated by the Commission or the authorities of any such jurisdiction, (iii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities and to the satisfaction of the Representatives, (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to you and you did not object thereto in good faith, (v) the NASD, upon review of the terms of the public offering of the Shares, shall not have objected to such offering, such terms or the Underwriters' participation in the same, and (vi) and you shall have received certificates, dated the Closing Date and the Option Closing Date and signed by the Chief Executive Officer or the Chairman of the Board of Directors of the Company and the Chief Financial Officer of the Company (who may, as to proceedings threatened, rely upon the best of their information and belief), to the effect of clauses (i), (ii) and (iii). (c) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) there shall not have been a material adverse change, or any development involving a prospective material adverse change, in the general affairs, business, business prospects, properties, management, key personnel, condition (financial or otherwise) or results of operations of the Company, whether or not arising from transactions in the ordinary course of business, in each case other than as set forth in the Registration Statement and the Prospectus (or, in the case of a prospective change, other than as contemplated by the Registration Statement and the Prospectus), and (ii) the Company shall not have sustained any material loss or interference with its business or properties from fire, explosion, flood, hurricane or other casualty or calamity, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not set forth in the Registration Statement and the Prospectus, if in your reasonable judgment any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Shares by you at the public offering price. (d) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no litigation or other proceeding instituted against the Company or any of its officers or directors in their capacities as such, before or by any federal, state, or local court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, in which litigation or proceeding an 11 12 unfavorable ruling, decision or finding would materially and adversely affect the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company. (e) Each of the representations and warranties of the Company contained herein shall be true and correct in all material respects at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, as if made at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, and all covenants and agreements herein contained to be performed on the part of the Company and all conditions herein contained to be fulfilled or complied with by the Company at or prior to the Closing Date and, with respect to the Option Shares, at or prior to the Option Closing Date, shall have been duly performed, fulfilled or complied with. (f) The Underwriters shall have received an opinion, dated the Closing Date and, with respect to the Option Shares, the Option Closing Date, and satisfactory in form and substance to your counsel, from Wright, Lindsey & Jennings, counsel to the Company, to the effect that: (i) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectus. The Company is qualified to do business as a foreign corporation in good standing in all other jurisdictions when the failure to so qualify would have a material adverse effect upon the Company. (ii) Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation or organization, as the case may be; each Subsidiary has the corporate power and authority to own its properties and conduct its business as described in the Prospectus; and each Subsidiary is qualified to do business as a foreign corporation in good standing and in all other jurisdictions when the failure to so qualify would have a material adverse effect upon the Company and its Subsidiaries taken as a whole. (iii) As of the dates specified therein, the Company had authorized and issued capital stock as set forth under the caption "Capitalization" in the Prospectus. All the outstanding shares of capital stock of each Subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable. and except as otherwise set forth in the Prospectus, all outstanding shares of capital stock of each of the Subsidiaries (except directors' qualifying shares) are owned by the Company free and clear of any perfected security interest and any other security interests, claims, liens or encumbrances. (iv) The Shares delivered on such Closing Date have been duly authorized, validly issued and are fully paid and nonassessable, and conform to the description thereof contained in the Prospectus. 12 13 (v) The outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive or similar rights with respect to the Shares or the Common Stock. All offers and sales of the Company's securities during the past three years were at all relevant times duly registered or exempt from the registration requirements of the Act and were duly registered or the subject of an exemption from the registration requirements of applicable state securities or Blue Sky laws. (vi) There are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (vii) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required for the issuance or sale of the Shares or the consummation of the other transactions contemplated by this Agreement, except such as have been obtained and made under the Act, the Exchange Act and such as may be required under state securities or Blue Sky laws. (viii) The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated, including the issuance and sale of the Shares and compliance with the provisions thereof, will not result in a breach or violation of any of the terms or provisions of, or constitute a default under, (A) any statute, rule, regulation or, to the knowledge of such counsel, order of any governmental agency or body or any court having jurisdiction over the Company or the Subsidiaries or any of their properties, or (B) any material obligation, agreement, covenant or condition contained in any agreement or instrument to the knowledge of such counsel to which the Company or the Subsidiaries is a party or by which the Company or the Subsidiaries is bound or to which any of the properties of the Company or the Subsidiaries is subject, or (C) the Certificate of Incorporation as amended, of the Company, or the Bylaws of the Company or the Articles of Incorporation or Bylaws of the Subsidiaries, and the Company has full power and authority to authorize, issue and sell the Shares as contemplated by this Agreement. (ix) The Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the Prospectus either was filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or was included in the Registration Statement (as the case may be), and, to the best of the knowledge of such 13 14 