<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1997
REGISTRATION NO. 333-31509
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
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.)
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)
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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. [ ]
---------------------
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 23, 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 22, 1997, THE LAST SALE PRICE OF THE COMMON STOCK AS REPORTED ON THE NASDAQ
NATIONAL MARKET WAS $28 5/8 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)
-------- -------------- ---------------
<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.................................................... 25
Management.................................................. 37
Principal and Selling Stockholders.......................... 40
Description of Capital Stock................................ 41
Shares Eligible for Future Sale............................. 44
Underwriters................................................ 46
Legal Matters............................................... 49
Experts..................................................... 49
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 Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 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
June 30, 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 4,300 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 six months ended June 30, 1997, COMSYS accounted for 45.7% and
49.3% 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 in March 1997, IT Solutions
accounted for 6.7% and 12.2% of the Company's pro forma revenues and gross
profit, respectively, for the six months ended June 30, 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 47.6% and 38.5% of the Company's pro forma revenues and gross
profit, respectively, for the six months ended June 30, 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 six months ended June 30, 1997, the Company's
revenues and operating income increased to $458.3 million and $28.0 million,
compared with $237.5 million and $14.2 million for the six months ended June 30,
1996, representing revenue and operating income growth of 92.9% and 97.4%,
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 March 1997. The Company believes that it is a leading provider of IT staff
augmentation services, with 1996 pro forma revenues of $403 million. In the
first half of 1997, pro forma revenues for the IT Services Group increased 38%
over the first half of 1996, reflecting strong 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. During
the first six months of 1997, the Company 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 certain businesses, which
would complement its existing IT Services 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 and Non-Voting
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
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SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
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HISTORICAL PRO FORMA(1)
------------------------------------------------------------------- ----------------------------------
INCEPTION
(JULY 16,
1993)
THROUGH SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
------------ ------------------------------ ------------------- ------------ -------------------
1993 1994 1995 1996 1996 1997 1996 1996 1997
------------ -------- -------- -------- -------- -------- ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
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STATEMENT OF OPERATIONS DATA:
Revenues from
services.............. $ 3,093 $163,351 $344,548 $596,101 $237,545 $458,299 $811,965 $367,399 $481,076
Gross profit............ 748 33,808 82,456 144,596 58,320 110,028 203,093 91,950 120,266
Operating income
(loss)................ (388) 4,876 17,807 36,725 14,186 27,998 56,612 24,090 32,313
Income (loss) before
income taxes.......... (395) 2,711 10,947 31,003 11,562 22,694 37,252 13,578 25,281
Net income (loss)....... $ (253) $ 1,549 $ 6,357 $ 16,454 $ 6,707 $ 13,162 $ 20,079 $ 7,876 $ 14,661
Earnings (loss) per
common share(2)....... $ (0.01) $ 0.07 $ 0.29 $ 0.54 $ 0.24 $ 0.41 $ 0.66 $ 0.28 $ 0.45
Number of shares used to
compute earnings per
share................. 16,523 17,587 19,715 30,365 28,212 32,450 30,365 28,212 32,450
OTHER DATA:
EBITDA(3)............... $ (276) $ 6,920 $ 22,140 $ 42,241 $ 17,528 $ 33,426 $ 66,794 $ 30,224 $ 38,457
Ratio of earnings to
fixed charges:
Actual(4)............. (13.6) 2.0 2.3 6.0 4.4 4.4
Pro forma(5).......... 6.8 5.0 4.7
Supplemental pro
forma(6)............ 4.1 2.9 4.3
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 94,315 $150,067
Total assets................................................ 396,397 530,418
Long-term debt, net of current maturities................... 107,839 216,787
Stockholders' equity........................................ 230,917 245,810
</TABLE>
- ---------------
(1) The pro forma consolidated financial data give effect to all businesses
acquired by the Company through June 30, 1997 as if such acquisitions were
consummated as of the beginning of the periods presented, 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 June 30, 1997 as
if such acquisitions were consummated as of the beginning of the periods
presented and the effect of the refinancing of a portion of the outstanding
borrowings under the Credit Agreement 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 26.88
Second Quarter............................................ 16.88 27.00
Third Quarter (through July 22, 1997)..................... 25.88 31.63
</TABLE>
On July 22, 1997, the closing sale price of the Common Stock as reported on
the Nasdaq National Market was $28 5/8.
