<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CORESTAFF, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 76-0407849
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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<TABLE>
<S> <C>
PETER T. DAMERIS
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
4400 POST OAK PARKWAY, SUITE 1130 4400 POST OAK PARKWAY, SUITE 1130
HOUSTON, TEXAS 77027-3413 HOUSTON, TEXAS 77027-3413
(281) 602-3400 (281) 602-3400
(Address, including zip code, and telephone (Name, address, including zip code, and telephone
number, number,
including area code, of Registrant's principal including area code, of agent for service)
executive offices)
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Copies to:
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JEFFERY B. FLOYD JOHN F. WOMBWELL
ROBERT K. HATCHER ANDREWS & KURTH L.L.P.
VINSON & ELKINS L.L.P. 4200 TEXAS COMMERCE TOWER
2300 FIRST CITY TOWER HOUSTON, TEXAS 77002
1001 FANNIN STREET (713) 220-4396
HOUSTON, TEXAS 77002-6760
(713) 758-2222
(713) 758-2346 (FAX)
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please 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, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(1)
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<S> <C> <C>
Convertible Subordinated Notes(2)............... $207,000,000 $62,727
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Common Stock, par value $0.01 per share......... $206,137,500 $62,466
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(1) Calculated pursuant to Rule 457(o).
(2) There is also registered hereunder such indeterminant number of shares of
Common Stock, $0.01 par value, of the Registrant as may be issuable upon
conversion of the Convertible Subordinated Notes being registered hereby.
---------------------
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains three forms of Prospectus, one to be
used in connection with the offering by certain selling stockholders of Common
Stock of the Company in the United States (the "U.S. Stock Prospectus"), one to
be used in connection with a concurrent offering of Common Stock of the Company
by such selling stockholders outside the United States (the "Non-U.S. Stock
Prospectus," and together with the U.S. Stock Prospectus, the "Stock
Prospectuses"), and one to be used in connection with the offering by the
Company of Convertible Subordinated Notes due 2004 (the "Notes Prospectus"). The
Common Stock offering pursuant to the Stock Prospectuses and the Notes offering
pursuant to the Notes Prospectus are not contingent upon each other. The form of
U.S. Stock Prospectus immediately follows this page and is followed by alternate
pages for the form of each of the Non-U.S. Stock Prospectus (on page A-1) and
the Notes Prospectus (on pages A-2 through A-23).
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS (Subject to Completion)
Issued July 17, 1997
6,000,000 Shares
[CORESTAFF, INC. LOGO]
COMMON STOCK
------------------------
OF THE 6,000,000 SHARES OF COMMON STOCK OF THE COMPANY (THE "SHARES") BEING
OFFERED, 5,000,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND
CANADA (THE "U.S. OFFERING") BY THE U.S. UNDERWRITERS AND 1,000,000 SHARES ARE
BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS (THE "INTERNATIONAL OFFERING," AND TOGETHER WITH THE
U.S. OFFERING, THE "STOCK OFFERINGS"). THE INITIAL PUBLIC OFFERING PRICE AND
AGGREGATE UNDERWRITING DISCOUNT PER SHARE WILL BE IDENTICAL FOR BOTH OF THE
STOCK OFFERINGS. SEE "UNDERWRITERS."
------------------------
ALL OF THE SHARES OFFERED HEREBY ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE
"PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE
PROCEEDS FROM THE SALE OF THE SHARES IN THE STOCK OFFERINGS. THE COMPANY'S
COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "CSTF." ON
JULY 16, 1997, THE LAST SALE PRICE OF THE COMMON STOCK AS REPORTED ON THE NASDAQ
NATIONAL MARKET WAS $30 1/4 PER SHARE.
------------------------
CONCURRENTLY WITH THE STOCK OFFERINGS BY THE SELLING STOCKHOLDERS, THE COMPANY
IS OFFERING $180,000,000 ($207,000,000 IF THE OVER-ALLOTMENT OPTION TO THE
UNDERWRITERS IS EXERCISED IN FULL) AGGREGATE PRINCIPAL AMOUNT OF %
CONVERTIBLE SUBORDINATED NOTES DUE 2004 (THE "NOTES") OF THE COMPANY (THE "NOTES
OFFERING"). THE CONSUMMATION OF THE NOTES OFFERING IS NOT CONTINGENT UPON
CONSUMMATION OF THE STOCK OFFERINGS OR VICE VERSA.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 8 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.
------------------------
PRICE $ PER SHARE
------------------------
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDERS(2)
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<S> <C> <C> <C>
Per Share........................................... $ $ $
Total(3)............................................ $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Pursuant to an agreement with the Company, the Selling Stockholders will
each pay their pro rata share of the expenses in connection with the sale
of Common Stock offered hereby.
(3) Another Selling Stockholder has granted to the Underwriters an option,
exercisable within 30 days of the date hereof, to purchase up to an
additional 900,000 shares of Common Stock at the price to public less
underwriting discounts and commissions to cover over-allotments, if any.
If the Underwriters exercise the option in full, the total price to
public, underwriting discounts and commissions and proceeds to Selling
Stockholders will be $ , $ and $ , respectively. See
"Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Andrews &
Kurth L.L.P., counsel for the Underwriters. It is expected that delivery of the
Shares will be made on or about August , 1997, at the office of Morgan Stanley
& Co. Incorporated, New York, New York, against payment therefor in immediately
available funds.
------------------------
MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO.
ALEX. BROWN & SONS
Incorporated
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
MONTGOMERY SECURITIES
THE ROBINSON-HUMPHREY COMPANY, INC.
<PAGE> 4
No person is authorized in connection with the offering made hereby to give
any information or to make any representation not contained or incorporated by
reference in this Prospectus and any information or representation not contained
or incorporated herein must not be relied upon as having been authorized by the
Company or the Underwriters. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, any of the securities offered hereby
by any person in any jurisdiction in which it is unlawful for such person to
make such an offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall under any circumstances imply that the information
herein is correct as of any date subsequent to the date hereof.
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES OR THE
COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT THE NOTES AND THE
COMMON STOCK IN CONNECTION WITH THE OFFERINGS, AND MAY BID FOR AND PURCHASE THE
NOTES OR SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITERS."
TABLE OF CONTENTS
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Page
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Available Information....................................... 1
Incorporation of Certain Documents by Reference............. 2
Prospectus Summary.......................................... 3
Risk Factors................................................ 8
Use of Proceeds............................................. 12
Notes Offering.............................................. 12
Price Range of Common Stock and Dividend Policy............. 12
Capitalization.............................................. 13
Selected Consolidated Financial Data........................ 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Business.................................................... 26
Management.................................................. 38
Principal and Selling Stockholders.......................... 41
Description of Capital Stock................................ 42
Shares Eligible for Future Sale............................. 45
Underwriters................................................ 47
Legal Matters............................................... 50
Experts..................................................... 50
Index to Consolidated Financial Statements.................. F-1
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: Seven World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials can be obtained by mail from the Public
Reference Section of the Commission, at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy
statements and other information regarding registrants that file electronically
with the Commission. In addition, reports, proxy statements and other
information concerning the Company can be inspected at the Nasdaq National
Market, 1735 K Street, N.W., Washington, D.C. 20006, on which exchange the
Common Stock is quoted.
1
<PAGE> 5
This Prospectus constitutes a part of a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission under the Securities Act of
1933, as amended (the "Securities Act"). This Prospectus omits certain of the
information contained in the Registration Statement, and reference is hereby
made to the Registration Statement for further information with respect to the
Company and the securities offered hereby. Any statements contained herein
concerning the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission are not
necessarily complete, and in each instance reference is made to the copy of such
document so filed. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed with the Securities and Exchange Commission
(the "Commission") by the Company pursuant to the Exchange Act, are incorporated
herein by reference and made a part of this Prospectus:
(i) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996;
(ii) the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997;
(iii) the Company's Current Report on Form 8-K filed on January 10,
1997; and
(iv) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A dated October 20, 1995.
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of this offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such document. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in this
Prospectus or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or suspended, to constitute a part of this Prospectus.
The Company will provide with charge to each person to whom a copy of this
Prospectus is delivered, on the request of any such person, a copy of any or all
of the foregoing documents incorporated herein by reference, other than exhibits
to such documents (unless such exhibits are specifically incorporated by
reference in such documents). Written or telephone requests for such copies
should be directed to Peter T. Dameris, Esq., CORESTAFF, Inc., 4400 Post Oak
Parkway, Suite 1130, Houston, Texas 77027-3413; telephone: (281) 602-3400.
2
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this Prospectus or incorporated by reference
herein. Unless otherwise indicated, the pro forma consolidated financial data
presented herein give effect to all businesses acquired by the Company through
March 31, 1997, as if such acquisitions were consummated as of the beginning of
the periods presented, but do not give effect to the Notes Offering. Information
contained in this Prospectus assumes no exercise of the over-allotment options.
As used herein, unless the context indicates otherwise, the terms "CORESTAFF"
and the "Company" mean CORESTAFF, Inc. and its predecessors, subsidiaries, and
divisions. In this Prospectus, references to "dollars" and "$" are to United
States dollars.
THE COMPANY
CORESTAFF is one of the largest information technology ("IT") services and
staffing firms in the United States. The Company provides a broad range of IT
services and staffing services to a diverse client base through its network of
147 branch offices in the United States, the United Kingdom and India. The
Company's principal clients include companies such as American Express, AT&T,
Compaq Computer, CSX, Lucent Technologies, MCI and Mobil.
The Company's services are provided through its two business groups: the IT
Services Group, which is comprised of COMSYS Information Technology Services
("COMSYS") and the recently formed IT Solutions unit ("IT Solutions"), and the
Staffing Services Group, which operates under the name "CORESTAFF Services."
COMSYS provides highly skilled IT consultants principally to FORTUNE 1000
companies and governmental agencies. COMSYS has more than 4,000 consultants on
assignments and supports all major computer technology platforms (mainframe,
mid-range, client/server and network) and supports client projects using a
variety of software applications. COMSYS maintains a database of approximately
170,000 consultants from which it recruits consultants to support client
projects. For the quarter ended March 31, 1997, COMSYS accounted for 45.8% and
51.6% of the Company's pro forma revenues and gross profit, respectively. The
Company's IT Solutions unit provides technologically advanced resources and
solutions, encompassing systems integration, software development, legacy
application support and outsourcing services. Formed during the first quarter of
1997, IT Solutions accounted for 3.1% and 5.1% of the Company's pro forma
revenues and gross profit, respectively, for the quarter ended March 31, 1997.
Management expects the growth of IT Solutions to exceed that of the Company's
other business units and to provide an increasing percentage of revenues and
profits for the Company. CORESTAFF Services provides office support, light
industrial and specialized staffing services to local, regional and national
customers. CORESTAFF Services accounted for 51.1% and 43.3% of the Company's pro
forma revenues and gross profit, respectively, for the quarter ended March 31,
1997.
Since its inception in July 1993, the Company has grown through the
acquisition of IT services and staffing businesses and through substantial
internal growth. As of June 30, 1997, the Company had acquired 32 businesses,
including 17 in the IT Services Group and 12 in the Staffing Services Group. The
Company's revenues and operating income have increased from $163.4 million and
$4.9 million, respectively, in 1994 to $596.1 million and $36.7 million,
respectively, in 1996. For the quarter ended March 31, 1997, the Company's
revenues and operating income increased to $216.9 million and $12.2 million as
compared to $103.4 million and $5.8 million for the period ended March 31, 1996,
representing revenue and operating income growth of 109.8% and 110.3%,
respectively.
STRATEGY
The Company seeks to expand on its success by broadening the range of IT
services and staffing services offered to its existing and prospective clients.
The Company's strategy is focused on internal growth, selective acquisitions,
and the continued development of additional complementary IT services and
staffing services. The Company believes that its business strategy will provide
it with a competitive advantage in pursuing and
3
<PAGE> 7
maintaining major national and regional accounts as well as in serving local
markets. The key elements of the Company's strategy are presented below.
Enhance Leadership Position in the Information Technology Services Sector.
In recent years, there has been a dramatic increase in demand for technical
project support, software development, and other IT services resulting from the
increased use of technology. This high level of demand, coupled with the high
value-added nature of such services, generally results in higher profit margins.
The Company has targeted the high-growth, high-margin IT services sector as its
primary growth area and intends to aggressively enhance its existing leadership
position in this sector.
The Company established its IT Services Group with the acquisition of two
major businesses in September 1994 and June 1995. Since that time, the Company
has acquired 15 additional IT services businesses, including three IT solutions
businesses. As part of its strategy to offer a more complete range of high end,
value-added IT services to its clients, the Company formed its IT Solutions unit
in the first quarter of 1997. The Company believes that it is a leading provider
of IT staff augmentation services, with 1996 pro forma revenues of $374 million.
In 1996, pro forma revenues for the IT Services Group increased 32% over 1995,
reflecting internal growth, while increasing gross margins. The Company expects
that revenues contributed by this group will continue to increase as a
percentage of its total revenues.
The Company believes that it is well positioned to capitalize on the
anticipated continued growth in the IT services sector due to its size,
geographic breadth, industry experience, and expertise in providing a wide range
of IT services. The Company intends to grow significantly in this area through
(i) selective acquisitions, (ii) aggressive recruiting, training, and marketing
of industry specialists with a wide range of technical expertise, (iii) opening
offices in new and existing markets, and (iv) active cross-selling of its IT
services to its existing IT and staffing services customers. The Company intends
to continue pursuing businesses with specializations in custom software
development, packaged software implementation, critical computer code
maintenance and network implementation and integration.
Leverage Infrastructure and Existing Client Base for Internal Growth. The
Company has established a national branch network for its IT Services Group and
Staffing Services Group and has used this network to increase revenues and
enhance earnings stability. The Company believes that this geographic and sector
diversity helps to protect it from adverse regional economic and business
cycles. In addition, the Company's existing branch office network has the
infrastructure and support systems in place to enable it to expand and enhance
services while limiting additional expense. This allows the Company to achieve
significant economies through the allocation of management, advertising,
recruiting and training costs over a larger revenue base. Further economies of
scale are presented by the Company's three domestic and three international
development centers established to provide offsite software development services
for clients.
The Company's branch office network, together with its software development
centers, provides it with an advantage when pursuing contracts with national
accounts. These accounts generally have numerous locations and a wide variety of
service needs. The Company's ability to meet the broad service requirements of
its clients provides a basis for establishing long-term relationships with
large-scale users of IT services and staffing services, and further provides the
Company with significant advantages over its competitors in marketing solutions
to such clients.
Broaden Range of Value-added IT Services and Solutions. The Company
believes that it can increase its revenues from existing clients and attract new
clients by offering a broad range of IT services through its IT Services Group.
The IT Services Group is comprised of COMSYS, which addresses IT staff
augmentation requirements, and IT Solutions, which addresses specific IT
problems. In response to the rapidly changing nature of IT, the Company
regularly evaluates emerging technologies and their potential benefit as new
services to clients. Based on these evaluations, the Company may develop or
expand the service lines of existing business units or acquire complementary
businesses to enhance the Company's ability to support its clients' ongoing IT
requirements. IT Solutions is a recent addition to the service line that
provides value-added services, including Internet/Intranet services, Year 2000
solutions, new media solutions (such as multimedia-based Web site design),
software development, training services, critical code maintenance and software
testing and quality assurance.
4
<PAGE> 8
Expand Use of Offshore Development Centers. In 1997, the Company acquired
three offshore software development centers in India which will provide the IT
Services Group with a significant cost advantage as well as the ability to
provide 24-hour service to its clients. The Company's costs in India are
significantly lower than costs incurred for comparable resources in the U.S.
Through satellite communications, the Company's clients may be directly linked
to the IT Services Group's facilities in India. Due to the time difference
between India and the U.S., the Company can create a virtual "second shift" for
its North American clients allowing for more rapid completion of projects and
off-peak use of clients' technology resources. In addition, for larger projects
with critically short time frames, the offshore facilities allow the Company to
parallel process many of its development phases to accelerate delivery time. The
Company intends to continue to seek opportunities to further use its facilities
in India as well as evaluate other offshore facilities that could provide
similar cost advantages.
Continue to Pursue Selective Acquisitions. The Company has made 32
acquisitions since its inception in 1993. While the Company initially
concentrated its acquisition efforts on establishing a national base of staffing
services, the Company has more recently focused its acquisition efforts in the
higher-margin IT services sector. The Company is currently focused on
acquisitions to expand the services offered by COMSYS and IT Solutions. Through
June 30, 1997, the Company had acquired five businesses in its IT Services Group
with aggregate 1996 revenues of $49.0 million. Currently, the Company has
non-binding letters of intent to acquire three businesses, which would
complement its existing IT businesses.
Focus on Recruiting, Training and Retention. The Company believes that its
ability to attract and retain a broad spectrum of high-quality employees,
consultants and computer professionals is a key element of its growth strategy.
The Company has established a domestic and international network to recruit
employees, consultants and computer professionals of all experience levels. The
Company has 12 full time employees dedicated to recruiting in India as well as
two full-time recruiters located in the U.K. In the IT Services Group, the
Company provides continual training opportunities in software engineering
techniques and key technologies. The Company has made significant investments in
its domestic and foreign training centers, including centers that employ
full-time instructors and are equipped with client/server and mainframe
hardware, software and development tools. These training resources enhance the
Company's ability to provide qualified IT professionals to satisfy its client
needs. In addition, the Company's complementary services from staff augmentation
to high-end software development offer its IT professionals the opportunity to
grow professionally within the Company. The Company believes that this internal
upward mobility is a critical factor in continuing to attract and retain
high-quality employees, consultants and computer professionals.
THE INFORMATION TECHNOLOGY SERVICES AND STAFFING INDUSTRIES
According to International Data Corporation ("IDC"), the worldwide market
for IT services was estimated at $202 billion in 1996, with a projected market
of $292 billion in 2000. IDC also projects that the domestic IT services market
will grow from $84 billion in 1996 to $130 billion in 2000. Currently,
substantially all of the Company's revenues from its IT Services Group are
derived from IT staff augmentation services and IT implementation and
integration services, two segments within the overall IT services industry. IDC
estimates that the domestic market for IT implementation and integration
services was $22 billion in 1996, with a forecast of $35 billion by 2000.
According to the Staffing Industry Report, a staffing service industry
publication, the domestic market for technical/IT staff augmentation services
was approximately $12 billion in 1996 and grew at a compounded annual rate of
approximately 20% over the past five years.
According to the Staffing Industry Report, the U.S. staffing industry was
estimated to have 1996 revenues of approximately $47.1 billion and a compound
annual growth rate of approximately 17% over the past five years. Within the
staffing industry, the office/clerical/industrial sector was estimated to have
1996 revenues of approximately $26.4 billion and a compounded annual growth rate
of 17% over the past five years. The Company believes that the demand for IT
staff augmentation and staffing services will continue to increase due to
changes in workforce lifestyles, advances in technology and the increasing
desire of many companies to shift employee costs from a fixed to a variable
expense and to outsource the support functions.
5
<PAGE> 9
THE OFFERINGS
Common Stock Offered by the Selling Stockholders:
U.S. Offering............ 5,000,000 shares
International Offering... 1,000,000 shares
Total............ 6,000,000 shares
Common Stock Outstanding
after the Stock
Offerings................ 32,104,977 shares(1)
Concurrent Notes
Offering................... Concurrently with the Stock Offerings, the Company
is offering $180,000,000 aggregate principal amount
of Convertible Subordinated Notes due 2004 in the
Notes Offering. Consummation of the Stock Offerings
and the Notes Offering are not contingent upon each
other. See "Notes Offering."
Use of Proceeds............ All of the shares are being offered by the Selling
Stockholders. The Company will not receive any
proceeds from the sale of the shares offered
hereby.
Nasdaq National Market
Symbol................... CSTF
- ---------------
(1) Based upon the number of outstanding shares of Common Stock at June 30,
1997. Does not include 2,739,753 shares issuable upon exercise of
outstanding employee stock options and shares issuable upon
conversion of the Notes, initially at a conversion rate of shares per
$1,000 principal amount at maturity of the Notes.
RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Common Stock should carefully consider the matters set forth
under "Risk Factors."
6
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
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HISTORICAL PRO FORMA(1)
------------------------------------------------------------------- ----------------------------------
INCEPTION
(JULY 16,
1993) THREE MONTHS THREE MONTHS
THROUGH ENDED YEAR ENDED ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
------------ ------------------------------ ------------------- ------------ -------------------
1993 1994 1995 1996 1996 1997 1996 1996 1997
------------ -------- -------- -------- -------- -------- ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from
services.............. $ 3,093 $163,351 $344,548 $596,101 $103,386 $216,948 $783,074 $171,357 $223,264
Gross profit............ 748 33,808 82,456 144,596 25,702 49,855 189,920 41,039 52,311
Operating income
(loss)................ (388) 4,876 17,807 36,725 5,826 12,221 51,234 10,204 12,965
Income (loss) before
income taxes.......... (395) 2,711 10,947 31,003 4,602 9,923 35,516 5,784 10,404
Net income (loss)....... $ (253) $ 1,549 $ 6,357 $ 16,454 $ 2,669 $ 5,755 $ 19,071 $ 3,355 $ 6,035
Earnings (loss) per
common share(2)....... $ (0.01) $ 0.07 $ 0.29 $ 0.54 $ 0.10 $ 0.18 $ 0.63 $ 0.12 $ 0.19
Number of shares used to
compute earnings per
share................. 16,523 17,587 19,715 30,365 27,339 32,429 30,365 27,339 32,429
OTHER DATA:
EBITDA(3)............... $ (276) $ 6,920 $ 22,140 $ 42,241 $ 7,269 $ 14,674 $ 60,287 $ 12,883 $ 15,602
Ratio of earnings to
fixed charges:
Actual(4)............. (13.6) 2.0 2.3 5.7 3.8 4.6
Pro forma(5).......... 7.1 4.6 5.0
Supplemental pro
forma(6)............ 3.8 2.7 4.9
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 94,315 $119,181
Total assets................................................ 396,397 458,324
Long-term debt, net of current maturities................... 107,839 152,366
Stockholders' equity........................................ 230,917 237,337
</TABLE>
- ---------------
(1) The pro forma consolidated financial data give effect to all businesses
acquired by the Company through March 31, 1997 as if such acquisitions were
consummated as of January 1, 1996, but do not give effect to the Offerings.
The pro forma results of operations are not necessarily indicative of the
results that would have occurred had the acquisitions been consummated as of
January 1, 1996 or that might be attained in the future.
(2) Gives retroactive effect to the two three-for-two stock splits in 1996 and
to the conversion of preferred stock into common stock in connection with
the Company's initial public offering of Common Stock in November 1995. See
Notes 1 and 5 to Consolidated Financial Statements included elsewhere
herein.
(3) Represents earnings before interest, income taxes, depreciation and
amortization. EBITDA should not be considered as an alternative to net
income as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a discussion of other
commonly used measures of liquidity and operating performance.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income (loss) before income taxes plus fixed charges and
amortization expense related to capitalized interest. Fixed charges consist
of interest expense (including amounts capitalized), amortization of debt
issuance costs, and interest portion of rent expense.
(5) Gives effect to the refinancing of a portion of the Company's historical
debt with the net proceeds to be received from the Notes Offering.
(6) Gives effect to businesses acquired by the Company through March 31, 1997 as
if such acquisitions were consummated as of January 1, 1996 and the effect
of the refinancing of a portion of the outstanding debt with the net
proceeds to be received from the Notes Offering.
7
<PAGE> 11
RISK FACTORS
In addition to other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the securities offered by this Prospectus.
FORWARD-LOOKING INFORMATION
This Prospectus contains various forward-looking statements and information
that are based on management's belief as well as assumptions made by and
information currently available to management. When used in this document, the
words "anticipate," "estimate," "project," "expect," and similar expressions are
intended to identify forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, projected or expected. Among the
key factors that may have a direct bearing on the Company's operating results
are fluctuations in the economy, the degree and nature of competition, demand
for the Company's services, and the Company's ability to integrate the
operations of acquired businesses, to recruit and place temporary and IT
professionals, to expand into new markets, and to maintain profit margins in the
face of pricing pressures.
NO ASSURANCE OF SUCCESSFUL MANAGEMENT AND MAINTENANCE OF GROWTH
The Company has experienced rapid growth, primarily through acquisitions.
The Company's financial results and prospects depend in large part on its
ability to successfully integrate, manage and maintain the operating
efficiencies and productivity of these acquired operations. In particular,
whether the anticipated benefits of acquired operations are ultimately achieved
will depend on a number of factors, including the ability of the combined
companies to maintain low administrative costs, successfully combine markets
targeted and services offered, general economies of scale and the ability of the
Company, generally, to capitalize on its combined service and marketing base and
strategic position. Moreover, the ability of the Company to continue to grow
will depend on a number of factors, including competition from other IT services
and staffing companies, availability of capital, ability to maintain margins,
ability to recruit and train additional qualified personnel and the management
of costs in a changing technological environment. There can be no assurance that
the Company will be able to continue to expand and successfully manage its
growth.
In addition, there can be no assurance that the Company will continue to be
able to expand its market presence in its current locations or to successfully
enter other markets or integrate acquired businesses into its operations. The
ability of the Company to continue its growth will depend on a number of
factors, including existing and emerging competition, the availability of
attractive acquisition opportunities and working capital to support such growth,
the ability of the Company to consummate such acquisition opportunities. The
Company must also manage costs in a changing technological environment,
continually adapt its infrastructure and systems to accommodate growth, and
recruit and train additional qualified personnel.
ABILITY TO CONTINUE ACQUISITION STRATEGY
The Company plans to continue to pursue opportunities to expand through
acquisitions. The Company's acquisition strategy involves certain potential
risks associated with assessing, acquiring and integrating the operations of
acquired companies. Although the Company generally has been successful in
implementing its acquisition strategy, there can be no assurance that attractive
acquisition opportunities will continue to be available, that the Company will
have access to the capital required to finance potential acquisitions on
satisfactory terms, or that any businesses acquired will prove profitable.
Future acquisitions may result in the incurrence of additional indebtedness or
the issuance of additional equity securities.
ABILITY TO ATTRACT AND RETAIN QUALIFIED IT PROFESSIONALS
The Company's continued success in its IT Services Group will depend in
large part upon its ability to attract, retain and motivate highly-skilled
employees, particularly project managers and client partners and
8
<PAGE> 12
other senior technical personnel. Qualified project managers are in particularly
great demand and are likely to remain a limited resource for the foreseeable
future. However, the Company believes that it has been successful in its efforts
to attract, develop and retain the number of high-quality professionals needed
to support present operations and future growth, in part because of its emphasis
on training and its policy of promoting from within. Although the Company
expects to continue to attract sufficient numbers of highly skilled employees
and to retain its existing project managers and other senior personnel for the
foreseeable future, there can be no assurance that the Company will be able to
do so.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SOLUTIONS
The Company's success will depend in part on its ability to develop IT
solutions that keep pace with continuing changes in IT, evolving industry
standards and changing client preferences. There can be no assurance that the
Company will be successful in adequately addressing these developments on a
timely basis or that, if these developments are addressed, the Company will be
successful in the marketplace. In addition, there can be no assurance that
products or technologies developed by others will not render the Company's
services uncompetitive or obsolete. The Company's failure to address these
developments could have a material adverse effect on the Company's business,
operating results and financial condition.
FIXED-BID PROJECTS
The Company undertakes certain IT projects billed on a fixed-bid basis,
which is distinguishable from the Company's principal method of billing on a
time and materials basis, and undertakes other projects on a fee-capped basis.
The failure of the Company to complete such projects within budget or below the
cap would expose the Company to risks associated with cost overruns, which could
have a material adverse effect on the Company's business, operating results and
financial condition.
GOVERNMENT REGULATION OF IMMIGRATION
Certain of the Company's 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 or at a sufficient rate could have a material adverse effect on the
Company's business, operating results and financial condition. 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 -- Employees."
LIABILITIES FOR CLIENT AND EMPLOYEE ACTIONS
Temporary service providers are in the business of employing people and
placing them 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. The Company has policies and
guidelines in place to reduce its exposure to these risks. However, a failure to
follow these policies and guidelines may result in negative publicity and the
payment by the Company of monetary damages or fines. Although the Company
historically has not had any significant problems in this area, there can be no
assurance that the Company will not experience such problems in the future.
The Company is also exposed to liability with respect to actions taken by
its employees while on assignment, such as damages caused by employee errors,
misuse of client proprietary information, or theft of client property. To reduce
such exposures, the Company maintains insurance policies covering general
liability, workers' compensation claims, errors and omissions, and employee
theft. Due to the nature of the
9
<PAGE> 13
Company's assignments, in particular, access to client information systems and
confidential information, and the potential liability with respect thereto,
there can be no assurance that insurance coverage will continue to be available
or that it will be adequate to cover any such liability.
RELIANCE ON KEY PERSONNEL
The Company is highly dependent on its management. The Company believes
that its continued success will depend to a significant extent upon the efforts
and abilities of its Chairman, President and Chief Executive Officer, Michael T.
Willis, and certain other key executives. The loss of the services of Mr. Willis
or any of the other key executives could have a material adverse effect upon the
Company.
HIGHLY COMPETITIVE MARKETS
The IT services and staffing services industries are highly competitive
with limited barriers to entry. The Company competes in national, regional and
local markets with IT services companies, full service agencies and specialized
temporary services agencies. The market for IT solutions services includes a
large number of competitors, is subject to rapid change and is highly
competitive. Primary competitors in the IT solutions services market include
participants from a variety of market segments, including "Big Six" accounting
firms, systems consulting and implementation firms, application software firms,
service groups of computer equipment companies, facilities management companies,
general management consulting firms and programming companies. Many of the
Company's competitors have significantly greater financial, technical and
marketing resources and greater name recognition than the Company. In addition,
the Company competes with its clients' internal resources, particularly where
these resources represent a fixed cost to the client. Such competition may
impose additional pricing pressures on the Company. The Company expects that the
level of competition will remain high in the future.
INTELLECTUAL PROPERTY RIGHTS
The Company's continued success in its IT solutions businesses is dependent
upon its software deployment and methodology and other proprietary intellectual
property rights. The Company relies upon a combination of trade secret,
nondisclosure and other contractual arrangements and technical measures, and
copyright and trademark laws, to protect its proprietary rights. The Company
holds no patents or registered copyrights. The Company generally enters into
confidentiality agreements with its employees, consultants, clients and
potential clients and limits access to and distribution of its proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of its proprietary
information or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights.
The Company's business includes the development of custom software
applications in connection with specific client engagements. Ownership of such
software is generally assigned to the client. In addition, the Company also
develops object-oriented software components that can be reused in software
application development and certain foundation and application software
products, or software "tools," most of which remain the property of the Company.
Although the Company believes that its services and products do not
infringe on the intellectual property rights of others, there can be no
assurance that such a claim will not be asserted against the Company in the
future.
RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS
The Company expects that international operations will account for an
increasingly significant percentage of the Company's operations. As a result,
the Company is subject to a number of risks, including, among other things,
difficulties relating to administering its business globally, managing foreign
operations, currency fluctuations, restrictions against the repatriation of
earnings, export requirements and restrictions, and multiple and possibly
overlapping tax structures. These risks could have a material adverse effect on
the Company's business, results of operations and financial condition. The
failure of the Company to manage growth, attract
10
<PAGE> 14
and retain personnel, profitably deliver services, or a significant interruption
of the Company's ability to transmit data via satellite, could have a material
adverse impact on the Company's ability to successfully maintain and develop its
international operations and could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company currently has operations in India and expects to establish
additional offshore operations in other countries. Although wage costs in India
are significantly lower than in the U.S. and elsewhere for comparably skilled IT
professionals, wages in India are increasing at a faster rate than in the U.S.
Changes in inflation, interest rates, taxation, regulation or other social,
political, economic or diplomatic developments affecting India could have a
material adverse effect on the Company's business, operating results and
financial condition.
FLUCTUATIONS IN THE GENERAL ECONOMY AFFECT DEMAND FOR IT SERVICES AND STAFFING
SERVICES
Demand for IT services and staffing services is significantly affected by
the general level of economic activity. When economic activity increases,
temporary employees are often added before full-time employees are hired.
Similarly, as economic activity slows, many companies reduce their usage of IT
services and temporary employees before undertaking layoffs of full-time
employees. Further, in an economic downturn, the Company may face pricing
pressure from its customers and increased competition from other IT services and
staffing companies that could have a material adverse effect on the Company's
business.
11
<PAGE> 15
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Common Stock
offered hereby.
NOTES OFFERING
Concurrently with the Stock Offerings, the Company is offering $180 million
aggregate principal amount of % Convertible Subordinated Notes due 2004.
The net proceeds of the Notes Offering are estimated to be approximately
$ million, after deducting underwriting discounts and estimated expenses.
The Company intends to use all of such net proceeds to repay certain
indebtedness incurred under the Credit Agreement and for general corporate
purposes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." The Notes will be
convertible at the option of the holders at any time after 90 days following the
date of original issuance thereof and prior to maturity, unless previously
redeemed, into Common Stock at a conversion rate of shares per $1,000
principal amount at maturity of the Notes, subject to adjustment. The Company
will be required to offer to purchase the Notes upon a fundamental change, at
declining redemption prices, subject to adjustments in certain events, together
with accrued and unpaid interest to the date of purchase. The Notes will be
subordinated to all existing and future senior indebtedness of the Company. The
closings of the Stock Offerings and the Notes Offering (collectively, the
"Offerings") are not contingent upon each other.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock has been quoted on the Nasdaq National Market under the
symbol "CSTF" since November 8, 1995. The Company effected two three-for-two
stock splits during 1996 by means of stock dividends of one share of Common
Stock and Class B Non-Voting Common Stock, $.01 par value per share (the
"Non-Voting Common Stock"), for every two shares of Common Stock and Non-Voting
Common Stock, respectively, held of record on March 14, 1996 and September 10,
1996, respectively. The following table sets forth the range of the low and high
closing prices of the Common Stock as reported on the Nasdaq National Market for
the periods indicated and as adjusted for the two stock splits.
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C>
1995
Fourth Quarter (November 8 through December 31)........... $10.61 $16.56
1996
First Quarter............................................. 15.00 22.22
Second Quarter............................................ 19.17 32.17
Third Quarter............................................. 23.17 31.33
Fourth Quarter............................................ 19.88 28.63
1997
First Quarter............................................. 19.31 25.88
Second Quarter............................................ 16.88 27.00
Third Quarter (through July 16, 1997)..................... 25.88 31.63
</TABLE>
On July 16, 1997, the closing sale price of the Common Stock as reported on
the Nasdaq National Market was $30 1/4.
The Company has not paid any cash dividends on its Common Stock or
Non-Voting Common Stock and does not anticipate doing so for the foreseeable
future. The Company currently intends to retain any earnings to fund the
expansion and development of its business. Any future determination as to the
payment of dividends will be made at the discretion of the Board of Directors of
the Company and will depend upon the Company's operating results, financial
condition, capital requirements, and such other factors as the Board of
Directors deems relevant. In addition, the Company's Credit Agreement generally
limits the payment of cash dividends to 50% of its net income.
12
<PAGE> 16
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1997, (i) on an historical basis, (ii) "As Adjusted" to
reflect additional borrowings through June 30, 1997, primarily related to
acquisitions and (iii) "As Further Adjusted" to reflect the Notes Offering and
the anticipated application of the estimated net proceeds therefrom of $147.1
million. See "Use of Proceeds." The table should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto incorporated by
reference herein and included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
------------------------------------
AS AS FURTHER
ACTUAL ADJUSTED(1) ADJUSTED(2)
-------- ----------- -----------
<S> <C> <C> <C>
Current maturities of long-term debt........................ $ 1,011 $ 1,011 $ 1,011
======== ======== ========
Long-term debt, net of current maturities:
Credit Agreement.......................................... $152,100 $216,600 $ 69,495
Notes..................................................... -- -- 147,105
Other..................................................... 266 266 266
-------- -------- --------
Total long-term debt, net of current maturities... 152,366 216,866 216,866
-------- -------- --------
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; no shares issued........................... -- -- --
Common Stock, $.01 par value, 40,000,000 shares
authorized(3); 31,992,048 shares issued and 31,308,048
shares outstanding..................................... 320 320 320
Class B Non-Voting Common Stock, $.01 par value, 3,000,000
shares authorized; 707,232 shares issued and
outstanding............................................ 7 7 7
Additional paid-in capital................................ 210,640 210,640 210,640
Retained earnings......................................... 27,522 27,522 27,522
Less -- Notes receivable from stockholders............. (787) (787) (787)
Less -- Deferred compensation.......................... (177) (177) (177)
Less -- 684,000 shares of Common Stock held in
treasury, at cost.................................... (188) (188) (188)
-------- -------- --------
Total stockholders' equity........................ 237,337 237,337 237,337
-------- -------- --------
Total capitalization.............................. $389,703 $454,203 $454,203
======== ======== ========
</TABLE>
- ---------------
(1) Does not include indebtedness which is expected to be incurred or assumed in
connection with the acquisition of any company currently party to a letter
of intent with the Company.
(2) The consummation of the Notes Offering is not contingent upon consummation
of the Stock Offerings or vice versa.
(3) In July 1997, the Company increased the authorized Common Stock to
100,000,000 shares.
13
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data were derived from the
Company's Consolidated Financial Statements, which have been audited by Ernst &
Young LLP, independent auditors. The selected historical consolidated financial
data for the three months ended March 31, 1996 and 1997 have been derived from
the unaudited consolidated financial statements of the Company, which in the
opinion of management include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the periods presented. The
results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results of operations to be expected for the year.
The selected historical consolidated financial data should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere herein and the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus and incorporated
herein by reference. The pro forma consolidated financial data give effect to
all businesses acquired by the Company through March 31, 1997 as if such
acquisitions were consummated as of January 1, 1996, but do not give effect to
the Notes Offering. The pro forma results of operations are not necessarily
indicative of the results that would have occurred had the acquisitions been
consummated as of January 1, 1996 or that might be attained in the future.
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------------------
INCEPTION PRO FORMA
(JULY 16, ------------
1993) THREE MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED MARCH 31, YEAR ENDED
DECEMBER 31, ------------------------------ ------------------- DECEMBER 31,
1993 1994 1995 1996 1996 1997 1996
------------ -------- -------- -------- -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from services............ $ 3,093 $163,351 $344,548 $596,101 $103,386 $216,948 $783,074
Cost of services.................. 2,345 129,543 262,092 451,505 77,684 167,093 593,174
------- -------- -------- -------- -------- -------- --------
Gross profit...................... 748 33,808 82,456 144,596 25,702 49,855 189,920
Operating costs and expenses...... 1,136 28,932 64,649 107,871 19,876 37,634 136,686
------- -------- -------- -------- -------- -------- --------
Operating income (loss)........... (388) 4,876 17,807 36,725 5,826 12,221 51,234
Other income (expense)(1)......... (7) (2,165) (6,860) (5,722) (1,224) (2,298) (15,719)
------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes........................... (395) 2,711 10,947 31,003 4,602 9,923 35,516
Provision (benefit) for income
taxes........................... (142) 1,162 4,590 13,609 1,933 4,168 15,505
------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
loss............................ (253) 1,549 6,357 17,394 2,669 5,755 20,011
Extraordinary loss(2)............. -- -- -- (940) -- -- (940)
------- -------- -------- -------- -------- -------- --------
Net income (loss)................. $ (253) $ 1,549 $ 6,357 $ 16,454 $ 2,669 $ 5,755 $ 19,071
======= ======== ======== ======== ======== ======== ========
Earnings (loss) per common
share(3)(4):
Before extraordinary loss....... $ (0.01) $ 0.07 $ 0.29 $ 0.57 $ 0.10 $ 0.18 $ 0.66
Extraordinary loss(2)........... -- -- -- (0.03) -- -- (0.03)
------- -------- -------- -------- -------- -------- --------
Net income (loss)............... $ (0.01) $ 0.07 $ 0.29 $ 0.54 $ 0.10 $ 0.18 $ 0.63
Number of shares used to compute
earnings per share.............. 16,523 17,587 19,715 30,365 27,339 32,429 30,365
OTHER DATA:
EBITDA(5)......................... $ (276) $ 6,920 $ 22,140 $ 42,241 $ 7,269 $ 14,674 $ 60,287
Ratio of earnings to fixed
charges:
Actual(6)....................... (13.6) 2.0 2.3 5.7 3.8 4.6
Pro forma(7).................... 7.1 4.6 5.0
Supplemental pro forma(8)....... 3.8
<CAPTION>
PRO FORMA
-------------------
THREE MONTHS
ENDED MARCH 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from services............ $171,357 $223,264
Cost of services.................. 130,318 170,953
-------- --------
Gross profit...................... 41,039 52,311
Operating costs and expenses...... 30,835 39,346
-------- --------
Operating income (loss)........... 10,204 12,965
Other income (expense)(1)......... (4,421) (2,561)
-------- --------
Income (loss) before income
taxes........................... 5,784 10,404
Provision (benefit) for income
taxes........................... 2,429 4,369
-------- --------
Income (loss) before extraordinary
loss............................ 3,355 6,035
Extraordinary loss(2)............. -- --
-------- --------
Net income (loss)................. $ 3,355 $ 6,035
======== ========
Earnings (loss) per common
share(3)(4):
Before extraordinary loss....... $ 0.12 $ 0.19
Extraordinary loss(2)........... -- --
-------- --------
Net income (loss)............... $ 0.12 $ 0.19
Number of shares used to compute
earnings per share.............. 27,339 32,429
OTHER DATA:
EBITDA(5)......................... $ 12,883 $ 15,602
Ratio of earnings to fixed
charges:
Actual(6).......................
Pro forma(7)....................