counsel, no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act; the Registration Statement and the Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations (except that such counsel need express no opinion as to financial statements, schedules and other financial or statistical information included therein); the descriptions in the Registration Statement and Prospectus of statutes, legal and governmental proceedings and contracts and other documents are accurate in all material respects and fairly present the information required to be shown; and such counsel does not know of any statutes or regulations or any pending or threatened legal or governmental proceedings, required to be described in the Prospectus which are not described as required nor of any contracts or documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement which are not described and filed as required; it being understood that such counsel need express no opinion as to the financial statements, schedules or other financial or statistical data contained in the Registration Statement or the Prospectus or as to the section of the Prospectus entitled "Underwriting." (x) This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding obligation of the Company enforceable in accordance with its terms, except (A) as such enforceability may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance or similar laws now or hereafter in effect relating to creditors' rights or debtors' obligations generally; (B) that the remedies of specific performance and injunctive and other forms of relief are subject to general equitable principles, whether enforcement is sought at law or in equity, and that such enforcement may be subject to the discretion of the court before which any proceedings therefor may be brought; and (C) as rights to indemnity and contribution may be limited by state or Federal laws relating to securities or the policies underlying such laws. Such opinion shall also contain a statement by counsel to the effect that such counsel have no reason to believe that the Registration Statement, or any amendment thereto, as of its effective date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, or any supplement thereto, as of its issue date, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statement of a material fact or omitted to state any material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely as to matters of fact, to the extent proper, on certificates of responsible officers of the Company. 14 15 (g) You shall have received an opinion, dated the Closing Date and the Option Closing Date, from Nelson Mullins Riley & Scarborough, L.L.P., as your counsel, with respect to the Registration Statement, the Prospectus and this Agreement, which opinion shall be satisfactory in all respects to you, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (h) The Representative shall have received from the Accountants a letter dated the date hereof, and at the Closing Date a second letter dated the Closing Date, in form and substance satisfactory to the Representatives, stating that they are independent auditors with respect to the Company within the meaning of the Act and the applicable Rules and Regulations, and to the effect that: (i) In their opinion, the financial statements and schedules examined by them and included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations and are presented in accordance with generally accepted accounting principles; and they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the interim financial statements, selected financial and operating data, and/or condensed financial statements derived from audited financial statements of the Company. (ii) The selected financial information included in the Preliminary Prospectus and the Prospectus under the captions "PROSPECTUS SUMMARY" and "SELECTED COMBINED FOUNDING COMPANIES FINANCIAL AND OPERATING DATA" for each of the fiscal years ended December 31, 1991, 1992, 1993, 1994 and 1995 and "SELECTED INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA" for each of the years ended December 31, 1993, 1994 and 1995 agrees with the corresponding amounts in the audited financial statements included in the Prospectus or previously reported on by them. (iii) On the basis of a reading of the latest available interim financial statements (unaudited) of the Company, a reading of the minute books of the Company, inquiries of officials of the Company responsible for financial and accounting matters and other specified procedures, all of which have been agreed to by the Representatives, nothing came to their attention that caused them to believe that: a. the unaudited financial statements included in the Registration Statement do not comply as to form in all material respects with the accounting requirements of the federal securities laws and the related published rules and regulations thereunder or are not in conformity with generally accepted accounting principles applied on a basis consistent with the basis for the audited financial statements contained in the Registration Statement; 15 16 b. any other unaudited financial statement data included in the Prospectus do not agree with the corresponding items in the unaudited consolidated financial statements from which data was derived and any such unaudited data were not determined on a basis consistent with the basis for the corresponding amounts in the audited financial statements included in the Prospectus; c. at a specified date not more than five days prior to the date of delivery of such respective letter, there was any change in the consolidated capital stock, decline in stockholders' equity or increase in long-term debt of the Company, or other items specified by the Underwriters, in each case as compared with amounts shown in the latest balance sheets included in the Prospectus, except in each case for changes, decreases or increases which the Prospectus discloses have occurred or may occur or which are described in such letters; and d. for the period from the closing date of the latest statements of income included in the Prospectus to a specified date not more than five days prior to the date of delivery of such respective letter, there were any decreases in net revenues or net income of the Company, or other items appearing on the face of the statement of operations specified by the Representatives, or any increases in any items appearing on the face of the statement of operations specified by the Representatives, in each case as compared with the corresponding period of the preceding year, except in each case for decreases which the Prospectus discloses have occurred or may occur or which are described in such letter. (iv) They have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information specified by you which are derived from the general accounting records of the Company, which appear in the Prospectus and have compared and agreed such amounts, percentages and financial