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 June 30, 1997, (i) on an historical basis and (ii) "As 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 JUNE 30, 1997
-----------------------------
ACTUAL AS ADJUSTED(1)(2)
-------- -----------------
<S> <C> <C>
Current maturities of long-term debt........................ $ 1,916 $ 1,916
======== ========
Long-term debt, net of current maturities:
Credit Agreement.......................................... $216,600 $ 69,495
Notes..................................................... -- 147,105
Other..................................................... 187 187
-------- --------
Total long-term debt, net of current maturities... 216,787 216,787
-------- --------
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); 32,081,745 shares issued and 31,397,745
shares outstanding..................................... 321 321
Class B Non-Voting Common Stock, $.01 par value, 3,000,000
shares authorized; 707,232 shares issued and
outstanding............................................ 7 7
Additional paid-in capital................................ 211,683 211,683
Retained earnings......................................... 34,929 34,929
Less -- Notes receivable from stockholders............. (787) (787)
Less -- Deferred compensation.......................... (155) (155)
Less -- 684,000 shares of Common Stock held in
treasury, at cost..................................... (188) (188)
-------- --------
Total stockholders' equity........................ 245,810 245,810
-------- --------
Total capitalization.............................. $462,597 $462,597
======== ========
</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 six months ended June 30, 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 six months ended June 30, 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 June 30, 1997 as if such acquisitions
were consummated as of the beginning of the periods presented, 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) SIX MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, JUNE 30, 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 $237,545 $458,299 $811,965
Cost of services.................. 2,345 129,543 262,092 451,505 179,225 348,271 608,872
------- -------- -------- -------- -------- -------- --------
Gross profit...................... 748 33,808 82,456 144,596 58,320 110,028 203,093
Operating costs and expenses...... 1,136 28,932 64,649 107,871 44,134 82,030 146,481
------- -------- -------- -------- -------- -------- --------
Operating income (loss)........... (388) 4,876 17,807 36,725 14,186 27,998 56,612
Other income (expense)(1)......... (7) (2,165) (6,860) (5,722) (2,624) (5,304) 19,360
------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes........................... (395) 2,711 10,947 31,003 11,562 22,694 37,252
Provision (benefit) for income
taxes........................... (142) 1,162 4,590 13,609 4,855 9,532 16,233
------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
loss............................ (253) 1,549 6,357 17,394 6,707 13,162 21,019
Extraordinary loss(2)............. -- -- -- (940) -- -- (940)
------- -------- -------- -------- -------- -------- --------
Net income (loss)................. $ (253) $ 1,549 $ 6,357 $ 16,454 $ 6,707 $ 13,162 $ 20,079
======= ======== ======== ======== ======== ======== ========
Earnings (loss) per common
share(3)(4):
Before extraordinary loss....... $ (0.01) $ 0.07 $ 0.29 $ 0.57 $ 0.24 $ 0.41 $ 0.69
Extraordinary loss(2)........... -- -- -- (0.03) -- -- (0.03)
------- -------- -------- -------- -------- -------- --------
Net income (loss)............... $ (0.01) $ 0.07 $ 0.29 $ 0.54 $ 0.24 $ 0.41 $ 0.66
Number of shares used to compute
earnings per share.............. 16,523 17,587 19,715 30,365 28,212 32,450 30,365
OTHER DATA:
EBITDA(5)......................... $ (276) $ 6,920 $ 22,140 $ 42,241 $ 17,528 $ 33,426 $ 66,794
Ratio of earnings to fixed
charges:
Actual(6)....................... (13.6) 2.0 2.3 6.0 4.4 4.4
Pro forma(7).................... 6.8 5.0 4.7
Supplemental pro forma(8)....... 4.1
<CAPTION>
PRO FORMA
-------------------
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1997
-------- --------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from services............ $367,399 $481,076
Cost of services.................. 275,449 360,810
-------- --------
Gross profit...................... 91,950 120,266
Operating costs and expenses...... 67,860 87,953
-------- --------
Operating income (loss)........... 24,090 32,313
Other income (expense)(1)......... (10,512) (7,032)
-------- --------
Income (loss) before income
taxes........................... 13,578 25,281
Provision (benefit) for income
taxes........................... 5,702 10,620
-------- --------
Income (loss) before extraordinary
loss............................ 7,876 14,661
Extraordinary loss(2)............. -- --
-------- --------
Net income (loss)................. $ 7,876 $ 14,661
======== ========
Earnings (loss) per common
share(3)(4):
Before extraordinary loss....... $ 0.28 $ 0.45
Extraordinary loss(2)........... -- --
-------- --------
Net income (loss)............... $ 0.28 $ 0.45
Number of shares used to compute
earnings per share.............. 28,212 32,450
OTHER DATA:
EBITDA(5)......................... $ 30,224 $ 38,457
Ratio of earnings to fixed
charges:
Actual(6).......................
Pro forma(7)....................