Supplemental pro forma(8)....... 2.7 4.9
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------
DECEMBER 31,
----------------------------------------- MARCH 31,
1993 1994 1995 1996 1997
------ ------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 659 $24,318 $ 33,665 $ 94,315 $119,181
Total assets................................................ 4,777 92,153 152,370 396,397 458,324
Long-term debt, net of current maturities................... 369 50,028 43,315 107,839 152,366
Stockholders' equity........................................ 3,604 19,485 75,165 230,917 237,337
</TABLE>
See footnotes on following page
14
<PAGE> 18
- ---------------
(1) Includes a one-time charge of $1.4 million in 1996 for the write-down of the
Company's physical therapy staffing business, a non-core business that was
sold in January 1997.
(2) Extraordinary loss of $1.4 million ($0.9 million after income taxes) for the
write-off of deferred loan costs of a $130 million revolving credit facility
that was extinguished in November 1996.
(3) Gives retroactive effect to the two three-for-two stock splits in 1996 and
to the conversion of preferred stock into common stock in connection with
the Company's initial public offering of Common Stock in November 1995. See
Notes 1 and 5 to Consolidated Financial Statements included elsewhere in
this Prospectus and incorporated herein by reference.
(4) Since inception, the Company has not declared or paid any cash dividends on
its Common Stock.
(5) Represents earnings before interest, income taxes, depreciation and
amortization. EBITDA should not be considered as an alternative to net
income as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a discussion of other
commonly used measures of liquidity and operating performance.
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income (loss) before income taxes plus fixed charges and
amortization expense related to capitalized interest. Fixed charges consist
of interest expense (including amounts capitalized), amortization of debt
issuance costs, capitalized interest, and interest portion of rent expense.
(7) Gives effect to the refinancing of the Company's historical debt with the
net proceeds to be received from the Notes Offering.
(8) Gives effect to businesses acquired by the Company through March 31, 1997 as
if such acquisitions were consummated as of January 1, 1996 and the effect
of the refinancing of a portion of the outstanding debt with the net
proceeds to be received from the Notes Offering.
15
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" included elsewhere in this Prospectus and the
Company's Consolidated Financial Statements included elsewhere herein or
incorporated by reference herein.
INTRODUCTION
Since its inception in July 1993, the Company's growth has been the result
of acquisitions of businesses primarily in the IT services and staffing services
industries, coupled with high internal growth. Through June 30, 1997, the
Company had completed 32 acquisitions, including 17 in the IT Services Group and
12 in the Staffing Services Group. The remaining three acquisitions were of
physical therapy staffing businesses, a non-core business that was sold by the
Company in January 1997.
All acquisitions completed by the Company have been accounted for under the
purchase method of accounting. Accordingly, the historical Consolidated
Financial Statements of the Company include the operating results of the
acquired businesses from the date of acquisition. Because the Company's
historical consolidated operating results have been significantly affected by
the number, timing and size of the acquisitions, pro forma financial data are
provided herein for a more meaningful period-to-period comparison of the
Company's operating results. The pro forma financial data for the three month
periods ended March 31, 1996 and 1997 have been prepared assuming all
acquisitions completed through March 31, 1997 were consummated as of the
beginning of such periods. The pro forma financial data for the years ended
December 31, 1995 and 1996 have been prepared assuming all acquisitions
completed through December 31, 1996 were consummated as of the beginning of such
periods. The pro forma results of operations are not necessarily indicative of
the results that would have occurred had the acquisitions been consummated as of
the beginning of the periods presented or that might be attained in the future.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared with the Three Months Ended March 31,
1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------------------- ------------------------------------
1996 1997 1996 1997
---------------- ---------------- ----------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
IT Services Group:
COMSYS................... $ 40,403 39.1% $102,274 47.1% $ 77,151 45.0% $102,274 45.8%
IT Solutions............. -- -- 608 0.3 4,317 2.5 6,924 3.1
Staffing Services Group.... 60,786 58.8 114,066 52.6 89,889 52.5 114,066 51.1
Other...................... 2,197 2.1 -- -- -- -- -- --
-------- ----- -------- ----- -------- ------ -------- -----
Total............... $103,386 100.0% $216,948 100.0% $171,357 100.0% $223,264 100.0%
Gross profit:
IT Services Group:
COMSYS................... $ 11,842 46.1% $ 27,010 54.2% $ 20,828 50.8% $ 27,010 51.6%
IT Solutions............. -- -- 214 0.4 1,574 3.8 2,670 5.1
Staffing Services Group.... 13,324 51.8 22,631 45.4 18,637 45.4 22,631 43.3
Other 536 2.1 -- -- -- -- -- --
-------- ----- -------- ----- -------- ------ -------- -----
Total............... $ 25,702 100.0% $ 49,855 100.0% $ 41,039 100.0% $ 52,311 100.0%
Operating income............. $ 5,826 $ 12,221 $ 10,204 $ 12,965
Net income................... $ 2,669 $ 5,755 $ 3,355 $ 6,035
Earnings per share........... $ 0.10 $ 0.18 $ 0.12 $ 0.19
16
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------------------- ------------------------------------
1996 1997 1996 1997
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Margins:
Gross:
IT Services Group:
COMSYS................. 29.3% 26.4% 27.0% 26.4%
IT Solutions........... -- 35.2 36.5 38.6
Staffing Services
Group.................. 21.9 19.8 20.7 19.8
Consolidated............. 24.9 23.0 23.9 23.4
Operating.................. 5.6 5.6 6.0 5.8
EBITDA..................... 7.0 6.8 7.5 7.0
Net Income................. 2.6 2.7 2.0 2.7
</TABLE>
Comparison of Historical Operating Results for the Three Months Ended March
31, 1997 with the Three Months Ended March 31, 1996
Summary. Net income for the current quarter increased 115.6% to $5.8
million compared with net income of $2.7 million in the first quarter of 1996.
Earnings per share increased 80.0% to $0.18 per share, up from $0.10 per share
in 1996. The average number of shares outstanding during the current quarter was
18.6% higher than a year ago as a result of the Company's second public equity
offering in May 1996.
Revenues in the current quarter increased 109.8% to $216.9 million from
$103.4 million in the first quarter of 1996. Operating income also increased
110.3% to $12.2 million from $5.8 million in the same period a year ago. Gross
margin for the current quarter was 23.0% compared with 24.9% for the first
quarter of 1996. The lower gross margin primarily resulted from the effects of
acquisitions of lower margin businesses made after March 31, 1996, and a higher
proportion of revenues from large customers. These larger accounts have lower
gross margins than smaller accounts, but higher operating leverage. Despite the
lower gross margin, operating margin for the current quarter was 5.6%, which
equaled the margin for the first quarter of 1996. This was the result of the
higher operating leverage and the higher proportion of revenues from the IT
Services Group, partially offset by the effects of investments in infrastructure
and IT technical practices to support the growth of the Company.
IT Services Group. For the current quarter, the IT Services Group accounted
for 47.4% and 54.6% of the Company's consolidated revenues and gross profit,
respectively, up from 39.1% and 46.1%, respectively, in 1996. These increases
reflect the higher internal growth rate of this group compared with staffing
services and the ten businesses acquired in this sector in 1996.
COMSYS. For the current quarter, COMSYS accounted for 47.1% and 54.2% of
the Company's consolidated revenues and gross profit, respectively, up from
39.1% and 46.1%, respectively, in the first quarter of 1996. Revenues and gross
profit for the current quarter were up 153.1% and 128.1%, respectively, over the
first quarter of 1996. Gross margin for the current quarter was 26.4% compared
with 29.3% for the first quarter of 1996. This reduction was due to a change in
the business mix related to the acquisition of certain lower margin businesses
in 1996 and the higher proportion of revenues from large customers, which have
lower gross margins than smaller accounts, but higher operating leverage.
IT Solutions Unit. During the current quarter, the Company formed a new
business unit, IT Solutions, to provide system integration and consulting
services. This new unit is currently comprised of one IT consulting and systems
integration business acquired in March 1997. The historical results do not
include the acquisition in June 1997 of Millennium Computer Corporation or the
April 1997 acquisition of Business Mgmt. Data, Inc., a California-based IT
solutions business and its India affiliate, Sriven Computer Solutions (Pvt.),
Ltd. (together "BMD").
Staffing Services Group. For the current quarter, the Staffing Services
Group accounted for 52.6% and 45.4% of the Company's consolidated revenues and
gross profit, respectively, down from 58.8% and 51.8%, respectively, in the
first quarter of 1996. Revenues and gross profit for the current quarter were up
87.7% and 69.9%, respectively, over the first quarter of 1996. Gross margin for
the current quarter was 19.8% compared
17
<PAGE> 21
with 21.9% for the first quarter of 1996. This reduction related to a change in
business mix caused by (i) the acquisition of a low margin staffing services
business in 1997, (ii) the higher proportion of revenues being generated from
the Company's large on-site programs ("VIP programs") and (iii) lower internal
growth of the Company's higher margin businesses. VIP programs have lower gross
margins than the group's other staffing services business, but higher operating
leverage.
Operating Costs and Expenses. Selling, general and administrative ("SG&A")
expenses for 1997 totaled $35.1 million (16.2% of revenues), compared with $18.5
million (17.9% of revenues) for 1996. The increase in SG&A expenses primarily
related to (i) the effects of the acquisitions, (ii) internal growth of the
operating companies post acquisition, (iii) investments made to improve
infrastructure and to develop technical practices in the IT Services Group and
(iv) higher expenses at the corporate level. The SG&A Margin (i.e. SG&A expenses
as a percentage of revenues) for the first quarter of 1997 was 16.2%, which was
lower than 1996 due to (i) higher operating leverage of the operating groups and
(ii) lower corporate-level overhead as a percentage of consolidated revenues.
Depreciation totaled $0.9 million and $0.6 million for the first quarter of
1997 and 1996, respectively. The increase primarily related to the fixed assets
of the businesses acquired and, to a lesser extent, depreciation on capital
expenditures made post-acquisition. Amortization of $1.7 million and $0.8
million for 1997 and 1996, respectively, related to amortization of intangible
assets (goodwill and non-compete agreements) of the businesses acquired.
Non-Operating Costs and Expenses. Interest expense for the current quarter
totaled $2.2 million compared with $1.3 million for 1996. The $0.9 million
increase was primarily due to increased borrowings for acquisitions.
Provision for Income Taxes. The provision for income taxes for the current
quarter was $4.2 million (an effective tax rate of 42.0%), as compared with $1.9
million (an effective tax rate of 42.0%) for 1996. The Company's effective tax
rate includes the effects of state income taxes and the portion of goodwill
amortization not deductible for federal income tax purposes.
Net Income. Due to the factors described above, net income for 1997 was
$5.8 million compared with $2.7 million for 1996. Net income as a percentage of
revenues ("Net Income Margin") increased to 2.7% for the 1997 period, from 2.6%
for 1996.
Comparison of Pro Forma Operating Results for the Three Months Ended March 31,
1997 with the Three Months Ended March 31, 1996
Summary. Pro forma operating results, which assume all acquisitions
consummated through March 31, 1997, and the sale of the physical therapy
staffing business in January 1997 occurred as of the beginning of the periods
presented, demonstrate the high internal growth rate of the Company's business
units during the current quarter. Pro forma revenues for the current quarter
were $223.3 million, up 30.3% from $171.4 million in the first quarter of 1996.
Pro forma net income rose 79.9% to $6.0 million, or $0.19 per share, compared
with pro forma net income of $3.4 million, or $0.12 per share, in 1996.
IT Services Group. Pro forma revenues and gross profit increased 34.0% and
32.5%, respectively, from the first quarter of 1996.
COMSYS. Pro forma revenues and gross profit for the current quarter
increased 32.6% and 29.7%, respectively, from the first quarter of 1996. These
improvements reflect the continued strong demand for the Company's IT services.
Pro forma gross margin for the current quarter was 26.4% compared with 27.0% for
1996. The lower gross margin primarily related to (i) a higher proportion of
revenues from large accounts, principally telecommunication clients, (ii) higher
bench time caused by delays in certain project work, (iii) one less billing day
in the current quarter and (iv) higher consultant costs.
IT Solutions Unit. Pro forma revenues and gross profit for the current
quarter increased 60.4% and 69.6%, respectively, from the first quarter of 1996.
Pro forma gross margin was 38.6%, compared with 36.5% for the first quarter of
1996. The gross margin for this unit is higher than that for the Company's other
business units due to the higher value-added nature of the services provided.
The growth rate for the unit is also expected to
18
<PAGE> 22
exceed the Company's other business units. The pro forma results do not include
the acquisition in April 1997 of BMD.
Staffing Services Group. Pro forma revenues and gross profit for the
current quarter increased 26.9% and 21.4%, respectively, from the first quarter
of 1996. These improvements primarily reflect the increase in revenues from the
VIP programs, including new programs that were added in 1997. Pro forma gross
margin for the current quarter was 19.8%, compared with 20.7% for the first
quarter of 1996. The lower gross margin reflects the higher proportion of
revenues from the Company's VIP programs, which have lower gross margins, but
higher operating leverage.
Operating Costs and Expenses. Pro forma SG&A expenses for the first quarter
of 1997 totaled $36.6 million (16.4% of revenues) compared with $28.3 million
(16.5% of revenues) for the first quarter of 1996. The increase in pro forma
SG&A expenses primarily related to (i) internal growth of the operating groups,
(ii) investments made to infrastructure and to develop technical practices in
the IT Services group and (iii) higher expenses at the corporate level. The pro
forma SG&A Margin for 1997 was lower than 1996 due to (i) higher operating
leverage of the operating groups and (ii) lower corporate-level overhead as a
percentage of consolidated revenues. The pro forma SG&A expenses reflect
historical SG&A expenses at the corporate level and therefore do not include the
pro forma effects of personnel additions made subsequent to the beginning of
each period to accommodate the growth of the Company.
Depreciation of $1.0 million and $0.8 million for 1997 and 1996,
respectively, related primarily to the fixed assets of the acquired companies.
Amortization of $1.8 million for both 1997 and 1996 related to amortization of
intangible assets (goodwill and non-compete agreements) related to the
businesses acquired.
Non-Operating Costs and Expenses. Pro forma interest expense for 1997
totaled $2.5 million compared with $4.5 million for 1996. The decrease relates
to lower long-term debt levels as a result of the repayment of indebtedness with
proceeds from the Company's public equity offering in May 1996.
Provision for Income Taxes. The Company's pro forma effective tax rate for
the current quarter was 42.0%, which was also the rate for the first quarter of
1996. The Company's effective tax rate includes the effects of state income
taxes and the portion of goodwill amortization not deductible for federal income
tax purposes.
Net Income. Due to the factors described above, pro forma net income for
the current quarter was $6.0 million compared with $3.4 million for the first
quarter of 1996. The pro forma Net Income Margin for the current quarter was
2.7% compared with 2.0% for 1996.
19
<PAGE> 23
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
----------------------------------- -----------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------------- -----------------------------------
1995 1996 1995 1996
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from services:
IT Services Group................ $101,065 29.3% $258,581 43.4% $268,289 44.6% $354,053 48.2%
Staffing Services Group.......... 233,823 67.9 329,142 55.2 323,340 53.8 371,755 50.6
Other............................ 9,660 2.8 8,378 1.4 9,660 1.6 8,378 1.2
-------- ----- -------- ----- -------- ----- -------- -----
Total..................... $344,548 100.0% $596,101 100.0% $601,289 100.0% $734,186 100.0%
Gross profit:
IT Services Group................ $ 28,079 34.1% $ 72,669 50.3% $ 73,764 50.7% $ 98,173 54.8%
Staffing Services Group.......... 52,076 63.2 69,828 48.3 69,427 47.7 78,829 44.0
Other............................ 2,301 2.7 2,099 1.4 2,301 1.6 2,099 1.2
-------- ----- -------- ----- -------- ----- -------- -----
Total..................... $ 82,456 100.0% $144,596 100.0% $145,492 100.0% $179,101 100.0%
Operating income................... $ 17,807 $ 36,725 $ 34,758 $ 48,320
Income before extraordinary loss... $ 6,357 $ 17,394 $ 6,019 $ 19,639
Net income......................... $ 6,357 $ 16,454 $ 6,019 $ 18,699
Earnings per common share:
Income before extraordinary
loss........................... $ 0.29 $ 0.57 $ 0.27 $ 0.65
Net income....................... $ 0.29 $ 0.54 $ 0.27 $ 0.62
Margins:
Gross:
IT Services Group.............. 27.8% 28.1% 27.5% 27.7%
Staffing Services Group........ 22.3 21.2 21.5 21.2
Other.......................... 23.8 25.1 23.8 25.1
Consolidated................... 23.9 24.3 24.2 24.4
Operating........................ 5.2 6.2 5.8 6.6
EBITDA(2)........................ 6.4 7.5 7.3 8.0
Net income....................... 1.8 2.8 1.0 2.5
</TABLE>
- ---------------
(1) The pro forma financial data have been prepared assuming all acquisitions
completed through December 31, 1996 were consummated as of the beginning of
such periods and do not include acquisitions completed subsequent to such
date.
(2) Before the effects of two one-time charges in 1996.
Comparison of Historical Operating Results for the Year Ended December 31,
1996 with the Year Ended December 31, 1995
Summary. Net income for 1996 increased 158.8% to $16.5 million compared
with net income of $6.4 million for 1995. Included in the 1996 results are the
after-tax effects of two one-time charges totaling $2.3 million, or $0.08 per
share, for the (i) write-down of $1.4 million, or $0.05 per share, of the
Company's physical therapy staffing business, a non-core business that was sold
in January 1997, and (ii) an extraordinary loss of $1.4 million ($0.9 million
after income taxes, or $0.03 per share) related to the write-off of deferred
loan costs of a $130 million credit facility that was extinguished in November
1996.
Income before these one-time charges was $18.8 million, an increase of
195.6% over 1995. Earnings per share before one-time charges increased 113.8% to
$0.62 per share from $0.29 per share in 1995. The average number of shares
outstanding during the year was 54.0% higher than 1995 as a result of the
Company's initial public offering (the "IPO") in November 1995 and a second
public offering in May 1996. All share and per share data have been
retroactively adjusted to give effect to two three-for-two stock splits in 1996.
Revenues for 1996 increased 73.0% to $596.1 million from $344.5 million in
1995. Operating income rose 106.2% to $36.7 million from $17.8 million in 1995.
Gross margin for 1996 was 24.3%, or 40 basis points ("BPS") higher than 1995,
due to the increase in the percentage of revenues contributed by the IT Services
20
<PAGE> 24
Group, as well as higher margins from that group. Operating margin was 6.2%, or
100 BPS higher than 1995, due to the increase in gross margin and improved
operating leverage.
IT Services Group. For 1996, the IT Services group accounted for 43.4% and
50.3% of the Company's consolidated revenues and gross profit, respectively, up
from 29.3% and 34.1%, respectively, in 1995. Revenues and gross profit were up
155.9% and 158.8%, respectively, over 1995. These increases reflect the high
internal growth rate of this group and the Company's focus on acquiring
businesses in the IT sector. Gross margin for 1996 was 28.1%, or 30 BPS above
that for 1995, primarily due to the acquisition of higher margin IT businesses
in the first half of 1996.
Staffing Services Group. For 1996, the Staffing Services group accounted
for 55.2% and 48.3% of the Company's consolidated revenues and gross profit,
respectively, down from 67.9% and 63.2%, respectively, in 1995. Revenues and
gross profit for 1996 were up 40.8% and 34.1%, respectively, over 1995. Gross
margin for 1996 was 21.2%, or 110 BPS lower than 1995, primarily due to (i) the
higher proportion of revenues being generated from the Company's large on-site
VIP programs, (ii) lower internal growth rates of the higher-margin businesses
within the group, and (iii) acquisitions in 1996 of staffing services businesses
having lower margins than the gross margin for the group in 1995.
Operating Costs and Expenses. SG&A expenses for 1996 totaled $100.3 million
(16.8% of revenues), compared with $60.4 million (17.5% of revenues) for 1995.
The increase in SG&A expenses primarily related to (i) the effects of the
acquisitions, (ii) internal growth of the operating companies post-acquisition
and (iii) higher expenses at the corporate level. The SG&A Margin for 1996 was
70 BPS lower than 1995 due to (i) higher operating leverage of the operating
groups and (ii) lower corporate level overhead as a percentage of consolidated
revenues.
Substantially all of the SG&A expenses were incurred by the operating
groups, which reflects the decentralized nature of the Company's operations. The
front office activities (e.g. recruiting, marketing, account management,
placement, etc.) and most of the accounting and administrative activities of the
operating groups are performed at the subsidiary level. SG&A expenses at the
corporate level totaled $6.4 million for 1996 compared with $3.9 million for
1995. Corporate SG&A expenses primarily related to salaries and benefits of
personnel responsible for corporate activities, including its acquisition
program, management and certain marketing, administrative and reporting
responsibilities. The increase in corporate SG&A expenses reflect personnel
additions necessary to accommodate the growth of the Company.
Depreciation and amortization totaled $7.5 million and $4.2 million for
1996 and 1995, respectively. Depreciation totaled $2.9 million and $1.8 million
for 1996 and 1995, respectively. The increase in depreciation primarily related
to the fixed assets of the businesses acquired and, to a lesser extent,
depreciation on capital expenditures made post-acquisition. Amortization of $4.6
million and $2.4 million for 1996 and 1995, respectively, related to
amortization of intangible assets (goodwill and non-compete agreements) related
to the businesses acquired.
Non-Operating Costs and Expenses. Interest expense for 1996 totaled $4.7
million compared with $7.0 million for 1995. The decrease primarily related to
the repayments of indebtedness with proceeds from the IPO in November 1995 and
from the second public offering in May 1996.
Provision for Income Taxes. The provision for income taxes for 1996 was
$13.6 million (an effective tax rate of 43.9%), compared with $4.6 million (an
effective tax rate of 41.9%) for 1995. The higher effective tax rate in 1996
related to effects of the write-down of the Company's physical therapy staffing
business and the increase in the nondeductible portion of business meals and
entertainment. Virtually all of the $1.4 million write-down was not deductible
for income tax purposes due to the Company's low tax basis in the goodwill of
certain of the physical therapy businesses. The increase in the non-deductible
portion of business meals and entertainment related to per diem expenses of IT
consultants on out-of-town assignments.
Net Income. Due primarily to the factors described above, net income for
1996 was $16.5 million compared with $6.4 million for 1995. Net Income Margin
increased to 2.8% for 1996, from 1.8% for 1995.
21
<PAGE> 25
Comparison of Pro Forma Operating Results for the Year Ended December 31, 1996
with the Year Ended December 31, 1995
Summary. Pro forma operating results, which assume all acquisitions
completed through December 31, 1996 were made as of the beginning of the periods
presented, reflect the high internal growth rate of the Company's IT Services
and Staffing Services groups. Pro forma revenues for 1996 were $734.2 million,
up 22.1% from $601.3 million in 1995. Pro forma income before one-time charges
for 1996 increased 249.5% to $21.0 million, or $0.70 per share, compared with
pro forma net income of $6.0 million, or $0.27 per share, for 1995.
IT Services Group. Pro forma revenues and gross profit for 1996 increased
32.0% and 33.1%, respectively, from 1995. These improvements reflect the
continued strong demand for the Company's IT services. Pro forma gross margin
for 1996 was slightly higher than 1995 due primarily to margin expansion in 1996
in certain lower-margin businesses that were acquired in 1996.
Staffing Services Group. Pro forma revenues and gross profit for 1996
increased 15.0% and 13.5%, respectively, from 1995. These improvements primarily
reflect the increase in revenues from VIP programs, including programs that were
added in 1996. Pro forma gross margin for 1996 was 21.2%, or 30 BPS lower than
1995, reflecting the change in business mix related to higher revenues from VIP
programs, which have lower gross margins but higher operating leverage compared
with the group's other staffing services business.
Operating Costs and Expenses. Pro forma SG&A expenses for 1996 totaled
$120.9 million (16.5% of pro forma revenues), compared with $101.7 million
(16.9% of pro forma revenues) for 1995. The increase in SG&A expenses primarily
related to the internal growth of the operating groups and higher expenses at
the corporate level. The pro forma SG&A Margin for 1996 was 40 BPS lower than
1995 due to (i) higher operating leverage of the operating groups and (ii) lower
corporate level overhead as a percentage of consolidated revenues. The pro forma
SG&A expenses reflect historical SG&A expenses at the corporate level and
therefore do not include the pro forma effects of personnel additions made
subsequent to the beginning of each period to accommodate the growth of the
Company.
Depreciation of $3.2 million and $2.6 million for 1996 and 1995,
respectively, related primarily to the fixed assets of the acquired companies.
Amortization of $6.7 million and $6.5 million for 1996 and 1995, respectively,
related to amortization of intangible assets (goodwill and non-compete
agreements) related to the businesses acquired.
Non-Operating Costs and Expenses. Pro forma interest expense for 1996
totaled $12.6 million compared with $24.2 million for 1995. The decrease
primarily related to the repayments of indebtedness with proceeds from the IPO
and from the second public offering in May 1996.
Provision for Income Taxes. The pro forma provision for income taxes for
1996 was $15.2 million (an effective tax rate of 43.7%), compared with $4.5
million (an effective tax rate of 42.8%) for 1995. The higher effective tax rate
in 1996 related to effects of the write-down of the Company's physical therapy
staffing business and the increase in the non-deductible portion of business
meals and entertainment. Virtually all of the $1.4 million write-down was not
deductible for income tax purposes due to the Company's low tax basis in the
goodwill of certain of the physical therapy businesses sold. The increase in the
non-deductible portion of business meals and entertainment related to per diem
expenses of IT consultants on out-of-town assignments.
Net Income. Due primarily to the factors described above, pro forma net
income for 1996 was $18.7 million compared with $6.0 million for 1995. Pro forma
Net Income Margin was 2.5% for 1996 compared with 1.0% for 1995.
22
<PAGE> 26
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1994 1995
----------------------- -----------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues from services:
IT Services Group................................... $ 19,159 11.7% $101,065 29.3%
Staffing Services Group............................. 135,551 83.0 233,823 67.9
Other............................................... 8,641 5.3 9,660 2.8
-------- ----- -------- -----
Total....................................... $163,351 100.0% $344,548 100.0%
Gross profit:
IT Services Group................................... $ 5,021 14.9% $ 28,079 34.1%
Staffing Services Group............................. 26,669 78.9 52,076 63.2
Other............................................... 2,118 6.2 2,301 2.7
-------- ----- -------- -----
Total....................................... $ 33,808 100.0% $ 82,456 100.0%
Operating income...................................... $ 4,876 $ 17,807
Net Income............................................ $ 1,549 $ 6,357
Earnings per common share............................. $ 0.07 $ 0.29
Margins:
Gross:
IT Services Group................................ 26.2% 27.8%
Staffing Services Group.......................... 19.7 22.3
Other............................................ 24.5 23.8
Consolidated..................................... 20.7 23.9
Operating........................................... 3.0 5.2
EBITDA.............................................. 4.2 6.4
Net income.......................................... 0.9 1.8
</TABLE>
Comparison of Historical Operating Results for the Year Ended December 31,
1995 with the Year Ended December 31, 1994
Summary. Revenues, gross profit and net income of the Company for 1995
increased 110.9% to $181.2 million, 143.9% to $48.6 million and 310.4% to $4.8
million, respectively, compared with 1994. This improvement was primarily due to
the effects of acquisitions.
IT Services Group. Prior to 1996, the Company's IT Services group consisted
of two companies, COMSYS Technical Services, Inc. ("COMSYS"), which was acquired
in August 1994 and Cutler-Williams, Incorporated ("Cutler"), which was acquired
in June 1995. Revenues and gross profit for 1995 were $101.1 million and $28.1
million, respectively, compared with $19.2 million and $5.0 million,
respectively, for 1994. This improvement was primarily due to the inclusion of
(i) a full year of operating results for 1995 from COMSYS and (ii) six months of
operating results for 1995 from Cutler. The gross margin of this group increased
to 27.8% for 1995 compared with 26.2% for 1994 primarily due to the higher gross
margin of Cutler as compared with COMSYS.
Staffing Services Group. Revenues and gross profit for 1995 increased by
$98.3 million (72.5%) and $25.4 million (95.3%), respectively, compared with
1994. This improvement was primarily due to the inclusion of (i) a full year of
operating results for 1995 from the three staffing services businesses acquired
in 1994 (the "1994 Acquisitions"), and (ii) the operating results from the date
of acquisition of the four staffing services companies acquired in 1995 (the
"1995 Acquisitions"). Revenues for the 1994 Acquisitions were $135.6 million
from their respective acquisition dates through December 31, 1994, compared with
$204.1 million for the year ended December 31, 1995. Revenues for the 1995
Acquisitions were $29.7 million from their respective acquisition dates through
December 31, 1995. Operating results for 1995 also benefited from a higher gross
margin of 22.3% compared with 19.7% for 1994. This improvement related to (i)
the inclusion of
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<PAGE> 27
a full year of operating results for one of the 1994 Acquisitions and a partial
year for 1995 Acquisitions, all three of which had higher gross margins than the
average for the Staffing Services group for 1994, and (ii) improvements in
overall cost performance due to the implementation of risk management
initiatives and the termination of certain low margin accounts.
Operating Costs and Expenses. SG&A expenses for 1995 totaled $60.4 million
(17.5% of revenues), compared with $27.0 million (16.5% of revenues) for 1994.
The increase in SG&A expenses primarily related to (i) the acquisitions, (ii)
internal growth of the operating companies, (iii) higher expenses at the
corporate level and (iv) a $0.7 million nonrecurring charge for payments
incurred in connection with the departure in August 1995 of two officers of an
acquired company.
Substantially all of the SG&A expenses for 1995 were incurred by the
operating groups, which reflects the current decentralized nature of the
Company's operations. The front office activities (e.g. recruiting, marketing,
account management, placement, etc.) and most of the accounting and
administrative activities of the operating companies are performed at the
subsidiary level. SG&A expenses at the corporate level totaled $3.9 million for
1995 compared with $2.1 million for 1994 and related primarily to salaries and
benefits of personnel responsible for corporate activities, including its
acquisition program, management and certain marketing, administrative and
reporting responsibilities. The increase in corporate level SG&A expenses
reflects personnel additions necessary to accommodate the growth of the Company.
Depreciation and amortization totaled $4.2 million and $1.9 million for
1995 and 1994, respectively. Depreciation of $1.8 million and $0.8 million for
1995 and 1994, respectively, related primarily to the fixed assets of the
acquired companies and, to a lesser extent, capital expenditures subsequent to
the acquisition. Amortization of $2.4 million and $1.1 million for 1995 and
1994, respectively, related to amortization of intangible assets (goodwill and
noncompete agreements) related to the businesses acquired.
Non-Operating Costs and Expenses. Interest expense for 1995 totaled $7.0
million compared with $2.3 million for 1994. The $4.7 million increase was a
result of increased borrowings for acquisitions.
Provision for Income Taxes. The provision for income taxes for 1995 was
$4.6 million (an effective tax rate of 41.9%), as compared with $1.2 million (an
effective tax rate of 42.9%) for 1994. The lower effective rate was due to an
increase in income before income taxes that substantially exceeded the increase
in permanent non-deductible expenses.
Net Income. Due primarily to the factors described above, net income for
1995 was $6.4 million compared with $1.5 million for 1994. The Net Income Margin
increased to 1.8% for 1995, from 0.9% for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have related to the acquisition of
businesses and capital expenditures. These requirements have been met through a
combination of bank debt, issuances of equity securities and internally
generated funds.
During the first three months of 1997 and 1996, the Company made cash
payments for acquisitions of $25.0 million and $29.8 million, respectively.
Capital expenditures totaled $8.5 million and $1.8 million for the three months
ended March 31, 1997 and 1996, respectively. The Company estimates that its
capital expenditures for 1997 will be approximately $30.0 million. The majority
of these expenditures relate to (i) the installation and development of an
integrated front and back office information system, which is expected to be
operational in 1998, (ii) the roll-out of proprietary software to the staffing
services branches, (iii) up-grading of computer hardware to facilitate the new
integrated information system and new software tools and (iv) furniture,
fixtures and equipment for new offices. The Company expects to fund the
expenditures with cash flows from operations and borrowings under its $250
million Senior Credit Agreement with a syndicate of 12 banks (the "Credit
Agreement").
The Company had working capital of $119.2 million and $94.3 million at
March 31, 1997 and December 31, 1996, respectively. The Company had cash and
cash equivalents of $11.7 million and $6.5 million at March 31, 1997 and
December 31, 1996, respectively. The Company's operating cash flows and
24
<PAGE> 28
working capital requirements are significantly affected by the timing of payroll
and the receipt of payment from the customer. Generally, the Company pays the
temporary employees of its Staffing Services Group weekly and the employees of
its IT Services Group semi-monthly. Payments from customers are generally
received within 30 to 65 days from the date of invoice. Cash flows provided by
(used in) operating activities were $(6.5) million and $8,000 for the quarter
ended March 31, 1997 and 1996, respectively. The decrease in operating cash
flows for 1997 reflected the significant growth in revenues in the first quarter
of 1997 from a number of the Company's larger accounts, which generally have a
longer billing and collection cycle.
At March 31, 1997, the Company had a $200 million Credit Agreement. Under
terms of the Credit Agreement, the Company could borrow under a revolving credit
facility up to the lesser of $200 million or 3.5 times Pro Forma Adjusted EBITDA
(earnings before interest, income taxes, depreciation and amortization of all
acquired companies for the preceding twelve-month period). Subsequently, the
Company raised the commitment under the Credit Agreement to $250 million.
Borrowings under the Credit Agreement bear interest, at the Company's option, at
LIBOR plus a margin of 0.625% to 1.375%, which depends upon the leverage ratio,
or the bank's base rate. A commitment fee of 0.18% to 0.25%, depending on the
leverage ratio, is payable on the unused portion of the facility. The Credit
Agreement contains certain covenants which, among other things, limit the
payment of dividends and require the maintenance of certain financial ratios. As
of June 30, 1997, the Company had outstanding borrowings under the Credit
Agreement of $216.6 million and remaining availability (after deducting
outstanding letters of credit of $9.3 million) of $24.1 million. The weighted
average interest rate of the Company's outstanding borrowings under the Credit
Agreement was 6.86% at June 30, 1997.
The Company is in the process of amending its Credit Agreement to, among
other things, increase the borrowing capacity under the agreement to the lesser
of $400 million or 4.0 times Pro Forma Adjusted EBITDA. The amended terms also
provide that, after the Notes Offering, the Company's total debt capacity will
be raised from 4.0 times to 4.25 times Pro Forma Adjusted EBITDA and the
borrowing capacity under the Credit Agreement will be lowered to 3.0 times Pro
Forma Adjusted EBITDA. The amended Credit Agreement is expected to be completed
on or before July 31, 1997.
The Company's acquisition program will require significant additional
capital resources. The Company intends to seek additional capital as necessary
to fund such acquisitions through one or more funding sources that may include
borrowings under the Credit Agreement or the issuance of debt or equity
securities or both. Cash flows from operations, to the extent available, may
also be used to fund acquisitions. Although management believes that the Company
will be able to obtain sufficient capital to fund acquisitions, there can be no
assurance that such capital will be available to the Company at the time it is
required or on terms acceptable to the Company.
SEASONALITY
The Company's quarterly operating results are affected primarily by the
number of billing days in the quarter and the seasonality of its customers'
businesses. Demand for services in the Staffing Services Group has historically
been lower during the year-end holidays through February of the following year,
showing gradual improvement over the remainder of the year. Although less
pronounced than in the Staffing Services Group, the demand for services of the
IT Services Group is typically lower during the first quarter until customers'
operating budgets are finalized. The Company believes that the effects of
seasonality will be less severe in the future as revenues contributed by the IT
Services Group continue to increase as a percentage of the Company's
consolidated revenues.
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<PAGE> 29
BUSINESS
GENERAL
CORESTAFF is one of the largest IT services and staffing firms in the
United States. The Company provides a broad range of IT services and staffing
services to a diverse client base through its network of 147 branch offices in
the United States, the United Kingdom and India. The Company's principal clients
include companies such as American Express, AT&T, Compaq Computer, CSX, Lucent
Technologies, MCI and Mobil.
The Company's services are provided through its two business groups: the IT
Services Group, which is comprised of COMSYS and the recently formed IT
Solutions unit, and the Staffing Services Group, which operates under the name
CORESTAFF Services. COMSYS provides highly skilled IT consultants principally to
FORTUNE 1000 companies and governmental agencies. COMSYS has more than 4,000
consultants on assignments and supports all major computer technology platforms
(mainframe, mid-range, client/server and network) and supports client projects
using a variety of software applications. COMSYS maintains a database of
approximately 170,000 consultants from which it recruits consultants to support
client projects. For the quarter ended March 31, 1997, COMSYS accounted for
45.8% and 51.6% of the Company's pro forma revenues and gross profit,
respectively. The Company's IT Solutions unit provides technologically advanced
resources and solutions, encompassing systems integration, software development,
legacy application support and outsourcing services. Formed during the first
quarter of 1997, IT Solutions accounted for 3.1% and 5.1% of the Company's pro
forma revenues and gross profit, respectively, for the quarter ended March 31,
1997. Management expects the growth of IT Solutions to exceed that of the
Company's other business units and to provide an increasing percentage of
revenues and profits for the Company. CORESTAFF Services provides office
support, light industrial and specialized staffing services to local, regional
and national customers. CORESTAFF Services accounted for 51.1% and 43.3% of the
Company's pro forma revenues and gross profit, respectively, for the quarter
ended March 31, 1997.
Since its inception in July 1993, the Company has grown through the
acquisition of IT services and staffing businesses and through substantial
internal growth. As of June 30, 1997, the Company had acquired 32 businesses,
including 17 in the IT Services Group and 12 in the Staffing Services Group. The
Company's revenues and operating income have increased from $163.4 million and
$4.9 million, respectively, in 1994 to $596.1 million and $36.7 million,
respectively, in 1996. For the quarter ended March 31, 1997, the Company's
revenues and operating income increased to $216.9 million and $12.2 million as
compared to $103.4 million and $5.8 million for the period ended March 31, 1996,
representing revenue and operating income growth of 109.8% and 110.3%,
respectively.
THE INFORMATION TECHNOLOGY SERVICES AND STAFFING INDUSTRIES
Information Technology Services. Many businesses today are facing intense
competition, accelerating technological change, personnel downsizing and
widespread business process reengineering. Increasingly, these companies are
turning to IT services and solutions to address these issues and to compete more
effectively. As a result, the ability of an organization to integrate and deploy
new information technologies has become critical. Information technology staff
augmentation services has become one of the fastest growing sectors of the
staffing industry. Over the last decade, the increased use of technology has led
to a dramatic rise in demand for technical project support, software
development, and other computer-related services. Corporations have outsourced
many of these departments and/or have used the employees of IT staff
augmentation firms in an attempt to meet the increased demand for
computer-skilled personnel.
Although many companies have recognized the importance of IT systems and
products to compete in today's business climate, the process of designing,
developing and implementing IT solutions has become increasingly complex.
Companies are continuing to migrate away from centralized mainframes running
proprietary software toward decentralized, scalable architectures based on
personal computers, client/server architectures, local and wide area networks,
shared data bases and packaged application software. These advances have greatly
enhanced the ability of companies to benefit from the application of IT.
Consequently,
26
<PAGE> 30
the number of companies desiring to use IT in new ways and the number of end
users within these organizations are rising rapidly.
As a result of the variety and complexity of these new technologies, IT
managers must integrate and manage "open systems" and "distributed computing
environments" consisting of multiple computing platforms, operating systems,
databases and networking protocols, and must implement off-the-shelf software
applications to support business objectives. Companies must also continually
keep pace with new developments, which often render existing equipment and
internal skills obsolete. At the same time, external economic factors have
forced organizations to focus on core competencies and trim workforces in the IT
management area. Accordingly, these organizations often lack the quantity or
variety of IT skills necessary to design and develop IT solutions. IT managers
are charged with developing and supporting increasingly complex IT systems and
applications of significant strategic value, while working under budgetary,
personnel and expertise constraints within their own organizations.
According to IDC, the worldwide market for IT services was estimated at
$202 billion in 1996, with a projected market of $292 billion in 2000. IDC also
projects that the domestic IT services market will grow from $84 billion in 1996
to $130 billion in 2000. Currently, substantially all of the Company's revenues
from its IT Services Group are derived from IT staff augmentation services and
IT implementation and integration services, two segments within the overall IT
services industry. IDC estimates that the domestic market for IT implementation
and integration services was $22 billion in 1996, with a forecast of $35 billion
by 2000. According to the Staffing Industry Report, the domestic market for
technical/IT staff augmentation services was approximately $12 billion in 1996
and grew at a compounded annual rate of approximately 20% over the past five
years.
Traditional Staffing Services. The staffing industry was once used
predominately as a short-term solution for peak production periods and to
temporarily replace workers absent due to illness, vacation, or abrupt
termination. Since the mid-1980s, the staffing services sector has evolved into
a permanent and significant component of the staffing plans of many
corporations. Corporate restructuring, downsizing, government regulations,
advances in technology, and the desire by many companies to shift employee costs
from a fixed to a variable expense have resulted in the use of a wide range of
staffing alternatives by businesses. In addition, the reluctance of corporations
to risk exposure to wrongful discharge claims has led to an increase in
companies using temporary staffing as a means of evaluating the qualifications
of personnel before hiring them on a full-time basis. Furthermore, many
companies are adopting strategies that focus on their core competencies and, as
a result, are outsourcing the support functions of their non-core competencies.
The National Association of Temporary and Staffing Services estimates that more
than 90% of all United States businesses use staffing services.
According to the Staffing Industry Report, the U.S. staffing industry was
estimated to have 1996 revenues of approximately $47.1 billion and a compound
annual growth rate of approximately 17% over the past five years. Within the
staffing industry, the office/clerical/industrial sector was estimated to have
1996 revenues of approximately $26.4 billion and a compounded annual growth rate
of 17% over the past five years. The Company believes that the demand for
staffing services will continue to increase due to changes in workforce
lifestyles, advances in technology and the increasing desire of many companies
to shift employee costs from a fixed to a variable expense and to outsource the
support functions.