information with the accounting records of the Company. In the event that the letters to be delivered referred to above set forth any such changes, decreases or increases, it shall be a further condition to the obligations of the Underwriters that the Underwriters shall have reasonably determined, after discussions with officers of the Company responsible for financial and accounting matters and with the Accountants, that such changes, decreases or increases as are set forth in such letters do not reflect a material adverse change in the stockholders' equity or long-term debt of the Company as compared with the amounts shown in the latest balance sheet of the Company included in the Prospectus, or a material adverse change in total net revenues or net income of the Company, in each case as compared with the corresponding period of the prior year. (i) At the Closing Date and, as to the Option Shares, the Option Closing Date, there shall be furnished to you a certificate, dated the date of its delivery, signed by each of the 16 17 Chief Executive Officer and Chief Financial Officer of the Company, in form and substance satisfactory to you, to the effect that: (i) Each of the representations and warranties of the Company contained in Section 3 of this Agreement were, when originally made, and are, at the time such certificate is delivered, true and correct in all material respects; (ii) Each of the covenants required herein to be performed by the Company on or prior to the delivery of such certificate has been duly, timely and fully performed and each condition herein required to be complied with by the Company on or prior to the date of such certificate has been duly, timely and fully complied with. (j) On or prior to the Closing Date, you shall have received the executed agreements referred to in Section 4(n). (k) The Shares shall be qualified for sale in such states as you may reasonably request, each such qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date or the Option Closing Date. (l) The Shares shall have been duly authorized for quotation on the Nasdaq National Market upon official notice of issuance. (m) No Underwriter shall have advised the Company that the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or any supplement thereto, contains an untrue statement of fact which, in your reasonable judgment, is material, or omits to state a fact which, in your reasonable judgment, is material and is required to be stated therein or necessary to make the statements therein not misleading and the Company shall not have cured such untrue statement of fact or stated a statement of fact required to be stated therein. (n) The Company shall have furnished to you such certificates, in addition to those specifically mentioned herein, as you may have reasonably requested as to the accuracy and completeness at the Closing Date and the Option Closing Date of any statement in the Registration Statement or the Prospectus, as to the accuracy at the Closing Date and the Option Closing Date of the representations and warranties of the Company herein, as to the performance by the Company of its obligations hereunder, or as to the fulfillment of the conditions concurrent and precedent to your obligations hereunder. 6. INDEMNIFICATION AND CONTRIBUTION. (a) The Company will indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter and each person, if any, who controls each Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, liabilities, expenses and damages (including any and all investigative, legal and other expenses reasonably incurred in connection 17 18 with,and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based in whole or in part upon (i) any inaccuracy in the representations and warranties of the Company contained herein, (ii) any failure of the Company to perform its obligations hereunder or under law or (iii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus or in any documents filed under the Exchange Act or any blue sky application or filing, or the omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus or the Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability; and further provided, that the Company will not be liable to the extent that such loss, claim, liability, expense or damage arises from the sale of the Shares in the public offering to any person by an Underwriter and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to an Underwriter furnished in writing to the Company by an Underwriter expressly for inclusion in the Registration Statement, any preliminary prospectus or the Prospectus. The Company acknowledges that the statements set forth under the heading "Underwriting" in any preliminary prospectus and the Prospectus constitute the only information relating to any Underwriter furnished in writing to the Company by you expressly for inclusion in the Registration Statement, any preliminary prospectus or the Prospectus. This indemnity agreement will be in addition to any liability that the Company might otherwise have. (b) Each Underwriter will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company and each officer of the Company who signs the Registration Statement to the same extent as the foregoing indemnity from the Company to the Underwriters, but only insofar as losses, claims, liabilities, expenses or damages arise out of or are based on any untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to you furnished in writing to the Company by you expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus. The Company acknowledges that the statements set forth under the heading "Underwriting" in any preliminary prospectus and the Prospectus constitute the only information relating to the Underwriters furnished in writing to the Company by the Underwriters expressly for inclusion in the Registration Statement, any preliminary prospectus or the Prospectus. This indemnity will be in addition to any liability that the Underwriters might otherwise have. 18 19 (c) Any party that proposes to assert the right to be indemnified under this Section 6 will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 6, notify each such indemnifying party of the commencement of such action, enclosing a copy of all papers served, but the omission so to notify such indemnifying party will not relieve it from any liability that it may have to any indemnified party under the foregoing provisions of this Section 6 unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with counsel reasonably satisfactory to the indemnified party, and after notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the indemnified party in connection with the defense. The indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such indemnified party unless (i) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (ii) the indemnified party has reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (iii) a conflict of interests exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (iv) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such fees, disbursements and other charges will be reimbursed by the indemnifying party promptly as they are incurred. An indemnifying party will not be liable for any settlement of any action or claim effected without its written consent (which consent will not be unreasonably withheld). (d) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs of this Section 6 is applicable in accordance with its terms but for any reason is held to be unavailable from the Company or the Underwriters, then the Company and the Underwriters will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Company from persons other than the Underwriters, such as persons who control the Company 19 20 within the meaning of the Act, officers of the Company who signed the Registration Statement and directors of the Company, who may be liable for contribution) to which the Company and the Underwriters may be subject in such proportion as shall be appropriate to reflect the relative benefits received by the Company and the Underwriters. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same respective proportions as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault of the Company and the Underwriters with respect to the statements or omissions which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to such offering. Such relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 6(d) were to be determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense or damage, or action in respect thereof, referred to above in this Section 6(d) shall be deemed to include, for purpose of this Section 6(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(d), an Underwriter shall not be required to contribute any amount in excess of the underwriting discounts received by it (less the aggregate amount of any damages which such Underwriter and its controlling persons have otherwise been required to pay in respect of the same or any similar claim), and no person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 6(d) are several in proportion to their respective underwriting obligations and not joint. For purposes of this Section 6(d), any person who controls a party to this Agreement within the meaning of the Act will have the same rights to contribution as that party, and each officer and director of the Company who signed the Registration Statement will have the same rights to contribution as the Company, subject in each case to the provisions hereof. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution maybe made under this Section 6(d), will notify any such party or parties from whom contribution may be sought, but the omission to notify will not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 6(d). No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld). 20 21 (e) The indemnity and contribution agreements contained in this Section 6 and the representations and warranties of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by the Underwriters or on their behalf, (ii) acceptance of any of the Shares and payment therefor or (iii) any termination of this Agreement. 7. TERMINATION. The Underwriters' obligations under this Agreement may be terminated at any time on or prior to the Closing Date (or, with respect to the Option Shares, on or prior to the Option Closing Date), by notice to the Company from the Representatives, without liability on the part of any of the Underwriters to the Company, if, prior to delivery and payment for the Shares (or the Option Shares, as the case may be), in your sole and reasonable judgment, (i) trading in any of the equity securities of the Company shall have been suspended by the Commission, by an exchange that lists the Shares or by the Nasdaq National Market, (ii) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the over-the-counter market shall have been suspended or limited or minimum or maximum prices shall have been generally established on such exchange, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by such exchange or by order of the Commission or any court of other governmental authority, (iii) a general banking moratorium shall have been declared by either Federal or State authorities or (iv) any material adverse change in the financial or securities markets in the United States or in political, financial or economic conditions in the United States or any outbreak or material escalation of hostilities or declaration by the United States of a national emergency or war or other calamity or crisis shall have occurred the effect of any of which is such as to make it, in your sole and reasonable judgment, impracticable or inadvisable to market the Shares on the terms and in the manner contemplated by the Prospectus. 8. SUBSTITUTION OF UNDERWRITERS. If any Underwriter shall fail or refuse to purchase any of the Firm Shares which it has agreed to purchase hereunder, and the aggregate number of Firm Shares which such defaulting Underwriter agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of Firm Shares, the other Underwriters shall be obligated, severally, to purchase the Firm Shares that such defaulting Underwriter agreed but failed or refused to purchase, in the proportions which the number of Firm Shares which they have respectively agreed to purchase pursuant to Section 1 bears to the aggregate number of Firm Shares which all such non-defaulting Underwriters have so agreed to purchase, or in such other proportions as you may specify; provided, that in no event shall the maximum number of Firm shares which an Underwriter has been obligated to purchase pursuant to Section 1 be increased pursuant to this Section 8 by more than one-ninth of such number of Firm Shares without the prior written consent of such Underwriter. If an Underwriter shall fail or refuse to purchase any Firm Shares and the aggregate number of Firm Shares which such defaulting Underwriter agreed but failed or refused to purchase exceeds one-tenth of the aggregate number of the Firm Shares and arrangements satisfactory to the non-defaulting Underwriters or the Company for the purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will 21 22 terminate without liability on the part of any non-defaulting Underwriter or the Company for the purchase or sale of any Shares under this Agreement. In any such case the Underwriters or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken pursuant to this Section 8 shall not relieve any defaulting Underwriter from liability in respect to any default of such Underwriter under this Agreement. 