-----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, UlB+grB44zeRWyF3k0tN6mdww0EZZjYZJ4dDGjsNtcHcve5KxKa8L/oV0K8VY63U K81+ue6ZC9EUwNuaJcNUUg== 0000950134-97-005719.txt : 19970807 0000950134-97-005719.hdr.sgml : 19970807 ACCESSION NUMBER: 0000950134-97-005719 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19970806 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: 333-32371 FILM NUMBER: 97652267 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 6, 1997 REGISTRATION NO. 333-32371 ================================================================================ 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 7363 71-0788538 (State or other jurisdiction (Primary Standard Industrial (I.R.S. employer of incorporation or Classification Code Number) identification no.) organization)
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) GORDON Y. ALLISON, ESQ. EXECUTIVE VICE PRESIDENT -- GENERAL COUNSEL STAFFMARK, INC. 302 EAST MILLSAP ROAD FAYETTEVILLE, ARKANSAS 72703 (501) 973-6000 (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. FRED M. PERKINS III, ESQ. JON H. KLAPPER, ESQ. WRIGHT, LINDSEY & JENNINGS NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. 200 WEST CAPITOL, SUITE 2200 999 PEACHTREE STREET, N.E., SUITE 1400 LITTLE ROCK, ARKANSAS 72201 ATLANTA, GEORGIA 30309 (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 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 BUT HAS NOT YET BECOME EFFECTIVE. 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 OR JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE OR JURISDICTION. SUBJECT TO COMPLETION, DATED AUGUST 6, 1997 PROSPECTUS 3,500,000 SHARES [STAFFMARK, INC. LOGO] COMMON STOCK Of the 3,500,000 shares of common stock, par value $0.01 per share (the "Common Stock") offered hereby (the "Offering"), 3,215,000 shares are being sold by StaffMark, Inc. (the "Company") and 285,000 shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. The Common Stock is traded on The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbol "STAF." On August 5, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market was $26.88 per share. See "Price Range of Common Stock and Dividend Policy." SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS 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.
==================================================================================================================== PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS - -------------------------------------------------------------------------------------------------------------------- Per Share............... $ $ $ $ - ------------------------------------------------------------------------------------------------------------------ Total(3)................ $ $ $ $ ==================================================================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated offering expenses of $2,000,000 payable by the Company. (3) The Company has granted the Underwriters a 30-day over-allotment option to purchase up to 525,000 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 $ , the total Proceeds to Company will be $ , and the total Proceeds to Selling Stockholders will be $ . See "Principal and Selling Stockholders" and "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 orders 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 , 1997. --------------------- LOGOS , 1997 3 [INSIDE FRONT PAGE OF PROSPECTUS] The Inside Front Cover Page of the Prospectus contains a map of the Company's operating regions, including states in which the Company operates and a chart showing growth in the number of branch offices from 1993 to June 30, 1997. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING." 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the pro forma and historical financial statements and the related notes thereto appearing elsewhere in this Prospectus. Prospective investors should carefully consider the matters set forth under "Risk Factors" herein. All references to the "Company" or "StaffMark" refer to StaffMark, Inc. and where appropriate, its subsidiaries and their respective operations and include the Company's predecessors. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriter's over-allotment option or options granted or reserved under the Company's 1996 Stock Option Plan. Industry information used in this Prospectus was obtained from industry publications that the Company believes to be reliable, but such information has not been independently verified. THE COMPANY StaffMark is a leading provider of diversified staffing, professional and consulting services to businesses, professional and service organizations, medical niches and governmental agencies. The Company offers these services through over 160 branches located in 21 states, Canada and the United Kingdom. Since the Company's initial public offering in October 1996 (the "Initial Public Offering"), the Company has grown both internally and through the acquisition of 15 additional staffing and professional service companies with 68 branches and 1996 revenues of approximately $168.4 million. The Company believes that this balance of internal growth and selective acquisitions will best allow the Company to capitalize on its growth opportunities. For the year ended December 31, 1996 and the six months ended June 30, 1997, the Company's combined revenues and operating income were $198.4 million and $11.2 million, and $160.0 million and $9.7 million, respectively. The Company's services are provided through three divisions: Commercial, Professional and Information Technology ("Professional/IT") and Specialty Medical. The Commercial division provides clerical and light industrial staffing services and generated approximately 88.1% and 76.4% of the Company's combined revenues for the year ended December 31, 1996 and for the six months ended June 30, 1997, respectively. The Professional/IT division provides information technology staffing, consulting and support services, as well as professional and technical services and generated 4.5% and 16.8% of the Company's combined revenues for the year ended December 31, 1996 and for the six months ended June 30, 1997, respectively. The Specialty Medical division provides clinical trial support services, medical office staffing, physical and occupational therapists and speech pathologists and generated 7.4% and 6.8% of the Company's combined revenues for the year ended December 31, 1996 and for the six months ended June 30, 1997, respectively. The Company's operating strategy is to continue to: (i) develop long-term relationships with its customers as a primary provider of quality, customized and diversified staffing and professional services; (ii) adopt on a Company-wide basis the best practices, policies and procedures of existing StaffMark operations and newly acquired companies; (iii) increase operating efficiencies and provide a strong level of corporate support by combining a number of general and administrative functions at the corporate level and by reducing or eliminating redundant functions; and (iv) maintain a decentralized entrepreneurial environment that rewards performance and attracts and retains self-motivated, achievement-oriented individuals. The Company's internal growth strategy consists of the following key components: (i) focusing on further penetration in existing geographic markets by continuing to provide high-quality services, by enhancing and expanding new services and by spinning off new branch offices; (ii) expanding and cross-developing the Professional/IT and Specialty Medical services offered by the Company and increasing the percentage of revenues and gross profits derived from these divisions; and (iii) increasing Vendor-on-Premises ("VOP") relationships which the Company believes provide a more stable source of revenues and attractive operating profits. The Company believes that it is successfully implementing its internal growth strategy as each of its three operating divisions achieved growth rates in excess of 20% for the six months ended June 30, 1997 as compared to the same period in 1996. The Company's acquisition strategy is to acquire and integrate independent staffing and professional service companies with strong management, profitable operating results and recognized local and regional 3 5 presence. The Company pursues acquisitions that expand the geographic scope of its operations, increase its penetration of existing markets, offer complementary services and expand the percentage of revenues generated by the Professional/IT and Specialty Medical divisions. Since the Initial Public Offering in October 1996, the Company has implemented this strategy and completed 15 acquisitions (the "Post-IPO Acquisitions"). Certain information related to such acquisitions is summarized in the following table:
1996 DATE OF REVENUES BRANCHES ACQUIRED COMPANY(1) ACQUISITION (IN MILLIONS)(2) ACQUIRED HEADQUARTERS SERVICES PROVIDED - ------------------- ----------- ----------------- ---------- -------------------- --------------------------- Technology Source.. Nov. 1996 $ 6.8 1 St. Louis, MO Professional/IT Advantage........ Dec. 1996 3.6 2 Spartanburg, SC Commercial Tom Bain......... Dec. 1996 3.6 1 Brentwood, TN Commercial, Professional/IT Advance.......... Feb. 1997 6.3 1 Memphis, TN Commercial MRIC............. Feb. 1997 2.5 2 Vancouver, BC Specialty Medical Flexible......... Mar. 1997 49.3 40 Fort Wayne, IN Commercial, Professional/IT Global........... Apr. 1997 17.2 1 Walnut Creek, CA Professional/IT Lindenberg....... Apr. 1997 18.0 4 St. Louis, MO Professional/IT TPS/Furr......... May 1997 4.5 1 Monroe, NC Commercial HR Alternatives... Jun. 1997 8.4 8 Kingsport, TN Commercial Kleven........... Jun. 1997 5.0 1 Lexington, MA Professional/IT, Commercial Sterling......... Jun. 1997 19.0 2 Phoenix, AZ Commercial, Professional/IT Baker Street..... Jul. 1997 11.0 1 Houston, TX Professional/IT, Commercial Temp Technology.. Jul. 1997 7.5 2 Portland, OR Commercial EBS.............. Aug. 1997 5.7 1 Dallas/Ft. Worth, TX Professional/IT ------- -- Total.......... $168.4 68 ======= ==
- --------------- (1) See "Business -- Post-IPO Acquisitions" for the full legal name of the acquired companies. (2) The revenue amounts presented in the table are for the fiscal year ended December 31, 1996 for all of the referenced entities, other than with respect to Baker Street which is for the 12 months ended May 31, 1997 and EBS which is for the 12 months ended June 30, 1997. The acquisition of Baker Street will be accounted for as a pooling-of-interests, while all other acquisitions have been accounted for as purchases. The revenues for 1996 were not audited except for Flexible, Global and Lindenberg. Substantially all of the 1996 revenues represent a period of time when the companies were operating independently from the Company and, thus, are not included in the Company's 1996 revenues. See "Business -- Post-IPO Acquisitions." The staffing industry has grown rapidly in recent years as companies have utilized supplemental employees to control personnel costs and to meet specialized or fluctuating personnel needs. According to the National Association of Temporary and Staffing Services, the U.S. market for staffing services grew at a compound annual growth rate of approximately 18% from $20.4 billion in revenues in 1991 to $47.1 billion in 1996. Furthermore, according to Staffing Industry Report, revenues from the domestic information technology sector in 1996 are estimated to have been $12.0 billion, and grew at a compound annual rate of approximately 20% over the past five years. The Company believes the staffing industry is highly fragmented with over 6,000 staffing companies and 2,500 Professional/IT companies. Although the industry is experiencing increasing consolidation, largely in response to opportunities to provide comprehensive supplemental staffing solutions to regional and national accounts, the Company believes that there are numerous attractive acquisition targets available. The Company maintains its principal executive offices at 302 East Millsap Road, Fayetteville, Arkansas 72703. Its telephone number is (501) 973-6000. The Company maintains various sites on the Internet's world wide web. Information contained in the Company's world wide web sites shall not be deemed to be part of this Prospectus. 4 6 RECENT DEVELOPMENTS The Company acquired Temp Technology, Inc. ("Temp Technology") on July 31, 1997. Through two offices located in the Portland, Oregon area, Temp Technology provides electronics assembly, light industrial, office/clerical, and information technology staffing services. Temp Technology had 1996 revenues of approximately $7.5 million and operates in the Commercial division. The Company acquired Expert Business Systems, Incorporated ("EBS") on August 4, 1997. EBS, located in the Dallas/Fort Worth metropolitan area provides information technology services, specializing in help desk support, distributed services and application developments. EBS has developed a model for providing information technology outsourcing services to a variety of businesses. EBS, which had revenues for the 12 months ended June 30, 1997 of approximately $5.7 million, operates in the Professional/IT division. THE OFFERING Common Stock offered by the Company................. 3,215,000 shares Common Stock offered by the Selling Stockholders.... 285,000 shares Common Stock to be outstanding after the 18,134,296 shares offering(1)....................................... Use of proceeds by the Company...................... To repay certain debt and for working capital and general corporate purposes including future acquisitions. See "Use of Proceeds." Nasdaq National Market symbol....................... STAF
- --------------- (1) Excludes approximately 1,265,000 shares of Common Stock reserved for issuance upon exercise of outstanding options and 435,000 shares reserved for future option grants under the Company's stock option plan and 300,000 shares reserved for issuance under the Company's Employee Stock Purchase Plan. See "Management -- 1996 Stock Option Plan" and "-- Employee Stock Purchase Plan." 5 7 SUMMARY FINANCIAL DATA StaffMark acquired in separate transactions (the "Mergers"), simultaneously with the closing of the Initial Public Offering, the Founding Companies (defined below). Pursuant to the requirements of the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 97, which was issued and became effective July 31, 1996, Brewer Personnel Services, Inc. ("Brewer") was designated, for financial reporting purposes, as the acquirer of Prostaff Personnel, Inc. and its related entities ("Prostaff"), Maxwell Staffing, Inc. and its related entities ("Maxwell"), HRA, Inc. ("HRA"); First Choice Staffing, Inc. ("First Choice"); and Blethen Temporaries, Inc. and its related entities ("Blethen") (collectively, the "Other Founding Companies" and together with Brewer, the "Founding Companies"). Accordingly, the primary financial information presented below relates to Brewer through the date of the Initial Public Offering and to StaffMark on a consolidated basis for all periods subsequent to the Initial Public Offering. The Summary Financial Data should be read in conjunction with the Company's consolidated financial statements and the related notes thereto appearing elsewhere in this Prospectus as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations" which includes a presentation and discussion of the results of operations on a combined basis for the three years ended December 31, 1996 and for the six months ended June 30, 1997. For a discussion of pro forma operating results, see the StaffMark, Inc. Unaudited Pro Forma Financial Statements and the related notes thereto appearing elsewhere in this Prospectus.
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------- ------------------- 1994 1995 1996 1996 1997 ------- ------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues.................................................. $27,894 $43,874 $104,476 $ 30,556 $159,987 Cost of services.......................................... 22,906 35,115 81,607 24,028 124,515 ------- ------- -------- -------- -------- Gross profit.............................................. 4,988 8,759 22,869 6,528 35,472 Operating expenses: Selling, general and administrative..................... 3,483 5,804 14,623 4,445 24,006 Depreciation and amortization........................... 256 591 1,374 566 1,749 ------- ------- -------- -------- -------- Operating income.......................................... 1,249 2,364 6,872 1,517 9,717 Interest expense.......................................... 92 801 1,376 880 507 Net income................................................ 1,177 1,587 4,023 634 5,583 PRO FORMA:(1) Revenues(2)............................................... $266,074 $123,432 $173,298 Operating income(3)....................................... 13,887 5,049 10,210 Net income(3)(4).......................................... 6,664 2,067 5,668 Primary net income per share.............................. $ 0.64 $ 0.23 $ 0.39 Fully diluted net income per share........................ $ 0.64 $ 0.23 $ 0.38 Primary weighted average shares outstanding............... 10,444 9,174 14,562 Fully diluted weighted average shares outstanding......... 10,444 9,174 14,816
AS OF JUNE 30, 1997 ---------------------- AS ACTUAL ADJUSTED(5) -------- ----------- BALANCE SHEET DATA: Working capital...................................................................... $ 24,088 $ 60,833 Total assets......................................................................... 141,908 178,653 Long-term debt....................................................................... 43,430 -- Stockholders' equity................................................................. 75,475 155,650
- --------------- (1) See the StaffMark, Inc. Unaudited Pro Forma Financial Statements and the related notes thereto appearing elsewhere in this Prospectus for information relating to the pro forma results of operations for the year ended December 31, 1996 and the six months ended June 30, 1997 and 1996. (2) Adjusted to reflect: (i) Brewer's October 1996 acquisition of the Other Founding Companies; (ii) Brewer's February 1996 acquisition of On Call Employment Services, Inc. ("On Call"); (iii) StaffMark's March 1997 acquisition of Flexible Personnel, Inc., Great Lakes Search Associates, Inc. and HR America, Inc. (collectively "Flexible"); and (iv) StaffMark's April 1997 acquisition of Global Dynamics, Inc. ("Global"), as if such acquisitions had occurred at the beginning of the periods presented. (3) Adjusted to reflect: (i) the acquisitions discussed in Note 2 above; (ii) the adjustment to compensation expense for the difference between historical compensation paid to certain previous owners of the Founding Companies, Flexible and Global and the employment contract compensation negotiated in conjunction with the Mergers and the respective acquisitions (the "Compensation Differential"); and (iii) the amortization expense relating to the intangible assets recorded in conjunction with the acquisitions discussed in Note 2 above. (4) Gives effect to certain tax adjustments related to the taxation of certain Founding Companies, Flexible and Global as S Corporations prior to the consummation of the acquisitions discussed in Note 2 above and the tax impact of the Compensation Differential. Pro forma income tax expense is based upon a combined effective tax rate of 39%, adjusted for the impact of nondeductible goodwill amortization. (5) Adjusted for the sale of 3,215,000 shares of common stock of the Company offered hereby at an assumed public offering price of $26.88 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 6 8 RISK FACTORS An investment in the shares of Common Stock offered by this Prospectus involves a high degree of risk. 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 the Common Stock offered hereby. ABILITY TO ACHIEVE AND MANAGE GROWTH; ACQUISITION RISKS. The Company has experienced significant growth, principally through acquisitions, internal growth and opening new offices. There can be no assurance that the Company will be able to expand its market presence in its current locations or successfully enter other markets through acquisitions or the opening of new offices. The Company's ability to continue its growth and profitability will depend on a number of factors, including the availability of capital to fund acquisitions, existing and emerging competition, the ability to maintain sufficient profit margins despite pricing pressures and the strength of demand for temporary associates, consultants and professionals in the Company's markets. 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. Additionally, there can be no assurance that the Company will be able to successfully identify suitable acquisition candidates (particularly Professional/IT and Specialty Medical candidates), complete acquisitions or integrate acquired businesses into its operations. Once integrated, acquisitions may not achieve acceptable levels of revenue or profitability or otherwise perform as expected. Acquisitions also involve special risks, including risks associated with unanticipated problems, liabilities and contingencies, diversion of management attention and possible adverse effects on earnings resulting from increased goodwill amortization, increased interest costs, the issuance of additional securities and difficulties related to the integration of the acquired business. The Company is unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Internal Growth Strategy" and "-- Acquisition and Integration Strategy." 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 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." FLUCTUATIONS IN OPERATING RESULTS; FLUCTUATIONS IN QUARTERLY RESULTS. The Company's operating results have fluctuated in the past and will fluctuate in the future based on many factors. These factors include, among others, changes in the regulatory environment, failure to adequately integrate acquired companies, fluctuations in the general economy, increased competition, the opening of new branch offices, changes in operating expenses, expenses related to acquisitions, and the potential adverse effect of acquisitions. Due to these and any unforeseen factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such an event, the price of the Common Stock would likely be materially adversely affected. In view of the Company's recent significant growth, the Company believes that period-to-period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. Because the Company only derives revenue when its temporary associates, consultants and professionals are actually working, its operating results are adversely affected when client facilities close due to holidays or inclement weather. The Company generally experiences lower revenues, operating income and net income during the first and fourth quarters due to certain holidays, weather conditions and seasonal vacation patterns. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 in the professional/information technology and specialty medical fields, is intense. The Company competes in 7 9 several markets in which unemployment is relatively low thereby increasing competition for employees. 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 -- Personnel -- Full Time Employees/Temporary Associates/Professionals." COMPETITIVE MARKET. The 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 service businesses. A significant number of competitors have greater marketing, financial and other resources and more established operations than the Company. Price competition in the staffing industry is intense, particularly for the provision of commercial personnel, and pricing pressures from competitors and customers are increasing. 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 and Information Technology Services Industry" and "-- Competition." 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 unemployment benefits are available. Workers' compensation costs may increase as a result of changes in the Company's experience rating or applicable laws. Although management believes its workers' compensation coverage amounts are adequate, there can be no assurance that the Company's actual future workers' compensation claims will not exceed the coverage amounts. 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 -- Personnel -- Workers' Compensation Program." INTANGIBLE ASSETS. As of June 30, 1997, approximately $86.7 million, or 61%, of the Company's total assets were intangible assets. These intangible assets primarily represent amounts attributable to goodwill recorded in connection with the Company's acquisitions. Any impairment in the value of such assets could have a material adverse effect on the Company's financial condition and results of operations. 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 not presently receiving 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 -- Regulation." GOVERNMENT REGULATION OF IMMIGRATION. Certain of the Company's Specialty Medical professionals and Professional/IT consultants are foreign nationals working in the United States under H-1B permits. Accordingly, both the Company and these foreign nationals must comply with United States immigration laws. The inability of the Company to obtain H-1B permits for certain of its employees in sufficient quantities 8 10 or at a sufficient rate could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, Congress and administrative agencies with jurisdiction over immigration matters have periodically expressed concerns over the levels of legal and illegal immigration into the U.S. These concerns have often resulted in proposed legislation, rules and regulations aimed at reducing the number of work permits that may be issued. Any changes in such laws making it more difficult to hire foreign nationals or limiting the ability of the Company to retain foreign employees could require the Company to incur additional unexpected labor costs and expenses. Any such restrictions or limitations on the Company's hiring practices could have a material adverse effect on the Company's business, operating results and financial condition. See "Business -- Regulation." INDUSTRY RISKS. Providers of temporary staffing and professional 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 by 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 and professional service 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. RISKS RELATED TO ACQUISITION FINANCING. The Company currently intends to continue to finance future acquisitions by using cash and shares of the Company's Common Stock for all or a 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. 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. Although the Company has established a $100 million credit facility, there can be no assurance that the Company will be able to obtain all the financing it will need in the near future 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" and "Business -- Acquisition and Integration Strategy." 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 Company. 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 Company's business, financial condition and results of operation could be materially adversely affected. See "Management." DISCRETION OF MANAGEMENT CONCERNING USE OF PROCEEDS. The Company has allocated approximately $52.4 million of the net proceeds of this Offering for specific identified purposes, with the remainder to be used for working capital and for general corporate purposes, including possible acquisitions. Accordingly, management will have unlimited discretion in spending a large percentage of the proceeds to be received by the Company. There can be no assurance that the Company will deploy such proceeds in a manner which enhances stockholder value. See "Use of Proceeds." CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS. Upon completion of the Offering, the Company's executive officers and directors beneficially will own approximately 26.5% of the outstanding shares of Common Stock. These persons 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 and Selling Stockholders." 9 11 POTENTIAL LIABILITY AND INSURANCE; LEGAL PROCEEDINGS. The provision of Professional/IT services and Specialty Medical services entails an inherent risk of professional malpractice and other similar claims. The Company maintains insurance coverage that it believes is adequate both as to risks and amounts. The Company believes that such insurance will extend to professional liability claims that may be asserted against temporary associates, consultants and professionals 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. 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's credit facility limits the payment of cash dividends without the lender's consent. See "Price Range of Common Stock and Dividend Policy." SHARES ELIGIBLE FOR FUTURE SALE. The market price of the Common Stock could be adversely affected by the sale of substantial amounts of Common Stock in the market following the Offering. Following the expiration and/or release of various lock-up periods, restricted securities held by certain stockholders will be available for public resale in accordance with Rule 144 under the Securities Act of 1933, as amended (the "Securities Act") or by operation of applicable registration rights agreements between the holders of such restricted securities and the Company. See "Shares Eligible for Future Sale." VOLATILITY OF STOCK PRICE. From time to time, there may be significant volatility in the market price for the Common Stock. Quarterly operating results of the Company or of other temporary staffing and service companies, changes in general conditions in the economy, analyst's earnings estimates, the financial markets or the staffing industry, natural disasters or other developments could cause the market price of the Common Stock to fluctuate substantially. In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. See "-- Fluctuations in Operating Results; Fluctuations in Quarterly Results" and "Price Range of Common Stock and Dividend Policy." 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 "Description of Capital Stock." FORWARD-LOOKING STATEMENTS. This Prospectus contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements made with respect to the results of operations and businesses of the Company. When used in this Prospectus, the words "may," "should," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated, projected, forecast, estimated or budgeted in such forward-looking statements include, among others, the following possibilities: (i) heightened competition, including specifically the intensification of price competition, the entry of new competitors, and new services by new and existing competitors; (ii) failure 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; (iii) failure to obtain new customers or retain existing customers; (iv) inability to carry out marketing and sales plans; (v) loss of key executives; (vi) general economic and business conditions which are less favorable than expected; and (vii) unanticipated changes in industry trends. Such forward-looking statements may be found in this "Risk Factors" section and under the captions "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as in this Prospectus generally. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, the risk factors set forth herein and the matters set forth in this Prospectus generally. 10 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,215,000 shares of Common Stock offered by the Company hereby at an assumed offering price of $26.88 per share are estimated to be approximately $80.2 million ($93.6 million if the Underwriters' over-allotment option is exercised in full), after deducting the underwriting discount and estimated offering expenses payable by the Company. Since the Initial Public Offering, the Company has expended a total of approximately $69.7 million in cash related to its 15 Post-IPO Acquisitions. The Company intends to use approximately $52.4 million of the net proceeds of this Offering to repay indebtedness outstanding under its line of credit facility (the "Credit Facility") with Mercantile Bank National Association ("Mercantile") which was incurred primarily in connection with these acquisitions. The indebtedness under the Credit Facility bears interest at variable rates (averaging approximately 6.9% at June 30, 1997) and requires quarterly principal repayments beginning in January 1999 and continuing through maturity in April 2002. The remaining net proceeds from the Offering of approximately $27.8 million will be used for working capital and for general corporate purposes, including the possible acquisition of staffing and professional service companies. The Company does not have any present binding agreements or commitments in place but does intend to evaluate and continue discussions with potential strategic acquisitions. Pending application of the net proceeds as described above, the Company intends to invest the net proceeds in investment grade, interest-bearing securities. The Company will not receive any proceeds from the sale of shares of Common Stock offered hereby by the Selling Stockholders. See "Principal and Selling Stockholders." CAPITALIZATION The following table sets forth the actual long-term debt and capitalization of the Company at June 30, 1997, and as adjusted to reflect the issuance of 3,215,000 shares of Common Stock of the Company offered hereby at an assumed offering price of $26.88 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with the Company's consolidated financial statements and the related notes thereto appearing elsewhere in this Prospectus.
JUNE 30, 1997 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Long-term debt(1)........................................... $ 43,430 $ -- -------- -------- Stockholders' equity: Preferred Stock, $.01 par value, 1,000,000 shares authorized; none issued or outstanding................. -- -- Common Stock, $.01 par value, 26,000,000 shares authorized; 14,509,634 shares issued and outstanding, actual; and 17,724,634 shares issued and outstanding, as adjusted(2)......................................... 145 177 Additional paid-in capital................................ 67,150 147,293 Retained earnings......................................... 8,180 8,180 -------- -------- Total stockholders' equity........................ 75,475 155,650 -------- -------- Total capitalization......................... $118,905 $155,650 ======== ========
- ------------------ (1) For a description of the Company's long-term debt, see Note 7 of Notes to the Company's consolidated financial statements. (2) Excludes approximately 1,265,000 shares of Common Stock reserved for issuance upon exercise of outstanding options and 435,000 shares reserved for future option grants under the Company's stock option plan and 300,000 shares reserved for issuance under the Company's Employee Stock Purchase Plan. See "Management -- 1996 Stock Option Plan" and "-- Employee Stock Purchase Plan." 11 13 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Since its Initial Public Offering (at $12.00 per share), the Company's Common Stock has traded on the Nasdaq National Market under the symbol "STAF." The following table sets forth the range of high and low closing prices for the Common Stock as reported on the Nasdaq National Market for the periods indicated.
HIGH LOW ------- ------ 1996 Third Quarter (from September 27, 1996)..................... $14.13 $14.00 Fourth Quarter.............................................. 16.00 11.25 1997 First Quarter............................................... $15.00 $12.25 Second Quarter.............................................. 22.38 12.00 Third Quarter (through August 5, 1997)...................... 27.50 21.88
On August 5, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market was $26.88 per share. As of August 4, 1997, there were 197 stockholders of record of the Company's Common Stock. The Company has not paid dividends in the past and intends to retain all of its earnings, if any, to finance the expansion of its business and for general corporate purposes, including future acquisitions, and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. In addition, the Credit Facility includes, and any additional lines of credit established in the future may include, restrictions on the ability of the Company to pay dividends without the consent of the lender. 12 14 SELECTED FINANCIAL DATA StaffMark acquired, simultaneously with the closing of the Initial Public Offering, the Founding Companies. Pursuant to the requirements of SAB No. 97, Brewer was designated, for financial reporting purposes, as the acquirer of the Other Founding Companies. Accordingly, the primary financial information presented below relates to Brewer through the date of the Initial Public Offering and to StaffMark on a consolidated basis for all periods subsequent to the Initial Public Offering. The Selected Financial Data should be read in conjunction with the Company's consolidated financial statements and the related notes thereto appearing elsewhere in this Prospectus as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations" which also includes a presentation and discussion of the results of operations on a combined basis for the three years ended December 31, 1996 and for the six months ended June 30, 1997. For a discussion of pro forma operating results, see the StaffMark, Inc. Unaudited Pro Forma Financial Statements and the related notes thereto appearing elsewhere in this Prospectus.
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------------ ------------------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- -------- -------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues................................ $11,159 $12,313 $27,894 $43,874 $104,476 $ 30,556 $159,987 Cost of services........................ 9,609 10,063 22,906 35,115 81,607 24,028 124,515 ------- ------- ------- ------- -------- -------- -------- Gross profit............................ 1,550 2,250 4,988 8,759 22,869 6,528 35,472 Operating expenses: Selling, general and administrative... 1,043 1,623 3,483 5,804 14,623 4,445 24,006 Depreciation and amortization......... 113 121 256 591 1,374 566 1,749 ------- ------- ------- ------- -------- -------- -------- Operating income........................ 394 506 1,249 2,364 6,872 1,517 9,717 Interest expense........................ 26 54 92 801 1,376 880 507 Net income.............................. 381 478 1,177 1,587 4,023 634 5,583 PRO FORMA(1): Revenues(2)............................. $266,074 $123,432 $173,298 Operating income(3)..................... 13,887 5,049 10,210 Net income(3)(4)........................ 6,664 2,067 5,668 Primary net income per share............ $ 0.64 $ 0.23 $ 0.39 Fully diluted net income per share...... $ 0.64 $ 0.23 $ 0.38 Primary weighted average shares outstanding........................... 10,444 9,174 14,562 Fully diluted weighted average shares outstanding........................... 10,444 9,174 14,816
AS OF DECEMBER 31, AS OF JUNE 30, 1997 ------------------------------------------------ ------------------------- 1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(5) ------- ------- ------- ------- -------- -------- -------------- BALANCE SHEET DATA: Working capital......................... $ (324) $ 366 $ 1,157 $ 1,508 $ 24,050 $ 24,088 $ 60,833 Total assets............................ 2,321 2,917 4,054 21,752 71,498 141,908 178,653 Long-term debt.......................... -- 1,232 224 15,986 -- 43,430 -- Stockholders' equity.................... 846 1,110 2,110 2,786 58,110 75,475 155,650
- --------------- (1) See the StaffMark, Inc. Unaudited Pro Forma Financial Statements and the related notes thereto appearing elsewhere in this Prospectus for information relating to the pro forma results of operations for the year ended December 31, 1996 and the six months ended June 30, 1997 and 1996. (2) Adjusted to reflect: (i) Brewer's October 1996 acquisition of the Other Founding Companies; (ii) Brewer's February 1996 acquisition of On Call (iii) StaffMark's March 1997 acquisition of Flexible and (iv) StaffMark's April 1997 acquisition of Global, as if such acquisitions had occurred at the beginning of the periods presented. (3) Adjusted to reflect: (i) the acquisitions discussed in Note 2 above; (ii) the Compensation Differential; and (iii) the amortization expense relating to the intangible assets recorded in conjunction with the acquisitions discussed in Note 2 above. (4) Gives effect to certain tax adjustments related to the taxation of certain Founding Companies, Flexible and Global as S Corporations prior to the consummation of the acquisitions discussed in Note 2 above and the tax impact of the Compensation Differential. Pro forma income tax expense is based upon a combined effective tax rate of 39%, adjusted for the impact of nondeductible goodwill amortization. (5) Adjusted for the sale of 3,215,000 shares of common stock of the Company offered hereby at an assumed public offering price of $26.88 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 13 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the "Selected Financial Data" and the related notes thereto, and StaffMark's audited financial statements and the related notes thereto appearing elsewhere in this Prospectus. OVERVIEW StaffMark, Inc., a Delaware corporation, was formed in March 1996 to create a leading provider of diversified staffing, professional and consulting services. On October 2, 1996, StaffMark acquired, simultaneously with the closing of its Initial Public Offering, the following established staffing businesses and their affiliates: Brewer, Prostaff, Maxwell, HRA, First Choice and Blethen. At the time of the Initial Public Offering, the Founding Companies had on average operated for over 13 years in eight states through over 90 branch offices. Since the Initial Public Offering, the Company has grown through substantial internal growth and the acquisition of 15 other staffing and professional service companies with 68 branches. The Company's services are provided through three divisions: Commercial, Professional/IT and Specialty Medical. The Commercial division provides clerical and light industrial staffing services. The Professional/IT division provides information technology staffing, consulting and support services, as well as professional and technical services. The Specialty Medical division provides clinical trial support services, medical office staffing, physical and occupational therapists and speech pathologists. The Company provides these services through its network of over 160 branch offices located in 21 states, Canada and the United Kingdom. The Company recognizes revenues upon performance of services. The Company generally compensates its temporary associates and consultants only for hours actually worked and, therefore, wages of the temporary associates and consultants are a variable cost that increase or decrease as revenues increase or decrease. However, certain of the Company's information technology consultants and professionals are full time, salaried employees. Cost of services primarily consists of wages paid to temporary associates and consultants, payroll taxes, workers' compensation and other related employee benefits. Selling, general and administrative expenses are comprised primarily of administrative salaries, benefits, marketing, rent and recruitment expenses. The financial information provided below has been rounded in order to simplify its presentation. However, the percentages provided below are calculated using the detailed financial information contained in the financial statements, the notes thereto and the other financial data included elsewhere in this Prospectus. RESULTS OF OPERATIONS -- SAB NO. 97 On October 2, 1996, StaffMark acquired, simultaneously with the closing of the Initial Public Offering, the Founding Companies. Based on the provisions of SAB No. 97, Brewer was designated as the acquirer of the Other Founding Companies for financial reporting purposes. Therefore, the financial information presented below reflects the results of its operations for the years ended December 31, 1994 and 1995. The Company's results of operations for 1996 represent a combination of Brewer's results for the nine months ended September 30, 1996 and the Company's consolidated results of operations for the three months ended December 31, 1996. Because the Mergers and the Initial Public Offering were accounted for based on the provisions of SAB No. 97, the acquisition of assets and assumption of liabilities of the Founding Companies are reflected at their historical cost. Throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations, references to "the Company" relate to Brewer for the periods prior to the acquisition of the Other Founding Companies, which occurred on October 2, 1996 and relate to StaffMark and its consolidated subsidiaries subsequent to that date. 14 16 RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 Revenues. Revenues increased $129.4 million, or 423.6%, to $160.0 million for the six months ended June 30, 1997 compared to $30.6 million for the six months ended June 30, 1996. This increase was attributable to the fourth quarter 1996 acquisitions of the Other Founding Companies, Technology Source, Advantage and Tom Bain as well as the 1997 acquisitions of Advance, MRIC, Flexible, Global, Lindenberg, TPS/Furr, HR Alternatives and Kleven. These acquisitions accounted for approximately $120.1 million of the increase for the six months ended June 30, 1997 and internal growth accounted for $9.3 million of the increase, or a 30.4% increase over the 1996 period. Gross Profit. Gross profit increased $28.9 million, or 443.3%, to $35.5 million for the six months ended June 30, 1997 compared to $6.5 million for the six months ended June 30, 1996. This increase was primarily attributable to the acquisitions and internal growth discussed above. Gross margin increased to 22.2% for the six months ended June 30, 1997 compared to 21.4% for the six months ended June 30, 1996. The increase in gross margin is primarily attributable to the Company's focus on increasing revenues from the Professional/IT division which generally provides higher profit margins than the Commercial division due to the specialized expertise of the consultants and professionals. Control of variable costs, such as workers' compensation expenses, also contributed to an increase in gross margin. Operating Expenses. Selling, general and administrative expenses ("SG&A") increased $19.6 million, or 440.0%, to $24.0 million for the six months ended June 30, 1997 compared to $4.4 million for the six months ended June 30, 1996. This increase was primarily attributable to the acquisitions discussed above, which accounted for approximately $16.6 million of the increase for the six months ended June 30, 1997. SG&A as a percentage of revenues increased to 15.0% for the six months ended June 30, 1997 compared to 14.5% for the six months ended June 30, 1996. This increase results primarily from higher SG&A associated with the Mergers, costs associated with being a public company and the costs associated with the acquisitions discussed above. Depreciation and amortization expense increased $1.2 million, or 209.1%, to $1.7 million for the six months ended June 30, 1997 compared to $566,000 for the six months ended June 30, 1996. This increase is primarily attributable to amortization of the goodwill associated with the acquisitions discussed above. Operating Income. Operating income increased $8.2 million, or 540.5%, to $9.7 million for the six months ended June 30, 1997 compared to $1.5 million for the six months ended June 30, 1996. The Company's operating margin increased to 6.1% for the six months ended June 30, 1997 compared to 5.0% for the six months ended June 30, 1996. Interest Expense. Interest expense was $507,000 for the six months ended June 30, 1997 as compared to $880,000 for the six months ended June 30, 1996. Interest expense for the six months ended June 30, 1997 is primarily related to borrowings made to fund the cash portion of several of the Company's acquisitions discussed above. Net Income. Net income increased $4.9 million, or 780.7%, to $5.6 million for the six months ended June 30, 1997 compared to $634,000 for the six months ended June 30, 1996. Net income as a percentage of revenues increased to 3.5% for the six months ended June 30, 1997 compared to 2.1% for the six months ended June 30, 1996. RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO RESULTS FOR THE YEAR ENDED DECEMBER 31, 1995 Revenues. Revenues increased $60.6 million, or 138.1%, to $104.5 million for 1996 compared to $43.9 million for 1995. This increase was largely attributable to the fourth quarter 1996 acquisitions of the Other Founding Companies, Technology Source, Advantage and Tom Bain, which accounted for $37.3 million of the increase. The acquisition of On Call in February 1996 and the acquisition of Caldwell in July 1995 accounted for $13.0 million and $11.7 million, respectively, of the increase in revenues, which was partially offset by a decrease in Brewer's revenues, exclusive of acquisitions, of approximately $1.3 million. Gross Profit. Gross profit increased $14.1 million, or 161.1%, to $22.9 million for 1996 as compared to $8.8 million for 1995. Gross margin increased to 21.9% for 1996 compared to 20.0% for 1995. These increases 15 17 are primarily attributable to the acquisitions of the Other Founding Companies, Technology Source, Advantage, Tom Bain, On Call and Caldwell, as well as a reduction in workers' compensation expense. Operating Expenses. SG&A increased $8.8 million, or 152.0%, to $14.6 million for 1996 compared to $5.8 million for 1995. This increase was primarily attributable to the acquisitions of the Other Founding Companies, Technology Source, Advantage and Tom Bain, which accounted for $5.5 million of the increase. Also contributing to the increase were the acquisitions of On Call and Caldwell, which accounted for $1.6 million and $1.4 million of the increase, respectively. SG&A as a percentage of revenues increased to 14.0% for 1996 compared to 13.2% for 1995. Depreciation and amortization expense increased $784,000, or 132.9%, to $1.4 million for 1996 compared to $590,000 for 1995. This increase was primarily attributable to increased amortization of intangibles resulting from the February 1996 acquisition of On Call. Also, 1996 included a full year of amortization of intangibles relating to the July 1995 acquisition of Caldwell. Both of these acquisitions were accounted for using the purchase method of accounting. Operating Income. Operating income increased $4.5 million, or 190.1%, to $6.9 million for 1996 as compared to $2.4 million for 1995. Operating margin increased to 6.6% for 1996 as compared to 5.4% for 1995. Interest Expense. Interest expense increased $575,000 to $1.4 million for 1996 compared to $801,000 for 1995. This increase was primarily attributable to higher interest costs on debt incurred to finance the acquisitions of Caldwell and On Call. Net Income. Net income increased $2.4 million, or 153.6%, to $4.0 million for 1996 compared to $1.6 million for 1995. Net income as a percentage of revenues increased to 3.9% for 1996 compared to 3.6% for 1995. RESULTS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO RESULTS FOR THE YEAR ENDED DECEMBER 31, 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. 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 Temporary Services, Inc. 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 margin 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. 16 18 RESULTS OF OPERATIONS -- COMBINED Presented below are the combined results of operations for the periods presented which reflect the results of operations as if the acquisitions of the Founding Companies had occurred as of the beginning of the periods presented. The combined results from January 1, 1994 through the Initial Public Offering date of October 2, 1996 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. The following table sets forth the combined results of operations for fiscal years 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997.