The Company believes that the staffing industry is highly fragmented and is
continuing to experience increasing consolidation primarily due to the
increasing demand by large companies for centralized staffing services and the
difficulties faced by many smaller staffing companies in today's staffing
services market. The growth of national and regional accounts resulting from the
centralization of staffing decisions by national and larger regional companies
has increased the importance of staffing companies being able to offer a wide
range of services over a broad geographic area. In addition, many smaller
staffing companies are experiencing increased difficulties due to factors such
as significant working capital requirements, limited management resources, and
an increasingly competitive environment.
27
<PAGE> 31
STRATEGY
The Company seeks to expand on its success by broadening the range of IT
services and staffing services offered to its existing and prospective clients.
The Company's strategy is focused on internal growth, selective acquisitions,
and the continued development of additional complementary IT services and
staffing services. The Company believes that its business strategy will provide
it with a competitive advantage in pursuing and maintaining major national and
regional accounts as well as in serving local markets. The key elements of the
Company's strategy are presented below.
Enhance Leadership Position in the Information Technology Services Sector
In recent years, there has been a dramatic increase in demand for technical
project support, software development, and other IT services resulting from the
increased use of technology. This high level of demand, coupled with the high
value-added nature of such services, generally results in higher profit margins.
The Company has targeted the high-growth, high-margin IT services sector as its
primary growth area and intends to aggressively enhance its existing leadership
position in this sector.
The Company established its IT Services Group with the acquisition of two
major businesses in September 1994 and June 1995. Since that time, the Company
has acquired 15 additional IT services businesses, including three IT solutions
businesses. As part of its strategy to offer a more complete range of high end,
value-added IT services to its clients, the Company formed its IT Solutions unit
in the first quarter of 1997. The Company believes that it is a leading provider
of IT staff augmentation services, with 1996 pro forma revenues of $374 million.
In 1996, pro forma revenues for the IT Services Group increased 32% over 1995,
reflecting internal growth, while increasing gross margins. The Company expects
that revenues contributed by this group will continue to increase as a
percentage of its total revenues.
The Company believes that it is well positioned to capitalize on the
anticipated continued growth in the IT services sector due to its size,
geographic breadth, industry experience, and expertise in providing a wide range
of IT services. The Company intends to grow significantly in this area through
(i) selective acquisitions, (ii) aggressive recruiting, training, and marketing
of industry specialists with a wide range of technical expertise, (iii) opening
offices in new and existing markets, and (iv) active cross-selling of its IT
services to its existing IT and staffing services customers. The Company intends
to continue pursuing businesses with specializations in custom software
development, packaged software implementation, critical computer code
maintenance and network implementation and integration.
Leverage Infrastructure and Existing Client Base for Internal Growth
The Company has established a national branch network for its IT Services
Group and Staffing Services Group and has used this network to increase revenues
and enhance earnings stability. The Company believes that this geographic and
sector diversity helps to protect it from adverse regional economic and business
cycles. In addition, the Company's existing branch office network has the
infrastructure and support systems in place to enable it to expand and enhance
services while limiting additional expense. This allows the Company to achieve
significant economies through the allocation of management, advertising,
recruiting and training costs over a larger revenue base. Further economies of
scale are presented by the Company's three domestic and three international
development centers established to provide offsite software development services
for clients.
The Company's branch office network, together with its software development
centers, provides it with an advantage when pursuing contracts with national
accounts. These accounts generally have numerous locations and a wide variety of
service needs. The Company's ability to meet the broad service requirements of
its clients provides a basis for establishing long-term relationships with
large-scale users of IT services and staffing services, and further provides the
Company with significant advantages over its competitors in marketing solutions
to such clients.
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<PAGE> 32
Broaden Range of Value-added IT Services and Solutions
The Company believes that it can increase its revenues from existing
clients and attract new clients by offering a broad range of IT services through
its IT Services Group. The IT Services Group is comprised of COMSYS, which
addresses IT staff augumentation requirements, and IT Solutions, which addresses
specific IT problems. In response to the rapidly changing nature of IT, the
Company regularly evaluates emerging technologies and their potential benefit as
new services to clients. Based on these evaluations, the Company may develop or
expand the service lines of existing business units or acquire complementary
businesses to enhance the Company's ability to support its clients' ongoing IT
requirements. IT Solutions is a recent addition to the service line that
provides value-added services, including Internet/Intranet services, Year 2000
solutions, new media solutions (such as multimedia-based Web site design),
software development, training services, critical code maintenance and software
testing and quality assurance.
Expand Use of Offshore Development Centers
In 1997, the Company acquired three offshore software development centers
in India which will provide the IT Services Group with a significant cost
advantage as well as the ability to provide 24-hour service to its clients. The
Company's costs in India are significantly lower than costs incurred for
comparable resources in the U.S. Through satellite communications, the Company's
clients may be directly linked to the IT Services Group's facilities in India.
Due to the time difference between India and the U.S., the Company can create a
virtual "second shift" for its North American clients allowing for more rapid
completion of projects and off-peak use of clients' technology resources. In
addition, for larger projects with critically short time frames, the offshore
facilities allow the Company to parallel process many of its development phases
to accelerate delivery time. The Company intends to continue to seek
opportunities to further use its facilities in India as well as evaluate other
offshore facilities that could provide similar cost advantages.
Continue to Pursue Selective Acquisitions
The Company has made 32 acquisitions since its inception in 1993. While the
Company initially concentrated its acquisition efforts on establishing a
national base of staffing services, the Company has more recently focused its
acquisition efforts in the higher-margin IT services sector. The Company is
currently focused on acquisitions to expand the services offered by COMSYS and
IT Solutions. Through June 30, 1997, the Company had acquired five businesses in
its IT Services Group with aggregate 1996 revenues of $49.0 million. Currently,
the Company has non-binding letters of intent to acquire three businesses, which
would complement its existing IT businesses. The following table shows
acquisition activity for each of the past three years and for the six months
ended June 30, 1997.
<TABLE>
<CAPTION>
1994 1995 1996 JUNE 30, 1997
------- ------- -------- -------------
<S> <C> <C> <C> <C>
Acquisitions Completed:
IT Services Group:
COMSYS............................. 1 1 10 2
IT Solutions....................... -- -- -- 3
Staffing Services Group............... 3 4 4 1
Other................................. -- 1 -- --
------- ------- -------- -------
Total......................... 4 6 14 6
======= ======= ======== =======
Purchase Consideration(1) (in
thousands)............................ $58,102 $40,304 $174,393 $66,587
======= ======= ======== =======
</TABLE>
- ---------------
(1) In certain transactions, the sellers are also entitled to contingent
consideration generally based on the increase in EBITDA. As of June 30,
1997, the aggregate contingent consideration due sellers based on increases
in EBITDA is capped at $49.2 million.
The Company is continually seeking acquisition opportunities and believes
there are a substantial number of attractive acquisition candidates in the
information technology and staffing services industries. The
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<PAGE> 33
Company from time to time enters into discussions and non-binding letters of
intent that may lead to acquisitions but no assurances can be given that future
acquisitions will be consummated.
Focus on Recruiting, Training and Retention
The Company believes that its ability to attract and retain a broad
spectrum of high-quality employees, consultants and computer professionals is a
key element of its growth strategy. The Company has established a domestic and
international network to recruit employees, consultants and computer
professionals of all experience levels. The Company has 12 full-time employees
dedicated to recruiting in India as well as two full-time recruiters located in
the U.K. In the IT Services Group, the Company provides continual training
opportunities in software engineering techniques and key technologies. The
Company has made significant investments in its domestic and foreign training
centers, including centers that employ full-time instructors and are equipped
with client/server and mainframe hardware, software and development tools. These
training resources enhance the Company's ability to provide qualified IT
professionals to satisfy its client needs. In addition, the Company's
complementary services from staff augmentation to high-end software development
offer its IT professionals the opportunity to grow professionally within the
Company. The Company believes that this internal upward mobility is a critical
factor in continuing to attract and retain high-quality employees, consultants
and computer professionals.
Entrepreneurial Corporate Environment
The Company believes that its entrepreneurial business environment is an
important component of its strategy for growth. Each branch office is operated
as a separate profit center with local management having profit and loss
responsibilities. The Company believes that this management philosophy allows it
to attract and retain highly talented managers who have demonstrated the ability
to operate independently and succeed within a decentralized management
structure. The Company has established guidelines that offer its managers and
field personnel latitude in operational areas such as hiring, pricing, training,
sales, and marketing. In addition, the Company has a profit-based compensation
program at the national, regional and local levels and a broadly distributed
stock option program to further motivate employees through ownership in the
Company.
IT SERVICES GROUP
The Company's strategic focus is to continue to grow the IT Services Group
through continued, aggressive acquisition and internal growth. Through June 30,
1997, the Company had acquired 17 IT services businesses, including three IT
solutions businesses.
COMSYS
COMSYS provides personnel to meet the growing need for employees with
advanced computer-related skills. As of June 30, 1997, COMSYS operated 45 branch
offices located in Alabama, Arizona, California, Colorado, Florida, Georgia,
Idaho, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada,
New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Texas, Washington
and the United Kingdom.
COMSYS offers staff for a full spectrum of computer-related services
ranging from traditional systems analysis to high value-added IT consulting and
project management. Depending upon the needs of the client, four primary types
of staffing services are offered: information and systems development services,
management services, advanced technology services, and government services.
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<PAGE> 34
Information and Systems Development Services. The Company provides
highly-skilled information systems personnel ("software engineers") to meet
clients' specific needs in the following areas:
<TABLE>
<S> <C>
Technical Services -- designing, programming and evaluation of operating systems,
databases, networks, and communications systems
Contract Programming programming of existing applications, development and
and Maintenance -- implementation of new applications and maintenance
Conversion Services -- data, platform, language and application conversions
Documentation creation, maintenance or re-engineering of various forms of
Services -- documentation
Testing -- systems and software testing and quality assurance
including support using proprietary testing
methodologies -- S.M.A.R.T. Testing Methods
</TABLE>
Management Services. As clients' technology needs have become more complex,
demand has increased for comprehensive IT solutions that involve not only staff
augmentation, but also management of the underlying project. In a management
services assignment, the Company assumes greater responsibility for a project's
success than it would in a traditional information services assignment. These
services are provided on the following bases:
<TABLE>
<S> <C>
Consulting Services -- development of solutions, usually delivered in a report or
recommendation, to a client's specific IT needs
Project Management staffing and management of a specific IT project within
and Project written performance criteria and objectives including
Outsourcing -- project outsourcing, both onsite and offsite
</TABLE>
Advanced Technology Services. The Company provides leading-edge IT services
to staff positions that require knowledge of emerging technologies. Such
advanced technology services include IT architecture and engineering, systems
consulting, network systems consulting, complex internet enabled applications
and client/server and object oriented services. The Company supports all major
computer technology platforms (mainframe, mid-range, client server and network)
and supports client projects using a variety of software applications. The
Company implements SAP's client/server software, custom develops Oracle,
Informix, DB2, Visual Basic and C++ applications and implements and supports
Windows NT, Novell and UNIX based environments.
Government Services. The Company provides software engineers and technical
consultants to 84 government agencies in 20 states and believes that it is a
major provider of IT services to state government agencies. In the government
services segment, the Company's personnel have technical expertise and
application knowledge primarily in health, welfare and human services,
transportation and highways, and environmental services.
Year 2000 Services. The Company provides complete solutions to the Year
2000 computer programming problem. The Company's services involve assessing the
impact of the Year 2000 problem in information systems, planning solutions to
the Year 2000 problem, renovating program code, testing the changed programs and
rolling out the corrected applications.
Technical Communications Outsourcing. COREComm maintains a full-time staff
of writers, editors, graphic artists, and consultants to fulfill the technical
communication outsourcing needs of its clients through four branch offices
located in Texas and Oklahoma. In an effort to further develop this business,
COREComm has established alliances with companies that have ongoing technical
communication needs, including company magazines, ISO 9000 documentation,
maintenance manuals, newsletters, on-line documentation, technical articles,
books, brochures, papers, reports, and product specification sheets.
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<PAGE> 35
IT Solutions
In March 1997, the IT Solutions unit was formed with the acquisition of
Metamor Technologies, Ltd. ("Metamor"), a Chicago-based firm. Since the
acquisition of Metamor, IT Solutions has acquired BMD, based in Irvine,
California and India, and Millennium Computer Corporation, based in Rochester,
New York.
IT Solutions offers a full spectrum of IT services from the planning stage
through implementation of the final product or service. The IT Solutions unit
has the capability to perform the services desired by its clients onsite at the
customer's facility, offsite at one its of U.S. facilities or one of its
offshore Indian facilities. This provides its clients alternatives for achieving
their required business solutions, while at the same time providing IT Solutions
operating efficiencies that the Company believes gives it a competitive
advantage over its competitors.
IT Solutions offers services that enable middle market and FORTUNE 1000
companies to use IT as a more effective business tool and supports these
companies' investment in IT. IT Solutions services include the following:
Systems Integration -- IT Solutions provides custom application
development, package implementation and network integration, and specializes in
Oracle, Informix, DB2, Visual Basic and C++ applications, Windows NT, Novell and
Unix-based environments and Internet/Intranet solutions.
Software Services -- IT Solutions focuses on developing software that
becomes part of their customers' products. This work includes development of
components of "shrink-wrap" packages, porting such products to different
platforms, and creating embedded software for various types of hardware
components.
Legacy Application Support. IT Solutions provides mission critical 24-hour,
seven-day-a-week systems maintenance for legacy applications. These services are
provided through its three development centers located in India, using satellite
links that allow it to communicate with its customers' information systems.
Offsite support is primarily accomplished during the night time hours in the
U.S. when a customer's use of its information systems is limited. IT Solutions
also provides Year 2000 conversions through its India facilities. The Company
believes that many of its Year 2000 customers will become longer-term
maintenance customers.
Software Development Centers. The Company maintains six software
development centers, of which three are located in India and three are located
in the United States in Portland, Oregon, Chicago, Illinois and Rochester, New
York. Through its development centers, the Company has the ability to perform a
portion or all of a client's IT requirements. IT Solutions performs the majority
of its turn-key projects, mainframe applications and additional services such as
custom software development, code maintenance and Web page development and
maintenance at its development centers. The ability to service the client's
needs offsite at one of the Company's development centers rather than onsite
provides the IT Solutions unit with greater operating efficiencies and quality
control. The Company's three offshore software development centers in India
provide the IT Services Group with a significant cost advantage as well as the
ability to provide 24-hour service to its clients. The Company's costs in India
are significantly lower than costs incurred for comparable resources in the U.S.
Through satellite communications, the Company's clients may be directly linked
to the IT Services Group's facilities in India. Due to the time difference
between India and the U.S., the Company can create a virtual "second shift" for
its North American clients allowing for more rapid completion of projects and
off-peak use of clients' technology resources. In addition, for larger projects
with critically short time frames, the offshore facilities allows the Company to
parallel process many of its development phases to accelerate delivery time. To
perform these services offshore the Company maintains over 65,000 square feet of
state of the art facilities in Hyderabad, Madras and New Delhi, India, and uses
six 64Kbps secured, high speed satellite links, NT computer servers, AS-400
mid-range computer servers, UNIX computer servers and S-390 development
machines.
STAFFING SERVICES GROUP
CORESTAFF Services provides office/clerical, light industrial, and
electronic/technical services through 95 branch offices (including five
franchise offices) located in Alabama, Arizona, California, Colorado,
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<PAGE> 36
Connecticut, the District of Columbia, Florida, Georgia, Illinois, Maryland,
Nevada, New Jersey, New York, North Carolina, Pennsylvania, South Carolina,
Texas, Virginia and Wyoming. In Philadelphia and the New York City metropolitan
area, CORESTAFF Services operates under the name Leafstone Staffing Services.
CORESTAFF Services accounted for 50.6% and 53.8% of the Company's pro forma
revenues for the years ended December 31, 1996 and 1995, respectively.
Office/clerical staffing services include providing secretaries, word
processors, receptionists, general office support, telemarketers, data entry
personnel, bookkeepers, and collectors. Also included in the office/clerical
category are staffing services in the accounting, financial and library services
areas, all of which require specialized training. Light industrial staffing
includes the provision of unskilled and semi-skilled personnel in light
manufacturing and assembly, picking and packing, warehouse services, equipment
handling, inventory, and shipping and receiving. Electronic/technical staffing
includes the training and provision of skilled personnel in electronic
manufacturing.
CORESTAFF Services provides a wide range of staffing options to its
clients, including, but not limited to, supplemental and project staffing and
Vendor-in-Partnership ("VIP") and Variable Capacity Strategies ("VCS") programs.
The appropriate staffing option depends on the nature and length of the
assignment and the degree of day-to-day management responsibility delegated to
the provider of the services.
Supplemental Staffing. Often considered traditional or tactical temporary
help, supplemental staffing assignments generally range in duration from one day
to several months. Supplemental staffing provides clients with maximum
flexibility in meeting staffing requirements as clients may commence and
terminate assignments at any time and with short notice. In addition, because
clients generally only pay for the time actually worked by a supplemental
staffing employee, they can use supplemental staffing employees at any time and
on any day without paying a premium for shift, holiday, or weekend labor.
Vendor-in-Partnership Programs. In response to increased client demand, the
Company provides, through its VIP program, coordination of temporary personnel
services by providing a dedicated onsite account manager to assist in the
procurement and management of the client's temporary workforce. Customized to
the needs of each client, the Company designs and implements programs that
include services such as specialized testing, drug screening, selection and
monitoring of back-up vendors, enforcement of the client's quality standards,
and orientation of each temporary employee to the client's work site, culture,
and job requirements. The Company had 47 VIP programs, which generated combined
pro forma revenues of approximately $103 million for the year ended December 31,
1996.
Project Staffing. The Company provides contract employees to clients who
require personnel to staff specific projects for a defined period of time.
Generally, project staffing involves a commitment of a team of employees who
remain at the site until completion of the project.
Variable Capacity Strategies ("VCS"). VCS is a staffing service program
that improves productivity and total quality output by reducing turnover through
proactive training and rotation of employees performing repetitive job
assignments. VCS, which was added to the Company's service offerings in 1996 as
a result of the acquisition of Transworld Services Group, generates
significantly higher margins than most of the Company's other staffing services
offerings. Currently, this program is being used by only a few of the Company's
customers and the Company is developing a roll-out strategy and methodology to
extend this program throughout the U.S.
Specialized Software Tools. During 1996, CORESTAFF Services added a number
of software tools, including COREtrack and COREskills, in an effort to give the
Company a competitive marketing advantage. COREtrack is a specialized software
program that assists clients in managing critical information related to
multiple staffing providers. This system tracks a wide-range of information,
including orders, activity assignments and invoices. COREskills is an
interactive computer training and certification program that trains and
qualifies temporary and client employees in the latest office software products.
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<PAGE> 37
ACQUISITIONS
During 1996 and the first six months of 1997, the Company acquired 20
businesses, which had combined 1996 revenues of more than $366.8 million.
Certain of the more significant acquisitions completed during 1996 and the first
six months of 1997 are briefly described below:
Millennium Computer Corporation ("Millennium"). In June 1997, the Company
acquired Millennium Computer Corporation. Millennium provides contract software
development services for its clients and is part of the IT Solutions unit.
Millennium had 1996 revenues of approximately $9.8 million.
CompuCorps Resources, Inc. ("CompuCorps"). In June 1997, the Company
acquired CompuCorps, an affiliate of Millennium. CompuCorps is a Rochester,
N.Y.-based IT services business with 1996 revenues of approximately $1.7
million.
Active Software, Inc. ("Active"). In May 1997, the Company acquired Active
Software, Inc., a Minneapolis-based IT services company with 1996 revenues of
approximately $5.0 million. Active has a Lotus' Notes groupware practice and
specializes in Internet technologies and applications.
Business Management Data, Inc. ("Business Management Data"). In April 1997,
the Company acquired Business Management Data and its India-based affiliate,
Sriven Computer Solutions, (Pvt.) Ltd. These companies are part of the IT
Solutions unit and provide various IT solutions, including system integration,
computer code maintenance, system reengineering and Year 2000 conversion
services with 1996 revenues of approximately $14.1 million.
Metamor Technologies, Ltd. ("Metamor"). In March 1997, the Company acquired
Metamor Technologies, Ltd., a Chicago-based firm, which is part of the IT
Solutions unit and provides a broad range of strategic IT services with 1996
revenues of approximately $20.1 million. Metamor's primary focus is assisting
clients in the transition from older technologies to state-of-the-art platforms
and products.
Roberta Enterprises, Inc. ("Roberta"). In January 1997, the Company
acquired Roberta, which had approximately $37.2 million in revenues for 1996.
Roberta provides staffing services through seven branch offices in Northern
California.
Telos Consulting Services ("Telos"). In December 1996, the Company acquired
the assets of Telos from Telos corporation. Telos is a California-based IT
services business with 1996 revenues of approximately $33.1 million. Telos has
11 branch offices in California, Colorado, Florida, Idaho, Massachusetts, Nevada
and Virginia.
Transworld Services Group ("Transworld"). In October 1996, the Company
acquired Transworld. Transworld is a Florida-based staffing services business
with 1996 revenues of approximately $36.0 million. Transworld has six branch
offices in Florida, New Jersey and South Carolina.
On-Line Resources, Inc. ("On-Line"). In September 1996, the Company
acquired On-Line. On-Line is a Florida-based IT services business with 1996
revenues of approximately $20.2 million.
Data Aid, Inc. ("Data Aid"). In June 1996, the Company acquired Data Aid.
Data Aid is an Alabama-based IT services business with 1996 revenues of
approximately $25.7 million. Data Aid has three branch offices in Alabama and
Georgia.
Regal Data Systems, Inc. ("Regal"). In April 1996, the Company acquired
Regal. Regal is a New Jersey-based IT services business with 1996 revenues of
approximately $31.2 million. Regal has one office in New Jersey.
Datronics Management, Inc. and Datronics U.K. Limited. ("Datronics"). In
January 1996, the Company acquired Datronics. Datronics is a New York-based IT
services business with 1996 revenues of approximately $15.1 million. Datronics
has seven branch offices located in New York, Texas, Georgia, Arizona, New
Jersey and North Carolina. Datronics also has a branch office in the United
Kingdom.
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INTEGRATION OF ACQUIRED COMPANIES
Management begins integrating newly acquired companies as soon as
practicable. This process involves formalizing and standardizing each acquired
company's marketing and sales programs and field operations procedures.
Standardized personnel manuals are distributed, and the acquired company is
brought under the Company's uniform risk management program. In some cases, the
Company closes certain of the acquired company's offices and merges its
operations and personnel, including field employees, into the Company's existing
business.
The Company is in the process of installing an integrated front- and
back-office information system. Once operational, the Company will convert all
its front- and back-office activities onto this new platform. This new system
will integrate the Company's two proprietary front-office systems with the
"PeopleSoft" system, which is a payroll, human resources, accounting and
reporting information system. The Company's front-office systems are MARS, a
proprietary management, administrative, recruiting and sales software system,
designed specifically for COMSYS, and COREmatch, a proprietary staffing services
front-office software system. Once implemented, this integrated information
system will improve the timeliness and efficiency of data gathering and
retrieval.
BRANCH OFFICES AND CENTRALIZED BUSINESS OPERATIONS
The Company provides staffing, contracting and outsourcing services through
147 company-operated branch offices and five franchise-operated branch offices
located in 28 states, the District of Columbia, the United Kingdom and India.
The IT Services Group and the Staffing Services Group maintain separate
facilities. All of the Company's branch offices are leased and the average lease
term is three to five years. As of June 30, 1997, the Company had 45 IT services
branch offices, 95 staffing services branch offices and seven IT Solutions
offices.
SALES AND MARKETING
COMSYS and CORESTAFF Services have each developed a sales and marketing
strategy that focuses on national, regional and local accounts and is
implemented through their branch locations. Regional and local accounts are
targeted by account managers at the branch offices, permitting the Company to
capitalize on the local expertise and established relationships of its branch
office employees. Such accounts are solicited through personal sales
presentations, telephone marketing, direct mail solicitation, referrals from
clients, and advertising in a variety of local and national media, including the
Yellow Pages, newspapers, and trade publications. The Company also conducts
public relations activities designed to enhance public recognition of the
Company and its services. Local employees are encouraged to be active in civic
organizations and industry trade groups to facilitate the development of new
customer relationships.
The Company's national sales and marketing effort is coordinated by
management at the corporate level, which enables the Company to develop a
consistent, focused strategy to pursue national account opportunities. This
strategy allows the Company to capitalize on the desire of national clients to
work with a limited number of preferred vendors for their staffing requirements.
The IT Solutions unit generates sales by focusing either on specific
industries or functional areas of expertise. IT Solutions also capitalizes on
established relationships between the Company and targeted prospects and has a
dedicated sales force focused on generating new customers and relationships. The
Company intends to establish a global sales organization for the IT Solutions
unit.
RECRUITING AND RETENTION
In the IT services sector, the demand for software engineers and technology
consultants significantly exceeds supply. The IT Services Group's success
depends in large part on its ability to attract, develop, motivate and retain
highly skilled IT professionals. The Company recruits from a number of
countries, including India, the U.S., Canada, the U.K., Singapore, Australia,
South Africa and the Philippines. The
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<PAGE> 39
Company advertises in leading newspapers and trade magazines. The Company uses a
standardized global selection process which includes interviews, tests and
reference checks.
CORESTAFF Services recruits its temporary and contract employees through a
recruiting program that primarily uses local and national advertisements and job
fairs. In addition, CORESTAFF Services has succeeded in recruiting qualified
employees through referrals from its existing labor force. As a result, the
Company has initiated a policy whereby it pays referral fees to employees
responsible for attracting new recruits. The Company believes this balanced
recruiting strategy will continue to provide it with sufficient high quality
temporary employees to meet its staffing demands.
In an effort to attract a wide spectrum of employees, the IT Services Group
offers diverse employment options and training programs. The two primary
approaches the IT Services Group uses are full-time employee status with an
annual salary irrespective of assignment, and hourly contingent worker status
for which compensation is tied to the duration of the assignment.
ASSESSMENT AND TRAINING
To better meet the needs and requirements of its clients and to enhance the
marketability and job satisfaction of its employees, the Company uses a
comprehensive system to assess and train its employees. The Company conducts
extensive background, drug, and skills screening of potential temporary
employees and contract consultants and provides these employees with written and
video workplace orientation courses that are tailored to the practices and
policies of specific clients. Computerized tutorials are available in the
CORESTAFF Services branch offices for temporary employees wishing to upgrade
their typing, data entry, spreadsheet, office automation, desktop publishing, or
word processing skills. In addition, the IT Services Group maintains 13 domestic
and foreign learning centers covering a broad spectrum of courses concerning
mainframe applications development and maintenance, client/server technology,
and desktop-user support. These learning centers are located in Austin and
Dallas, Texas; Cleveland, Ohio; Raleigh, North Carolina; St. Louis, Missouri;
Chicago and Springfield, Illinois; Tallahassee, Florida; Atlanta, Georgia;
Rockville, Maryland, Rochester, New York and Hyderabad, India.
COMPETITION
The market for IT solutions services includes a large number of
competitors, is subject to rapid change and is highly competitive. Primary
competitors in the IT solutions services market include participants from a
variety of market segments, including "Big Six" accounting firms, systems
consulting and implementation firms, application software firms, service groups
of computer equipment companies, facilities management companies, general
management consulting firms and programming companies. Many of the Company's
competitors have significantly greater financial, technical and marketing
resources and greater name recognition than the Company. In addition, the
Company competes with its clients' internal resources, particularly where these
resources represent a fixed cost to the client. Such competition may impose
additional pricing pressures on the Company.
The staffing services industry is fragmented and highly competitive, with
limited barriers to entry. Within local markets, smaller firms 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 that have significantly greater
marketing, financial and other resources than the Company. The Company believes
that the primary competitive factors in obtaining and retaining clients are the
ability to provide a wide range of staffing services within an expansive
geographic area, to understand the client's specific job requirements, to
provide temporary personnel with the appropriate skills in a timely manner, to
monitor quality of job performance, and to properly price services. The primary
competitive factors in obtaining qualified candidates for temporary employment
assignments are wages, responsiveness to work schedules, and the number of hours
of work available. Management believes that the Company is highly competitive in
these areas.
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<PAGE> 40
WORKERS' COMPENSATION PROGRAM; SAFETY PROGRAM
The Company maintains workers' compensation insurance for all claims in
excess of a deductible of $250,000 per occurrence and an aggregate $5 million
limit of liability provision per year through May 31, 1997, increased to $10
million per year beginning June 1, 1997. The Company's insurance carrier
currently requires the Company to maintain irrevocable letters of credit to
cover potential losses related to the self-insurance portion of its program.
Under its workers' compensation program, field personnel work in conjunction
with a designated risk manager and a third-party administrator to manage claims
and establish appropriate reserves for the deductible portion of claims. An
independent actuary provides advice on overall workers' compensation costs as
well as an actuarial valuation regarding the adequacy of the reserves for
payments relating to the uninsured portion of workers' compensation claims. The
reserve balances determined by the third-party administrator and Company
management are adjusted to the amounts recommended by the actuary.
The Company has a safety program in its branch offices to provide
appropriate safety training to employees prior to job assignment. The risk
manager and field personnel also perform safety inspections at customer
locations to help determine potential risks for employee injury and to assist
customers in making the workplace safer. Company policies prohibit staffing of
high-risk work. Behavioral testing is also used to help reduce unnecessary
claims.
EMPLOYEES
At December 31, 1996, the Company employed approximately 2,000 full-time
staff employees and had approximately 3,800 IT consultants on assignment. During
1996, the Company employed approximately 91,000 temporary and contract employees
and had an average of approximately 23,000 employees on assignment per week. As
of December 31, 1996, approximately 11% of the Company's IT professionals were
citizens of other countries, with most of those in the U.S. working under H-1B
temporary work permits. The Company is not a party to any collective bargaining
agreements and considers its relationships with its employees to be
satisfactory.
The Company is responsible for and pays the employer's share of Social
Security taxes (FICA), federal and state unemployment taxes, workers'
compensation insurance, and other costs relating to its temporary employees. The
Company makes health insurance benefits available to its temporary employees.
Generally, temporary employees with more than 1,000 hours of service per year
are eligible to participate in the Company's 401(k) Retirement Savings Plan.
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<PAGE> 41
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information and ages as of July 16,
1997 regarding each of the Company's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<S> <C> <C>
Michael T. Willis................. 52 Chairman of the Board, Chief Executive Officer and
President
Austin P. Young................... 56 Executive Vice President -- Finance and
Administration, Director
Rocco N. Aceto.................... 40 Executive Vice President -- Staffing Services;
President of CORESTAFF Support Services
Joseph V. Amella.................. 41 Executive Vice President -- Eastern Operations,
Staffing Services
George W. Fink.................... 49 Executive Vice President; President of COMSYS
Information Technology Services
Kenneth R. Johnsen................ 43 Executive Vice President; President of IT Solutions
Peter T. Dameris.................. 37 Senior Vice President, General Counsel and Secretary
Edward L. Pierce.................. 40 Senior Vice President, Chief Financial Officer and
Assistant Secretary
Nuala Beck........................ 45 Director
Charles H. Cotros................. 59 Director
Donald J. Edwards................. 31 Director
Bruce V. Rauner................... 41 Director
Charles R. Schneider.............. 56 Director
John T. Turner.................... 53 Director
</TABLE>
MICHAEL T. WILLIS has served as Chairman of the Board, Chief Executive
Officer and President of the Company since its formation and has been in the
personnel and temporary services industry for more than 20 years. Mr. Willis
founded The Talent Tree Corporation ("Talent Tree") in 1976 and built it into
one of the largest staffing services companies in the United States. Mr. Willis
sold Talent Tree to Hestair plc in 1987 and then continued as President and
Chief Executive Officer until April 1993. Mr. Willis is also a director of the
Southwest Bank of Texas, a publicly-traded financial institution.
AUSTIN P. YOUNG has served as a director and Executive Vice
President -- Finance and Administration of the Company since August 1996. Prior
to joining the Company, Mr. Young served as Senior Vice President and Chief
Financial Officer of American General Corporation. Prior to joining American
General Corporation in 1987, Mr. Young was a partner with KPMG Peat Marwick
where his career spanned 22 years.
ROCCO N. ACETO has served as Executive Vice President -- Staffing Services
since September 1996 and President of CORESTAFF Support Services, Inc. (formerly
United Staffing Services, Inc.), a subsidiary of the Company, since August 1994.
Mr. Aceto serves as President of CORESTAFF Services. Prior to joining the
Company in August 1994, Mr. Aceto was a corporate Vice President and General
Manager of Pagenet of Orange County, California from March 1992 to August 1994.
From July 1980 until joining Pagenet, Mr. Aceto worked with Pitney Bowes where
he served as a division Vice President.
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<PAGE> 42
JOSEPH V. AMELLA has served as Executive Vice President -- Eastern
Operations, Staffing Services since August 1994. Mr. Amella serves as President
of the Eastern Division of CORESTAFF Services and has over 15 years of
experience in the staffing industry. Prior to joining the Company, Mr. Amella
served in various capacities with Talent Tree including Vice President and
General Manager, and Senior Vice President -- Mid-Atlantic Division from March
1984 to April 1993.
GEORGE W. FINK has served as an Executive Vice President of the Company and
President of COMSYS Information Technical Services since September 1995. Prior
to joining the Company, Mr. Fink was self-employed, managing a variety of
personal investments. From June 1986 until July 1993 and from August 1993 until
March 1994, Mr. Fink served as President and Chief Executive Officer of Remco
America, Inc. and Rent-a-Center, respectively. Prior to joining Remco, Mr. Fink
was a partner with Ernst & Young LLP and a director of the Houston Office
Entrepreneurial Services Group.
KENNETH R. JOHNSEN joined the Company in May 1997 as an Executive Vice
President of the Company and President of IT Solutions. Prior to joining the
Company, Mr. Johnsen was employed with IBM Corporation since 1975 in various
managerial capacities, including Vice President of Worldwide Commercial
Operations for IBM PC Company from January 1997 to May 1997, Vice President,
Business Services and Business Development for ISSC, IBM's outsourcing
subsidiary, from January 1994 to December 1996 and General Manager of IBM
China/Hong Kong from September 1991 to December 1993.
PETER T. DAMERIS has served as Senior Vice President, General Counsel and
Secretary of the Company since September 1996. Mr. Dameris previously served as
Vice President, General Counsel and Secretary since January 1995. Prior to
joining the Company in January 1995, Mr. Dameris was a partner with the law firm
of Cochran, Rooke and Craft, LLP and served as counsel to the Company since its
formation in July 1993. Mr. Dameris was associated with Cochran, Rooke and
Craft, LLP from June 1989 to January 1995.
EDWARD L. PIERCE has served as Senior Vice President, Chief Financial
Officer and Assistant Secretary of the Company since September 1996. Mr. Pierce
Previously served as Vice President-Finance and prior thereto as Vice President
and Controller of the Company. Prior to joining the Company in November 1994,
Mr. Pierce served in various capacities with American Oil and Gas Corporation,
including Director of Accounting, Taxation and Reporting, Assistant Controller
and Corporate Controller, from January 1990 to November 1994 and as an Audit
Manager for Arthur Andersen LLP prior thereto.
NUALA BECK has served as a director of the Company since April 1996. Ms.
Beck, an international economist, serves as the President and is the founder of
Nuala Beck & Associates, Inc., a management consulting firm. Ms. Beck also
serves as a director of Ontario Hydro.
CHARLES H. COTROS has served as a director of the Company since November
1995. Mr. Cotros has served as Executive Vice President and Chief Operating
Officer of Sysco Corporation ("Sysco") since January 1995 and has held various
positions for Sysco for more than the past five years. Mr. Cotros has also
served as a director of Sysco since 1985 and is a member of the Executive
Committee of the Board of Directors of Sysco.
DONALD J. EDWARDS has served as a director of the Company since August
1995. Mr. Edwards joined Golder, Thoma, Cressey, Rauner, Inc. in August 1994 and
became a Principal in April 1996. From September 1992 to June 1994, Mr. Edwards
attended the Harvard Business School and received his MBA. Prior to that time,
Mr. Edwards served as an analyst with Lazard Freres & Co. from August 1988 to
January 1990 and as an associate from January 1990 to April 1992. Mr. Edwards
also serves as a director of American Habilitation Services, Inc., Select
Medical Corporation and Shahdill, Inc.
BRUCE V. RAUNER has served as a director of the Company since July 1993.
Mr. Rauner joined Golder, Thoma, Cressey, Rauner, Inc. in 1981 and became a
Principal in 1984. Mr. Rauner also serves as a director of ERO Industries.
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<PAGE> 43
CHARLES R. SCHNEIDER has served as a director of the Company since October
1994. Mr. Schneider founded U.S. Security Associates, Inc. and has served as its
President and Chief Executive Officer and a director since November 1993. From
October 1986 to November 1993, Mr. Schneider served as President of Baker
Industries, Inc. and as a Vice President of Borg-Warner Security Corp., the
parent of Baker Industries, Inc., from August 1987 to September 1993.
JOHN T. TURNER has served as a director of the Company since October 1994.
Mr. Turner currently is self-employed, managing a variety of personal
investments. From November 1990 to March 1993, Mr. Turner served as a Senior
Vice President and director of The Loewen Group, Inc. Mr. Turner was also a
founder of Paragon Family Services, Inc. and served as its President from
November 1986 to November 1990.
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<PAGE> 44
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's equity securities as of July 15, 1997: (i)
by each person known to the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) by each director of the Company, (iii)
by each of the Named Officers, (iv) by all directors and officers of the Company
as a group, and (v) each Selling Stockholder in the Stock Offerings. Each
stockholder has (i) sole voting and investment power with respect to such
stockholder's shares of stock except to the extent that authority is shared by
his or her spouse under applicable law and (ii) record and beneficial ownership
with respect to such stockholders' shares of stock.
<TABLE>
<CAPTION>
SHARES OWNED BENEFICIALLY SHARES OWNED
PRIOR TO THE OFFERINGS(1) BENEFICIALLY
------------------------- AFTER THE
SHARES TO BE OFFERINGS(1)
PERCENT OF SOLD IN THE ------------
NAME NUMBER CLASS(2) OFFERINGS(3) NUMBER
---- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
SHARES OF COMMON STOCK:
Golder Thoma & Cressey Fund III Limited
Partnership(4)........................ 8,701,921 27.1% 5,500,000 3,201,921
Michael T. Willis(3)..................... 3,238,761 10.1% -- 3,238,761
Austin P. Young.......................... 33,482 * -- 33,482
Rocco N. Aceto........................... 77,900 * -- 77,900
Joseph V. Amella......................... 131,190 * -- 131,190
George W. Fink........................... 160,655 * -- 160,655
Peter T. Dameris......................... 94,650 * -- 94,650
Donald J. Edwards(5)..................... 2,250 * -- 2,250
Bruce V. Rauner(6)....................... 8,701,921 27.1% -- 8,701,921
Charles R. Schneider..................... 18,255 * -- 18,255
John T. Turner........................... 5,880 * -- 5,880
Charles H. Cotros........................ 8,250 * -- 8,250
Nuala Beck............................... 750 * -- 750
First Union Corporation(7)............... 940,749 2.9% 500,000 440,749
All officers and directors as a group (14
persons).............................. 12,538,769 38.7% -- 12,538,769
</TABLE>
- ---------------
* Less than 1%
(1) Including 37,500, 21,000, 18,000, 18,000, 143,800 and 18,000 shares for
Messrs. Willis, Young, Aceto, Amella, Fink and Dameris, respectively, and
750 shares for each of Messrs. Schneider, Turner, Cotros and Beck,
purchasable within 60 days upon the exercise of stock options.
(2) Shares of Common Stock and shares of Non-Voting Common Stock, which are
convertible into shares of Common Stock, are treated as a single class for
purposes of the beneficial ownership table.
(3) Mr. Willis has agreed to sell up to 900,000 shares of Common Stock to cover
over-allotments, if any. If the over-allotment option is exercised in full,
Mr. Willis would beneficially own 2,338,761 shares of Common Stock after the
Stock Offerings. The address for Mr. Willis is 4400 Post Oak Parkway, Suite
1130, Houston, Texas 77027.
(4) Golder, Thoma, Cressey Fund III Limited Partnership's ("GTC III") sole
general partner is Golder, Thoma, Cressey, Rauner Limited Partnership ("GTCR
Partnership"). The address for GTC III is 6100 Sears Tower, Chicago,
Illinois 60606.
(5) Mr. Edwards is a Principal with Golder, Thoma, Cressey, Rauner, Inc. an
affiliate of GTC III.
(6) Includes all of the shares of Common Stock owned by GTC III. Mr. Rauner is a
general partner of GTCR Partnership, which serves as the sole general
partner of GTC III and over which he may be deemed to have voting and
investment power. The address for Mr. Rauner is 6100 Sears Tower, Chicago,
Illinois 60606.
(7) Includes 707,232 shares of Non-Voting Common Stock. The address for First
Union Corporation is One First Union Center, 18th Floor, Charlotte, North
Carolina 28288-0732.
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<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
Pursuant to the Certificate of Incorporation, the Company's authorized
capital stock consists of 100,000,000 shares of Common Stock; 3,000,000 shares
of Non-Voting Common Stock; and 5,000,000 shares of Preferred Stock. As of July
15, 1997, the Company had 32,081,745 shares of Common Stock issued and
31,397,745 shares outstanding; 707,232 shares of Non-Voting Common Stock issued
and outstanding; and no shares of Preferred Stock issued or outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters submitted to a vote of stockholders and do
not have cumulative voting rights. Subject to preferences that may be applicable
to any outstanding Preferred Stock, the holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to receive, after payment of the
Company's debts and liabilities, the remaining assets of the company on a
ratable basis. This right, however, is subject to (i) any prior liquidation
rights of Preferred Stock then outstanding (to the extent such rights are
designated by the Board of Directors) and (ii) any rights of holders of
Preferred Stock to share ratably with holders of Common Stock in all assets
remaining after payment of liabilities and liquidation preferences (to the
extent such rights are designated by the Board of Directors). The Common Stock
has no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the Common Stock. All
shares of Common Stock currently outstanding are fully paid and non-assessable.