9. MISCELLANEOUS. All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be mailed or delivered or telegraphed and confirmed in writing to the Representatives in care of J.C. Bradford & Co., J.C. Bradford Financial Center, 330 Commerce Street, Nashville, Tennessee 37201, Attention: Thomas C. Wylly, II, or if sent to the Company shall be mailed, delivered or telegraphed and confirmed in writing to the Company at 302 East Millsap Road, Fayetteville, Arkansas 72703, Attention: Clete T. Brewer. This Agreement has been and is made solely for the several Underwriters' and the Company's benefits and of the controlling persons, directors and officers referred to in Section 6, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" as used in this Agreement shall not include a purchaser, as such purchaser, of Shares from an Underwriter. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee. This Agreement may be signed in two or more counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. The Company and you each hereby irrevocably waive any right they may have to a trial by jury in respect of any claim based upon or arising out of this Agreement or the transactions contemplated hereby. You hereby represent and warrant to the Company that you have authority to act hereunder on behalf of the several Underwriters, and any action hereunder taken by you will be binding upon all the Underwriters. 22 23 Please confirm that the foregoing correctly sets forth the agreement among the Company and you. Very truly yours, STAFFMARK, INC. By: ---------------------------------- Clete T. Brewer President and Chief Executive Officer Confirmed and accepted as of the date first above written. J.C. BRADFORD & CO. STEPHENS INC. For themselves and as Representatives of the several Underwriters By: J.C. Bradford & Co. By: ------------------------------ 23 24 SCHEDULE I Underwriters
Number of Name of Underwriter Firm Shares ------------------- ----------- J.C. Bradford & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stephens Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,500,000
24 EX-10.4 3 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.4 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") by and between StaffMark, Inc., a Delaware corporation (the "Company"), and Terry Bellora ("Employee") is hereby entered into and effective as of August 20, 1996. This Agreement hereby supersedes any other employment agreements or understandings; written or oral, between the Company and Employee. R E C I T A L S The following statements are true and correct: As of the date of this Agreement, the Company is engaged primarily in the temporary staffing business. Employee is employed hereunder by the Company in a confidential relationship wherein Employee, in the course of his employment with the Company, has and will continue to become familiar with and aware of information as to the Company's customers, specific manner of doing business, including the processes, techniques and trade secrets utilized by the Company, and future plans with respect thereto, all of which has been and will be established and maintained at great expense to the Company; this information is a trade secret and constitutes the valuable goodwill of the Company. Therefore, in consideration of the mutual promises, terms, covenants and conditions set forth herein and the performance of each, it is hereby agreed as follows: A G R E E M E N T S 1. EMPLOYMENT AND DUTIES. (a) The Company hereby employs Employee as Chief Financial Officer. As such, Employee shall have responsibilities, duties and authority reasonably accorded to and expected of a Chief Financial Officer and will report directly to the Chief Executive Officer and the Board of Directors of the Company (the "Board"). Employee hereby accepts this employment upon the terms and conditions herein contained and, subject to paragraph 1(b), agrees to devote his working time, attention and efforts to promote and further the business of the Company. (b) Employee shall not, during the term of his employment hereunder, be engaged in any other business activity pursued for gain, profit or other pecuniary advantage except to the extent that such activity (i) does not interfere with Employee's duties and responsibilities hereunder and (ii) does not violate paragraph 3 hereof. The foregoing limitations shall not be construed as prohibiting Employee from serving on the boards of directors of other companies or making personal investments in such form or manner as will require his services, other than to a minimal extent, in the operation or affairs of the companies or enterprises in which such investments are made nor violate the terms of paragraph 3 hereof. 2. COMPENSATION. For all services rendered by Employee, the Company shall compensate Employee as follows: 2 (a) Base Salary. The base salary payable to Employee shall be $150,000 per year, payable on a regular basis in accordance with the Company's standard payroll procedures but not less than bi-monthly. On at least an annual basis, the Board will review Employee's performance and may make increases to such base salary if, in its discretion, any such increase is warranted. Such recommended increase would, in all likelihood, require approval by the Board or a duly constituted committee thereof. (b) Incentive Bonus Plan. For 1997 and subsequent years, it is the Company's intent to develop a written Incentive Bonus Plan setting forth the criteria under which Employee and other officers and key employees will be eligible to receive year-end bonus awards. Employee shall be eligible for a bonus opportunity of up to 100% of his base salary in accordance with this Incentive Bonus Plan. The award of any bonus shall be based on the total performance of the Company, but shall be related to the earnings per share and stock price per share growth of the Company and shall be payable in various increments based on the performance of the Company versus targeted goals. The incremental payments and the Company's targeted performance shall be determined by the Chief Executive Officer or the compensation committee of the Board. (c) Executive Perquisites, Benefits and Other Compensation. Employee shall be entitled to receive additional benefits and compensation from the Company in such form and to such extent as specified below: (i) When eligible under non-discriminatory standards, Employee shall be entitled to participate in any employee benefit plan maintained by the Company for its full time employees, and such benefits shall be not less favorable than the benefits provided to other Company executives. (ii) Reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by Employee in the performance of his services pursuant to this Agreement. All reimbursable expenses shall be appropriately documented in reasonable detail by Employee upon submission of any request for reimbursement, and in a format and manner consistent with the Company's expense reporting policy. (iii) Four (4) weeks paid vacation for each year during the period of employment or such greater amount as may be afforded officers and key employees generally under the Company's policies in effect from time to time (pro rated for any year in which Employee is employed for less than the full year). (iv) Beginning upon the completion