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------------------ ----------------------------------- 1994 1995 1996 1996 1997 ---------------- ---------------- ---------------- ---------------- ---------------- (DOLLARS IN THOUSANDS) Revenues........................ $121,156 100.0% $146,687 100.0% $198,444 100.0% $ 89,854 100.0% $159,987 100.0% Cost of Services................ 97,112 80.2 117,103 79.8 155,472 78.3 70,807 78.8 124,515 77.8 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Gross profit.................. 24,044 19.8 29,584 20.2 42,972 21.7 19,047 21.2 35,472 22.2 Operating Expenses: Selling, general and administrative.............. 19,067 15.7 24,069 16.4 29,840 15.0 14,197 15.8 24,006 15.0 Depreciation and amortization................ 742 0.6 1,157 0.8 1,911 1.0 919 1.0 1,749 1.1 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Operating income.............. $ 4,235 3.5% $ 4,358 3.0% $ 11,221 5.7% $ 3,931 4.4% $ 9,717 6.1% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
COMBINED RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE COMBINED RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 Combined Revenues. Combined revenues increased $70.1 million, or 78.1%, to $160.0 million for the six months ended June 30, 1997 compared to combined revenues of $89.9 million for the six months ended June 30, 1996. The acquisitions of Technology Source, Advantage, Tom Bain, Advance, MRIC, Flexible, Global, Lindenberg, TPS/Furr, HR Alternatives and Kleven accounted for $42.5 million of the increase, while the Company's internal growth accounted for $27.6 million of the increase. The internal growth increase resulted primarily from the Company's emphasis on customer development and the increased demand from existing customers. Combined Gross Profit. Combined gross profit increased $16.4 million, or 86.2%, to $35.5 million for the six months ended June 30, 1997 as compared to combined gross profit of $19.0 million for the six months ended June 30, 1996. This increase is attributable to higher revenues due to internal growth and the acquisitions discussed above. Combined gross margin increased to 22.2% for the six months ended June 30, 1997 as compared to combined gross margin of 21.2% for the six months ended June 30, 1996. The increase in combined gross margin is primarily attributable to the Company's focus on increasing the revenues from the Professional/IT division, which generally provides higher profit margins than the Commercial division due to the specialized expertise of the consultants. Emphasis on controlling variable costs, such as workers' compensation expenses, also contributed to the increase in gross margin. Combined Operating Expenses. Combined SG&A increased $9.8 million, or 69.1%, to $24.0 million for the six months ended June 30, 1997 compared to combined SG&A of $14.2 million for the six months ended June 30, 1996. The increase was primarily attributable to costs related to the additional revenues from internal and acquisition growth, as well as costs associated with being a public company and maintaining the Company's acquisition program. Combined SG&A as a percentage of revenues decreased to 15.0% for the six months ended June 30, 1997 compared to combined SG&A as a percentage of revenues of 15.8% for the six months ended June 30, 1996. The decrease is the result of the Company beginning to realize efficiencies from the Mergers and subsequent acquisitions somewhat offset by the higher SG&A associated with being a public company and maintaining the Company's acquisition program. Combined depreciation and amortization expense increased $830,000, or 90.3%, to $1.7 million for the six months ended June 30, 1997 compared to combined depreciation and amortization of $919,000 for the six months ended June 30, 1996. This increase is primarily related to the amortization of goodwill resulting from the Company's acquisitions. 17 19 Combined Operating Income. Combined operating income increased $5.8 million, or 147.2%, to $9.7 million for the six months ended June 30, 1997 as compared to combined operating income of $3.9 million for the six months ended June 30, 1996. Combined operating margin increased to 6.1% for the six months ended June 30, 1997 as compared to combined operating margin of 4.4% for the six months ended June 30, 1996. COMBINED RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO COMBINED RESULTS FOR THE YEAR ENDED DECEMBER 31, 1995 Combined Revenues. Combined revenues increased $51.8 million, or 35.3%, to $198.4 million for 1996 compared to $146.7 million for 1995. This increase was largely attributable to Brewer's increase in revenue of $23.3 million primarily resulting from the acquisitions of On Call in February 1996 and Caldwell in July 1995. Also contributing to the increase in combined revenues was an increase in Prostaff's, Maxwell's, HRA's, First Choice's and Blethen's revenues of $4.6 million, $5.4 million, $9.0 million, $3.9 million and $3.4 million, respectively, and the acquisitions of Technology Source, Advantage and Tom Bain during the fourth quarter of 1996. Combined Gross Profit. Combined gross profit increased $13.4 million, or 45.3%, to $43.0 million for 1996 as compared to $29.6 million for 1995. Combined gross margin increased to 21.7% at December 31, 1996 from 20.2% at December 31, 1995. These increases are primarily attributable to increased revenues and an expansion of the Professional/IT and Specialty Medical divisions, which generally provide higher gross margins, as well as a reduction in workers' compensation expense. Combined Operating Expenses. Combined SG&A increased $5.8 million, or 24.0%, to $29.8 million for 1996 compared to $24.1 million for 1995. This increase was primarily attributable to an increase in Brewer's SG&A of $3.3 million resulting from their acquisitions of On Call and Caldwell. Also contributing to the increase in combined SG&A was an increase in Maxwell's, HRA's, and First Choice's SG&A of $750,000, $895,000 and $216,000, respectively. Combined SG&A as a percentage of revenues decreased to 15.0% for 1996 compared to 16.4% for 1995 as a result of spreading fixed costs over increased revenues and gaining operating efficiencies as the result of the Mergers. Combined depreciation and amortization expense increased $800,000, or 65.2%, to $1.9 million for 1996 compared to $1.2 million for 1995. This increase was primarily attributable to increased amortization of intangibles resulting from the acquisition of On Call in February 1996. Also, 1996 included a full year of amortization of intangibles relating to the acquisition of Caldwell in July 1995. Combined Operating Income. Combined operating profit increased $6.9 million, or 157.5%, to $11.2 million for 1996 as compared to $4.4 million for 1995. Combined operating margin increased to 5.7% for 1996 as compared to 3.0% for 1995. COMBINED RESULTS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO COMBINED RESULTS FOR THE YEAR ENDED DECEMBER 31, 1994 Combined Revenues. Combined 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 combined 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. Combined Gross Profit. Combined gross profit increased $5.5 million, or 23.0%, to $29.6 million for 1995 as compared to $24.0 million for 1994. Combined gross margin increased to 20.2% for 1995 compared to 19.8% for 1994. The increase in combined gross margin was primarily the result of the acquisition of Caldwell by Brewer. 18 20 Combined Operating Expenses. Combined 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. Combined SG&A as a percentage of combined revenues increased to 16.4% for 1995 compared to 15.7% for 1994. Combined 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. Combined Operating Income. Combined operating profit increased $123,000, or 2.9%, to $4.4 million for 1995 as compared to $4.2 million for 1994. Combined operating margin decreased to 3.0% for 1995 as compared to 3.5% for 1994. LIQUIDITY AND CAPITAL RESOURCES On October 2, 1996, the Company completed the Initial Public Offering which involved the public sale of 6,325,000 shares of Common Stock (including the underwriters' over-allotment) at a price of $12.00 per share. The proceeds from the transaction, net of the underwriting discount and after deducting expenses were approximately $66.6 million. Of this amount, $15.9 million was used to pay the cash portion of the purchase price for the Founding Companies. The remaining net proceeds were used primarily to fund the cash portion of the Company's acquisitions. In October 1996, the Company also established a $50.0 million Credit Facility with Mercantile to be used for working capital and other general corporate purposes, including acquisitions. In May 1997, the Company expanded the Credit Facility from $50.0 million to $100.0 million, which includes a $30.0 million revolving line of credit and a $70.0 million acquisition facility. The Credit Facility matures on April 1, 2002 and interest on any borrowings is computed at the Company's option at either LIBOR or Mercantile's prime rate and incrementally adjusted based on the Company's operating leverage ratios. For the period ended March 31, 1997, the Company paid a quarterly commitment fee equal to 0.25% of the total Credit Facility ($50.0 million at that time). Subsequent to March 31, 1997, the quarterly commitment fee is determined by multiplying the unused portion of the Credit Facility by a percentage which varies from 0.25% to 0.375% based on the Company's operating leverage ratio. The Credit Facility is secured by all of the assets of the Company and a pledge of 100% of the stock of all of the Company's subsidiaries. During the six months ended June 30, 1997, the Company borrowed approximately $42.6 million on the acquisition facility which was used to pay the cash consideration for several acquisitions during the period. The Company's net borrowing on the revolving credit facility totaled $800,000 during the six months ended June 30, 1997. These funds were used for general corporate purposes. The Company intends to use a substantial portion of the net proceeds of this Offering to pay off all amounts due under the Credit Facility. See "Use of Proceeds." The Company is obligated under various acquisition agreements to pay additional consideration, which will be paid in a combination of cash and Common Stock, to certain former stockholders of acquired companies. See Note 16 of Notes to the Company's consolidated financial statements. The total amount of these contingent payments are not currently determinable; however, the Company believes that the Credit Facility, its cash flows from operations, the proceeds of the Offering and its ability to issue additional shares of Common Stock will provide sufficient liquidity and capital resources to satisfy these obligations. Net cash provided by (used in) operating activities was $894,000, $1.6 million, $1.9 million, ($110,000) and $143,000 in 1994, 1995, 1996 and the six months ended June 30, 1996 and 1997, respectively. The net cash provided by and used in operating activities for the periods presented was primarily attributable to net income adjusted for non-cash expenses such as depreciation and amortization and changes in operating assets and liabilities. Net cash used in investing activities was $345,000, $12.0 million, $28.0 million, $3.2 million and $52.9 million in 1994, 1995, 1996 and the six months ended June 30, 1996 and 1997, respectively. Cash used 19 21 in investing activities in 1995 was primarily related to the acquisition of Caldwell for approximately $11.5 million. Cash used in investing activities in 1996 was primarily related to the acquisitions of the Other Founding Companies, On Call, Technology, Advantage and Tom Bain. Cash used in investing activities in the first half of 1997 was primarily related to the acquisition of Advance, MRIC, Flexible, Global, Lindenberg, TPS/Furr, HR Alternatives, Kleven and Sterling for cash totaling $50.9 million. Net cash provided by (used in) financing activities was $(512,000), $10.6 million, $39.7 million, $3.8 million and $41.5 million in 1994, 1995, 1996 and the six months ended June 30, 1996 and 1997, respectively. Cash provided by financing activities in 1996 was primarily attributable to the issuance of Common Stock in conjunction with the Initial Public Offering and proceeds from debt issued in conjunction with the acquisition of On Call partially offset by the repayment of all Founding Company debt obligations with proceeds from the Initial Public Offering and dividends to stockholders. Cash provided by financing activities in 1995 was primarily attributable to the proceeds from debt issued in conjunction with the acquisition of Caldwell partially offset by debt payments and dividends paid to stockholders. Cash provided by financing activities in the first half of 1997 was primarily attributable to the proceeds from debt issued in conjunction with the acquisitions of Global, Lindenberg, TPS/Furr, HR Alternatives, Kleven and Sterling. As a result of the foregoing, combined cash and cash equivalents increased $37,000, $211,000, $13.5 million and $459,000 in 1994, 1995, 1996 and the six months ended June 30, 1996. Cash decreased $11.2 million for the six months ended June 30, 1997. Management believes that the Credit Facility, its cash flows from operations, the proceeds of the Offering and the use of Common Stock as partial consideration for acquisitions will provide sufficient liquidity or acquisition currency to execute the Company's acquisition and internal growth plans through the expiration of the Credit Facility. Should the Company accelerate its acquisition program, the Company may need to seek additional financing through the public or private sale of equity or debt securities. There can be no assurance that the Company could secure such financing if and when it is needed or on terms the Company deems acceptable. Management plans to periodically reassess the adequacy of the Company's liquidity position, taking into consideration current and anticipated operating cash flow, anticipated capital expenditures, and acquisition plans, in order to ensure the Company's negotiated credit facilities are adequate to meet the Company's needs on a short-term and long-term basis. SEASONALITY The timing of certain holidays, weather conditions and seasonal vacation patterns may cause the Company's results of operations to fluctuate slightly. The Company generally expects to realize higher revenues, operating income and net income during the second and third quarters and relatively lower revenues, operating income and net income during the first and fourth quarters. INFLATION The effects of inflation on the Company's operation were not significant during the periods presented in the financial statements. IMPACT OF NEW ACCOUNTING STANDARDS In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which will change the current method of computing earnings per share. SFAS 128 requires the dual presentation of "basic earnings per share" and "diluted earnings per share" amounts, as defined. SFAS 128 will be effective for the Company's quarter and year ending December 31, 1997, and all prior-period earnings per share data presented will be restated to conform with the provisions of the new pronouncement. Application earlier than the Company's quarter ending December 31, 1997 is not permitted. Basic and diluted earnings per share as computed under SFAS 128 were $0.40 for the six months ended June 30, 1997. 20 22 BUSINESS GENERAL StaffMark is a leading provider of diversified staffing, professional and consulting services to businesses, professional and service organizations, medical niches and governmental agencies. The Company offers these services through over 160 branches located in 21 states, Canada and the United Kingdom. Since the Initial Public Offering, the Company has grown both internally and through the acquisition of 15 additional staffing and professional service companies with 68 branches and 1996 revenues of approximately $168.4 million. The Company believes that this balance of internal growth and selective acquisitions will best allow the Company to capitalize on its growth opportunities. For the year ended December 31, 1996 and the six months ended June 30, 1997, the Company's combined revenues and operating income were $198.4 million and $11.2 million and $160.0 million and $9.7 million, respectively. The Company's services are provided through three divisions: Commercial, Professional/IT and Specialty Medical. The Commercial division generated approximately 88.1% and 76.4% of the Company's combined revenues for the year ended December 31, 1996 and for the six months ended June 30, 1997, respectively. The Professional/IT division generated 4.5% and 16.8% of the Company's combined revenues for the year ended December 31, 1996 and for the six months ended June 30, 1997, respectively. The Specialty Medical division generated 7.4% and 6.8% of the Company's combined revenues for the year ended December 31, 1996 and for the six months ended June 30, 1997, respectively. OPERATING STRATEGY The Company's operating strategy is to continue to: Develop Long-Term Relationships with Customers. The Company seeks to satisfy the needs of its clients by providing customized services such as on-site management, direct placement services and recruiting specialists. The flexibility of the Company's decentralized organization allows 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 its services has enabled it to establish and maintain long-term relationships with clients by understanding the clients' needs, responding promptly to clients' requests, proactively assessing clients' staffing needs, and continually monitoring job performance and client satisfaction. Adopt Best Practices, Policies and Procedures. Management of the Company has evaluated the operating policies and procedures of each of the existing and newly acquired StaffMark companies and is implementing Company-wide the various practices that management believes best serve the needs of the Company. These best practices have included the development of an information tracking system for clients, human resources policies, bonus plans, time and attendance systems, and recruiting and training programs. Management believes the examination and adoption of best practices will continue with future acquisitions. Increase Operating Efficiencies and Provide Strong Corporate Support. The Company is achieving 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 existing branches and newly acquired companies. This centralization allows the Company to provide a strong level of corporate support allowing the branches to focus on marketing and selling the Company's services. The Company is also benefiting from further economies of scale through common regional management and the allocation of recruiting, training, advertising, administrative and branch office costs over a larger number of temporary associates, consultants, professionals and clients. Maintain 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 operates as a separate profit center with local management having primary profit and loss responsibility. Each branch office has been given latitude in many fundamental operational functions, including hiring, pricing, training, sales and marketing. This permits each branch 21 23 manager to be flexible and responsive to the specific needs of local clientele. The Company has also established a profit-based compensation plan at the branch level and utilizes various performance-based bonuses at the regional level and, on a Company-wide basis, an employee stock purchase plan to further motivate management and employees. INTERNAL GROWTH STRATEGY The Company's internal growth strategy is to continue to: Focus on Further Penetration in Existing Geographic Markets. The Company currently provides diversified staffing, professional and consulting services to businesses, professional and service organizations, medical niches and governmental agencies. The Company plans to continue to provide high-quality services to its existing customers, to strengthen its customer relationships and to establish additional customer relationships in existing geographic markets. The Company believes there are substantial growth opportunities through the introduction of its broad range of existing services to its strong client base throughout its network of branch offices. To further penetrate existing geographic markets, the Company spins-off new branch offices from existing branches, which provide the Company greater coverage in its geographic markets at low marginal cost. These office clusters provide economies of scale by spreading common costs such as recruiting, advertising and management over a larger revenue base as well as providing better service to clients and opportunities to temporary associates in these markets. Expand and Cross-Develop the Professional/IT and Specialty Medical Services. The Professional/IT and Specialty Medical divisions generally enjoy higher profit margins than the Commercial division due to the specialized expertise of the professionals and consultants in those divisions. The Company's strategy is to continue to increase the percentage of its revenue and gross profits from the Professional/IT and Specialty Medical divisions by emphasizing the expansion of information technology, by cross-developing into new and existing geographic markets and by adding new professional lines of business, leveraging wherever possible on existing customer relationships. Increase Vendor-On-Premise Relationships. As of June 30, 1997, the Company had 37 VOP partnering relationships, as compared to 27 at December 31, 1996. VOP relationships represented $37.0 million and $27.1 million of the Company's combined revenues for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. Under these programs, the Company can assume administrative responsibility for coordinating all staffing and/or professional services throughout a client's location or organization, including skills testing and training. The VOP relationships provide clients with dedicated on-site account management which can more effectively meet the client's changing staffing needs with high quality and consistent service. While these partnering relationships tend to have lower gross margins than traditional temporary staffing services, the higher volumes, comparatively lower operating expenses and relatively long-term contracts associated with these relationships result in attractive operating profits for the Company and a more stable source of revenue. The Company seeks to expand its VOP program into comprehensive outsourcing arrangements in which the Company staffs and manages an entire department or function on a turnkey basis at a higher gross margin than traditional VOP arrangements. ACQUISITION AND INTEGRATION STRATEGY Since the Initial Public Offering, StaffMark has acquired 15 staffing and professional service companies. The Company's acquisition strategy is to acquire and integrate independent staffing and professional service companies with strong management, profitable operating results and recognized local and regional presence. The Company pursues acquisitions that expand the geographic scope of its operations, increase its penetration of existing markets, offer complementary services and expand the percentage of revenues generated by the Professional/IT and Specialty Medical divisions. StaffMark has established a team of corporate officers responsible for identifying prospective acquisitions, performing due diligence, negotiating contracts and subsequently integrating the acquired companies. Each potential acquisition is rated to ensure that it will be a good fit with the StaffMark team, philosophies, culture and goals. It is generally the Company's policy to 22 24 include some amount of Common Stock as part of the consideration so that the stockholder/managers of the acquired company and StaffMark will have common motivation and goals. As soon as practicable after an acquisition is completed, management begins integrating newly acquired companies. This process involves standardizing each acquired company's accounting and financial procedures with those of the Company. Acquired companies are brought under the Company's uniform risk management program, and key personnel of acquired companies often become a part of management of the Company. Marketing, sales, field operations and personnel programs are reviewed and, where appropriate, conformed to the best practices of StaffMark's existing operations. In addition, StaffMark seeks to identify and integrate the best practices from each acquired company on a Company-wide basis. These best practices have included the development of an information tracking system for clients, human resources policies, bonus plans, time and attendance systems, and recruiting and training programs. POST-IPO ACQUISITIONS Since the Initial Public Offering, the Company has acquired and is in the process of integrating 15 staffing and professional service companies with 68 branches and 1996 revenues of approximately $168.4 million. The acquired Companies are described briefly below: The Technology Source, L.L.C. ("Technology Source") was acquired in November 1996. Technology Source, located in St. Louis, Missouri, provides information technology services to several Fortune 100 companies in the St. Louis and Chicago area. Technology Source had 1996 revenues of approximately $6.8 million and operates as part of the Professional/IT division. Chandler Enterprises, Inc. d.b.a. Advantage Staffing ("Advantage") was acquired in December 1996. Advantage, headquartered in Spartanburg, South Carolina, provides clerical and light industrial services. Advantage had 1996 revenues of approximately $3.6 million and operates as part of the Commercial division. Tom Bain Personnel, Inc. ("Tom Bain") was acquired in December 1996. Tom Bain, located in Brentwood, Tennessee, provides primarily clerical and information technology services. Tom Bain had 1996 revenues of approximately $3.6 million and operates in the Commercial and Professional/IT divisions. Advance Personnel Service, Inc. ("Advance") was acquired in February 1997. Advance, located in Memphis, Tennessee, provides clerical, light industrial, assembly and packing services for several Fortune 500 companies. Advance had 1996 revenues of approximately $6.3 million and operates in the Commercial division. MRIC Medical Recruiters International LTD ("MRIC") was acquired in February 1997. MRIC, located in Vancouver, British Columbia, provides physical therapists on a direct placement and locum basis in Canada and the United States. MRIC had 1996 revenues of approximately $2.5 million and operates in the Specialty Medical division. Flexible Personnel, Inc., H.R. America, Inc. and Great Lakes Search Associates, Inc. (collectively "Flexible") was acquired in March 1997. Flexible, headquartered in Fort Wayne, Indiana, operates a total of 40 offices in Indiana, Michigan and Ohio, providing clerical, light industrial, professional/information technology, accounting and staff leasing services. Flexible had 1996 revenues of approximately $49.3 million and operates in the Commercial and Professional/IT divisions. Global Dynamics, Inc. ("Global") was acquired in April 1997. Located in Walnut Creek, California, Global provides information technology staffing services to several Fortune 500 companies. Global had 1996 revenues of approximately $17.2 million and operates in the Professional/IT division. Lindenberg & Associates, Inc. ("Lindenberg") was acquired in April 1997. Lindenberg, located in St. Louis, Missouri, provides information technology staffing services through offices in St. Louis, Missouri; Kansas City, Kansas; Omaha, Nebraska and Minneapolis/St. Paul, Minnesota. Lindenberg had 1996 revenues of approximately $18.0 million and operates in the Professional/IT division. 23 25 TPS/Furr & Associates, Inc. ("TPS/Furr") was acquired in May 1997. TPS/Furr, located in Monroe, North Carolina, provides clerical and light industrial services in the Charlotte, North Carolina area. TPS/Furr had 1996 revenues of approximately $4.5 million and operates in the Commercial division. HR Alternatives, Inc. ("HR Alternatives") was acquired in June 1997. Located in Kingsport, Tennessee, HR Alternatives provides clerical and light industrial services through eight offices in the areas of Eastern Tennessee, Western Carolina and Southwestern Virginia. HR Alternatives had 1996 revenues of approximately $8.4 million and operates in the Commercial division. The Kleven Group and Affiliates, Inc. ("Kleven") was acquired in June 1997. Located in Lexington, Massachusetts, Kleven provides professional and information technology services and executive retained searches, as well as clerical services, in the New England area. Kleven had 1996 revenues of approximately $5.0 million and operates in the Professional/IT and Commercial divisions. Sterling Human Resources, Inc. ("Sterling") was acquired in June 1997. Located in Phoenix, Arizona and Boca Raton, Florida, Sterling provides, clerical, light industrial, technical and information technology, services and had 1996 revenues of approximately $19.0 million. Sterling operates in the Commercial and Professional/IT divisions. Baker Street Group, Inc. ("Baker Street") was acquired in July 1997. Located in Houston, Texas, Baker Street provides professional, information technology and clerical staffing services and staffing in niche areas such as mortgage banking and title searches. Baker Street had revenues of approximately $11.0 million for the 12 months ended May 31, 1997 and operates in the Professional/IT and Commercial divisions. Temp Technology, Inc. ("Temp Technology") was acquired on July 31, 1997. Located in Portland, Oregon, Temp Technology provides electronics assembly, light industrial, office/clerical, and information technology staffing services. Temp Technology had 1996 revenues of approximately $7.5 million and operates in the Commercial division. Expert Business Systems, Incorporated ("EBS") was acquired on August 4, 1997. Located in the Dallas/ Fort Worth metropolitan area, EBS provides information technology services, specializing in help desk support, distributed services and application developments. EBS had revenues of approximately $5.7 million for the 12 months ended June 30, 1997 and operates in the Professional/IT division. THE STAFFING AND INFORMATION TECHNOLOGY SERVICES INDUSTRY The staffing industry has grown rapidly in recent years as companies have utilized supplemental employees to control personnel costs and to meet specialized or fluctuating personnel needs. According to the National Association of Temporary and Staffing Services, the U.S. market for staffing services grew at a compound annual growth rate of approximately 18% from $20.4 billion in revenues in 1991 to $47.1 billion in 1996. Furthermore, according to Staffing Industry Report, revenues from the domestic information technology sector in 1996 are estimated to have been $12.0 billion, and grew at a compound annual rate of approximately 20% over the past five years. The Company believes the staffing industry is highly fragmented with over 6,000 staffing companies and 2,500 Professional/IT companies. Although the industry is experiencing increasing consolidation, largely in response to opportunities to provide comprehensive supplemental staffing solutions to regional and national accounts, the Company believes that there are numerous attractive acquisition targets. THE COMPANY'S STAFFING SERVICES The Company's staffing services are provided through three divisions: Commercial Division. The Commercial division provides clerical and light industrial staffing services, and generated approximately 88.1% and 76.4% of the Company's combined revenues for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. The Company's Commercial 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 24 26 workers, maintenance workers, assemblers, quality control clerks, order pullers, food service workers, production workers, shipping/receiving clerks, janitors, packagers, inventory clerks, textile manufacturers and machinists. Professional/IT Division. The Professional/IT division provides information technology staffing, consulting and support services and professional and technical services and generated approximately 4.5% and 16.8% of the Company's combined revenues for the year ended December 31, 1996, and the six months ended June 30, 1997, respectively. 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, system maintenance, "help-desk" assistance and education and training. The Company provides technical services personnel such as drafters, designers and engineers in the mechanical and electrical engineering and computer science fields. The Company also provides accounting personnel, paralegals and other legal assistants, and sales, marketing and human resource professionals. Specialty Medical Division. The Specialty Medical division provides clinical trial support services, medical office staffing, physical and occupational therapists and speech pathologists, and generated approximately 7.4% and 6.8% of the Company's combined revenues for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. The Company's clinical consultants support the staffing demands of the pharmaceutical, biotechnology, medical device and medical and clinical research data industries. 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 outpatient clinics as well as rural and suburban acute care hospitals. The Company also provides front office and clinical support for physicians, medical offices and clinics in select markets. PERSONNEL Recruiting. One of the Company's most successful recruiting tools is referrals by its temporary associates and professionals. The Company finds that referrals from its existing labor force provide a higher quality and a larger number of new temporary associates and professionals. The Company employs full-time regional recruiters who regularly monitor the skills and availability of their region's temporary associates 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 through its various world wide web sites, through advertising in major newspapers, on radio, on television, in the Yellow Pages and through other print media. In the information technology area, the Company also pays its consultants a referral fee for the recruitment and retention of qualified information technology professionals. A growing international recruiting base is being developed to meet increased demands for Professional/IT and Specialty Medical services. Full Time Employees/Temporary Associates/Professionals. Currently, StaffMark provides over 17,800 temporary associates and professionals to more than 3,900 clients during a typical week. As of June 30, 1997, the Company employed approximately 800 internal staff. None of the Company's employees, including its temporary associates and consultants, are represented by a collective bargaining agreement. The Company believes its employee relations to be strong. Hourly wages for the Company's temporary associates and salaries for its professionals 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 also offers access to various insurance programs and other benefits, such as vacations, holidays and 401(k) programs to certain of its temporary associates and professionals. Assessment, Training and Quality Control. The Company uses a comprehensive system to assess, select and train its temporary associates and professionals in order to provide quality assurance for its staffing and professional service operations. Applicants are given a range of tests, applicable to the position(s) they seek. Clerical and office-support applicants receive comprehensive tests in computer skills, word processing, typing, 25 27 data entry, accounting and other business applications. These sophisticated tests cover the latest software and thoroughly and objectively evaluate each individual's skills and experience. The Company feels it is imperative to customize testing and training to match the specific office environment in which the individuals will be placed. In the information technology and 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, industry aptitude, hand and finger dexterity, soldering, mathematics, ability to read a blue print, ability to assemble electronic components 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 requirements, such as electronic or mechanical assembly or the use of specialized software applications. Computerized tutorials are generally available for temporary employees and professionals seeking to upgrade their typing, data entry, office automation or word processing skills, and classes on topics such as spreadsheets, software applications and network management 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. In one of its markets, the Company currently operates a career training center where temporary employees and professionals as well as the general public can enroll in career advancement classes. This center helps to increase the number of trained and qualified applicants for placement with the Company's clients. The Company offers advanced training opportunities and reimbursement for certain educational expenses to information technology consultants as part of a comprehensive benefit package. Workers' Compensation Program. The Company maintains workers' compensation insurance for most claims in excess of a retention level of $250,000 per occurrence. The Company's risk management team works alongside the third party administrator and the broker in order to take a proactive approach to safety and risk control. The team works diligently to train the Company's full-time staff to better screen, test and orient the Company's temporary associates and professionals to a more safety-conscious environment. The risk management team performs periodic safety inspections of new and existing clients in order to evaluate the safety environment. The team has the authority to decline service if the work environment is perceived to be unsafe or potentially hazardous. The Company's policies prohibit staffing of high-risk activities such as working on unprotected elevated platforms or the handling of hazardous materials. The team's goal is to work alongside the client company and achieve a safe work environment through effective training and commitment to safety. An independent actuary provides advice on overall workers' compensation cost and periodically performs an actuarial valuation regarding the adequacy of the Company's reserve for workers' compensation claims. Newly acquired operations will be integrated into the Company's program at such time as, in management's judgment, the integration is most effective. OPERATIONS Branch Offices. The Company offers its services through over 160 branch offices in Arizona, Arkansas, California, Colorado, Florida, Georgia, Indiana, Kansas, Michigan, Massachusetts, Minnesota, Missouri, Nebraska, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia, Canada and the United Kingdom. Branch managers operate their offices with a significant degree of autonomy and accountability and receive bonuses based on the profitability and growth of the branch. The compensation system is designed to motivate the managers and staff to maximize the growth and profitability of their offices while securing long-term client relationships. Branch managers report directly to regional managers who report to either general managers, vice presidents or executive vice presidents, all of whom receive bonuses based upon the profitability of their region or branch. Operating within the guidelines set by the Company, the branch managers are responsible for pursuing new business opportunities and focusing on sales and marketing, account development and retention, and employee recruitment, development and retention. 26 28 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 prospective clients. 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 sales calls, consultation meetings with target companies, 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 and through its various world wide web sites. Also, the Company's major accounts director has developed a strategy utilizing sales calls and consultation meetings with targeted companies. In addition, the Company sponsors job fairs and other community events and the Company's officers and senior management participate in national and regional trade associations, local chambers of commerce and other civic associations. Management Information Systems. The primary front office software utilized by the Company is the Caldwell-Spartin system which management believes is currently one of the leading application software systems in the staffing industry. Caldwell-Spartin permits access to a shared database of resumes and job orders at the branch level, allowing the branch office to fill client orders, communicate with clients regarding invoices and perform candidate screening for the most suitable job opportunity. The Company believes that the Caldwell-Spartin system can be readily expanded to meet increased demands without significant additional expenditures. Consolidation of the Company's two largest Caldwell-Spartin users, Brewer and Prostaff, was completed January 1, 1997. HRA and Blethen completed upgrades of this system in June 1997. All companies currently using Caldwell-Spartin are now operating on an identical software release. StaffMark has licensed its back office accounting and administrative systems from PeopleSoft, Inc. ("PeopleSoft"). The Company believes that PeopleSoft applications will provide excellent management tools, the ability to eliminate duplicate functions and provide a high degree of internal control as well as lower costs through centralization of systems, providing economy and control in such areas as accounts payable, cash control, budgeting, management reporting and human resource functions. The PeopleSoft implementation plan began in April 1997 and as of July 1, 1997, the Company began operation of the general ledger and accounts payable modules in its operations in Arkansas, Colorado, Georgia, western Tennessee and Virginia. Implementation in the Company's remaining areas of operations is scheduled to be completed by the first quarter of 1998. The Company has chosen Digital as the hardware provider for the database server for PeopleSoft. Digital currently supplies the hardware supporting the Caldwell-Spartin application in all locations as well. The Company anticipates investing approximately $2.0 million in 1997 on the PeopleSoft and network implementations. COMPETITION The staffing industry is highly competitive and fragmented, with limited barriers to entry. The Company competes with other companies in the recruitment of qualified personnel, the development of client relationships and the acquisition of other staffing and professional service companies. A large percentage of temporary staffing and consulting companies are local operators with fewer than five offices. Within local markets, these operators actively compete with the Company for business and, in most of these markets, no single company has a dominant share of the market. The Company also competes with larger, full-service and specialized competitors in national, regional and local markets. The principal national competitors include AccuStaff, Inc., Corestaff, Inc., Manpower, Inc., Kelly Services, Inc., The Olsten Corporation, Interim Services, Inc., and Norrell Corporation, all of which may have greater marketing, financial and other resources than the Company. The primary Professional/IT competitors include AccuStaff, Inc., Corestaff, Inc., Ciber, Inc., Keane, Inc. and The Registry, Inc. The Company believes that the primary competitive factors in obtaining and retaining clients are the number and location of offices, an understanding of clients' specific job requirements, the ability to provide temporary personnel in a timely manner, the monitoring of quality of job performance and the price of services. The primary competitive factors in obtaining qualified candidates for temporary employment assignments are wages, responsiveness to work schedules and number of hours of work available. Management believes that StaffMark is highly competitive in these areas. The Company believes its 27 29 long-term client relationships and strong emphasis on providing service and value to its clients and temporary staffing associates and consultants are important competitive advantages. The Company also competes for acquisition candidates. The Company believes that further industry consolidation will continue during the next several 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 competitive advantage in completing acquisitions as a result of: (i) management's personal relationships with existing staffing companies; (ii) the proven merger and acquisition experience of the Company's key executives; (iii) the successful assimilation and integration of previous acquisitions; (iv) its decentralized entrepreneurial environment; and (v) its willingness to include some amount of Common Stock as part of the consideration so that the stockholder/managers of the acquired company and StaffMark will have common motivation and goals. However, no assurance can be given that the Company's acquisition program will continue to be successful. FACILITIES The Company owns no real property, but leases 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 corporate 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 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. While the Company believes that its corporate headquarters are currently adequate for its needs, it is in the process of considering the leasing of additional space at an adjacent property from a related party. See "Certain Transactions -- Leases 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 raise 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 information technology consultants and professionals and 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. See "Risk Factors -- Government Regulation of Immigration." 28 30 INTELLECTUAL PROPERTY The Company has applied for Federal Trademark registration of "StaffMark" and the associated Company logo with the U.S. Patent and Trademark office. The Company has received a Notice of Allowance and has filed Statements of Use for both marks. The Company has also applied for a service mark for "StaffView," which is software developed for client reporting of its temporary workforce. No assurance can be given that any such registrations will be granted or that if granted, such registration will be effective to prevent others from: (i) using the marks concurrently; or (ii) preventing the Company from using the service marks in certain locations. The Company owns and licenses several other state and federal trademarks used by the Founding Companies and the Post-IPO Acquisitions. The Company believes that it has all rights to trademarks and trade names necessary for the conduct of its business. LEGAL AND ADMINISTRATIVE PROCEEDINGS 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. The Company is not a party to any material legal proceedings. 29 31 MANAGEMENT The directors and executive officers of the Company, and their ages as of July 31, 1997, are as follows:
NAME AGE POSITION ---- --- -------- Jerry T. Brewer(1)(3)(5).......... 56 Chairman of the Board Clete T. Brewer(1)(5)............. 32 President and Chief Executive Officer; Director Terry C. Bellora(5)............... 51 Chief Financial Officer Ted Feldman(5).................... 44 Chief Operating Officer Robert H. Janes III(5)............ 30 Executive Vice President -- Mergers and Acquisitions Gordon Y. Allison................. 37 Executive Vice President -- General Counsel W. David Bartholomew.............. 40 Executive Vice President -- Southeastern Operations; Director Donald A. Marr, Jr................ 32 Executive Vice President -- Southwestern Operations Steven E. Schulte(5).............. 34 Executive Vice President -- Administration; Director John H. Maxwell, Jr.(2)........... 54 Executive Vice President -- Medical Services; Director Janice Blethen.................... 53 Executive Vice President -- Clinical Trials Support Services; Director William T. Gregory................ 55 Vice President and General Manager -- Carolina Region; Director Mary Sue Maxwell(2)............... 54 Vice President and General Manager -- Oklahoma Region William J. Lynch(3)(4)............ 55 Director R. Clayton McWhorter(4)........... 63 Director Charles A. Sanders, M.D.(3)....... 65 Director