NON-VOTING COMMON STOCK
Except as required by applicable law, the holders of Non-Voting Common
Stock are not entitled to vote in the election of directors or on any other
matters submitted to a vote of stockholders. In addition, Non-Voting Common
Stock (i) may only be issued to and held by a "Regulated Stockholder" which is
defined in the Certificate of Incorporation to be an entity subject to the
Federal Reserve Board's rules and regulations, (ii) may be converted into Common
Stock at any time at the option of the holder thereof on a one-for-one basis;
provided, however, any such conversion may only be made if in the opinion of the
holder of the Non-Voting Common Stock the regulations of the Federal Reserve
Board in effect at such time would not prohibit a national bank holding company
from holding such shares of Common Stock, and (iii) is subject to the same
dividend and liquidation preferences and benefits as the Common Stock. Except
for the restrictions on ownership, voting, and conversion, the Non-Voting Common
Stock is substantially similar to the Common Stock.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued shares of
Preferred Stock and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
stockholders. Although it currently has no intention to do so, the Board of
Directors, without stockholder approval, can issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company.
PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECTS
The Certificate of Incorporation and the Bylaws of the Company contain
provisions that could have an anti-takeover effect. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors of the Company and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of the
Company. The provisions are designed to reduce the vulnerability of the Company
to an
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<PAGE> 46
unsolicited proposal for a takeover of the Company that does not contemplate the
acquisition of all of its outstanding shares or an unsolicited proposal for the
restructuring or sale of all or part of the Company. The provisions are also
intended to discourage certain tactics that may be used in proxy contests. Set
forth below is a description of such provisions in the Certificate of
Incorporation and the Bylaws. The Board of Directors has no current plans to
formulate or effect additional measures that could have an anti-takeover effect.
Pursuant to the Certificate of Incorporation, directors, other than those,
if any, elected by the holders of Preferred Stock, can be removed from office by
the affirmative vote of the holders of 66 2/3% of the voting power of the then
outstanding shares of capital stock entitled to vote thereon ("Voting Stock").
Vacancies on the Board of Directors may be filled by the remaining directors and
does not require stockholder approval.
The Certificate of Incorporation of the Company provides for the Board of
Directors to be divided into three classes, with staggered three-year terms. As
a result, only one class of directors will be elected at each annual meeting of
stockholders of the Company, with the other classes continuing for the remainder
of their respective three-year term. The classification of the Board of
Directors makes it more difficult to replace the Board of Directors as well as
for another party to obtain control of the Company by replacing the Board of
Directors. Since the Board of Directors has the power to retain and discharge
officers of the Company, these provisions could also make it more difficult for
existing stockholders or another party to effect a change in management.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). In general, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business transaction"
with an "interested stockholder" for a period of three years after the date that
the person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. A "business combination"
generally includes, without limitation, a merger, assets or stock sale, or a
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" generally is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's outstanding voting stock.
In addition, the Company's Certificate of Incorporation provides that in
addition to any other vote required by law, the following actions involving the
Company or its subsidiaries and an interested stockholder (an "interested
stockholder" is defined in the Certificate of Incorporation to generally include
any person, entity or group which beneficially owns 10% or more of the
outstanding Voting Stock of the Company) shall require the affirmative vote of
both the holders of shares constituting 66 2/3% of the Voting Stock of the
Company and the holders of the majority of the shares of Common Stock at the
time outstanding, given in person or by proxy at a meeting called for such
purpose at which the holders of Common Stock shall vote separately as a class
(a) for any merger, consolidation or reorganization, (b) for any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of (1) the Company's
or its subsidiaries' assets to an interested stockholder or (2) an interested
stockholder's assets to the Company or its subsidiaries, (c) for any issuance,
sale, exchange, disposition or other transfer or any reclassification or
recapitalization of any securities of the Company or its subsidiaries with a
value of $1.0 million or more, and (d) for certain other material corporate
transactions with an interested stockholder; provided, however, in the event
neither (y) more than 66 2/3% of the Company's directors shall have expressly
approved the transaction or (z) the stockholders receive a fair price for their
holdings and other requirements are fulfilled as set forth in the Certificate of
Incorporation, such special vote of the stockholders shall not be required. A
"fair price" shall be deemed to be an amount equal to the highest amount of
consideration paid by the interested stockholder for a share of Common Stock of
Non-Voting Common Stock (collectively, "Common Equity") at any time within a two
year period immediately prior to the date such interested stockholder became an
interested stockholder and during any time while such interested stockholder was
an interested stockholder.
The Certificate of Incorporation provides that except as otherwise provided
for with respect to the rights of holders of Preferred Stock, no action that is
required or permitted to be taken by the stockholders of the Company at any
annual or special meeting of the stockholders may be effected by written consent
of the stockholders in lieu of a meeting of stockholders, unless the actions to
be effected by written consent of the
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<PAGE> 47
stockholders and the taking of such action by such written consent has been
expressly approved in advance by the Board of Directors of the Company. This
provisions makes it difficult for stockholders to initiate or effect an action
by written consent, and thereby effect an action opposed by the Board of
Directors. The Certificate of Incorporation and Bylaws also provide that special
meetings of stockholders may be called only by the Chairman of the Board, the
Vice Chairman of the Board, the Chief Executive Officer, or the President of the
Company, the Board of Directors of the Company, or the holders of at least 25%
of the outstanding Voting Stock. In addition, the Bylaws set forth an advance
notice procedure with regard to business to be brought before an annual meeting
of stockholders of the Company.
The Certificate of Incorporation further provides that the Board of
Directors, by a majority vote, may adopt, alter, amend or repeal provisions of
the Bylaws. However, stockholders may only adopt, alter, amend or repeal
provisions of the Bylaws by a vote of 66 2/3% or more of the combined voting
power of the then outstanding Voting Stock. In addition, the Certificate of
Incorporation provides that whenever any vote of Voting Stock is required by law
to amend, alter, repeal or rescind ("Change") any provision thereof, then, in
addition to any affirmative vote required by law (i) the affirmative vote of
66 2/3% or more of the combined voting power of the then outstanding shares of
Voting Stock is required to Change certain provisions of the Certificate of
Incorporation, including the provisions referred to above relating to interested
stockholder transactions, the filling of vacancies on the Board of Directors,
the removal of directors, the limitations on stockholder action by written
consent, the calling of special meetings by stockholders and the approval of
amendments to the Company's Bylaws and (ii) if at such time there exists one or
more interested stockholders, such Change must also be approved by the
affirmative vote of the holders of at least a majority of the combined voting
power of the outstanding shares of Voting Stock beneficially owned by persons
other than the interested stockholder or any affiliate or associate thereof.
LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY; INDEMNIFICATION
The Certificate of Incorporation of the Company limits the liability of the
directors of the Company to the Company or its stockholders (in their capacity
as directors but not in their capacity as officers) to the fullest extent
permitted by the DGCL. Accordingly, pursuant to the terms of the DGCL as
presently in effect, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts and omissions not in good faith or
which involve international misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit. In addition, such provisions do
not limit the rights of the Company or its stockholders, in appropriate
circumstances, to seek equitable remedies such as injunctive or other forms of
non-monetary relief. Such remedies may not be effective in all cases. The
Certificate of Incorporation also provides that if the DGCL is amended after the
approval of the Certificate of Incorporation to authorize corporate action
further eliminating or limiting the personal liability of the directors, then
the liability of a director of the Company will be eliminated or limited to the
full extent permitted by the DGCL, as so amended. In addition, the Certificate
of Incorporation provides that the Company may purchase and maintain insurance
on behalf of any director, officer, employee or agent of the Company who is or
was serving, at the request of the Corporation, as director, officer, employer,
or agent for another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in
such capacity or arising out of his status as such, whether or not the Company
would have the power to indemnify such person for such liability under the DGCL.
In addition, the Bylaws, in substance, require the Company to indemnify
each person who is or was, a director, officer, employee or agent of the Company
to the full extent permitted by the laws of the State of Delaware in the event
he/she is involved in legal proceedings by reason of the fact that he/she is or
was a director, officer, employee or agent of the Company, or is or was serving
at the Company's request as a director, officer, employee or agent of another
corporation, partnership or other enterprise. The Company is also required to
advance to such persons payments incurred in defending a proceeding to which
indemnification might apply, provided the recipient provides an undertaking
agreeing to repay all such advanced amounts
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<PAGE> 48
if it is ultimately determined that he is not entitled to be indemnified. In
addition, the Bylaws specifically provide that the indemnification rights
granted thereunder are non-exclusive.
INDEMNIFICATION AGREEMENTS
Each director of the Company has also entered into an indemnification
agreement with the Company (the "Indemnification Agreements"). The
Indemnification Agreements are intended to permit indemnification which may be
broader than specifically provided by law. It is possible that the applicable
law could change the degree to which indemnification is expressly permitted.
The Indemnification Agreements cover most monetary liabilities paid in
settlement or defense of claims if the indemnified party acted in good faith and
in the manner he or she believed to be in or not opposed to the best interests
of the Company or, with respect to a criminal proceeding, had no reason to
believe his or her conduct was unlawful. The determination as to whether such
standard of conduct has been met is determined by a majority of disinterested
directors of if there are no such directors, by independent legal counsel of the
stockholders. The Indemnification Agreements cover claims relating to the fact
that the indemnified party is or was a director, officer, employee, or agent of
the Company or its subsidiary, or is or was serving at the request of the
Company as a director, officer, employee, or agent for another entity. The
Indemnification Agreements also obligate the Company to promptly advance all
expenses incurred in connection with any claim. The indemnitee is, in turn,
obligated to reimburse the Company for all amounts so advanced if it is later
determined that the indemnitee is not entitled to indemnification. The
indemnification provided under the Indemnification Agreements is not exclusive
of any other indemnity rights.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Stock Offerings, the Company will have outstanding
31,397,745 shares of Common Stock and 207,232 shares of Non-Voting Common Stock
(assuming no exercise of outstanding options or conversion of the Notes). Of
such shares 12,158,982 shares of Common Stock and 207,232 shares of Non-Voting
Common Stock are considered "restricted securities" for the purpose of 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. Upon the expiration of
certain lockup agreements, most of the restricted securities will be eligible
for sale in the public market under Rule 144 or Rule 701 of the Securities Act
as described below.
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.
In general, under Rule 701 under the Securities Act, any employee, officer,
or director of or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701. Such provisions permit nonaffiliates to sell
their Rule 701 shares
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<PAGE> 49
without having to comply with the public information, holding period, volume
limitation, or notice provisions of Rule 144 and permit affiliates to sell their
Rule 701 shares without having to comply with the Rule 144 holding period
restrictions.
The Company has reserved an aggregate of 3,840,000 shares of Common Stock
for issuance pursuant to the 1995 Plan. The Company has filed a registration
statement under the Securities Act with respect to the shares reserved for
issuance under the 1995 Plan. The Company has reserved an aggregate of 450,000
shares of Common Stock for issuance pursuant to the Stock Purchase Plan. The
Company has filed a registration statement under the Securities Act with respect
to the shares reserved for issuance under the Stock Purchase Plan. In addition,
the Company has reserved shares of Common Stock for issuance upon
conversion of the Notes.
Sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through the sale of its equity
securities.
REGISTRATION RIGHTS
GTC III, First Union, Michael T. Willis, the Leslie J. Cohen Trust, William
L. Caudell, Daniel L. Shimer, Peter T. Dameris, Rocco N. Aceto, Joseph V.
Amella, John T. Turner and Charles R. Schneider are parties to a Registration
Agreement with the Company (the "Registration Agreement") under which each has
certain rights with respect to the registration under the Securities Act, for
resale to the public, of an aggregate of 12,866,214 shares of Common Stock and
Non-Voting Common Stock (the "Registrable Shares") after giving effect to the
completion of the Stock Offerings ( shares if the Underwriters'
over-allotment option is exercised in full). The Registration Agreement provides
that in the event the Company proposes to register any of its securities under
the Securities Act and the registration form to be used to register such
securities may also be used for the registration of the Registrable Shares, such
stockholders will be entitled to include Registrable Shares in such
registration, subject to certain conditions and limitations, including the right
of the managing underwriter of any such offering to exclude for marketing
reasons all or some of the Registrable Shares from such registration. In
addition, GTC III and First Union each have the right, subject to certain
conditions and limitations, to require the Company to register such Registrable
Shares on a Form S-1 on no more than three occasions or on a Form S-2 or S-3 or
any other similar short-form registration, if available, on an unlimited number
of occasions. The Company will be obligated to pay all expenses associated with
the exercise of such registration rights other than underwriting discounts or
commissions incurred in connection with such registration.
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<PAGE> 50
UNDERWRITERS
Under the terms of and subject to the conditions contained in an
Underwriting Agreement dated as of the date hereof (the "Common Stock
Underwriting Agreement"), the U.S. Underwriters named below for whom Morgan
Stanley & Co. Incorporated, Goldman, Sachs & Co., Alex. Brown & Sons
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Montgomery
Securities and The Robinson-Humphrey Company, Inc. are acting as U.S.
Representatives, and the International Underwriters named below for whom Morgan
Stanley & Co. International Limited, Goldman Sachs International, Alex. Brown &
Sons Incorporated, Donaldson, Lufkin & Jenrette International, Montgomery
Securities and The Robinson-Humphrey Company, Inc. are acting as International
Representatives, have severally agreed to purchase, and the Selling Stockholders
have agreed to sell to them, severally, the respective number of shares of
Common Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
UNDERWRITING NUMBER OF SHARES
------------ ----------------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.........................
Goldman, Sachs & Co.......................................
Alex. Brown & Sons Incorporated...........................
Donaldson, Lufkin & Jenrette Securities Corporation.......
Montgomery Securities.....................................
The Robinson-Humphrey Company, Inc........................
----------------
Subtotal.......................................... 5,000,000
================
International Underwriters:
Morgan Stanley & Co. International Limited................
Goldman Sachs International...............................
Alex. Brown & Sons Incorporated...........................
Donaldson, Lufkin & Jenrette International................
Montgomery Securities.....................................
The Robinson-Humphrey Company, Inc........................
----------------
Subtotal.......................................... 1,000,000
----------------
Total............................................. 6,000,000
================
</TABLE>
The U.S. Underwriters and the International Underwriters and the U.S.
Representatives and the International Representatives are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The Common
Stock Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the U.S. Underwriters' over-allotment described below) if any such
shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions, (i)
it is not purchasing any Shares for the account of anyone other than a United
States or Canadian Person (as defined herein) and (ii) it has not offered or
sold, and will not offer or sell, directly or indirectly, any Shares or
distribute any prospectus relating to the Shares outside the United States or
Canada or to anyone other than a United States or Canadian Person. Pursuant to
the Agreement between U.S. and International Underwriters, each International
Underwriter has represented and agreed that, with certain exceptions, (i) it is
not purchasing any Shares for the account of any United States or Canadian
person and (ii) it has not offered or sold, and will not offer or sell, directly
or indirectly, any Shares or distribute any prospectus relating to the Shares in
the United States or Canada or to any United States or Canadian person. With
respect to any Underwriter that is a U.S. Underwriter and an International
Underwriter, the foregoing representations and agreements (i) made by it in its
capacity as a U.S. Underwriter apply only to it in its capacity as a U.S.
Underwriter and (ii) made by it in its capacity as an
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<PAGE> 51
International Underwriter apply only to it in its capacity as an International
Underwriter. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement between
U.S. and International Underwriters. As used herein "United States or Canadian
person" means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person), and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian person. All
shares of Common Stock to be purchased by the Underwriters are referred to
herein as the "Shares."
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of Shares as may be mutually agreed. The per share price of any
Shares so sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per share
amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada in contravention of the securities laws thereof and has
represented that any offer of Shares in Canada will be made only pursuant to an
exemption from the requirement to file a prospectus in the province or territory
of Canada in which such offer or sale is made. Each U.S. Underwriter has further
agreed to send to any dealer who purchases from it any of the Shares a notice
stating in substance that, by purchasing such Shares, such dealer represents and
agrees that it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such Shares in any province or territory of Canada or to, or
for the benefit of, any resident of any province or territory of Canada in
contravention of the securities laws thereof and that any offer of Shares in
Canada will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer or sale is
made, and that such dealer will deliver to any other dealer to whom it sells any
of such Shares a notice containing substantially the same statement as is
contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the closing date for the sale of
the Shares to the International Underwriters, will not offer or sell, any Shares
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on and will only
issue or pass on in the United Kingdom any document received by it in connection
with the offering of the Shares to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom such document may otherwise be
lawfully issued or passed on.
The Underwriters initially propose to offer part of the Shares directly to
the public at the public offering price set forth on the cover page hereof and
part to certain dealers at a price which represents a concession not in excess
of $ per share under the public offering price. An Underwriter may
allow, and such dealers may reallow, a concession not in excess of $
per share to other Underwriters or to certain other dealers. After the initial
offering of the Shares, the offering price and other selling terms may from time
to time be varied by the Representatives.
Michael T. Willis has granted to the U.S. Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 900,000 additional Shares at the public offering price set forth on
the cover page hereof, less underwriting discounts and commissions. The U.S.
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the
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<PAGE> 52
offering of the Shares offered hereby. To the extent such option is exercised,
each U.S. Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional Shares as the
number set forth next to such U.S. Underwriter's name in the preceding table
bears to the total number of Shares set forth next to the names of all U.S.
Underwriters in the preceding table.
Each of the Company and the directors and executive officers of the Company
and the Selling Stockholders has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 90 days (45 days in the case of the directors and
executive officers) after the date of this Prospectus, (i) offer, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase, loan or
otherwise dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
(ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is
settled by delivery of Common Stock or such other securities, in cash or
otherwise. Each of the Selling Stockholders has also agreed that, without the
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, it will not, during the period ending 90 days after the date of
this Prospectus, make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock. The restriction on the Company is
subject to exceptions for the issuance of Common Stock pursuant to existing
director and employee benefit plans and as payment for acquisitions by the
Company. The restriction on the officers, directors and Selling Stockholders is
subject to exceptions for charitable contributions and estate planning so long
as the recipient or donee is subject to a similar restricted transfer period.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover overallotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
the Common Stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Stock in the offering if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time. The Underwriters and dealers
may engage in passive market making transactions in the Common Stock in
accordance with Rule 103 of Regulation M promulgated by the Securities and
Exchange Commission. In general, a passive market maker may not bid for, or
purchase, the Common Stock at a price that exceeds the highest independent bid.
In addition, the net daily purchases made by any passive market maker generally
may not exceed 30% of its average daily trading volume in the Common Stock
during a specified two month prior period, or 200 shares, whichever is greater.
A passive market maker must identify passive market making bids as such on the
NASDAQ electronic inter-dealer reporting system. Passive market making may
stabilize or maintain the market price of the Common Stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Underwriters have engaged in transactions with and performed various
investment banking and other services for the Company in the past, and may do so
from time to time in the future.
The Company has provided staffing services to Morgan Stanley & Co.
Incorporated in the past, and may continue to do so in the future.
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<PAGE> 53
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by Vinson & Elkins L.L.P., Houston, Texas.
Certain legal matters will be passed upon for the Underwriters by Andrews &
Kurth L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of CORESTAFF, Inc. appearing in
CORESTAFF, Inc.'s Annual Report (Form 10-K) for the year ended December 31, 1996
and appearing in this Prospectus and Registration Statement, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and included or incorporated by reference herein. Such
consolidated financial statements have been included or incorporated by
reference herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
50
<PAGE> 54
CORESTAFF, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1994,
1995 and 1996............................................. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1994,
1995 and 1996............................................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994,
1995 and 1996............................................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 55
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CORESTAFF, Inc.
We have audited the accompanying consolidated balance sheets of CORESTAFF, Inc.
and subsidiaries (the "Company") as of December 31, 1995 and 1996 and the
related consolidated statements of operations, 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 consolidated financial position of CORESTAFF, Inc.
and subsidiaries at December 31, 1995 and 1996 and the consolidated 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.
ERNST & YOUNG LLP
Houston, Texas
February 5, 1997
F-2
<PAGE> 56
CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 4,091 $ 6,521
Accounts receivable, net of allowance of $891 and
$1,637................................................. 54,453 126,302
Prepaid expenses and other................................ 2,583 10,450
Deferred income taxes..................................... 1,740 2,817
-------- --------
Total current assets.............................. 62,867 146,090
Fixed Assets, net........................................... 6,005 16,503
Intangible Assets, net of accumulated amortization of $2,906
and $8,106................................................ 81,277 231,475
Other Assets................................................ 2,221 2,329
-------- --------
Total Assets................................................ $152,370 $396,397
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt........................ $ 2,063 $ 456
Accounts payable.......................................... 8,682 17,089
Payroll and related taxes................................. 9,955 21,045
Self-insurance reserve.................................... 2,026 2,374
Amounts due sellers of acquired businesses................ 5,972 9,615
Other..................................................... 504 1,196
-------- --------
Total current liabilities......................... 29,202 51,775
Non-current Self-insurance Reserve.......................... 3,461 2,279
Long-term Debt, net of current maturities................... 43,315 107,839
Deferred Income Taxes and Other............................. 1,227 3,587
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.01; 5,000,000 shares
authorized; none outstanding
Common stock, par value $.01
Common stock -- 40,000,000 shares authorized,
26,243,144 and 31,944,657 shares issued............... 175 319
Class B (non-voting) -- 3,000,000 shares authorized,
1,679,584 and 707,232 shares issued................... 11 7
Additional paid-in capital.................................. 70,637 210,034
Retained earnings........................................... 5,420 21,767
-------- --------
76,243 232,127
-------- --------
Less -- 684,000 shares of common stock held in treasury, at
cost...................................................... (188) (188)
Less -- notes receivable from stockholders.................. (890) (787)
Less -- deferred compensation............................... -- (235)
-------- --------
Total stockholders' equity........................ 75,165 230,917
-------- --------
Total Liabilities and Stockholders' Equity.................. $152,370 $396,397
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 57
CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues from Services..................................... $163,351 $344,548 $596,101
Cost of Services........................................... 129,543 262,092 451,505
-------- -------- --------
Gross Profit............................................... 33,808 82,456 144,596
Operating Costs and Expenses:
Selling, general and administrative...................... 26,999 60,434 100,349
Depreciation and amortization............................ 1,933 4,215 7,522
-------- -------- --------
28,932 64,649 107,871
-------- -------- --------
Operating Income........................................... 4,876 17,807 36,725
Other Income (Expense):
Interest expense......................................... (2,276) (6,978) (4,656)
Write-down of business held for sale..................... -- -- (1,400)
Other, net............................................... 111 118 334
-------- -------- --------
(2,165) (6,860) (5,722)
-------- -------- --------
Income before Income Taxes and Extraordinary Loss.......... 2,711 10,947 31,003
Provision for Income Taxes................................. 1,162 4,590 13,609
-------- -------- --------
Income Before Extraordinary Loss........................... 1,549 6,357 17,394
Extraordinary Loss on Early Extinguishment of Debt, net of
income tax benefit of $547............................... -- -- (940)
-------- -------- --------
Net Income................................................. $ 1,549 $ 6,357 16,454
======== ======== ========
Earnings per Common Share:
Before extraordinary loss................................ $ 0.07 $ 0.29 $ 0.57
Extraordinary loss....................................... -- -- (0.03)
-------- -------- --------
Net income............................................... $ 0.07 $ 0.29 $ 0.54
======== ======== ========
Number of Shares Used to Compute Earnings per
Common Share............................................. 17,587 19,715 30,365
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 58
CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED STOCK-
PREFERRED ---------------- PAID-IN RETAINED TREASURY FROM COMPEN- HOLDERS'
STOCK COMMON CLASS B CAPITAL EARNINGS STOCK STOCKHOLDERS SATION EQUITY
--------- ------ ------- ---------- -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993..................... $-- $ 71 $-- $ 3,826 $ (253) $ -- $ (40) $ -- $ 3,604
Repurchase of 684,000
shares of common stock... (188) (188)
Sale of 684,000 shares of
Class B common stock
(non-voting)............. 7 181 188
Sale of 380,000 shares of common stock, net.. 4 96 (100)
Sale of 145,000 shares of preferred stock, net.. 2 14,330 14,332
Net income................. 1,549 1,549
--- ---- --- -------- ------- ----- ----- ----- --------
Balance at December 31,
1994..................... 2 75 7 18,433 1,296 (188) (140) -- 19,485
Sale of 20,679.794 shares
of preferred stock,
net...................... 2,047 2,047
Repurchase of 152,000
shares of
common stock............. (371) 40 (331)
Sale of 4,037,560 shares of
common stock............. 40 59,417 371 (790) 59,038
Conversion of 87,014.6089
shares of preferred stock
into 482,075 shares of
common stock............. (1) 4 (3)
Conversion of 5,560.2425
shares of preferred stock
into 62,482 shares of
Class B common stock
(non-voting).............
Redemption of 92,573.8504
shares of preferred
stock.................... (1) (9,257) (9,258)
Preferred stock
dividends................ (2,173) (2,173)
Net income................. 6,357 6,357
Three-for-two stock split
(issuance of 5,603,809
and 373,241 shares of
common stock and Class B
common stock (non-
voting), respectively)... 56 4 (60)
--- ---- --- -------- ------- ----- ----- ----- --------
Balance at December 31,
1995..................... -- 175 11 70,637 5,420 (188) (890) -- 75,165
Sale of 3,395,696 shares of
common stock............. 33 139,077 139,110
Issuance of 10,482 shares
of restricted common
stock, net............... 320 (235) 85
Repayment of stockholders'
notes.................... 103 103
Conversion of 648,235
shares of Class B common
stock (non-voting) into
648,235 shares of common
stock.................... 6 (6)
Net income................. 16,454 16,454
Three-for-two stock split
(issuance of 10,394,800
and 235,744 shares of
common stock and Class B
common stock
(non-voting),
respectively)............ 105 2 (107)
--- ---- --- -------- ------- ----- ----- ----- --------
Balance at December 31,
1996..................... $-- $319 $ 7 $210,034 $21,767 $(188) $(787) $(235) $230,917
=== ==== === ======== ======= ===== ===== ===== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 59
CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 1,549 $ 6,357 $ 16,454
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 1,933 4,215 7,522
Amortization of deferred loan costs.................. 102 546 304
Deferred income tax benefit (provision).............. (1,800) (1,108) 673
Self-insurance reserve............................... 2,502 (776) (1,009)
Write-down of business held for sale................. -- -- 1,400
Loss on extinguishment of debt....................... -- -- 1,487
Provision for doubtful accounts...................... 308 476 641
Loss (gain) on disposal of assets.................... 8 69 (27)
Changes in assets and liabilities net of effects of
acquisitions:
Accounts receivable................................ (8,099) (5,619) (39,289)
Prepaid expenses and other......................... 208 (607) (5,223)
Accounts payable................................... 1,736 1,433 2,706
Accrued liabilities................................ 1,059 1,071 (3,800)
-------- -------- ---------
Net cash provided by (used in) operating
activities.................................... (494) 6,057 (18,161)
-------- -------- ---------
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired........ (55,836) (39,733) (168,058)
Capital expenditures.................................... (1,941) (3,005) (11,735)
Payments received on stockholders' notes................ -- -- 103
Proceeds from sale of assets............................ -- -- 116
Other................................................... 1,203 (207) (1,605)
-------- -------- ---------
Net cash used in investing activities........... (56,574) (42,945) (181,179)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt................ 68,255 84,684 252,538
Payments on long-term debt.............................. (21,388) (97,665) (189,878)
Net proceeds from sale of preferred stock............... 14,356 2,047 --
Net proceeds from sale of common stock.................. 188 59,038 139,110
Repurchase of common stock.............................. (188) (331) --
Redemption of preferred stock........................... -- (9,258) --
Payment of dividends on preferred stock................. -- (2,173) --
-------- -------- ---------
Net cash provided by financing activities....... 61,223 36,342 201,770
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents...... 4,155 (546) 2,430
Cash and cash equivalents at beginning of year............ 482 4,637 4,091
-------- -------- ---------
Cash and cash equivalents at end of year.................. $ 4,637 $ 4,091 $ 6,521
======== ======== =========
Cash paid during the year for:
Interest, net of capitalized amounts.................... $ 1,625 $ 6,518 $ 4,002
Income taxes............................................ $ 2,391 $ 5,717 $ 11,313
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 60
CORESTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
CORESTAFF, Inc. (the "Company"), and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
All short-term investments with an original maturity of 90 days or less are
considered cash equivalents.
Fixed Assets
Fixed assets are recorded at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets. Amortization
of leasehold improvements is computed on a straight-line basis over the useful
life of the asset or lease term, whichever is shorter. Accumulated depreciation
and amortization was $2.6 million and $5.5 million at December 31, 1995 and
1996, respectively.
Intangible Assets
Intangible assets primarily consist of goodwill associated with the
acquired businesses. Goodwill is amortized on a straight-line basis over 40
years. Other intangible assets consist of non-compete agreements, which are
amortized over the term of the agreement. In the event that facts and
circumstances indicate intangible or other long-lived assets may be impaired,
the Company evaluates the recoverability of such assets. The estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value is necessary.
In the fourth quarter of 1996, the Company recognized a one-time charge to
earnings of $1.4 million for the write-down of goodwill associated with its
physical therapy staffing business, a non-core business that was sold in January
1997. After reflecting this write-down, the Company believes all intangible or
other long-lived assets are fully realizable as of December 31, 1996.
Revenue Recognition
Revenue is recognized at the time the services are provided.
Income Taxes
The Company follows the liability method of accounting for income taxes.
Under this method, deferred income tax assets and liabilities are determined
based on differences between the financial statement and income tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
Self-Insurance
The Company self-insures most of its workers' compensation exposure.
Consulting actuaries are used by the Company to assist in the determination of
its liability, which is calculated using a claims-incurred method.
Earnings per Common Share
Earnings per common share were computed by dividing net income applicable
to common stock (net income less preferred stock dividends in arrears applicable
to the period) by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period giving effect to the
F-7
<PAGE> 61
CORESTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dilutive effect of common stock issued within one year prior to the Company's
initial public offering in November 1995 (the "IPO"). Common stock equivalents
consisted of the number of shares issuable on exercise of the outstanding stock
options less the number of shares that could have been purchased with the
proceeds from the exercise of the options based on the average price of the
common stock during the period. The dilutive effect of common stock issued
within one year prior to the IPO for the periods prior to issuance was
determined in the same manner except that the IPO price of $7.55 per share
(which has been adjusted for the two three-for-two stock splits discussed in
Note 5) was used for the repurchase price.
Earnings per common share for 1994 and 1995 as shown in the accompanying
statements of operations were determined in the same manner as described above,
except that the conversion of one-half of the preferred stock into common stock
(See Note 5) was assumed to have occurred as of the beginning of the periods.
Net income applicable to common stock was increased by the dividends in arrears
applicable to the preferred stock converted. Historical earnings per common
share were $0.04 and $0.26 for the years ended December 31, 1994 and 1995,
respectively. Net income applicable to common stock was $748,000 and $5,041,000
for the years ended December 31, 1994 and 1995, respectively.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock Options
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations ("APB 25") in
accounting for its employee stock options. The pro forma disclosures required by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which established a fair-value based method of
accounting for stock-based compensation plans, are set forth in Note 6.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year presentation.
F-8
<PAGE> 62
CORESTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
Through December 31, 1996, the Company had acquired 26 businesses in the
staffing industry. The Company's acquisition activity and a brief description of
the material acquisitions follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Acquisitions completed:
Information Technology ("IT") Services............. 1 1 10
Staffing Services.................................. 3 4 4
Other.............................................. -- 1 --
------- ------- --------
Total...................................... 4 6 14
======= ======= ========
Purchase consideration (in thousands):
Cash paid.......................................... $58,102 $40,304 $174,393
Amounts due sellers of acquired businesses......... -- -- 9,615
Liabilities assumed................................ 21,935 15,093 16,067
------- ------- --------
Fair value of assets acquired (including
intangibles)............................. $80,037 $55,397 $200,075
======= ======= ========
</TABLE>
In April 1994, the Company acquired United Temporary Services, Incorporated
and United Personnel Systems, a California-based staffing services business, for
$19.9 million in cash. In August 1994, the Company acquired TSTP Corp., a
Maryland-based staffing services business, for $17.3 million in cash. In
September 1994, the Company acquired COMSYS Technical Services, Inc., a
Maryland-based IT services business, for $20.9 million in cash.
In June 1995, the Company acquired Cutler-Williams Incorporated, a
Texas-based IT services business, for $28.3 million in cash.
In January 1996, the Company acquired Datronics Management, Inc., a New
York-based IT services business, and its United Kingdom affiliate, Datronics
U.K. Limited, for $19.2 million in cash. In April 1996, the Company acquired
Regal Data Systems, Inc., a New Jersey-based IT services business, for $21.7
million in cash and a note payable for $0.1 million. In June 1996, the Company
acquired Data Aid, Inc., an Alabama-based IT services business, for $23.2
million in cash. In September 1996, the Company acquired On-Line Resources,
Inc., a Florida-based IT services business, for $17.9 million in cash. In
October 1996, the Company acquired substantially all of the assets of Transworld
Services Group, Inc., a Florida-based staffing services business, for $18.1
million in cash. In December 1996, the Company acquired substantially all of the
assets of Telos Consulting Services, a California-based IT services business,
for $31.4 million in cash.
All the acquisitions made by the Company have been accounted for using the
purchase method of accounting. Accordingly, the results of operations of the
acquired companies are included in the Company's consolidated results of
operations from the date of acquisition. In certain transactions, the sellers
are also entitled to contingent consideration based on the increase in earnings
before interest and taxes ("EBIT"), as defined. As of December 31, 1996, the
Company had accrued $9.6 million for additional purchase consideration due
sellers based on the increase in the acquired companies' EBIT for 1996. The
aggregate contingent consideration due sellers based on increases in EBIT for
future years is capped at $4.5 million. The payment of any contingent
consideration will increase the amount of goodwill related to the acquisition.
The following unaudited results of operations have been prepared assuming
the acquisitions described above and the conversion of one-half of the preferred
stock into common stock in November 1995 had occurred as of the beginning of the
periods presented. These results are not necessarily indicative of results of
F-9
<PAGE> 63
CORESTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future operations nor of results that would have occurred had the acquisitions
been consummated as of the beginning of the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenues from services...................................... $601,289 $734,186
Income before extraordinary loss............................ $ 6,019 $ 19,639
Net income.................................................. $ 6,019 $ 18,699
Earnings per common share:
Income before extraordinary loss............................ $ 0.27 $ 0.65
Extraordinary loss.......................................... -- (0.03)
-------- --------
Net income........................................ $ 0.27 $ 0.62
======== ========
</TABLE>
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under Senior Credit Agreement:
$200 million revolving credit facility, interest at bank's
base rate or London Interbank Offered Rate ("LIBOR")
plus the applicable margin of 0.625% to 1.375%,
depending on the leverage ratio (weighted rate of 6.64%
at December 31, 1996), due November 2001............... $ -- $107,500
$130 million revolving credit facility, interest at bank's
base rate or LIBOR plus 1.25% to 2.50% (weighted rate
of 7.36% at December 31, 1995), repaid in November
1996................................................... 43,122 --
Other..................................................... 2,256 795
------- --------
45,378 108,295
Less current maturities................................... 2,063 456
------- --------
$43,315 $107,839
======= ========
</TABLE>
In November 1996, the Company entered into a new Senior Credit Agreement
(the "Agreement"), which provides for borrowings under a revolving credit
facility of up to the lesser of $200 million or 3.5 times Pro Forma Adjusted
EBITDA (earnings before interest, income taxes, depreciation and amortization of
all acquired companies for the preceding twelve-month period). The Company may
request that the commitment be raised to $250 million. A commitment fee of 0.18%
to 0.25%, depending on the leverage ratio, is payable on the unused portion of
the commitment. The Agreement contains certain covenants which, among other
things, limit the payment of dividends and require the maintenance of certain
financial ratios. The Agreement is secured by a pledge of the stock of the
material subsidiaries of the Company. As of December 31, 1996, the Company had
remaining availability under the Agreement (after deducting outstanding letters
of credit of $4.9 million) of $87.6 million.
In the fourth quarter of 1996, the Company recorded an extraordinary loss
of $1.4 million ($0.9 million after income taxes, or $0.03 per share) in
connection with the early extinguishment of its $130 million revolving credit
facility. This loss related to the write-off of the deferred loan costs of this
facility.
F-10
<PAGE> 64
CORESTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, a financial institution, which owns all the Company's Class B
(non-voting) common stock, provided the Company with a $10 million senior
subordinated note. Borrowings under this note accrued interest at LIBOR, plus
4.5 percent. The Company paid an up-front fee of $0.3 million to the institution
for arranging the financing. This note, plus accrued interest, was repaid out of
the proceeds of the IPO.
4. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1996 1995
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................. $2,582 $ 5,098 $11,626
State................................................ 380 600 1,310
------ ------- -------
2,962 5,698 12,936
------ ------- -------
Deferred:
Federal.............................................. (1,530) (967) 788
State................................................ (270) (141) (115)
------ ------- -------
(1,800) (1,108) 673
------ ------- -------
$1,162 $ 4,590 $13,609
====== ======= =======
</TABLE>
The differences between income taxes computed at the federal statutory
income tax rate and the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes computed at federal statutory income tax
rate.................................................. $ 922 $3,731 $10,850
State income taxes, net of federal benefit............ 103 498 1,282
Non-deductible portion of business meals,
entertainment and other............................ 67 184 669
Amortization of non-deductible goodwill................. 70 177 436
Write-down of business held for sale.................... -- -- 372
------ ------ -------
Provision for income taxes.............................. $1,162 $4,590 $13,609
====== ====== =======
</TABLE>
The net current and non-current components of deferred income taxes
reflected in the consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Net current assets.......................................... $1,740 $2,817
Net non-current liabilities................................. 755 3,417
------ ------
Net asset (liability)....................................... $ 985 $ (600)
====== ======
</TABLE>
F-11
<PAGE> 65
CORESTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Self-insurance reserve.................................... $ 2,439 $ 2,008
Non-compete agreements.................................... 453 713
Bad debt allowances....................................... 297 567
Vacation pay.............................................. 144 426
Other..................................................... 46 264
------- -------
Total deferred tax assets......................... 3,379 3,978
------- -------
Deferred tax liabilities:
Goodwill.................................................. (880) (2,658)
Excess financial over tax basis of acquisitions........... (1,443) (1,621)
Other..................................................... (71) (299)
------- -------
Total deferred tax liabilities.................... (2,394) (4,578)
------- -------
Net deferred tax asset (liability).......................... $ 985 $ (600)
======= =======
</TABLE>
5. STOCKHOLDERS' EQUITY
Preferred stock. The Company's preferred stock, which was outstanding prior
to the IPO, had a liquidation value of $100 per share and entitled the holders
to receive cumulative dividends at 8% per annum of the sum of the liquidation
value plus all accumulated and unpaid dividends. In November 1995, one-half of
the outstanding shares of preferred stock was converted into common stock at the
IPO price of $7.55 per share and the remainder of the outstanding shares were
redeemed out of the proceeds from the IPO. Dividends in arrears of $2.2 million
were also paid out of the proceeds from the IPO.
Common stock. During 1996, the Board of Directors authorized two
three-for-two stock splits, effected in the form of stock dividends. All
references in the financial statements to number of shares outstanding and
related prices, per share amounts and stock option plan data have been restated
to reflect the stock splits. The stock splits resulted in the issuance of
approximately 16.6 million new shares of common stock and a reclassification of
approximately $0.2 million from retained earnings to common stock representing
the par value of the shares issued.
Under terms of an agreement, 3,420,000 shares of the Company's common stock
were issued to key executives and management. In connection with certain of
these issuances, the Company received notes from the executives as
consideration. These notes, which total $0.9 million and $0.8 million at
December 31, 1995 and 1996, respectively, are secured by the common stock, bear
interest at 8% per year and are due on demand. These shares became fully vested
in connection with the IPO.
In November 1995, the Company completed its IPO of 8,538,750 shares of its
common stock at $7.55 per share. Net proceeds from the IPO were approximately
$59 million. The proceeds were used to (i) redeem the outstanding preferred
stock, plus accrued dividends, (ii) repay the $10 million senior subordinated
note, plus accrued interest, and (iii) pay down of borrowings by approximately
$38 million.
In May 1996, the Company completed a second public offering of 8,259,030
shares (4,950,000 shares sold by the Company and the remainder by certain
selling stockholders) at $29.17 per share. Net proceeds to the Company were
approximately $137.5 million, of which $111.5 million were used to repay
borrowings under the Senior Credit Agreement.
F-12
<PAGE> 66
CORESTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental earnings per common share reflect adjustments to the earnings
per common share to give effect to the use of proceeds described above as if the
public offering in May 1996 had occurred at the beginning of 1996. Supplemental
earnings per common share for the year ended December 31, 1996 were $0.57.
6. STOCK PLANS
Long-Term Incentive Plan. In August 1995, the Company adopted the 1995
Long-Term Incentive Plan (the "Plan") that provides for the issuance of stock
options, stock appreciation rights, restricted stock, performance share awards,
stock value equivalent awards and cash awards. All full time employees and
directors of the Company or its affiliates are eligible to participate. An
aggregate of 2.7 million shares of common stock has been reserved for issuance
under the Plan. Generally, options granted have ten year terms and vest and
become fully exercisable in three to five years. Stock options issued under the
Plan can be either incentive stock options or non-qualified stock options. The
exercise price of an incentive stock option will not be less than the fair
market value of the common stock on the date the option is granted.
The Company applies APB 25 in accounting for the Plan. Accordingly, no
compensation cost has been recognized for its fixed stock option plan. Pro forma
information regarding net income and earnings per common share is required by
SFAS 123 as if the Company had accounted for its employee stock options under
the fair value method of that statement. The fair value of these options was
estimated at the date of grant using a Black-Scholes option pricing
("Black-Scholes") model with the following weighted average assumptions for 1995
and 1996, respectively: (i) risk-free interest rates of 5.81% and 6.12%, (ii) a
dividend yield of 0%, (iii) volatility factors of the expected market price of
the Company's common stock of 27.5% and (iv) a weighted average expected life of
3 years and 3.75 years.