of the Company's initial public offering (the "IPO"), an automobile allowance in the amount of $600 per month. (v) The Company shall reimburse Employee up to $250 per month for club dues actually incurred by Employee, provided that such club is used at least fifty (50%) percent of the time for business purposes and such usage is subject to audit by the Company. (vi) The Company shall provide Employee with other executive perquisites as may be available to or deemed appropriate for Employee by the Board and participation in all 3 other company-wide employee benefits as available from time to time, which will include participation in the Company's 1996 Long-Term Incentive Compensation Plan. (vii) The Company shall, under Employee's direction, establish a 401(k) Plan following consummation of the IPO of the common stock (the "Common Stock") of the Company. The terms of such Plan shall be approved by the Board or by the compensation committee thereof. (viii) Employee shall be granted options (the "Options") to acquire 150,000 shares of Common Stock at the price to the public of the Common Stock of the IPO. The Options shall be exercisable as to 25,000 of the underlying shares of Common Stock on the date of the IPO, as to 50,000 of the underlying shares of Common Stock on the first anniversary of the consummation of the IPO, and as to 25,000 of the underlying shares of Common Stock on each of the second, third and fourth anniversaries of the consummation of the IPO. All terms and conditions shall be subject to the Company's 1996 Stock Option Plan. 3. NON-COMPETITION AGREEMENT. (a) Employee 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 and its affiliates. Therefore, in consideration of this Agreement, Employee 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: (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") within a radius of fifty (50) miles from any office operated during the Noncompetition Period by the Company or any of its affiliates (collectively, the "Territory") or in any StaffMark, Inc. Services Business directly competitive with that of the Company or any of its affiliates, or itself engage in such business; provided, however, that (A) Nothing herein shall be construed to prohibit Employee 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 Employee with respect to businesses, other than StaffMark, Inc. Services Businesses, engaged in by the Company or its affiliates during the Noncompetition Period unless Employee either is or was substantially involved in such other businesses of the Company or such affiliates or 3 4 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 affiliates relating to their business or the operations, employees or customers of the Company or its affiliates which constitutes proprietary or confidential information of the Company or its affiliates ("Confidential Information"), including without limitation any Confidential Information contained in any customer lists, 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 Employee in violation of this Agreement); provided, however, this subparagraph (iv) shall not be applicable to the extent Employee is required to testify in a judicial or regularity proceeding pursuant to the order of a judge or administrative law judge after Employee 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 affiliates or any other person who is under contract with or rendering services to the Company or its 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. 4 5 (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 Employee ceases to be an officer or employee of, or consultant to, the Company, or any of its affiliates; provided, however, that the Noncompetition Period shall end one (1) year from the date of termination of the employment of Employee by the Company under this Agreement which is without cause. (c) The invalidity or non-enforceability of this paragraph 3 in any respect shall not affect the validity or enforceability of this paragraph 3 in any other respect or of any other provisions of this Agreement. In the event that any provision of this paragraph 3 shall be held 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) Employee acknowledges that the Company's remedy at law for any breach of the provisions of this paragraph 3 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 paragraph 3 shall survive termination of this Agreement. 4. PLACE OF PERFORMANCE. (a) Employee has agreed to employment at the Company's corporate headquarters in Fayetteville, Arkansas. (b) If Employee is requested by the Board to relocate and Employee refuses, such refusal shall not constitute "good cause" for termination of this Agreement under the terms of paragraph 5 (c). 5. TERM: TERMINATION: RIGHTS ON TERMINATION. The term of this Agreement shall began on the date hereof and continue for five (5) years (the Initial Term"), and, unless terminated sooner as herein provided, shall continue thereafter on a year-to-year basis on the same terms and conditions contained herein. This Agreement and Employee's employment may be terminated in any one of the following ways: (a) Death. The death of Employee shall immediately terminate the Agreement. Employee's estate shall receive from the Company, in a lump-sum payment due within thirty (30) days of Employee's death, the lesser of the base salary at the rate then in effect (i) for whatever time period is remaining under the Initial Term of this Agreement or (ii) for one (1) year. (b) Disability. If, as a result of incapacity due to physical or mental illness or injury, Employee shall have been absent from his full-time duties hereunder for six (6) consecutive months, 5 6 then thirty (30) days after receiving written notice (which notice may occur before or after the end of such six (6) month period, but which shall not be effective earlier than the last day of such six (6) month period), the Company may terminate Employee's employment hereunder provided Employee is unable to resume his full-time duties at the conclusion of such notice period. Also, Employee may terminate his employment hereunder if his health should become impaired to an extent that makes the continued performance of his duties hereunder hazardous to his physical or mental health or his life, provided that Employee shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request made within thirty (30) days of the date of such written statement, Employee shall submit to an examination by a doctor selected by the Company who is reasonably acceptable to Employee or Employee's doctor and such doctor shall have concurred in the conclusion of Employee's doctor. In the event this Agreement is terminated as a result of Employee's disability, Employee shall receive from the Company, in a lump-sum payment due within ten (10) days of the effective date of termination, the lesser of the base salary at the rate then in effect (i) for whatever time period is remaining under the Initial