- --------------- (1) Jerry T. Brewer is the father of Clete T. Brewer. (2) John H. Maxwell, Jr. is the husband of Mary Sue Maxwell. (3) Member of the Audit Committee. (4) Member of the Compensation Committee. (5) Member of the Acquisition Committee. 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 served as its Chairman of the Board. From July 1988 to April 1994, 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 served since April 1994, as President, Chief Executive Officer and Director of Brewer. From July 1988 to April 1994, Mr. Brewer served as Vice President and a Director of Brewer. Terry C. Bellora became the Chief Financial Officer of the Company in August 1996. Prior to joining StaffMark, Mr. Bellora served as Chief Financial Officer of Pace Industries, Inc. ("Pace") from 1988 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 an audit partner for a regional accounting firm. Ted Feldman became the Chief Operating Officer of the Company upon consummation of the Initial Public Offering. Mr. Feldman founded HRA in 1991 and since its inception served as its President and Chief Executive Officer. From 1979 until 1992, Mr. Feldman served as President of Nashville Trunk & Bag Co. Mr. Feldman is also an independent trustee of CCA Prison Realty Trust, a publicly traded real estate investment trust. 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 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 (hereinafter defined). In 1992, Mr. Janes obtained an MBA from The Wharton School. 30 32 Gordon Y. Allison became Executive Vice President -- General Counsel of the Company in June 1997. Prior to joining the Company, Mr. Allison was the Vice President -- General Counsel of Pace since February 1995. Beginning in May 1992, Mr. Allison practiced law at the firm of Giroir & Gregory, Professional Association in Little Rock, Arkansas, and was a partner from 1994 until his employment with Pace. From 1990 to 1992, Mr. Allison was a special counsel in the Division of Corporation Finance at the Securities and Exchange Commission in Washington, D.C. and from 1988 to 1990 was a staff attorney. Mr. Allison is a certified public accountant and worked at Arthur Andersen LLP prior to attending law and graduate business school. Mr. Allison received his Masters of Laws in Securities Regulation and Taxation from Georgetown University Law School. W. David Bartholomew is the Executive Vice President -- Southeastern Operations and a Director of the Company. Prior to joining the Company, Mr. Bartholomew had served as Secretary/Treasurer and Principal of HRA since 1993. From 1991 through 1993, Mr. Bartholomew was President of Cobble Personnel of Nashville. Donald A. Marr, Jr. is the Executive Vice President -- Southwestern Operations of the Company. Prior to joining the Company, Mr. Marr had been employed by Brewer since 1990 and had served as Brewer's Vice President of Operations since October 1993. Steven E. Schulte is the Executive Vice President -- Administration and a Director of the Company. Prior to joining the Company, Mr. Schulte had been employed by Prostaff since August 1987 and served as President and Chief Executive Officer since June 1992. John H. Maxwell, Jr. is the Executive Vice President -- Medical Services and a Director of the Company. Prior to joining the Company, Mr. Maxwell had served as the Chief Executive Officer of Maxwell since 1973. He is a Certified Personnel Consultant and a Certified International Personnel Consultant. Janice Blethen is the Executive Vice President -- Clinical Trial Support Services and a Director of the Company. Prior to joining the Company, Ms. Blethen had served as the Chief Executive Officer of Blethen since its inception in 1975. Ms. Blethen is a Certified Personnel Consultant. William T. Gregory is the Vice President and General Manager -- Carolina Region of the Company. Prior to joining the Company, Mr. Gregory had served as President of First Choice since 1985. Mr. Gregory is a Certified Personnel Consultant. Mary Sue Maxwell is the Vice President and General Manager -- Oklahoma Region of the Company. Prior to joining the Company, Ms. Maxwell had served as President of Maxwell since 1983. William J. Lynch has been a Director of the Company since the consummation of the Initial Public 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 Coach USA, Inc., a publicly traded motorcoach services company. R. Clayton McWhorter has been a Director of the Company since the consummation of the Initial Public Offering. In 1996, Mr. McWhorter founded and serves as Chairman and Chief Executive Officer of Clayton Associates, LLC and Life Trust America, LLC. Mr. McWhorter is a member of the Board of Directors of Columbia/HCA Healthcare Corporation, a public company ("Columbia/HCA"), and served as its Chairman of the Board from April 1995 to May 1996. Mr. McWhorter served as Chairman, President and Chief Executive Officer of Healthtrust, Inc. from 1987 to April 1995 and served as President and Chief Executive Officer of Hospital Corporation of America from 1985 to 1987 (both of which are now a part of Columbia/HCA). In addition, Mr. McWhorter is a director of Suntrust Bank -- Nashville and Corrections Corporation of America, which also are publicly traded companies. Charles A. Sanders, M.D. has been a Director of the Company since the consummation of the Initial Public Offering. Dr. Sanders is retired from Glaxo, Inc. where he served as Chief Executive Officer from 1989 through 1994 and Chairman from 1992 through 1995. Dr. Sanders currently serves as Chairman of The Commonwealth Fund and Project HOPE and serves on the Board of Trustees of the University of North 31 33 Carolina at Chapel Hill. Dr. Sanders currently serves as a director of Magainin Pharmaceuticals, Inc. and Vertex Pharmaceuticals Incorporated and is a former director of Merrill Lynch & Co., Inc., Morton International, Inc. and Reynolds Metal Company. The number of directors on the Board of Directors is currently fixed at 10. Directors of the Company are elected at the annual meeting of stockholders. Officers of the Company are appointed at the first meeting of the Board of Directors after each annual meeting of stockholders. Directors and executive officers of the Company are elected to serve until they resign or are removed or are otherwise disqualified to serve, or until their successors are elected and qualified. The Board of Directors has established committees to perform certain of its functions, including the Audit Committee and the Compensation Committee. The Audit Committee reviews the internal controls of the Company, reviews the objectivity of its financial reporting and meets with appropriate Company financial personnel and the Company's independent certified public accountants in connection with these reviews. The Audit Committee also recommends to the Board of Directors the appointment of independent certified public accountants to serve as auditors for the following year. The Compensation Committee advises and makes recommendations to the Board of Directors with respect to salaries and bonuses to be paid to officers and other employees of the Company. The Compensation Committee also administers the Company's 1996 Stock Option Plan. 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 receives a fee of $2,000 for attendance at each Board of Directors meeting and $500 for each committee meeting (unless held on the same day as a Board of Directors meeting). Under the Company's 1996 Stock Option Plan, each non-employee director automatically receives non-qualified options to purchase 10,000 shares of Common Stock upon such person's initial election as a director. Non-employee directors also receive annual grants of non-qualified options to purchase 2,000 shares of Common Stock at the time of each annual stockholder's meeting. See "-- 1996 Stock Option Plan." All such options are or will have an exercise price equal to the fair market value of the Common Stock on the date of grant, are or will be exercisable in equal amounts over three years except as limited by the rules and regulations of the Securities Act and the Securities Exchange Act of 1934, as amended, (the "Exchange Act") and will expire five years from the date of grant. All directors of the Company are reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees thereof, or for other expenses incurred in their capacity as directors. EXECUTIVE COMPENSATION The following table summarizes the compensation paid or accrued by the Company for services rendered to the Company's Chief Executive Officer and to the Company's four other most highly compensated executive officers (collectively, the "Named Executive Officers") during the year ended December 31, 1996. 32 34 The Company did not grant any stock appreciation rights or make any long-term incentive plan payouts during the periods shown. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES ------------------------------ UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) OPTIONS COMPENSATION --------------------------- ---- ------------ -------- ------------ ------------ Clete T. Brewer, President and Chief Executive Officer.................. 1996 $40,869 -- 10,000 $2,487 Terry C. Bellora, Chief Financial Officer............................ 1996 41,538 -- 160,000 2,824 Ted Feldman, Chief Operating Officer............................ 1996 39,769 -- 10,000 1,025 W. David Bartholomew, Executive Vice President -- Southeastern Operations......................... 1996 34,615 10,000 1,025 Steven E. Schulte, Executive Vice President -- Administration........ 1996 31,250 -- 10,000 502
- --------------- (1) For the period October 2, 1996, the completion of the Initial Public Offering, through fiscal year-end. The following table sets forth information concerning each grant of stock options to the Named Executive Officers during the year ended December 31, 1996. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------------------------------------------- PERCENTAGE OF TOTAL NUMBER OF OPTIONS SECURITIES GRANTED EXERCISE OR UNDERLYING TO EMPLOYEES IN BASE PRICE EXPIRATION GRANT DATE NAME OPTIONS GRANTED FISCAL 1996 ($/SHARE)(1) DATE PRESENT VALUE($)(2) ---- --------------- --------------- ------------ ---------- ------------------- Clete T. Brewer........... 10,000 1.1% $12.00 10/02/06 $ 72,800 Terry C. Bellora.......... 160,000 18.4 12.00 10/02/06 1,059,800 Ted Feldman............... 10,000 1.1 12.00 10/02/06 72,800 W. David Bartholomew...... 10,000 1.1 12.00 10/02/06 72,800 Steven E. Schulte......... 10,000 1.1 12.00 10/02/06 72,800
- --------------- (1) The exercise price per share for all options granted is equal to the market price of the underlying Common Stock as of the date of the Initial Public Offering. (2) The grant date present value was based on the Black-Scholes Option Valuation Model, a widely recognized method of valuing options. The following underlying assumptions were used to derive the present value of these options: expected volatility of the Company's stock of 65.1%, based upon the actual monthly volatility in the industry for the five years prior to the grant date; a risk-free rate of return of 6.4%, based on the yield of the five year U.S. Treasury Notes as of the grant date; and exercise of the option five years after the grant date. The actual value, if any, the Named Executive Officers may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised; consequently, there is no assurance the value realized by the Named Executive Officers will be at or near the value estimated by the Black-Scholes Option Valuation Model. 33 35 The following table sets forth information concerning the value of unexercised options as of December 31, 1996 for the Named Executive Officers. None of the Named Executive Officers exercised options during the year ended December 31, 1996. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF THE UNEXERCISED OPTIONS HELD AT IN-THE-MONEY OPTIONS AT FISCAL YEAR END(#) FISCAL YEAR END(1) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Clete T. Brewer.................................. -- 10,000 -- $ 5,000 Terry C. Bellora................................. 25,000 135,000 $12,500 67,500 Ted Feldman...................................... -- 10,000 -- 5,000 W. David Bartholomew............................. -- 10,000 -- 5,000 Steven E. Schulte................................ -- 10,000 -- 5,000
- --------------- (1) Options are "in-the-money" if the closing market price of the Company's Common Stock exceeds the exercise price of the options. The value of the unexercised options represents the difference between the exercise price of such options and the closing market price of the Company's Common Stock of $12.50 on December 31, 1996. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee currently consists of Messrs. Lynch and McWhorter. Neither Mr. Lynch nor Mr. McWhorter has been an officer or employee of the Company at any time. In connection with the formation of StaffMark, Inc., the Company issued 136,042 shares to Capstone Partners, LLC, a Delaware Limited Liability Company, of which Mr. Lynch is a member. Of this amount, 36,607 shares were distributed to Mr. Lynch individually. EMPLOYMENT AGREEMENTS; COVENANTS NOT TO COMPETE Messrs. Clete Brewer, Feldman, Bartholomew and Schulte entered into employment agreements with the Company, or a subsidiary thereof, commencing on the date of the closing of the Initial Public Offering providing for base annual compensation of $150,000, $145,000, $125,000 and $125,000, respectively. Pursuant to such employment agreements, each such officer is eligible for additional year-end bonus compensation to be determined pursuant to an incentive bonus plan. Each employment agreement is 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 provides that, in the event of a termination of employment by the Company, except for specific instances of "cause" as defined in the employment agreement, such employee shall be entitled to receive from the Company such employee's then current salary for a period specified in the agreement. Each employment agreement contains a covenant not to compete with the Company for a period of two years immediately following the termination of his employment. Each of the other executive officers of the Company have entered into employment agreements with substantially similar terms. Mr. Bellora has entered into an employment agreement with the Company providing for an annual base salary of $150,000, a bonus to be determined annually pursuant to an incentive bonus plan and options to purchase 150,000 shares of Common Stock at the Initial Public Offering price, exercisable over a period of five years. Such options expire ten years after the date of grant. 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 34 36 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 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 In June 1996, the Board of Directors and the Company's stockholders approved the StaffMark 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 administers the Plan, consists of two directors who qualify as non-employee directors within the meaning of Rule 16b-3 under 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 classes of the stock of the Company or of its parent or subsidiaries 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 of the Company 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 shares 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 canceled 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 35 37 state law or regulation or by the rules of any stock exchange or automated quotation system on which the Common Stock may then be listed or quoted. The Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the Internal Revenue Code of 1986, as amended (the "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 $1.0 million in any tax year beginning on or after January 1, 1994. Compensation that qualifies as "performance-based compensation" is excluded from the $1.0 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). As of June 30, 1997 the Company had issued options to purchase a total of 1,265,000 shares of Common Stock since the completion of the Initial Public Offering and it has 435,000 additional shares of Common Stock reserved for issuance under the Plan. Options issued, other than those granted to non-employee directors and Mr. Bellora, are generally 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. EMPLOYEE STOCK PURCHASE PLAN On May 2, 1997, the Company's stockholders approved the Company's Employee Stock Purchase Plan (the "Purchase Plan"), pursuant to which eligible employees may purchase shares of Common Stock. The purpose of the Purchase Plan is to provide employees who wish to become stockholders an opportunity to purchase Common Stock. The Company has reserved 300,000 shares of Common Stock for issuance under the Purchase Plan. Eligible Participants. Regular full or part-time employees of the Company are eligible to participate in the Purchase Plan, on a purely voluntary basis, if they meet certain conditions. To be eligible, an employee's customary employment must be greater than both 20 hours per week and five months per calendar year. The employee must also have completed one year of continuous service with the Company. An employee who owns five percent or more of the total combined voting power or value of all classes of stock of the Company is not eligible to participate in the Purchase Plan. Temporary employees also are not eligible to participate in the Purchase Plan. Approximately 4,200 employees would have been eligible to participate as of July 31, 1997. Material Features of the Purchase Plan. Eligible employees participate in the Purchase Plan by exercising options to purchase Common Stock. Options shall be granted for each purchase period to eligible employees who elect to participate in the Purchase Plan. Each calendar quarter will be a purchase period unless otherwise established by the committee administering the Purchase Plan (the "Committee"). Common Stock will be purchased through a participant's payroll deductions at a stated dollar amount not less than $10 per pay period (or $20 if the pay period is every month), as determined by the participant, at a price equal to the lower of 85% of the fair market value of the Common Stock as of the first or the last trading day of each purchase period. The fair market value of the Common Stock will be determined by reference to the Common Stock price on the Nasdaq National Market on each relevant date. No employee will be permitted to purchase shares of Common Stock under the Purchase Plan having an aggregate fair market value of more than $25,000 for each calendar year. Each eligible employee who elects to participate in the Purchase Plan will, without any action on his or her part, be automatically deemed to have exercised his or her option on the last day of each purchase period if he or she is then employed, unless the employee notifies the Committee of his or her desire not to make such purchase. To the extent that the amount withheld through payroll deductions throughout the purchase period is sufficient to purchase, at the option price, one or more whole shares of Common Stock, such shares shall be purchased for the participant and delivered by the Company as determined by the Committee. An option granted under the Purchase Plan shall not be transferable by an employee other than by will or by the laws of 36 38 descent and distribution and is exercisable during his or her lifetime only by the employee. Shares of Common Stock purchased under the Purchase Plan may not be sold or withdrawn from the participant's account prior to one year following the date on which such shares were purchased. A participant may voluntarily suspend his or her payroll deductions at any time, but will not be permitted to resume the payroll deductions again until the January 1 or July 1 following the date of notice to resume payroll deductions. A participant may change the rate of his or her payroll deductions on any January 1 or July 1. If a participant terminates his or her employment with the Company, his or her participation in the Purchase Plan will be automatically terminated as of the date of termination of employment, and the shares held in his or her stockholder account will either be sold as directed by the participant or distributed to the participant, in which case the Common Stock purchased through the Purchase Plan as of the date of termination will be distributed to the participant together with cash equal to the sum of the fair market value of any fractional shares owned by the participant and amounts withheld through payroll deductions that had not been applied to purchase Common Stock under the Purchase Plan. All funds received or held by the Company under the Purchase Plan are general assets of the Company, free of any trust or other restriction, and may be used for any corporate purpose. No interest on such funds will be credited to or paid to any participant under the Purchase Plan. Tax Treatment. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code. Under the Code, an employee who elects to participate in the Purchase Plan will not realize income at the time the offering commences or when the shares are actually purchased under the Purchase Plan. If an employee disposes of such shares after two years from the date the offering of such shares commences under the Purchase Plan and after one year from the actual date of purchase of such shares under the Purchase Plan (collectively, the "Holding Period"), the employee will be required to include in income, as capital gain for the year in which such disposition occurs, an amount equal to the lesser of (i) the excess of the fair market value of such shares at the time of disposition over the purchase price and (ii) the excess of the fair market value of such shares at the time the offering commenced over the purchase price. If any employee disposes of the shares purchased under the Purchase Plan during the Holding Period, the employee will be required to include in income, as compensation for the year in which such disposition occurs, an amount equal to the excess, if any, of the fair market value of such shares on the date of purchase over the purchase price. The employee's basis in such shares disposed of will be increased by an amount equal to the amount includable in his or her income as compensation, and any gain or loss computed with reference to such adjusted basis which is recognized at the time of disposition will be capital gain or loss, either short-term or long-term, depending on the length of the Holding Period for such shares. In the event of a disposition during the Holding Period, the Company (or the subsidiary by which the employee is employed) will be entitled to a deduction from income equal to the amount the employee is required to include in income as a result of such disposition. 37 39 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock of the Company as of July 31, 1997 and as adjusted to reflect the sale of Common Stock offered by this Prospectus, by: (i) each person known to the Company to own beneficially more than 5% of the outstanding shares of the Company's Common Stock; (ii) each of the Company's directors, (iii) each Named Executive Officer; (iv) each of the Selling Stockholders; and (v) all executive officers and directors as a group. Except as otherwise indicated, all persons listed have sole voting and investment power with respect to their shares.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING OFFERING(1) ------------------- ------------------- NAME NUMBER PERCENT SHARES OFFERED NUMBER PERCENT ---- --------- ------- -------------- --------- ------- EXECUTIVE OFFICERS AND DIRECTORS: Jerry T. Brewer(2)..................... 672,944 4.6% 10,327 662,617 3.7% Clete T. Brewer(3)..................... 1,071,084 7.2 70,000 1,001,084 5.6 Terry C. Bellora(4).................... 25,200 * -- 25,200 * Ted Feldman(5)......................... 303,611 2.1 -- 303,611 1.7 Robert H. Janes III.................... 184,957 1.3 18,495 166,462 * David Bartholomew(6)................... 281,937 1.9 10,000 271,937 1.5 Donald A. Marr, Jr..................... 117,010 * 11,700 105,310 * Steven E. Schulte(7)................... 572,870 3.9 10,000 562,870 3.1 John H. Maxwell, Jr.(8)................ 714,059 4.8 5,000 709,059 3.9 Mary Sue Maxwell(9).................... 714,059 4.8 5,000 709,059 3.9 Janice Blethen(10)..................... 476,477 3.2 5,000 471,477 2.6 William T. Gregory..................... 435,750 3.0 -- 435,750 2.4 William J. Lynch(11)(12)............... 43,640 * -- 43,640 * Clayton McWhorter(12).................. 4,000 * -- 4,000 * Charles A. Sanders, M.D.(12)........... 14,000 * -- 14,000 * All executive officers and directors as a group (16 persons)................ 4,917,539 33.2 135,522 4,777,017 26.5 OTHER SELLING STOCKHOLDERS: Chad J. Brewer(13)..................... 680,022 4.6 60,000 620,022 3.4 John C. & Betty L. Becker Charitable Remainder Trust(14)................. 232,022 1.6 47,000 185,022 1.0 Jean A. Curtis(15)..................... 160,497 1.1 20,000 140,497 * Bradley C. Faerber..................... 3,860 * 860 3,000 * Jeffrey T. Gregory..................... 62,250 * 5,000 57,250 * Ann F. Jaeger(16)...................... 8,732 * 1,746 6,986 * J. Christopher Jaeger.................. 8,732 * 1,746 6,986 * Robert Kleven(17)...................... 23,263 * 2,326 20,937 * Karla Leigh Schulte Trust.............. 116,945 * 5,000 111,945 * Donna Vassil(18)....................... 57,938 * 5,800 52,138 *
- --------------- * Less than 1%. (1) Assumes no exercise of the Underwriters' over-allotment option. (2) Includes 175,000 shares held by Mr. Brewer's spouse, as to which Mr. Brewer disclaims beneficial ownership. 38 40 (3) Includes 750 shares held by Mr. Brewer's spouse, as to which Mr. Brewer disclaims beneficial ownership. Mr. Brewer's address is c/o StaffMark, Inc., 302 East Millsap Road, Fayetteville, Arkansas 72703. At the effective time of the Offering, 1,500 shares beneficially owned by Mr. Brewer, which were acquired on May 1, 1997 for $14.25 per share, will be matched against 1,500 shares to be offered by Mr. Brewer with respect to this Prospectus pursuant to Section 16(b) of the Exchange Act. As a result of the Section 16(b) matching principle, which applies to certain purchases and sales of stock within a six month period, and assuming a public offering price of $26.88, Mr. Brewer will be required to pay the Company the profit resulting from such transactions, or approximately $18,945 at the effective time of the Offering. Mr. Brewer has informed the Company that he will deliver a check made payable to the Company for the required amount at the effective time of the Offering. (4) Includes 25,000 shares subject to options which are currently exercisable. (5) Includes 1,000 shares held by Mr. Feldman's spouse, as to which Mr. Feldman disclaims beneficial ownership. (6) These shares are held by Bartfund I Limited Partnership, of which Mr. Bartholomew is the general partner. (7) Includes 437,025 shares held by the Steven E. Schulte Revocable Trust for which Mr. Schulte is trustee and 116,945 shares held by the Karla Leigh Schulte Trust for which Mr. Schulte is trustee. Of the shares offered by Mr. Shulte, 5,000 are held of record by the Karla Leigh Schulte Trust. (8) Includes 351,620 shares held by the John H. Maxwell, Jr. Revocable Living Trust, of which Mr. Maxwell is the trustee, and includes 362,439 shares held by a trust for the benefit of Mr. Maxwell's spouse, as to which Mr. Maxwell disclaims beneficial ownership. John H. Maxwell, Jr. is the spouse of Mary Sue Maxwell. Of the shares offered by Mr. Maxwell, 2,500 are held of record by Mr. Maxwell's spouse. (9) Includes 362,439 shares held by the Mary Sue Maxwell Revocable Living Trust, of which Ms. Maxwell is the trustee, and includes 351,620 shares held by a trust for the benefit of Ms. Maxwell's spouse, as to which Ms. Maxwell disclaims beneficial ownership. Mary Sue Maxwell is the spouse of John H. Maxwell, Jr. Of the shares offered by Ms. Maxwell, 2,500 are held of record by Ms. Maxwell's spouse. (10) Includes 71,905 shares held by Blethen Family Investments Limited Partnership, the general partner of which is a corporation controlled by Ms. Blethen. (11) Includes 3,033 shares for which Mr. Lynch is trustee under the Uniform Gift to Minors Act and 3,333 shares subject to options which are currently exercisable. (12) Includes 4,000 shares subject to options which are currently exercisable. (13) Includes 66,044 shares held by the Clete Brewer Irrevocable Trust for the benefit of Chad J. Brewer and for which Chad J. Brewer is the trustee. Chad J. Brewer is the son of Jerry T. Brewer and the brother of Clete T. Brewer. Prior to the merger, Chad J. Brewer was a risk manager with Brewer and with StaffMark subsequent to the merger. (14) Includes 185,022 shares held by John and Betty Becker, individually. Mr. and Mrs. Becker were officers of On Call before it merged with Brewer in February 1995. (15) Includes 105,717 shares held by Ms. Curtis' spouse, as to which Ms. Curtis disclaims beneficial ownership. Prior to the acquisition of Flexible by StaffMark, Ms. Curtis served as its Secretary and Mr. Curtis served as its President. (16) Ms. Jaeger was associated with Blethen through July 1997. (17) Prior to the acquisition of Kleven by StaffMark, Mr. Kleven served as president of Kleven, and he continues to run its operations for the Company. (18) Ms. Vassil is the general manager of Georgia operations of the Company, and prior to the Mergers, Ms. Vassil was general manager of Caldwell. 39 41 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"). Without giving effect to the issuance of shares as contemplated by this Prospectus, the Company has outstanding 14,919,296 shares of Common Stock and no shares of Preferred 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. 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. The Common Stock trades on the Nasdaq National Market under the symbol "STAF." 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 stockholder unless: (i) the transaction resulting in a person becoming an interested stockholder, or the 40 42 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 and executive officers 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. As permitted by Delaware law, the Company has entered 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. Further, the Company maintains liability insurance for the benefit of its directors and officers. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is First Chicago Trust Company of New York. 41 43 CERTAIN TRANSACTIONS ORGANIZATION OF THE COMPANY In connection with its formation, 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; 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. Of this amount, 36,607 shares were distributed to Mr. Lynch individually. Simultaneously with the closing of the Initial Public Offering, the Company acquired by merger all of the issued and outstanding stock of the six Founding Companies, at which time each Founding Company became a wholly owned subsidiary of the Company. The aggregate consideration paid by the Company in the Mergers was approximately $83.3 million, consisting of approximately $15.9 million in cash and 5,618,249 shares of Common Stock. In addition, in conjunction with the Mergers certain of the Founding Companies made distributions totaling approximately $5.3 million, representing S Corporation earnings previously taxed to their respective stockholders. Also, prior to the Mergers, certain of the Founding Companies made distributions of certain assets with a net book value totaling approximately $349,000. The following table sets forth the consideration paid for each Founding Company:
COMMON STOCK --------------------- VALUE OF COMPANY CASH SHARES SHARES TOTAL ------- ------- --------- -------- ------- (DOLLARS IN THOUSANDS) Brewer..................................... $ 2,950 1,935,000 $23,220 $26,170 Prostaff................................... 4,500 1,050,000 12,600 17,100 Maxwell.................................... 2,280 912,000 10,944 13,224 HRA........................................ 2,348 615,175 7,382 9,730 First Choice............................... 2,075 622,500 7,470 9,545 Blethen.................................... 1,764 483,574 5,803 7,567 ------- --------- ------- ------- Total............................ $15,917 5,618,249 $67,419 $83,336 ======= ========= ======= =======
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, together with trusts for which they act as trustees, received 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........................................... -- 610,912 Ted Feldman............................................... 1,009 302,611 W. David Bartholomew...................................... 1,210 282,437 Donald A. Marr, Jr........................................ -- 83,000 Steven E. Schulte......................................... 1,954 455,925 John H. Maxwell, Jr....................................... 886 354,402 Mary Sue Maxwell.......................................... 913 365,221 Janice Blethen............................................ 1,626 451,410 William T. Gregory........................................ 1,453 435,750 ------- --------- Total........................................... $10,427 3,659,668 ======= =========
42 44 Pursuant to the agreements entered into in connection with the Mergers, all of the stockholders of the Founding Companies agreed not to compete with the Company for five years, unless reduced by applicable state law, commencing on the date of consummation of the Initial Public Offering. Prior to the Initial Public Offering, certain of the Founding Companies incurred indebtedness which was personally guaranteed by its stockholders or by entities controlled by its stockholders. The Company repaid approximately $29.5 million of indebtedness of the Founding Companies immediately following the consummation of the Initial Public Offering, of which approximately $14.5 million directly or indirectly benefited persons who became officers, directors or greater than 5% stockholders of the Company upon consummation of the Initial Public Offering. In each case, such person was either a direct obligor or a guarantor of such indebtedness. Further, approximately $4.1 million of such indebtedness was 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 assumed 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 Kay Brewer is the mother of Clete T. Brewer who was 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 became the Company's headquarters. The total lease payments to Brewer Investments for the year ended December 31, 1996 and the six months ended June 30, 1997 were $225,000 and $113,000, respectively. 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 the Company. The Company is responsible for all real estate taxes, insurance and maintenance. In connection with the acquisition of Prostaff, the Company assumed leases by Prostaff of property in Little Rock, Arkansas used by Prostaff in its operations that are owned by an Arkansas limited liability company, one of whose members is Steven E. Schulte, who was an officer, director and principal stockholder of Prostaff. The aggregate rental expenses for this property was approximately $74,000, $114,000 and $116,000 for fiscal years 1994, 1995, and 1996, respectively, and approximately $51,000 for the six months ended June 30, 1997. The annual rent is $127,000 and Prostaff is responsible for all real estate taxes, insurance and maintenance. Prior to the Mergers, Maxwell distributed real estate to John H. Maxwell, Jr. and Mary Sue Maxwell, with an aggregate carrying value of approximately $221,000. Such real estate is 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 made for leased facilities with related parties are on terms that are as favorable to the Company as those that could be obtained from unaffiliated third parties. CERTAIN LOANS In October 1996, StaffMark advanced Donald A. Marr, Jr. the principal amount of $80,000 due on October 2, 1999 pursuant to a promissory note that accrues interest at six percent per annum. During 1996, Blethen had made advances to Janice Blethen totaling $250,752. Such amounts were repaid prior to the consummation of the Mergers. During 1996, First Choice had an unsecured demand note payable to William T. Gregory in the principal amount of $140,000, with interest payable semiannually at 8% per annum, which was paid off as of the closing of the Initial Public Offering. 43 45 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 and $132,000 to Clete T. Brewer. In November 1995, Ted Feldman and Bartfund I Limited Partnership, an affiliate of W. David Bartholomew, purchased the common stock of a former stockholder of HRA for $150,000, each issuing to him a promissory note in the amount of $75,000. HRA guaranteed payment of Mr. Fedman's and Bartfund I Limited Partnership's promissory notes to the former stockholder. Such amounts were 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 were 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 In the future, any 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. SHARES ELIGIBLE FOR FUTURE SALE SECURITIES LAW RESTRICTIONS Upon completion of the Offering, the Company will have outstanding 18,134,296 shares of Common Stock (assuming no exercise of outstanding options). Of such shares, 8,308,476 shares of Common Stock are considered "restricted securities" pursuant to Rule 144 under the Securities Act and may only be sold if they are registered under the Securities Act or if an exemption from registration is available, including an exemption afforded by Rule 144 under the Securities Act. In general, under Rule 144, as currently in effect, a person (or persons whose shares are aggregated), including an affiliate of the Company, who has beneficially owned his or her restricted securities for at least one year but less than two years, is entitled to sell within any three-month period a number of such shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale is filed with the Securities and Exchange Commission (the "Commission"). Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice, and availability of current public information about the Company. A person who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who owns shares that have not been held by the Company or an affiliate of the Company for at least two years, would be entitled to sell the shares under Rule 144(k) without compliance with the limitations described above. Restricted securities properly sold in reliance on Rule 144 are thereafter freely tradeable without restrictions or registration under the Securities Act unless thereafter held by an affiliate of the Company. LOCK-UP RESTRICTIONS Underwriters' Lock-Ups. The Company, its directors, executive officers and certain of its stockholders have agreed with the Representatives that they will not offer or sell any shares of Common Stock they currently own for a period of 180 days after the date of this Prospectus without the prior written consent of 44 46 J.C. Bradford & Co., except that the Other Founding Stockholders (as defined) and the Stockholder Affiliates (as defined) may sell a portion of their shares of Common Stock without the prior written consent of J.C. Bradford & Co. during the Open Period (as defined). In addition, the Company may issue shares of Common Stock in connection with acquisitions, upon exercise of options granted or to be granted under the Company's 1996 Stock Option Plan and in connection with the Purchase Plan. Company Lock-Ups. At time of the Initial Public Offering, each of the stockholders of the Founding Companies and the organizers of the Company agreed with the Company that they would not sell any of their shares they received immediately prior to the Initial Public Offering until September 27, 1998 (the "Two Year Lock-Up"), subject to certain exceptions. On July 29, 1997, each of the directors, executive officers and certain stockholders of the Company who were either a Founding Company stockholder and/or an organizer of the Company (collectively, the "Stockholder Affiliates") agreed with the Company to extend the Two Year Lock-Up relating to their shares of Common Stock until September 27, 1999 (the "Extended Lock-Up"), subject to certain exceptions. The shares of Common Stock of the Founding Company stockholders and organizers of the Company who are not Stockholder Affiliates (collectively the "Other Founding Stockholders") will remain subject to the Two Year Lock-Up, subject to certain exceptions. Even though the shares of Common Stock owned by the Other Founding Stockholders and the Stockholder Affiliates remain subject to the Two Year Lock-Up and the Extended Lock-Up, respectively, upon proper notice, the Company has agreed to allow the Other Founding Stockholders and the Stockholder Affiliates to sell (if they so desire) up to 10% of their shares of Common Stock, or approximately 671,144 shares of Common Stock during a 30 day period that will begin during either late October 1997 or early November 1997 (the "Open Period"). Any shares that are eligible for sale during the Open Period, but are not then sold, will remain subject to the Two Year Lock-Up or the Extended Year Lock-Up, as applicable. In addition to any sales by the Other Founding Stockholders or the Stockholder Affiliates during the Open Period, the Company has agreed to release from the Two Year Lock-Up or the Extended Lock-Up, as applicable, a certain number of the shares owned by the Other Founding Stockholders and Stockholder Affiliates at different points in time through September 27, 1999. In either late April 1998 or early May 1998, the Company has agreed to release 10% of the shares of Common Stock (the "First Release Amount") then owned by the Other Founding Stockholders and the Stockholder Affiliates, which, assuming no sales during the Open Period, will be approximately 671,144 shares of Common Stock. In either late October 1998 or early November 1998, the Company has agreed to release 20% of the shares of Common Stock then owned by the Stockholder Affiliates and not previously released (the "Second Release Amount"), which, assuming no sales during either the Open Period or with respect to any shares that are a part of the First Release Amount, will be approximately 810,909 shares of the Company's Common Stock. In either late April 1999 or early May 1999, the Company has agreed to release 40% of the shares of Common Stock then owned by the Stockholder Affiliates and not previously released, which, assuming no sales during either the Open Period or with respect to any shares that are a part of either the First Release Amount or the Second Release Amount, will be approximately 1,297,454 shares of the Company's Common Stock. Any sales of shares of Common Stock by the Other Founding Stockholders or the Stockholder Affiliates during the Open Period would be subject to all of the provisions of the Securities Act, the Exchange Act and the rules and regulations thereunder, including Rule 144. Any sales of shares of Common Stock by the Other Founding Stockholders or the Stockholder Affiliates that have been released from the Two Year Lock-Up or the Extended Year Lock-Up, as applicable, would be subject to all of the provisions of the Securities Act, the Exchange Act and the rules and regulations thereunder, including Rule 144. Net Effect of the Extended Year-Lock Up. Assuming no sales by the Stockholder Affiliates during the Open Period, the Extended Lock-Up effectively restricts the transfer of approximately 1,946,180 shares of Common Stock beyond the expiration date of the Two Year Lock-Up to September 27, 1999. Without the agreement by the Stockholder Affiliates to the Extended Lock-Up, these shares of the Common Stock would otherwise have become available for sale pursuant to Rule 144 on September 27, 1998. Expiration of Various Lock-Up Periods. Following the expiration of the Two Year Lock-Up and assuming no sales during the Open Period, 1,985,748 shares owned by the Other Founding Stockholders will 45 47 be eligible for public resale in accordance with Rule 144. Following the expiration of the Extended Lock-Up and assuming no sales during the Open Period, 1,946,180 shares owned by the Stockholder Affiliates will be eligible for public resale in accordance with Rule 144. Following the later of: (i) one year subsequent to the closing date of various Post-IPO Acquisitions in which shares of Common Stock were issued as all or part of the consideration or; (ii) the expiration of various lock-up periods with respect to shares of Common Stock issued in certain of the Post-IPO Acquisitions, 1,597,041 shares will be eligible for resale in accordance with Rule 144. SHELF REGISTRATION STATEMENT In August 1997, the Company intends to file a shelf registration statement on Form S-1 (the "Shelf Registration") to register the sale of up to 376,162 shares of its Common Stock. The shares of Common Stock to be included on the Shelf Registration were issued as all or part of the consideration in two of the Post-IPO Acquisitions. None of the shares to be included on the Shelf Registration are owned by the Stockholder Affiliates or the Other Founding Stockholders. Of the shares to be included on the Shelf Registration, 286,162 shares were issued in a transaction that will be accounted for as a pooling-of-interests. The stockholders of the acquired entity who received shares in the pooling transaction have agreed not to sell any of the shares to be included on the Shelf Registration until the Company releases its earnings for the quarterly period ending on September 30, 1997, after which time these shares may be sold without any restriction. The remaining number of shares that are to be included on the Shelf Registration are not subject to this limitation, but are nevertheless subject to a lock-up restriction with the Company that expires on April 4, 1999, and thus, may not be sold until the expiration of such lock-up. REGISTRATION RIGHTS Certain of the Other Founding Stockholders and the Stockholder Affiliates have exercised their registration rights and are selling shares of Common Stock as part of the Offering. Subsequent to the Offering and notwithstanding the Two Year Lock-Up and the Extended Lock-Up, each of the Other Founding Stockholders, the Stockholder Affiliates and persons or entities who received shares of Common Stock in the Post-IPO Acquisitions have the right, in the event the Company proposes to register under the Securities Act any Common Stock for its own account, 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. At any time after August 22, 1998, and upon the vote of the holders of at least a majority of the shares of the Common Stock issued in connection with the Mergers that are not eligible for sale pursuant to Rule 144(k), the Other Founding Stockholders and the Stockholder Affiliates have certain limited demand registration rights to require the Company to register shares held by them. See "Principal and Selling Stockholders." 1996 EQUITY BASED PLANS The Company has granted options under the Plan options to purchase 1,265,000 shares of Common Stock. Substantially all of the options will vest in increments over a period of five years from the date of each respective grant. The Company has registered the shares that will be issuable upon exercise of options granted under the Plan, such that these shares when issued, will be immediately eligible for resale in the public market. The Company has reserved 300,000 shares of Common Stock for issuance during the term of the Purchase Plan. The Company has registered the shares that will be issued under the Purchase Plan, such that these shares when issued, will be immediately eligible for resale in the public market. 46 48 UNDERWRITING Pursuant to the Underwriting Agreement, and subject to the terms and conditions thereof, the Underwriters named below, acting through J.C. Bradford & Co., Montgomery Securities and Stephens Inc., as representatives of the several underwriters (the "Representatives"), have agreed, severally, to purchase from the Company and the Selling Stockholders the number of shares of Common Stock set forth below opposite their respective names:
NUMBER OF NAME OF UNDERWRITER SHARES ------------------- --------- J.C. Bradford & Co. ........................................ Montgomery Securities ...................................... Stephens Inc. .............................................. --------- Total............................................. 3,500,000 =========
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 and the Selling Stockholders have been advised by the Representatives that the Underwriters propose initially to offer the shares of Common Stock to the public at the 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 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 525,000 additional shares of Common Stock to cover over-allotments, if any. To the extent that the Underwriters exercise the 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 3,500,000 shares of Common Stock offered hereby. If purchased, the Underwriters will sell these additional shares on the same terms as those on which the 3,500,000 shares are being offered. The Company, its executive officers, directors and certain of its stockholders, have agreed with the Representatives not to offer to sell or otherwise dispose of any shares of Common Stock they currently own for a period of 180 days from the date of this Prospectus, without the prior written consent of J.C. Bradford & Co., except for any sales during the Open Period and except that the Company may issue shares in connection with acquisitions or upon the exercise of stock options granted or to be granted under the Plan and in connection with the Purchase Plan. See "Shares Eligible for Future Sale -- Underwriters' Lock-Ups." See "Shares Eligible for Future Sale" for information with respect to additional information regarding the lock-up restrictions for the Stockholder Affiliates and the Other Founding Stockholders, as well as the terms of certain registration rights held by these individuals and others. 47 49 The Underwriting Agreement provides that the Company and the Selling Stockholders 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. In connection with this Offering, certain Underwriters and selling group members (if any) who in the past have acted as market makers in the Common Stock may engage in passive market making activities in the Common Stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Exchange Act. Underwriters and other participants in the distribution of the Common Stock generally are prohibited during a specified time period (the "qualifying period"), determined in light of the timing of the pricing of the Offering, from bidding for or purchasing the Common Stock or a related security except to the extent permitted under the applicable rules of Regulation M. Rule 103 allows, among other things, an Underwriter or member of the selling group (if any) for the Common Stock to effect "passive market making" transactions on the Nasdaq National Market in the Common Stock during the qualifying period at a price that does not exceed the highest independent bid for that security at the time of the transaction. Such a passive market maker must not display a bid for the subject security at a price in excess of the highest independent bid, and generally must lower its bid if all independent bids are lowered. Moreover, the passive market maker's net purchases of such security on each day of the qualifying period shall not exceed 30% of its average daily trading volume during a reference period preceding the distribution. In connection with the Offering, the Underwriters and other persons participating in the Offering may engage in transactions that stabilize, maintain or otherwise affect the price of Common Stock. Specifically, the Underwriters may over-allot in connection with the Offering, creating a short position in Common Stock for their own account. To cover over-allotments or to stabilize the price of Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. The Underwriters may also impose a penalty bid whereby they may reclaim selling concessions allowed to an underwriter or a dealer for distributing Common Stock in the Offering, if the Underwriters repurchase previously distributed Common Stock in transactions to cover their short position, in stabilization transactions or otherwise. Finally, the Underwriters may bid for, and purchase, shares of Common Stock in market making transactions. These activities may stabilize or maintain the market price of Common Stock above market levels that may otherwise prevail. The Underwriters are not required to engage in these activities and may end any of these activities at any time. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered by this Prospectus will be passed upon for the Company by Wright, Lindsey & Jennings, Little Rock, Arkansas. Counsel for the Underwriters is Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia. EXPERTS The audited financial statements of StaffMark, Prostaff, Maxwell, HRA, First Choice, Blethen and Global 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. The combined balance sheet of Flexible as of December 31, 1996 and the related combined statements of income, changes in stockholders' equity and cash flows for the year then ended included in this Prospectus have been included herein in reliance on the report, which includes an explanatory paragraph due to a change in entities, of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. 48 50 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. This 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 necessarily summaries, 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. The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, files 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 world wide web site (http://www.sec.gov). This Registration Statement, as well as all exhibits and amendments hereto, have been filed through EDGAR. The Company will provide without charge to each person who receives a copy of this Prospectus, upon written or oral request of such person, a copy of any of the information that is incorporated by reference in this Prospectus (not including exhibits to the information that is incorporated by reference unless the exhibits are themselves specifically incorporated by reference). Such request should be directed to: StaffMark, Inc., Attention: Gordon Y. Allison, Executive Vice President -- General Counsel, 302 East Millsap Road, Fayetteville, Arkansas 72703, (501) 973-6000. The Company's Common Stock is traded on the Nasdaq National Market. Proxy statements and other information concerning the Company can also be inspected at the offices of the Nasdaq National Market, 1735 K Street, Washington, D.C. 20006. 49 51 INDEX TO FINANCIAL STATEMENTS