Supplemental pro forma(8)....... 2.9 4.3
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------
DECEMBER 31,
----------------------------------------- JUNE 30,
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 $150,067
Total assets................................................ 4,777 92,153 152,370 396,397 530,418
Long-term debt, net of current maturities................... 369 50,028 43,315 107,839 216,787
Stockholders' equity........................................ 3,604 19,485 75,165 230,917 245,810
</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 June 30, 1997 as
if such acquisitions were consummated as of the beginning of the periods
presented and the effect of the refinancing of a portion of the outstanding
borrowings under the Credit Agreement 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 six months
ended June 30, 1996 and 1997 have been prepared assuming all acquisitions
completed through June 30, 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
Six Months Ended June 30, 1996 Compared with the Six Months Ended June 30,
1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------------------- ------------------------------------
1996 1997 1996 1997
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
IT Services................ $ 96,607 40.7% $229,356 50.0% $182,640 49.7% $252,133 52.4%
Staffing Services.......... 136,617 57.5 228,943 50.0 184,759 50.3 228,943 47.6
Other...................... 4,321 1.8 -- -- -- -- -- --
-------- ----- -------- ----- -------- ------ -------- -----
Total............... $237,545 100.0% $458,299 100.0% $367,399 100.0% $481,076 100.0%
Gross profit:
IT Services................ $ 27,682 47.5% $ 63,778 58.0% $ 53,318 58.0% $ 74,016 61.5%
Staffing Services.......... 29,569 50.7 46,250 42.0 38,632 42.0 46,250 38.5
Other...................... 1,069 1.8 -- -- -- -- -- --
-------- ----- -------- ----- -------- ------ -------- -----
Total............... $ 58,320 100.0% $110,028 100.0% $ 91,950 100.0% $120,266 100.0%
Operating income............. $ 14,186 $ 27,998 $ 24,090 $ 32,313
Net income................... $ 6,707 $ 13,162 $ 7,876 $ 14,661
Earnings per share........... $ 0.24 $ 0.41 $ 0.28 $ 0.45
</TABLE>
Comparison of Historical Operating Results
Summary. Net income for the first six months of 1997 increased 96.2% to
$13.2 million, or $0.41 per share, from $6.7 million, or $0.24 per share, in
1996. Revenues in the first six months of 1997 increased 92.9% to $458.3 million
from $237.5 million in the first six months of 1996. Operating income increased
97.4% to $28.0 million from $14.2 million in the same period a year ago. Gross
margin for the first six months of 1997 was 24.0% compared with 24.6% for the
first six months of 1996. The lower gross margin primarily resulted from the
effects of acquisitions of lower margin businesses made after June 30, 1996, and
a higher proportion of revenues from large customers, partially offset by the
effects of acquisitions of IT Solutions businesses, which have higher gross
margins than the Company's other business units. Although larger accounts
generally
16
<PAGE> 20
have lower gross margins than smaller accounts, they tend to have higher
operating leverage. Despite the lower gross margin, operating margin for the
first six months of 1997 was 6.1%, which was slightly higher than the margin for
the first six months 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 in
technical practices in the IT Services Group.
IT Services Group. The IT Services Group, which is comprised of COMSYS and
the recently formed IT Solutions unit, accounted for 50.0% and 58.0% of the
Company's consolidated revenues and gross profit, respectively, up from 40.7%
and 47.5%, respectively, in the first six months of 1996. These increases
reflect the higher internal growth rate of this group compared with the Staffing
Services Group and the effects of the businesses acquired in this sector,
including three IT Solutions businesses in 1997. Revenues and gross profit for
the first six months of 1997 were up 137.4% and 130.4%, respectively, over the
first six months of 1996. Gross margin for the first six months of 1997 was
27.8% compared with 28.7% for the first six months of 1996. This lower gross
margin reflects the high growth of certain large accounts in the Company's
COMSYS unit, which generally have lower gross margins but comparable or higher
operating margins due to higher operating leverage.
Staffing Services Group. For the first six months of 1997, the Staffing
Services Group accounted for 50.0% and 42.0% of the Company's consolidated
revenues and gross profit, respectively, down from 57.5% and 50.7%,
respectively, in the first six months of 1996. Revenues and gross profit for the
first six months of 1997 were up 67.6% and 56.4%, respectively, over the first
six months of 1996. Gross margin for the first six months of 1997 was 20.2%,
down from 21.6% for the first six months of 1996. The lower gross margin
primarily related to the acquisition of a low margin staffing services business
in January 1997 and the higher proportion of revenues being generated from the
Company's large on-site programs (VIP programs). 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 the first six months of 1997 totaled $76.4 million, compared with
$41.0 million for the first six months of 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.
Depreciation totaled $2.1 million and $1.2 million for the first six months
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 $3.5 million and
$1.9 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 first six months
of 1997 totaled $5.1 million compared with $2.8 million for the first six months
of 1996. The $2.3 million increase was primarily due to increased borrowings for
acquisitions and lower long-term debt levels during the first six months of 1996
as a result of the Companys' second public offering in May.
Provision for Income Taxes. Provision for income taxes for the first six
months of 1997 was $9.5 million (an effective tax rate of 42.0%), as compared
with $4.9 million (an effective tax rate of 42.0%) for the first six months 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, net income for the first
six months of 1997 was $13.2 million compared with $6.7 million for the first
six months of 1996. Net income as a percentage of revenues ("Net Income Margin")
increased to 2.9% for the first six months of 1997, from 2.8% for the first six
months of 1996.
17
<PAGE> 21
Comparison of Pro Forma Operating Results
Summary. Pro forma operating results, which assume all acquisitions
consummated through June 30, 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 first six months of 1997. Pro forma revenues for the first half of 1997 were
$481.1 million, up 30.9% from $367.4 million for the first half of 1996. Pro
forma net income rose 86.2% to $14.7 million, or $0.45 per share, from $7.9
million, or $0.28 per share, in 1996.
IT Services Group. Pro forma revenues and gross profit for the first half
of 1997 increased 38.0% and 38.8%, respectively, from the first half of 1996.
These improvements reflect the continued strong demand for the Company's IT
services. Pro forma gross margin for the first half of 1997 increased to 29.4%,
up from 29.2% for 1996. The improvement in gross margin primarily related to the
higher internal growth rate of the IT Solutions unit, which accounted for 12.9%
and 19.8% of the Group's pro forma revenues and gross profit, respectively, in
the first half of 1997, compared with 10.0% and 15.1% in 1996.