The Black-Scholes model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation for the Company's stock-based compensation plan been determined
based on the fair value at the grant dates for awards under the Plan consistent
with the method of SFAS 123, the Company's net income and earnings per common
share would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996
----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Income before extraordinary loss......... $6,357 $6,297 $17,394 $16,373
Net income............................... $6,357 $6,297 $16,454 $15,433
Earnings per common share:
Income before extraordinary loss....... $ 0.29 $ 0.29 $ 0.57 $ 0.54
Net income............................. $ 0.29 $ 0.29 $ 0.54 $ 0.51
</TABLE>
F-13
<PAGE> 67
CORESTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995 and 1996, the Company issued non-qualified stock options under
the Plan, which had exercise prices equal to the fair market value of the common
stock at the date of grant. A summary of the Company's stock option activity and
related information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1996
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Outstanding -- beginning of year.......... -- $ -- 1,189 $ 7.12
Granted................................. 1,215 7.09 1,514 24.11
Exercised............................... (23) 4.98 (77) 7.10
Forfeited............................... (3) 7.56 (314) 17.60
------ ------
Outstanding -- end of year................ 1,189 $7.12 2,312 $16.83
====== ======
Options exercisable at year-end........... 94 374
Weighted average fair value of options
granted during the year................. $ 1.86 $ 8.15
</TABLE>
The following summarizes information related to stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE EXERCISE CONTRACTUAL EXERCISE
PRICES OPTIONS PRICE LIFE OPTIONS PRICE
----------------- ------- -------- ----------- -------- ---------
(OPTIONS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 4.98 to $11.45.......................... 986 $ 7.08 8.3 Years 374 $6.89
17.45 to 30.50.......................... 1,326 24.08 9.4 -- --
----- ---
$ 4.98 to $30.50.......................... 2,312 $16.83 9.1 374 $6.89
===== ===
</TABLE>
Employee Stock Purchase Plan. In 1996, the Company implemented an employee
stock purchase plan whereby eligible employees may purchase shares of the
Company's common stock at a price equal to 85 percent of the lower of the
closing market price on the first or last trading day of a quarter. A total of
450,000 shares of common stock have been reserved for issuance under the plan.
During 1996, employees purchased 33,312 shares for aggregate proceeds to the
Company of $0.7 million.
7. COMMITMENTS AND CONTINGENCIES
The Company leases various office space and equipment under noncancelable
operating leases. Rent expense was $1,631,897, $3,335,158 and $5,754,752 for
1994, 1995 and 1996, respectively. The related future minimum lease payments as
of December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997..................................................... $ 6,427
1998..................................................... 5,325
1999..................................................... 4,117
2000..................................................... 2,772
2001..................................................... 1,180
Thereafter............................................... 51
-------
$19,872
=======
</TABLE>
F-14
<PAGE> 68
CORESTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company self-insures most of its workers' compensation exposure.
Consulting actuaries are used by the Company in the determination of its
liability, which is calculated using a claims-incurred method. Using this
method, the present value (using a 5% discount factor) of the estimated
liability for claims incurred but unpaid as of December 31, 1996 was
approximately $4.7 million ($5.0 million undiscounted), of which approximately
$2.4 million was classified as a current liability. As of December 31, 1996, the
Company had irrevocable stand-by letters of credit of approximately $3.9
million, as required by its insurance programs.
Certain of the Company's executives are covered by employment agreements
covering, among other things, base compensation, incentive-bonus determinations
and payments in the event of termination or change in control of the Company.
Under terms of certain acquisitions, the Company is required to make
additional payments to sellers generally to the extent future earnings, as
defined, exceed certain stipulated levels. The provisions of these contingent
payments are described in Note 2.
The Company is a defendant in various lawsuits and claims arising in the
normal course of business. Management believes it has valid defenses in these
cases and is defending them vigorously. While the results of litigation cannot
be predicted with certainty, management believes the final outcome of such
litigation will not have a material effect on the Company.
8. RELATED PARTY TRANSACTIONS
Under terms of a professional services agreement, which terminated in
November 1995 following the Company's initial public offering, the general
partner of the Company's largest stockholder provided certain financial and
management consulting services to the Company. Fees paid under this agreement
totaled $85,000 and $127,000 during 1994 and 1995, respectively.
The CEO of the Company owns a minority interest in a firm that provided
investment banking services on certain acquisitions or acquisition targets. Fees
for services rendered were based on rates stipulated in an agreement, which in
the opinion of management, are equivalent to rates charged by unrelated
investment banking firms. Fees paid to this firm during 1994, 1995 and 1996 were
approximately $550,000, $31,000 and $129,000, respectively. The CEO also owns a
50 percent interest in a firm that provided certain charter aircraft services to
the Company. Fees for these services totaled $55,143 in 1996. In the opinion of
management, these fees are based on rates that are comparable to those charged
by third parties.
A bank, which is an affiliate of the financial institution that owns all
the Company's Class B common stock (non-voting), serves as the agent bank for
the Company's Senior Credit Agreement. This bank also provided the Company with
cash management services under terms of a separate agreement.
9. CREDIT RISK
The Company provides staffing services to customers in numerous states. A
substantial portion of these sales are in California, Texas and the greater
Washington D.C. area. This concentration could impact the Company's overall
exposure to credit risk inasmuch as these customers could be affected by similar
economic or other conditions. The Company believes its portfolio of accounts
receivable is well diversified and, as a result, its credit risks are minimal.
The Company continually evaluates the creditworthiness of its customers and
monitors accounts on a periodic basis, but typically does not require
collateral.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has determined, based on available market information and
appropriate valuation methodologies, that the fair value of its financial
instruments approximates carrying value. The carrying amounts of cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to
F-15
<PAGE> 69
CORESTAFF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the short-term maturity of the instruments. The carrying amount of long-term
debt approximates fair value because the interest rates under the credit
agreement are variable, based on current market.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for 1995 and 1996 follow (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1995
Revenues.......................... $ 69,471 $ 76,775 $ 97,644 $100,658
Operating income.................. 2,397 3,590 5,215 6,605
Net income........................ 685 1,190 1,705 2,777
Earnings per common share(1)...... 0.03 0.05 0.08 0.11
1996
Revenues.......................... $103,386 $134,159 $163,284 $195,272
Operating income.................. 5,826 8,360 10,232 12,307
Income before extraordinary
loss........................... 2,669 4,038 5,669 5,018
Net income........................ 2,669 4,038 5,669 4,078
Earnings per common share:
Income before extraordinary
loss......................... $ 0.10 $ 0.14 $ 0.18 $ 0.15
Extraordinary loss............. -- -- -- (0.03)
-------- -------- -------- --------
Net income..................... $ 0.10 $ 0.14 $ 0.18 $ 0.12
======== ======== ======== ========
</TABLE>
- ---------------
(1) Adjusted to give effect to the conversion of preferred stock into common
stock (See Note 5).
F-16
<PAGE> 70
[CORESTAFF, INC. LOGO]
<PAGE> 71
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS (Subject to Completion)
Issued July 17, 1997
6,000,000 Shares
[CORESTAFF, INC. LOGO]
COMMON STOCK
------------------------
OF THE 6,000,000 SHARES OF COMMON STOCK OF THE COMPANY (THE "SHARES") BEING
OFFERED, 1,000,000 SHARES ARE BEING OFFERED HEREBY INITIALLY OUTSIDE THE UNITED
STATES AND CANADA (THE "INTERNATIONAL OFFERING") THROUGH INTERNATIONAL
UNDERWRITERS AND 5,000,000 SHARES ARE INITIALLY BEING OFFERED IN A CONCURRENT
OFFERING IN THE UNITED STATES AND CANADA (THE "U.S. OFFERING," AND TOGETHER WITH
THE INTERNATIONAL OFFERING, THE "STOCK OFFERINGS"). THE INITIAL PUBLIC OFFERING
PRICE AND AGGREGATE UNDERWRITING DISCOUNT PER SHARE WILL BE IDENTICAL FOR BOTH
OF THE STOCK OFFERINGS. SEE "UNDERWRITERS."
------------------------
ALL OF THE SHARES OFFERED HEREBY ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE
"PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE
PROCEEDS FROM THE SALE OF THE SHARES IN THE STOCK OFFERINGS. THE COMPANY'S
COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "CSTF." ON
JULY 16, 1997, THE LAST SALE PRICE OF THE COMMON STOCK AS REPORTED ON THE NASDAQ
NATIONAL MARKET WAS $30 1/4 PER SHARE.
------------------------
CONCURRENTLY WITH THE STOCK OFFERINGS BY THE SELLING STOCKHOLDERS, THE COMPANY
IS OFFERING $180,000,000 ($207,000,000 IF THE OVER-ALLOTMENT OPTION TO THE
UNDERWRITERS IS EXERCISED IN FULL) AGGREGATE PRINCIPAL AMOUNT OF %
CONVERTIBLE SUBORDINATED NOTES DUE 2004 (THE "NOTES") OF THE COMPANY (THE "NOTES
OFFERING"). THE CONSUMMATION OF THE NOTES OFFERING IS NOT CONTINGENT UPON
CONSUMMATION OF THE STOCK OFFERINGS OR VICE VERSA.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 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.
------------------------
PRICE $ PER SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDERS(2)
-------- -------------- ---------------
<S> <C> <C> <C>
Per Share........................................... $ $ $
Total(3)............................................ $ $ $
</TABLE>
- ------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Pursuant to an agreement with the Company, the Selling Stockholders will
each pay their pro rata share of the expenses in connection with the sale
of Common Stock offered hereby.
(3) Another Selling Stockholder has granted to the Underwriters an option,
exercisable within 30 days of the date hereof, to purchase up to an
additional 900,000 shares of Common Stock at the price to public less
underwriting discounts and commissions to cover over-allotments, if any.
If the Underwriters exercise the option in full, the total price to
public, underwriting discounts and commissions and proceeds to Selling
Stockholders will be $ , $ and $ , respectively. See
"Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Andrews &
Kurth L.L.P., counsel for the Underwriters. It is expected that delivery of the
Shares will be made on or about August , 1997, at the office of Morgan Stanley
& Co. Incorporated, New York, New York, against payment therefor in immediately
available funds.
------------------------
MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS INTERNATIONAL
ALEX. BROWN & SONS
Incorporated
DONALDSON, LUFKIN & JENRETTE
International
MONTGOMERY SECURITIES
THE ROBINSON-HUMPHREY COMPANY, INC.
<PAGE> 72
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS (Subject to Completion)
Issued July 17, 1997 $180,000,000
[CORESTAFF, INC. LOGO]
% CONVERTIBLE SUBORDINATED NOTES DUE 2004
------------------------
Interest payable August and February
------------------------
THE NOTES ARE CONVERTIBLE INTO COMMON STOCK OF THE COMPANY AT ANY TIME AFTER 90
DAYS FOLLOWING THE ORIGINAL ISSUANCE THEREOF AND PRIOR TO MATURITY, UNLESS
PREVIOUSLY REDEEMED, AT A CONVERSION RATE OF SHARES PER $1,000 PRINCIPAL
AMOUNT AT MATURITY, SUBJECT TO ADJUSTMENT IN CERTAIN EVENTS. SEE "DESCRIPTION OF
THE NOTES -- CONVERSION OF NOTES." THE COMPANY'S COMMON STOCK IS QUOTED ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "CSTF." ON JULY 16, 1997, THE LAST SALE
PRICE OF THE COMMON STOCK AS REPORTED ON THE NASDAQ NATIONAL MARKET WAS $30 1/4
PER SHARE.
------------------------
THE NOTES ARE BEING ISSUED AT AN ORIGINAL PRICE OF % OF THE PRINCIPAL AMOUNT
AT MATURITY (THE "ISSUE PRICE"), WHICH REPRESENTS AN ORIGINAL ISSUE DISCOUNT OF
% FROM THE PRINCIPAL AMOUNT THEREOF WHICH IS PAYABLE AT MATURITY. INTEREST ON
THE NOTES AT THE RATE OF % PER ANNUM ON THE PRINCIPAL AMOUNT AT MATURITY IS
PAYABLE ON AUGUST AND FEBRUARY IN EACH YEAR COMMENCING , 1998.
SUCH RATE OF INTEREST TOGETHER WITH ACCRUAL OF ORIGINAL ISSUE DISCOUNT REPRESENT
A YIELD TO MATURITY OF % PER ANNUM (COMPUTED ON A SEMI-ANNUAL BOND
EQUIVALENT BASIS).
------------------------
THE NOTES ARE NOT REDEEMABLE BY THE COMPANY PRIOR TO AUGUST , 2000.
THEREAFTER, THE NOTES WILL BE REDEEMABLE ON AT LEAST 30 DAYS' NOTICE AT THE
OPTION OF THE COMPANY, IN WHOLE OR IN PART AT ANY TIME, AT A REDEMPTION PRICE
FOR EACH NOTE EQUAL TO THE ISSUE PRICE PLUS ACCRUED ORIGINAL ISSUE DISCOUNT,
TOGETHER WITH ACCRUED INTEREST, IN EACH CASE TO THE REDEMPTION DATE. THE NOTES
MAY ALSO BE REDEEMED AT THE OPTION OF THE HOLDER IF THERE IS A FUNDAMENTAL
CHANGE (AS DEFINED) AT A REDEMPTION PRICE FOR EACH NOTE EQUAL TO THE ISSUE PRICE
PLUS ACCRUED ORIGINAL ISSUE DISCOUNT, TOGETHER WITH ACCRUED INTEREST, IN EACH
CASE TO THE REDEMPTION DATE, SUBJECT TO ADJUSTMENT IN CERTAIN CIRCUMSTANCES.
------------------------
THE NOTES ARE GENERAL, UNSECURED OBLIGATIONS OF THE COMPANY, SUBORDINATED IN
RIGHT OF PAYMENT TO ALL SENIOR INDEBTEDNESS OF THE COMPANY, AND ARE SUBORDINATED
BY OPERATION OF LAW TO ALL LIABILITIES (INCLUDING TRADE PAYABLES) OF THE
COMPANY'S SUBSIDIARIES. THE INDENTURE PURSUANT TO WHICH THE NOTES WILL BE ISSUED
WILL NOT RESTRICT THE INCURRENCE OF SENIOR INDEBTEDNESS OR OTHER INDEBTEDNESS BY
THE COMPANY OR ITS SUBSIDIARIES. AT JUNE 30, 1997, THE COMPANY WOULD HAVE HAD AN
AGGREGATE OF APPROXIMATELY $217 MILLION OF SENIOR INDEBTEDNESS AFTER GIVING
EFFECT TO THE CONSUMMATION OF THIS OFFERING AND THE APPLICATION OF THE ESTIMATED
NET PROCEEDS. SEE "DESCRIPTION OF THE NOTES."
------------------------
CONCURRENTLY WITH THIS OFFERING OF THE NOTES BY THE COMPANY, CERTAIN
STOCKHOLDERS OF THE COMPANY (THE "SELLING STOCKHOLDERS") ARE OFFERING AN
AGGREGATE OF 6,000,000 SHARES OF COMMON STOCK OF THE COMPANY (6,900,000 SHARES
IF THE OVER-ALLOTMENT OPTION TO THE UNDERWRITERS IS EXERCISED IN FULL) IN A
UNITED STATES OFFERING AND AN INTERNATIONAL OFFERING (THE "STOCK OFFERINGS").
THE CONSUMMATION OF THE NOTES OFFERING IS NOT CONTINGENT UPON CONSUMMATION OF
THE STOCK OFFERINGS OR VICE VERSA. THE COMPANY WILL NOT RECEIVE ANY PROCEEDS
FROM THE STOCK OFFERINGS.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES OFFERED HEREBY.
------------------------
APPLICATION WILL BE MADE FOR THE NOTES TO BE LISTED ON THE NASDAQ NATIONAL
MARKET.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE % AND ACCRUED INTEREST, IF ANY
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
--------- -------------- -----------
<S> <C> <C> <C>
Per Note................................................. % % %
Total(4)................................................. $ $ $
</TABLE>
- ------------
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(3) Before deducting expenses payable by the Company estimated at $450,000.
(4) The Company has granted to the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an additional $27,000,000
aggregate principal amount of the Notes at the price to public less
underwriting discounts and commissions to cover over-allotments, if any.
If the Underwriters exercise the option in full, the total price to
public, underwriting discounts and commissions and proceeds to Company
will be $ , $ and $ , respectively. See
"Underwriters."
------------------------
The Notes are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Andrews &
Kurth L.L.P., counsel for the Underwriters. It is expected that delivery of the
Notes will be made on or about August , 1997, at the office of Morgan Stanley
& Co. Incorporated, New York, New York, in book-entry form through the
facilities of The Depository Trust Company against payment therefor in
immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
ALEX. BROWN & SONS
Incorporated
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
GOLDMAN, SACHS & CO.
MONTGOMERY SECURITIES
THE ROBINSON-HUMPHREY COMPANY, INC.
<PAGE> 73
[Note: This alternate Table of Contents replaces the Table of Contents
contained in the Common Stock Prospectus.]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.......................................
Incorporation of Certain Documents by Reference.............
Prospectus Summary..........................................
Risk Factors................................................
Use of Proceeds.............................................
Price Range of Common Stock and Dividend Policy.............
Capitalization..............................................
Selected Consolidated Financial Data........................
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................
Business....................................................
Management..................................................
Principal and Selling Stockholders..........................
Description of the Notes....................................
Certain United States Federal Income Tax Considerations.....
Description of Capital Stock................................
Shares Eligible for Future Sale.............................
Underwriters................................................
Legal Matters...............................................
Experts.....................................................
Index to Consolidated Financial Statements.................. F-1
</TABLE>
A-3
<PAGE> 74
THE OFFERING
Securities offered......... $180,000,000 aggregate principal amount at maturity
of % Convertible Subordinated Notes due 2004
(the "Notes") (excluding an additional $27,000,000
principal amount if the Underwriters'
over-allotment option is exercised in full). See
"Description of the Notes."
Issue price................ % plus accrued interest, if any, from the date
of issuance.
Interest................... % per annum on the principal amount at
maturity, payable semiannually in arrears in cash
on August and February of each year, commencing
February , 1998.
Yield to Maturity of
Notes...................... % per annum (computed on a semi-annual bond
equivalent basis giving effect both to accrual of
Original Issue Discount and to accrual of interest)
calculated from August , 1997.
Conversion................. Each Note will be convertible, at the option of the
holder, at any time after 90 days following the
latest date of original issuance thereof through
maturity, unless previously redeemed or otherwise
purchased by the Company, into Common Stock at the
Conversion Rate of shares per $1,000 principal
amount at maturity of the Notes. The Conversion
Rate will not be adjusted for accrued Original
Issue Discount or interest, but will be subject to
adjustment upon the occurrence of certain events
affecting the Common Stock. Upon conversion, the
holder will not receive any cash payment
representing accrued Original Issue Discount or
interest; such accrued Original Issue Discount and
interest will be deemed paid by the Common Stock
received on conversion. See "Description of the
Notes -- Conversion of Notes."
Subordination.............. The Notes will be subordinated to all existing and
future Senior Indebtedness (as defined herein) and
pari passu with the Company's indebtedness that is
not Senior Indebtedness. The Notes will also be
effectively subordinated to all indebtedness and
liabilities of subsidiaries of the Company. At June
30, 1997, the Company had approximately $
million of outstanding Senior Indebtedness. The
Company will use the proceeds of the sale of the
Notes to repay a portion of the borrowings
outstanding under the Credit Agreement. The
Indenture does not prohibit or limit the incurrence
of additional Senior Indebtedness. See "Risk
Factors -- " and "Use of Proceeds."
Original Issue Discount.... Each Note is being offered at an Original Issue
Discount for federal income tax purposes equal to
the excess of the principal amount at maturity of
the Note over the amount of its Issue Price.
Prospective purchasers of Notes should be aware
that accrued Original Issue Discount will be
includable periodically in a holder's gross income
for federal income tax purposes prior to
conversion, redemption, other disposition or
maturity of such holder's Notes, whether or not
such Notes are ultimately converted, redeemed, sold
(to the Company or otherwise) or paid at maturity.
See "Certain United States Federal Income Tax
Considerations."
Sinking Fund............... None.
Redemption by Company...... The Notes are not redeemable by the Company prior
to August , 2000. Subject to the foregoing, the
Notes will be redeemable on at least 30 days notice
at the option of the Company, in whole or in part,
at any
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time, at the redemption prices set forth in
"Description of the Notes," in each case together
with accrued and unpaid interest.
Fundamental Change......... Upon the occurrence of any Fundamental Change in
the Company occurring prior to the maturity of the
Notes, each holder shall have the right, at such
holder's option, to require the Company to purchase
all or any part (provided that the principal amount
at maturity is $1,000 or an integral multiple
thereof) of such holder's Notes at declining
redemption prices, subject to adjustment in certain
events, together with accrued and unpaid interest
thereon to the date of purchase. See "Description
of the Notes -- Redemption at Option of the
Holder."
Use of Proceeds............ The net proceeds from the issuance of the Notes
will be used to repay borrowings outstanding under
the Credit Agreement. See "Use of Proceeds."
Listing.................... Application will be made to list the Notes on the
Nasdaq National Market.
RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Notes should carefully consider the matters set forth under
"Risk Factors."
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[NOTE: THESE RISK FACTORS SUPPLEMENT THE RISK FACTORS CONTAINED IN THE COMMON
STOCK PROSPECTUS.]
SUBORDINATION
The Notes will be unsecured and subordinated in right of payment in full to
all existing and future Senior Indebtedness of the Company. As a result of such
subordination, in the event of bankruptcy, liquidation or reorganization of the
Company or upon acceleration of the Notes due to an event of default, the assets
of the Company would be available to pay obligations on the Notes only after all
Senior Indebtedness had been paid in full, and there might not be sufficient
assets remaining to pay amounts due on any or all of the Notes then outstanding.
The Notes are structurally subordinated to the liabilities, including trade
payables, of the Company subsidiaries. The Indenture does not prohibit or limit
the incurrence of Senior Indebtedness or the incurrence of other indebtedness
and other liabilities by the Company or its subsidiaries, and the incurrence of
additional indebtedness and other liabilities by the Company or its subsidiaries
could adversely affect the Company's ability to pay its obligations on the
Notes. At , 1997, the Company had approximately $ million of
outstanding Senior Indebtedness. The Company anticipates that from time to time
it will incur additional indebtedness, including Senior Indebtedness, and that
its subsidiaries will form time to time incur other additional indebtedness and
liabilities. See "Description of the Notes -- Subordination of Notes" and "Use
of Proceeds."
LIMITATIONS ON REDEMPTION OF NOTES
Upon a Fundamental Change, each holder of Notes will have certain rights,
at the holder's option, to require the Company to redeem all or a portion of
such holder's Notes. If a Fundamental Change were to occur, there can be no
assurance that the Company would have sufficient funds to pay the redemption
price of all Notes tendered. Any future credit agreements or other agreements
(including those relating to Senior Indebtedness) may contain provisions
restricting the purchase or redemption of the Notes. In the event a Fundamental
Change occurs at a time when the Company is prohibited from purchasing or
redeeming the Notes, the Company could seek the consent of its lenders to the
purchase of the Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company would remain prohibited from purchasing or redeeming
Notes. In such case, the Company's failure to redeem tendered Notes would
constitute an Event of Default under the Indenture, which might, in turn,
constitute a default under the terms of agreements relating to other
indebtedness that the Company may enter into from time to time. In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the holders of the Notes. See "Description of the
Notes -- Redemption at Option of the Holder."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
Prior to the Notes Offering, there has been no trading market for the
Notes. Although the Underwriters have advised the Company that they currently
intend to make a market in the Notes, they are not obligated to do so and may
discontinue such market making at any time without notice. In addition, such
market making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act. Accordingly, there can be no assurance that any market
for the Notes will develop or, if one does develop, that it will be maintained.
If an active market for the Notes fails to develop or be sustained, the trading
price of such Notes could be materially adversely affected.
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USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Notes,
after deducting the expenses of this offering, are estimated to be approximately
$ million. The net proceeds are expected to be used to repay $ million
of the outstanding indebtedness under the Credit Agreement. At ,
1997, the aggregate outstanding balance under the Credit Agreement was $
million. Borrowing under the Credit Agreement bears interest, at the Company's
option, at LIBOR plus a margin of 0.625% to 1.375%, which depends upon the
leverage ratio, or the bank's base rate. A commitment fee of 0.18% to 0.25%,
depending on the leverage ratio, is payable on the unused portion of the
facility. The weighted average interest rate of the Company's outstanding
borrowings under the Credit Agreement was % at June 30, 1997. Amounts
currently outstanding under the Credit Agreement were incurred to fund
acquisitions, capital expenditures and general corporate purposes. Amounts
repaid on the Credit Agreement may be reborrowed from time to time for possible
future acquisitions, capital expenditures and other general corporate purposes.
DESCRIPTION OF THE NOTES
The Notes will be issued under an indenture to be dated as of August ,
1997 (the "Indenture"), between the Company and The Bank of New York, as trustee
(the "Trustee"). A copy of the Indenture (as defined below) will be available
from the Trustee upon request by a registered holder of the Notes. The following
summaries of certain provisions of the Notes and the Indenture do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Notes and the Indenture, including the definitions
therein of certain terms which are not otherwise defined in this Prospectus.
Wherever particular provisions or defined terms of the Indenture (or of the form
of Note which is a part thereof) are referred to, such provisions or defined
terms are incorporated herein by reference.
GENERAL
The Notes represent unsecured general obligations of the Company
subordinate in right of payment to certain other obligations of the Company as
described under "Subordination of Notes" and convertible into Common Stock as
described under "Conversion of Notes." The Notes will be limited to $180,000,000
($207,000,000 if the Underwriters' over-allotment option is exercised in full)
aggregate principal amount, will be issued only in denominations of $1,000 or
any multiple thereof and will mature on August , 2004, unless earlier redeemed
at the option of the Company or at the option of the holder upon a Fundamental
Change (as defined below).
The Indenture does not contain any financial covenants or restrictions on
the payment of dividends, the incurrence of Senior Indebtedness (as defined
below under "Subordination of Notes") or the issuance or repurchase of
securities of the Company. The Indenture contains no covenants or other
provisions to afford protection to holders of the Notes in the event of a highly
leveraged transaction or a change in control of the Company except to the extent
described under "Redemption at Option of the Holder."
The Notes will bear interest at the annual rate set forth on the cover page
hereof from August , 1997, payable semi-annually on February and August
, commencing on February , 1998, to holders of record at the close of
business on the preceding January and July , respectively, except (i) that
the interest payment upon redemption (unless the date of redemption is an
interest payment date) will be payable to the person to whom principal is
payable and (ii) as set forth in the next succeeding sentence. In the case of
any Note (or portion thereof) which is converted into Common Stock of the
Company during the period from (but excluding) a record date to (but excluding)
the next succeeding interest payment date either (i) if such Note (or portion
thereof) has been called for redemption on a redemption date which occurs during
such period, or is to be redeemed in connection with a Fundamental Change on a
Fundamental Change Repurchase Date (as defined below) which occurs during such
period, the Company shall not be required to pay interest on such interest
payment date in respect of any such Note (or portion thereof) or (ii) if
otherwise, any Note (or portion thereof) submitted for conversion during such
period shall be accompanied by funds equal to the interest payable on such
succeeding interest payment date on the aggregate principal amount so converted
(see "Conversion of Notes" below). Interest may, at the Company's option, be
paid either (i) by check mailed to the address of the person entitled thereto as
it appears in the Note register or (ii) by transfer to an
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<PAGE> 78
account maintained by such person located in the United States; provided,
however, that payments to The Depository Trust Company, New York, New York
("DTC") will be made by wire transfer of immediately available funds to the
account of DTC or its nominee. Interest will be computed on the basis of a
360-day year composed of twelve 30-day months.
The Notes are being offered at a substantial discount from their principal
amount at maturity. See "Certain United States Federal Income Tax
Considerations." The calculation of the accrual of Original Issue Discount (the
difference between the Issue Price and the principal amount at maturity of a
Note) in the period during which a Note remains outstanding will be on a
semi-annual bond equivalent basis using a year composed of twelve 30-day months;
such accrual will commence on the first date of issuance of any of the Notes.
Maturity, conversion or redemption of a Note will cause Original Issue Discount
and interest, if any, to cease to accrue on such Note under the terms and
subject to the conditions of the Indenture. The Company may not reissue a Note
that has matured or been converted, redeemed or otherwise cancelled (except for
registration of transfer, exchange or replacement thereof).
Application will be made to list the Notes on the Nasdaq National Market
under the symbol " ."
BOOK ENTRY; DELIVERY AND FORM
The Notes will be issued in fully registered form, without coupons, in
denominations of $1,000 principal amount at maturity and multiples thereof.
The Notes will be evidenced by one or more global notes (each a "Global
Note"), which will be deposited with, or on behalf of, DTC and registered in the
name of Cede & Co. ("Cede") as DTC's nominee.
Except as set forth below, the Global Note may be transferred, in whole or
in part, only to another nominee of DTC or to a successor of DTC or its nominee.
Non-U.S. Persons, if any, will be required to hold their Notes in definitive
registered form. As a result, the ability to transfer beneficial interests in
such Notes may be limited.
Non-U.S. Persons who are not Participants may beneficially own interests in
Global Notes held by DTC only through Participants, including Morgan Guaranty
Trust Company of New York, Brussels office, as operator of the Euroclear System
("Euroclear") and Cedel, S.A. ("Cedel"), or certain banks, brokers, dealers,
trust companies and other parties that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants"). So long as Cede, as the nominee of DTC, is the registered owner
of the Global Note, Cede for all purposes will be considered the sole holder of
the Global Note. Except as provided below, owners of beneficial interests in the
Global Note will not be entitled to have certificates registered in their names,
will not receive or be entitled to receive physical delivery of certificates in
definitive form, and will not be considered the holders thereof.
Payment of interest on and the redemption price of the Global Note will be
made to Cede, the nominee for DTC, as the registered owner of the Global Note by
wire transfer of immediately available funds on each interest payment date or
the redemption date, as the case may be. Neither the Company, the Trustee nor
any paying agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
The Company has been informed by DTC that, with respect to any payment of
interest on, or the redemption price of, the Global Note, DTC's practice is to
credit Participants' accounts on the payment date therefor with payments in
amounts proportionate to their respective beneficial interests in the principal
amount represented by the Global Note as shown on the records of DTC, unless DTC
has reason to believe that it will not receive payment on such payment date.
Payments by Participants to owners of beneficial interests in the principal
amount represented by the Global Note held through such Participants will be the
responsibility of such Participants, as is now the case with securities held for
the accounts of customers registered in "street name."
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<PAGE> 79
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in the principal amount represented by the Global
Note to pledge such interest to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Neither the Company nor the Trustee (or any registrar, paying agent or
conversion agent under the Indenture) will have any responsibility for the
performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations. DTC has advised the Company that it will take any action permitted
to be taken by a holder of Notes (including, without limitation, the
presentation of Notes for exchange as described below), only at the direction of
one or more Participants to whose account with DTC interests in the Global Note
are credited, and only in respect of the principal amount of the Notes
represented by the Global Note as to which such Participant or Participants has
or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC holds securities that its Participants
deposit with DTC. DTC also facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes to the accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with, a Participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among Participants, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days, the Company will cause the Notes to be issued in
definitive form in exchange for the Global Note.
Certificated Notes. Notes sold to investors that are Non-U.S. Persons will
be issued in definitive registered form and may not be represented by the Global
Note. In addition, holders of Notes may request that certificated Notes be
issued in exchange for Notes represented by the Global Note. Furthermore,
certificated Notes may be issued in exchange for Notes represented by the Global
Note if no successor depositary is appointed by the Company as set forth above
under "Book-Entry; Delivery and Form."
CONVERSION OF NOTES
A Noteholder may convert a Note into Common Stock of the Company at any
time after 90 days following the latest date of original issuance of the Notes
through the close of business on the final maturity date of the Notes; provided
that if a Note is called for redemption, the holder may convert such Note only
until the close of business on the day prior to the Redemption Date. A Note in
respect of which a holder is exercising its option to require redemption upon a
Fundamental Change may be converted only if such holder withdraws its election
to exercise its option in accordance with the terms of the Indenture. A holder
may convert such holder's Notes in part so long as such part is $1,000 principal
amount at maturity or an integral multiple thereof. If Notes not called for
redemption are converted after a record date for the payment of interest and
prior to the next succeeding interest payment date, such Notes must be
accompanied by funds equal to the interest payable on such succeeding interest
payment date on the principal amount at maturity so converted provided that no
such payment will be required if the Company exercises its rights to redeem the
Notes.
The initial Conversion Rate is shares of Common Stock per $1,000
principal amount at maturity of Notes, subject to adjustment upon the occurrence
of certain events. A Noteholder who would otherwise be entitled to a fractional
share of Common Stock shall receive cash equal to the then current market value
of
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<PAGE> 80
such fractional share. On conversion of a Note, a holder will not receive any
cash payment representing accrued Original Issue Discount or accrued interest
thereon. The Company's delivery to the holder of the fixed number of shares of
Common Stock into which the Note is convertible (together with the cash payment
in lieu of any fractional share of Common Stock) will be deemed to satisfy the
Company's obligation to pay the principal amount of the Note including the
accrued Original Issue Discount attributable to the period from the first date
of issuance of any of the Notes to the date of surrender for conversion and
accrued interest thereon. Thus, the accrued Original Issue Discount and accrued
interest are deemed to be paid in full rather than canceled, extinguished or
forfeited. The Conversion Rate will not be adjusted at any time during the term
of the Notes for such accrued Original Issue Discount or accrued interest.
To convert a Note into shares of Common Stock, the Holder of a Note must
(i) complete and manually sign the conversion notice on the back of the Note (or
complete and manually sign a facsimile thereof) and deliver such notice to the
Conversion Agent, (ii) surrender the Note to the Conversion Agent, (iii) if
required, furnish appropriate endorsements and transfer documents, (iv) if
required, pay all transfer or similar taxes, and (v) if required, pay funds
equal to interest payable on the next interest payment date. Pursuant to the
Indenture, the date on which all of the foregoing requirements have been
satisfied is the date of surrender for conversion.
The initial Conversion Rate is subject to adjustment under formulae as set
forth in the Indenture in certain events, including:
(i) the issuance of Common Stock of the Company as a dividend or
distribution on the Common Stock;
(ii) certain subdivisions and combinations of the Common Stock;
(iii) the issuance to all holders of Common Stock of certain rights or
warrants to purchase Common Stock;
(iv) the distribution to all holders of Common Stock of capital stock
(other than Common Stock), of evidences of indebtedness of the Company or
of assets (including securities, but excluding those rights, warrants,
dividends and distributions referred to in clause (iii) above or paid in
cash);
(v) distributions consisting of cash, excluding any quarterly cash
dividend on the Common Stock to the extent that the aggregate cash dividend
per share of Common Stock in any quarter does not exceed the greater of (x)
the amount per share of Common Stock of the next preceding quarterly cash
dividend on the Common Stock to the extent that such preceding quarterly
dividend did not require an adjustment of the Conversion Rate pursuant to
this clause (v) (as adjusted to reflect subdivisions or combinations of the
Common Stock), and (y) 3.75 percent of the average of the last reported
sales price of the Common Stock during the ten trading days immediately
prior to the date of declaration of such dividend, and excluding any
dividend or distribution in connection with the liquidation, dissolution or
winding up of the Company. If an adjustment is required to be made as set
forth in this clause (v) as a result of a distribution that is a quarterly
dividend, such adjustment would be based upon the amount by which such
distribution exceeds the amount of the quarterly cash dividend permitted to
be excluded pursuant to this clause (v). If an adjustment is required to be
made as set forth in this clause (v) as a result of a distribution that is
not a quarterly dividend, such adjustment would be based upon the full
amount of the distribution;
(vi) payment in respect of a tender offer or exchange offer by the
Company or any subsidiary of the Company for the Common Stock to the extent
that the cash and value of any other consideration included in such payment
per share of Common Stock exceeds the Current Market Price (as defined in
the Indenture) per share of Common Stock on the trading day next succeeding
the last date on which tenders or exchanges may be made pursuant to such
tender or exchange offer; and
(vii) payment in respect of a tender offer or exchange offer by a
person other than the Company or any subsidiary of the Company in which, as
of the closing date of the offer, the Board of Directors is not
recommending rejection of the offer. The adjustment referred to in this
clause (vii) will only be made if
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<PAGE> 81
the tender offer or exchange offer is for an amount which increases the
offeror's ownership of Common Stock to more than 25% of the total shares of
Common Stock outstanding, and if the cash and value of any other
consideration included in such payment per share of Common Stock exceeds
the Current Market Price per share of Common Stock on the business day next
succeeding the last date on which tenders or exchanges may be made pursuant
to such tender or exchange offer. The adjustment referred to in this clause
(vii) will generally not be made, however, if, as of the closing of the
offer, the offering documents with respect to such offer disclose a plan or
an intention to cause the Company to engage in a consolidation or merger of
the Company or a sale of all or substantially all of the Company's assets.
In the case of (i) any reclassification of the Common Stock, or (ii) a
consolidation, merger or combination involving the Company or a sale or
conveyance to another person of the property and assets of the Company as an
entirety or substantially as an entirety, in each case as a result of which
holders of Common Stock shall be entitled to receive stock, other securities,
other property or assets (including cash) with respect to or in exchange for
such Common Stock, the holders of the Notes then outstanding will generally be
entitled thereafter to convert such Notes into the kind and amount of shares of
stock, other securities or other property or assets which they would have owned
or been entitled to receive upon such reclassification, change, consolidation,
merger, combination, sale or conveyance had such Notes been converted into
Common Stock immediately prior to such reclassification, consolidation, merger,
combination, sale or conveyance assuming that a holder of Notes would not have
exercised any rights of election as to the stock, other securities or other
property or assets receivable in connection therewith.
In the event of a taxable distribution to holders of Common Stock or in
certain other circumstances requiring Conversion Rate adjustments, the holders
of Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States income tax as a dividend; in certain other
circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock. See "Certain United States Federal
Income Tax Considerations."
The Company from time to time may, to the extent permitted by law, increase
the Conversion Rate by any amount for any period of at least 20 days, in which
case the Company shall give at least 15 days' notice of such increase if the
Company's Board of Directors has made a determination that such increase would
be in the best interests of the Company, which determination shall be
conclusive. The Company may, at its option, make such increases in the
Conversion Rate, in addition to those set forth above, as the Board of Directors
deems advisable to avoid or diminish any income tax to holders of Common Stock
resulting from any dividend or distribution of stock (or rights to acquire
stock) or from any event treated as such for income tax purposes. See "Certain
United States Federal Income Tax Considerations."
No adjustment in the Conversion Rate will be required unless such
adjustment would require a change of at least 1 percent in the Conversion Rate
then in effect; provided that any adjustment that would otherwise be required to
be made shall be carried forward and taken into account in any subsequent
adjustment. Except as stated above, the Conversion Rate will not be adjusted for
the issuance of Common Stock or any securities convertible into or exchangeable
for Common Stock or carrying the right to purchase any of the foregoing.
The Indenture will provide that if the Company implements a stockholders'
rights plan, such rights plan must provide that upon conversion of the Notes the
holders will receive, in addition to the Common Stock issuable upon such
conversion, such rights whether or not such rights have separated from the
Common Stock at the time of such conversion.
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OPTIONAL REDEMPTION BY THE COMPANY
No sinking fund is provided for the Notes. Prior to August , 2000, the
Notes will not be redeemable at the option of the Company. At any time on or
after such date, the Company may redeem the Notes for cash as a whole at any
time, or from time to time in part at the applicable Redemption Price together
with accrued interest to, but excluding, the date fixed for redemption; provided
that any semi-annual payment of interest becoming due on the date fixed for
redemption shall be payable to the holders of such Notes registered on the
relevant record date. Not less than 30 days' nor more than 60 days' notice of
redemption shall be given by mail to holders of Notes. The Notes will be
redeemable in integral multiples of $1,000 principal amount at maturity.
The table below shows Redemption Prices of a Note per $1,000 principal
amount at maturity, at August , 2000, at each August thereafter prior to
maturity and at maturity on August , 2004, which prices reflect the accrued
Original Issue Discount calculated to each such date. The Redemption Price of a
Note redeemed between such dates would include an additional amount reflecting
the additional Original Issue Discount accrued since the next preceding date in
the table to the actual Redemption Date.
<TABLE>
<CAPTION>
(1) (2) (3)
NOTE ISSUE ACCRUED ORIGINAL REDEMPTION PRICE
REDEMPTION DATE PRICE ISSUE DISCOUNT (1) + (2)
--------------- ---------- ---------------- ----------------
<S> <C> <C> <C>
August , 2000........................... $ $ $
August , 2001...........................
August , 2002...........................
August , 2003...........................
August , 2004...........................
</TABLE>
If less than all of the outstanding Notes are to be redeemed, the Trustee
shall select the Notes to be redeemed in principal amounts of $1,000 or
multiples thereof by lot, pro rata or by another method the Trustee considers
fair and appropriate. If a portion of a holder's Notes is selected for partial
redemption and such holder converts a portion of such Notes, such converted
portion shall be deemed to be of the portion selected for redemption.
REDEMPTION AT OPTION OF THE HOLDER
If a Fundamental Change (as defined below) occurs at any time prior to
August , 2004, each Noteholder shall have the right, at the holder's option,
to require the Company to redeem any or all of such holder's Notes on the date
(the "Fundamental Change Repurchase Date") that is 30 days after the date of the
Company's notice of such Fundamental Change. The Notes will be redeemable in
multiples of $1,000 principal amount at maturity.