Term of this Agreement or (ii) for one (1) year. (c) Good Cause. The Company may terminate the Agreement ten (10) days after written notice to Employee for good cause, which shall be: (1) Employee's material and irreparable breach of this Agreement; (2) Employee's negligence in the performance or intentional nonperformance (continuing for ten (10) days after receipt of the written notice) of any of Employee's material duties and responsibilities hereunder; (3) Employee's dishonesty, fraud or misconduct with respect to the business or affairs of the Company which materially and adversely affects the operations or reputation of the Company; (4) Employee's conviction of a felony crime; or (5) chronic alcohol abuse or illegal drug abuse by Employee. In the event of a termination for good cause, as enumerated above, Employee shall have no right to any severance compensation. (d) Without Cause. At any time after the commencement of employment, the Company may, without cause, terminate this Agreement and Employee's employment, effective thirty (30) days after written notice is provided to the Employee. Should Employee be terminated by the Company without cause, Employee shall receive from the Company two payments, each equal to one-half of the following: the lesser of the base salary at the rate then in effect (i) for whatever time period is remaining under the Initial Term of this Agreement or (ii) for two (2) years ("Severance Pay"). The first payment shall be due on the effective date of termination and the second payment shall be due ninety days after the effective date of termination. Upon the effective date of termination by the Company without cause, all Options granted to Employee in paragraph 2(c)(viii) shall become immediately exercisable. Further, any termination without cause by the Company shall operate to shorten the period set forth in paragraph 3 (b) and during which the terms of paragraph 3 apply to one (1) year from the date of termination of employment. (e) Change in Control. Refer to paragraph 9 below. (f) Termination by Employee Without Cause. If Employee resigns or otherwise terminates his employment, Employee shall receive no severance compensation. Upon termination or this Agreement for any reason provided in clauses (a) through (e) above, Employee shall be entitled to receive all compensation earned and all benefits vested and reimbursements due through the effective date of termination. All other rights and obligations of the Company and Employee under this Agreement shall cease as of the effective date of termination, except that the Employee's 6 7 obligations under paragraphs 3, 6 and 7 herein shall survive such termination in accordance with their terms. 6. RETURN OF COMPANY PROPERTY. All records, designs, patents, business plans, financial statements, manuals, memoranda, lists and other property delivered to or compiled by Employee by or on behalf of the Company or its representatives, vendors or customers which pertain to the business of the Company shall be and remain the property of the Company and be subject at all times to its discretion and control. Likewise, all correspondence, reports, records, charts, advertising materials and other similar data pertaining to the business, activities or future plans of the Company which is collected by Employee shall be delivered promptly to the Company without request by it upon termination of Employee's employment. 7. TRADE SECRETS. Employee agrees that he will not, during or after the term of this Agreement with the Company, disclose the specific terms of the Company's relationships or agreements with its significant vendors or customers or any other significant and material trade secret of the Company, whether in existence or proposed, to any person, firm, partnership, corporation or business for any reason or purpose whatsoever, except as is disclosed in the ordinary course of business. 8. ASSIGNMENT; BINDING EFFECT. Employee understands that he has been selected for employment by the Company on the basis of his personal qualifications, experience and skills. Employee agrees, therefore: he cannot assign all or any portion of his performance under this Agreement. Subject to the preceding two (2) sentences and the express provisions of paragraph 13 below, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective heirs, legal representatives, successors and assigns. 9. CHANGE IN CONTROL. (a) Unless he elects to terminate this Agreement pursuant to (c) below, Employee understands and acknowledges that the Company may be merged or consolidated with or into another entity and that such entity shall automatically succeed to the rights and obligations of the Company hereunder. (b) In the event of a pending Change in Control wherein the Company and Employee have not received written notice at least fifteen (15) business days prior to the anticipated closing date of the transaction giving rise to the Change in Control from the successor to all or a substantial portion of the Company's business and/or assets that such successor is willing as of the closing to assume and agree to perform the Company's obligations under this Agreement in the same manner and to the same extent that the Company is hereby required to perform, then such Change in Control shall be deemed to be a termination of this Agreement by the Company without cause and the applicable portions of paragraph 5(d) will apply; however, under such circumstances, the amount of the lump-sum severance payment due to Employee shall be 100% the amount calculated under the terms of paragraph 5(d) and the non-competition provisions of paragraph 3 shall not apply whatsoever. (c) In any Change in Control situation in which Employee has received written notice from the successor to the Company that such successor is willing to assume the Company's obligations hereunder, Employee may nonetheless, at his sole discretion, elect to terminate this Agreement by providing written notice to the Company at least five (5) business days prior to the anticipated closing of the transaction giving rise to the Change in Control. In such case, the applicable provisions of 7 8 paragraph 5(d) will apply as though the Company had terminated the Agreement without cause; however, under such circumstances, the amount of the lump-sum severance payment due to Employee shall be 100% the amount calculated under the terms of paragraph 5(d) and the non-competition provisions of paragraph 3 shall all apply for a period of one (1) year from the effective date of termination. (d) For purposes of applying paragraph 5 under the circumstances described in (b) and (c) above, the effective date of termination will be the closing date of the transaction giving rise to the Change in Control and all compensation, reimbursements and lump-sum payments due Employee must be paid in full by the Company at or prior to such closing. Further, Employee will be given sufficient time and opportunity to