PAGE ----- STAFFMARK, INC. UNAUDITED PRO FORMA FINANCIAL STATEMENTS: Introduction to Unaudited Pro Forma Financial Statements............................................. F-3 Unaudited Pro Forma Statement of Income for the Six Months Ended June 30, 1997.................................... F-4 Notes to Unaudited Pro Forma Statement of Income for the Six Months Ended June 30, 1997......................... F-5 Unaudited Pro Forma Statement of Income for the Six Months Ended June 30, 1996.................................... F-6 Notes to Unaudited Pro Forma Statement of Income for the Six Months Ended June 30, 1996......................... F-7 Unaudited Pro Forma Statement of Income for the Year Ended December 31, 1996...................................... F-8 Notes to Unaudited Pro Forma Statement of Income for the Year Ended December 31, 1996........................... F-9 HISTORICAL FINANCIAL STATEMENTS OF STAFFMARK, INC.: Report of Independent Public Accountants.................. F-10 Consolidated Balance Sheets............................... F-11 Consolidated Statements of Income......................... F-12 Consolidated Statements of Stockholders' Equity........... F-13 Consolidated Statements of Cash Flows..................... F-14 Notes to Consolidated Financial Statements................ F-15 HISTORICAL FINANCIAL STATEMENTS OF OTHER FOUNDING COMPANIES: THE PROSTAFF COMPANIES Report of Independent Public Accountants.................. F-28 Combined Balance Sheets................................... F-29 Combined Statements of Income............................. F-30 Combined Statements of Stockholders' Equity............... F-31 Combined Statements of Cash Flows......................... F-32 Notes to Combined Financial Statements.................... F-33 THE MAXWELL COMPANIES Report of Independent Public Accountants.................. F-40 Combined Balance Sheets................................... F-41 Combined Statements of Income............................. F-42 Combined Statements of Stockholders' Equity............... F-43 Combined Statements of Cash Flows......................... F-44 Notes to Combined Financial Statements.................... F-45 HRA, INC. Report of Independent Public Accountants.................. F-52 Balance Sheets............................................ F-53 Statements of Income...................................... F-54 Statements of Stockholders' Equity........................ F-55 Statements of Cash Flows.................................. F-56 Notes to Financial Statements............................. F-57
FIRST CHOICE STAFFING, INC. Report of Independent Public Accountants.................. F-66 Balance Sheets............................................ F-67 Statements of Income...................................... F-68 Statements of Stockholders' Equity........................ F-69 Statements of Cash Flows.................................. F-70 Notes to Financial Statements............................. F-71 F-1 52
PAGE ----- THE BLETHEN GROUP Report of Independent Public Accountants.................. F-77 Combined Balance Sheets................................... F-78 Combined Statements of Income............................. F-79 Combined Statements of Stockholders' Equity............... F-80 Combined Statements of Cash Flows......................... F-81 Notes to Combined Financial Statements.................... F-82 HISTORICAL FINANCIAL STATEMENTS OF ACQUIRED COMPANIES: FLEXIBLE PERSONNEL GROUP OF COMPANIES Report of Independent Public Accountants.................. F-90 Combined Balance Sheet.................................... F-91 Combined Statement of Income.............................. F-92 Combined Statement of Changes in Stockholders' Equity..... F-93 Combined Statement of Cash Flows.......................... F-94 Notes to Combined Financial Statements.................... F-95 GLOBAL DYNAMICS, INC. Report of Independent Public Accountants.................. F-98 Balance Sheet............................................. F-99 Statement of Income....................................... F-100 Statement of Changes in Stockholders' Equity.............. F-101 Statement of Cash Flows................................... F-102 Notes to Financial Statements............................. F-103
F-2 53 STAFFMARK, INC. INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS StaffMark, through wholly-owned subsidiaries, simultaneously with the closing of the Initial Public Offering, merged with Brewer, Prostaff, Maxwell, HRA, First Choice and Blethen. Pursuant to the requirements of SAB No. 97, Brewer was designated as the acquirer for financial reporting purposes, of the Other Founding Companies. Based upon the provisions of SAB No. 97, these acquisitions were accounted for as combinations at historical cost. The following unaudited pro forma financial statements present StaffMark and give effect to the following pro forma adjustments as if the transactions were consummated as of the beginning of the applicable reporting period: (i) Brewer's 1996 acquisition of the Other Founding Companies; (ii) Brewer's February 1996 acquisition of On Call; (iii) StaffMark's March 1997 acquisition of Flexible; (iv) StaffMark's April 1997 acquisition of Global; (v) the adjustment to compensation expense for the Compensation Differential; and (vi) the incremental provision for income taxes attributable to the income of S Corporations, net of the income tax benefits related to the Compensation Differential. The pro forma financial statements do not purport to represent what the Company's results of operations would actually have been if such transactions in fact had occurred on those dates or to project the Company's results of operations for any future period. See "Risk Factors" included elsewhere herein. The pro forma financial statements should be read in conjunction with other information contained elsewhere in this Prospectus under the heading "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's consolidated financial statements, and the historical financial statements of the Other Founding Companies. See "Index to Financial Statements." F-3 54 STAFFMARK, INC. UNAUDITED PRO FORMA STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 (DOLLARS IN THOUSANDS)
ACQUISITION RELATED ADJUSTMENTS ---------------------------------------------------- PRO FORMA TOTAL STAFFMARK FLEXIBLE(A) GLOBAL(B) ADJUSTMENTS ADJUSTMENTS PRO FORMA ---------- ----------- --------- ----------- ----------- --------- SERVICE REVENUES....................... $ 159,987 $8,376 $4,935 $ -- $ 13,311 $173,298 COST OF SERVICES....................... 124,515 6,753 3,697 -- 10,450 134,965 ---------- ------ ------ ----- ---------- -------- Gross profit...................... 35,472 1,623 1,238 -- 2,861 38,333 OPERATING EXPENSES: Selling, general and administrative.................... 24,006 1,349 936 (172)(c) 2,113 26,119 Depreciation and amortization........ 1,749 52 13 37(d) 255 2,004 153(e) ---------- ------ ------ ----- ---------- -------- Operating income.................. 9,717 222 289 (18) 493 10,210 ---------- ------ ------ ----- ---------- -------- OTHER INCOME (EXPENSE): Interest expense..................... (507) (18) (12) (245)(f) (275) (782) Other, net........................... 253 1 -- -- 1 254 ---------- ------ ------ ----- ---------- -------- INCOME BEFORE INCOME TAXES............. 9,463 205 277 (263) 219 9,682 INCOME TAX PROVISION................... 3,880 -- 14 120(g) 134 4,014 ---------- ------ ------ ----- ---------- -------- Net income........................ $ 5,583 $ 205 $ 263 $(383) $ 85 $ 5,668 ========== ====== ====== ===== ========== ======== PRO FORMA NET INCOME PER COMMON SHARE: PRIMARY................................................................................................. $ 0.39 ======== FULLY DILUTED........................................................................................... $ 0.38 ======== PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING: PRIMARY................................................................................................. 14,562(h) ======== FULLY DILUTED........................................................................................... 14,816(i) ========
The accompanying notes are an integral part of this statement. F-4 55 STAFFMARK, INC. NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 (a) Records the financial results of Flexible, which was acquired by StaffMark effective March 1997, for the period from January 1, 1997 through the date of the acquisition. (b) Records the financial results of Global, which was acquired by StaffMark effective April 1997, for the period from January 1, 1997 through the date of the acquisition. (c) Adjusts compensation to the level the owners of Flexible and Global have agreed to receive from StaffMark subsequent to the acquisition. (d) Adjustment to reflect amortization expense relating to the goodwill recorded in conjunction with the acquisition of Flexible for the period from January 1, 1997 through the date of the acquisition. Goodwill recorded in conjunction with this acquisition was approximately $6.7 million which is being amortized over thirty years. (e) Adjustment to reflect amortization expense relating to the goodwill recorded in conjunction with the acquisition of Global for the period from January 1, 1997 through the date of the acquisition. Goodwill recorded in conjunction with this acquisition was approximately $18.3 million which is being amortized over thirty years. (f) Adjustment to reflect interest expense relating to debt incurred in conjunction with the acquisition of Global for the period from January 1, 1997 through the acquisition date. This pro forma expense calculation is based on the $14.0 million borrowed by StaffMark under the Credit Facility. Pro forma interest expense is computed based upon the applicable rate in effect on the Credit Facility which, based upon the terms of the agreement, would have approximated 7.0% during the pro forma period. (g) Records the incremental provision to reflect federal and state income taxes as if Flexible and Global had been C Corporations. This adjustment records income tax expense at an effective combined tax rate of 39%, adjusted for nondeductible goodwill amortization. (h) Represents the actual weighted average primary shares outstanding for the six months ended June 30, 1997 of 14,158,260, adjusted to reflect the issuance as of January 1, 1997 of the 183,823 shares issued in conjunction with the March 1997 acquisition of Flexible; and the 690,855 shares issued in conjunction with the April 1997 acquisition of Global. (i) Pro forma fully diluted weighted average shares outstanding for the six months ended June 30, 1997 include the shares discussed in Note (h) above and 253,837 shares representing the incremental fully dilutive effect of the Company's outstanding stock options. F-5 56 STAFFMARK, INC. UNAUDITED PRO FORMA STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 (DOLLARS IN THOUSANDS)
ACQUISITION RELATED ADJUSTMENTS ----------------------------------------- OTHER FOUNDING STAFFMARK COMPANIES(A) ON CALL(B) FLEXIBLE(C) --------- -------------- ---------- ----------- SERVICE REVENUES........................... $30,556 $59,298 $1,127 $24,043 COST OF SERVICES........................... 24,028 46,779 945 19,673 ------- ------- ------ ------- Gross profit............................. 6,528 12,519 182 4,370 OPERATING EXPENSES: Selling, general and administrative...... 4,445 9,752 116 4,059 Depreciation and amortization............ 566 353 3 158 ------- ------- ------ ------- Operating income....................... 1,517 2,414 63 153 ------- ------- ------ ------- OTHER INCOME (EXPENSE): Interest expense......................... (880) (201) 5 (67) Other, net............................... (3) 401 -- -- ------- ------- ------ ------- INCOME BEFORE INCOME TAXES................. 634 2,614 68 86 INCOME TAX PROVISION....................... -- 270 -- -- ------- ------- ------ ------- Net income (loss).................. $ 634 $ 2,344 $ 68 $ 86 ======= ======= ====== ======= PRO FORMA NET INCOME PER COMMON SHARE: PRIMARY.................................. FULLY DILUTED............................ WEIGHTED AVERAGE SHARES OUTSTANDING: PRIMARY.................................. FULLY DILUTED............................ ACQUISITION RELATED ADJUSTMENTS -------------------------------------- PRO FORMA TOTAL GLOBAL(D) ADJUSTMENTS ADJUSTMENTS PRO FORMA --------- ----------- ----------- --------- SERVICE REVENUES........................... $8,408 $ -- $92,876 $123,432 COST OF SERVICES........................... 5,992 -- 73,389 97,417 ------ ------- ------- -------- Gross profit............................. 2,416 -- 19,487 26,015 OPERATING EXPENSES: Selling, general and administrative...... 1,591 (536)(e) 14,982 19,427 Depreciation and amortization............ 26 16(f) 973 1,539 112(g) 305(h) ------ ------- ------- -------- Operating income....................... 799 103 3,532 5,049 ------ ------- ------- -------- OTHER INCOME (EXPENSE): Interest expense......................... (9) (25)(i) (786) (1,666) (489)(j) Other, net............................... -- -- 401 398 ------ ------- ------- -------- INCOME BEFORE INCOME TAXES................. 790 (411) 3,147 3,781 INCOME TAX PROVISION....................... 12 1,432(k) 1,714 1,714 ------ ------- ------- -------- Net income (loss).................. $ 778 $(1,843) $ 1,433 $ 2,067 ====== ======= ======= ======== PRO FORMA NET INCOME PER COMMON SHARE: PRIMARY.................................. $ 0.23 ======== FULLY DILUTED............................ $ 0.23 ======== WEIGHTED AVERAGE SHARES OUTSTANDING: PRIMARY.................................. 9,174(l) ======== FULLY DILUTED............................ 9,174(l) ========
The accompanying notes are an integral part of this statement. F-6 57 STAFFMARK, INC. NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 (a) Records the financial results of the Other Founding Companies, which were acquired by Brewer on October 2, 1996, for the period from January 1, 1996 through June 30, 1996. (b) Records the financial results of On Call, which was acquired by Brewer effective February 2, 1996, for the period from January 1, 1996 through the date of the acquisition. (c) Records the financial results of Flexible, which was acquired by StaffMark effective April 1997. (d) Records the financial results of Global, which was acquired by StaffMark effective April 1997. (e) Adjusts compensation to the level the owners have agreed to receive from the Founding Companies, Flexible, and Global subsequent to the Mergers and respective acquisitions. (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 amortization expense relating to the goodwill recorded in conjunction with the acquisition of Flexible. Goodwill recorded in conjunction with this acquisition was approximately $6.7 million which is being amortized over thirty years. (h) Adjustment to reflect amortization expense relating to the goodwill recorded in conjunction with the acquisition of Global. Goodwill recorded in conjunction with this acquisition was approximately $18.3 million which is being amortized over thirty years. (i) Adjustment to reflect 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 the 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 expense is computed based upon the applicable 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. (j) Adjustment to reflect interest expense relating to debt incurred in conjunction with the acquisition of Global. This pro forma expense calculation is based on the $14.0 million borrowed by StaffMark under the Credit Facility. Pro forma interest expense is computed based upon the applicable rate in effect on the Credit Facility which, based upon the terms of the agreement, would have approximated 7.0% during the pro forma period. (k) Records the incremental provision to reflect federal and state income taxes as if the Founding Companies, Flexible and Global had been C Corporations. This adjustment records income tax expense at an effective combined tax rate of 39%, adjusted for nondeductible goodwill amortization. (l) Includes: (i) 1,355,000 shares issued by StaffMark prior to the Offering; (ii) 5,618,249 shares issued to the stockholders of the Founding Companies in connection with the Merger; (iii) 1,326,459 shares issued in conjunction with the Offering to pay the cash portion of the consideration for the Founding Companies; (iv) 183,823 shares issued in conjunction with the March 1997 acquisition of Flexible; and (v) 690,855 shares issued in conjunction with the April 1997 acquisition of Global. F-7 58 STAFFMARK, INC. UNAUDITED PRO FORMA STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
ACQUISITION RELATED ADJUSTMENTS ------------------------------------------------------------------------------- OTHER FOUNDING PRO FORMA TOTAL STAFFMARK COMPANIES(A) ON CALL(B) FLEXIBLE(C) GLOBAL(D) ADJUSTMENTS ADJUSTMENTS --------- ------------ ---------- ----------- --------- ----------- ----------- SERVICE REVENUES............... $104,476 $93,969 $1,127 $49,342 $17,160 $ -- $161,598 COST OF SERVICES............... 81,607 73,865 946 39,928 12,109 -- 126,848 -------- ------- ------ ------- ------- ------- -------- Gross profit................. 22,869 20,104 181 9,414 5,051 -- 34,750 OPERATING EXPENSES: Selling, general and administrative............. 14,623 15,217 116 8,085 3,726 (1,137)(e) 26,007 Depreciation and amortization............... 1,374 538 2 316 44 16(f) 1,728 202(g) 610(h) -------- ------- ------ ------- ------- ------- -------- Operating income........... 6,872 4,349 63 1,013 1,281 309 7,015 -------- ------- ------ ------- ------- ------- -------- OTHER INCOME (EXPENSE): Interest expense............. (1,376) (354) -- (121) (52) (27)(i) (1,533) (979)(j) Other, net................... 301 423 5 -- -- -- 428 -------- ------- ------ ------- ------- ------- -------- INCOME BEFORE INCOME TAXES..... 5,797 4,418 68 892 1,229 (697) 5,910 INCOME TAX PROVISION........... 1,774 465 -- -- 22 2,782(k) 3,269 -------- ------- ------ ------- ------- ------- -------- Net income................. $ 4,023 $ 3,953 $ 68 $ 892 $ 1,207 $(3,479) $ 2,641 ======== ======= ====== ======= ======= ======= ======== PRO FORMA NET INCOME PER COMMON SHARE: PRIMARY...................... FULLY DILUTED................ WEIGHTED AVERAGE SHARES OUTSTANDING: PRIMARY...................... FULLY DILUTED................ PRO FORMA --------- SERVICE REVENUES............... $266,074 COST OF SERVICES............... 208,455 -------- Gross profit................. 57,619 OPERATING EXPENSES: Selling, general and administrative............. 40,630 Depreciation and amortization............... 3,102 -------- Operating income........... 13,887 -------- OTHER INCOME (EXPENSE): Interest expense............. (2,909) Other, net................... 729 -------- INCOME BEFORE INCOME TAXES..... 11,707 INCOME TAX PROVISION........... 5,043 -------- Net income................. $ 6,664 ======== PRO FORMA NET INCOME PER COMMON PRIMARY...................... $ 0.64 ======== FULLY DILUTED................ $ 0.64 ======== WEIGHTED AVERAGE SHARES OUTSTAN PRIMARY...................... 10,444(l) ======== FULLY DILUTED................ 10,444(1) ========
The accompanying notes are an integral part of this statement. F-8 59 STAFFMARK, INC. NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (a) Represents the audited financial results of the Other Founding Companies, which were acquired by Brewer on October 2, 1996, for the period from January 1, 1996, through the date of acquisition. (b) Records the audited financial results of On Call, which was acquired by Brewer effective February 1996, for the period from January 1, 1996 through the date of acquisition. (c) Records the audited financial results of Flexible, which was acquired by StaffMark effective March 1997. (d) Records the audited financial results of Global, which was acquired by StaffMark effective April 1997. (e) Adjusts compensation to the level the owners have agreed to receive from the Founding Companies, Flexible and Global subsequent to the Mergers and respective acquisitions. (f) Adjustment to reflect 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 is being amortized over five years. (g) Adjustment to reflect amortization expense relating to the goodwill recorded in conjunction with the acquisition of Flexible for fiscal year 1996. Goodwill recorded in conjunction with this acquisition was approximately $6.7 million which is being amortized over thirty years. (h) Adjustment to reflect amortization expense relating to the goodwill recorded in conjunction with the acquisition of Global for fiscal year 1996. Goodwill recorded in conjunction with this acquisition was approximately $18.3 million which is being amortized over thirty years. (i) Adjustment to reflect 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 expense 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. (j) Adjustment to reflect interest expense relating to debt incurred in conjunction with the acquisition of Global for fiscal year 1996. This pro forma expense calculation is based on the $14.0 million borrowed by StaffMark under the Credit Facility. Pro forma interest expense is computed based upon the applicable rate in effect on the Credit Facility which, based upon the terms of the agreement, would have approximated 7.0% during the pro forma period. (k) Records the incremental provision to reflect federal and state income taxes as if the Founding Companies, Flexible and Global had been subchapter C Corporations. This adjustment records income tax expense at an effective combined tax rate of 39%, adjusted for nondeductible goodwill amortization. (l) Includes: (i) 1,355,000 shares issued by StaffMark prior to the Initial Public Offering; (ii) 5,618,249 shares issued to the stockholders of the Founding Companies in connection with the Mergers; (iii) the weighted average of 1,326,459 shares issued in conjunction with the Initial Public Offering to pay the cash portion of the consideration for the Founding Companies for the period from January 1, 1996 through the date of the Initial Public Offering and 6,325,000 shares issued in connection with the Initial Public Offering for the period from October 2, 1996 through December 31, 1996; (iv) 19,794 shares representing the weighted average shares issued in conjunction with the November 1996 acquisition of Technology Source; (v) 183,823 shares issued in conjunction with the March 1997 acquisition of Flexible; and (vi) 690,855 shares issued in conjunction with the April 1997 acquisition of Global. F-9 60 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of StaffMark, Inc.: We have audited the accompanying consolidated balance sheets of StaffMark, Inc. (the "Company", a Delaware Corporation) and Subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 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 StaffMark, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Little Rock, Arkansas, February 5, 1997. F-10 61 STAFFMARK, INC. CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, -------------------------- JUNE 30, 1995 1996 1997 ----------- ----------- ------------ (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents........................ $ 319,159 $13,856,422 $ 2,639,536 Accounts receivable, net of allowance for doubtful accounts of $214,187, $441,397 and $1,125,926.................................... 4,798,476 21,064,875 41,060,043 Advances to officers and employees............... -- -- 175,635 Deferred income taxes............................ -- -- 753,515 Prepaid expenses and other....................... 253,143 1,577,508 1,930,467 ----------- ----------- ------------ Total current assets..................... 5,370,778 36,498,805 46,559,196 PROPERTY AND EQUIPMENT, net........................ 796,930 4,003,638 6,663,478 INTANGIBLE ASSETS, net............................. 15,555,459 30,512,571 86,734,041 ADVANCES TO OFFICERS AND EMPLOYEES................. -- 160,000 984,365 OTHER ASSETS....................................... 29,192 323,217 967,362 ----------- ----------- ------------ $21,752,359 $71,498,231 $141,908,442 =========== =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and other accrued liabilities... $ 648,106 $ 1,907,331 $ 3,128,388 Outstanding checks............................... 226,307 176,156 -- Payroll and related liabilities.................. 1,020,973 3,515,743 11,649,723 Reserve for workers' compensation claims......... 775,801 3,771,398 6,556,738 Line of credit................................... 309,068 -- -- Current maturities of long-term debt............. 882,487 -- -- Income taxes payable............................. -- 2,415,203 676,856 Accrued interest................................. -- -- 459,743 Deferred income taxes............................ -- 662,505 -- ----------- ----------- ------------ Total current liabilities................ 3,862,742 12,448,336 22,471,448 LONG-TERM DEBT, less current maturities............ 15,103,831 -- 43,430,000 OTHER LONG-TERM LIABILITIES........................ -- 518,669 136,075 DEFERRED INCOME TAXES.............................. -- 421,147 396,226 COMMITMENTS AND CONTINGENCIES (Notes 12 through 14) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; authorized shares of 1,000,000; no shares issued or outstanding................................... -- -- -- Common stock, $.01 par value in 1995 and 1996; authorized shares of 10,000 in 1995 and 26,000,000 in 1996 and 1997; shares issued and outstanding of 117.5 in 1995; 13,417,012 in 1996 and 14,509,634 in 1997................... 1 134,170 145,096 Paid-in capital.................................. 98,059 55,379,391 67,149,886 Retained earnings................................ 2,687,726 2,596,518 8,179,711 ----------- ----------- ------------ Total stockholders' equity............... 2,785,786 58,110,079 75,474,693 ----------- ----------- ------------ $21,752,359 $71,498,231 $141,908,442 =========== =========== ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-11 62 STAFFMARK, INC. CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS SIX MONTHS ENDED JUNE 30 ---------------------------------------- -------------------------- 1994 1995 1996 1996 1997 ----------- ----------- ------------ ----------- ------------ (UNAUDITED) SERVICE REVENUES........... $27,894,455 $43,874,246 $104,476,109 $30,556,381 $159,987,151 COST OF SERVICES........... 22,906,230 35,115,355 81,606,986 24,027,885 124,515,015 ----------- ----------- ------------ ----------- ------------ Gross profit.......... 4,988,225 8,758,891 22,869,123 6,528,496 35,472,136 OPERATING EXPENSES: Selling, general and administrative........ 3,483,070 5,804,348 14,623,615 4,445,462 24,005,794 Depreciation and amortization.......... 255,895 590,066 1,373,954 565,974 1,749,616 ----------- ----------- ------------ ----------- ------------ Operating income...... 1,249,260 2,364,477 6,871,554 1,517,060 9,716,726 OTHER INCOME (EXPENSE): Interest expense......... (92,132) (800,704) (1,375,879) (879,924) (507,226) Other, net............... 19,653 22,765 300,954 (3,182) 253,539 ----------- ----------- ------------ ----------- ------------ Income before provision for income taxes............... 1,176,781 1,586,538 5,796,629 633,954 9,463,039 PROVISION FOR INCOME TAXES.................... -- -- 1,773,833 -- 3,879,846 ----------- ----------- ------------ ----------- ------------ Net income....... $ 1,176,781 $ 1,586,538 $ 4,022,796 $ 633,954 $ 5,583,193 =========== =========== ============ =========== ============ Earnings Per Share......... $ 0.39 ============ Unaudited Pro Forma Data (Note 15): Pro forma net income..... $ 6,368,000 ============ Pro forma earnings per share................. $ 0.67 ============ Weighted average common shares outstanding.... 9,545,558 ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-12 63 STAFFMARK, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ----------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------------- -------- ------------ ----------- ------------ 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 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 Dividends declared: Cash.................................................. -- -- -- (1,015,092) (1,015,092) Property.............................................. -- -- -- (73,700) (73,700) Shares issued in conjunction with purchase of On Call... 10.0 -- 319,149 -- 319,149 Exercise of stock options............................... 7.5 -- 160,000 -- 160,000 Issuance of common stock upon formation of StaffMark, Inc. ................................................. 1,000.0 10 -- -- 10 Split of StaffMark, Inc. common stock................... 1,354,000.0 13,540 (13,540) -- -- Issuance of common stock, net of offering costs......... 6,325,000.0 63,250 66,518,234 -- 66,581,484 Conversion of Brewer common stock into common stock of StaffMark, Inc. ...................................... 1,934,865.0 19,349 (2,969,349) -- (2,950,000) Acquisition of Other Founding Companies................. 3,683,249.0 36,832 (10,940,326) -- (10,903,494) Reclassification of retained earnings in conjunction with the conversion from S Corporation to C Corporation status for tax reporting purposes......... -- -- 3,025,212 (3,025,212) -- Establishment of deferred income tax liabilities in conjunction with the conversion from S Corporation to C Corporation status for tax reporting purposes....... -- -- (1,839,706) -- (1,839,706) Shares issued in conjunction with purchase of Technology Source................................................ 118,763.0 1,188 1,021,658 -- 1,022,846 Net income.............................................. -- -- -- 4,022,796 4,022,796 ------------- -------- ------------ ----------- ------------ BALANCE, December 31, 1996................................ 13,417,012.0 134,170 55,379,391 2,596,518 58,110,079 Shares issued in conjunction with acquisitions (unaudited)........................................... 1,092,622.0 10,926 11,770,495 -- 11,781,421 Net Income (Unaudited).................................. -- -- -- 5,583,193 5,583,193 ------------- -------- ------------ ----------- ------------ BALANCE, June 30, 1997 (Unaudited)........................ 14,509,634.0 $145,096 $ 67,149,886 $ 8,179,711 $ 75,474,693 ============= ======== ============ =========== ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-13 64 STAFFMARK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED FISCAL YEARS JUNE 30, ---------------------------------------- -------------------------- 1994 1995 1996 1996 1997 ---------- ------------ ------------ ----------- ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................... $1,176,781 $ 1,586,538 $ 4,022,796 $ 633,954 $ 5,583,193 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................. 255,895 590,066 1,373,954 565,974 1,749,616 Provision for bad debts........................ 24,058 169,879 206,123 57,932 148,528 Net (gain) loss on sale of property and equipment.................................... (5,066) 4,095 (24,985) -- -- Change in operating accounts, net of effects of acquisitions: Accounts receivable.......................... (963,971) (334,940) (1,547,830) (1,246,671) (8,610,894) Prepaid expenses and other................... (49,960) (44,025) (207,421) (209,763) (49,613) Other assets................................. (16,152) (6,101) (421,792) (2,095) 657,973 Accounts payable and other accrued liabilities................................ 88,096 58,395 (439,051) (249,152) (1,285,294) Outstanding checks........................... 66,468 (508,117) (305,921) 115,345 (176,156) Payroll and related liabilities.............. 241,001 (270,377) (2,228,932) 250,733 5,243,007 Reserve for workers' compensation claims..... 76,391 359,810 94,496 (26,404) 1,066,629 Income taxes payable/receivable.............. -- -- 1,340,056 -- (1,906,114) Deferred income taxes........................ -- -- -- -- (2,278,141) ---------- ------------ ------------ ----------- ------------ Net cash provided by operating activities............................. 893,541 1,605,223 1,861,493 (110,147) 142,734 ---------- ------------ ------------ ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Founding Companies, net of cash acquired..................................... -- -- (14,989,436) -- -- Purchases of businesses, net of cash acquired..................................... -- (11,500,000) (12,322,832) (3,000,000) (50,930,702) Capital expenditures........................... (253,373) (414,569) (664,996) (234,143) (1,923,674) Acquisition of training licenses and rights.... -- (65,262) -- -- -- Receipts on notes receivable................... 110,000 -- -- -- -- Advances of notes receivable................... (220,445) (40,000) -- -- -- Proceeds from sale of property and equipment... 19,067 16,652 -- -- -- ---------- ------------ ------------ ----------- ------------ Net cash used in investing activities.... (344,751) (12,003,179) (27,977,264) (3,234,143) (52,854,376) ---------- ------------ ------------ ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock, net of offering costs........................................ -- -- 66,581,484 -- -- Proceeds from borrowings....................... 1,584,500 13,366,512 5,875,106 4,736,794 43,430,000 Payments on debt and borrowings................ (1,920,296) (1,919,865) (32,015,298) (860,204) (1,935,244) Distributions to stockholders.................. (176,271) (623,484) (1,015,092) (17,000) -- Contribution from stockholder.................. -- 57,636 -- -- -- Proceeds from exercise of stock options........ -- -- 160,000 -- -- Deferred financing costs....................... -- (271,750) (398,708) (56,250) -- Other, net..................................... -- -- 465,542 -- -- ---------- ------------ ------------ ----------- ------------ Net cash (used in) provided by financing activities............................. (512,067) 10,609,049 39,653,034 3,803,340 41,494,756 ---------- ------------ ------------ ----------- ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS........ 36,723 211,093 13,537,263 459,050 (11,216,886) CASH AND CASH EQUIVALENTS, beginning of period... 71,343 108,066 319,159 319,159 13,856,422 ---------- ------------ ------------ ----------- ------------ CASH AND CASH EQUIVALENTS, end of period......... $ 108,066 $ 319,159 $ 13,856,422 $ 778,209 $ 2,639,536 ========== ============ ============ =========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid.................................. $ 107,222 $ 427,456 $ 1,629,958 $ 1,042,906 $ 326,243 ========== ============ ============ =========== ============ Income taxes paid.............................. $ -- $ -- $ 344,000 $ -- $ 4,533,450 ========== ============ ============ =========== ============ Non-cash transactions: Notes payable issued to purchase businesses................................. $ -- $ 3,100,000 $ -- $ -- $ -- ========== ============ ============ =========== ============ Distribution of notes receivable to stockholders............................... $ -- $ 345,107 $ -- $ -- $ -- ========== ============ ============ =========== ============ Distribution of property to stockholders..... $ -- $ -- $ 73,700 $ -- $ -- ========== ============ ============ =========== ============ Issuance of Common Stock in conjunction with acquisitions............................... $ -- $ -- $ 320,000 $ 320,000 $ 11,781,421 ========== ============ ============ =========== ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements F-14 65 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: In March 1996, StaffMark, Inc. (the "Company" or "StaffMark") was founded to create a national company to provide temporary staffing services. Effective October 2, 1996, the Company acquired six local and regional temporary staffing companies (the "Founding Companies") and completed an initial public offering of its common stock (the "Offering"). Based on the provisions of the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 97, Brewer Personnel Services, Inc. ("Brewer") was designated as the acquirer, for financial reporting purposes, of The Prostaff Companies, The Maxwell Companies, Human Resources, Inc. , First Choice Staffing, Inc. and The Blethen Group (collectively referred to as the "Other Founding Companies"). As Brewer was designated as the acquirer for financial reporting purposes, the accompanying financial statements reflect the results of its operations for the years ended January 1, 1995 and December 31, 1995. The results of operations for 1996 represent a combination of Brewer's results for the nine months ended September 30, 1996 and the Company's consolidated results of operations for the three months ended December 31, 1996. Based on the applicable provisions of SAB No. 97, the acquisition of assets and assumption of liabilities of the Other Founding Companies are reflected at their historical cost. All significant intercompany transactions have been eliminated in the accompanying consolidated financial statements. References to "the Company" relate to Brewer for the periods prior to the acquisitions discussed above and relate to StaffMark, Inc. and its consolidated subsidiaries subsequent to that date. As of June 30, 1997, StaffMark operated offices in 19 states located throughout the United States and provides temporary staffing in the commercial, professional/information technology and specialty medical staffing service lines. StaffMark extends trade credit to customers representing a variety of industries. There are no individual customers that account for more than 10% of service revenues of StaffMark in any of the periods presented. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Fiscal Periods -- Prior to the Offering, the fiscal years of Brewer ended on the Sunday closest to December 31. The fiscal years 1994 and 1995 each included 52 weeks. Upon completion of the Offering, StaffMark established a calendar year reporting period. The unaudited interim periods for the six month periods ended June 30, 1996 and 1997 included in the accompanying financial statements each included 26 weeks. Classification of Prior Year Balances -- Certain reclassifications have been made to prior year balances in order to conform with the current year presentation. Unaudited Interim Financial Statements -- The accompanying unaudited interim financial statements as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 and related disclosures have not been audited by independent public 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, 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. F-15 66 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in preparing the accompanying consolidated 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 these financial statements. Cash and Cash Equivalents -- For statement of cash flow purposes, StaffMark considers cash on deposit with financial institutions and all highly liquid investments with original maturities of three months or less to be cash equivalents. 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: Furniture, fixtures and equipment........................... 5-7 years Computer equipment and software............................. 3-5 years Leasehold improvements...................................... 3-15 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 related cost and accumulated depreciation or amortization are removed from the balance sheet and any resultant gain or loss is recorded. Intangible Assets -- Intangible assets primarily consist of goodwill, which is amortized using the straight-line method over 30 years. Deferred financing costs are amortized over the life of the respective debt obligation using a method which approximates the interest method. Intangibles associated with non-compete agreements are amortized using the straight-line method over the life of the respective agreements. Income Taxes -- Prior to the acquisition of the Other Founding Companies, Brewer was an S Corporation for income tax reporting purposes. Accordingly, no provision for federal or state income taxes related to the income for those periods is reflected in the accompanying consolidated financial statements as such taxes are liabilities of the individual stockholders. The S Corporation status of Brewer terminated upon the effective date of the acquisition of the Other Founding Companies. Subsequent to the acquisition of the Other Founding Companies, income taxes have been provided based upon the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires recognition of deferred income taxes using the liability method. Deferred income taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes. Deferred income taxes are recognized for the tax consequences of such temporary differences by applying enacted statutory tax rates to differences between the financial reporting and the tax bases of existing assets and liabilities. Revenue Recognition -- Service revenues are recognized as income at the time staffing services are provided. F-16 67 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Workers' Compensation -- StaffMark 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. StaffMark has engaged the services of a third party actuary to assist with the development of these cost estimates. Fair Value of Financial Instruments -- StaffMark's financial instruments include cash and cash equivalents and its debt obligations. Management believes that these financial instruments bear interest at rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, that the carrying values for these instruments are reasonable estimates of fair value. Accounting for Stock Options -- During 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which encourages all companies to recognize compensation expense based on the fair value, at grant date, of instruments issued pursuant to stock-based compensation plans. SFAS No. 123 requires the fair value of the instruments granted, which is measured pursuant to the provisions of the statement, to be recognized as compensation expense over the vesting period of the instrument. However, the statement also allows companies to continue to measure compensation costs for these instruments using the method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Companies electing to account for stock-based compensation plans pursuant to the provisions of APB 25 must make pro forma disclosures of net income as if the fair value method defined in SFAS No. 123 had been applied. StaffMark has elected to account for stock options under the provisions of APB 25 and has included the disclosures required by SFAS No. 123 in Note 11. Impairment of Long-Lived Assets -- StaffMark regularly evaluates whether events and circumstances have occurred which may indicate that the carrying amount of intangible or other long-lived assets warrant revision or may not be recoverable. When factors indicate that an asset or assets should be evaluated for possible impairment, an evaluation would be performed pursuant to the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is required. As of December 31, 1995 and 1996, management considered StaffMark's intangible and other long-lived assets to be fully recoverable. 3. BUSINESS COMBINATIONS: Brewer Acquisitions -- On July 10, 1995, Brewer acquired the stock of E.P. Enterprises Corporation, d/b/a Caldwell Services, Inc. ("Caldwell"). Caldwell is engaged in providing temporary personnel services through five staffing offices located in Georgia. The acquisition has been accounted for as a purchase, and the results of operations of Caldwell have been included in the accompanying consolidated 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 F-17 68 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) acquisition date, with the remaining acquisition costs of approximately $15.3 million being recorded as goodwill. On February 2, 1996, Brewer acquired the stock of On Call Employment Services, Inc. ("On Call"). On Call is engaged in providing temporary personnel services through four staffing offices in Colorado. The acquisition has been accounted for as a purchase, and the results of operations of On Call have been included in the accompanying consolidated 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 non-compete agreement, 10 shares of Brewer's common stock valued at approximately $320,000 and the assumption of liabilities totaling approximately $480,000. The assets acquired have been recorded at historical, depreciated cost, which approximated fair value as of the acquisition date, with the remaining acquisition costs of approximately $3.1 million being recorded as goodwill. Acquisition of the Other Founding Companies -- Simultaneously with the closing of the Offering, StaffMark acquired by merger all of the issued and outstanding stock of the Founding Companies. The aggregate consideration paid in conjunction with the mergers with the Other Founding Companies consisted of approximately $13.0 million in cash and 3,683,249 shares of common stock. The consideration paid in conjunction with the merger with Brewer consisted of approximately $2.9 million in cash and 1,935,000 shares of common stock. Based upon the applicable provisions of SAB No. 97, these acquisitions have been accounted for as combinations at historical cost. Accordingly, the consideration paid to the Founding Companies as reflected in the accompanying consolidated financial statements represents the carryover basis in the net assets of the Founding Companies, reduced by the cash consideration paid. StaffMark Acquisitions -- Between the date of the Offering and December 31, 1996, StaffMark completed three acquisitions accounted for as purchases. The aggregate consideration paid for The Technology Source, L.L.C. ("Technology"), Chandler Enterprises, Inc. d/b/a Advantage Staffing ("Advantage") and Tom Bain Personnel, Inc. ("Tom Bain") included $9.6 million in cash and 118,763 shares of StaffMark's common stock. The operating results of these companies have been included since the effective date of their acquisitions. The costs of these acquisitions have been allocated on the basis of estimated fair market value of the assets acquired. The tangible assets acquired have been recorded at historical, depreciated cost, which approximated fair value as of the acquisition date, with the remaining acquisition costs being recorded as goodwill. The operating results of Technology, Advantage and Tom Bain prior to their acquisitions are not material to StaffMark's 1996 consolidated statements of income and, accordingly, have not been reflected in the pro forma results shown below. Pro Forma Operating Results -- The unaudited consolidated results of operations on a pro forma basis as though the Other Founding Companies, Caldwell and On Call had been acquired as of the beginning of 1995 are shown below. Note that the pro forma information presented below does not reflect income tax expense as if the Company had been a C Corporation for income tax reporting purposes for the entire periods presented or the reductions in salaries of certain owners of the Founding Companies which have been agreed to in conjunction with the acquisitions F-18 69 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) discussed in Note 1. See the accompanying consolidated statements of income and Note 15 for a presentation of 1996 pro forma information which reflects these adjustments:
FISCAL YEARS ---------------------------- 1995 1996 ------------ ------------ Revenues................................................ $171,463,305 $200,020,807 ============ ============ Net income.............................................. $ 3,742,274 $ 8,020,520 ============ ============
4. ACCOUNTS RECEIVABLE: Included in accounts receivable in the accompanying consolidated balance sheets are unbilled amounts of approximately $541,906 and $1,195,370 at December 31, 1995 and 1996, respectively. StaffMark maintains allowances for potential losses which management believes are adequate to absorb losses to be incurred in realizing the amounts recorded in the accompanying consolidated financial statements. The following are the changes in the allowance for doubtful accounts:
FISCAL YEARS ----------------------------- 1994 1995 1996 ------- -------- -------- Balance at beginning of year............................ $10,250 $ 34,308 $214,187 Increases relating to acquisitions...................... -- 10,000 252,216 Provision for bad debts................................. 24,058 169,879 206,123 Charge offs, net of recoveries.......................... -- -- 231,129 ------- -------- -------- Balance at end of year.................................. $34,308 $214,187 $441,397 ======= ======== ========
5. INTANGIBLE ASSETS: Intangible assets consisted of the following:
DECEMBER 31, ------------------------- 1995 1996 ----------- ----------- Goodwill................................................... $15,356,334 $30,506,256 Deferred financing costs................................... 271,750 342,457 Non-compete agreements..................................... 299,010 889,647 Other...................................................... 140,262 160,262 ----------- ----------- 16,067,356 31,898,622 Less accumulated amortization.............................. 511,897 1,386,051 ----------- ----------- $15,555,459 $30,512,571 =========== ===========
Amortization expense related to intangible assets for the years ended December 31, 1995 and 1996, totaled approximately $391,207 and $879,288, respectively. F-19 70 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. PROPERTY AND EQUIPMENT: Components of property and equipment are as follows:
DECEMBER 31, ----------------------- 1995 1996 ---------- ---------- Furniture, fixtures and equipment........................... $ 553,328 $2,923,451 Computer equipment and software............................. 749,750 4,033,251 Leasehold improvements...................................... 31,483 501,525 ---------- ---------- 1,334,561 7,458,227 Less accumulated depreciation and amortization.............. 537,631 3,454,589 ---------- ---------- $ 796,930 $4,003,638 ========== ==========
Depreciation and amortization expense related to property and equipment for the years ended December 31, 1995 and 1996, totaled approximately $198,859 and $494,666, respectively. 7. DEBT: Proceeds from the Offering were used to repay all debt obligations of StaffMark, Brewer and the Other Founding Companies. As of December 31, 1996 StaffMark had established a $50 million credit facility (the "Credit Facility") with Mercantile Bank of St. Louis, National Association ("Mercantile") to be used for working capital and other general corporate purposes, including future acquisitions. The Credit Facility included a $20 million revolving line of credit and a $30 million acquisition facility. The Credit Facility matures on October 4, 2001 and interest on any borrowings will be computed at StaffMark's option at either LIBOR or the bank's prime rate and incrementally adjusted based on StaffMark's operating leverage ratios. Through March 31, 1997, StaffMark was obligated to pay a commitment fee equal to 0.25% per annum multiplied by the total amount of the Credit Facility. Subsequent to March 31, 1997, the quarterly commitment fee is determined by multiplying the average daily unused portion of the total Credit Facility by a percentage which varies from 0.25% to 0.375% based on the Company's operating leverage ratios. The Credit Facility is secured by all assets of StaffMark and a pledge of 100% of the stock of all the subsidiaries. No funds had been borrowed on the Credit Facility as of December 31, 1996. As of December 31, 1995, debt consisted of the following: Term loan note with Boatmen's. Interest payable monthly at a variable rate which averaged 9.56% during the year ended December 31, 1995. Principal was due in quarterly installments beginning October 1, 1995 through maturity on June 30, 2001. Note was secured by the assets and common stock of Brewer and partially guaranteed by certain stockholders of Brewer. .................................. $12,750,000 Note payable to the previous owner of Caldwell, interest at 8.00%, payable quarterly. Principal was to be paid in equal annual installments beginning June 30, 1998 through June 30, 2001 or in full upon a change in control of Brewer. Note was secured by a lien on the assets of Brewer and guaranteed by certain stockholders of Brewer. ........ 3,100,000 Other....................................................... 445,386 ----------- 16,295,386 Less short-term borrowings, including current maturities.... 1,191,555 ----------- $15,103,831 ===========
F-20 71 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. INCOME TAXES: The income tax provision (benefit) for the year ended December 31, 1996 consisted of the following: Current: Federal................................................... $2,022,827 State..................................................... 392,376 ---------- 2,415,203 ---------- Deferred: Federal................................................... (532,521) State..................................................... (108,849) ---------- (641,370) ---------- $1,773,833 ==========
The components of deferred income tax assets and liabilities as of December 31, 1996 were as follows: Deferred income tax assets: Workers' compensation reserves............................ $ 797,321 Non-compete and deferred compensation agreements.......... 156,912 Other expense accruals.................................... 424,292 ---------- Total deferred income tax assets.................. 1,378,525 Deferred income tax liabilities: Change in income tax accounting method from cash to accrual basis in conjunction with termination of S Corporation status..................................... 1,884,118 Depreciation and amortization............................. 280,609 Other..................................................... 297,450 ---------- Total deferred income tax liabilities............. 2,462,177 ---------- $1,083,652 ==========
Components of the net deferred tax liabilities reported in the accompanying consolidated balance sheet were as follows as of December 31, 1996:
CURRENT LONG-TERM ---------- --------- Assets...................................................... $1,221,613 $156,912 Liabilities................................................. 1,884,118 578,059 ---------- -------- $ 662,505 $421,147 ========== ========
A valuation allowance for the deferred tax assets has not been recorded in the accompanying consolidated balance sheet because management believes that all deferred tax assets are more likely than not to be recovered. In assessing the realizability of deferred income tax assets, management has considered scheduled reversals of the deferred income tax liabilities and projected future taxable income. F-21 72 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The differences in income taxes determined by applying the statutory federal tax rate of 34% to income before income taxes and the amounts recorded in the accompanying consolidated statement of income for 1996 result from the following:
AMOUNT RATE ---------- ---- Tax at statutory rate....................................... $1,970,854 34.0% Add (deduct): Effect of S Corporation income............................ (484,934) (8.4) State income taxes, net of federal tax benefit............ 185,542 3.2 Non-deductible amortization............................... 52,204 .9 Other, net................................................ 50,167 .9 ---------- ---- $1,773,833 30.6% ========== ====
9. WORKERS' COMPENSATION: StaffMark is self-insured for certain workers' compensation claims and is regulated by various state-administered workers' compensation insurance commissions. StaffMark has purchased insurance for medical claims which exceed certain thresholds and is required in certain states to maintain letters of credit to cover any potential unpaid claims. At December 31, 1996, these letters of credit totaled $2,300,000. 10. EMPLOYEE BENEFIT PLANS: Certain of the Founding Companies maintain employee benefit plans, some of which allow eligible employees to defer a portion of their income through contributions to the plans. Under provisions of certain of these plans, StaffMark matches a percentage of the employee contributions, up to a maximum as specified in the individual plan, and may contribute additional amounts at the discretion of management. Contributions by StaffMark to the various plans were approximately $23,000 for the year ended December 31, 1996. 11. COMMON STOCK AND STOCK OPTIONS: Common Stock -- In conjunction with the organization and initial capitalization, StaffMark issued 1,000 shares of common stock at a par value of $.01 per share. In June 1996, StaffMark'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 consolidated financial statements. StaffMark issued 5,618,249 shares of common stock to the stockholders of the Founding Companies and issued 6,325,000 shares of common stock to the public in conjunction with the Offering. StaffMark also issued 118,763 shares of common stock in conjunction with business acquisitions. F-22 73 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock Options -- Prior to the Offering, Brewer granted stock options to certain key employees. These options were granted at fair value as determined by management, were exercisable in installments and expired from June 30, 1999 to February 26, 2001. A summary of Brewer's stock option activity is as follows:
WEIGHTED AVERAGE SHARES UNDER PRICE PER OPTION OPTION ------------ --------- 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................................................. (7.5) 21,333 Forfeited................................................. (5.0) 30,000 ---- ------- Outstanding prior to conversion to StaffMark options........ 1.0 $35,000 ==== =======
In June 1996, StaffMark's Board of Directors and stockholders approved StaffMark's 1996 Stock Option Plan (the "Plan"). The maximum number of shares of StaffMark's common stock that may be issued under the Plan is approximately 1,600,000. As of December 31, 1996 approximately 740,000 shares have been reserved for future options. Options granted under the Plan generally become 40% vested after two years and then vest 20% in each of the next three years. Under the Plan, the exercise price of the option equals the market value of StaffMark's common stock on the date of the grant, and the maximum term for each option is 10 years. A summary of StaffMark's stock option activity is as follows:
WEIGHTED AVERAGE SHARES UNDER PRICE PER OPTION OPTION ------------ ---------- Outstanding Brewer options prior to conversion to StaffMark options........................................ 1 $35,000.00 Conversion of Brewer options............................. 16,397 2.13 Granted.................................................. 867,928 12.01 Forfeited................................................ (14,550) 12.00 ------- ---------- Outstanding, December 31, 1996............................. 869,776 $ 11.82 ======= ==========
The following is a summary of stock options outstanding as of December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE OPTIONS RANGE OF REMAINING EXERCISE OPTIONS EXERCISE OUTSTANDING EXERCISE PRICES CONTRACTUAL LIFE PER SHARE EXERCISABLE PER SHARE - ----------- --------------- ---------------- ---------- ----------- --------- 16,398 $2.13 1.17 years $ 2.13 -- $ -- 853,378 $11.38 -- 12.75 4.37 years 12.01 35,000 12.00 ------- ---------- ------ ------ ------ 869,776 4.31 years $11.82 35,000 $12.00 ======= ========== ====== ====== ======
F-23 74 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As discussed in Note 2, StaffMark has elected to account for its stock options under the provisions of APB 25. Accordingly, no compensation expense has been recognized in the accompanying consolidated statements of income. However, pursuant to the requirements of SFAS No. 123, the following disclosures are presented to reflect StaffMark's pro forma net income for the years ended December 31, 1995 and 1996, as if the fair value method of accounting prescribed by SFAS No. 123 had been used. In preparing the pro forma disclosures, StaffMark determined the value of all options granted from January 1, 1995 through the Offering date using the minimum value method, as discussed in SFAS No. 123. For stock options granted from the Offering date to December 31, 1996, the fair value was estimated on the grant date using the Black-Scholes option-pricing model. These fair value calculations were based on the following assumptions:
FISCAL YEARS ---------------------- 1995 1996 --------- --------- Weighted average risk-free interest rate.................... 6.5% 6.3% Dividend yield.............................................. 0% 0% Weighted average expected life.............................. 2.5 years 4.6 years Expected volatility......................................... 0% 65%
Using these assumptions, the fair value of the stock options granted during the years ended December 31, 1995 and 1996 was approximately $36,000 and $5,958,000, respectively. The weighted average fair value of options granted during 1995 and 1996 was $4,800 and $7.04, respectively. Had compensation expense been determined consistent with SFAS No. 123, utilizing the assumptions above and the straight-line amortization method over the vesting period, net income would have been reduced to the following pro forma amounts:
FISCAL YEARS ------------------------ 1995 1996 ---------- ---------- Net income, as reported..................................... $1,586,538 $4,022,796 ========== ========== Pro forma net income........................................ $1,578,367 $3,711,738 ========== ==========
12. RELATED PARTY TRANSACTIONS: Concurrent with the acquisition, StaffMark entered into agreements with certain officers of the company to lease certain parcels of land and buildings used in the operations of StaffMark for negotiated amounts and terms. Rent expense related to these facilities totaled approximately $60,000 and $304,000 for the years ended December 31, 1995 and 1996, respectively. Annual future minimum payments required under these leases are included in the table in Note 14 and are summarized as follows:
YEARS ENDING DECEMBER 31, ------------ 1997........................................................ $ 548,416 1998........................................................ 535,143 1999........................................................ 407,921 2000........................................................ 351,167 2001........................................................ 345,951 ---------- $2,188,598 ==========
Included in Accounts Payable and Other Accrued Liabilities is an unsecured demand note payable to an employee in the amount of $61,436 which bears interest at 8%. In December 1995, a note receivable from Brewer Investments, a partnership owned by certain stockholders, in the amount of $345,107 was distributed to the individual stockholders of Brewer. F-24 75 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES: StaffMark is subject to certain claims and lawsuits arising in the normal course of business, primarily relating to workers' compensation and other employee related matters. StaffMark maintains various insurance coverages in order to minimize the financial risk associated with certain of these claims. StaffMark has provided for certain of these actions in the accompanying consolidated financial statements and, in the opinion of management, any uninsured losses resulting from the ultimate resolution of these matters will not be material to StaffMark's financial position or results of operations. StaffMark 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 covenants against competition with StaffMark, which extends for a period of time after termination. These agreements generally continue until terminated by the employee or StaffMark. 14. NONCANCELABLE OPERATING LEASES: StaffMark leases office space under noncancelable operating leases. As discussed in Note 12, certain of these facilities are leased from related parties. 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 ENDED DECEMBER 31, ------------ 1997........................................................ $1,819,176 1998........................................................ 1,601,881 1999........................................................ 1,312,904 2000........................................................ 887,981 2001........................................................ 615,658 ---------- $6,237,600 ==========
Rent expense, including amounts paid to related parties, was $275,460 and $951,369 for the years ended December 31, 1995 and 1996, respectively. F-25 76 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION (UNAUDITED): The supplemental pro forma information included in the accompanying consolidated statements of income reflects: (i) the acquisition of the Other Founding Companies at historical cost in accordance with the applicable provisions of SAB No. 97; (ii) the effects of the acquisition of On Call; (iii) the estimated impact of recognizing income tax expense as if StaffMark, the Founding Companies and On Call had been C Corporations for tax reporting purposes during the entire year ended December 31, 1996; and (iv) the adjustment to compensation expense to reflect the reductions in salaries to certain owners of the Founding Companies which were agreed to in conjunction with the acquisitions discussed in Note 1. Following is a reconciliation of the reported net income to the pro forma net income shown in the accompanying consolidated statement of income:
YEAR ENDED DECEMBER 31, 1996 ------------ Net income, as reported..................................... $ 4,022,796 Pro forma adjustments: Inclusion of the operating results of the Other Founding Companies and On Call as if these acquisitions were effected as of January 1, 1996......................... 3,995,095 Reductions in salaries to certain owners of the Founding Companies.............................................. 581,332 Recognition of income tax expense as if StaffMark, the Founding Companies and On Call had been C Corporations during the entire year ended December 31, 1996......... (2,231,223) ----------- Pro forma net income, as reported........................... $ 6,368,000 ===========
The computation of pro forma earnings per share for the year ended December 31, 1996, is based on the pro forma shares outstanding for the period prior to the Offering of approximately 8.3 million and the actual weighted average shares outstanding for the period from the Offering through December 31, 1996, of approximately 13.2 million. 16. EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED): Business Combinations -- Subsequent to year-end the Company consummated the following significant business combinations:
CONSIDERATION PAID DATE OF APPROXIMATE ----------------------- METHOD OF NAME OF COMPANY ACQUISITION 1996 REVENUES CASH SHARES ACCOUNTING --------------- ----------- ------------- ------------- ------- ---------- (IN MILLIONS) (IN MILLIONS) Flexible Personnel Group of Companies........................ March 1997 $49.3 $ 7.5 183,823 Purchase Global Dynamics, Inc............... April 1997 17.2 14.0 690,855 Purchase Lindenberg & Associates, Inc....... April 1997 18.0 15.3 -- Purchase
In addition to the three acquisitions listed above the Company also acquired nine other businesses which were not individually material to the Company's financial statements. Eight of these acquisitions were purchase business combinations which represented aggregate 1996 unaudited revenues of approximately $57 million. The aggregate purchase prices for these eight companies included approximately $23.6 million in cash and 340,623 shares of the Company's common stock. The Company also completed a pooling-of-interest business combination with a company which generated 1996 unaudited revenues of approximately $9.7 million. The Company issued 286,162 shares of common stock in conjunction with this merger. F-26 77 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In addition to the purchase prices disclosed above, certain of these acquisition agreements include provisions for the payment of additional consideration which is contingent upon the achievement of certain performance measures of the businesses acquired, typically during the twelve months immediately following the respective acquisitions. For certain of the acquisitions discussed above the contingent consideration could be significant relative to the consideration paid; however, the amounts are not currently determinable. The obligations for this contingent consideration, which will be payable in a combination of cash and common stock, will be recorded in the Company's financial statements when they become fixed and determinable. Credit Facility -- Subsequent to year-end the Company negotiated an increase in the Credit Facility from $50 million to $100 million, which includes a $30 million revolving line of credit and a $70 million acquisition facility. As of June 30, 1997 the Company had borrowed approximately $42.6 million under the acquisition facility which was used to fund the cash consideration related to several of the acquisitions discussed above. As of June 30, 1997 net borrowings under the revolving line of credit totaled $800,000 which was used for general corporate purposes. Employee Stock Purchase Plan -- In May 1997 the Company's shareholders approved an employee stock purchase plan (the "Plan") which grants employees the right to purchase common shares of the Company's stock at a price equal to the lower of 85% of the market value on the date of purchase or the beginning of the calendar quarter of the purchase. Purchases under the Plan are limited to 10% of the respective employees' compensation and will not have an impact on the Company's reported net income. Registration of Securities -- On July 30, 1997 the Company filed a registration statement with the Securities and Exchange Commission in connection with a public offering of 3.5 million shares of its common stock. Of the shares to be offered, 285,000 shares are to be offered on behalf of certain selling shareholders. The Company will not receive any of the proceeds from the sale of shares by the selling shareholders. F-27 78 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Prostaff Companies: We have audited the accompanying combined balance sheets of the companies identified in Note 1 to the financial statements ("The Prostaff Companies"), as of December 31, 1994 and 1995 and the nine months ended September 29, 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 nine months ended September 29, 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 nine months ended September 29, 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 nine months ended September 29, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Little Rock, Arkansas, October 22, 1996. F-28 79 THE PROSTAFF COMPANIES COMBINED BALANCE SHEETS ASSETS
DECEMBER 31, ----------------------- SEPTEMBER 29, 1994 1995 1996 ---------- ---------- ------------- CURRENT ASSETS: Cash and cash equivalents............................... $ 228,372 $ 188,145 $ 69,587 Certificates of deposit................................. 152,028 155,154 -- Accounts receivable, net of allowance for doubtful accounts of $10,000, $48,500 and $45,096, respectively......................................... 2,634,108 3,020,622 3,952,688 Deferred tax asset...................................... 154,601 -- -- Prepaid expenses and other.............................. 86,337 135,673 120,604 ---------- ---------- ---------- Total current assets............................ 3,255,446 3,499,594 4,142,879 PROPERTY AND EQUIPMENT, net............................... 640,552 756,983 735,737 OTHER ASSETS: Cash surrender value of officer's life insurance........ 34,670 41,280 -- Advance to StaffMark, Inc............................... -- -- 40,703 Other................................................... 3,675..... 4,730 7,440 ---------- ---------- ---------- Total other assets.............................. 38,345 46,010 48,143 ---------- ---------- ---------- $3,934,343 $4,302,587 $4,926,759 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit.......................................... $ 417,000 $ 20,000 $1,554,005 Current maturities of long-term debt.................... 61,742.... 64,872 67,598 Note payable to stockholder............................. -- 30,000 30,000 Accounts payable and accrued liabilities................ 83,413 117,339 84,911 Outstanding checks...................................... 109,084 -- 71,212 Payroll and related liabilities......................... 703,263 1,129,777 1,116,619 Reserve for workers' compensation claims................ 439,444 635,290 671,640 Income taxes payable.................................... 54,883 -- -- ---------- ---------- ---------- Total current liabilities....................... 1,868,829 1,997,278 3,595,985 LONG-TERM DEBT, less current maturities................... 170,064 111,459 65,874 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 September 29, 1996, shares issued and outstanding of 55,000 in 1994, 55,100 in 1995 and at September 29, 1996................................................. 11,000 11,100 11,100 Retained earnings....................................... 1,826,565 2,182,750 1,253,800 ---------- ---------- ---------- Total stockholders' equity...................... 1,837,565 2,193,850 1,264,900 ---------- ---------- ---------- $3,934,343 $4,302,587 $4,926,759 ========== ========== ==========
The accompanying notes to combined financial statements are an integral part of these balance sheets. F-29 80 THE PROSTAFF COMPANIES COMBINED STATEMENTS OF INCOME
YEARS ENDED NINE MONTHS ENDED ------------------------------------------ ----------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 29, 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------- ------------- (UNAUDITED) SERVICE REVENUES................ $27,244,744 $30,607,744 $34,330,413 $25,840,311 $29,509,631 COST OF SERVICES................ 22,858,206 25,455,432 28,234,379 21,339,195 24,034,483 ----------- ----------- ----------- ----------- ----------- Gross profit.................. 4,386,538 5,152,312 6,096,034 4,501,116 5,475,148 OPERATING EXPENSES: Selling, general and administrative............. 3,640,825 4,184,021 5,338,844 3,796,754 4,043,409 Depreciation and amortization............... 114,796 174,998 220,433 160,700 186,171 ----------- ----------- ----------- ----------- ----------- Operating income........... 630,917 793,293 536,757 543,662 1,245,568 OTHER INCOME (EXPENSE): Interest expense.............. (87,181) (28,689) (20,393) (16,088) (49,443) Interest income and other..... 60,745 10,987 26,537 20,949 28,515 ----------- ----------- ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES.................. 604,481 775,591 542,901 548,523 1,224,640 PROVISION FOR INCOME TAXES...... 205,742 253,847 96,716 96,716 -- ----------- ----------- ----------- ----------- ----------- Net income............ $ 398,739 $ 521,744 $ 446,185 $ 451,807 $ 1,224,640 =========== =========== =========== =========== =========== PRO FORMA DATA (Unaudited) (Note 11): Historical income before income taxes............... $ 542,901 $ 1,224,640 Less: Pro forma provision for income taxes............... 211,731 477,610 ----------- ----------- PRO FORMA NET INCOME............ $ 331,170 $ 747,030 =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-30 81 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..................................... -- -- 1,224,640 1,224,640 Dividends: Cash........................................ -- -- (2,043,210) (2,043,210) Property.................................... -- -- (110,380) (110,380) ------ ------- ----------- ----------- BALANCE, September 29, 1996...................... 55,100 $11,100 $ 1,253,800 $ 1,264,900 ====== ======= =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-31 82 THE PROSTAFF COMPANIES COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED NINE MONTHS ENDED ------------------------------------------ ----------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 29, 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------- ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.............................. $ 398,739 $ 521,744 $ 446,185 $ 451,807 $ 1,224,640 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 114,796 174,998 220,433 160,700 186,171 Provision for deferred income taxes... (35,138) (20,021) -- 96,716 -- Write-off of net deferred tax assets.............................. -- -- 96,716 -- -- Provision for bad debts............... 27,561 10,000 38,500 20,300 45,659 Loss (gain) on sale of property and equipment........................... -- 20,854 -- -- (14,854) 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) (1,243,341) (977,725) Prepaid expenses and other.......... (38,493) (2,052) (49,336) 18,555 15,069 Other............................... 2,357 (8,979) (7,665) (6,647) (1,405) Accounts payable and accrued liabilities....................... 21,229 (10,535) 33,926 (22,994) (32,428) Outstanding checks.................. -- 109,084 (109,084) (109,084) 71,212 Payroll and related liabilities..... 193,651 5,365 426,514 1,188,217 (13,158) Reserve for workers' compensation claims............................ 148,385 101,480 195,846 144,306 36,350 Income taxes payable................ (15,039) (19,130) (54,883) (54,883) -- --------- --------- --------- ---------- ----------- Net cash provided by operating activities...................... 780,647 739,625 986,139 643,652 539,531 --------- --------- --------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Advance to StaffMark, Inc............... -- -- -- -- (40,703) Acquisition of personnel service business.............................. -- -- (30,000) -- -- Capital expenditures.................... (405,265) (293,936) (328,837) (279,848) (220,476) 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) (279,848) (106,025) --------- --------- --------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments) borrowings under line of credit................................ (125,000) (158,000) (397,000) (369,995) 1,534,005 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) (39,828) (42,859) Proceeds from issuance of common stock................................. -- -- 100 -- -- Dividends............................... (25,625) (44,479) (90,000) -- (2,043,210) --------- --------- --------- ---------- ----------- Net cash used in financing activities (390,388) (260,910) (512,375) (409,823) (552,064) --------- --------- --------- ---------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................. (15,006) 186,179 (40,227) (46,019) (118,558) 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 $ 182,353 $ 69,587 ========= ========= ========= ========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid........................... $ 84,708 $ 30,549 $ 21,006 $ 16,088 $ 49,443 ========= ========= ========= ========== =========== 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-32 83 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 September 29, 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 15% of combined service revenues for 1993, 1994, 1995 and the nine months ended September 29, 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 nine months ended September 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 nine months ended September 29, 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-33 84 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 $838,847 at December 31, 1994, 1995 and September 29, 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. F-34 85 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Upon election of S Corporation status, the Company wrote off net deferred tax assets totaling $96,716 related to years prior to 1995, which is reflected as provision for income taxes in the accompanying combined statements of income. (See Note 11) 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, --------------------- SEPTEMBER 29, 1994 1995 1996 -------- ---------- ------------- Office equipment................................. $311,414 $ 412,661 $ 481,410 Computer equipment............................... 382,903 477,744 523,890 Vehicles......................................... 107,900 136,859 -- Computer software................................ 113,884 165,635 220,046 Leasehold improvements........................... 83,593 136,949 172,464 -------- ---------- ---------- 999,694 1,329,848 1,397,810 Less accumulated depreciation and amortization... 359,142 572,865 662,073 -------- ---------- ---------- $640,552 $ 756,983 $ 735,737 ======== ========== ==========
3. DEBT: Long-term debt consisted of the following:
DECEMBER 31, ------------------- SEPTEMBER 29, 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 $133,472 Less current maturities.............................. 61,742 64,872 67,598 -------- -------- -------- $170,064 $111,459 $ 65,874 ======== ======== ========
Total maturities of long-term debt are as follows:
YEARS ENDING ----------------------------- DECEMBER 31, SEPTEMBER 29, ------------ ------------- 1996....................................................... $ 64,872 $ -- 1997....................................................... 68,531 67,598 1998....................................................... 42,928 65,874 -------- -------- $176,331 $133,472 ======== ========
F-35 86 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Line of credit balances consisted of the following:
DECEMBER 31, ------------------ SEPTEMBER 29, 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 8.5% during the nine months ended September 29, 1996. Due upon demand. Secured by the accounts receivable of Prostaff and guaranteed by stockholders.............. $417,000 $ -- $1,500,000 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 44,000 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 9.67% during the nine months ended September 29, 1996. Secured by accounts receivable of Excel and guaranteed by stockholders........................... -- -- 10,005 -------- ------- ---------- $417,000 $20,000 $1,554,005 ======== ======= ==========
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 nine months ended September 29, 1996 was $246 and $1,850, 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-36 87 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 $401,146 for 1993, 1994, 1995 and the nine months ended September 29, 1996, respectively. Unaudited workers' compensation expense for the nine months ended September 30, 1995 was $567,242. 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-37 88 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) tions made by the Company to the plan for 1995 and the nine months ended September 29, 1996 were $12,448 and $16,547, 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 nine months ended September 29, 1996 was $35,550 and $83,562, 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 not to compete 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 not to compete 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, SEPTEMBER 29, 1995 1996 ------------ ------------- 1996....................................................... $323,397 $ -- 1997....................................................... 264,480 304,634 1998....................................................... 216,665 239,562 1999....................................................... 106,499 156,280 2000....................................................... 63,424 79,677 -------- -------- $974,465 $780,153 ======== ========
Rent expense totaled $147,835, $197,243, $258,992 and $251,165 for fiscal years 1993, 1994, 1995 and the nine months ended September 29, 1996, respectively. Unaudited rent expense for the nine months ended September 30, 1995 was $189,315. The Company leases the office facilities of its headquarters from a limited liability corporation ("LLC") owned by a stockholder of the Company. For the fiscal years 1993, 1994, 1995 and the nine months ended September 29, 1996, rent paid to the LLC totaled $61,100, $73,761, $114,180 and $94,275, respectively. Unaudited rent paid to the LLC was $85,152 for the nine months ended September 30, 1995. F-38 89 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 10. 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. Effective October 2, 1996, StaffMark completed the initial public offering. In conjunction with this merger, certain of the stockholders entered 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. Prior to this merger, the Company declared a dividend of 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 $91,749. In addition, the Company made cash distributions equal to the Company's S Corporation Accumulated Adjustment Account as of the merger date. As of September 29, 1996, the Company had advanced $40,703 to StaffMark to fund organizational and other costs related to the merger and StaffMark's initial public offering. On October 2, 1996, all of the Company's borrowings and debt obligations totaling $1,717,477 were repaid using a portion of the proceeds from the completed initial public offering. 11. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION (UNAUDITED): In conjunction with the merger with StaffMark as discussed in Note 10, the Company changed from an S Corporation to C Corporation for federal and state income tax reporting purposes, which required 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 nine months ended December 31, 1995 and September 29, 1996, respectively. F-39 90 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 September 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 nine months ended September 30, 1996. These financial statements are the responsibility of The Maxwell 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 September 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 nine months ended September 30, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Little Rock, Arkansas, October 22, 1996. F-40 91 THE MAXWELL COMPANIES COMBINED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------------ SEPTEMBER 30, 1994 1995 1996 ---------- ---------- ------------- CURRENT ASSETS: Cash and cash equivalents............................ $ 556,544 $1,041,373 $ 162,562 Restricted cash...................................... 138,453 253,171 50,279 Investments.......................................... 209,505 273,354 -- Accounts receivable, net of allowance for doubtful accounts of $75,711, $63,988 and $122,120, respectively...................................... 2,810,176 2,536,603 2,898,083 Prepaid expenses and other........................... 96,669 24,628 153,609 ---------- ---------- ---------- Total current assets......................... 3,811,347 4,129,129 3,264,533 PROPERTY AND EQUIPMENT, net............................ 480,594 499,792 337,774 INTANGIBLE ASSETS, net................................. -- -- 294,632 ADVANCE TO STAFFMARK, INC. ............................ -- -- 31,250 ---------- ---------- ---------- $4,291,941 $4,628,921 $3,928,189 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable..................................... $ 167,991 $ 169,250 $ 333,471 Payroll and related liabilities...................... 653,772 570,444 851,469 Reserve for workers' compensation claims............. 476,000 1,153,000 912,000 Current maturities of long-term debt................. -- -- 1,821,618 Accrued dividends.................................... 197,500 151,000 -- Other accrued liabilities............................ 20,728 25,462 18,993 ---------- ---------- ---------- Total current liabilities.................... 1,515,991 2,069,156 3,937,551 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 (91,924) ---------- ---------- ---------- Total stockholders' equity................... 2,775,950 2,559,765 (86,924) ---------- ---------- ---------- $4,291,941 $4,628,921 $3,928,189 ========== ========== ==========
The accompanying notes to combined financial statements are an integral part of these balance sheets. F-41 92 THE MAXWELL COMPANIES COMBINED STATEMENTS OF INCOME
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) SERVICE REVENUES.......................... $16,324,216 $21,225,866 $23,092,606 $17,154,803 $20,428,988 COST OF SERVICES.......................... 11,253,565 16,003,387 17,748,020 13,009,183 15,385,451 ----------- ----------- ----------- ----------- ----------- Gross profit............................ 5,070,651 5,222,479 5,344,586 4,145,620 5,043,537 OPERATING EXPENSES: Selling, general and administrative..... 3,582,427 3,820,565 4,296,703 3,233,692 3,815,406 Depreciation and amortization........... 75,368 107,601 136,135 107,187 98,997 ----------- ----------- ----------- ----------- ----------- Operating income..................... 1,412,856 1,294,313 911,748 804,741 1,129,134 OTHER INCOME (EXPENSE): Interest income......................... 14,767 21,645 43,213 35,969 49,493 Interest expense........................ (27,678) (33,849) -- -- (62,540) Other, net.............................. (104,397) (18,836) (35,396) (35,009) 18,616 ----------- ----------- ----------- ----------- ----------- Net income...................... $ 1,295,548 $ 1,263,273 $ 919,565 $ 805,701 $ 1,134,703 =========== =========== =========== =========== =========== PRO FORMA DATA (Unaudited) (Note 15): Historical income before income taxes... $ 919,565 $ 1,134,703 Less: Pro forma provision for income taxes................................ 358,630 442,534 ----------- ----------- PRO FORMA NET INCOME...................... $ 560,935 $ 692,169 =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-42 93 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............................ -- -- -- 1,134,703 1,134,703 Issuance of stock..................... 1,000 1,000 -- -- 1,000 Dividends declared: Cash............................... -- -- -- (3,288,223) (3,288,223) Investments........................ -- -- (43,296) (230,058) (273,354) Property........................... -- -- -- (220,815) (220,815) ----- ------ -------- ----------- ----------- BALANCE, September 30, 1996............. 5,000 $5,000 $ -- $ (91,924) $ (86,924) ===== ====== ======== =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-43 94 THE MAXWELL COMPANIES COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ---------- ----------- ----------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................ $1,295,548 $ 1,263,273 $ 919,565 $ 805,701 $ 1,134,703 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....... 75,368 107,601 136,135 107,187 98,997 Provision for bad debts............. 77,690 100,615 223,216 223,216 50,056 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) (34,096) 202,892 Accounts receivable............... (777,846) (1,073,300) 50,357 (77,936) (411,536) Prepaid expenses and other........ 26,124 (10,457) 72,041 60,524 (128,981) Accounts payable.................. 40,808 (74,812) 1,259 (23,898) 158,478 Payroll and related liabilities... 525,769 33,483 (83,328) 49,385 281,025 Reserve for workers' compensation claims......................... -- 476,000 677,000 520,250 (241,000) Other accrued liabilities......... 64,574 (43,846) 4,734 27,090 (726) ---------- ----------- ----------- ----------- ----------- Net cash provided by operating activities................... 1,364,617 718,558 1,884,115 1,657,423 1,143,908 ---------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Sumner-Ray Technical Resources, Inc...................... -- -- -- -- (168,000) Capital expenditures.................. (155,150) (211,595) (155,333) (150,435) (135,246) Purchases of investments.............. (109,144) (13,750) (116,526) (116,526) -- Sales of investments.................. -- -- 98,119 -- -- Advance to StaffMark, Inc............. -- -- -- -- (31,250) ---------- ----------- ----------- ----------- ----------- Net cash used in investing activities................... (264,294) (225,345) (173,740) (266,961) (334,496) ---------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends........................ (813,409) (666,854) (1,225,546) (1,176,956) (3,439,223) 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) (1,176,956) (1,688,223) ---------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 240,617 (509,942) 484,829 213,506 (878,811) 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 $ 770,050 $ 162,562 ========== =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid......................... $ 27,678 $ 23,950 $ -- $ -- $ 48,085 ========== =========== =========== =========== =========== Non-cash transactions: Notes payable issued in conjunction with the purchase of Sumner-Ray Technical Resources, Inc............ $ -- $ -- $ -- $ -- $ 149,180 ========== =========== =========== =========== =========== Distribution of investments to stockholders........................ $ -- $ -- $ -- $ -- $ 273,354 ========== =========== =========== =========== =========== Distribution of property to stockholders........................ $ -- $ -- $ -- $ -- $ 220,815 ========== =========== =========== =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-44 95 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 and related disclosures for the nine months ended September 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 nine months ended September 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-45 96 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 $166,429 at December 31, 1994, December 31, 1995 and September 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 on the accompanying 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 September 30, 1996, the Company's intangible assets were considered to be fully recoverable. F-46 97 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Workers' Compensation and Health Benefits -- The Company self-insures certain risks related to workers' compensation and employee health benefits claims. The estimated costs of existing and future claims are accrued as incidents occur based upon historical loss development trends and may be subsequently revised based on developments relating to such claims. 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 direct 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, ------------------------ SEPTEMBER 30, 1994 1995 1996 ---------- ---------- ------------- Building and improvements..................... $ 483,136 $ 502,130 $ -- Office equipment.............................. 346,530 386,411 439,829 Computer equipment............................ 204,268 300,265 361,710 Vehicles...................................... 25,105 27,561 27,561 Leasehold improvements........................ -- -- 31,089 Land.......................................... 13,000 13,000 -- ---------- ---------- -------- 1,072,039 1,229,367 860,189 Less accumulated depreciation and amortization................................ 591,445 729,575 522,415 ---------- ---------- -------- $ 480,594 $ 499,792 $337,774 ========== ========== ========
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 nine months ended September 30, 1995 and 1996 totaled $107,187 (unaudited) and $91,449, respectively. F-47 98 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 September 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 $7,548 for the nine months ended September 30, 1996. 6. LONG-TERM DEBT: Long-term debt as of September 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-48 99 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. See Note 15. 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 September 30, 1996, this letter of credit was in the amount of $575,000. Workers' compensation expense totaled $485,151, $918,961 and $1,089,901 for the years ended December 31, 1993, 1994 and 1995, respectively. For the nine months ended September 30, 1995 and 1996, workers' compensation expense was $713,749 (unaudited) and $29,722, respectively. The decrease in workers' compensation expense for the nine months ended September 30, 1996 is 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 nine months ended September 30, 1996 were $30,578. 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 and 1995 and September 30, 1996, respectively. Expenses related to this plan for the years ended December 31, 1993, 1994 and 1995 were $190,537, $184,605 and $188,066, respectively. Expenses related to this plan for the nine months ended September 30, 1995 and 1996 were $191,298 (unaudited) and $180,205, respectively. 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 F-49 100 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1993, 1994 and 1995. Rent expense totaled $12,600 (unaudited) and $13,000 for the nine months ended September 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. Effective May 31, 1996, the Company entered into an agreement with certain stockholders to lease the building in which the Company is headquartered for $100,000 a year. Rent expense totaled $33,332 for the nine months ended September 30, 1996. 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 September 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. See Note 15. 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, SEPTEMBER 30, ------------ ------------- 1996....................................................... $224,093 $181,766 1997....................................................... 67,545 154,257 1998....................................................... 52,132 110,311 1999....................................................... 43,643 43,643 2000....................................................... 43,643 18,971 -------- -------- $431,056 $508,948 ======== ========