The Company shall redeem such Notes at a price (the "Fundamental Change
Repurchase Price") equal to (i) $ if the Fundamental Change Repurchase
Date is August , 1997, (ii) $ if the Fundamental Change Repurchase
Date is August , 1998, (iii) $ if the Fundamental Change Repurchase
Date is August , 1999 and (iv) thereafter at the redemption price set forth
under "Optional Redemption by the Company" which would be applicable to a
redemption at the option of the Company on the Fundamental Change Repurchase
Date; provided, that if the Fundamental Change Repurchase Date is between such
dates, the Fundamental Change Repurchase Price would include an additional
amount reflecting the additional Original Issue Discount accrued since the
preceding August (or August , if applicable). Notwithstanding the foregoing,
if the Applicable Price (as defined) is less than the Reference Market Price (as
defined), the Company shall redeem such Notes at a price equal to the foregoing
redemption price multiplied by the fraction obtained by dividing the Applicable
Price by the Reference Market Price. In each case, the Company shall also pay
accrued interest on the redeemed Notes to, but excluding, the Fundamental Change
Repurchase Date; provided that, if such Fundamental Change Repurchase Date is an
interest payment date, then the interest payable on such date shall be paid to
the holder of record of the Notes on the relevant record date.
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<PAGE> 83
The Company is required to mail to all holders of record of the Notes a
notice of the occurrence of a Fundamental Change and of the redemption right
arising as a result thereof on or before the tenth day after the occurrence of
such Fundamental Change. The Company is also required to deliver to the Trustee
a copy of such notice. To exercise the redemption right, a holder of Notes must
deliver, on or before the 30th day after the date of the Company's notice of a
Fundamental Change (the "Fundamental Change Expiration Time"), written notice of
the holder's exercise of such right, together with the Notes to be so redeemed,
duly endorsed for transfer, to the Company (or an agent designated by the
Company for such purpose). Payment for Notes surrendered for redemption (and not
withdrawn) prior to the Fundamental Change Expiration Time will be made promptly
following the Fundamental Change Repurchase Date.
The term "Fundamental Change" means the occurrence of any transaction or
event in connection with which all or substantially all Common Stock shall be
exchanged for, converted into, acquired for or constitute the right to receive
consideration (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or
otherwise) which is not all or substantially all common stock listed (or, upon
consummation of or immediately following such transaction or event, which will
be listed) on a United States national securities exchange or approved for
quotation on the Nasdaq National Market or any similar United States system of
automated dissemination of quotations of securities prices.
The term "Applicable Price" means (i) in the event of a Fundamental Change
in which the holders of Common Stock receive only cash, the amount of cash
received by the holder of one share of Common Stock and (ii) in the event of any
other Fundamental Change, the average of the last reported sale price for the
Common Stock during the ten trading days prior to the record date for the
determination of the holders of Common Stock entitled to receive cash,
securities, property or other assets in connection with such Fundamental Change,
or, if there is not such record date, the date upon which the holders of the
Common Stock shall have the right to receive such cash, securities, property or
other assets in connection with the Fundamental Change.
The term "Reference Market Price" shall initially mean $ (which is
equal to 66 2/3% of the last sale price of the Common Stock as reflected on the
cover page of this Prospectus) and, in the event of any adjustment to the
Conversion Rate described above pursuant to the provisions of the Indenture, the
Reference Market Price shall also be adjusted so that the Reference Market Price
after giving effect to any such adjustment shall equal the Reference Market
Price multiplied by a fraction, the numerator of which is the Conversion Rate
prior to such adjustment and the denominator of which is the Conversion Rate
after such adjustment.
The Company will comply with the provisions of Rule 13e-4 and any other
tender offer rules under the Exchange Act which may then be applicable in
connection with the redemption rights of Note holders in the event of a
Fundamental Change. The redemption rights of the holders of Notes could
discourage a potential acquiror of the Company. The Fundamental Change
redemption feature, however, is not the result of management's knowledge of any
specific effort to obtain control of the Company by means of a merger, tender
offer, solicitation or otherwise, or part of a plan by management to adopt a
series of anti-takeover provisions.
The Company could, in the future, enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute a
Fundamental Change, but that would increase the amount of indebtedness,
including Senior Indebtedness, outstanding at such time. Further, payment of the
Fundamental Change Repurchase Price on the Notes may be subordinated to the
prior payment of Senior Indebtedness as described under "Subordination of Notes"
below. There are no restrictions in the Indenture on the creation of additional
Senior Indebtedness or other indebtedness. Under certain circumstances, the
incurrence of additional indebtedness could have an adverse effect on the
Company's ability to service its indebtedness, including the Notes. If a
Fundamental Change were to occur, there can be no assurance that the Company
would have sufficient funds to pay the Fundamental Change Redemption Price for
all Notes tendered by the holders thereof. A default by the Company on its
obligations to pay the Fundamental Change Repurchase Price could result in
acceleration of the payment of other indebtedness of the Company at the time
outstanding pursuant to cross-default provisions.
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SUBORDINATION OF NOTES
The Indebtedness evidenced by the Notes is subordinated to the extent
provided in the Indenture to the prior payment in full of all Senior
Indebtedness. The Notes will also be effectively subordinated to all
indebtedness and liabilities of subsidiaries of the Company. Upon any
distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization, the payment of the principal of, premium, if any,
and interest on the Notes is to be subordinated to the extent provided in the
Indenture in right of payment to the prior payment in full in cash of all Senior
Indebtedness. In the event of any acceleration of the Notes because of an Event
of Default (as defined in the Indenture), the holders of any Senior Indebtedness
then outstanding would be entitled to payment in full in cash of all obligations
in respect of such Senior Indebtedness before the holders of the Notes are
entitled to receive any payment or distribution in respect thereof. The
Indenture will require that the Company promptly notify holders of Senior
Indebtedness if payment of the Notes in accelerated because of an Event of
Default.
The Company also may not make any payment upon or in respect of the Notes
if (i) a default in the payment of the principal of, premium, if any, interest,
rent or other obligations in respect of Senior Indebtedness occurs and is
continuing beyond any applicable period of grace or (ii) any other default
occurs and is continuing with respect to Designated Senior Indebtedness (as
defined) that permits holders of the Designated Senior Indebtedness as to which
such default relates to accelerate its maturity and the Trustee receives a
notice of such default (a "Payment Blockage Notice") from the Company or other
person permitted to give such notice under the Indenture. Payments on the Notes
may and shall be resumed (a) in case of a payment default, upon the date on
which such default is cured or waived and (b) in case of a nonpayment default,
the earlier of the date on which such nonpayment default is cured or waived or
179 days after the date on which the applicable Payment Blockage Notice is
received. No new period of payment blockage may be commenced pursuant to a
Payment Blockage Notice unless and until (i) 365 days have elapsed since the
initial effectiveness of the immediately prior Payment Blockage Notice and (ii)
all scheduled payments of principal, premium, if any, and interest on the Notes
that have come due have been paid in full in cash. During any period of payment
blockage, any payment that otherwise would have been made during such period
will accrue interest, to the extent legally permissible, at the annual rate set
forth on the cover page hereof from the date on which such payment was required
under the terms of the Indenture until the date of payment. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or shall be made, the basis for a
subsequent Payment Blockage Notice.
By reason of the subordination provisions described above, in the event of
the Company's bankruptcy, dissolution or reorganization, holders of Senior
Indebtedness may receive more, ratably, and holders of the Notes may receive
less, ratably, than the other creditors of the Company. Such subordination will
not prevent the occurrence of any Event of Default under the Indenture.
The term "Senior Indebtedness" means the principal of, premium, if any,
interest (including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding) and rent payable on or
in connection with, and all fees, cost, expenses and other amounts accrued or
due on or in connection with, Indebtedness (as defined below) of the Company,
whether outstanding on the date of this Indenture or thereafter created,
incurred, assumed, guaranteed or in effect guaranteed by the Company (including
all deferrals, renewals, extensions or refundings of, or amendments,
modifications or supplements to, the foregoing), unless in the case of any
particular Indebtedness the instrument creating or evidencing the same or the
assumption or guarantee thereof expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes or expressly provides that such
Indebtedness is pari passu with or junior to the Notes. Notwithstanding the
foregoing, the term Senior Indebtedness shall not include any Indebtedness of
the Company to any subsidiary of the Company, a majority of the voting stock of
which is owned, directly or indirectly, by the Company.
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The term "Indebtedness" means, with respect to any Person (as defined in
the Indenture), and without duplication:
(a) all indebtedness, obligations and other liabilities (contingent or
otherwise) of such Person for borrowed money (including obligations of the
Company in respect of overdrafts, foreign exchange contracts, currency
exchange agreements, interest rate protection agreements, and any loans or
advances from banks, whether or not evidenced by notes or similar
instruments) or evidenced by bonds, debentures, notes or similar
instruments (whether or not the recourse of the lender is to the whole of
the assets of such Person or to only a portion thereof) (other than any
account payable or other accrued current liability or obligation incurred
in the ordinary course of business in connection with the obtaining of
materials or service),
(b) all reimbursement obligations and other liabilities (contingent or
otherwise) of such Person with respect to letters of credit, bank
guarantees or bankers' acceptances,
(c) all obligations and liabilities (contingent or otherwise) in
respect of leases of such Person required, in conformity with generally
accepted accounting principles, to be accounted for as capitalized lease
obligations on the balance sheet of such Person and all obligations and
other liabilities (contingent or otherwise) under any lease or related
document (including a purchase agreement) in connection with the lease of
real property which provides that such Person is contractually obligated to
purchase or cause a third party to purchase the leased property and thereby
guarantee a minimum residual value of the leased property to the lessor and
the obligations of such Person under such lease or related document to
purchase or to cause a third party to purchase such leased property,
(d) all obligations of such Person (contingent or otherwise) with
respect to an interest rate or other swap, cap or collar agreement or other
similar instrument or agreement or foreign currency hedge, exchange,
purchase or similar instrument or agreement,
(e) all direct or indirect guaranties or similar agreements by such
Person in respect of, and obligations or liabilities (contingent or
otherwise) of such Person to purchase or otherwise acquire or otherwise
assure a creditor against loss in respect of, indebtedness, obligations or
liabilities of another Person of the kind described in clauses (a) through
(d),
(f) any indebtedness or other obligations described in clauses (a)
through (d) secured by any mortgage, pledge, lien or other encumbrance
existing on property which is owned or held by such Person, regardless of
whether the indebtedness or other obligation secured thereby shall have
been assumed by such Person, and
(g) any and all deferrals, renewals, extensions and refundings of, or
amendments, modifications or supplements to, any indebtedness, obligation
or liability of the kind described in clauses (a) through (f).
The term "Designated Senior Indebtedness" means any particular Senior
Indebtedness in which the instrument creating or evidencing the same or the
assumption or guarantee thereof (or related agreements or documents to which the
Company is a party) expressly provides that such Senior Indebtedness shall be
"Designated Senior Indebtedness" for purposes of the Indenture (provided that
such instrument, agreement or other document may place limitations and
conditions on the right of such Senior Indebtedness to exercise the rights of
Designated Senior Indebtedness).
At June 30, 1997, the Company had approximately $217 million of outstanding
Senior Indebtedness. The Company intends to use the proceeds of the sale of the
Notes to repay a portion of the borrowings outstanding under the Company's
Credit Agreement. The Indenture will not limit the amount of additional
Indebtedness, including Senior Indebtedness, which the Company can create,
incur, assume or guarantee, nor will the Indenture limit the amount of
indebtedness or liabilities which any subsidiary can create, incur, assume or
guarantee.
In the event that, notwithstanding the foregoing, the Trustee or any holder
of the Notes receives any payment or distribution of assets of the Company or
any kind in contravention of any of the subordination provisions of the
Indenture, whether in cash, property or securities, including, without
limitation, by way of
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set-off or otherwise, in respect of the Notes before all Senior Indebtedness is
paid in full, then such payment or distribution will be held by the recipient in
trust for the benefit of holders of Senior Indebtedness or their representatives
to the extent necessary to make payment in full of all Senior Indebtedness
remaining unpaid, after giving effect to any concurrent payment or distribution,
or provision therefor, to or for the holders of Senior Indebtedness.
The Company is obligated to pay reasonable compensation to the Trustee and
to indemnify the Trustee against certain losses, liabilities or expenses
incurred by it in connection with its duties relating to the Notes. The
Trustee's claims for such payments will generally be senior to those of holders
of the Notes in respect of all funds collected or held by the Trustee.
EVENTS OF DEFAULT; NOTICE AND WAIVER
An Event of Default is defined in the Indenture as being: (i) default for
30 days in payment of any installment of interest on any Note (whether or not
payment is prohibited by the subordination provisions of the Indenture); (ii)
default in payment of the principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price or Fundamental Change Repurchase
Price, with respect to any Note when such becomes due and payable; (iii) default
by the Company for 30 days after notice in the observance or performance of any
other covenants in the Indenture; or (iv) certain events involving bankruptcy,
insolvency or reorganization of the Company. The Indenture provides that the
Trustee may withhold notice to the holders of the Notes of any default (except
in payment of principal of, premium, if any, or interest with respect to the
Notes) if the Trustee considers it in the interest of the holders of the Notes
to do so.
The Indenture provides that if an Event of Default shall have occurred and
be continuing, the Trustee or the holders of not less than 25% in aggregate
principal amount at maturity of the Notes then outstanding may declare the Issue
Price of the Notes, plus the accrued Original Issue Discount and accrued
interest on the Notes to the date of such declaration, to be due and payable
immediately. In the case of certain events of bankruptcy or insolvency, the
Issue Price of the Notes plus the Original Issue Discount accrued thereon and
interest on the Notes to the occurrence of such event shall automatically become
and be immediately due and payable. However, if the Company shall cure all
defaults (except the nonpayment of principal amount at maturity, accrued
Original Issue Discount and interest on any of the Notes which shall have become
due by acceleration) and certain other conditions are met, with certain
exceptions, such declaration may be canceled and past defaults may be waived by
the holders of a majority of the principal amount at maturity of the Notes then
outstanding.
The holders of a majority in principal amount at maturity of the Notes then
outstanding shall have the right to direct the time, method and place of
conducting any proceedings for any remedy available to the Trustee, subject to
certain limitations specified in the Indenture.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the holders of not less than a majority in principal amount
at maturity of the Notes at the time outstanding, to modify the Indenture or any
supplemental indenture or the rights of the holders of the Notes; provided,
however, no such modification may (i) extend the fixed maturity of any Note,
reduce the rate or extend the time for payment of interest thereon, change the
rate of accrual or extend the time of payment in connection with the Original
Issue Discount, reduce the principal amount at maturity, accrued Original Issue
Discount, Issue Price, Redemption Price, Fundamental Change Repurchase Price or
interest, if any, change the obligation of the Company to repurchase any Note
upon the happening of any Fundamental Change in a manner adverse to holders of
Notes, impair the right of a holder to institute suit for the payment thereof,
change the currency in which the Notes are payable, impair the right to convert
the Notes into Common Stock subject to the terms set forth in the Indenture, or
modify the provisions of the Indenture with respect to the subordination of the
Notes in a manner adverse to the holders of the Notes in any material respect,
without the consent of each holder of a Note so affected, or (ii) reduce the
aforesaid percentage of Notes whose holders are required to consent to any such
supplemental indenture, without the consent of the holders
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of all of the Notes then outstanding. The Indenture also provides for certain
modifications of its terms without the consent of holders of the Notes for
certain specified purposes, including, among other things, curing ambiguities,
defects or inconsistencies, qualifying or maintaining the qualifications of the
Indenture under the Trust Indenture Act of 1939, as amended (the "TIA"), or
making any change that does not adversely affect the rights of any Noteholder.
INFORMATION CONCERNING THE TRUSTEE
The Bank of New York, as the Trustee under the Indenture, has been
appointed by the Company as paying agent, conversion agent, registrar and
custodian with regard to the Notes. The Indenture provides that, except during
the continuance of an Event of Default, the Trustee thereunder will exercise
such rights and powers vested in it under the Indenture and use the same degree
of care and skill in its exercise as a prudent Person would exercise under the
circumstances in the conduct of such Person's own affairs.
The Indenture and provisions of the TIA, incorporated by reference therein
contain limitations on the rights of the Trustee thereunder, should it become a
creditor of the Company, to obtain payment of certain claims in certain cases or
to realize on certain property received by it in respect of any such claims, as
security or otherwise. The Trustee is permitted to engage in other transactions;
provided, however, that it acquires any conflicting interest (within the meaning
of the TIA) it must eliminate such conflicting interest or resign.
LIMITATIONS OF CLAIMS IN BANKRUPTCY
If a bankruptcy proceeding is commenced in respect of the Company, the
claim of a Holder of a Note is, under Title 11 of the United States Code,
limited to the Issue Price of the Note plus that portion of the Original Issue
Discount and unpaid interest that has accrued from the date of issue to the
commencement of the proceeding. In addition, the holders of the Notes will be
subordinated in right of payment to Senior Indebtedness and effectively
subordinated to the indebtedness and other obligations of the Company's
subsidiaries. See "Subordination of Notes" above.
GOVERNING LAW
The Indenture and the Notes provide that they will be governed by the laws
of the State of New York, without regard to the principles of conflicts of law.
TAXATION OF NOTES
See "Certain United States Federal Income Tax Considerations" for a
discussion of certain federal income tax matters
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
UNITED STATES TAXATION OF UNITED STATES HOLDERS
The following is a general discussion of certain material United States
federal income tax consequences of the purchase, ownership and disposition of
the Notes (and of Common Stock acquired upon a conversion of the Notes) to the
initial holders thereof. This discussion is based on provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury regulations promulgated
thereunder, and administrative and judicial interpretations thereof now in
effect, all of which are subject to change, possibly with retroactive effect.
This discussion addresses the tax consequences to the initial holders of Notes
and does not address the tax consequences to subsequent holders of Notes.
Furthermore, this discussion is limited to holders who hold the Notes as capital
assets. This discussion is for general information only, and does not address
all of the tax consequences that may be relevant to particular holders in light
of their personal circumstances, or to certain types of holders (such as certain
financial institutions, insurance companies, tax exempt entities, dealers in
securities or persons who have hedged the interest rate).
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As used herein, the term "United States Holder" or "U.S. Holder" means a
holder of a Note, or of Common Stock acquired upon conversion of a Note, that is
for United States federal income tax purposes (i) a citizen or resident of the
United States, (ii) a corporation or partnership created or organized in or
under the laws of the United States or of any State, (iii) an estate the income
of which is subject to United States federal income taxation regardless of
source, or (iv) a trust which is subject to the supervision of a court within
the United States and the control of a United States fiduciary. As used herein,
the term "Foreign Holder" means a holder of a Note (or Common Stock acquired
upon conversion of a Note) who is not a United States Holder.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE NOTES OR COMMON STOCK, INCLUDING THE APPLICABILITY OF ANY
FEDERAL ESTATE OR GIFT TAX LAWS OR ANY STATE, LOCAL OR FOREIGN TAX LAWS, CHANGES
IN APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION.
Tax Treatment of Interest Payments. Interest payments on the Notes will be
includable in a United States Holder's taxable income as received or accrued in
accordance with the holder's method of tax accounting.
Original Issue Discount. The Notes are being issued at a substantial
discount from their principal amount at maturity. For federal income tax
purposes, the excess of the principal amount at maturity of a Note over its
issue price (generally the first price at which a substantial amount of the
Notes are sold) constitutes original issue discount ("OID"). The Notes will
carry a substantial amount of OID. U.S. Holders of the Notes will be required to
include OID in income periodically over the term of the Notes before receipt of
the cash attributable to such income. A U.S. Holder of a Note must include in
gross income for federal income tax purposes the sum of the daily portions of
OID with respect to the Note for each day during the taxable year or portion of
a taxable year on which such U.S. Holder holds the Note. The daily portion is
determined by allocating to each day of the accrual period a pro rata portion of
an amount equal to the adjusted issue price of the Note at the beginning of the
accrual period multiplied by the yield to maturity of the Note (determined by
compounding at the close of each accrual period and adjusted for the length of
the accrual period) reduced by any interest payable for such period. The accrual
period generally will be each six-month period (or shorter period from the date
of original issue) that ends on a day in the calendar year corresponding to the
maturity date of the Note or the date six months before such maturity date,
although a holder may elect another accrual period (with certain restrictions).
The adjusted issue price of the Note at the start of any accrual period is the
issue price of the Note increased by the accrued OID for each prior accrual
period. Under these rules, U.S. Holders will have to include in gross income
increasingly greater amounts of OID in each successive accrual period. A U.S.
Holder's original tax basis for determining gain or loss on the sale or other
disposition of a Note will be increased by any accrued OID includable in such
U.S. Holder's gross income.
Sale, Exchange or Retirement of the Notes. Upon the sale, exchange,
redemption, retirement at maturity or other disposition of a Note, a United
States Holder generally will recognize capital gain or loss equal to the
difference between the amount of cash plus the fair market value of all property
received on such disposition (except to the extent such cash or property is
attributable to accrued interest, which is taxable as ordinary income) and such
holder's adjusted tax basis in the Note. Such gain or loss will be long-term
capital gain or loss if, at the time of such disposition, the United States
Holder's holding period in the Note is more than one year.
Adjustments to Conversion Rate. The Conversion Rate of the Notes is subject
to adjustment under certain circumstances. See "Description of
Notes -- Conversion of Notes." Section 305 of the Code may treat a United States
Holder of Notes as receiving a constructive distribution, taxable as a dividend
to the extent of the Company's current or accumulated earnings and profits, in
the case of certain adjustments in the Conversion Rate of the Notes that may
occur in limited circumstances (particularly an adjustment to reflect a taxable
dividend to holders of the Common Stock).
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Conversion of Notes into Common Stock. Generally, no gain or loss will be
recognized for federal income tax purposes on a conversion of the Notes into
shares of Common Stock. However, cash paid in lieu of a fractional share of
Common Stock will result in capital gain (or loss) to the extent of the
difference between the amount of such cash and the portion of the adjusted basis
of the Note allocable to such fractional share. The adjusted basis of shares of
Common Stock received on conversion will equal the adjusted basis of the Note
converted, reduced by the portion of such adjusted basis allocated to any
fractional share of Common Stock deemed exchanged for cash. The holding period
of the Common Stock received on conversion will include the period during which
the converted Notes were held, except that the holding period of the Common
Stock allocable to accrued OID and accrued stated interest, if any, will not
include the holding period of the Notes converted. A United States Holder who
converts a Note into Common Stock between interest payment dates will be
required to include in income the OID accruing before the conversion, and will
be treated for United States federal income tax purposes as receiving a payment
of interest in an amount equal to the fair market value of the Common Stock
received for the payment of the accrued stated interest.
Sale or Exchange of Common Stock. A United States Holder of Common Stock
into which the Notes have been converted generally will recognize capital gain
or loss upon the sale, exchange, redemption, or other disposition of the Common
Stock measured by the difference between the amount realized on such disposition
and the United States Holder's adjusted tax basis in the Common Stock. Such gain
or loss will be long-term capital gain or loss if the holding period of the
Common Stock (determined as described above under "Conversion of Notes into
Common Stock") is more than one year at the time of the sale or exchange.
Special rules may apply to certain redemptions of Common Stock which may result
in different treatment.
Back-Up Withholding. A United States Holder of Notes or Common Stock may be
subject to "back-up withholding" at a rate of 31 percent with respect to certain
"reportable payments," including interest payments, dividend payments and, under
certain circumstances, principal payments on the Notes and payments of the
proceeds of the sale of Notes or Common Stock. These back-up withholding rules
apply if the United States Holder, among other things, (i) fails to furnish a
social security number or other taxpayer identification number ("TIN") certified
under penalties of perjury within a reasonable time after the request therefor,
(ii) furnishes an incorrect TIN, (iii) fails to report properly interest or
dividends, or (iv) under certain circumstances, fails to provide a certified
statement, signed under penalties of perjury, that the TIN furnished is the
correct number and that such holder is not subject to back-up withholding. A
United States Holder who does not provide the Company with its correct TIN also
may be subject to penalties imposed by the IRS. Any amount withheld from a
payment to a United States Holder under the back-up withholding rules is
creditable against the United States Holder's federal income tax liability,
provided the required information is furnished to the IRS. Back-up withholding
does not apply, however, with respect to payments made to certain holders,
including corporations, tax-exempt organizations and certain foreign persons,
provided their exemption from back-up withholding is properly established. The
Company will report to the holders of Notes and Common Stock and to the IRS the
amount of any "reportable payments" for each calendar year and the amount of tax
withheld, if any, with respect to such payments.
UNITED STATES TAXATION OF FOREIGN HOLDERS
Taxation of Interest Payments and OID. Subject to the discussion of backup
withholding below, a Foreign Holder generally will not be subject to United
States federal income taxes or withholding on payments of interest or OID on a
Note, unless such Foreign Holder is (i) a direct or indirect 10 percent or
greater stockholder of the Company (taking into account certain stock ownership
attribution rules), (ii) a controlled foreign corporation related to the
Company, (iii) a bank which acquired the Notes on an extension of credit
pursuant to a loan agreement entered into in the ordinary course of its trade or
business or (iv) carrying on a trade or business within the United States with
which such amounts are effectively connected. To qualify for the exemption from
taxation, the Foreign Holder must provide a statement that (i) is signed by the
beneficial owner of the Note under penalties of perjury, (ii) certifies that
such owner is a Foreign Holder and (iii) provides the name and address of the
beneficial owner. The statement may be made on an IRS Form W-8 or a
substantially similar form. If a Note is held through a securities clearing
organization or certain financial institutions, the organization or institution
may provide a signed statement to the person
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otherwise required to withhold taxes. However, in such case, the signed
statement must be accompanied by a copy of the IRS Form W-8 or the substitute
form provided by the beneficial owner to the organization or institution.
To the extent that such amounts are effectively connected with a U.S. trade
or business carried on by the Foreign Holder, the Foreign Holder will be subject
to regular U.S. income tax in the same manner as a U.S. resident. Effectively
connected income received by a Foreign Holder which is a corporation may be
subject to an additional "branch profits tax" at a rate of 30 percent (or such
lower rate as may be specified by an applicable treaty), subject to certain
adjustments.
Dividends Paid on Common Stock. Dividends paid to a Foreign Holder of
Common Stock generally will be subject to withholding tax at a 30 percent rate
or such lower rate as may be specified by an applicable income tax treaty. For
purposes of determining whether tax is to be withheld at a 30 percent rate or at
a reduced rate as specified by an income tax treaty, under existing U.S.
Treasury Regulations the Company may presume that dividends paid to an address
in a foreign country are paid to a resident of such country absent definite
knowledge that such presumption is not warranted. However, under proposed U.S.
Treasury regulations which have not yet been put into effect, a Foreign Holder
of Common Stock who wishes to claim the benefits of an income tax treaty would
be required to certify as to its eligibility therefor.
No withholding tax is imposed on dividends that are effectively connected
with the Foreign Holder's conduct of trade or business within the United States.
Instead, these effectively connected dividends are subject to regular U.S.
income tax in the same manner as if the Foreign Holder were a U.S. resident.
Effectively connected dividends received by a Foreign Holder which is a
corporation may be subject to an additional "branch profits tax" at a rate of 30
percent (or such lower rate as may be specified by an applicable treaty),
subject to certain adjustments.
Sale, Exchange or Retirement of the Notes or Common Stock. A Foreign Holder
generally will not be subject to United States federal income tax (and generally
no tax will be withheld) with respect to gain realized on the sale, exchange,
redemption, retirement at maturity or other disposition of the Notes or Common
Stock, unless (i) the gain is effectively connected with a United States trade
or business conducted by the Foreign Holder, or (ii) the Foreign Holder is an
individual who is present in the United States for a period or periods
aggregating 183 or more days in the taxable year of the disposition and certain
other conditions are met. lf the gain is effectively connected with U.S. trade
or business, the gain would be subject to United States federal income tax at
applicable individual or corporate tax rates (and in the case of gain recognized
by a Foreign Holder which is a corporation, may be subject to an additional
"branch profits tax" at a rate of 30 percent or such lower rate as may be
specified by an applicable treaty, subject to certain adjustments). If the
Foreign Holder is an individual and is present in the United States for 183 days
or more in the taxable year of sale or other disposition and certain other
conditions are met (but the gain is not effectively connected with a U.S. trade
or business), the gain derived from the disposition of Notes or Common Stock
generally will be taxed at the rate of 30 percent (or lower treaty rate).
Foreign Holders should consult applicable income tax treaties, which may provide
for different rules.
Federal Estate Taxes. Notes held at the time of death by an individual who
at the time of death is a Foreign Holder generally will not be included in such
Foreign Holder's gross estate for United States federal estate tax purposes
provided that interest paid with respect to such Notes would not be subject to
U.S. income tax under the rules described above in "Taxation of Interest
Payments and OID." Subject to an applicable estate tax treaty provision, Common
Stock held by a Foreign Holder at the time of death (or previously transferred
subject to certain retained rights or powers) will be included in the Foreign
Holder's gross estate for United States federal estate tax purposes.
Certain FIRPTA Considerations. The foregoing discussion for Foreign Holders
assumes that the Company is not a United States real property holding
corporation ("USRPHC") within the meaning of Section 897(c) of the Code. In
general, if the Company were a USRPHC, Foreign Holders could be subject to
United States federal income tax on the sale, exchange, retirement or other
disposition of a Note and on the sale, exchange, or other disposition of Common
Stock. The Company believes that it is not a USRPHC.
A-20
<PAGE> 91
Back-up Withholding and Information Reporting on Payments of Proceeds of
Sales. Payment of the proceeds from the sale of Notes or Common Stock by or
through the foreign office of a foreign broker is not subject to back-up
withholding or information reporting. Information reporting (but not backup
withholding) will apply, however, to a payment by or through a foreign office of
a broker that is a United States person, that derives 50 percent or more of its
gross income for certain periods from the conduct of a trade or business in the
United States, or that is a "controlled foreign corporation" (generally. a
foreign corporation controlled by United States shareholders) with respect to
the United States, unless the broker has documentary evidence in its records
that the holder is a Foreign Holder and certain other conditions are met, or the
holder otherwise establishes an exemption. Payment by or through a United States
office of a broker is subject to both back-up withholding at a rate of 31
percent and information reporting unless the holder certifies under penalties of
perjury that it is a Foreign Holder or otherwise establishes an exemption. Any
amounts withheld under the back-up withholding rules would be creditable against
the holder's U.S. federal income tax liability or refunded to the holder,
provided the required information is filed with the IRS.
A-21
<PAGE> 92
UNDERWRITERS
Under the terms of and subject to the conditions contained in an
Underwriting Agreement dated the date hereof (the "Notes Underwriting
Agreement"), the Underwriters named below for whom Morgan Stanley & Co.
Incorporated, Alex. Brown & Sons Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Goldman, Sachs & Co., Montgomery Securities and The
Robinson-Humphrey Company, Inc. are acting as Representatives, have severally
agreed to purchase, and the Company has agreed to sell to them, severally, the
respective principal amounts of the Notes set forth after their names below at a
purchase price of % of the principal amount thereof, plus accrued interest,
if any, from August , 1997 to the date of payment and delivery:
<TABLE>
<CAPTION>
UNDERWRITING PRINCIPAL AMOUNT
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated........................... $
Alex. Brown & Sons Incorporated.............................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Goldman, Sachs & Co.........................................
Montgomery Securities.......................................
The Robinson-Humphrey Company, Inc..........................
------------
Total............................................. $180,000,000
============
</TABLE>
The Notes Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. Each Underwriter is obligated to take and pay for its
allocation of the Notes offered hereby (other than those covered by the
over-allotment described below) if any such Notes are taken.
The Underwriters initially propose to offer the Notes to the public at the
public offering price set forth on the cover page hereof, plus accrued interest,
if any, from August , 1997, and to certain dealers at such price less a
concession of % of the principal amount of the Notes. After the initial
offering of the Notes, the public offering price and other selling terms may be
changed.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
$27,000,000 additional principal amount of Notes at the public offering price
set forth on the cover page hereof, less underwriting discounts and commissions.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the Notes
offered hereby. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional Notes as the number set forth next to such
Underwriter's name in the preceding table bears to the total aggregate principal
amount of Notes set forth next to the names of all Underwriters in the preceding
table.
Each of the Company, the directors and executive officers of the Company
and the Selling Stockholders has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 90 days (45 days in the case of the directors and
executive officers) after the date of this Prospectus, (i) offer, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase, loan or
otherwise dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
(ii) enter into any swap or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of the Common Stock, whether
any such transaction is described in clause (i) or (ii) above is settled by
delivery of Common Stock or such other securities, in cash or otherwise. The
restriction on the Company is subject to exceptions for the issuance of Common
Stock pursuant to existing director and employee benefit plans and as payment
for acquisitions by the Company. The restrictions on the officers, directors and
Selling Stockholders is subject to exceptions for charitable contributions and
estate planning so long as the recipient or donee is subject to a similar
restricted transfer period.
A-22
<PAGE> 93
Application will be made to list the Notes on the Nasdaq National Market.
The Underwriters have advised the Company that they presently intend to make a
market in the Notes as permitted by applicable laws and regulations. The
Underwriters are not obligated, however, to make a market in the Notes and any
such market making may be discontinued at any time at the sole discretion of the
Underwriters. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Notes.
In order to facilitate the offering of the Notes, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Notes or the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Notes for their
own account. In addition, to cover over-allotments or to stabilize the price of
the Notes, the Underwriters may bid for, and purchase, the Notes or shares of
the Common Stock in the open market. Any of these activities may stabilize or
maintain the market price of the Notes or the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time. The Underwriters and dealers
may engage in passive market making transactions in the Common Stock in
accordance with Rule 103 of Regulation M promulgated by the Securities and
Exchange Commission. In general, a passive market maker may not bid for, or
purchase, the Common Stock at a price that exceeds the highest independent bid.
In addition, the net daily purchases made by any passive market maker generally
may not exceed 30% of its average daily trading volume in the Common Stock
during a specified two month prior period, or 200 shares, whichever is greater.
A passive market maker must identify passive market making bids as such on the
NASDAQ electronic inter-dealer reporting system. Passive market making may
stabilize or maintain the market price of the Common Stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Underwriters have engaged in transactions with and performed various
investment banking and other services for the Company in the past, and may do so
from time to time in the future.
The Company has provided staffing services to Morgan Stanley & Co.
Incorporated in the past, and may continue to do so in the future.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters will be
passed upon for the Underwriters by Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of CORESTAFF, Inc. appearing in
CORESTAFF, Inc.'s Annual Report (Form 10-K) for the year ended December 31, 1996
and appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and included or incorporated by reference herein. Such
consolidated financial statements have been included or incorporated by
reference herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
A-23
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by the Company or the
Selling Stockholders in connection with the issuance and distribution of the
Notes and the Common Stock registered hereby, other than underwriting discounts
and commissions. All the amounts shown are estimates, except the registration
and Nasdaq filing fees.
<TABLE>
<S> <C>
Registration fee............................................ $125,193
NASD filing fee............................................. 17,500
Fees and expenses of accountants............................ 200,000
Fees and expenses of legal counsel of the Company........... 140,000
Printing and engraving expenses............................. 275,000
Blue Sky fees and expenses (including counsel).............. 5,000
Nasdaq listing fees......................................... 20,000
Transfer Agent fees and expenses............................ 5,000
Trustee fees and expenses................................... 5,000
Miscellaneous............................................... 7,307
--------
Total............................................. 800,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation of the Company limits the liability of the
directors of the Company to the Company or its stockholders (in their capacity
as directors but not in their capacity as officers) to the fullest extent
permitted by the DGCL. Accordingly, pursuant to the terms of the DGCL as
presently in effect, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit. In addition, such provisions do
not limit the rights of the Company or its stockholders, in appropriate
circumstances, to seek equitable remedies such as injunctive or other forms of
non-monetary relief. Such remedies may not be effective in all cases. The
Certificate of Incorporation also provides that if the DGCL is amended after the
approval of the Certificate of Incorporation to authorize corporate action
further eliminating or limiting the personal liability of the directors, then
the liability of a director of the Company will be eliminated or limited to the
full extent permitted by the DGCL, as so amended. In addition, the Certificate
of Incorporation provides that the Company may purchase and maintain insurance
on behalf of any director, officer, employee or agent of the Company who is or
was serving, at the request of the Corporation, as a director, officer,
employer, or agent for another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in such capacity or arising out of his status as such, whether or not the
Company would have the power to indemnify such person for such liability under
the DGCL.
In addition, the Bylaws, in substance, require the Company to indemnify
each person who is or was a director, officer, employee or agent of the Company
to the full extent permitted by the laws of the State of Delaware in the event
he is involved in legal proceedings by reason of the fact that he is or was a
director, officer, employee or agent of the Company, or is or was serving at the
Company's request as a director, officer, employee or agent of another
corporation, partnership or other enterprise. The Company is also required to
advance to such persons payments incurred in defending a proceeding to which
indemnification might apply, provided the recipient provides an undertaking
agreeing to repay all such advanced amounts if it is ultimately
II-1
<PAGE> 95
determined that he is not entitled to be indemnified. In addition, the Bylaws
specifically provide that the indemnification rights granted thereunder are
non-exclusive.
Each director of the Company has also entered into an indemnification
agreement with the Company (the "Indemnification Agreements"). The
Indemnification Agreements are intended to permit indemnification which may be
broader than specifically provided by law. It is possible that the applicable
law could change the degree to which indemnification is expressly permitted.
The Indemnification Agreements cover most monetary liabilities paid in
settlement of claims if such settlement is approved in advance by the Company,
which approval shall not be unreasonably withheld. The Indemnification
Agreements generally cover claims relating to the fact that the indemnified
party is or was an agent ("Agent") of the Company or its subsidiary, or is or
was serving at the request of the Company as an Agent for another entity. The
Indemnification Agreements also obligate the Company to promptly advance all
expenses incurred in connection with any claim. The indemnitee is, in turn,
obligated to reimburse the Company for all amounts so advanced if it is later
determined that the indemnitee is not entitled to indemnification. The
indemnification provided under the Indemnification Agreements is not exclusive
of any other indemnity rights; however, double payment to the indemnitee is
prohibited.
The Company is not obligated to indemnify the indemnitee with respect to
(a) acts, omissions, or transactions from which the indemnitee may not be
relieved of liability under applicable law, (b) claims initiated or brought
voluntarily by the indemnitee which are not defensive, except in certain
situations, (c) proceedings instituted by the indemnitee to enforce the
Indemnification Agreements which are not made in good faith or are frivolous, or
(d) violations of Section 16(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or any similar successor statute.
ITEM 16. EXHIBITS.
The following documents are filed as exhibits to this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBITS
----------- --------
<C> <S>
1.1 -- Form of Common Stock Underwriting Agreement
1.2 -- Form of Notes Underwriting Agreement
3.1 -- Second Amended and Restated Certificate of Incorporation
of the Registrant
*4.1 -- Form of Indenture between the Company and The Bank of New
York, as Trustee
5.1 -- Opinion of Vinson & Elkins L.L.P.
12.1 -- Calculation of Ratio of Earnings to Fixed Charges
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit
5.1)
24.1 -- Powers of Attorney (included in the signature page
hereto)
25.1 -- Statement of Eligibility under the Trust Indenture Act of
1939 of The Bank of New York
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
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
II-2
<PAGE> 96
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.
(b) The registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and,
where applicable, each filing of an employee benefits plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference
in this registration statement 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.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to any charter provision, by-law, contract, arrangement,
statute, 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 labilities (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 counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of 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.
II-3
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on the 17th day of July,
1997.
CORESTAFF, INC.
By /s/ MICHAEL T. WILLIS
-----------------------------------
Michael T. Willis
Chief Executive Officer and
President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter T. Dameris and Edward L. Pierce, or either
of them, his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any additional registration statement
pursuant to Rule 462(b), and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and ratifying
and confirming all that said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to
the requirements of the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities indicated on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MICHAEL T. WILLIS Chairman of the Board, Chief July 17, 1997
- ----------------------------------------------------- Executive Officer and President
Michael T. Willis (Principal Executive Officer)
/s/ AUSTIN P. YOUNG Executive Vice July 17, 1997
- ----------------------------------------------------- President -- Finance and
Austin P. Young Administration and Director
/s/ EDWARD L. PIERCE Senior Vice President, Chief July 17, 1997
- ----------------------------------------------------- Financial Officer and Assistant
Edward L. Pierce Secretary (Principal Accounting
Officer and Principal Financial
Officer)
/s/ NUALA BECK Director July 17, 1997
- -----------------------------------------------------
Nuala Beck
/s/ CHARLES H. COTROS Director July 17, 1997
- -----------------------------------------------------
Charles H. Cotros
/s/ DONALD J. EDWARDS Director July 17, 1997
- -----------------------------------------------------
Donald J. Edwards
</TABLE>
II-4
<PAGE> 98
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ BRUCE V. RAUNER Director July 17, 1997
- -----------------------------------------------------
Bruce V. Rauner
/s/ CHARLES R. SCHNEIDER Director July 17, 1997
- -----------------------------------------------------
Charles R. Schneider
/s/ JOHN T. TURNER Director July 17, 1997
- -----------------------------------------------------
John T. Turner
</TABLE>
II-5
<PAGE> 99
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBITS
----------- --------
<C> <S>
1.1 -- Form of Common Stock Underwriting Agreement
2.1 -- Form of Notes Underwriting Agreement
3.1 -- Second Amended and Restated Certificate of Incorporation
of the Registrant
*4.1 -- Form of Indenture between the Company and The Bank of New
York, as Trustee
5.1 -- Opinion of Vinson & Elkins L.L.P.
12.1 -- Calculation of Ratio of Earnings to Fixed Charges
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit
5.1)
24.1 -- Powers of Attorney (included in the signature page
hereto)
25.1 -- Statement of Eligibility under the Trust Indenture Act of
1939 of The Bank of New York
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
Draft of 7/16/97
6,000,000 Shares
CORESTAFF, INC.