elect whether to exercise all or any of his vested options to purchase Common Stock of the Company, including any options with accelerated vesting under the provisions of the Company's 1996 Long-Term Incentive Compensation Plan, such that he may convert the options to shares of Common Stock of the Company at or prior to the closing of the transaction giving rise to the Change in Control, if he so desires. (e) A "Change in Control" shall be deemed to have occurred if: (i) any person, other than the Company or an employee benefit plan of the Company, acquires directly or indirectly the Beneficial Ownership (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended) of any voting security of the Company 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 all of the then-outstanding voting securities of the Company; (ii) the individuals (A) who, as of the effective date of the Company's registration statement with respect to its initial public offering, constitute the Board of Directors of the Company (the "Original Directors") or (B) who thereafter are elected to the Board of Directors of the Company and whose election, or nomination for election, to the Board of Directors of the Company was approved by 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 of Directors of the Company and whose election, or nomination for election, to the Board of Directors of the Company 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), cease for any reason to constitute a majority of the members of the Board of Directors of the Company; (iii) the stockholders of the Company shall approve a merger, consolidation, recapitalization, or reorganization of the Company, a reverse stock split of outstanding voting securities, or consummation of any such transaction if stockholder approval is not sought nor 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 Company 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 8 9 (iv) the stockholders of the Company shall approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or a substantial portion of the Company's assets (i.e., 50% or more of the total assets of the Company). (f) Employee must be notified in writing by the Company at any time that the Company or any member of its Board anticipates that a Change in Control may take place. (g) Employee shall be reimbursed by the Company or its successor for any excise taxes that Employee incurs under Section 4999 of the Internal Revenue Code of 1986, as a result of any Change in Control. Such amount will be due and payable by the Company or its successor within ten (10) days after Employee delivers a written request for reimbursement accompanied by a copy of his tax return(s) showing the excise tax actually incurred by Employee. 10. COMPLETE AGREEMENT. This Agreement is not a promise of future employment. Employee has no oral representations, understandings or agreements with the Company or any of officers, directors or representatives covering the same subject matter as this Agreement. This written Agreement is the final, complete and exclusive statement and expression of the agreement between the Company and Employee and of all the terms of this Agreement, and it cannot be varied, contradicted or supplemented by evidence of any prior or contemporaneous oral or written agreements. This written Agreement may not be later modified except by a further writing signed by a duly authorized officer of the Company and Employee, and no term of this Agreement may be waived except by writing signed by the party waiving the benefit of such term. 11. NOTICE. Whenever any notice is required hereunder, it shall be given in writing addressed as follows: To the Company: StaffMark, Inc. 302 E. Millsap Road Fayetteville, Arkansas 72703 Attn: Clete T. Brewer, Chief Executive Officer with a copy to: Fred M. Perkins, III, Esq. Wright, Lindsey & Jennings 200 West Capitol, Suite 2200 Little Rock, Arkansas 72201 To Employee: Terry Bellora 2620 Sherwood Lane Fayetteville, Arkansas 72703 Notice shall be deemed given and effective three (3) days after the deposit in the U.S. mail of a writing addressed as above and sent first class mail, certified, return receipt requested, or when actually received. Either party may change the address for notice by notifying the other party of such change in accordance with this paragraph 11. 12. SEVERABILITY: HEADINGS. If any portion of this Agreement is held invalid or inoperative, the other portions of this Agreement shall be deemed valid and operative and, so far as is reasonable and 9 10 possible, effect shall be given to the intent manifested by the portion held invalid or inoperative. The paragraph headings herein are for reference purposes only and are not intended in any way to describe, interpret, define or limit the extent or intent of the Agreement or of any part hereof. 13. ASSIGNMENT. This Agreement is personal and non-assignable by Employee. 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. 14. 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. 15. REASONABLENESS OF CONDITIONS. Employee has carefully read all of the terms herein stated and agrees that the same are necessary for the reasonable and proper protection of the Company's business; and that Employee has been induced to offer this employment upon the representation of Employee that he will abide by and be bound by each of the aforesaid covenants and restraints; and that each and every covenant is reasonable with respect to such matter, length of time, and the geographical area embraced; and that irrespective of all other conditions, the covenants and restrictions hereinabove provided shall be operative during the full period and throughout the geographical area described. 16. GOVERNING LAW. This Agreement shall in all respects be construed according to the laws of the State of Delaware. I HAVE READ AND UNDERSTAND THIS AGREEMENT AND IN PARTICULAR THE NON-COMPETITION ASPECTS HEREOF CONTAINED IN PARAGRAPH 3, AND DO HEREBY EXECUTE THE SAME BEFORE THE WITNESS WHO HAS SIGNED HEREUNDER. TERRY BELLORA /s/ TERRY BELLORA ----------------------------------------------- /s/ JERRY T. BREWER - -------------------- WITNESS STAFFMARK, INC. /s/ CLETE T. BREWER ----------------------------------------------- 10 EX-23.2 4 CONSENTS 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, August 16, 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, August 16, 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, August 16, 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, August 16, 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, August 16, 1996. EX-23.9 5 CONSENT OF R. CLAYTON MCWHORTER 1 EXHIBIT 23.9 CONSENT TO SERVE AS DIRECTOR OF STAFFMARK, INC. I, R. Clayton McWhorter, 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/ R. CLAYTON McWHORTER ---------------------------------------- R. Clayton McWhorter DATE: July 11, 1996 ----------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----