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 nine months ended September 30, 1995 and 1996 was $69,303 (unaudited) and $111,847, respectively. F-50 101 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 NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, -------------------- ------------------- 1993 1994 1995 1995 1996 ---- ---- ---- ----------- ---- (UNAUDITED) Customer 1.................................. 21% 14% 10% -- -- Customer 2.................................. -- 14% 12% 13% 11%
14. 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. Effective October 2, 1996, StaffMark completed the initial public offering. In conjunction with the 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 $100,000 per year by assuming the lease agreement discussed in Note 10. In addition, the Company made 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 $3.3 million, which represented the Company's estimated S Corporation Accumulated Adjustment Account at September 30, 1996. In conjunction with this merger, the owners entered 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. As of September 30, 1996, the Company had advanced $31,250 to StaffMark to fund organizational and other costs related to the merger and StaffMark's initial public offering. On October 2, 1996, all of the Company's borrowings and debt obligations totaling $1,899,180 were repaid using a portion of the proceeds from the completed 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 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 nine months ended December 31, 1995 and September 30, 1996, respectively. F-51 102 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, 1995 and 1996, and the related statements of income (loss), stockholders' equity and cash flows for each of the three years ended September 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, 1995 and 1996, and the results of its operations and its cash flows for each of the three years ended September 30, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Memphis, Tennessee, October 22, 1996. F-52 103 HRA, INC. BALANCE SHEETS ASSETS
SEPTEMBER 30, ----------------------- 1995 1996 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents................................. $ 367,978 $ 354,417 Restricted cash........................................... 50,251 -- Accounts receivable, net of allowance for doubtful accounts of $26,000 and $40,000.................................... 1,998,724 2,944,791 Advances to StaffMark, Inc................................ -- 31,250 Prepaid expenses and other................................ 467,002 756,836 Income taxes receivable................................... 25,125 -- Deferred income taxes..................................... 160,000 281,300 ---------- ---------- Total current assets.............................. 3,069,080 4,368,594 PROPERTY AND EQUIPMENT, net................................. 144,179 258,087 INTANGIBLE ASSETS, net...................................... 37,156 1,001,308 OTHER ASSETS: Deferred income taxes..................................... 65,000 55,300 Other..................................................... 21,071 1,423 ---------- ---------- Total other assets................................ 86,071 56,723 ---------- ---------- $3,336,486 $5,684,712 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Borrowings under accounts receivable financing agreement.............................................. $ 502,512 $ -- Line of credit............................................ -- 1,340,000 Current portion of note payable to Liberty Mutual......... -- 255,238 Current portion of deferred compensation arrangements..... 43,699 108,939 Outstanding checks........................................ 166,761 184,558 Accounts payable.......................................... 193,096 164,199 Payroll and related liabilities........................... 621,317 766,417 Reserve for workers' compensation claims.................. 1,390,351 1,224,378 Income taxes payable...................................... -- 443,896 Accrued expenses.......................................... 138,416 169,594 ---------- ---------- Total current liabilities......................... 3,056,152 4,657,219 DEFERRED COMPENSATION ARRANGEMENTS, less current portion.... 127,332 247,383 NOTE PAYABLE TO A STOCKHOLDER............................... 122,000 116,000 NOTE PAYABLE TO LIBERTY MUTUAL, less current portion........ -- 386,156 COMMITMENTS AND CONTINGENCIES (Notes 11, 12 and 15) STOCKHOLDERS' EQUITY: Common stock, no par value, 1,000 shares authorized, 790 shares issued and outstanding.......................... 12,600 12,600 Retained earnings......................................... 18,402 265,354 ---------- ---------- Total stockholders' equity........................ 31,002 277,954 ---------- ---------- $3,336,486 $5,684,712 ========== ==========
The accompanying notes are an integral part of these balance sheets. F-53 104 HRA, INC. STATEMENTS OF INCOME (LOSS)
FISCAL YEARS ----------------------------------------- 1994 1995 1996 ----------- ----------- ----------- SERVICE REVENUES.................................... $16,453,375 $18,306,542 $24,629,470 COST OF SERVICES.................................... 13,367,561 14,939,279 19,525,952 ----------- ----------- ----------- Gross profit...................................... 3,085,814 3,367,263 5,103,518 OPERATING EXPENSES: Selling, general and administrative............... 2,381,168 3,438,436 4,224,370 Depreciation and amortization..................... 45,783 65,691 107,697 ----------- ----------- ----------- Operating income (loss)........................... 658,863 (136,864) 771,451 OTHER INCOME (EXPENSE): Interest expense.................................. (100,828) (107,364) (120,126) Interest and other, net........................... 16,466 13,443 245,922 ----------- ----------- ----------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES............................................. 574,501 (230,785) 897,247 PROVISION (BENEFIT) FOR INCOME TAXES................ 221,100 (84,160) 353,006 ----------- ----------- ----------- Net income (loss)......................... $ 353,401 $ (146,625) $ 544,241 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-54 105 HRA, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK RETAINED ----------------- EARNINGS SHARES AMOUNT (DEFICIT) TOTAL ------ ------- --------- --------- 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 Dividends........................................ -- -- (297,289) (297,289) Net income....................................... -- -- 544,241 544,241 --- ------- --------- --------- BALANCE, September 30, 1996........................ 790 $12,600 $ 265,354 $ 277,954 === ======= ========= =========
The accompanying notes are an integral part of these financial statements. F-55 106 HRA, INC. STATEMENTS OF CASH FLOWS
FISCAL YEARS ------------------------------------- 1994 1995 1996 --------- --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 353,401 $(146,625) $ 544,241 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 45,783 65,691 107,697 Provision (recovery) for bad debts, net................. 4,498 2,041 (5,578) Change in deferred income taxes......................... (10,200) (112,200) (111,600) Change in operating assets and liabilities: Accounts receivable..................................... (421,143) (316,713) (940,489) Prepaid expenses and other.............................. 2,531 (454,386) (289,834) Income taxes receivable................................. -- (25,125) 25,125 Other assets............................................ 17 (20,671) 19,648 Outstanding checks...................................... -- 166,761 17,797 Accounts payable........................................ 51,940 49,190 (34,153) Payroll and related liabilities......................... (30,697) 128,284 145,100 Reserve for workers' compensation claims................ (68,655) 914,639 500,421 Income taxes payable.................................... 192,487 (228,217) 443,896 Accrued expenses........................................ (21,755) 66,332 6,178 --------- --------- ----------- Net cash provided by operating activities........... 98,207 89,001 428,449 --------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (40,096) (135,765) (177,713) Advances to StaffMark, Inc................................ -- -- (31,250) Other..................................................... -- (16,000) -- Payment for purchase acquisition.......................... -- -- (863,151) --------- --------- ----------- Net cash used in investing activities............... (40,096) (151,765) (1,072,114) --------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (increase) decrease in restricted cash................ (60,083) 9,832 50,251 Increase in deferred compensation arrangements............ 21,559 -- 135,596 Payments on deferred compensation arrangements............ -- (24,691) (89,942) Net borrowings (payments) under an accounts receivable financing agreement..................................... 100,830 (98,318) (502,512) Net borrowings under a revolving line of credit........... -- -- 1,340,000 Principal payments on note payable to a stockholder....... -- (33,295) (6,000) Dividends................................................. -- -- (297,289) Proceeds from issuance of common stock.................... 11,600 -- -- Other..................................................... (5,749) -- -- --------- --------- ----------- Net cash provided by (used in) financing activities........................................ 68,157 (146,472) 630,104 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 126,268 (209,236) (13,561) CASH AND CASH EQUIVALENTS, beginning of period.............. 450,946 577,214 367,978 --------- --------- ----------- CASH AND CASH EQUIVALENTS, end of period.................... $ 577,214 $ 367,978 $ 354,417 ========= ========= =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid............................................. $ 77,737 $ 106,467 $ 116,161 ========= ========= =========== Taxes paid................................................ $ 41,813 $ 267,622 $ 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 fiscal year 1996, the Company recorded a deferred compensation arrangement liability for the purchase of a noncompete agreement with a former stockholder totaling $139,637. During fiscal year 1996, the Company settled a dispute with its former workers' compensation insurance carrier for $641,394. The anticipated settlement amount had been recorded in previous periods in the Reserve for Workers' Compensation and was reclassified in fiscal year 1996 to Note Payable to Liberty Mutual (Note 7). The accompanying notes are an integral part of these financial statements. F-56 107 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 and direct placement services primarily in the Nashville, Tennessee area. 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 presented. Fiscal Periods -- The Company's fiscal year ends on September 30. The fiscal years 1994, 1995 and 1996 each included 52 weeks. 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 5). 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. F-57 108 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 4). The Company regularly evaluates whether events and circumstances have occurred which may indicate the carrying amount of intangible assets may warrant revision or may not be recoverable. When factors indicate that certain intangible assets should be evaluated for possible impairment, the Company uses an estimate of the future undiscounted net cash flows of the related assets over their remaining lives in measuring whether the assets are recoverable. As of September 30, 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, 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. These accruals are based upon historical loss development trends and may be subsequently revised based on developments relating to such claims. The Company engages, from time-to-time, 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 a stockholder and the Company's borrowing arrangements secured by accounts receivable, including the Company's line of credit, approximate fair value based upon management's assessment of interest rates currently available to the Company. F-58 109 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. BUSINESS COMBINATION: On July 11, 1996, the Company completed the purchase of the assets and intellectual property of Dorothy Johnson's Career Consultants, Inc. ("Career Consultants") for a cash payment of $850,000. Career Consultants provides direct placement services on a fee basis to companies primarily in the Nashville, Tennessee area. In addition, the Company entered into 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 6), which was extended in contemplation of this transaction. Since the acquisition of Career Consultants was accounted for as a purchase, the Company recorded Career Consultant's assets and liabilities at their estimated fair market values at the date of the acquisition. Results of operations of Career Consultants are included in the accompanying financial statements subsequent to July 11, 1996. Of the total consideration paid for Career Consultants, $70,000 was associated with a non-compete agreement with the remaining purchase price in excess of the estimated fair market value of the net assets acquired of approximately $769,000 being recorded as goodwill. In connection with the purchase of Career Consultants, the Company incurred certain legal and other costs of approximately $13,000. The following unaudited pro forma combined results for fiscal years 1995 and 1996 give effect to the acquisition of Career Consultants as if it had occurred at the beginning of those periods. This pro forma information does not necessarily represent what the results would have been had the acquisition actually occurred at the beginning of each period presented.
1995 1996 ----------- ----------- Revenue................................................... $19,243,686 $25,906,321 Income (loss) before taxes................................ (249,334) 894,097 Net income (loss)......................................... (158,410) 542,876
3. PROPERTY AND EQUIPMENT: Components of property and equipment are as follows:
1995 1996 -------- -------- Office equipment............................................ $ 65,237 $134,387 Computer equipment.......................................... 141,200 173,192 Computer software........................................... 76,715 139,179 Leasehold improvements...................................... 17,569 42,474 -------- -------- 300,721 489,232 Less accumulated depreciation and amortization.............. 156,542 231,145 -------- -------- $144,179 $258,087 ======== ========
Depreciation and amortization expense related to property and equipment totaled $45,783, $61,847 and $74,603 for fiscal years 1994, 1995 and 1996, respectively. F-59 110 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. 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 of up to $67,000, based upon certain performance events. Contingent consideration payments during fiscal years 1995 and 1996 totaled approximately $1,700 and $6,600, respectively. The Company is amortizing this arrangement over the 48 month term of the agreement.
AMORTIZATION METHODS 1995 1996 AND PERIODS ------- ---------- -------------------- Consulting and noncompetition agreements..................... $41,000 $ 111,000 Straight-line over 4 & 5 years Noncompete agreement with a former stockholder (see Note 11)............................ -- 139,637 Straight-line over 10 years Goodwill (Note 2)................ -- 769,202 Straight-line over 30 years Other (Note 2)................... -- 18,407 Straight-line over 5 years ------- ---------- 41,000 1,038,246 Less accumulated amortization.... 3,844 36,938 ------- ---------- $37,156 $1,001,308 ======= ==========
Amortization expense totaled $3,844 and $33,094 in fiscal years 1995 and 1996, respectively. 5. 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 were not collected. Accordingly, this arrangement has been reflected as a financing transaction in the accompanying financial statements. As of September 30, 1995, the receivables financed pursuant to this agreement totaled $502,512. 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 $7,538 for fiscal year 1995 and have been reflected in interest expense in the accompanying statements of income (loss). 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. 6. LINE OF CREDIT: In November 1995, the Company replaced its "Purchase of Accounts" bank agreement (Note 5) with a revolving line of credit with the same bank. Under the revolving line of credit, the Company may borrow an amount equal to 80% of its outstanding Eligible Accounts Receivable, as defined, not to exceed an aggregate borrowing of $1,500,000. Borrowings are collateralized by the Company's accounts receivable and are guaranteed by the Company's stockholders. Interest is payable monthly on outstanding borrowings at the Bank's base rate plus 1.25% (weighted average rate of 8.55% during fiscal year 1996). Under the terms of the line of credit agreement, the Company has certain dividend restrictions and is required, among other things, to maintain F-60 111 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) certain financial ratios. The Company is in compliance with or has received waivers through maturity for all covenants of this line of credit as of September 30, 1996. As of September 30, 1996, the Company had borrowed $1,340,000 under this line of credit and principally used the proceeds to fund the acquisition of Career Consultants (Note 2). As discussed in Note 2, the line of credit was extended on July 11, 1996. The extension agreement 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. 7. NOTE PAYABLE TO LIBERTY MUTUAL: On September 27, 1996, the Company settled a lawsuit with its former workers' compensation insurance carrier, in which the Company had disputed the amount of insurance premiums owed for fiscal years 1993 and 1994 and a portion of fiscal year 1995. The settlement totaled $641,394 and calls for the Company to make an initial payment of $100,000, with the balance due in 36 monthly installments of $16,470, including interest at 6%. The note may be prepaid in whole or in part at any time without penalty. In the event that the Company elects to prepay the note, the Company will be entitled to a 10% discount of the present value of the balance outstanding at prepayment date. The Company had provided for these disputed amounts in the fiscal years in which they arose. Annual maturities pursuant to this note are as follows: 1997........................................................ $255,238 1998........................................................ 179,353 1999........................................................ 190,415 2000........................................................ 16,388 -------- $641,394 ========
8. NOTE PAYABLE TO A STOCKHOLDER: As of September 30, 1995 and 1996, the Company had a note payable to a former stockholder for $122,000 and $116,000, 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, 1994, 1995 and 1996, interest expense on this note totaled $18,636, $12,100 and $11,310, respectively. In connection with the purchase of this stockholder's common stock in the Company by two of the remaining stockholders (Note 11), 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. As of September 30, 1996, the Company owed $116,000 pursuant to this amended note agreement. Annual maturities pursuant to this note are as follows: 1997........................................................ $ -- 1998........................................................ 35,753 1999........................................................ 57,917 2000........................................................ 20,301 Thereafter.................................................. 2,029 -------- $116,000 ========
F-61 112 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES: Components of the provision for income taxes were as follows:
1994 1995 1996 -------- -------- --------- Current: Federal......................................... $194,600 $ 10,180 $ 391,206 State........................................... 36,700 4,100 73,400 Deferred.......................................... (10,200) (98,440) (111,600) -------- -------- --------- $221,100 $(84,160) $ 353,006 ======== ======== =========
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:
1994 1995 1996 -------- -------- -------- Taxes at statutory U.S. income tax rate............ $201,075 $(80,775) $305,064 Increase (decrease) resulting from: Tax penalties...................................... 846 -- -- State income taxes, net of federal benefit......... 23,855 2,666 45,837 Effect of graduated federal income tax rate........ (7,672) (9,933) (5,150) Meals and entertainment and other.................. 2,996 3,882 7,255 -------- -------- -------- $221,100 $(84,160) $353,006 ======== ======== ========
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:
1995 1996 -------- -------- Compensation arrangements................................... $ 65,000 $ 87,800 Vacation and workers' compensation reserves................. 160,000 238,700 Other....................................................... -- 10,100 -------- -------- $225,000 $336,600 ======== ========
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. 10. WORKERS' COMPENSATION: During fiscal year 1995, the Company began self-insuring certain risks related to workers' compensation claims and is regulated by the Workers' Compensation Insurance Commission in the state of Tennessee. The Company has purchased insurance for claims which exceed $250,000 per employee. To satisfy unpaid claims, the Company deposits amounts with a third party administrator. At the Company's option, it may withdraw its deposits upon notification to its third party administrator. Included in prepaids and other in the accompanying balance sheets are deposits to fund workers' compensation claims totaling $451,617 and $722,000 as of September 30, 1995 and 1996, respectively. Workers' compensation expense totaled $664,468 and $1,270,271 and $1,306,212 for fiscal years 1994, 1995 and 1996, respectively. F-62 113 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 11. RELATED PARTY TRANSACTIONS: Stockholder Transaction -- During November 1995, two of the Company's stockholders purchased from another stockholder his entire common stock interest in the Company (approximately 32%). 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 12). Dividend Distributions to Stockholders -- In conjunction with the stockholder transaction described above and other matters, the Company advanced via dividend distributions, $250,000 to two of its stockholders during 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 16. These costs are to be borne by the stockholders of the Company, and have been reflected as dividends to stockholders in the accompanying statement of stockholders' equity as of September 30, 1996. 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 fiscal year 1996. Included in general and administrative expenses are advisor and/or director fees paid or payable to the stockholders of the Company totaling $69,000 and $94,000 for the years ended September 30, 1994 and 1995. No such fees were accruable for the year ended September 30, 1996. 12. 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 arrangement 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 11). 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. F-63 114 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 fiscal year 1996, with a related liability established in the accompanying balance sheets. The discounted value of the noncompete agreement (8.75% discount rate) was recorded as an intangible asset (Note 4) and a related liability was established in the accompanying balance sheets. The following summarizes the Company's obligations under these deferred compensation arrangements:
1995 1996 -------- -------- Consulting arrangement...................................... $171,031 $127,332 Severance agreement with a former stockholder............... -- 87,015 Noncompete agreement with a former stockholder.............. -- 141,975 -------- -------- 171,031 356,322 Less current portion........................................ 43,699 108,939 -------- -------- $127,332 $247,383 ======== ========
Annual maturities pursuant to these deferred compensation arrangements are as follows: 1997........................................................ $111,955 1998........................................................ 61,079 1999........................................................ 35,402 2000........................................................ 5,911 2001........................................................ -- Thereafter.................................................. 141,975 -------- $356,322 ========
13. NONCANCELABLE OPERATING LEASES: The Company leases office locations and certain equipment under noncancelable operating lease agreements expiring at various times through June 30, 1998. Future minimum payments required under operating leases that have an initial or remaining noncancelable lease term in excess of one year at September 30, 1996, are as follows: 1997........................................................ $184,904 1998........................................................ 105,265 1999........................................................ 94,276 2000........................................................ 96,825 2001........................................................ 113,594 -------- $594,864 ========
Rent expense totaled $143,430, $194,096 and $228,686 for fiscal years 1994, 1995 and 1996, respectively. 14. 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 and $7,600 were made during fiscal years 1995 and 1996, respectively. The plan also F-64 115 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 $7,800 for fiscal years 1995 and 1996, respectively. Contributions deposited into the plan are held by an unrelated third party and are registered in the name of the participants. 15. LITIGATION: 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 fiscal year ending September 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. 16. 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. Effective October 2, 1996, StaffMark completed the initial public offering. In conjunction with this merger, 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. Prior to or coincident with this proposed merger, the Company's leased automobiles will be transferred to the respective stockholders. The Company advanced $31,250 to StaffMark as an advance to fund organizational and other costs related to the merger and StaffMark's initial public offering. Subsequent to fiscal year 1996, using a portion of the proceeds from the completed initial public offering described above, the Company repaid $1,340,000 borrowed under its line of credit (Note 6) and retired certain other obligations outstanding to a former stockholder of approximately $489,000 (Notes 8, 11 and 12). 17. SUBSEQUENT EVENT: In November 1996, two of the principal stockholders of the Company remitted $109,000 to the Company representing dividends previously distributed as described in Note 11. F-65 116 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 September 29, 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 nine-month period ended September 29, 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 September 29, 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 nine-month period ended September 29, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Raleigh, North Carolina, October 22, 1996. F-66 117 FIRST CHOICE STAFFING, INC. BALANCE SHEETS ASSETS
FISCAL YEARS ----------------------- SEPTEMBER 29, 1994 1995 1996 ---------- ---------- ------------- CURRENT ASSETS: Cash and cash equivalents................................ $ 194,111 $ 268,440 $ 174,946 Accounts receivable, net................................. 1,078,340 1,145,532 1,835,493 Prepaid expenses and other............................... 71,100 72,171 31,467 ---------- ---------- ---------- Total current assets............................. 1,343,551 1,486,143 2,041,906 PROPERTY AND EQUIPMENT, net................................ 196,110 327,240 348,628 OTHER ASSETS: Investment in captive insurance pool..................... 36,000 36,000 36,000 Advance to StaffMark, Inc................................ -- -- 31,801 Other.................................................... -- -- 727,194 ---------- ---------- ---------- Total other assets............................... 36,000 36,000 794,995 ---------- ---------- ---------- $1,575,661 $1,849,383 $3,185,529 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit........................................... $ -- $ 200,000 $ 225,000 Accounts payable......................................... 21,326 65,608 99,853 Accrued workers' compensation............................ 92,347 46,359 27,083 Payroll and related benefits............................. 630,555 534,047 510,688 Other accrued expenses................................... 7,000 5,735 -- Current maturities of long-term debt..................... -- -- 1,488,754 Note payable to stockholder.............................. 250,000 180,000 -- ---------- ---------- ---------- Total current liabilities........................ 1,001,228 1,031,749 2,351,378 LONG-TERM DEBT, less current maturities.................... -- -- 500,000 COMMITMENTS AND CONTINGENCIES (Notes 5, 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 Retained earnings........................................ 564,433 807,634 324,151 ---------- ---------- ---------- Total stockholders' equity....................... 574,433 817,634 334,151 ---------- ---------- ---------- $1,575,661 $1,849,383 $3,185,529 ========== ========== ==========
The accompanying notes to financial statements are an integral part of these balance sheets. F-67 118 FIRST CHOICE STAFFING, INC. STATEMENTS OF INCOME
NINE MONTHS ENDED FISCAL YEARS ----------------------------- --------------------------------------- SEPTEMBER 24, SEPTEMBER 29, 1993 1994 1995 1995 1996 ----------- ----------- ----------- ------------- ------------- (UNAUDITED) SERVICE REVENUES................ $10,807,801 $13,007,484 $13,703,404 $9,956,709 $12,695,551 COST OF SERVICES................ 8,825,086 10,573,111 11,149,085 8,105,090 10,186,083 ----------- ----------- ----------- ---------- ----------- Gross profit.................. 1,982,715 2,434,373 2,554,319 1,851,619 2,509,468 OPERATING EXPENSES: Selling, general and administrative............. 1,361,834 2,485,029 2,258,780 1,605,478 1,780,660 Depreciation and amortization............... 34,570 34,357 32,923 24,693 79,068 ----------- ----------- ----------- ---------- ----------- Operating income (loss).... 586,311 (85,013) 262,616 221,448 649,740 OTHER INCOME (EXPENSE): Interest expense.............. (71) (26,109) (19,415) (15,717) (33,416) Other, net.................... (2,427) 2,256 -- -- (1,053) ----------- ----------- ----------- ---------- ----------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES.... 583,813 (108,866) 243,201 205,731 615,271 PROVISION (BENEFIT) FOR INCOME TAXES......................... 232,787 (168,251) -- -- -- ----------- ----------- ----------- ---------- ----------- NET INCOME...................... $ 351,026 $ 59,385 $ 243,201 $ 205,731 $ 615,271 =========== =========== =========== ========== =========== PRO FORMA DATA (Unaudited) (Note 10): Historical Income before income taxes............... $ 243,201 $ 615,271 Less pro forma provision for income taxes............... 94,848 239,956 ----------- ----------- PRO FORMA NET INCOME............ $ 148,353 $ 375,315 =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-68 119 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..................................... -- -- 615,271 615,271 Distributions.................................. -- -- (1,098,754) (1,098,754) ------ ------- ----------- ----------- BALANCE, September 29, 1996...................... 10,000 $10,000 $ 324,151 $ 334,151 ====== ======= =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-69 120 FIRST CHOICE STAFFING, INC. STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED FISCAL YEARS ----------------------------- --------------------------------- SEPTEMBER 24, SEPTEMBER 24, 1993 1994 1995 1995 1996 --------- --------- --------- ------------- ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................... $ 351,026 $ 59,385 $ 243,201 $ 205,731 $ 615,271 Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation and amortization.................. 34,570 34,357 32,923 24,693 79,068 Loss on sale of equipment...................... -- -- -- -- 1,053 Deferred income taxes.......................... (3,908) 11,256 -- -- -- Change in operating assets and liabilities: Accounts receivable, net..................... (311,121) (149,482) (67,192) (67,512) (689,961) Prepaid expenses and other................... (32,022) (15,485) (1,071) 42,486 40,704 Other assets................................. (158,104) -- -- -- (735,406) Accounts payable............................. 12,587 (2,923) 44,282 46,555 34,245 Accrued workers' compensation................ 68,247 10,867 (45,988) (132,269) (19,276) Payroll and related liabilities.............. 189,670 259,929 (96,508) (3,820) (23,359) 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 45,576 108,382 108,864 (703,396) --------- --------- --------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................. (53,582) (120,441) (164,053) (150,833) (93,297) Advance to StaffMark, Inc. ...................... -- -- -- -- (31,801) --------- --------- --------- --------- ----------- Net cash used in investing activities...... (53,582) (120,441) (164,053) (150,833) (125,098) --------- --------- --------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions.................................... -- -- -- -- (1,098,754) Proceeds from (payments on) line of credit....... (191,038) -- 200,000 -- 25,000 Proceeds from issuance of long-term debt......... -- -- -- -- 1,988,754 Proceeds from note payable to stockholder........ 9,349 250,000 -- -- -- Payments on note payable to stockholder.......... -- (9,349) (70,000) (70,000) (180,000) --------- --------- --------- --------- ----------- Net cash provided by (used in) financing activities............................... (181,689) 240,651 130,000 (70,000) 735,000 --------- --------- --------- --------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (26,893) 165,786 74,329 (111,969) (93,494) 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 $ 82,142 $ 174,946 ========= ========= ========= ========= =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid.................................... $ 71 $ 26,109 $ 19,415 $ 6,285 $ 19,502 ========= ========= ========= ========= =========== Taxes paid (refunded)............................ $ 189,769 $ (26,393) $ -- $ -- $ -- ========= ========= ========= ========= ===========
The accompanying notes to financial statements are an integral part of these statements. F-70 121 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 September 29, 1996, and for the nine-month periods ended September 24, 1995 (unaudited), and September 29, 1996, correspond to the Company's fiscal quarters which ended on the last Sunday in September. Interim Financial Statements -- The accompanying interim financial statements and related disclosures for the nine-month period ended September 24, 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 include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of operations and cash flows for 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. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, F-71 122 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) revenues and expenses and disclosures of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements. Cash and Cash Equivalents -- For statement of cash flow purposes, the Company considers cash on deposit with financial institutions and all highly liquid investments with original maturities of three months or less to be cash equivalents. Accounts Receivable -- The Company maintains allowances for potential losses which management believes are adequate to absorb losses to be incurred in realizing the amounts recorded in the accompanying financial statements. The Company has recorded an allowance for doubtful accounts of $25,000 at December 31, 1994, December 31, 1995 and September 29, 1996. Included in accounts receivable in the accompanying balance sheets are unbilled amounts of $188,778, $172,834 and $380,414 at December 31, 1994, December 31, 1995 and September 29, 1996, respectively. Property and Equipment -- Property and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets which are as follows: Office equipment............................................ 7 years Computer equipment.......................................... 5 years Vehicles.................................................... 5 years Computer software........................................... 3 years Leasehold improvements...................................... 7 years
Additions that extend the lives of the assets are capitalized while repairs and maintenance costs are expensed as incurred. When property and equipment are retired, the cost of the property and equipment and the related accumulated depreciation are removed from the balance sheet and any resultant gain or loss is recorded. Other Assets -- Other assets 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 goodwill and a noncompete agreement, recorded in conjunction with the acquisition of Strategic Sourcing, Inc. ("SSI") (see Note 9). The goodwill is amortized using the straight-line method over its estimated economic life of 30 years. The investment in the insurance pool 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-72 123 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 subchapter 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 a subchapter 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 -------------------- SEPTEMBER 29, 1994 1995 1996 -------- -------- ------------- Office equipment................................. $117,938 $171,842 $200,981 Computer equipment............................... 123,966 153,405 199,337 Vehicles......................................... 16,301 26,501 26,501 Computer software................................ 33,531 45,775 55,805 Leasehold improvements........................... 56,009 83,248 88,103 -------- -------- -------- 347,745 480,771 570,727 Less accumulated depreciation.................... 151,635 153,531 222,099 -------- -------- -------- $196,110 $327,240 $348,628 ======== ======== ========
3. DEBT: 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 September 29, 1996), with principal due June 17, 1997. The weighted average interest rate was approximately 8.25% for the nine months ended September 29, 1996. Amounts outstanding under the line were $0, $200,000 and $225,000 as of December 31, 1994, December 31, 1995 and September 29, 1996, respectively. The line of credit is secured by a personal guaranty of the majority stockholder. The Company had approximately $275,000 available under its line of credit at September 29, 1996. F-73 124 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) During July 1996, the Company entered into a $375,000 note payable to the seller of SSI (see Note 9). This note is payable in three equal installments of $125,000 beginning on July 1, 1997, and bears interest at an annual rate of 7%. This note is secured by the personal guaranty of the Company's majority stockholder. During July 1996, the Company entered into a $375,000 note payable to a bank. This note is payable beginning October 5, 1996, in 36 monthly installments of $10,417 plus interest at prime. Proceeds from this note were used for the acquisition of SSI (see Note 9). This note is secured by the personal guaranty of the Company's majority stockholder. During September 1996, the Company entered into a $1,238,754 note payable to a bank. This note is payable in full on November 25, 1996, and bears interest at prime less 0.50%. Proceeds from this note were used to repay the note payable to stockholder (see Note 4) and to fund the cash distribution of the Company's estimated September 29, 1996 S Corporation Accumulated Adjustment Account balance (see Note 8). This note is secured by the personal guaranty of the Company's majority stockholder. Certain of the debt instruments described above are subject to covenants requiring that the Company achieve certain financial ratios and restrictions on incurring additional debt. The Company was in compliance with or had obtained waivers for these covenants as of September 29, 1996. 4. NOTE PAYABLE TO STOCKHOLDER: The Company had an unsecured note payable to the majority stockholder with interest payable semiannually in June and December at 8% and principal due on demand. This note was repaid during September 1996. 5. INCOME TAXES: Components of the tax provision (benefit) for the periods prior to the subchapter 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) ======== =========
F-74 125 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The income tax provision (benefit) for the periods prior to the subchapter 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 subchapter S Corporation election.................................... -- 3,827 Taxable income earned after subchapter S Corporation election, not subject to taxation......................... -- (137,854) Other....................................................... (1,108) -- -------- --------- Provision (benefit) for income taxes........................ $232,787 $(168,251) ======== =========
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 September 29, 1996, are as follows:
YEARS ENDING ----------------------------- DECEMBER 31, SEPTEMBER 29, 1995 1996 ------------ ------------- 1996....................................................... $111,000 $ 32,000 1997....................................................... 101,000 114,000 1998....................................................... 86,000 91,000 1999....................................................... 68,000 68,000 2000....................................................... 43,000 43,000 Thereafter................................................. 78,000 78,000 -------- -------- $487,000 $426,000 ======== ========
Rental expense totaled $61,000, $82,000 and $103,000 for fiscal years 1993, 1994 and 1995, respectively, and $56,279 (unaudited) and $84,886 for the nine-month periods ended September 24, 1995 and September 29, 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 $11,086 (unaudited) and $15,844 for the nine-month periods ended September 24, 1995 and September 29, 1996, respectively. 7. SIGNIFICANT CUSTOMERS: The Company had one customer which represented 12%, 13%, 12%, 13% and 11% of service revenues for the years ended December 31, 1993, 1994 and 1995, and the nine-month periods ended September 24, 1995 (unaudited) and September 29, 1996, respectively. Another customer represented 11% of service revenues for F-75 126 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) the year ended December 31, 1993. No other customer accounted for more than 10% of service revenues for those periods. 8. SUBSEQUENT CLOSING OF 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. Effective October 2, 1996, StaffMark completed the initial public offering. In conjunction with the merger, the majority stockholder entered 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 following termination of such person's employment. During September 1996, in anticipation of the completion of this merger, the Company made cash distributions of $1,098,754 which equal the Company's estimated S Corporation Accumulated Adjustment Account as of September 29, 1996. In April 1996, the Company advanced $31,250 to StaffMark to fund offering costs related to StaffMark's initial public offering. On October 2, 1996, using a portion of the proceeds from the completed initial public offering, StaffMark repaid all of the Company's borrowings, debt and interest obligations. 9. SIGNIFICANT 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 has been accounted for using the purchase method of accounting. Fixed assets acquired were recorded at historical, depreciated cost, which approximated fair value as of the acquisition date, and the remaining purchase price of approximately $685,000 has been recorded as goodwill and will be amortized on a straight-line basis over its estimated economic life of 30 years. The $50,000 noncompete agreement with the seller will be amortized on a straight-line basis over its five year term. 10. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION (UNAUDITED): In conjunction with the merger with StaffMark as discussed in Note 8, the Company changed from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which required 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 nine months ended December 31, 1995 and September 29, 1996, respectively. F-76 127 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 September 29, 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 nine months ended September 29, 1996. These financial statements are the responsibility of The Blethen Group'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 September 29, 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 nine months ended September 29, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Raleigh, North Carolina, October 22, 1996. F-77 128 THE BLETHEN GROUP COMBINED BALANCE SHEETS ASSETS
JANUARY 1, DECEMBER 31, SEPTEMBER 29, 1995 1995 1996 ---------- ------------ ------------- CURRENT ASSETS: Cash and cash equivalents........................... $ 31,921 $ 44,644 $ 115,773 Accounts receivable................................. 1,136,081 1,377,799 1,782,289 Deferred tax asset.................................. 5,500 11,000 16,000 Prepaid expenses and other.......................... 16,809 14,510 2,776 ---------- ---------- ---------- Total current assets........................ 1,190,311 1,447,953 1,916,838 PROPERTY AND EQUIPMENT, net........................... 393,330 307,286 255,298 OTHER ASSETS: Due from stockholders............................... 185,236 194,163 2,998 Deferred tax asset.................................. 24,100 20,760 -- Advances to StaffMark, Inc.......................... -- -- 31,250 Other............................................... 11,750 12,232 14,492 ---------- ---------- ---------- Total other assets.......................... 221,086 227,155 48,740 ---------- ---------- ---------- $1,804,727 $1,982,394 $2,220,876 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Lines of credit..................................... $ 764,645 $ 971,436 $1,175,203 Accounts payable.................................... 220,801 105,648 62,446 Outstanding checks.................................. -- 25,329 -- Payroll and related liabilities..................... 295,472 301,258 511,412 Current maturities of long-term debt................ 25,341 10,151 10,678 Current maturities of capital lease obligations..... 82,708 47,148 -- Current maturities of notes payable to related parties.......................................... 83,308 62,813 105,582 Income taxes payable................................ 15,783 82,583 49,638 Accrued interest and other.......................... 16,001 55,043 25,967 ---------- ---------- ---------- Total current liabilities................... 1,504,059 1,661,409 1,940,926 LONG-TERM DEBT, less current maturities............... 35,604 24,922 17,057 CAPITAL LEASE OBLIGATIONS, less current maturities.......................................... 67,452 22,475 -- NOTES PAYABLE TO RELATED PARTIES, less current maturities.......................................... 49,037 45,271 -- DEFERRED TAX LIABILITY................................ -- -- 26,300 COMMITMENTS AND CONTINGENCIES (Notes 5, 6, 7 and 8) STOCKHOLDERS' EQUITY: Common stock........................................ 8,399 8,399 8,399 Additional paid-in capital.......................... 8,940 8,940 8,940 Retained earnings................................... 131,236 210,978 219,254 ---------- ---------- ---------- Total stockholders' equity.................. 148,575 228,317 236,593 ---------- ---------- ---------- $1,804,727 $1,982,394 $2,220,876 ========== ========== ==========
The accompanying notes to combined financial statements are an integral part of these balance sheets. F-78 129 THE BLETHEN GROUP COMBINED STATEMENTS OF INCOME (LOSS)
NINE MONTHS ENDED FISCAL YEARS --------------------------- --------------------------------------- OCTOBER 1, SEPTEMBER 29, 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ------------- (UNAUDITED) SERVICE REVENUES................. $11,197,726 $11,966,633 $13,380,157 $9,743,890 $12,047,667 COST OF SERVICES................. 8,131,773 8,729,634 9,743,747 7,211,548 9,084,803 ----------- ----------- ----------- ---------- ----------- Gross profit................... 3,065,953 3,236,999 3,636,410 2,532,342 2,962,864 OPERATING EXPENSES: Selling, general and administrative.............. 3,042,816 2,789,866 3,105,682 2,115,861 2,274,816 Depreciation and amortization................ 134,968 122,963 111,437 83,578 83,475 ----------- ----------- ----------- ---------- ----------- Operating income (loss)..... (111,831) 324,170 419,291 332,903 604,573 OTHER INCOME (EXPENSE): Interest expense............... (134,815) (137,448) (140,800) (100,702) (112,958) Other, net..................... 19,467 2,917 10,884 4,760 (8,392) ----------- ----------- ----------- ---------- ----------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES..... (227,179) 189,639 289,375 236,961 483,223 PROVISION (BENEFIT) FOR INCOME TAXES.......................... (136,263) 49,000 81,000 71,000 76,755 ----------- ----------- ----------- ---------- ----------- Net income (loss)...... $ (90,916) $ 140,639 $ 208,375 $ 165,961 $ 406,468 =========== =========== =========== ========== =========== PRO FORMA DATA (Unaudited) (Note 9): Historical income before income taxes....................... $ 289,375 $ 483,223 Less pro forma provision for income taxes................ 112,856 188,457 ----------- ----------- PRO FORMA NET INCOME............. $ 176,519 $ 294,766 =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-79 130 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...................................... -- -- 406,468 406,468 Dividends....................................... -- -- (398,192) (398,192) ------ -------- --------- --------- BALANCE, September 29, 1996....................... $8,399 $ 8,940 $ 219,254 $ 236,593 ====== ======== ========= =========