Common Stock
(par value $.01 per share)
UNDERWRITING AGREEMENT
__________, 1997
<PAGE> 2
_____________, 1997
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Alex. Brown & Sons
Donaldson, Lufkin & Jenrette Securities Corporation
Montgomery Securities
The Robinson-Humphrey Company, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Goldman Sachs International
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
Certain shareholders of the Company (the "SELLING
SHAREHOLDERS") of CORESTAFF, Inc., a Delaware corporation (the "COMPANY"),
named in Schedule III hereto severally propose to sell to the several
Underwriters named in Schedule I and II hereto (the "UNDERWRITERS"), an
aggregate of 6,000,000 shares of the Common Stock, par value $.01 per share, of
the Company (the "FIRM SHARES"), each Selling Shareholder selling the amount
set forth opposite such Selling Shareholder's name in Schedule III hereto.
It is understood that, subject to the conditions hereinafter
stated, 5,000,000 Firm Shares (the "U.S. FIRM SHARES") will be sold to the
several U.S. Underwriters named in Schedule I hereto (the "U.S. UNDERWRITERS")
in connection with the offering and sale of such U.S. Firm Shares in the United
States and Canada to United States and Canadian Persons (as such terms are
defined in the Agreement Between U.S. and International Underwriters of even
date herewith), and 1,000,000 Firm Shares (the "INTERNATIONAL SHARES") will be
sold to the several International Underwriters named in Schedule II hereto (the
"INTERNATIONAL UNDERWRITERS") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons
<PAGE> 3
other than United States and Canadian Persons. Morgan Stanley & Co.
Incorporated and Goldman, Sachs & Co., Alex. Brown & Sons, Donaldson, Lufkin &
Jenrette Securities Corporation, Montgomery Securities and The
Robinson-Humphrey Company, Inc. shall act as representatives (the "U.S.
REPRESENTATIVES") of the several U.S. Underwriters, and Morgan Stanley & Co.
International Limited and Goldman Sachs International shall act as
representatives (the "INTERNATIONAL REPRESENTATIVES") of the several
International Underwriters. The U.S. Underwriters and the International
Underwriters are hereinafter collectively referred to as the Underwriters.
The additional Selling Stockholder specified in Schedule III
hereto also proposes to issue and sell to the several U.S. Underwriters not
more than an additional 900,000 shares of its Common Stock, par value $.01 per
share, (the "ADDITIONAL SHARES") if and to the extent that the U.S.
Representatives shall have determined to exercise, on behalf of the U.S.
Underwriters, the right to purchase such shares of common stock granted to the
U.S. Underwriters in Section 2 hereof. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "SHARES." The shares of
Common Stock, par value $.01 per share, of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "COMMON STOCK."
The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement relating to the Shares.
The registration statement contains two prospectuses to be used in connection
with the offering and sale of the Shares: the U.S. prospectus, to be used in
connection with the offering and sale of Shares in the United States and Canada
to United States and Canadian Persons, and the international prospectus, to be
used in connection with the offering and sale of Shares outside the United
States and Canada to persons other than United States and Canadian Persons. The
international prospectus is identical to the U.S. prospectus except for the
outside front cover page. The registration statement as amended at the time it
becomes effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "Registration Statement"; the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter collectively referred to as the "PROSPECTUS" (including,
in the case of all references to the Registration Statement or the Prospectus,
documents incorporated therein by reference). The terms "supplement" and
"amendment" or "amend" as used in this Agreement with respect to the
Registration Statement or Prospectus shall include all documents subsequently
filed by the Company with the Commission pursuant to the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), that are deemed to be
incorporated by reference in the Prospectus. If the Company has filed an
abbreviated registration statement to register additional shares of Common
Stock pursuant to Rule 462(b) under the Securities Act (the "RULE 462
REGISTRATION STATEMENT"), then any reference herein to the term "REGISTRATION
STATEMENT" shall be deemed to include such Rule 462 Registration Statement.
2
<PAGE> 4
1. REPRESENTATIONS AND WARRANTIES. The Company represents
and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) Each document, if any, filed or to be filed pursuant
to the Exchange Act and incorporated by reference in the Prospectus
complied or will comply when so filed in all material respects with
the Exchange Act and the applicable rules and regulations of the
Commission thereunder, (ii) the Registration Statement, when it became
effective, did not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (iii) the
Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with
the Securities Act and the applicable rules and regulations of the
Commission thereunder and (iv) the Prospectus does not contain and, as
amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that
the representations and warranties set forth in this paragraph 1(b) do
not apply to statements or omissions in the Registration Statement or
the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State
of Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(d) Each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as
a whole; all of the issued shares of capital stock of each subsidiary
of the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and (except for directors' qualifying
shares and except as set forth in the
3
<PAGE> 5
Prospectus) are owned directly by the Company, free and clear of all
liens, encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed
and delivered by the Company.
(f) The authorized capital stock of the Company conforms
as to legal matters to the description thereof contained in the
Prospectus.
(g) The Shares of Common Stock have been duly authorized and
are validly issued, fully paid and non-assessable, and the issuance of
such Shares did not violate any preemptive or similar rights.
(h) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the Certificate
of Incorporation or By-laws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no
consent, approval, authorization or order of, or qualification with,
any governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(i) There has not occurred any material adverse change, or
any development involving a prospective material adverse change, in
the condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(j) There are no legal or governmental proceedings pending
or, to the Company's knowledge after due inquiry, threatened to which
the Company or any of its subsidiaries is a party or to which any of
the properties of the Company or any of its subsidiaries is subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not described or filed as
required.
(k) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities
Act and the applicable rules and regulations of the Commission
thereunder.
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<PAGE> 6
(l) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of
1940, as amended.
(m) The Company and its subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or approvals would not, singly or in the
aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(n) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(o) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares
registered pursuant to the Registration Statement, except for rights
under such contracts or agreements that have been waived by all
persons holding such rights.
(p) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
(q) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default
in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be
bound.
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<PAGE> 7
(r) The statements set forth in the Prospectus under the
caption "Description of Capital Stock," insofar as they purport to
constitute a summary of the terms of the Shares, are accurate,
complete and fair.
(s) Ernst & Young LLP who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of
the Commission thereunder.
(t) The Company owns or possesses adequate licenses or other
rights to use all trademarks, service marks, trade names, copyrights,
and know-how necessary to conduct the business now or proposed to be
conducted by the Company as described in the Prospectus, and, except
as disclosed in the Prospectus, the Company has not received any
notice of infringement of or conflict with (and knows of no such
infringement of or conflict with) asserted rights of others with
respect to trademarks, service marks, trade names, copyrights, or
know-how which, individually or in the aggregate, is reasonably likely
to result in any material adverse effect upon the financial position,
stockholders' equity or results of operations of the Company; and,
except as disclosed in the Prospectus and to the knowledge of the
Company, the Company does not, in the conduct of its business as now
or proposed to be conducted as described in the Prospectus, infringe
or conflict with any right of any third party, known to the Company,
where such infringement or conflict is reasonably likely to result in
any material adverse effect upon the financial position, stockholders'
equity or results of operations of the Company.
(u) The Company has obtained any permits, consents and
authorizations required to be obtained by it under laws or regulations
relating to its business, including, without limitation, laws or
regulations relating to the operation and sales of franchises
(collectively, "LAWS"), and any such permits, consents and
authorizations remain in full force and effect, except as to any of
the foregoing the absence of which (individually or in the aggregate)
will not have a material adverse effect on the financial position,
stockholders' equity or results of operations of the Company; and the
Company is in compliance with the Laws in all material respects, and
there is no pending or, to the Company's knowledge, threatened, action
or proceeding against the Company for violation of any Law, other than
any such actions or proceedings which, individually or in the
aggregate, if adversely determined, is not reasonably likely to have a
material adverse effect on the financial position, stockholders'
equity or results of operations of the Company.
(v) The Company (i) has timely and properly prepared and
filed all federal, state and local income and franchise tax returns
required to be filed through the date hereof and has paid all taxes
due thereon, and has furnished all information returns it is required
to furnish pursuant to the Internal Revenue Code of 1986, as amended,
(ii) the charges, accruals and reserves on the consolidated books of
the Company in respect of any income, franchise or corporation tax
liability for any years not fully determined are reasonable and have
been recorded on a basis in conformance with generally accepted
accounting principles, and (iii)
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<PAGE> 8
does not have any tax deficiency or claims outstanding, assessed or to
its knowledge, proposed against it which is reasonably likely to
result in any material adverse effect upon the financial position,
stockholders' equity or results of operations of the Company.
(w) The Company maintains insurance of the types and in the
amounts which the Company reasonably believes are adequate for its
business and consistent with insurance coverage maintained by similar
companies in similar businesses, including but not limited to,
workers' compensation insurance, insurance covering real and personal
property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING
SHAREHOLDERS. Each of the Selling Shareholders represents and warrants to and
agrees with each of the Underwriters that:
(a) This Agreement has been duly authorized, executed
and delivered by or on behalf of such Selling Shareholder.
(b) The execution and delivery by such Selling Shareholder
of, and the performance by such Selling Shareholder of its obligations
under, this Agreement, the Custody Agreement signed by such Selling
Shareholder and the Company, as Custodian, relating to the deposit of
the Shares to be sold by such Selling Shareholder (the "CUSTODY
AGREEMENT") and the Power of Attorney appointing certain individuals
as such Selling Shareholder's attorneys-in-fact to the extent set
forth therein, relating to the transactions contemplated hereby and by
the Registration Statement (the "POWER OF ATTORNEY") will not
contravene any provision of applicable law, or the certificate of
incorporation or by-laws of such Selling Shareholder (if such Selling
Shareholder is a corporation), or any agreement or other instrument
binding upon such Selling Shareholder or any judgment, order or decree
of any governmental body, agency or court having jurisdiction over
such Selling Shareholder, and no consent, approval, authorization or
order of, or qualification with, any governmental body or agency is
required for the performance by such Selling Shareholder of its
obligations under this Agreement or the Custody Agreement or Power of
Attorney of such Selling Shareholder, except such as may be required
by the securities or Blue Sky laws of the various states in connection
with the offer and sale of the Shares.
(c) Such Selling Shareholder has, and on the Closing Date
will have, valid title to the Shares to be sold by such Selling
Shareholder and the legal right and power, and all authorization and
approval required by law, to enter into this Agreement, the Custody
Agreement and the Power of Attorney and to sell, transfer and deliver
the Shares to be sold by such Selling Shareholder.
(d) The Shares to be sold by such Selling Shareholder
pursuant to this Agreement have been duly authorized and are validly
issued, fully paid and non-assessable.
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<PAGE> 9
(e) The Custody Agreement and the Power of Attorney have been
duly authorized, executed and delivered by such Selling Shareholder
and are valid and binding agreements of such Selling Shareholder.
(f) Delivery of the Shares to be sold by such Selling
Shareholder pursuant to this Agreement will pass title to such Shares
free and clear of any security interests, claims, liens, equities and
other encumbrances assuming the Underwriters purchase such shares
without notice of any adverse claim, as defined in the Uniform
Commercial Code as adopted in the State of New York (the "UCC") and
are otherwise bona fide purchasers for the purposes of the UCC and
that such Underwriters' rights are not limited by subsection (4) of
Section 8-302 of the UCC.
(g) To the extent, but only to the extent, that any
statements or omissions made in the Registration Statement, the
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 Shareholder
expressly for use therein or filed by the Selling Shareholder pursuant
to the Exchange Act, (i) the Registration Statement, when it became
effective, did not contain and, as supplemented, if applicable, will
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and
(iii) the Prospectus does not contain and, as amended or supplemented,
if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, except that the representations and warranties set
forth in this paragraph 2(g) do not apply to statements or omissions
in the Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein.
(h) Certificates in negotiable form representing all of the
Shares to be sold by such Selling Shareholder hereunder have been
placed in custody under a Custody Agreement, in the form heretofore
furnished to you (the "CUSTODY AGREEMENT"), duly executed and
delivered by such Selling Shareholder to the Company, as custodian
(the "CUSTODIAN"), and such Selling Shareholder has duly executed and
delivered a Power of Attorney, in the form heretofore furnished to you
(the "POWER OF ATTORNEY"), appointing Michael T. Willis and Peter T.
Dameris, and each of them, as such Selling Shareholder's
attorneys-in-fact (the "ATTORNEYS-IN-FACT") with authority to execute
and deliver this Agreement on behalf of such Selling Shareholder, to
determine the purchase price to be paid by the Underwriters to the
Selling Shareholders as provided in Section 3 hereof, to authorize the
delivery of the Shares to be sold by such Selling Shareholder
hereunder and certain other matters provided therein; and
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<PAGE> 10
(i) The Shares represented by the certificates held in
custody for such Selling Shareholder under the Custody Agreement are
subject to the interests of the Underwriters hereunder; the
arrangements made by such Selling Shareholder for such custody, and
the appointment by such Selling Shareholder of the Attorneys-in-Fact
by the Power of Attorney, are to that extent irrevocable; the
obligations of the Selling Shareholders hereunder shall not be
terminated by operation of law, whether by the death or incapacity of
any individual Selling Shareholder or, in the case of an estate or
trust, by the death or incapacity of any executor or trustee or the
termination of such estate or trust, or in the case of a partnership
or corporation, by the dissolution of such partnership or corporation,
or by the occurrence of any other event; if any individual Selling
Shareholder or any such executor or trustee should die or become
incapacitated, or if any such estate or trust should be terminated, or
if any such partnership or corporation should be dissolved, or if any
other such event should occur, before the delivery of such Shares
hereunder certificates representing the Shares shall be delivered by
or on behalf of such Selling Shareholder in accordance with the terms
and conditions of this Agreement and of the Custody Agreement; and
actions taken by the Attorneys-in-Fact pursuant to the Power of
Attorney shall be as valid as if such death, incapacity, termination,
dissolution or other event had not occurred, regardless of whether or
not the Custodian, the Attorneys-in-Fact, or any of them, shall have
received notice of such death, incapacity, termination, dissolution or
other event.
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 the transactions herein contemplated, such Selling
Shareholder agrees to deliver to you prior to or at the First Time of Delivery
(as hereinafter defined) 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).
3. AGREEMENTS TO SELL AND PURCHASE. Each Selling Stockholder,
severally and not jointly, hereby agrees to sell to the several Underwriters,
and each Underwriter, upon the basis of the representations and warranties
herein contained, but subject to the conditions hereinafter stated, agrees,
severally and not jointly, to purchase from such Selling Stockholder at U.S.
$______ a share (the "PURCHASE PRICE") the number of Firm Shares (subject to
such adjustments to eliminate fractional shares as you may determine) that
bears the same proportion to the number of Firm Shares to be sold by such
Selling Stockholder as the number of Firm Shares set forth in Schedule II
hereto opposite the name of such Underwriters bears to the total number of Firm
Shares.
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, Michael T. Willis,
a Selling Stockholder, agrees to sell to the U.S. Underwriters the Additional
Shares, and the U.S. Underwriters shall have a one-time right to purchase,
severally and not jointly, up to 900,000 Additional Shares at the Purchase
Price. If the U.S. Representatives, on behalf of the U.S. Underwriters, elect
to exercise such option, the U.S. Representatives shall so notify the Company
in writing not later than 30 days after the date of this Agreement, which
notice shall specify the number of Additional Shares to be purchased by the
U.S.
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<PAGE> 11
Underwriters and the date on which such shares are to be purchased. Such date
may be the same as the Closing Date (as defined below) but not earlier than the
Closing Date nor later than ten business days after the date of such notice.
Additional Shares may be purchased as provided in Section 4 hereof solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. If any Additional Shares are to be purchased, each U.S.
Underwriter agrees, severally and not jointly, to purchase the number of
Additional Shares (subject to such adjustments to eliminate fractional shares
as the U.S. Representatives may determine) that bears the same proportion to
the total number of Additional Shares to be purchased as the number of U.S.
Firm Shares set forth in Schedule I hereto opposite the name of such U.S.
Underwriter bears to the total number of U.S. Firm Shares.
The Company and each Selling Shareholder hereby agrees that,
without the prior written consent of Morgan Stanley & Co. Incorporated on
behalf of the Underwriters, it will not, during the period ending 90 days after
the date of the Prospectus, (i) offer, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, loan or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to, with respect to the
Company: (A) the Shares to be sold hereunder; (B) the issuance by the Company
of shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing; or (C) any shares of Common Stock
issued as payment of any part of the purchase price for acquisitions of
businesses by the Company. In addition, each Selling Shareholders, agree that,
without the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the Underwriters, it will not, during the period ending 90 days after the
date of the Prospectus, make any demand for, or exercise any right with respect
to, the registration of any shares of Common Stock or any security convertible
into or exercisable or exchangeable for Common Stock.
4. TERMS OF PUBLIC OFFERING. The Selling Shareholders are
advised by you that the Underwriters propose to make a public offering of their
respective portions of the Shares as soon after the Registration Statement and
this Agreement have become effective as in your judgment is advisable. The
Selling Shareholders are further advised by you that the Shares are to be
offered to the public initially at $____________ a share (the "PUBLIC OFFERING
PRICE") and to certain dealers selected by you at a price that represents a
concession not in excess of $______ a share under the Public Offering Price,
and that any Underwriter may allow, and such dealers may reallow, a concession,
not in excess of $____ a share, to any Underwriter or to certain other dealers.
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<PAGE> 12
5. PAYMENT AND DELIVERY. Payment for the Firm Shares to be
sold by each Selling Shareholder shall be made to such Selling Shareholder in
Federal or other funds immediately available in New York City against delivery
of such Firm Shares for the respective accounts of the several Underwriters at
10:00 A.M., New York City time, on ____________, 1997, or at such other time on
the same or such other date, not later than _________, 1997, as shall be
designated in writing by you. The time and date of such payment are hereinafter
referred to as the "CLOSING DATE."
Payment for any Additional Shares shall be made to Michael T.
Willis in Federal or other funds immediately available in New York City against
delivery of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on the date specified in the
notice described in Section 3 or at such other time on the same or on such
other date, in any event not later than _______, 1997, as shall be designated
in writing by the U.S. Representatives. The time and date of such payment are
hereinafter referred to as the "OPTION CLOSING DATE."
Certificates for the Firm Shares and Additional Shares shall
be in definitive form and registered in such names and in such denominations as
you shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes
payable in connection with the transfer of the Shares to the Underwriters duly
paid, against payment of the Purchase Price therefor.
6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The
obligations of the Selling Stockholders to sell the Shares to the Underwriters
and the several obligations of the Underwriters to purchase and pay for the
Shares on the Closing Date are subject to the condition that the Registration
Statement shall have become effective not later than 5:00 P.M. (New York City
time) on the date hereof.
The several obligations of the Underwriters are subject to
the following further conditions:
(a) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date:
(i) there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or
potential downgrading or of any review for a possible change
that does not indicate the direction of the possible change,
in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization,"as
such term is defined for purposes of Rule 436(g)(2) under the
Securities Act; and
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<PAGE> 13
(ii) there shall not have occurred any change, or
any development involving a prospective change, in the
condition, financial or otherwise, or in the earnings,
business or operations of the Company and its subsidiaries,
taken as a whole, from that set forth in the Prospectus
(exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your
judgment, is material and adverse and that makes it, in your
judgment, impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date
a certificate, dated the Closing Date and signed by an executive
officer of the Company, to the effect set forth in clause (a)(i) above
and to the effect that the representations and warranties of the
Company contained in this Agreement are true and correct as of the
Closing Date and that the Company has complied with all of the
agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate
may rely upon the best of his or her knowledge as to proceedings
threatened.
(c) The Underwriters shall have received on the Closing Date
an opinion of Vinson & Elkins, L.L.P., outside counsel for the
Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing under the
State of Delaware, has the corporate power and authority to
own its property and to conduct its business as described in
the Prospectus and is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property
requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is
in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries,
taken as a whole;
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
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<PAGE> 14
(iv) the outstanding shares of Common Stock as of
the date and as set forth under the caption "Capitalization"
in the Prospectus have been duly authorized and are validly
issued, fully paid and non-assessable;
(v) all of the issued shares of capital stock of
each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and
are owned directly by the Company, free and clear of all
liens, encumbrances, equities or claims;
(vi) the Shares have been duly authorized and are
validly issued, fully paid and non-assessable, and the
issuance of such Shares did not violate any preemptive or
similar rights at the time of their issuance;
(vii) this Agreement has been duly authorized,
executed and delivered by the Company and, assuming the due
authorization, execution and delivery of the Power of
Attorney and Custody Agreement by each of the Selling
Shareholders, the Selling Shareholders;
(viii) the execution and delivery by the Company of,
and the performance by the Company of its obligations under,
this Agreement will not contravene any provision of
applicable law or the certificate of incorporation or by-laws
of the Company or, to the best of such counsel's knowledge,
any agreement or other instrument binding upon the Company or
any of its subsidiaries that is material to the Company and
its subsidiaries, taken as a whole, or, to the best of such
counsel's knowledge, any judgment, order or decree of any
governmental body, agency or court having jurisdiction over
the Company or any subsidiary, and no consent, approval,
authorization or order of, or qualification with, any
governmental body or agency is required for the performance
by the Company of its obligations under this Agreement,
except such as may be required by the securities or Blue Sky
laws of the various states in connection with the offer and
sale of the Shares by the U.S.
Underwriters;
(ix) the statements (A) in the Prospectus under the
captions "Description of Capital Stock" and, with respect to
the summary of this Agreement and Exhibit A hereto,
"Underwriters" and (B) in the Registration Statement in Item
15, in each case insofar as such statements constitute
summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called
for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to
therein;
(x) after due inquiry, such counsel does not know of
any legal or governmental proceedings pending or threatened
to which the Company or any of its subsidiaries is a party or
to which any of the properties of the Company or any of its
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<PAGE> 15
subsidiaries is subject that are required to be described in
the Registration Statement or the Prospectus and are not so
described or of any statutes, regulations, contracts or other
documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described
or filed as required;
(xi) the Company is not and, after giving effect to
the offering and sale of the Shares and the application of
the proceeds thereof as described in the Prospectus, will not
be an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended;
(xii) except as described in the Prospectus or as
have been waived at the Closing Date, there are no persons
with registration or similar rights to have any securities of
the Company registered pursuant to the Registration Statement
or otherwise registered by the Company under the Securities
Act or the Exchange Act pursuant to any agreement or
instrument known to us after due inquiry to which the Company
is a party; and
(xiii) such counsel (A) is of the opinion that each
document, if any, filed pursuant to the Exchange Act and
incorporated by reference in the Prospectus (except for
financial statements and schedules as to which such counsel
need not express any opinion) complied when so filed as to
form in all material respects with the Exchange Act and the
rules and regulations of the Commission thereunder, (B) is of
the opinion that the Registration Statement and Prospectus
(except for financial statements and schedules and other
financial and statistical data included therein as to which
such counsel need not express any opinion) comply as to form
in all material respects with the Securities Act and the
applicable rules and regulations of the Commission
thereunder, (C) has no reason to believe that (except for
financial statements and schedules and other financial and
statistical data as to which such counsel need not express
any belief) the Registration Statement and the prospectus
included therein at the time the Registration Statement
became effective contained any untrue statement of a material
fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein
not misleading and (D) has no reason to believe that (except
for financial statements and schedules and other financial
and statistical data as to which such counsel need not
express any belief) the Prospectus contains any untrue
statement of a material fact or omits 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.
(d) The Underwriters shall have received on the Closing Date
an opinion of each of (A) Kirkland & Ellis, (B) Kennedy Covington
Lobdell & Hickman, L.L.P., and (C) Vinson & Elkins, L.L.P., counsel
for (A) Golder, Thoma, Cressey Fund III Limited
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<PAGE> 16
Partnership, (B) First Union Corporation and (C) Michael T. Willis,
respectively, dated the Closing Date, to the effect that:
(i) such Selling Shareholder, if a corporation, has
been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of
its incorporation, or such Selling Shareholder, if a
partnership has been duly formed and is validly existing as a
partnership in good standing under the laws of the state of
its formation;
(ii) this Agreement has been duly authorized,
executed and delivered by or on behalf of such Selling
Shareholder;
(iii) the execution and delivery of each Selling
Shareholder of, and the performance by such Selling
Shareholder of its obligations under, this Agreement and the
Custody Agreement and Powers of Attorney of such Selling
Shareholder will not contravene any provision of applicable
law, or the certificate of incorporation or by-laws of such
Selling Shareholder (if such Selling Shareholder is a
corporation), or, to the best of such counsel's knowledge,
any agreement or other instrument binding upon such Selling
Shareholder or, to the best of such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or
court having jurisdiction over such Selling Shareholder
(excluding breaches, violations and defaults that,
individually or in the aggregate, will not materially
adversely affect such Selling Shareholder's ability to
perform its obligations under this Agreement);
(iv) no consent, approval, authorization or order
of, or qualification with, any governmental body or agency is
required for the performance by such Selling Shareholder of
its obligations under this Agreement or the Custody Agreement
or Power of Attorney of such Selling Shareholder, except such
as may be required by the securities or Blue Sky laws of the
various states in connection with offer and sale of the
Shares;
(v) such Selling Shareholder has valid title to the
Shares to be sold by such Selling Shareholder and the legal
right and power, and all authorization and approval required
by law, to enter into this Agreement and the Custody
Agreement and Power of Attorney of such Selling Shareholder
and to sell, transfer and deliver the Shares to be sold by
such Selling Shareholder;
(vi) the Custody Agreement and the Power of Attorney
of such Selling Shareholder have been duly authorized,
executed and delivered by such Selling Shareholder and are
valid and binding agreements of such Selling Shareholder;
(vii) immediately prior to the consummation of the
transactions contemplated by this Agreement, such Selling
Shareholder was the sole record owner
15
<PAGE> 17
of the Shares to be sold by such Selling Shareholder under
this Agreement; upon delivery of the Shares to be sold by the
Selling Shareholders under this Agreement and payment of the
purchase price therefor as contemplated by this Agreement,
assuming the Underwriters have purchased the Shares for value
in good faith and without notice of any adverse claim or
actual knowledge of a restriction on transfer, (1) the
Underwriters will have acquired all rights of such Selling
Shareholder in such Shares free of any adverse claim, any
lien in favor of the Company and any restrictions on transfer
imposed by the Company, and (2) the owner of such Shares, if
other than such Selling Shareholder, is precluded from
asserting against the Underwriters the ineffectiveness of any
unauthorized endorsement or instruction; and
(e) The Underwriters shall have received on the Closing Date
an opinion of Andrews & Kurth L.L.P., counsel for the Underwriters,
dated the Closing Date, covering the matters referred to in Sections
5(c)(vi), 5(c)(vii), 5(c)(ix) (but without limitation to
"Underwriters") and 5(c)(xiii)(B)-(D) above.
With respect to subparagraph (xiii) of paragraph (c) above,
Vinson & Elkins, L.L.P. and Andrews & Kurth L.L.P., may state that
their opinion and belief are based upon their participation and
preparation of the Registration Statement and Prospectus and any
amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification,
except as specified.
The opinions of Vinson & Elkins, L.L.P. on behalf of the
Company, and Kirkland & Ellis, Kennedy Covington Lobdell & Hickman,
L.L.P. and Vinson & Elkins, L.L.P. on behalf of the Selling
Shareholder described in paragraphs (c) and (d) above, shall be
rendered to the Underwriters at the request of the Company or one or
more of the Selling Shareholders, as the case may be, and shall so
state therein.
(f) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory
to the Underwriters, from Ernst & Young LLP, independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in, or incorporated by reference into, the
Registration Statement and the Prospectus; provided that the letter
delivered on the Closing Date shall use a "cut-off date" not earlier
than the date hereof.
(g) The "lock-up" agreements, each substantially in the form
of Exhibit A hereto, between you and certain shareholders, officers
and directors of the Company (other than the Selling Shareholders)
relating to sales and certain other dispositions of shares of Common
Stock or certain other securities, delivered to you on or before the
date hereof, shall be in full force and effect on the Closing Date.
16
<PAGE> 18
(h) The Shares to be sold at such Time of Delivery shall have
been duly approved, subject to notice of issuance, for quotation on
the Nasdaq National Market.
(i) The several obligations of the U.S. Underwriters to
purchase Additional Shares hereunder are subject to the delivery to
the U.S. Representatives on the Option Closing Date of such documents
as they may reasonably request with respect to the good standing of
the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional
Shares.
7. COVENANTS OF THE COMPANY. In further consideration
of the agreements of the Underwriters herein contained, the Company covenants
with each Underwriter as follows:
(a) To furnish to you, without charge, 13 signed copies of
the Registration Statement (including exhibits thereto and any
documents incorporated therein by reference) and for delivery to each
other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto but including documents incorporated therein
by reference) and to furnish to you in New York City, without charge,
prior to 10:00 A.M. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned
in paragraph (c) below, as many copies of the Prospectus, any
documents incorporated therein by reference and any supplements and
amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file
with the Commission within the applicable period specified in Rule
424(b) under the Securities Act any prospectus required to be filed
pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall
occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered to
a purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the
Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments
or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
17
<PAGE> 19
(d) To endeavor to qualify the Shares for offer and sale
under the securities or Blue Sky laws of such jurisdictions as you
shall reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement
covering the twelve-month period ending September 30, 1998 that
satisfies the provisions of Section 11(a) of the Securities Act and
the rules and regulations of the Commission thereunder.
8. EXPENSES. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, (a) the Company
agrees to pay or cause to be paid all expenses incident to the performance of
the Selling Shareholders and its obligations under this Agreement, including:
(i) the fees, disbursements and expenses of the Company's counsel and the
Company's accountants in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any
Blue Sky or Legal Investment memorandum in connection with the offer and sale
of the Shares under state securities laws and all expenses in connection with
the qualification of the Shares for offer and sale under state securities laws
as provided in Section 7(d) hereof, including filing fees and the reasonable
fees and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and disbursements of counsel to the
Underwriters incurred in connection with the review and qualification of the
offering of the Shares by the National Association of Securities Dealers, Inc.,
(v) all costs and expenses incident to listing the Shares on the Nasdaq
National Market, (vi) the cost of printing certificates representing the
Shares, (vii) the costs and charges of any transfer agent, registrar or
depositary, and (viii) all other costs and expenses incident to the performance
of the obligations of the Company hereunder for which provision is not
otherwise made in this Section; and (b) each Selling Shareholder agrees to pay
or cause to be paid all costs and expenses incident to the performance of such
Selling Shareholder's obligations hereunder which are not otherwise
specifically provided for in this Section, including (i) any fees and expenses
of counsel for such Selling Shareholder, (ii) such Selling Shareholder's pro
rata share of the fees and expenses of the Attorneys-in-Fact and the Custodian,
if any, and (iii) all expenses and taxes incident to the sale and delivery of
the Shares to be sold by such Selling Shareholder to the Underwriters
hereunder. It is understood, however, that the Company shall bear, and the
Selling Shareholders shall not be required to pay or to reimburse the Company
for, the cost of any other matters not directly relating to the sale and
purchase of the Shares pursuant to this Agreement, that except as provided in
this Section, Section 9 entitled "Indemnity and Contribution", and the last
paragraph of Section 11 below, the Underwriters will pay all of their costs and
expenses, including fees and disbursements of their counsel, stock transfer
taxes payable on resale of any of the Shares by them and any advertising
expenses connected with any offers they may make.
18
<PAGE> 20
The provisions of this Section shall not supersede or
otherwise affect any agreement that the Comany and the Selling Stockholders may
otherwise have for the allocation of such expenses among themselves.
9. INDEMNITY AND CONTRIBUTION. (a) The Company and Michael T.
Willis, an officer of the Company who is a Selling Shareholder, (the "INSIDE
SELLER") agree, jointly and severally, 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 Securities Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), 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, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein. Notwithstanding the
foregoing, in no event shall any Inside Seller be required to pay an amount in
indemnification under this Section 9(a) in excess of the total price at which
Shares sold by such Inside Seller were offered to the public.
(b) The Selling Shareholders other than the Insider Seller
(the "OTHER SELLERS"), agree 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 Securities Act or Section 20 of the Exchange Act, from
and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), 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, in
each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Other Seller expressly for use
therein, except insofar as such losses, claims, damages or liabilities are
caused by any such untrue statement or omission or alleged untrue statement or
omission based upon information relating to any Underwriter any in writing by
such Underwriter through you expressly for use therein; provided, however, that
each Other Seller shall not be liable to any Underwriter under the indemnity
agreement in this subsection (b) with respect to any Preliminary Prospectus to
the extent that any such loss, claim, damage or liability to any Underwriter
results from the fact that such
19
<PAGE> 21
Underwriter sold Shares to a person as to whom it shall be established that
there was not sent or given, at or prior to the written confirmation of such
sale, a copy of the Prospectus or of the Prospectus as then amended or
supplemented in any case where such delivery is required by the Securities Act
if the Company has previously furnished copies thereof in sufficient quantity
to such Underwriter and the loss, claim, damage or liability of such
Underwriter results from an untrue statement or omission of a material fact
contained in the Preliminary Prospectus which was identified in writing at such
time to such Underwriter and corrected in the Prospectus or in the Prospectus
as then amended or supplemented. Notwithstanding the foregoing, in no event
shall any Other Seller be required to pay an amount in indemnification under
this Section 9(b) or contribution under Section 9(e) hereof in excess of the
net amount received by such Other Seller from the sale of the Shares pursuant
to the Prospectus.
(c) Each Selling Shareholder agrees, severally and not
jointly, to indemnify and hold less the Company, its directors, its officers
who sign the Registration Statement and each son, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), 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 Shareholder furnished in writing by or on behalf of such Selling
Shareholder expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto.
(d) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Selling Shareholders, the
directors of the Company, the officers of the Company who sign the Registration
Statement and each person, if any, who controls the Company or any Selling
Shareholder within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), 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
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus,
the Prospectus or any amendments or supplements thereto.
20
<PAGE> 22
(e) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to paragraph (a), (b), (c) or (d) of this
Section 9, such person (the "INDEMNIFIED PARTY") shall promptly notify the
person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in
writing and the indemnifying party, upon request of the indemnified party,
shall retain counsel reasonably satisfactory to the indemnified party to
represent the indemnified party and any others the indemnifying party may
designate in such proceeding and shall pay the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (i)
the indemnifying party and the indemnified party shall have mutually agreed to
the retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
It is understood that the indemnifying party shall not, in respect of the legal
expenses of any indemnified party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for (i) the fees and expenses
of more than one separate firm (in addition to any local counsel) for all
Underwriters and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, (ii) the fees and expenses of more than one separate firm (in
addition to any local counsel) for 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 and (iii) the fees and
expenses of more than one separate firm (in addition to any local counsel) for
all Selling Shareholders and all persons, if any, who control any Selling
Shareholder within the meaning of either such Section, and that all such fees
and expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters and such control persons of any
Underwriters, such firm shall be designated in writing by Morgan Stanley & Co.
Incorporated. In the case of any such separate firm for the Company, and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company. In the case of any such separate firm for
the Selling Shareholders and such control persons of any Selling Shareholders,
such firm shall be designated in writing by the persons named as
attorneys-in-fact for the Selling Shareholders under the Powers of Attorney.
The indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnity the indemnified party from and against any loss or liability by
reason of such settlement or judgment. Notwithstanding the foregoing sentence,
if at any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed
the indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and
21
<PAGE> 23
indemnity could have been sought hereunder by such indemnified party, unless
such settlement includes an unconditional release of such indemnified party
from all liability on claims that are the subject matter of such proceeding.
(f) To the extent the indemnification provided for in
paragraph (a), (b), (c) or (d) of this Section 9 is unavailable to an
indemnified party or insufficient in respect of any losses, claims, damages or
liabilities referred to therein, then each indemnifying party under such
paragraph, in lieu of indemnifying such indemnified party thereunder, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the indemnifying party
or parties on the one hand and the indemnified party or parties on the other
hand from the offering of the Shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the indemnifying party or parties on the
one hand and of the indemnified party or parties on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company or the Selling
Shareholders on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by each Selling Stockholder and the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover of the Prospectus, bear to the
aggregate Public Offering Price of the Shares. The relative fault of Company or
the Selling Shareholders on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, the
Selling Shareholders or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 9 are several in proportion to the respective number
of Shares they have purchased hereunder, and not joint.
(g) The Company, the Selling Shareholders and the
Underwriters agree that it would not be just or equitable if contribution
pursuant to this Section 9 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable considerations
referred to in paragraph (e) of this Section 9. The amount paid or payable by
an indemnified party as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, 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 9, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages that such Underwriter has otherwise been required to pay by reason
of such untrue
22
<PAGE> 24
or alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The remedies provided for in this
Section 9 are not exclusive and shall not limit any rights or remedies which
may otherwise be available to any indemnified party at law or in equity.
(h) The indemnity and contribution provisions contained in
this Section 9 and the representations, warranties and other statements of the
Company and the Selling Shareholders contained in this Agreement shall remain
operative and in full force and effect regardless of (i) any termination of
this Agreement, (ii) any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter, any Selling Shareholder or any
person controlling any Selling Shareholder, or the Company, its officers or
directors or any person controlling the Company and (iii) acceptance of and
payment for any of the Shares.
10. TERMINATION. This Agreement shall be subject to
termination by notice given by you to the Company, if (a) after the execution
and delivery of this Agreement and prior to the Closing Date (i) trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange or the Nasdaq National Market, (ii)
trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York or Texas shall have been declared by
either Federal or New York or Texas State authorities or (iv) there shall have
occurred any outbreak or escalation of hostilities involving the United States
or any change in financial markets or any calamity or crisis that, in your
judgment, is material and adverse and (b) in the case of any of the events
specified in clauses (a)(i) through (iv), such event, singly or together with
any other such event, makes it, in your judgment, impracticable or inadvisable
to market the Shares on the terms and in the manner contemplated in the
Prospectus.
11. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This
Agreement shall become effective upon the execution and delivery hereof by the
parties hereto.
If, on the Closing Date or the Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares that it has or they have agreed to purchase hereunder on such
date, and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than
one-tenth of the aggregate number of the Shares to be purchased on such date,
the other Underwriters shall be obligated severally in the proportions that the
number of Firm Shares set forth opposite their respective names in Schedule I
or Schedule II bears to the aggregate number of Firm Shares set forth opposite
the names of all such non-defaulting Underwriters, or in such other proportions
as you may specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to this Agreement be increased pursuant to this Section 11 by
an amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If, on the Closing Date, any Underwriter or
Underwriters shall fail or refuse to
23
<PAGE> 25
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Firm Shares to be purchased, and arrangements satisfactory to you and the
Company for the purchase of such Firm Shares are not made within 36 hours after
such default, this Agreement shall terminate without liability on the part of
any non-defaulting Underwriter or the Company. In any such case either you 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. If, on the Option Closing Date, any Underwriter
or Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of the Company to
comply with the terms or to fulfill any of the conditions of this Agreement, or
if for any reason the Company shall be unable to perform its obligations under
this Agreement, the Company will reimburse the Underwriters or such
Underwriters as have so terminated this Agreement with respect to themselves,
severally, for all out-of-pocket expenses (including the fees and disbursements
of their counsel) reasonably incurred by such Underwriters in connection with
this Agreement or the offering contemplated hereunder.
12. COUNTERPARTS. This Agreement may be signed in two
or more counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument.
13. APPLICABLE LAW. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of New York.
14. HEADINGS. The headings of the sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed a part of this Agreement.
15. TIME OF THE ESSENCE. Time shall be of the essence of
this Agreement. As used herein, the term "business day" shall mean any day when
the Commission's office in Washington, D.C. is open for business.
24
<PAGE> 26
Very truly yours,
CORESTAFF, INC.
By
------------------------------------
Name: Michael T. Willis
Title: President
THE SELLING SHAREHOLDERS
NAMED ON SCHEDULE III HERETO
By
------------------------------------
Name: Peter T. Dameris
Title: Attorney-in-Fact
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
GOLDMAN, SACHS & CO.
ALEX. BROWN & SONS
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
MONTGOMERY SECURITIES
THE ROBINSON-HUMPHREY COMPANY, INC.
Acting severally on behalf of themselves
and the several U.S. Underwriters
named in Schedule I hereto.
By Morgan Stanley & Co. Incorporated
By
--------------------------
Name:
Title:
25
<PAGE> 27
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
GOLDMAN SACHS INTERNATIONAL
Acting severally on behalf of themselves
and the several International Underwriters
named in Schedule II hereto.
By Morgan Stanley & Co. International Limited
By
--------------------------
Name:
Title:
26
<PAGE> 28
Schedule I
U.S. Underwriters
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriter To Be Purchased
----------- ---------------
<S> <C>
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Alex. Brown & Sons
Donaldson, Lufkin & Jenrette Securities Corporation
Montgomery Securities
The Robinson-Humphrey Company, Inc.
---------
Total U.S. Firm Shares............................ 5,000,000
=========
</TABLE>
27
<PAGE> 29
Schedule II
International Underwriters
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriter To Be Purchased
----------- ---------------
<S> <C>
Morgan Stanley & Co. International Limited
Goldman, Sachs International
Alex. Brown & Sons
Donaldson, Lufkin & Jenrette Securities Corporation
Montgomery Securities
The Robinson-Humphrey Company, Inc.
---------
Total International Firm Shares.................. 1,000,000
=========
</TABLE>
28
<PAGE> 30
Schedule III
Selling Shareholders
<TABLE>
<CAPTION>
Number of Number of
Firm Shares Additional Shares
Selling Shareholder To Be Sold To Be Sold
------------------- ---------- -----------------
<S> <C> <C>
Golder, Thoma & Cressey Fund III Limited Partnership 5,500,000 0
First Union Corporation 500,000 0
Michael T. Willis 0 900,000
--------- ---------
Total Selling Shareholder Shares..................... 6,000,000 9,000,000
========= =========
</TABLE>
29
<PAGE> 31
Exhibit A
FORM OF LOCK-UP LETTER
____________, 1997
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Alex. Brown & Sons
Donaldson, Lufkin & Jenrette Securities Corporation
Montgomery Securities
The Robinson-Humphrey Company, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
Goldman Sachs International
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co.