Staffing Services Group. Pro forma revenues and gross profit for the first
six months of 1997 increased 23.9% and 19.7%, respectively, from the first six
months of 1996. These improvements primarily related to the increase in revenues
from the VIP programs, including new programs that were added in 1997. Pro forma
gross margin for the first six months of 1997 was 20.2%, compared with 20.9% for
the first six months 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 six
months of 1997 totaled $81.6 million compared with $62.1 million for the first
six months 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 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 $2.4 million and $1.7 million for the first half of 1997
and 1996, respectively, related primarily to the fixed assets of the acquired
companies. Amortization of $4.0 million for both the first half of 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 the first
half of 1997 totaled $6.8 million compared with $10.9 million for 1996. The
decrease related 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 first half of 1997 was 42.0%, which was also the rate for the first half 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 first half of 1997 was $14.7 million compared with $7.9 million for the
first half of 1996. The pro forma Net Income Margin for the first half of 1997
was 3.0% compared with 2.1% for the first half of 1996.
18
<PAGE> 22
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
19
<PAGE> 23
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.
20
<PAGE> 24
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.
21
<PAGE> 25
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
22
<PAGE> 26
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 six months of 1997 and 1996, the Company made cash
payments for acquisitions of $65.3 million and $81.3 million, respectively.
Capital expenditures totaled $17.5 million and $4.8 million for the six months
ended June 30, 1997 and 1996, respectively. The Company estimates that its
capital expenditures for 1997 will be approximately $40.0 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 primarily with borrowings under its Senior Credit Agreement (the
"Credit Agreement") and cash flows from operations.
The Company had working capital of $150.1 million and $94.3 million at June
30, 1997 and December 31, 1996, respectively. The Company had cash and cash
equivalents of $12.5 million and $6.5 million at June 30, 1997 and December 31,
1996, respectively. The Company's operating cash flows and
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<PAGE> 27
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 $(21.4) million and $0.2 million for the six
months ended June 30, 1997 and 1996, respectively. The decrease in operating
cash flows for 1997 reflected the significant growth in revenues in the first
six months of 1997 from a number of the Company's larger accounts, which
generally have a longer billing and collection cycle.
At June 30, 1997, the Company had a $250 million Credit Agreement. Under
terms of the Credit Agreement, the Company could borrow under a revolving credit
facility up to the lesser of $250 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). 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 intends to repay outstanding borrowings under the Credit
Agreement with the net proceeds from the Notes Offering.
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 $350 million or 4.0 times Pro Forma Adjusted EBITDA. The Company may request
that the commitment be raised to $400 million. 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.
On June 24, 1997, the Company entered into a three-year interest rate swap
agreement to reduce a portion of its interest rate exposure on borrowings under
the Credit Agreement. Under terms of the agreement, the Company will pay the
counterparty 6.05% on notional principal of $25.0 million and the counterparty
will pay the Company interest at a variable rate based on LIBOR.
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> 28
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 six months ended June 30, 1997, COMSYS accounted for
45.7% and 49.3% 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 6.7% and 12.2% of the Company's pro
forma revenues and gross profit, respectively, for the six months ended June 30,
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 47.6% and 38.5% of the
Company's pro forma revenues and gross profit, respectively, for the six months
ended June 30, 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 six months ended June 30, 1997, the Company's
revenues and operating income increased to $458.3 million and $28.0 million,
compared with $237.5 million and $14.2 million for the six months ended June 30,
1996, representing revenue and operating income growth of 92.9% and 97.4%,
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,
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<PAGE> 29
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.
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<PAGE> 30
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 March 1997. The Company believes that it is a leading provider of IT staff
augmentation services, with 1996 pro forma revenues of $403 million. In the
first half of 1997, pro forma revenues for the IT Services Group increased 38%
over the first half of 1996, reflecting strong 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> 31
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.
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 certain 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 $66,517
======= ======= ======== =======
</TABLE>
- ---------------
(1) In certain transactions, the sellers are also entitled to contingent
consideration. As of June 30, 1997, the aggregate contingent consideration
due sellers was capped at $48.2 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> 32
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> 33
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> 34
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> 35
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 47.6% and 50.3% of the Company's pro forma
revenues for the six months ended June 30, 1997 and 1996, 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> 36
ACQUISITIONS
During 1996 and the first six months of 1997, the Company acquired 20
businesses, which had combined 1996 revenues of more than $366.7 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 $8.5 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 $1.4
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> 38
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> 39
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 June 30, 1997, the Company employed approximately 1,800 full-time staff
employees, the IT Solutions Group had approximately 800 full-time computer
professionals, COMSYS had approximately 4,300 IT consultants on assignment and
CORESTAFF Services had an average of approximately 25,000 employees on
assignment per week. As of June 30, 1997, 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> 40
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 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.
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
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<PAGE> 41
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.