The accompanying notes to combined financial statements are an integral part of these statements. F-80 131 THE BLETHEN GROUP COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED FISCAL YEARS --------------------------- --------------------------------- OCTOBER 1, SEPTEMBER 29, 1993 1994 1995 1995 1996 --------- --------- --------- ----------- ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................. $ (90,916) $ 140,639 $ 208,375 $165,961 $ 406,468 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................... 134,968 122,963 111,437 83,578 83,475 Provision for (benefit from) deferred income taxes......................................... (136,263) 29,898 (2,160) (1,400) 42,060 Change in operating assets and liabilities: Accounts receivable............................. (17,767) (54,870) (241,718) (211,584) (404,490) Prepaid expenses and other...................... (14,096) 30,971 2,299 (26,299) 11,734 Other assets.................................... 21,491 5,769 (482) 11,750 (2,260) Accounts payable................................ 180,570 (97,532) (115,153) 10,471 (43,202) Outstanding checks.............................. -- -- 25,329 -- (25,329) Payroll and related liabilities................. (75,190) 65,663 5,786 1,099 210,154 Income taxes payable (receivable)............... (13,711) 29,494 66,800 56,040 (32,945) Accrued interest and other...................... 77,477 (55,306) 39,042 98,575 (29,076) --------- --------- --------- -------- --------- Net cash provided by operating activities... 66,563 217,689 99,555 188,191 216,589 --------- --------- --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.............................. (130,178) (72,119) (25,393) (6,396) (31,487) Advances to StaffMark............................. -- -- -- -- (31,250) --------- --------- --------- -------- --------- Net cash used in investing activities............. (130,178) (72,119) (25,393) (6,396) (62,737) --------- --------- --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from line of credit.................. 53,773 10,681 206,791 48,151 203,767 Proceeds from issuance of long-term debt.......... 12,851 54,172 -- -- -- Payments on long-term debt........................ (28,243) (10,282) (25,872) (5,170) (7,338) Payments on capital lease obligations............. (16,213) (113,042) (80,537) (61,240) (69,623) Change in notes payable to related parties........ 34,314 73,031 (24,261) (8,049) (2,502) Cash distributions to stockholders................ (57,343) (99,474) (128,633) (94,181) (398,192) Change in due from stockholders................... 837 (44,099) (8,927) (40,126) 191,165 --------- --------- --------- -------- --------- Net cash used in financing activities....... (24) (129,013) (61,439) (160,615) (82,723) --------- --------- --------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... (63,639) 16,557 12,723 21,180 71,129 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 $ 53,101 $ 115,773 ========= ========= ========= ======== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid..................................... $ 97,062 $ 169,227 $ 141,324 $122,591 $ 131,963 ========= ========= ========= ======== ========= Taxes paid........................................ $ -- $ 66 $ 41,476 $ 41,476 $ 66,939 ========= ========= ========= ======== ========= Noncash transactions: Repurchase of common stock through issuance of 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-81 132 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 September 29, 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 Company:
FORM OF DATE OF CORPORATION INCORPORATION FOR INCOME ENTITY IN NORTH CAROLINA TAX PURPOSES SERVICE TYPE ------ ----------------- ------------ ------------ Blethen Temporaries, Inc.................... October 6, 1981 S Corporation Clerical and light industrial Dixon Enterprises of Burlington, Inc........ February 7, 1992 C Corporation Clerical and light industrial DP Pros of Burlington, Inc.................... June 6, 1985 C Corporation Information technology and clinical Personnel Placement, Inc.................... October 6, 1981 C Corporation Direct placement TRASEC Corp.............. February 7, 1992 C Corporation Clerical and light industrial Jaeger Personnel Services, Ltd.......... December 20, 1985 S Corporation Clerical and light industrial
Basis of Presentation -- The accompanying financial statements are presented on a combined basis as the entities comprising the Company are under common ownership and/or common management. Furthermore, Blethen Temporaries, Inc. has an option to purchase all outstanding shares of common stock of Dixon Enterprises of Burlington, Inc. and TRASEC Corp. for an amount not to exceed $5,000. 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 included 39 weeks. Interim Financial Statements -- The accompanying interim combined financial statements and related disclosures for the nine months ended October 1, 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 include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the financial position of the Company and the combined results of operations and 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-82 133 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition -- Service revenues and direct placement fee revenues are recognized as income at the time staffing services are provided or the permanent employee is placed with the customer. In addition to the services described above, the Company, through a Licensing Agreement (see Note 6), employs and pays individuals to perform services for the licensees' customers, invoices customers, maintains professional liability insurance and supports the training, office administration, systems and marketing needs of the licensee. All revenues generated by the licensee, therefore, belong to the Company and are included in the Company's revenues and expenses. The Company is primarily liable for operating expenses. Use of Estimates -- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying combined financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the combined financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying combined financial statements. Cash and Cash Equivalents -- For statement of cash flow purposes, the Company considers cash on deposit with financial institutions and all highly liquid investments with original maturities of three months or less to be cash equivalents. Accounts Receivable -- The Company provides, if necessary, allowances for potential losses which management believes are adequate to absorb losses to be incurred in realizing the amounts recorded in the accompanying combined financial statements. Management believes all accounts are collectible and accordingly, has not recorded an allowance as of January 1, 1995, December 31, 1995, and September 29, 1996. Included in accounts receivable in the accompanying combined balance sheets are unbilled amounts of $143,515, $149,665 and $449,040 at January 1, 1995, December 31, 1995, and September 29, 1996, respectively. All unbilled amounts are normally billable in the following month. Credit risk with respect to accounts receivable is dispersed due to the nature of the business, the large number of customers and the diversity of industries serviced. Property and Equipment -- Property and equipment are recorded at cost and are depreciated or amortized on a straight-line basis over the estimated useful lives of the assets which are as follows: Office equipment............................................ 5 to 7 years Computer equipment and software............................. 5 years Vehicles.................................................... 5 years Leasehold improvements...................................... 5 to 15 years
Additions that extend the lives of the assets are capitalized while repairs and maintenance costs are expensed as incurred. When property and equipment are retired, the cost of the property and equipment and the related accumulated depreciation or amortization are removed from the balance sheet and any resultant gain or loss is recorded. F-83 134 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Fair Value of Financial Instruments -- The Company's financial instruments include cash, related party notes payable, due from stockholders and their debt obligations. Management believes that these instruments bear interest at rates which approximate prevailing market rates for instruments with similar characteristics, and accordingly, that the carrying values for these instruments are reasonable estimates of fair value. Income Taxes -- Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under this new statement, deferred income taxes are provided based on the estimated future tax effects of differences between the financial statement carrying amounts and the tax 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. Reclassifications -- Certain amounts in the 1994 and 1995 financial statements have been reclassified to conform with 1996 presentations. 2. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
JANUARY 1, DECEMBER 31, SEPTEMBER 29, 1995 1995 1996 ---------- ------------ ------------- Office equipment............................... $421,890 $428,610 $444,556 Computer equipment and software................ 336,166 352,528 368,069 Vehicles....................................... 65,118 65,118 65,118 Leasehold improvements......................... 109,926 109,926 109,926 -------- -------- -------- 933,100 956,182 987,669 Less accumulated depreciation and amortization................................. 539,770 648,896 732,371 -------- -------- -------- $393,330 $307,286 $255,298 ======== ======== ========
F-84 135 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. DEBT: Long-term debt consisted of the following:
JANUARY 1, DECEMBER 31, SEPTEMBER 29, 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 $24,291 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 nine months of 1996. .................. 9,873 6,559 3,444 ------- ------- ------- 60,945 35,073 27,735 Less current maturities........................ 25,341 10,151 10,678 ------- ------- ------- $35,604 $24,922 $17,057 ======= ======= =======
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 10.78% during the nine months ended September 29, 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 September 29, 1996, approximately $9,800 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 September 29, 1996, the Company did not comply with certain of these ratios, as well as certain other negative covenants. However, Lighthouse Financial Corp. has waived all events of noncompliance and default through June 30, 1997. Balances outstanding under these lines were $764,645, $971,436 and $1,175,203 as of January 1, 1995, December 31, 1995, and September 29, 1996, respectively. F-85 136 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Annual maturities of debt were as follows:
YEAR ENDING ---------------------------- DECEMBER 31, SEPTEMBER 29, ------------ ------------- 1996........................................................ $ 981,587 $ -- 1997........................................................ 10,262 1,185,881 1998........................................................ 7,773 7,963 1999........................................................ 6,887 8,027 2000........................................................ -- 1,067 ---------- ---------- $1,006,509 $1,202,938 ========== ==========
4. INCOME TAXES: Provision (benefit) for income taxes consisted of the following components:
NINE MONTHS ENDED FISCAL YEARS --------------------------- ----------------------------- OCTOBER 1, SEPTEMBER 29, 1993 1994 1995 1995 1996 --------- ------- ------- ----------- ------------- (UNAUDITED) Current -- Federal......................... $ -- $19,102 $69,160 $58,500 $27,695 State........................... -- -- 14,000 14,000 7,000 --------- ------- ------- ------- ------- -- 19,102 83,160 72,500 34,695 --------- ------- ------- ------- ------- Deferred -- Federal......................... (109,263) 23,898 (1,660) (1,200) 34,060 State........................... (27,000) 6,000 (500) (300) 8,000 --------- ------- ------- ------- ------- (136,263) 29,898 (2,160) (1,500) 42,060 --------- ------- ------- ------- ------- Total............................. $(136,263) $49,000 $81,000 $71,000 $76,755 ========= ======= ======= ======= =======
Provision (benefit) for income taxes differs from the amount computed by applying the federal statutory tax rate to pretax income due to the following:
NINE MONTHS ENDED FISCAL YEARS --------------------------- ----------------------------- OCTOBER 1, SEPTEMBER 29, 1993 1994 1995 1995 1996 --------- ------- ------- ----------- ------------- (UNAUDITED) Provision (benefit) for income taxes computed at the federal statutory rate.................. $ (77,000) $64,000 $98,000 $81,000 $ 164,000 State taxes, net of federal tax benefit......................... (12,000) 10,000 15,000 12,000 25,000 Effect of permanent differences... 1,000 2,000 3,000 3,000 3,000 (Income) of S Corporations not subject to taxation............. (43,000) (19,000) (32,000) (16,000) (113,000) Other............................. (5,263) (8,000) (3,000) (9,000) (2,245) --------- ------- ------- ------- --------- Provision (benefit) for income taxes........................... $(136,263) $49,000 $81,000 $71,000 $ 76,755 ========= ======= ======= ======= =========
F-86 137 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes reflect the impact of "temporary differences" between the financial and tax basis of assets and liabilities. The temporary differences which gave rise to deferred tax assets and (liabilities) are as follows:
JANUARY 1, DECEMBER 31, SEPTEMBER 29, 1995 1995 1996 ---------- ------------ ------------- Current -- Employee advances treated as compensation.............. $ (1,000) $ -- $ -- Workers' compensation accrual.......................... 4,000 4,000 11,000 Vacation accrual....................................... 2,000 3,000 5,000 Other.................................................. 500 4,000 -- -------- -------- -------- 5,500 11,000 16,000 -------- -------- -------- Long term -- NOLs................................................... 78,000 42,000 1,000 Accelerated depreciation for tax purposes.............. (30,000) (26,000) (28,800) Alternative minimum tax and other credits.............. 13,000 4,000 1,500 Change in income tax accounting method................. (37,000) -- -- Other.................................................. 100 760 -- -------- -------- -------- 24,100 20,760 (26,300) -------- -------- -------- Net deferred tax asset (liability)....................... $ 29,600 $ 31,760 $(10,300) ======== ======== ========
The NOL carryforward at September 29, 1996, was approximately $16,000. 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 (see 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 had an informal note payable to a member of its Board of Directors and relative of the majority stockholder which was paid in full in the nine-month period ended September 29, 1996. The note was payable in monthly installments of $711. The note bore interest at an annually adjustable rate equal to the six month average rate of two year treasury notes (approximately 6% at September 29, 1996). The outstanding balances as of January 1, 1995, and December 31, 1995, were $68,694 and $49,038. 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 $2,200 during the unaudited nine-month period ended October 1, 1995, and $3,000 during the nine-month period ended September 29, 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 September 29, 1996, were $52,337, $59,046 and $105,582, respectively. Interest expense related to these notes amounted to $5,000 and $6,000 during fiscal years 1994 and 1995, respectively, and $4,500 and $6,000 during the unaudited nine-month period ended October 1, 1995, and the nine-month period ended September 29, 1996, respectively. F-87 138 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Stockholder Transactions -- The Company leases office space and a vehicle from the majority stockholder at a monthly cost of $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 $10,800 and $15,000 for the unaudited nine-month period ended October 1, 1995, and for the nine-month period ended September 29, 1996, respectively. Due from stockholders primarily represents advances to the majority stockholder. The Company rents its Henderson, North Carolina, office facilities from a stockholder under a month-to-month agreement. Rental expense related to these facilities was $17,500, $19,000 and $24,000 during the fiscal years 1993, 1994 and 1995, respectively, and $18,000 during the unaudited nine-month period ended October 1, 1995, and $20,700 during the nine-month period ended September 29, 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 nonexclusive 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 $36,516 during fiscal year 1995 and $80,290 during the nine-month period ended September 29, 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 nine-month period ended September 29, 1996. 7. NONCANCELABLE OPERATING LEASES: The Company leases office space and a vehicle under noncancelable operating lease agreements. As discussed in Note 5, some of these agreements are with related parties. Future minimum payments required F-88 139 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) under operating leases that have an initial or remaining noncancelable lease term in excess of one year are as follows:
YEAR ENDING ----------------------------- DECEMBER 31, SEPTEMBER 29, ------------ ------------- 1996....................................................... $ 93,395 $ -- 1997....................................................... 86,317 102,324 1998....................................................... 88,140 104,136 1999....................................................... 33,932 64,950 2000....................................................... -- 3,393 -------- -------- $301,784 $274,803 ======== ========
Rental expense totaled $95,208, $155,230 and $157,121 for fiscal years 1993, 1994 and 1995, respectively, and $113,086 and $111,379 for the unaudited nine-month period ended October 1, 1995, and the nine-month period ended September 29, 1996, respectively. 8. 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. Additionally, effective October 2, 1996, StaffMark completed the initial public offering. In conjunction with this merger, the majority stockholder will enter into an employment agreement which provides for a base salary, participation in future incentive bonus plans and certain other benefits. The agreement also includes a noncompete provision if and when the stockholder's employment is terminated. The Company advanced $31,250 to StaffMark to fund organizational and other costs related to the planned merger and StaffMark's initial public offering. Prior to and coincident with this merger, the Company made a cash distribution to the majority stockholder representing the Company's subchapter S Corporation Accumulated Adjustment Account. The balance of the Company's subchapter S Corporation Accumulated Adjustment Account at September 29, 1996, was $0. Coincident with the above mentioned business combination on October 2, 1996, all outstanding debt related to the Lighthouse Financial Corp. line of credit totaling $1,406,964 (principal and accrued interest at October 2) was extinguished. 9. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION (UNAUDITED): In conjunction with the merger with StaffMark as discussed in Note 8, the Company changed from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which required 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 nine months ended December 31, 1995 and September 29, 1996, respectively. F-89 140 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders Flexible Personnel Group of Companies: We have audited the accompanying combined balance sheet of Flexible Personnel Group of Companies (the Company) as of December 31, 1996, and the related combined statements of income, changes in stockholders' equity and cash flows for the year then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Flexible Personnel Group of Companies as of December 31, 1996, and the combined results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. As discussed in Note 1 to the combined financial statements, the Company changed the entities included in the combined financial statements during 1996. Fort Wayne, Indiana February 4, 1997 except for Note 3 for which the date is February 24, 1997 and Note 7 for which the date is March 17, 1997. F-90 141 FLEXIBLE PERSONNEL GROUP OF COMPANIES COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 (ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash...................................................... $ 117 Accounts receivable, trade, net of allowance for doubtful accounts of $69........................................ 3,869 Accounts receivable, related parties...................... 26 Notes receivable, related parties......................... 502 Other..................................................... 403 ------ Total current assets.............................. 4,917 PROPERTY AND EQUIPMENT, at cost: Leasehold improvements.................................... 267 Office equipment.......................................... 1,252 Automobiles............................................... 113 ------ 1,632 Less accumulated depreciation and amortization......... 864 ------ 768 NOTES RECEIVABLE, RELATED PARTIES........................... 47 OTHER ASSETS................................................ 242 ------ Total assets...................................... $5,974 ====== LIABILITIES CURRENT LIABILITIES: Accrued expenses.......................................... $1,376 Accounts payable, trade................................... 70 Accounts payable, related parties......................... 1 Notes payable............................................. 867 ------ Total current liabilities......................... 2,314 WORKERS COMPENSATION PAYABLE.............................. 520 NOTES PAYABLE............................................. 206 STOCKHOLDERS' EQUITY Common stock................................................ 8 Additional paid-in capital.................................. 914 Retained earnings........................................... 2,928 ------ 3,850 Less notes receivable from stockholders..................... 644 Less treasury stock, 71 shares, at cost..................... 272 ------ 2,934 ------ Total liabilities and stockholders' equity........ $5,974 ======
The accompanying notes are an integral part of the financial statements. F-91 142 FLEXIBLE PERSONNEL GROUP OF COMPANIES COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (ALL DOLLAR AMOUNTS IN THOUSANDS) SERVICE REVENUES............................................ $49,342 COST OF SERVICES............................................ 39,928 ------- Gross profit.............................................. 9,414 OPERATING EXPENSES: Selling, general and administrative....................... 8,085 Depreciation and amortization............................. 316 ------- Operating income....................................... 1,013 INTEREST EXPENSE............................................ 121 ------- Net income........................................ $ 892 =======
The accompanying notes are an integral part of the financial statements. F-92 143 FLEXIBLE PERSONNEL GROUP OF COMPANIES COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1996 (ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK, $0 PAR --------------------------- NOTES $10 PER $0 PER ADDITIONAL RECEIVABLE SHARE SHARE PAID-IN RETAINED FROM TREASURY STATED VALUE STATED VALUE CAPITAL EARNINGS STOCKHOLDERS STOCK TOTAL ------------ ------------ ---------- -------- ------------ -------- ------- BALANCE, December 31, 1995........... $ 7 $ 1 $744 $2,153 $(707) -- $ 2,198 Distributions paid................. -- -- -- (117) -- -- (117) Acquisition of stock into treasury........................ -- -- -- -- -- $(272) (272) Shareholder advances forgiven...... -- -- -- -- 63 -- 63 Capital contribution............... -- -- 170 -- -- -- 170 Net income......................... -- -- -- 892 -- -- 892 --- --- ---- ------ ----- ----- ------- BALANCE, December 31, 1996........... $ 7 $ 1 $914 $2,928 $(644) $(272) $ 2,934 === === ==== ====== ===== ===== =======
The accompanying notes are an integral part of the financial statements. F-93 144 FLEXIBLE PERSONNEL GROUP OF COMPANIES COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 (ALL DOLLAR AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 892 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 316 Non-cash write-off of notes receivable, stockholder.... 63 Changes in assets and liabilities: Accounts receivable, trade........................... (335) Accounts receivable, related parties................. (19) Other assets......................................... (395) Accrued expenses..................................... 450 Accounts payable, trade.............................. 65 Accounts payable, related parties.................... (43) ------- Net cash provided by operating activities......... 994 ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (204) Issuance of notes receivable, related parties............. (28) Issuance of notes receivable, stockholders................ (760) Principal payments received from notes receivable, related parties................................................ 402 ------- Net cash used for investing activities............ (590) ------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable....................... (4,034) Proceeds from notes payable............................... 3,617 Capital contribution...................................... 170 Distributions paid........................................ (117) ------- Net cash used for financing activities............ (364) ------- NET INCREASE IN CASH........................................ 40 CASH, beginning of year..................................... 77 ------- CASH, end of year........................................... $ 117 =======
The accompanying notes are an integral part of the financial statements. F-94 145 FLEXIBLE PERSONNEL GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (ALL DOLLAR AMOUNTS IN THOUSANDS) 1. COMPANY BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Combination -- The combined financial statements of Flexible Personnel Group of Companies (the Company) include the accounts of Flexible Personnel, Inc. (FPI) H.R. America, Inc. (HRA) and Great Lakes Search Associates, Inc. (GLSA), all of which are under common ownership. The Company offers temporary, direct, and employee leasing services to customers mainly in the midwestern portion of the United States. The December 31, 1995 financial statement information was restated to reflect exclusion of National On-Site Personnel, Inc. (NOPS), which had previously been combined with the aforementioned entities. This entity has been excluded as the nature of its business focus differs from that of the Companies included. All significant intercompany accounts and transactions have been eliminated in the combined financial statements. Depreciation and Amortization -- Depreciation of equipment and amortization of leasehold improvements are determined principally on accelerated methods used for income tax reporting purposes. The amount of depreciation and amortization under these methods is not significantly different than that based on the estimated economic useful lives for financial reporting purposes. Costs and related accumulated depreciation are removed from the accounts for assets retired or disposed of and a gain or loss on disposition is recorded when realized. Cash Flows -- Cash paid for interest approximated $130 for 1996. 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 and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition -- Service revenues are recognized as income at the time staffing services are provided. 2. INCOME TAXES: No provision is made for federal or state income taxes in as much as the Company's stockholders have consented to have the Companies' income taxed directly to them as provided by Section 1362(a) of the Internal Revenue Code. 3. NOTES PAYABLE: During 1996, the Company maintained a short-term revolving line of credit with a commercial bank which aggregated $4,600 (including a $605 letter of credit). The agreement, which expires May 31, 1997, requires quarterly interest payments charged at 2.25% above the 30, 60, or 90 day LIBOR for comparable 30, 60, or 90 day periods (effective rate of 7.75%). The total amount borrowed against the agreement was $1,245 at December 31, 1996. The Company was contingently liable for $444 at December 31, 1996, which was F-95 146 FLEXIBLE PERSONNEL GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) borrowed by NOPS, an affiliated company. The additional amount available at December 31, 1996 was $2,750. The agreement is collateralized by substantially all the trade accounts receivable of FPI of $3,366 and NOPS of $1,148, at December 31, 1996. The agreement also contains certain restrictive covenants common to such agreements related to the Company's operations, including the maintenance of working capital, net worth, limitations on capital expenditures, limitations on stockholder distributions and incurrence of additional indebtedness. Subsequent to December 31, 1996, the Company received a waiver for loan covenant violations that occurred during the year ended December 31, 1996. During 1996, a key employee and minority shareholder's employment was terminated with the Company. Under the terms of the termination agreement, the Company agreed to buy back the employee's shares of stock and forgive approximately $63 of shareholder advances that the minority shareholder owed to the Company. The former shareholder also signed a non-compete agreement in the amount of $157 that will be paid out over the term of the agreement (four years). In total, based on the terms of the termination agreement, including the items discussed above, the Company is required to pay approximately $293 in monthly principal and interest installments of approximately $7 for a period of four years. Notes payable at December 31 consisted of the following: Line of credit.............................................. $ 801 8.25% note to former shareholder due in monthly principal and interest payments of approximately $7 through August 1, 2001................................................... 272 ------ 1,073 Less current maturities................................... 867 ------ $ 206 ======
Aggregate maturities of debt in the ensuing four years are $867, $72, $78 and $56, respectively. 4. COMMON STOCK: The components of Common Stock at December 31 are as follows: Common stock, no par value, $10 per share stated value, 1,000 shares authorized; 677.9 shares issued; 623.6 shares outstanding............................................... $ 7 Common stock, no par value, no stated value, 2,000 shares authorized; 49 shares issued and outstanding.............. 1 Common stock, no par value, $1 per share stated value, 1,000 shares authorized; 100 shares issued and outstanding...... -- --- $ 8 ===
5. NOTES RECEIVABLE, RELATED PARTIES: Notes receivable from related parties consisted of the following at December 31: 9% notes from certain franchises of Flexible Personnel, Inc., principal and interest due in 1997.................. $ 47 8.50% demand notes from shareholders........................ 644 8.50% demand notes from shareholders to be repaid in 1997... 502
F-96 147 FLEXIBLE PERSONNEL GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 6. LEASE COMMITMENTS: The Company has several noncancelable operating lease agreements for buildings where their operations are located. Certain of these lease agreements contain renewal options. Rent expense under these leases approximated $607 in 1996. Minimum annual rental payments due under these leases during the remaining lease terms approximate the following:
YEAR ---- 1997.................................................. $454 1998.................................................. 282 1999.................................................. 210 2000.................................................. 129 2001.................................................. 81
7. SUBSEQUENT EVENT: On March 17, 1997, the Company was sold and these financial statements reflect the entities which were sold to StaffMark, Inc. F-97 148 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Global Dynamics, Inc.: We have audited the accompanying balance sheet of Global Dynamics, Inc. (a Delaware corporation) as of December 31, 1996, and the related statements of operations, changes in shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Global Dynamics, Inc. as of December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California, March 27, 1997. F-98 149 GLOBAL DYNAMICS, INC. BALANCE SHEET DECEMBER 31, 1996 ASSETS CURRENT ASSETS: Cash...................................................... $ 281,905 Accounts receivable, trade, net allowance for uncollectible accounts of $41,217...................... 135,953 Unbilled receivables, trade............................... 2,968,224 Note receivable........................................... 20,145 Employee advances......................................... 67,400 Other assets.............................................. 20,614 ---------- Total current assets.............................. 3,494,241 FURNITURE, FIXTURES AND EQUIPMENT, at cost, less accumulated depreciation of $193,926................... 156,340 ---------- Total assets...................................... $3,650,581 ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accrued employee compensation and benefits and other related costs.......................................... $ 957,528 Accounts payable, trade................................... 98,571 Deferred rent............................................. 22,442 Income taxes payable...................................... 38,916 Current portion of notes payable.......................... 22,387 Current portion of capital lease obligation............... 10,431 ---------- Total current liabilities......................... 1,150,275 NOTES PAYABLE............................................... 403,303 CAPITAL LEASE OBLIGATIONS................................... 3,778 ---------- Total liabilities................................. 1,557,356 ---------- SHAREHOLDERS' EQUITY: Common stock, 10,000 shares authorized; 633 shares issued and outstanding; $.01 par value...... 6 Additional paid-in capital................................ 1,377 Retained earnings......................................... 2,091,842 ---------- Total shareholders' equity........................ 2,093,225 ---------- Total liabilities and shareholders' equity........ $3,650,581 ==========
The accompanying notes are an integral part of these statements. F-99 150 GLOBAL DYNAMICS, INC. STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 SERVICE REVENUES............................................ $17,160,076 COST OF SERVICES............................................ 12,109,316 ----------- Gross Profit.............................................. 5,050,760 OPERATING EXPENSES: Selling, general and administrative....................... 3,726,263 Depreciation.............................................. 43,873 ----------- Operating Income.................................. 1,280,624 INTEREST EXPENSE............................................ 52,380 ----------- Income before state income tax.................... 1,228,244 STATE INCOME TAX............................................ 22,000 ----------- Net income........................................ $ 1,206,244 ===========
The accompanying notes are an integral part of these statements. F-100 151 GLOBAL DYNAMICS, INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1996
ADDITIONAL TOTAL COMMON PAID-IN RETAINED SHAREHOLDERS' STOCK CAPITAL EARNINGS EQUITY ------ ---------- ---------- ------------- BALANCE, December 31, 1995....................... $6 $1,377 $ 989,220 $ 990,603 Distributions.................................. -- -- (103,622) (103,622) Net income..................................... -- -- 1,206,244 1,206,244 -- ------ ---------- ---------- BALANCE, December 31, 1996....................... $6 $1,377 $2,091,842 $2,093,225 == ====== ========== ==========
The accompanying notes are an integral part of these statements. F-101 152 GLOBAL DYNAMICS, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 1,206,244 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................... 43,873 Decrease in accounts receivable........................ 645,767 Increase in unbilled receivables....................... (1,301,550) Decrease in employee advances.......................... 35,728 Increase in other assets............................... (3,999) Increase in accrued employee compensation and benefits and other related costs............................... 27,366 Decrease in accounts payable, trade.................... (191,395) Decrease in deferred rent.............................. (2,041) Increase in income taxes payable....................... 17,700 ----------- Total adjustments................................. (728,551) ----------- Net cash provided by operating activities......... 477,693 ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and furnishings.................... (58,345) ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Notes receivable.......................................... (20,145) Distribution to shareholder............................... (103,622) Principal payment on notes payable........................ (12,379) Principal payment under capital lease..................... (13,674) ----------- Cash used in financing activities................. (149,820) ----------- NET INCREASE IN CASH........................................ 269,528 CASH, beginning of the year................................. 12,377 ----------- CASH, end of the year....................................... $ 281,905 =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: The Company made state income tax payments of $2,588 and interest payments of $5,500 during 1996
The accompanying notes are an integral part of these statements. F-102 153 GLOBAL DYNAMICS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. ORGANIZATION: Global Dynamics, Inc. (the "Company"), a Delaware corporation, is an information technology consulting firm established for the purpose of providing skilled computer professionals to clients requiring permanent and temporary technical resources. The Company provides contract personnel, contract-to-hire, direct placement, payrolling and foreign recruiting. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 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 and liabilities 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 could differ from those estimates. Equipment and Furnishings -- Equipment and furnishings are stated at cost less accumulated depreciation. Depreciation of equipment and furnishings is provided using the straight-line method over estimated useful lives of five to seven years. Revenue Recognition -- Temporary services revenues are recognized when the services are rendered by the Company's temporary employees. Permanent placement revenues are recognized when employment candidates accept offers of permanent employment. Services performed during the year but not invoiced are recorded as "Unbilled receivables, trade" on the balance sheet. Income Taxes -- As an S Corporation, the Company is generally not subject to federal income taxes, but rather its net income and losses are passed through directly to its shareholders for inclusion in their taxable income or loss. Effective March 1, 1997, the Company became a C Corporation. State taxes are recorded by the Company using the liability method. 3. COMMITMENTS AND CONTINGENCIES: The Company leases office space under a noncancelable lease. Rent expense for office space for the year ended December 31, 1996, was $144,862. At December 31, 1996, minimum future lease payments under noncancelable office space lease agreements are as follows:
YEAR ENDING LEASE DECEMBER 31 COMMITMENTS ----------- ----------- 1997...................................................... $146,902 1998...................................................... 148,942 1999...................................................... 150,982 2000...................................................... 75,491 2001 and thereafter....................................... -- -------- Total............................................. $522,317 ========
F-103 154 GLOBAL DYNAMICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company has a capital lease obligation for equipment that expires in June 1998. Payments on the obligation were $11,820 for the year ended December 31, 1996. Future minimum lease payments for the obligation are as follows: 1997........................................................ $10,431 1998........................................................ 3,778 ------- Total............................................. $14,209 =======
4. FURNITURE, FIXTURES AND EQUIPMENT: A summary of furniture, fixtures and equipment at December 31, 1996, is as follows: Furniture and fixtures...................................... $ 41,560 Equipment................................................... 70,887 Computer equipment.......................................... 237,819 --------- Total furniture, fixtures and equipment, at cost............................................ 350,266 Less: Accumulated depreciation.............................. (193,926) --------- Total net furniture, fixtures and equipment....... $ 156,340 =========
5. RELATED-PARTY TRANSACTIONS: At December 31, 1996, the Company held a note receivable of $20,145 from a permanent employee. The note, which is secured by the assets of the employee, bears an annual rate of 10.5% and is to be repaid in 1997. During 1996, the Company advanced salaries to certain permanent employees and shareholders. The balance to be repaid from 1997 salaries was $67,400 at December 31, 1996. 6. LINE OF CREDIT: The Company has access to a line of credit with a credit facility that provides up to $1,000,000, which is available to fund the Company's general business and working capital needs, and a second line of credit that provides up to $100,000, which is available to fund purchases of equipment for the Company. The lines of credit are secured by the assets of the Company and guaranteed by the shareholders. At December 31, 1996, the Company had no outstanding borrowing against either of these lines of credit. Interest expense related to these lines of credit during the year ended December 31, 1996, was $3,927. 7. NOTES PAYABLE: At December 31, 1996, the Company had a promissory note payable with an original balance of $40,000. This note, which bears an annual rate of 11.35 percent, is due on July 28, 2000. At December 31, 1996, the unpaid balance on this note was $31,607. During the year ended December 31, 1996, interest of $4,059 was expensed. During 1995, the Company entered into an agreement to purchase shares of the Company from previous employees. In exchange for the shares, the Company issued promissory notes payable to the previous employees for an aggregate amount of $400,000, bearing an annual interest rate of 8.5%. The remaining balance is payable on December 15, 2005, or upon the sale and transfer of 100% of the stock in the Company, whichever occurs first. Interest expense related to the notes for the year ended December 31, 1996, was $14,083. F-104 155 GLOBAL DYNAMICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Future principal payments for all notes payable are as follows: 1997............................................................. $ 23,082 1998............................................................. 24,417 1999............................................................. 25,865 2000............................................................. 27,052 2001 and thereafter.............................................. 325,274 -------- Total.................................................. $425,690 ========
8. EMPLOYEE BENEFIT PLANS: The Company offers a 401(k) plan to eligible employees, as defined in the Plan Document. The Company matches employee contributions up to a specified amount. Company contributions for the year ended December 31, 1996, was $11,980. 9. SUBSEQUENT EVENTS: On March 7, 1997, the Company signed a letter of intent to sell 100% of the outstanding shares of the Company to an unaffiliated company. If the sale is consummated, the effective date will be April 1, 1997. F-105 156 INSIDE BACK The Inside Back Cover Page of the Prospectus contains a corporate profile description and a summary description of the Company's three divisions: Commercial Staffing; Professional/Information Technology; and Specialty Medical. Each summary contains a photo relating to the division. 157 ====================================================== NO DEALER, SALESPERSON 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, THE SELLING STOCKHOLDERS 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. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 7 Use of Proceeds....................... 11 Capitalization........................ 11 Price Range of Common Stock and Dividend Policy..................... 12 Selected Financial Data............... 13 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 14 Business.............................. 21 Management............................ 30 Principal and Selling Stockholders.... 38 Description of Capital Stock.......... 40 Certain Transactions.................. 42 Shares Eligible for Future Sale....... 44 Underwriting.......................... 47 Legal Matters......................... 48 Experts............................... 48 Additional Information................ 49 Index to Financial Statements......... F-1
====================================================== ====================================================== 3,500,000 SHARES [STAFFMARK, INC. LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- LOGOS , 1997 ====================================================== 158 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. 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........................................ $ 197 Nasdaq National Market Listing Fee.......................... 17,500 NASD Filing Fee............................................. 10,965 Blue Sky Fees and Expenses.................................. 10,000 Accounting Fees and Expenses................................ 225,000 Legal Fees and Expenses..................................... 375,000 Printing and Engraving Costs................................ 200,000 Transfer Agent Fees and Expenses............................ 5,000 Miscellaneous............................................... 1,156,338 ---------- Total............................................. $2,000,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Bylaws 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 the 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. The Company's Certificate 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. In accordance with Delaware law, the Company has entered 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 shall not have been entitled to indemnification. II-1 159 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 original 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 the Initial Public Offering, the Company issued 5,618,249 shares of its Common Stock in connection with the Mergers of the six Founding Companies. See "Certain Transactions"; (iii) In connection with the acquisition of The Technology Source, LLC, the Company issued 118,763 shares of Common Stock to the Technology Source members in January 1997; (iv) In connection with the acquisition of Flexible Personnel, Inc., the Company issued 183,824 shares of Common Stock to the Flexible Personnel stockholders in March 1997; (v) In connection with the acquisition of Global Dynamics, Inc., the Company issued 690,855 shares of Common Stock to the Global Dynamics stockholders in April 1997; (vi) In connection with the acquisition of The Kleven Group, the Company issued 23,263 shares of Common Stock to the Kleven Group stockholders in June 1997; (vii) In connection with the acquisition of Sterling Enterprises, the Company issued 193,860 shares of Common Stock to the Sterling Enterprise stockholders in June 1997; (viii) In connection with the acquisition of Baker Street Group, Inc., the Company issued 286,162 shares of Common Stock to the Baker Street Group stockholders in July, 1997; and (ix) In connection with the acquisition of Expert Business Systems, Incorporated, the Company issued 123,500 shares of Common Stock to certain of the Expert Business Systems stockholders. Each of these transactions was completed without registration of the respective securities 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 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, Brewer Personnel Services Acquisition Corp., Brewer and the Stockholders named therein. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 2.2 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Prostaff Personnel Acquisition Corp., Prostaff, Excel Temporary Staffing Acquisition Corp., Professional Resources, Inc., and the Stockholders named therein. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)).