Incorporated ("Morgan Stanley") and Morgan Stanley & Co. International Limited
("MSIL") propose to enter into an Underwriting Agreement (the "Underwriting
Agreement") with CORESTAFF, Inc., a Delaware corporation (the "Company")
providing for the public offering (the "Public Offering") by the several
Underwriters, including Morgan Stanley and MSIL (the "Underwriters") of
6,000,000 shares (the "Shares") of the Common Stock, par value $.01 per share,
of the Company (the "Common Stock").
30
<PAGE> 32
To induce the Underwriters that may participate in the Public
Offering to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 45 days after the date of the final
prospectus relating to the Public Offering (the "Prospectus"), (1) offer,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, loan
or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or (2) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to the sale of any
Shares to the Underwriters pursuant to the Underwriting Agreement. In addition,
the undersigned agrees that, without the prior written consent of Morgan Stanley
on behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 45 days after the date of the Prospectus, make any demand
for or exercise any right with respect to, the registration of any shares of
Common Stock or any security convertible into or exercisable or exchangeable for
Common Stock.
Whether or not the Public Offering actually occurs depends on
a number of factors, including market conditions. Any Public Offering will only
be made pursuant to an Underwriting Agreement, the terms of which are subject
to negotiation between the Company and the Underwriters.
Very truly yours,
-------------------------------------
(Name)
-------------------------------------
(Address)
31
<PAGE> 1
EXHIBIT 2.1
Draft of 7/16/97
$180,000,000
CORESTAFF, INC.
___% Convertible Subordinated Notes due 2004
UNDERWRITING AGREEMENT
__________, 1997
<PAGE> 2
_____________, 1997
Morgan Stanley & Co. Incorporated
Alex. Brown & Sons
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
Montgomery Securities
The Robinson-Humphrey Company, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
CORESTAFF, Inc., a Delaware corporation (the "COMPANY"), proposes
to issue and sell to the several Underwriters named in Schedule I hereto (the
"UNDERWRITERS") $180,000,000 principal amount at maturity of its ____%
Convertible Subordinated Notes due 2004 (the "FIRM SECURITIES") to be issued
pursuant to the provisions of an Indenture dated as of __________, 1997 (the
"INDENTURE") between the Company and The Bank of New York, as Trustee (the
"TRUSTEE").
The Company also proposes to issue and sell to the several
Underwriters not more than an additional $27,000,000, (the "ADDITIONAL
SECURITIES") if and to the extent that the Representatives shall have
determined to exercise, on behalf of the Underwriters, the right to purchase
such shares of common stock granted to the Underwriters in Section 2 hereof.
The Firm Securities and the Additional Securities are hereinafter collectively
referred to as the "SECURITIES."
The ___% Convertible Subordinated Notes due 2004 to be issued
pursuant to the Indenture after giving effect to the sales contemplated hereby
are hereinafter referred to as the "SECURITIES." The shares of common stock,
par value $.01 per share, of the Company (the "COMMON STOCK") issuable upon
conversion of the Securities are hereinafter referred to as the "SHARES."
The Company has filed with the Securities and Exchange Commission
(the "COMMISSION") a registration statement relating to the Securities. The
registration statement as amended at the time it becomes effective, including
the information (if any) deemed to be part of the registration statement at the
time of effectiveness pursuant to Rule 430A under the Securities Act of 1933,
as amended (the "SECURITIES ACT"), is hereinafter referred to as the
"Registration
<PAGE> 3
Statement"; the U.S. prospectus and the international prospectus in the
respective forms first used to confirm sales of Shares are hereinafter
collectively referred to as the "PROSPECTUS" (including, in the case of all
references to the Registration Statement or the Prospectus, documents
incorporated therein by reference). The terms "supplement" and "amendment" or
"amend" as used in this Agreement with respect to the Registration Statement or
Prospectus shall include all documents subsequently filed by the Company with
the Commission pursuant to the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), that are deemed to be incorporated by reference in the
Prospectus. If the Company has filed an abbreviated registration statement to
register additional shares of Common Stock pursuant to Rule 462(b) under the
Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference
herein to the term "REGISTRATION STATEMENT" shall be deemed to include such
Rule 462 Registration Statement.
1. REPRESENTATIONS AND WARRANTIES. The Company represents
and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) Each document, if any, filed or to be filed pursuant
to the Exchange Act and incorporated by reference in the Prospectus
complied or will comply when so filed in all material respects with the
Exchange Act and the applicable rules and regulations of the Commission
thereunder, (ii) the Registration Statement, when it became effective,
did not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (iii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iv)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph 1(b) do not apply to (A) statements or omissions in the
Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein or (B) that part of
the Registration Statement that constitutes the Statement of Eligibility
(Form T-1) under the Trust Indenture Act of 1939, as amended (the "TRUST
INDENTURE ACT"), of the Trustee.
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State
of Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the
2
<PAGE> 4
conduct of its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated,
is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its business
or its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole; all of the issued shares of capital
stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and (except for
directors' qualifying shares and except as set forth in the Prospectus)
are owned directly by the Company, free and clear of all liens,
encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and
delivered by the Company.
(f) The Indenture has been duly qualified under the Trust
Indenture Act and has been duly authorized, executed and delivered by
the Company and is a valid and binding agreement of the Company,
enforceable in accordance with its term, subject to applicable
bankruptcy, insolvency or similar laws affecting creditors' rights
generally and general principles of equity; and the Indenture will be
substantially in the same form as filed as an exhibit to the
Registration Statement.
(g) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(h) The Company has duly authorized and reserved for issuance
a number of shares of Common Stock equal to the number of Shares to be
issued upon the conversion of the Securities, and when issued pursuant
to conversion of the Securities in accordance with the Indenture, the
Shares will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not violate any preemptive or similar
rights.
(i) The Securities have been duly authorized and, when
executed and authenticated in accordance with the provisions of the
Indenture and delivered to and paid for by the Underwriters in
accordance with the terms of this Agreement, will be entitled to the
benefits of the Indenture and will be valid and binding obligations of
the Company, enforceable in accordance with their terms, subject to
applicable bankruptcy, insolvency and similar laws affecting creditors'
rights generally and general principles of equity.
3
<PAGE> 5
(j) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement, the
Indenture and the Securities will not contravene any provision of
applicable law or the Certificate of Incorporation or By-laws of the
Company or any agreement or other instrument binding upon the Company or
any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company
or any subsidiary, and no consent, approval, authorization or order of,
or qualification with, any governmental body or agency is required for
the performance by the Company of its obligations under this Agreement,
the Indenture and the Securities except such as may be required by the
securities or Blue Sky laws of the various states in connection with the
offer and sale of the Securities.
(k) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(l) There are no legal or governmental proceedings pending or,
to the Company's knowledge after due inquiry, threatened to which the
Company or any of its subsidiaries is a party or to which any of the
properties of the Company or any of its subsidiaries is subject that are
required to be described in the Registration Statement or the Prospectus
and are not so described or any statutes, regulations, contracts or
other documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(m) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder.
(n) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended.
(o) The Company and its subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
4
<PAGE> 6
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(p) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(q) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares
registered pursuant to the Registration Statement, except for rights
under such contracts or agreements that have been waived by all persons
holding such rights.
(r) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government
of Cuba or with any person or affiliate located in Cuba.
(s) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default
in the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which
it is a party or by which it or any of its properties may be bound.
(t) The statements set forth in the Prospectus under the
caption "Description of the Notes," insofar as they purport to
constitute a summary of the terms of the Securities, are accurate,
complete and fair.
(u) Ernst & Young LLP who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder.
(v) The Company owns or possesses adequate licenses or other
rights to use all trademarks, service marks, trade names, copyrights,
and know-how necessary to conduct the business now or proposed to be
conducted by the Company as described in the Prospectus, and, except as
disclosed in the Prospectus, the Company has not received any notice of
infringement of or conflict with (and knows of no such infringement of
or conflict with) asserted rights of others with respect to trademarks,
service marks, trade names, copyrights,
5
<PAGE> 7
or know-how which, individually or in the aggregate, is reasonably
likely to result in any material adverse effect upon the financial
position, stockholders' equity or results of operations of the Company;
and, except as disclosed in the Prospectus and to the knowledge of the
Company, the Company does not, in the conduct of its business as now or
proposed to be conducted as described in the Prospectus, infringe or
conflict with any right of any third party, known to the Company, where
such infringement or conflict is reasonably likely to result in any
material adverse effect upon the financial position, stockholders'
equity or results of operations of the Company.
(w) The Company has obtained any permits, consents and
authorizations required to be obtained by it under laws or regulations
relating to its business, including, without limitation, laws or
regulations relating to the operation and sales of franchises
(collectively, "LAWS"), and any such permits, consents and
authorizations remain in full force and effect, except as to any of the
foregoing the absence of which (individually or in the aggregate) will
not have a material adverse effect on the financial position,
stockholders' equity or results of operations of the Company; and the
Company is in compliance with the Laws in all material respects, and
there is no pending or, to the Company's knowledge, threatened, action
or proceeding against the Company for violation of any Law, other than
any such actions or proceedings which, individually or in the aggregate,
if adversely determined, is not reasonably likely to have a material
adverse effect on the financial position, stockholders' equity or
results of operations of the Company.
(x) The Company (i) has timely and properly prepared and filed
all federal, state and local income and franchise tax returns required
to be filed through the date hereof and has paid all taxes due thereon,
and has furnished all information returns it is required to furnish
pursuant to the Internal Revenue Code of 1986, as amended, (ii) the
charges, accruals and reserves on the consolidated books of the Company
in respect of any income, franchise or corporation tax liability for any
years not fully determined are reasonable and have been recorded on a
basis in conformance with generally accepted accounting principles, and
(iii) does not have any tax deficiency or claims outstanding, assessed
or to its knowledge, proposed against it which is reasonably likely to
result in any material adverse effect upon the financial position,
stockholders' equity or results of operations of the Company.
(y) The Company maintains insurance of the types and in the
amounts which the Company reasonably believes are adequate for its
business and consistent with insurance coverage maintained by similar
companies in similar businesses, including but not limited to, workers'
compensation insurance, insurance covering real and personal property
owned or leased by the Company against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against, all of
which insurance is in full force and effect.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby
agrees to sell to the several Underwriters, and each Underwriter, upon the
basis of the representations and warranties herein contained, but subject to
the conditions hereinafter stated, agrees, severally and not jointly,
6
<PAGE> 8
to purchase from the Company the respective principal amounts at maturity of
Securities set forth in Schedule I hereto opposite its name at _____% of their
principal amount at maturity plus (the "PURCHASE PRICE") accrued interest, if
any, from _____________, 1997 to the date of payment and delivery.
On the basis of the representations and warranties contained in
this Agreement, and subject to its terms and conditions, the Company agrees to
sell to the Underwriters the Additional Securities, and the Underwriters shall
have a one-time right to purchase, severally and not jointly, up to $27,000,000
Additional Securities at the Purchase Price. If the Representatives, on
behalf of the Underwriters, elect to exercise such option, the Representatives
shall so notify the Company in writing not later than 30 days after the date of
this Agreement, which notice shall specify the number of Additional Securities
to be purchased by the Underwriters and the date on which such Securities are
to be purchased. Such date may be the same as the Closing Date (as defined
below) but not earlier than the Closing Date nor later than ten business days
after the date of such notice. Additional Securities may be purchased as
provided in Section 4 hereof solely for the purpose of covering over-allotments
made in connection with the offering of the Firm Securities. If any Additional
Securities are to be purchased, each Underwriter agrees, severally and not
jointly, to purchase the principal amount at maturity of Additional Securities
that bears the same proportion to the total number of Additional Securities to
be purchased as the number of Firm Securities set forth in Schedule I hereto
opposite the name of such Underwriter bears to the total principal amount at
maturity of Firm Securities.
The Company hereby agrees that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will
not, during the period ending 90 days after the date of the Prospectus, (i)
offer, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, loan or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to, with respect to the Company: (A) the Shares to be sold
hereunder; (B) the issuance by the Company of shares of Common Stock upon the
exercise of an option or warrant or the conversion of a security outstanding on
the date hereof of which the Underwriters have been advised in writing; or (C)
any shares of Common Stock issued as payment of any part of the purchase price
for acquisitions of businesses by the Company. The Company further agrees that,
without the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the Underwriters, it will not, during the period beginning on the date hereof
and continuing to and including the Closing Date, not offer, sell, contract to
sell or otherwise dispose of any debt securities of the Company or warrants to
purchase
7
<PAGE> 9
or otherwise acquire debt securities of the Company substantially similar to
the Securities (other than (i) the Securities and (ii) commercial paper issued
in the ordinary course of business).
3. TERMS OF PUBLIC OFFERING. The Company is advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Securities as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable. The Company
is further advised by you that the Securities are to be offered to the public
initially at ____% of their principal amount at maturity (the "PUBLIC OFFERING
PRICE") plus accrued interest, if any, from __________________, 1997 to the
date of payment and delivery and to certain dealers selected by you at a price
that represents a concession not in excess of ____% of their principal amount
at maturity, and that any Underwriter may allow, and such dealers may reallow,
a concession, not in excess of ____% of their principal amount at maturity, to
any Underwriter or to certain other dealers.
4. PAYMENT AND DELIVERY. Payment for the Firm Securities to
be sold by the Company shall be made to the Company in Federal or other funds
immediately available in New York City against delivery of such Firm Securities
for the respective accounts of the several Underwriters at 10:00 A.M., New York
City time, on ____________, 1997, or at such other time on the same or such
other date, not later than _________, 1997, as shall be designated in writing
by you. The time and date of such payment are hereinafter referred to as the
"CLOSING DATE."
Payment for any Additional Securities shall be made to the
Company in Federal or other funds immediately available in New York City
against delivery of such Additional Securities for the respective accounts of
the several Underwriters at 10:00 A.M., New York City time, on the date
specified in the notice described in Section 2 or at such other time on the
same or on such other date, in any event not later than _______, 1997, as shall
be designated in writing by the Representatives. The time and date of such
payment are hereinafter referred to as the "OPTION CLOSING DATE."
The Firm Securities and Additional Securities shall be prepared
in definitive form and registered in such names and in such denominations as
you shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be, with any transfer
taxes payable in connection with the transfer of the Securities to the
Underwriters duly paid, against payment of the Purchase Price therefor.
5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The
obligations of the Company to sell the Securities to the Underwriters and the
several obligations of the Underwriters to purchase and pay for the Securities
on the Closing Date are subject to the condition that the Registration
Statement shall have become effective not later than 5:00 P.M. (New York City
time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
8
<PAGE> 10
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating
accorded any of the Company's securities by any "nationally
recognized statistical rating organization," as such term is
defined for purposes of Rule 436(g)(2) under the Securities Act;
and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole,
from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement) that, in your judgment, is material and adverse and
that makes it, in your judgment, impracticable to market the
Shares on the terms and in the manner contemplated in the
Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in clause (a)(i) above and to
the effect that the representations and warranties of the Company
contained in this Agreement are true and correct as of the Closing Date
and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date.
The officer signing and delivering such certificate may
rely upon the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date
an opinion of Vinson & Elkins, L.L.P., outside counsel for the Company,
dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the State of
Delaware, has the corporate power and authority to own its
property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a
whole;
(ii) each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
9
<PAGE> 11
incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a
whole;
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof contained
in the Prospectus;
(iv) the shares of Common Stock outstanding prior to the
issuance of the Securities have been duly authorized and are
validly issued, fully paid and non-assessable;
(v) the Indenture has been duly qualified under the
Trust Indenture Act and has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of
the Company, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally and general principles of equity.
(vi) the Securities have been duly authorized and, when
executed and authenticated in accordance with the provisions of
the Indenture and delivered to and paid for by the Underwriters
in accordance with the terms of this Agreement, will be entitled
to the benefits of the Indenture and will be valid and binding
obligations of the Company, enforceable in accordance with their
terms, subject to applicable bankruptcy, insolvency or similar
laws affecting creditors' rights generally and general principles
of equity.
(vii) all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized
and issued, are fully paid and non-assessable and are owned
directly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(viii) the Shares have been duly authorized and reserved
for issuance upon conversion of the Securities and, when issued
and delivered in accordance with the terms of the Indenture and
the Securities, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights;
(ix) this Agreement has been duly authorized, executed
and delivered by the Company;
10
<PAGE> 12
(x) the execution and delivery by the Company of, and
the performance by the Company of its obligations under, this
Agreement will not contravene any provision of applicable law or
the certificate of incorporation or by-laws of the Company or, to
the best of such counsel's knowledge, any agreement or other
instrument binding upon the Company or any of its subsidiaries
that is material to the Company and its subsidiaries, taken as a
whole, or, to the best of such counsel's knowledge, any judgment,
order or decree of any governmental body, agency or court having
jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by
the Company of its obligations under this Agreement, except such
as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the
Securities by the Underwriters;
(xi) the statements (A) in the Prospectus under the
captions "Description of Capital Stock," "Description of the
Notes" and, with respect to the summary of this Agreement and
Exhibit A hereto, "Underwriters" and (B) in the Registration
Statement in Item 15, in each case insofar as such statements
constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly present the information
called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;
(xii) after due inquiry, such counsel does not know of
any legal or governmental proceedings pending or threatened to
which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its
subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described
or of any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(xiii) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as such term is defined in the Investment
Company Act of 1940, as amended;
(xiv) except as described in the Prospectus or as have
been waived at the Closing Date, there are no persons with
registration or similar rights to have any securities of the
Company registered pursuant to the Registration Statement or
otherwise registered by the Company under the Securities Act or
the Exchange Act pursuant to any agreement or instrument known to
us after due inquiry to which the Company is a party; and
11
<PAGE> 13
(xv) such counsel (A) is of the opinion that each
document, if any, filed pursuant to the Exchange Act and
incorporated by reference in the Prospectus (except for financial
statements and schedules as to which such counsel need not
express any opinion) complied when so filed as to form in all
material respects with the Exchange Act and the rules and
regulations of the Commission thereunder, (B) is of the opinion
that the Registration Statement and Prospectus (except for
financial statements and schedules and other financial and
statistical data included therein as to which such counsel need
not express any opinion) comply as to form in all material
respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder, (C) has no reason to
believe that (except for financial statements and schedules and
other financial and statistical data as to which such counsel
need not express any belief and except for that part of the
Registration Statement that constitutes the Form T-1 heretofore
referred to) the Registration Statement and the prospectus
included therein at the time the Registration Statement became
effective contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (D)
has no reason to believe that (except for financial statements
and schedules and other financial and statistical data as to
which such counsel need not express any belief) the Prospectus
contains any untrue statement of a material fact or omits 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.
(d) The Underwriters shall have received on the Closing Date
an opinion of Andrews & Kurth L.L.P., counsel for the Underwriters,
dated the Closing Date, covering the matters referred to in Sections
5(c)(vi), 5(c)(xi) (but without limitation to "Underwriters") and
5(c)(xv)(B)-(D) above.
With respect to subparagraph (xv) of paragraph (c) above, Vinson
& Elkins, L.L.P. and Andrews & Kurth L.L.P., may state that their
opinion and belief are based upon their participation and preparation of
the Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents thereof,
but are without independent check or verification, except as specified.
The opinion of Vinson & Elkins, L.L.P. on behalf of the Company
shall be rendered to the Underwriters at the request of the Company and
shall so state therein.
(e) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from Ernst & Young LLP, independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in or incorporated by reference into the
Registration
12
<PAGE> 14
Statement and the Prospectus; provided that the letter delivered on the
Closing Date shall use a "cut-off date" not earlier than the date
hereof.
(f) The "lock-up" agreements, each substantially in the form
of Exhibit A hereto, between you and certain stockholders, officers and
directors of the Company relating to sales and certain other
dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full force
and effect on the Closing Date; provided, such agreement with respect to
certain stockholders selling shares of Common Stock in a contemporanous
offering shall deliver agreements with a period of 90 days.
(g) The Securities to be sold on the Closing Date shall have
been duly approved, subject to notice of issuance, for quotation on the
Nasdaq National Market.
(h) The several obligations of the Underwriters to purchase
Additional Securities hereunder are subject to the delivery to the
Representatives on the Option Closing Date of such documents as they may
reasonably request with respect to the good standing of the Company, the
due authorization and issuance of the Additional Securities and other
matters related to the issuance of the Additional Securities.
6. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with
each Underwriter as follows:
(a) To furnish to you, without charge, 13 signed copies of the
Registration Statement (including exhibits thereto and any documents
incorporated therein by reference) and for delivery to each other
Underwriter a conformed copy of the Registration Statement (without
exhibits thereto but including documents incorporated therein by
reference) and to furnish to you in New York City, without charge, prior
to 10:00 A.M. New York City time on the business day next succeeding the
date of this Agreement and during the period mentioned in paragraph (c)
below, as many copies of the Prospectus, any documents incorporated
therein by reference and any supplements and amendments thereto or to
the Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file with
the Commission within the applicable period specified in Rule 424(b)
under the Securities Act any prospectus required to be filed pursuant to
such Rule.
(c) If, during such period after the first date of the public
offering of the Securities as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall occur
or condition exist as a result of which it is necessary to amend or
supplement the Prospectus
13
<PAGE> 15
in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the Prospectus to comply with
applicable law, forthwith to prepare, file with the Commission and
furnish, at its own expense, to the Underwriters and to the dealers
(whose names and addresses you will furnish to the Company) to which
Securities may have been sold by you on behalf of the Underwriters and
to any other dealers upon request, either amendments or supplements to
the Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Securities for offer and sale
under the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement covering
the twelve-month period ending September 30, 1998 that satisfies the
provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(f) To apply the net proceeds from the sale of the Securities
as set forth in the Prospectus.
(g) The Company has reserved and will continue to reserve, as
long as any Securities are outstanding, a sufficient number of shares of
Common Stock for issuance upon conversion of the Securities.
(h) The Company will not voluntarily claim and will actively
resist any attempts to claim, the benefit of any usury laws against
holders of the Securities.
(i) the outstanding shares of Common Stock are quoted on the
Nasdaq National Market, and prior to the Closing Date, the Company will
have accomplished the inclusion, subject only to notice of issuance, of
the Securities and the Shares for quotation on the Nasdaq National
Market.
7. EXPENSES. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, (a) the Company
agrees to pay or cause to be paid all expenses incident to the performance of
the Company and its obligations under this Agreement, including: (i) the fees,
disbursements and expenses of the Company's counsel and the Company's
accountants in connection with the registration and delivery of the Shares
under the Securities Act and all other fees or expenses in connection with the
preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs
14
<PAGE> 16
and expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii) the
cost of printing or producing any Blue Sky or Legal Investment memorandum in
connection with the offer and sale of the Securities under state securities
laws and all expenses in connection with the qualification of the Securities
for offer and sale under state securities laws as provided in Section 7(d)
hereof, including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky or Legal Investment memorandum, (iv) all filing
fees and disbursements of counsel to the Underwriters incurred in connection
with the review and qualification of the offering of the Securities by the
National Association of Securities Dealers, Inc., (v) all costs and expenses
incident to listing the Securities and Shares issuable upon conversion of the
Securities on the Nasdaq National Market, (vi) the cost of printing
certificates representing the Shares, (vii) the costs and charges of any
trustee, transfer agent, registrar or depositary, (viii) all fees and expenses
in connection with the preparation and filing of the registration statement on
Form 8-A relating to the Securities, (ix) any fees or expenses charged by
investment rating agencies for the rating of the Securities and (x) all other
costs and expenses incident to the performance of the obligations of the
Company hereunder for which provision is not otherwise made in this Section.
8. INDEMNITY AND CONTRIBUTION. (a) The Company agrees 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
Securities Act or Section 20 of the Exchange Act from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the
Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto), 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, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the directors of the Company, the
officers of the Company who sign the Registration Statement and each person, if
any, who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the
Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto), 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 Underwriter furnished to the Company
in writing by such Underwriter
15
<PAGE> 17
through you expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to paragraph (a) or (b) of this Section 8,
such person (the "INDEMNIFIED PARTY") shall promptly notify the person against
whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding
and shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel, but the fees and expenses of such counsel shall be
at the expense of such indemnified party unless (i) the indemnifying party and
the indemnified party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. It
is understood that the indemnifying party shall not, in respect of the legal
expenses of any indemnified party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for (i) the fees and expenses
of more than one separate firm (in addition to any local counsel) for all
Underwriters and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act and (ii) the fees and expenses of more than one separate firm (in
addition to any local counsel) for 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, and that all such fees and
expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters and such control persons of any
Underwriters, such firm shall be designated in writing by Morgan Stanley & Co.
Incorporated. In the case of any such separate firm for the Company, and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnity the indemnified party
from and against any loss or liability by reason of such settlement or
judgment. Notwithstanding the foregoing sentence, if at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by the
second and third sentences of this paragraph, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party, unless such
settlement
16
<PAGE> 18
includes an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in
paragraph (a) or (b) of this Section 8 is unavailable to an indemnified party
or insufficient in respect of any losses, claims, damages or liabilities
referred to therein, then each indemnifying party under such paragraph, in lieu
of indemnifying such indemnified party thereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the indemnifying party or parties on
the one hand and the indemnified party or parties on the other hand from the
offering of the Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the indemnifying party or parties on the one hand
and of the indemnified party or parties on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other hand in connection with the offering of the Securities shall be
deemed to be in the same respective proportions as the net proceeds from the
offering of the Securities (before deducting expenses) received by the Company
and the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover of the
Prospectus, bear to the aggregate Public Offering Price of the Securities. The
relative fault of Company on the one hand and the Underwriters on the other
hand shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Underwriters' respective obligations to contribute pursuant to
this Section 8 are several in proportion to the respective number of Securities
they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not
be just or equitable if contribution pursuant to this Section 8 were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account
of the equitable considerations referred to in paragraph (e) of this Section 8.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, 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, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of
17
<PAGE> 19
such fraudulent misrepresentation. The remedies provided for in this Section 8
are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in
this Section 8 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force
and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its officers or directors or any person
controlling the Company and (iii) acceptance of and payment for any of the
Securities.
9. TERMINATION. This Agreement shall be subject to
termination by notice given by you to the Company, if (a) after the execution
and delivery of this Agreement and prior to the Closing Date (i) trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange or the Nasdaq National Market, (ii)
trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York or Texas shall have been declared by
either Federal or New York or Texas State authorities or (iv) there shall have
occurred any outbreak or escalation of hostilities involving the United States
or any change in financial markets or any calamity or crisis that, in your
judgment, is material and adverse and (b) in the case of any of the events
specified in clauses (a)(i) through (iv), such event, singly or together with
any other such event, makes it, in your judgment, impracticable or inadvisable
to market the Securities on the terms and in the manner contemplated in the
Prospectus.
10. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement
shall become effective upon the execution and delivery hereof by the parties
hereto.
If, on the Closing Date or the Option Closing Date, as the case
may be, any one or more of the Underwriters shall fail or refuse to purchase
the Securities that it has or they have agreed to purchase hereunder on such
date, and the aggregate principal amount at maturity of Securities which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
is not more than one-tenth of the aggregate principal amount at maturity of
Securities to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the aggregate principal amount at
maturity of Securities of Firm Securities set forth opposite their respective
names in Schedule I bears to the aggregate principal amount at maturity of Firm
Securities set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Securities which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date; provided that in no event shall the
principal amount at maturity of Securities that any Underwriter has agreed to
purchase pursuant to this Agreement be increased pursuant to this Section by an
amount in excess of one-ninth of such aggregate principal amount at maturity of
Securities without the written consent of such Underwriter. If, on the Closing
Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm
Securities and the aggregate principal amount at maturity of Firm Securities
with respect to which such default occurs
18
<PAGE> 20
is more than one-tenth of the aggregate principal amount at maturity of Firm
Securities to be purchased, and arrangements satisfactory to you and the
Company for the purchase of such Firm Securities are not made within 36 hours
after such default, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriter or the Company. In any such case
either you 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. If, on the Option Closing Date, any
Underwriter or Underwriters shall fail or refuse to purchase Additional
Securities and the aggregate principal amount at maturity of Additional
Securities with respect to which such default occurs is more than one-tenth of
the aggregate principal amount at maturity of Additional Securities to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Securities or (ii)
purchase not less than the principal amount at maturity of Additional
Securities that such non-defaulting Underwriters would have been obligated to
purchase in the absence of such default. Any action taken under this paragraph
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any
of them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for
all out-of-pocket expenses (including the fees and disbursements of their
counsel) reasonably incurred by such Underwriters in connection with this
Agreement or the offering contemplated hereunder.
11. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
12. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
13. HEADINGS. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
14. TIME OF THE ESSENCE. Time shall be of the essence of this
Agreement. As used herein, the term "business day" shall mean any day when the
Commission's office in Washington, D.C. is open for business.
19
<PAGE> 21
Very truly yours,
CORESTAFF, INC.
By
----------------------------
Name: Michael T. Willis
Title: President
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
ALEX. BROWN & SONS
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MONTGOMERY SECURITIES
THE ROBINSON-HUMPHREY COMPANY, INC.
Acting severally on behalf of themselves
and the several Underwriters
named in Schedule I hereto.
By Morgan Stanley & Co. Incorporated
By
--------------------------
Name:
Title:
20
<PAGE> 22
Schedule I
Underwriters
<TABLE>
<CAPTION>
Aggregate
Principal Amount
at Maturity of
Firm Securities
Underwriter To Be Purchased
----------- ---------------
<S> <C>
Morgan Stanley & Co. Incorporated $
Alex. Brown & Sons
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
Montgomery Securities
The Robinson-Humphrey Company, Inc.
----------------
Total Firm Securities . . . . . . . . . . . . . . $ 180,000,000
================
</TABLE>
21
<PAGE> 23
Exhibit A
FORM OF LOCK-UP LETTER
____________, 1997
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Alex. Brown & Sons
Donaldson, Lufkin & Jenrette Securities Corporation
Montgomery Securities
The Robinson-Humphrey Company, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
Goldman Sachs International
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co.
Incorporated ("Morgan Stanley") proposes to enter into an Underwriting
Agreement (the "Underwriting Agreement") with CORESTAFF, Inc., a Delaware
corporation (the "Company") providing for the public offering (the "Public
Offering") by the several Underwriters, including Morgan Stanley and MSIL (the
"Underwriters") of ___% Convertible Subordinated Notes due 2004, which are
convertible into shares of Common Stock, par value $.01 per share, of the
Company (the "Common Stock").
To induce the Underwriters that may participate in the Public
Offering to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 45 days after the date of the final
prospectus relating to the Public Offering (the "Prospectus"), (1) offer, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, loan or
otherwise transfer or dispose of, directly or indirectly, any shares of
22
<PAGE> 24
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or (2) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the Common Stock, whether any such transaction described in clause
(1) or (2) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to
the sale of any Shares to the Underwriters pursuant to the Underwriting
Agreement. In addition, the undersigned agrees that, without the prior written
consent of Morgan Stanley on behalf of the Underwriters, it will not, during
the period commencing on the date hereof and ending 45 days after the date of
the Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a
number of factors, including market conditions. Any Public Offering will only
be made pursuant to an Underwriting Agreement, the terms of which are subject
to negotiation between the Company and the Underwriters.
Very truly yours,
------------------------------
(Name)
------------------------------
(Address)
23
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION OF
CORESTAFF, INC.
CORESTAFF, Inc. (the "CORPORATION"), a corporation organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation
adopted resolutions on March 20, 1997 proposing and declaring advisable the
following amendment to the First Amended and Restated Certificate of
Incorporation and directing that the amendment proposed be considered by the
stockholders of the Corporation:
RESOLVED, that the Board of Directors of the Corporation does
hereby propose and declare advisable an amendment to the First Amended and
Restated Certificate of Incorporation of the Corporation to amend Article 4 so
that paragraph A of such Article reads in its entirety as follows:
Article 4.
A. AUTHORIZED SHARES. The total number of
shares of capital stock which the Corporation has authority to
issue is 108,000,000 shares, consisting of:
1. 100,000,000 shares of Common Stock,
par value $.01 per share (the "Common Stock");
2. 3,000,000 shares of Class B
Non-Voting Common Stock par value $.01 per share (the
"Class B Non-Voting Common Stock") and
3. 5,000,000 shares of Preferred Stock,
par value $.01 per share (the "Preferred Stock").
The Common Stock and the Class B Non-Voting Common
Stock are herein collectively referred to as the
"Common Equity."
SECOND: That the amendment referred to herein was duly
authorized by a majority of the outstanding stock entitled to vote there on at
he annual meeting of the stockholders on May, 6, 1997.
<PAGE> 2
THIRD: That the aforesaid amendments have been duly adopted
in accordance with the applicable provisions of Section 242 of the Delaware
General Corporation Law.
FOURTH: That this Certificate of Amendment of the Certificate
of Incorporation has been executed and acknowledged and shall be filed and
recorded in accordance with Section 103 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, CORESTAFF, Inc. has caused this
Certificate to be signed by its Chief Executive Officer and attested by its
Secretary, this 14th day of July, 1997.
CORESTAFF, Inc.
By: /s/ MICHAEL T. WILLIS
-------------------------------------
Michael T. Willis
Chief Executive Officer and President
ATTEST:
By: /s/ PETER T. DAMERIS
-------------------------
Peter T. Dameris
Secretary
<PAGE> 3
PAGE 1
State of Delaware
Office of the Secretary of State
___________________________
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "CORESTAFF, INC.", FILED IN THIS OFFICE ON THE FOURTEENTH DAY OF
JULY, A.D. 1997, AT 4:30 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ EDWARD J. FREEL
[SEAL] -------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 8557682
DATE: 07-15-97
<PAGE> 1
(713) 758-2222 (713) 758-2346
July 17, 1997
CORESTAFF, Inc.
4400 Post Oak Parkway, Suite 1130
Houston, Texas 77027
Ladies and Gentlemen:
We have acted as counsel to CORESTAFF, Inc., a Delaware corporation
("CORESTAFF"), in connection with the preparation of the Registration Statement
on Form S-3 (the "Registration Statement") filed on July 17, 1997, with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to (a) CORESTAFF's (i)
Convertible subordinated notes due 2004 (the "Notes"), which may be convertible
into common stock, par value $.01 per share, of CORESTAFF ("Common Stock") and
(ii) shares of Common Stock (such Notes and Common Stock are collectively
referred to herein as the "Securities"), which Securities may be issued for an
aggregate initial offering price not to exceed $413,137,500, plus such amounts
for the registration of additional Securities pursuant to Rule 462(b) under the
Securities Act.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of (i) the Restated Certificate of Incorporation and Bylaws
of CORESTAFF, each as amended to the date hereof, (ii) the Indenture (the
"Indenture") to be entered into between CORESTAFF and a trustee, in the form to
be included as an exhibit to the Registration Statement and (iii) such other
certificates, statutes and other instruments and documents as we considered
appropriate for purposes of the opinions hereafter expressed.
In connection with this opinion, we have assumed that (i) the
Registration Statement, and any amendments thereto (including post-effective
amendments), and the Rule 462(b) Registration Statement (if any) will have
become effective; (ii) all Securities will be issued and sold in compliance with
applicable federal and state securities laws and in the manner described in the
Registration Statement and the applicable Prospectus; (iii) the Indenture will
be duly authorized, executed and delivered by CORESTAFF and a trustee qualified
under the Trust Indenture Act of 1939, as amended (the "TIA"), in substantially
the form reviewed by us; (iv)
<PAGE> 2
CORESTAFF, Inc.
Page 2
July 17, 1997
a definitive underwriting or similar agreement with respect to any
Securities offered will have been duly authorized and validly executed and
delivered by CORESTAFF and the other parties thereto; and (vi) any Securities
issuable upon conversion of the Notes being offered will have been duly
authorized, created and, if appropriate, reserved for issuance upon such
conversion.
Based on the foregoing, we are of the opinion that:
1. With respect to Notes to be issued under the Indenture, when
(i) the Indenture has been duly qualified under the TIA; (ii) the Board of
Directors of CORESTAFF or, to the extent permitted by Section 141 of the
Delaware General Corporation Act (the "DGCL"), a duly constituted and acting
committee thereof (such Board of Directors or committee being referred to herein
as the "Board") has taken all necessary corporate action to approve the issuance
and terms of such Notes, the terms of the offering thereof and related matters;
(iii) the terms of such Notes and of their issuance and sale have been
established so as not to violate any applicable law or result in a default under
or breach of any agreement or instrument binding upon CORESTAFF and so as to
comply with any requirement or restriction imposed by any court or governmental
body having jurisdiction over CORESTAFF; and (iv) such Notes have been duly
executed, authenticated, issued and delivered in accordance with the provisions
of the Indenture and in accordance with the applicable definitive underwriting
or similar agreement approved by the Board upon payment of the consideration
provided for therein, such Notes will be legally issued and will constitute
valid and binding obligations of CORESTAFF, enforceable against CORESTAFF in
accordance with their terms, except as such enforcement is subject to any
applicable bankruptcy, insolvency, reorganization or other law relating to or
affecting creditors' rights generally and general principles of equity and will
be entitled to the benefits of the Indenture.
<PAGE> 3
CORESTAFF, Inc.
Page 3
July 17, 1997
2. With respect to shares of Common Stock, when (i) the Board has
taken all necessary corporate action to approve the issuance and terms of the
offering thereof and related matters; and (ii) certificates representing the
shares of Common Stock have been duly executed, countersigned, registered and
delivered either (a) in accordance with the applicable definitive underwriting
or similar agreement approved by the Board upon payment of the consideration
therefor (not less than the par value of the Common Stock) provided for therein,
or (b) upon conversion of the Notes in accordance with the terms of such Notes
providing for such conversion, as approved by the Board, for the consideration
approved by the Board (not less than the par value of the Common Stock), the
shares of Common Stock will be duly authorized, validly issued, fully paid and
non-assessable.
The foregoing opinions are limited in all respects to the laws of the
State of New York, the General Corporation Law of the State of Delaware and
federal laws.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. By giving such consent, we do not admit that we are
within the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the Commission issued
thereunder.
Very truly yours,
/s/ VINSON & ELKINS L.L.P.
VINSON & ELKINS L.L.P.
<PAGE> 1
EXHIBIT 12.1
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Inception
(July 16,
1993)
through Three Months
December 31, Year Ended December 31, Ended March 31,
------------ ----------------------- ---------------
1993 1994 1995 1996 1996 1997
----------- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Consolidated pretax income
from continuing operations (395) 2,771 10,947 31,003 4,602 9,923
Fixed charges per below 27 2,786 8,358 6,514 1,626 2,771
Less interest capitalized during the period 0 0 0 (115) 0 0
----------- ----- ------ ------ ------ ------
Earnings (368) 5,497 19,305 37,402 6,228 12,694
----------- ----- ------ ------ ------ ------
Interest 16 2,276 6,978 4,656 1,285 2,203
Interest portion of rental expense 11 408 834 1,439 259 542
Net amortization of debt issuance costs 0 102 546 304 82 26
Interest capitalized during the period 0 0 0 115 0 0
----------- ----- ------ ------ ------ ------
Fixed Charges 27 2,786 8,358 6,514 1,626 2,771
----------- ----- ------ ------ ------ ------
Ratio of Earnings to Fixed Charges (13.6) 2.0 2.3 5.7 3.8 4.6
=========== ===== ====== ====== ====== ======
Consolidated pretax income
from continuing operations 31,003 4,602 9,923
Fixed charges per below 5,158 1,330 2,531
Interest expense difference 725 152 99
Less interest capitalized during the period (115) 0 0
------ ------ ------
Earnings 36,771 6,084 12,553
------ ------ ------
Interest 3,300 989 1,963
Interest portion of rental expense 1,439 259 542
Net amortization of debt issuance costs 304 82 26
Interest capitalized during the period 115 0 0
------ ------ ------
Fixed Charges 5,158 1,330 2,531
------ ------ ------
Pro Forma Ratio of Earnings to Fixed Charges 7.1 4.6 5.0
====== ====== ======
Consolidated pro forma pretax income
from continuing operations 35,516 5,784 10,404
Fixed charges per below 13,569 3,927 2,744
Interest expense difference 3,119 977 166
Less interest capitalized during the period (115) 0 0
------ ------ ------
Earnings 52,089 10,688 13,314
------ ------ ------
Interest 11,192 3,417 2,160
Interest portion of rental expense 1,958 428 558
Net amortization of debt issuance costs 304 82 26
Interest capitalized during the period 115 0 0
------ ------ ------
Fixed Charges 13,569 3,927 2,744
------ ------ ------
Supplemental Pro Forma Ratio of Earnings to Fixed Charges 3.8 2.7 4.9
====== ====== ======
</TABLE>
- ------------
(1) Gives effect to businesses acquired by the Company through March 31, 1997
as if such acquisitions were consummated as of January 1, 1996. The pro forma
results of operations are not necessarily indicative of the results that would
have occurred had the acquisitions been consummated as of January 1, 1996 or
that might be attained in the future.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Consolidated Financial Data" in the Registration Statement (Form S-3)
and related Prospectuses of CORESTAFF, Inc. for the registration of 6,000,000
shares of its common stock and Convertible Subordinated Notes and to the use or
to the incorporation by reference included therein of our report dated February
5, 1997, with respect to the consolidated financial statements of CORESTAFF,
Inc. included therein, and included in its Annual Report (Form 10-K) for the
year ended December 31, 1996, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Houston, Texas
July 16, 1997
<PAGE> 1
EXHIBIT 25.1
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
- --------------------------------------------------------------------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
- --------------------------------------------------------------------------------
CORESTAFF, INC.
(Exact name of obligor as specified in its charter)
Delaware 76-0407849
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4400 Post Oak Parkway, Suite 1130
Houston, Texas 77027-3413
(Address of principal executive offices) (Zip code)
-----------------------
Convertible Subordinated Notes
(Title of the indenture securities)
================================================================================
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE
TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Name Address
-------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7a-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 16th day of July, 1997.
THE BANK OF NEW YORK
By: /s/ WALTER N. GITLIN
---------------------------------
Name: Walter N. Gitlin
Title: Vice President
- 3 -