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
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<PAGE> 42
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> 43
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. Except as
otherwise noted, 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 BENEFICIALLY
PRIOR TO THE OFFERINGS(1) SHARES TO AFTER THE OFFERINGS(1)
------------------------- BE ----------------------------
PERCENT OF SOLD IN THE PERCENT OF
NAME NUMBER CLASS(2) OFFERINGS NUMBER CLASS(2)
---- ----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
SHARES OF COMMON STOCK:
Golder, Thoma, Cressey Fund III
Limited Partnership(3)............ 8,701,921 27.1% 5,500,000 3,201,921 10.0%
First Union Corporation(4)........... 940,749 2.9 500,000 440,749 1.4
Michael T. Willis(5)................. 3,238,761 10.1 -- 3,238,761 10.1
Rocco N. Aceto....................... 77,900 * -- 77,900 *
Joseph V. Amella..................... 131,190 * -- 131,190 *
Nuala Beck........................... 750 * -- 750 *
Charles H. Cotros.................... 8,250 * -- 8,250 *
Peter T. Dameris..................... 94,650 * -- 94,650 *
Donald J. Edwards(6)................. 2,250 * -- 2,250 *
George W. Fink....................... 160,655 * -- 160,655 *
Bruce V. Rauner(7)................... 8,701,921 27.1 -- 3,201,921 10.0
Charles R. Schneider................. 18,255 * -- 18,255 *
John T. Turner....................... 5,880 * -- 5,880 *
Austin P. Young...................... 33,482 * -- 33,482 *
Putnam Investments, Inc.(8).......... 4,202,434 13.1 -- 4,202,434 13.1
Putnam Investment Management,
Inc.(8)........................... 3,947,456 12.3 -- 3,947,456 12.3
Putnam New Opportunities Fund(8)..... 1,675,000 5.2 -- 1,675,000 5.2
All officers and directors as a group
(14 persons)...................... 12,538,769 38.7 -- 7,038,769 21.7
</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) 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.
(4) 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.
(5) 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, or 7.3%,
after the Stock Offerings. The address for Mr. Willis is 4400 Post Oak
Parkway, Suite 1130, Houston, Texas 77027.
(6) Mr. Edwards is a Principal with Golder, Thoma, Cressey, Rauner, Inc. an
affiliate of GTC III.
(7) 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.
(8) The address for each of Putnam Investments, Inc., Putnam Investment
Management, Inc. and Putnam New Opportunities Fund is One Post Office
Square, Boston, Massachusetts 02109. Based on Schedule 13G dated January 27,
1997 of Putnam Investments, Inc., Marsh & McLennan Companies, Inc., Putnam
Investment Management, Inc., The Putnam Advisory Company, Inc. and Putnam
New Opportunities Fund.
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<PAGE> 44
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> 45
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> 46
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> 47
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
31,897,745 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, 6,960,842 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> 48
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 7,168,074 shares of Common Stock and
Non-Voting Common Stock (the "Registrable Shares") after giving effect to the
completion of the Stock Offerings (6,268,074 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> 49
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
46
<PAGE> 50
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
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.
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<PAGE> 51
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 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.
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<PAGE> 52
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.
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.
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<PAGE> 53
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
Consolidated Balance Sheet as of June 30, 1997
(Unaudited)............................................... F-17
Consolidated Statements of Operations for the Six Months
Ended June 30, 1996 and 1997 (Unaudited).................. F-18
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1997 (Unaudited).................. F-19
Notes to Unaudited Consolidated Financial Statements........ F-20
</TABLE>
F-1
<PAGE> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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 1995 1996
------ ------- -------
(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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 12,451
Accounts receivable, net of allowance of $2,837........... 175,299
Prepaid expenses and other................................ 18,937
Deferred income taxes..................................... 3,291
--------
Total current assets.............................. 209,978
Fixed Assets, net........................................... 36,420
Intangible Assets, net of accumulated amortization of
$11,350................................................... 279,053
Other Assets................................................ 4,967
--------
Total Assets................................................ $530,418
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt...................... $ 1,916
Accounts payable.......................................... 16,451
Payroll and related taxes................................. 35,070
Self-insurance reserve.................................... 1,270
Amounts due sellers of acquired companies................. 216
Other current liabilities................................. 4,988
--------
Total current liabilities......................... 59,911
--------
Non-current Self-insurance Reserve.......................... 2,564
Long-term Debt, net of current maturities................... 216,787
Deferred Income Taxes and Other............................. 5,346
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.01; 5,000,000 shares
authorized; none issued
Common stock, par value $.01 --
Common Stock -- 40,000,000 shares authorized;
32,081,745 shares issued.............................. 321
Class B (non-voting) -- 3,000,000 shares authorized;
707,232 shares issued................................. 7
Additional paid-in capital................................ 211,683
Retained earnings......................................... 34,929
--------
246,940
--------
Less -- 684,000 shares of common stock in treasury, at
cost................................................... (188)
Less -- notes receivable from stockholders................ (787)
Less -- deferred compensation............................. (155)
--------
Total stockholders' equity........................ 245,810
--------
Total Liabilities and Stockholders' Equity.................. $530,418
========
</TABLE>
See notes to unaudited consolidated financial statements.