II-2 160
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.3 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Maxwell/Healthcare Acquisition Corp., Square One Rehab Acquisition Corp., Maxwell Staffing of Bristow Acquisition Corp., Maxwell Staffing, Inc., Technical Staffing, Inc. and the Stockholders named therein. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 2.4 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark., HRA Acquisition Corp., HRA, and the Stockholders named therein. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 2.5 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, First Choice Staffing Acquisition Corp., First Choice, and the Stockholders named therein. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 2.6 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, 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. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 2.7 -- Asset Purchase Agreement, dated as of November 29, 1996, among StaffMark, The Technology Source Acquisition Corporation, and Technology Source. (Incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 1996). 2.8 -- Asset Purchase Agreement, dated as of March 17, 1997, among StaffMark, StaffMark Acquisition Corporation Two, StaffMark Acquisition Corporation Three, and Flexible Personnel, Great Lakes Search Associates, Inc., H.R. America, Inc., Douglas H. Curtis, Jean A. Curtis and Robert P. Curtis. (Incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on April 2, 1997, as amended on May 30, 1997). 2.9 -- Agreement and Plan of Reorganization, dated April 4, 1997, among StaffMark, StaffMark Acquisition Corporation Four, and Global, Perry Butler, trustee of the Perry Butler Charitable Remainder Trust, Carolyn J. Butler, trustee of the Carolyn J. Butler Charitable Remainder Trust, Perry Butler, individually, Carolyn J. Butler, individually, and Paul Sharps, individually. (Incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on April 24, 1997, as amended on June 6, 1997). 2.10 -- Asset Purchase Agreement, dated April 24, 1997, among StaffMark, StaffMark Acquisition Corporation Five, and Lindenberg, Earl Lindenberg, and Mark Tiemann. (Incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on April 25, 1997). 3.1 -- Certificate of Incorporation of the Company. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)).
II-3 161
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.2 -- Certificate of amendment of Certificate of Incorporation. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 3.3 -- Amended and Restated Bylaws of the Company, as amended to date. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 4.1 -- Form of certificate evidencing ownership of Common Stock of the Company. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 5.1 -- Opinion of Wright, Lindsey & Jennings regarding legality. 10.1 -- StaffMark, Inc. 1996 Stock Option Plan. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 10.2 -- Form of Director Indemnification Agreement. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 10.3 -- Employment Agreement between StaffMark and Terry C. Bellora. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 10.4 -- Employment Agreement among StaffMark, Brewer and Clete T. Brewer. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.5 -- Employment Agreement among StaffMark, Brewer and Jerry T. Brewer. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.6 -- Employment Agreement among StaffMark, Prostaff and Steven E. Schulte. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.7 -- Employment Agreement among StaffMark, Maxwell and John H. Maxwell, Jr. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.8 -- Employment Agreement among StaffMark, Maxwell and Mary Sue Maxwell. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.9 -- Employment Agreement among StaffMark, HRA and W. David Bartholomew. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.10 -- Employment Agreement among StaffMark, HRA and Ted Feldman. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.11 -- Employment Agreement among StaffMark, First Choice and William T. Gregory. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.12 -- Employment Agreement among StaffMark, DP Pros of Burlington, Inc. and Janice Blethen. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)).
II-4 162
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.13 -- Credit Agreement dated October 4, 1996 in the amount of $50,000,000 by and between StaffMark, the Lenders named therein ("Lender") and Mercantile Bank of St. Louis National Association, as Agent on behalf of the Lenders. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.14 -- First Amendment to the Credit Agreement dated December 18, 1996 among the Registrant and the Lenders named therein. (Incorporated by reference from the Company's Annual Report on Form 10-K filed with the SEC on March 17, 1997, as amended by Form 10-K/A filed with the SEC on March 24, 1997). 10.15 -- Second Amendment to the Credit Agreement dated May 30, 1997 among StaffMark and the Lenders named herein. (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, filed with the SEC on July 28, 1997). 10.16 -- Lock-Up and Registration Rights Agreement dated September 20, 1996 among StaffMark, Jerry T. Brewer, Clete T. Brewer, Chad J. Brewer, Donald A. Marr, Jr., Robert H. Janes III, John C. Becker, Betty Becker, Donna F. Vassil, Janice Blethen and Capstone Partners, L.L.C. ("Lock-Up and Registration Rights Agreement"). (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.17 -- Lease Agreement among Brewer and Brewer Investments for the StaffMark Corporate offices located at 302 East Millsap Road, City of Fayetteville, County of Washington, State of Arkansas. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.18 -- Lease Agreement among Maxwell Staffing, Inc. and Maxwell Properties, L.L.C. for the Company's offices located at 8221 East 63rd Place, Tulsa, Oklahoma. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.19 -- Lease Agreement among Maxwell/Healthcare, Inc. and Maxwell Properties L.L.C. for the Company's offices located at 8211-8213 East 65th Street, Tulsa, Oklahoma. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.20 -- The Company's Employee Stock Purchase Plan adopted May 2, 1997. (Incorporated by reference from the Company's Registration Statement on Form S-8 (File No. 333-29689)). 10.21 -- Form of Second Amendment to Agreement and Plan of Reorganization for Founding Companies.* 10.22 -- Form of First Amendment to Lock-Up and Registration Rights Agreement.* 10.23 -- Employment Agreement among StaffMark and Gordon Y. Allison. (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, filed with the SEC on July 28, 1997). 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.
II-5 163
EXHIBIT NUMBER DESCRIPTION ------- ----------- 23.3 -- Consent of Coopers & Lybrand, L.L.P., Independent Public Accountants. 24.1 -- Power of Attorney (included with the signature page hereof).* 27.1 -- Financial Data Schedule (Incorporated by reference from the Company's Annual Report on Form 10-K/A for the year ended December 31, 1997 and the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.)
* Previously filed. (b) Financial Statement Schedules All other 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 the related notes thereto. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act 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 Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been 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 the purpose 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-6 164 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, as of August 6, 1997. STAFFMARK, INC. By: /s/ CLETE T. BREWER ---------------------------------- Clete T. Brewer President and Chief Executive Officer POWER OF ATTORNEY 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, Terry C. Bellora and Gordon Y. Allison, 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 PAGE ---- ----- ---- /s/ CLETE T. BREWER President, Chief Executive August 6, 1997 - ----------------------------------------------------- Officer and Director Clete T. Brewer (Principal Executive Officer) /s/ TERRY C. BELLORA Chief Financial Officer August 6, 1997 - ----------------------------------------------------- (Principal Financial and Terry C. Bellora Accounting Officer) /s/ JERRY T. BREWER* Chairman of the Board August 6, 1997 - ----------------------------------------------------- Jerry T. Brewer /s/ W. DAVID BARTHOLOMEW* Executive Vice President -- August 6, 1997 - ----------------------------------------------------- Southeastern Operations and W. David Bartholomew Director /s/ STEVEN E. SCHULTE* Executive Vice President -- August 6, 1997 - ----------------------------------------------------- Administration and Director Steven E. Schulte /s/ JOHN H. MAXWELL, JR.* Executive Vice President -- August 6, 1997 - ----------------------------------------------------- Medical Services and Director John H. Maxwell, Jr. /s/ JANICE BLETHEN* Executive Vice President -- August 6, 1997 - ----------------------------------------------------- Clinical Trials Support Janice Blethen Services and Director /s/ WILLIAM T. GREGORY* Vice President and General August 6, 1997 - ----------------------------------------------------- Manager -- Carolina Region William T. Gregory and Director /s/ WILLIAM J. LYNCH* Director August 6, 1997 - ----------------------------------------------------- William J. Lynch /s/ R. CLAYTON MCWHORTER* Director August 6, 1997 - ----------------------------------------------------- R. Clayton McWhorter /s/ CHARLES A. SANDERS* Director August 6, 1997 - ----------------------------------------------------- Charles A. Sanders *By: /s/ CLETE T. BREWER --------------------------------------- Clete T. Brewer, As Attorney-In-Fact pursuant to power of attorney contained in the Company's Registration Statement on Form S-1 (No. 333-32371) as filed on July 30, 1997.
II-7 165 INDEX TO 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, Brewer Personnel Services Acquisition Corp., Brewer and the Stockholders named therein. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 2.2 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Prostaff Personnel Acquisition Corp., Prostaff, Excel Temporary Staffing Acquisition Corp., Professional Resources, Inc., and the Stockholders named therein. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 2.3 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Maxwell/Healthcare Acquisition Corp., Square One Rehab Acquisition Corp., Maxwell Staffing of Bristow Acquisition Corp., Maxwell Staffing, Inc., Technical Staffing, Inc. and the Stockholders named therein. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 2.4 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark., HRA Acquisition Corp., HRA, and the Stockholders named therein. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 2.5 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, First Choice Staffing Acquisition Corp., First Choice, and the Stockholders named therein. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 2.6 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, 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. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 2.7 -- Asset Purchase Agreement, dated as of November 29, 1996, among StaffMark, The Technology Source Acquisition Corporation, and Technology Source. (Incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 1996). 2.8 -- Asset Purchase Agreement, dated as of March 17, 1997, among StaffMark, StaffMark Acquisition Corporation Two, StaffMark Acquisition Corporation Three, and Flexible Personnel, Great Lakes Search Associates, Inc., H.R. America, Inc., Douglas H. Curtis, Jean A. Curtis and Robert P. Curtis. (Incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on April 2, 1997, as amended on May 30, 1997).
166
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.9 -- Agreement and Plan of Reorganization, dated April 4, 1997, among StaffMark, StaffMark Acquisition Corporation Four, and Global, Perry Butler, trustee of the Perry Butler Charitable Remainder Trust, Carolyn J. Butler, trustee of the Carolyn J. Butler Charitable Remainder Trust, Perry Butler, individually, Carolyn J. Butler, individually, and Paul Sharps, individually. (Incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on April 24, 1997, as amended on June 6, 1997). 2.10 -- Asset Purchase Agreement, dated April 24, 1997, among StaffMark, StaffMark Acquisition Corporation Five, and Lindenberg, Earl Lindenberg, and Mark Tiemann. (Incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on April 25, 1997). 3.1 -- Certificate of Incorporation of the Company. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 3.2 -- Certificate of amendment of Certificate of Incorporation. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 3.3 -- Amended and Restated Bylaws of the Company, as amended to date. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 4.1 -- Form of certificate evidencing ownership of Common Stock of the Company. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 5.1 -- Opinion of Wright, Lindsey & Jennings regarding legality. 10.1 -- StaffMark, Inc. 1996 Stock Option Plan. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 10.2 -- Form of Director Indemnification Agreement. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 10.3 -- Employment Agreement between StaffMark and Terry C. Bellora. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-7513)). 10.4 -- Employment Agreement among StaffMark, Brewer and Clete T. Brewer. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.5 -- Employment Agreement among StaffMark, Brewer and Jerry T. Brewer. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.6 -- Employment Agreement among StaffMark, Prostaff and Steven E. Schulte. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.7 -- Employment Agreement among StaffMark, Maxwell and John H. Maxwell, Jr. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.8 -- Employment Agreement among StaffMark, Maxwell and Mary Sue Maxwell. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)).
167
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.9 -- Employment Agreement among StaffMark, HRA and W. David Bartholomew. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.10 -- Employment Agreement among StaffMark, HRA and Ted Feldman. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.11 -- Employment Agreement among StaffMark, First Choice and William T. Gregory. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.12 -- Employment Agreement among StaffMark, DP Pros of Burlington, Inc. and Janice Blethen. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.13 -- Credit Agreement dated October 4, 1996 in the amount of $50,000,000 by and between StaffMark, the Lenders named therein ("Lender") and Mercantile Bank of St. Louis National Association, as Agent on behalf of the Lenders. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.14 -- First Amendment to the Credit Agreement dated December 18, 1996 among the Registrant and the Lenders named therein. (Incorporated by reference from the Company's Annual Report on Form 10-K filed with the SEC on March 17, 1997, as amended by Form 10-K/A filed with the SEC on March 24, 1997). 10.15 -- Second Amendment to the Credit Agreement dated May 30, 1997 among StaffMark and the Lenders named herein. (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, filed with the SEC on July 28, 1997). 10.16 -- Lock-Up and Registration Rights Agreement dated September 20, 1996 among StaffMark, Jerry T. Brewer, Clete T. Brewer, Chad J. Brewer, Donald A. Marr, Jr., Robert H. Janes III, John C. Becker, Betty Becker, Donna F. Vassil, Janice Blethen and Capstone Partners, L.L.C. ("Lock-Up and Registration Rights Agreement"). (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.17 -- Lease Agreement among Brewer and Brewer Investments for the StaffMark Corporate offices located at 302 East Millsap Road, City of Fayetteville, County of Washington, State of Arkansas. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.18 -- Lease Agreement among Maxwell Staffing, Inc. and Maxwell Properties, L.L.C. for the Company's offices located at 8221 East 63rd Place, Tulsa, Oklahoma. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.19 -- Lease Agreement among Maxwell/Healthcare, Inc. and Maxwell Properties L.L.C. for the Company's offices located at 8211-8213 East 65th Street, Tulsa, Oklahoma. (Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 333-15059)). 10.20 -- The Company's Employee Stock Purchase Plan adopted May 2, 1997. (Incorporated by reference from the Company's Registration Statement on Form S-8 (File No. 333-29689)). 10.21 -- Form of Second Amendment to Agreement and Plan of Reorganization for Founding Companies.*
168
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.22 -- Form of First Amendment to Lock-Up and Registration Rights Agreement.* 10.23 -- Employment Agreement among StaffMark and Gordon Y. Allison. (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, filed with the SEC on July 28, 1997). 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 Coopers & Lybrand, L.L.P., Independent Public Accountants. 24.1 -- Power of Attorney (included with the signature page hereof).* 27.1 -- Financial Data Schedule (Incorporated by reference from the Company's Annual Report on Form 10-K/A for the year ended December 31, 1997 and the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.)
- --------------- * Previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 STAFFMARK, INC. 3,500,000 SHARES OF COMMON STOCK UNDERWRITING AGREEMENT August ___, 1997 J.C. BRADFORD & CO. MONTGOMERY SECURITIES 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 3,215,000 shares (the "Company Shares") of the Company's common stock, par value $0.01 per share (the "Common Stock"), and the stockholders of the Company named in Schedule II hereto (the "Selling Stockholders") propose to sell to the Underwriters 285,000 shares of the Common Stock (the "Selling Stockholder Shares"). The Company Shares and the Selling Stockholder Shares are hereinafter referred to collectively as the "Firm Shares." The Company has also agreed to grant to you an option (the "Option") to purchase up to a total of 525,000 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 and the Selling Stockholders confirm as follows their 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 3,215,000 Firm Shares, and each of the Selling Stockholders agrees, severally and not jointly, to sell to the Underwriters the aggregate number of Firm Shares set forth opposite such Selling Stockholder's name in Schedule II hereto, 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. 2 (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 525,000 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 10 business days before the date and time specified for closing in the Option Shares Notice (the "Option Closing Date") setting 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 and the Selling Stockholders against payment of the purchase price by federal funds wire transfer payable in same 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 2 3 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. 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. 333-32371) 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 3 4 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. 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 and all trade names or other fictitious names used by the Company or such subsidiaries 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 jurisdiction of their incorporation. 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. 4 5 (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 Financial Data," "Use of Proceeds," "Capitalization," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Management" and "Principal and Selling Stockholders" and the financial statements contained in the Prospectus fairly present 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 5 6 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 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; the lack of which 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. 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; the occurrence of which 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. 6 7 (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 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, except where the lack of authorization, execution, delivery or enforceability of any such contract would not 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. (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, except as disclosed in the Prospectus. (r) The Company has taken such action as necessary to have the Shares authorized for trading and all of the Shares have been approved for listing 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. 7 8 (t) The Company has timely filed all required forms, reports and other documents with the Commission all of which complied, when filed, in all material respects, with all applicable requirements of the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As of their respective dates, such reports, forms and other documents (including all exhibits and schedules thereto) and documents incorporated by reference therein (the "Reports"), did not contain any untrue statement of a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company has delivered a complete copy of all such Reports to the Representatives prior to the date of this Agreement. The financial statements of the Company included or incorporated by reference in such Reports, forms and other documents were prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may otherwise be indicated in the notes thereto), and fairly present the financial position of the Company as of the date thereof and the consolidated results of its operations and consolidated changes in financial position for the periods then ended (subject, in the case of any unaudited interim financial statements, to year-end adjustments). (u) The representations and warranties made by the Company and its Subsidiaries in that certain Credit Agreement dated as of October 4, 1996 by and between the Company, Mercantile Bank of St. Louis National Association and the lenders party thereto, as amended (the "Credit Agreement") were true, correct and complete when and as made and continue to be true, correct and complete as of the date of this Agreement as if set forth in their entirety herein. The Company is in compliance with all covenants of the Company and is not in default or breach of any of the terms and provisions set forth in the Credit Agreement and, after giving effect to the Offering, the Company will continue to be in compliance with the covenants, terms and provisions of the Credit Agreement. 4. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each of the Selling Stockholders, severally and not jointly, represents, warrants and covenants to each Underwriter that: (a) Such Selling Stockholder at the Closing Date will have good and valid title to the Shares set forth in Schedule II to be sold by such Selling Stockholder, free and clear of any liens, encumbrances, equities and claims (other than as imposed by the Act or this Agreement), and full right, power and authority to effect the sale and delivery of such Shares; and upon the delivery of and payment for the Shares to be sold by such Selling Stockholder pursuant to this Agreement, good and valid title thereto, free and clear of any liens, encumbrances, equities and claims, will be transferred to the Underwriters. (b) Such Selling Stockholder has duly executed and delivered the Selling Stockholders' Custody Agreement (the "Custody Agreement") and the Selling Stockholders' Power of Attorney (the "Power of Attorney") in the forms previously delivered to the Representatives, appointing Clete T. Brewer, Terry C. Bellora and Gordon Y. Allison, and each of them as such Selling Stockholder's attorney-in-fact (the "Attorney-in-Fact") and First Chicago Trust Company of New York, as custodian (the "Custodian"). The Attorney-in-Fact is 8 9 authorized to execute, deliver and perform this Agreement on behalf of such Selling Stockholder, to deliver the Shares to be sold by such Selling Stockholder hereunder, to accept payment therefor and otherwise to act on behalf of such Selling Stockholder in connection with this Agreement. Certificates, in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank, representing the Shares to be sold by such Selling Stockholder hereunder have been deposited with the Custodian pursuant to the Custody Agreement for the purpose of delivery pursuant to this Agreement. Such Selling Stockholder agrees that the shares of Common Stock represented by the certificates on deposit with the Custodian are subject to the interest of the Underwriters hereunder, that the arrangements made for such custody and the appointment of the Attorney-in-Fact are to that extent irrevocable, and that the obligations of such Selling Stockholder hereunder shall not be terminated except as provided in this Agreement and the Custody Agreement. If such Selling Stockholder should die, become disabled or be declared incompetent, dissolve or become insolvent, or if any other event should occur before the delivery of the Shares of such Selling Stockholder hereunder, the certificates for such Shares deposited with the Custodian shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, disability, incompetency, dissolution, insolvency or other event had not occurred, regardless of whether or not the Custodian or the Attorney-in-Fact shall have received notice thereof. (c) Such Selling Stockholder, acting through its duly authorized Attorney-in-Fact, has duly executed and delivered this Agreement, the Custody Agreement and the Power of Attorney; this Agreement constitutes a legal valid and binding obligation of such Selling Stockholder; all authorizations and consents necessary for the execution and delivery of this Agreement, the Custody Agreement and the Power of Attorney on behalf of such Selling Stockholder and for the sale and delivery of the Shares to be sold by such Selling Stockholder hereunder have been given, except as may be required by the Act or state securities laws or the NASD; and such Selling Stockholder has the legal capacity and full right, power and authority to execute this Agreement, the Custody Agreement and the Power of Attorney. (d) The performance of this Agreement, the Custody Agreement and the Power of Attorney and the consummation of the transactions contemplated hereby and thereby by each of the Selling Stockholders will not result in a material breach or violation of, or material conflict with, any of the terms or provisions of, or constitute a material default by such Selling Stockholder under, any indenture, mortgage, deed of trust (constructive or other), loan agreement, lease, franchise, license or other agreement or instrument to which such Selling Stockholder or any of its properties is bound, any statute, or any judgment, decree, order, rule or regulation or any court or governmental agency or body applicable to such Selling Stockholder or any of its properties. (e) Such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offer and sale of the Shares other than any preliminary prospectus prepared and filed by the Company with the Commission or the Prospectus or other material permitted by the Act. 9 10 (f) For a period of 180 days from the Effective Date of the Registration Statement, such Selling Stockholder will not, directly or indirectly, sell, offer to sell, grant any option for the sale of, or otherwise dispose of any shares of Common Stock, other than to the Underwriters pursuant to this Agreement, without the prior written consent of J.C. Bradford & Co.; provided, however, that the undersigned may give or pledge any such securities without the prior written consent of J.C. Bradford & Co. if the donee or pledgee, as the case may be, agrees in writing prior to such gift or pledge to be bound by the terms of this agreement and such writing is delivered to J.C. Bradford & Co. within five days after said gift or pledge; and provided further, that the "Other Founding Stockholders" and the "Stockholder Affiliates" (as those terms are defined in the "Shares Eligible For Future Sale" section of the Prospectus) may sell, subject to all applicable federal and state securities laws, a limited portion of their shares of Common Stock without the prior written consent of J.C. Bradford & Co. during the "Open Period" (as defined in "Shares Eligible for Future Sale"). (g) Except to the knowledge of such Selling Stockholder, the representations and warranties of the Company contained in Section 3 of this Agreement are true and correct; such Selling Stockholder has reviewed and is familiar with the Registration Statement as originally filed with the Commission and the preliminary prospectus contained therein. To the knowledge of such Selling Stockholder, the preliminary prospectus does not include an untrue statement of a material fact, or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; other than as disclosed to the Underwriters, such Selling Stockholder is not prompted to sell the Shares to be sold by such Selling Stockholder by any information concerning the Company that is not set forth in the preliminary prospectus or the Prospectus. (h) To the extent that any statements or omissions made in the Registration Statement, any preliminary prospectus, the Prospectus or any amendment or supplement thereto are made in reliance upon and in conformity with written information furnished to the Company by such Selling Stockholder expressly for use therein, such Registration Statement, preliminary prospectus and Prospectus and any amendments or supplements thereto did not and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (i) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory body, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement by such Selling Stockholder, and the consummation by it of the transaction herein contemplated (other than as required by the Act, state securities laws and the NASD). (j) Any certificates signed by or on behalf of such Selling Stockholder as such and delivered to the Representatives or to counsel for the Representatives shall be deemed a representation and warranty by such Selling Stockholder to each Underwriter as to the matters covered thereby. (k) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to 10 11 the transactions herein contemplated such Selling Stockholder agrees to deliver to you prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (l) Such Selling Stockholder will not take, directly or indirectly, any action designed to cause or result in, or which might constitute or reasonably be expected to constitute, stabilization or manipulation of the price of the Common Stock. 5. 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 of any event during the period mentioned in the second sentence of Section 5(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, three signed copies of the Registration Statement and of any post-effective amendment thereto, including financial statements and schedules, and all exhibits thereto. 11 12 (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 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 5(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 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 promptly after such filing. 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 12 13 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 5(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 $10,000, 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 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 13 14 stockholders, 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 one percent (1%) or more of the outstanding shares of Common Stock (or options to acquire or become the holder of one percent (1%) or more of the 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). (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. 6. 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 hereof 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 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 14 15 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 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: 15 16 (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, except 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 in all other jurisdictions, except 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. (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) Except as set forth in the Prospectus, 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. 16 17 (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 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 17 18 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. (g) The Underwriters shall have received an opinion, dated the Closing Date and satisfactory in form and substance to your counsel, from Wright, Lindsey & Jennings, counsel to the Selling Stockholders, to the effect that: (i) This Agreement, the Custody Agreement and the Power of Attorney have been duly executed and delivered by or on behalf of each of the Selling Stockholders and constitute valid and binding agreements of such Selling Stockholders in accordance with their terms, except as enforceability may be limited by applicable equitable principles or by bankruptcy, insolvency, moratorium, reorganization or similar laws from time to time in effect affecting the enforcement of creditors' rights and except that the enforceability of the rights to indemnity and contribution contained herein may be limited by federal or state laws and public policy underlying such laws. (ii) To the knowledge of such counsel, the sale of the Shares to be sold by each Selling Stockholder hereunder and the compliance by such Selling Stockholder with all of the provisions of this Agreement, the Custody Agreement and the Power of Attorney and the consummation of the transactions herein and 18 19 therein contemplated will not conflict with or result in a breach or violation of any terms or provisions of, or constitute a default under any material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property or assets of such Selling Stockholder is subject, or any statute, order, rule or regulation of any court or governmental agency or body known to such counsel to be applicable to such Selling Stockholder or the property of such Selling Stockholder. (iii) To the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated by this Agreement in connection with the Shares to be sold by each Selling Stockholder hereunder, except which have been duly obtained and in full force and effect, such as have been obtained under the Act and such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of such Shares by the Underwriters, as to which such counsel need express no opinion. (iv) Assuming that the Underwriters will take delivery of the Shares for value in good faith and without notice of any adverse claim and that the Underwriters are not parties themselves to any fraud or illegality affecting the Shares, and by delivery of a certificate or certificates therefor, the Selling Stockholders will transfer to the Underwriters good and valid title to such shares, free and clear of any pledge, lien, security interest, charge, claim, equity, or encumbrance of any kind. In rendering such opinion, such counsel may rely as to matters of fact, to the extent proper, on certificates of the Selling Stockholders and the representations and warranties contained in the Custody Agreement and Power of Attorney executed by such Selling Stockholder. Such counsel also may rely as to matters of fact, to the extent deemed proper, on certificates of responsible officers of the Company and public officials. (h) 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. (i) 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 19 20 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 financial information included in the Preliminary Prospectus and the Prospectus under the captions "Prospectus Summary" and "Selected Financial Data" for each of the fiscal years ended December 31, 1992, 1993, 1994, 1995 and 1996 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; 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 20 21 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. (j) 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 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. (k) On or prior to the Closing Date, you shall have received the executed agreements referred to in Section 5(n). 21 22 (l) 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. (m) The Shares shall have been duly authorized for quotation and shall have been approved for listing on the Nasdaq National Market upon official notice of issuance. (n) 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. (o) 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. (p) The Selling Stockholders or the Attorney-in-Fact shall deliver to the Underwriters a certificate dated the Closing Date and executed by each Selling Stockholder or the Attorney-in-Fact to the effect that the representations and warranties of the Selling Stockholders shall be true and correct as of the Closing Date. 7. 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 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 22 23 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 Selling Stockholder agrees, severally and not jointly, to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, and the Company, its directors, its officers who sign the Registration Statement and each person, if any who controls the Company within the meaning of either such Section, provided, however, that the indemnification obligation of each Selling Stockholder shall be limited to the aggregate public offering price of the Shares sold by such Selling Stockholder, from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus (as amended or supplemented if the Company shall have furnished any amendment or supplement thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Selling Stockholder furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement or the Prospectus or in any preliminary prospectus; 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. 23 24 (c) Each Underwriter will indemnify and hold harmless the Company, each Selling Stockholder, 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. (d) Any party that proposes to assert the right to be indemnified under this Section 7 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 7, 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 7 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 24 25 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). (e) 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 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 7(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 7(d) shall be deemed to include, for purpose of this Section 7(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 7(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 25 26 contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 7(d) are several in proportion to their respective underwriting obligations and not joint. For purposes of this Section 7(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 7(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 7(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). (f) The indemnity and contribution agreements contained in this Section 7 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. 8. 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 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 Nasdaq National 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 reasonable judgment, impracticable or inadvisable to market the Shares on the terms and in the manner contemplated by the Prospectus. 9. 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 26 27 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 9 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 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 9 shall not relieve any defaulting Underwriter from liability in respect to any default of such Underwriter under this Agreement. 10. DEFAULT BY A SELLING STOCKHOLDER. If any of the Selling Stockholders shall fail to sell and deliver the number of Shares that such Selling Stockholder is obligated to sell, the Underwriters may, at their option, by notice to the Company, either (a) require the Company to sell and deliver such number of shares of Common Stock as to which the Selling Stockholders have defaulted, (b) elect to purchase the Firm Shares and the Option Shares that the Company and the non-defaulting Selling Stockholders have agreed to sell pursuant to this Agreement, or (c) terminate this Agreement if the Company shall have refused to sell and deliver to the Underwriters the shares of Common Stock referred to in clause (a) of this Section 10. In the event of a default under this Section 10 that does not result in the termination of this Agreement, either the Underwriters or the Company shall have the right to postpone the Closing Date or Option Closing Date for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. No action taken pursuant to this Section 10 shall relieve the Company or the Selling Stockholder so defaulting from liability, if any, in respect of such default. 11. MISCELLANEOUS. All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be mailed, first class postage prepaid, sent via reliable overnight delivery service, sent by telefacsimile (and by one of the two preceding methods), delivered by hand or 27 28 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 sent by one of the foregoing methods 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 and the Selling Stockholders' benefits and of the controlling persons, directors and officers referred to in Section 7, 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, EACH SELLING STOCKHOLDER 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 and each Selling Stockholder 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. Please confirm that the foregoing correctly sets forth the agreement among the Company, the Selling Stockholders and you. Very truly yours, STAFFMARK, INC. By: ---------------------------------------- Clete T. Brewer President and Chief Executive Officer 28 29 SELLING STOCKHOLDERS: By: ____________________________________ ___________________, Attorney-in- Fact for each of the Selling Stockholders identified on Schedule II Confirmed and accepted as of the date first above written. J.C. BRADFORD & CO. MONTGOMERY SECURITIES STEPHENS INC. For themselves and as Representatives of the several Underwriters By: J.C. Bradford & Co. By: ----------------------------- 29 30 SCHEDULE I UNDERWRITERS
Number of Name of Underwriter Firm Shares - ------------------- ----------- J.C. Bradford & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Montgomery Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stephens Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 =========
31 SCHEDULE II SELLING STOCKHOLDERS
Number of Name of Selling Stockholder Firm Shares - --------------------------- ----------- Jerry T. Brewer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,327 Clete T. Brewer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 Robert H. Janes III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,495 Bartfund I Limited Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 Donald A. Marr, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,700 Steven E. Schulte . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 Karla Leigh Schulte Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 John H. Maxwell, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 Mary Sue Maxwell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 Janice Blethen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 Chad J. Brewer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 John C. & Betty L. Becker Charitable Remainder Trust . . . . . . . . . . . . . . . . . . . 47,000 Jean A. Curtis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Bradley C. Faerber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 860 Jeffrey T. Gregory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 Ann F. Jaeger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,746 J. Christopher Jaeger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,746 Robert Kleven . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,326 Donna Vassil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,800 --------- TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285,000 =========
EX-5.1 3 OPINION OF WRIGHT, LINDSEY & JENNINGS 1 EXHIBIT 5.1 [WRIGHT, LINDSEY & JENNINGS LETTERHEAD] August 5, 1997 StaffMark, Inc. 302 East Millsap Road Fayetteville, Arkansas 72703 Ladies and Gentlemen: In our opinion, the 4,025,000 shares of common stock being registered under Registration Statement No. 333-32371, when sold, will constitute legally issued, fully paid, and non-assessable shares of StaffMark, Inc. We consent to the inclusion of this opinion in the Registration Statement and the reference to us under the caption "Legal Matters" in the Prospectus included in the Registration Statement. Very truly yours, WRIGHT, LINDSEY & JENNINGS EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 STAFFMARK, INC. AND SUBSIDIARIES STATES OF INCORPORATION AND QUALIFICATION STAFFMARK, INC., a Delaware corporation SUBSIDIARIES OF STAFFMARK, INC.: 1. BREWER PERSONNEL SERVICES, INC. an Arkansas corporation. Business Names: Prostaff Personnel, Inc., Excel Temporary Staffing, Inc., and Professional Resources, Inc. filed in Arkansas. 2. STAFFMARK ACQUISITION CORPORATION SIX, a Delaware corporation. A. KLEVEN TECHNICAL SERVICES, INC., A MASSACHUSETTS CORPORATION B. THE KLEVEN GROUP, INC., A MASSACHUSETTS CORPORATION 3. GLOBAL DYNAMICS, INC., (formerly StaffMark Acquisition Corporation Four), a Delaware corporation. Business Name: "Global Resourcing Services, Inc." filed in Texas. 4. STAFFMARK ACQUISITION CORPORATION TWO, a Delaware corporation. Business Names: "Flexible Personnel, Great Lakes Search Associates, Flexible Technical, Flexible Accountants and Flexible Information Technology" filed with the Indiana Secretary of State and Allen County, Indiana. 5. STAFFMARK ACQUISITION CORPORATION THREE, a Delaware corporation. Business Names: HR America filed with the Indiana Secretary of State and Allen County, Indiana. 6. THE TECHNOLOGY SOURCE ACQUISITION CORPORATION, a Delaware corporation. Business Names: The Technology Source Acquisition Corporation d/b/a Technology Source, Inc. filed in Missouri. 7. STAFFMARK ACQUISITION CORPORATION FIVE, a Delaware corporation. Business Name: "Lindenberg & Associates" filed in Missouri. 8. THE BLETHEN GROUP, INC., formerly Blethen Temporaries, Inc., a North Carolina corporation. Business Name: The Blethen Group, Inc. d/b/a Clinical Trial Support Services filed in Alamance County, North Carolina. 9. MAXWELL STAFFING, INC., an Oklahoma corporation. 10. MAXWELL STAFFING OF BRISTOW, INC., an Oklahoma corporation. 11. MAXWELL/HEALTHCARE, INC., an Oklahoma corporation. 12. SQUARE ONE REHAB, INC., an Oklahoma corporation. 13. TECHNICAL STAFFING, INC., an Oklahoma corporation. 14. FIRST CHOICE STAFFING, INC., a South Carolina corporation. 15. HRA, INC., a Tennessee corporation. A. TOM BAIN PERSONNEL, INC., a Tennessee corporation, a subsidiary of HRA, Inc. 16. APS - ADVANCE PERSONNEL SERVICE ACQUISITION CORPORATION, a Delaware corporation. Business Names: Advance Personnel Service Acquisition Corporation d/b/a Advance Personnel Service, Inc. filed in Tennessee. 2 17. 533993 B.C., LTD., a British Columbia corporation. A. MRIC - MEDICAL RECRUITERS INTERNATIONAL LTD., a British Columbia corporation, a subsidiary of 533993 B.C., LTD. 18. STERLING HUMAN RESOURCE COMPANY, a Delaware corporation. 19. BAKER STREET GROUP, INC., a Texas corporation. 20. STAFFMARK ACQUISITION CORPORATION NINE, a Delaware corporation, d/b/a Temp Technology, Inc. in Portland, Oregon. 21. EBIT, Inc., a Delaware corporation. 2 EX-23.2 5 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Little Rock, Arkansas, August 5, 1997. 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 5, 1997. 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 5, 1997. 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 San Francisco, California, August 5, 1997. EX-23.3 6 CONSENT OF COOPERS & LYBRAND LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-32371) of our report, which includes an explanatory paragraph due to changes in entities, dated February 4, 1997, except for Note 3 for which the date is February 24, 1997 and except for Note 7 for which the date is March 17, 1997, on our audit of the financial statements of Flexible Personnel Group of Companies. We also consent to the reference to our firm under the caption "Experts." Coopers & Lybrand, L.L.P Fort Wayne, Indiana August 5, 1997 -----END PRIVACY-ENHANCED MESSAGE-----