F-17
<PAGE> 70
CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Revenues from Services...................................... $237,545 $458,299
Cost of Services............................................ 179,225 348,271
-------- --------
Gross Profit................................................ 58,320 110,028
Operating Costs and Expenses:
Selling, general and administrative....................... 40,995 76,379
Depreciation and amortization............................. 3,139 5,651
-------- --------
44,134 82,030
-------- --------
Operating Income............................................ 14,186 27,998
Other Income (Expense):
Interest expense.......................................... (2,827) (5,081)
Other, net................................................ 203 (223)
-------- --------
(2,624) (5,304)
-------- --------
Income before Income Taxes.................................. 11,562 22,694
Provision for Income Taxes.................................. 4,855 9,532
-------- --------
Net Income.................................................. $ 6,707 $ 13,162
======== ========
Earnings per Common Share................................... $ 0.24 $ 0.41
======== ========
Number of Shares Used to Compute Earnings per Common
Share..................................................... 28,212 32,450
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
F-18
<PAGE> 71
CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 6,707 $ 13,162
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 3,139 5,651
Amortization of deferred loan costs.................... 177 53
Amortization of deferred compensation.................. -- 80
Provision for doubtful accounts........................ 477 1,546
Deferred income taxes.................................. 44 1,122
Self-insurance reserve................................. (890) (997)
Loss on disposal of assets............................. (29) --
Changes in assets and liabilities net of effects of
acquisitions:
Accounts receivable.................................. (11,071) (34,226)
Prepaid expenses and other........................... 24 (6,769)
Accounts payable..................................... 631 (5,681)
Accrued liabilities.................................. 995 4,661
-------- --------
Net cash provided by (used in) operating
activities...................................... 204 (21,398)
-------- --------
Cash Flows from Investing Activities:
Cash paid for acquisitions, net of cash acquired.......... (81,272) (65,300)
Capital expenditures...................................... (4,810) (17,517)
Proceeds from sale of physical therapy staffing
business............................................... -- 2,500
Payments received on stockholders' notes.................. 63 --
Proceeds from sale of assets.............................. 71 --
Other..................................................... 6 (3,162)
-------- --------
Net cash used in investing activities............. (85,942) (83,479)
-------- --------
Cash Flows from Financing Activities:
Principal payments on long-term debt...................... (114,454) (218)
Net proceeds from issuance of long-term debt.............. 68,204 109,374
Net proceeds from sale of common stock.................... 137,640 1,651
-------- --------
Net cash provided by financing activities......... 91,390 110,807
-------- --------
Net Increase in Cash and Cash Equivalents................... 5,652 5,930
Cash and Cash Equivalents at Beginning of Year.............. 4,091 6,521
-------- --------
Cash and Cash Equivalents at End of Period.................. $ 9,743 $ 12,451
======== ========
Cash paid during the period for:
Interest, net of amounts capitalized...................... $ 2,890 $ 4,853
Income taxes.............................................. $ 5,039 $ 10,130
</TABLE>
See notes to unaudited consolidated financial statements.
F-19
<PAGE> 72
CORESTAFF INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of CORESTAFF, Inc. and its
wholly-owned subsidiaries (the "Company") included herein have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. The Company believes that the
presentations and disclosures herein are adequate to make the information not
misleading. The consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
elsewhere herein.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted for periods
ending after December 15, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of common stock equivalents ("CSE") will be
excluded. The exclusion of CSE from the calculation would not have had a
material effect on primary earnings per share for the six months ended June 30,
1997 and 1996.
3. 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. The Company's interim provisions for
income taxes were computed using its estimated effective tax rate for the year.
4. ACQUISITIONS AND DISPOSITION
During the six months ended June 30, 1997, the Company acquired six
businesses, which are summarized below:
<TABLE>
<S> <C>
Acquisitions completed:
IT Services --............................................
COMSYS................................................. 2
IT Solutions........................................... 3
Staffing Services......................................... 1
-------
Total............................................. 6
=======
Purchase consideration (in thousands):
Cash paid................................................. $66,517
Liabilities assumed....................................... 10,047
-------
Fair value of assets acquired (including intangibles)..... $76,564
=======
</TABLE>
In January 1997, the Company acquired substantially all of the assets of
Roberta Enterprises, Inc., a California-based staffing services business, for
$8.8 million in cash. In March 1997, the Company acquired
F-20
<PAGE> 73
CORESTAFF INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Metamor Technologies, Ltd., an Illinois-based IT Solutions business, for $16.0
million in cash. In April 1997, the Company acquired Business Management Data,
Inc., a California-based IT Solutions business, and its India-based affiliate,
Sriven Computer Solutions (PVT.), Ltd., for $16.8 million. In May 1997, the
Company acquired Active Software, Inc., a Minnesota-based IT Services business,
for $5.1 million. In June 1997, the Company acquired Millennium Computer
Corporation, a New York-based IT Solutions business, and its affiliate,
CompuCorps Resources, Inc., a New York-based IT Services business, for $19.2
million.
All acquisitions made by the Company have been accounted for using the
purchase method of accounting. Accordingly, the results of operations of the
acquired businesses 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 June 30, 1997, the maximum
aggregate contingent consideration based on EBIT for future periods was $48.2
million. The payment of any contingent consideration will increase the amount of
goodwill related to the acquisitions.
In January 1997, the Company sold its non-core physical therapy staffing
business, which accounted for less than two percent of the Company's 1996
consolidated revenues and operating income. A loss of $1.4 million on the sale
was recognized in the fourth quarter of 1996.
The following unaudited results of operations have been prepared assuming
the acquisitions made through June 30, 1997 and the sale of the Company's
physical therapy staffing business had occurred as of the beginning of the
periods presented. The unaudited pro forma operating results are not necessarily
indicative of future operating results nor of results that would have occurred
had the acquisitions been consummated as of the beginning of the periods
presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1996 1997
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenues........................................... $367,399 $481,076
Net income......................................... $ 7,876 $ 14,661
Earnings per common share.......................... $ 0.28 $ 0.45
</TABLE>
5. LONG-TERM DEBT
At June 30, 1997, the Company had outstanding borrowings under its $250
million Senior Credit Agreement (the "Credit Agreement") of $216.6 million and
remaining availability (after deducting outstanding letters of credit of $9.3
million) of $24.1 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. The weighted average
interest rate at June 30, 1997 was 6.86%. A commitment fee of 0.18% to 0.25%,
depending on the leverage ratio, is payable on the unused portion of the
commitment.
The Company is in the process of amending it Credit Agreement to, among
other things, increase the borrowing capacity under the agreement to the lesser
of $350 million or 4.0 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 $400 million. The amended terms also provide that, after
the debt offering described below, 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.
F-21
<PAGE> 74
CORESTAFF INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 24, 1997, the Company entered into a three-year interest rate swap
agreement to reduce a portion of its interest rate exposure on borrowings under
the Credit Agreement. Under terms of the agreement, the Company will pay the
counterparty 6.05% on notional principal of $25.0 million and the counterparty
will pay the Company interest at a variable rate based on LIBOR.
6. SUBSEQUENT EVENT
On July 17, 1997, the Company filed a registration statement on Form S-3
with the Securities and Exchange Commission covering the sale of $180,000,000
aggregate principal amount of convertible subordinated notes due 2004 (the
"Notes Offering") and the sale of 6.0 million shares of its common stock by
certain selling stockholders. The Company intends to use the net proceeds from
the Notes Offering to repay outstanding borrowings under the Credit Agreement.
The Company will not receive any proceeds from the sale of the common stock by
the selling stockholders.
F-22
<PAGE> 75
[CORESTAFF, INC. LOGO]
<PAGE> 76
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 23, 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 22, 1997, THE LAST SALE PRICE OF THE COMMON STOCK AS REPORTED ON THE NASDAQ
NATIONAL MARKET WAS $28 5/8 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
------------------------
<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> 77
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 23, 1997 $180,000,000
[CORESTAFF, INC. LOGO]
% CONVERTIBLE SUBORDINATED NOTES DUE 2004
------------------------
Interest payable February and August
------------------------
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 22, 1997, THE LAST SALE
PRICE OF THE COMMON STOCK AS REPORTED ON THE NASDAQ NATIONAL MARKET WAS $28 5/8
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 FEBRUARY AND AUGUST 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 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES OFFERED HEREBY.
------------------------
THE NOTES HAVE BEEN APPROVED FOR LISTING ON THE NASDAQ SMALLCAP MARKET, SUBJECT
TO OFFICIAL NOTICE OF ISSUANCE.
------------------------
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> 78
[Note: This alternate Table of Contents replaces the Table of Contents on
page 1 contained in the Common Stock Prospectus.]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information....................................... 1
Incorporation of Certain Documents by Reference............. 2
Prospectus Summary.......................................... 3
Risk Factors................................................ 9
Use of Proceeds............................................. 13
Price Range of Common Stock and Dividend Policy............. 13
Capitalization.............................................. 14
Selected Consolidated Financial Data........................ 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Business.................................................... 26
Management.................................................. 38
Principal and Selling Stockholders.......................... 41
Description of the Notes.................................... 42
Certain United States Federal Income Tax Considerations..... 52
Description of Capital Stock................................ 57
Shares Eligible for Future Sale............................. 60
Underwriters................................................ 62
Legal Matters............................................... 63
Experts..................................................... 63
Index to Consolidated Financial Statements.................. F-1
</TABLE>
INFORMATION FOR PROSPECTIVE INVESTORS IN THE UNITED KINGDOM
Neither this Prospectus nor any other document issued in connection with
the Stock Offerings may be issued or passed on to any person in the United
Kingdom unless that person 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 the document may otherwise lawfully be issued or passed
on.
INFORMATION FOR PROSPECTIVE INVESTORS IN THE NETHERLANDS
In the Netherlands, the Shares may only be offered, transferred, delivered
or sold to individuals or legal entities who or which trade or invest in
securities in the conduct of their profession or trade, which include banks,
brokers, dealers, insurance companies, pension funds and other institutional
investors, and commercial enterprises which regularly, as an ancillary activity,
invest in securities.
A-3
<PAGE> 79
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 February and August 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 $216.6
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
A-4
<PAGE> 80
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.................... The Notes have been approved for listing on the
Nasdaq SmallCap Market, subject to official notice
of issuance.
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."
A-5
<PAGE> 81
[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 June 30, 1997, the Company had approximately $216.6 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.
A-6
<PAGE> 82
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 Company intends to use all of such net proceeds to repay
certain indebtedness incurred under the Credit Agreement and for general
corporate purposes. At June 30, 1997, the aggregate outstanding balance under
the Credit Agreement was $216.6 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 weighted average interest rate of the
Company's outstanding borrowings under the Credit Agreement was 6.86% at June
30, 1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
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
A-7
<PAGE> 83
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).
The Notes have been approved for listing on the Nasdaq SmallCap Market,
subject to official notice of issuance, under the symbol "CSTFG."
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."
A-8
<PAGE> 84
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 such fractional share. On conversion of a Note, a holder will not receive any
cash payment representing
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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 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 the tender offer or exchange offer is for
an amount which increases the offeror's ownership of Common
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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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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 is 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 $216.6 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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<PAGE> 91
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, 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, 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 of all of the Notes then outstanding. The Indenture also
provides
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<PAGE> 92
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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<PAGE> 93
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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<PAGE> 95
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.
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<PAGE> 96
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.
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<PAGE> 97
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.
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<PAGE> 98
The Notes have been approved for listing on the Nasdaq SmallCap Market,
subject to official notice of issuance. 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.
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<PAGE> 99
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,
NASD filing and Nasdaq filing fees.
<TABLE>
<S> <C>
Registration fee............................................ $125,193
NASD filing fee............................................. 30,000
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......................................... 10,000
Transfer Agent fees and expenses............................ 5,000
Trustee fees and expenses................................... 5,000
Miscellaneous............................................... 4,807
--------
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
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<PAGE> 100
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 -- Certificate of Amendment of the 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
25.1 -- Statement of Eligibility under the Trust Indenture Act of
1939 of The Bank of New York
</TABLE>
- ---------------
* Filed herewith. All other exhibits have been previously filed.
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
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<PAGE> 101
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.
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<PAGE> 102
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 22nd day of July,
1997.
CORESTAFF, INC.
By /s/ MICHAEL T. WILLIS
-----------------------------------
Michael T. Willis
Chief Executive Officer and
President
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
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL T. WILLIS Chairman of the Board, Chief July 22, 1997
- ----------------------------------------------------- Executive Officer and President
Michael T. Willis (Principal Executive Officer)
/s/ AUSTIN P. YOUNG Executive Vice July 22, 1997
- ----------------------------------------------------- President -- Finance and
Austin P. Young Administration and Director
/s/ EDWARD L. PIERCE Senior Vice President, Chief July 22, 1997
- ----------------------------------------------------- Financial Officer and Assistant
Edward L. Pierce Secretary (Principal Financial
and Accounting Officer)
* Director July 22, 1997
- -----------------------------------------------------
Nuala Beck
* Director July 22, 1997
- -----------------------------------------------------
Charles H. Cotros
* Director July 22, 1997
- -----------------------------------------------------
Donald J. Edwards
* Director July 22, 1997
- -----------------------------------------------------
Bruce V. Rauner
* Director July 22, 1997
- -----------------------------------------------------
Charles R. Schneider
* Director July 22, 1997
- -----------------------------------------------------
John T. Turner
*By: /s/ PETER T. DAMERIS
------------------------------------------------
Peter T. Dameris
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 103
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBITS
----------- --------
<C> <S>
1.1 -- Form of Common Stock Underwriting Agreement
1.2 -- Form of Notes Underwriting Agreement
3.1 -- Certificate of Amendment of the 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
25.1 -- Statement of Eligibility under the Trust Indenture Act of
1939 of The Bank of New York
</TABLE>
- ---------------
* Filed herewith. All other exhibits have been previously filed.
<PAGE> 1
================================================================================
CORESTAFF, INC.
TO
THE BANK OF NEW YORK
Trustee
INDENTURE
Dated as of ______________, 1997
_____% Convertible Subordinated Notes due 2004
================================================================================
<PAGE> 2
CORESTAFF, INC.
Reconciliation and Tie Between the Trust Indenture Act
of 1939 and Indenture dated as of ______________, 1997
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
- --------------------------- -----------------
Trust Indenture
Act Section Indenture Section
------------------------- -------------------------
<S> <C>
Section 310(a)(1) 8.9
Section (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9
Section (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
Section (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
Section (a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9
Section (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.8
8.10
8.11
Section 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3(a)
Section 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1
6.2(a)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2(b)
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2(c)
Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3(a)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3(a)
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3(a)
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3(b)
Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.7
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.5
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.5
(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.5
Section 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1
(d)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1(a)
(d)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1(b)
(d)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1(c)
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.9
- -----------------------------------------------------------------------------------------------
</TABLE>
i
<PAGE> 3
<TABLE>
Trust Indenture
Act Section Indenture Section
------------------------- -------------------------
<S> <C>
Section 316(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4
Section 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4
Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.7
</TABLE>
- ------------------------------
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture
ii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES . . . . . . . . . . . . . . . . . 9
SECTION 2.1. DESIGNATION AMOUNT AND ISSUE OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 2.2. FORM OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2.3. DATE AND DENOMINATION OF NOTES; PAYMENTS OF INTEREST . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2.4. EXECUTION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 2.5. EXCHANGE AND REGISTRATION OF TRANSFER OF NOTES: RESTRICTIONS
ON TRANSFER DEPOSITARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 2.6. MUTILATED, DESTROYED, LOST OR STOLEN NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 2.7. TEMPORARY NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.8. CANCELLATION OF NOTES PAID, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.9. CUSIP NUMBERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE III REDEMPTION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 3.1. REDEMPTION PRICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 3.2. NOTICE OF TRUSTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 3.3. NOTICE OF REDEMPTION; SELECTION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 3.4. PAYMENT OF NOTES CALLED FOR REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 3.5. NO SINKING FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.6. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.7. REDEMPTION AT OPTION OF HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE IV SUBORDINATION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 4.1. AGREEMENT OF SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 4.2. PAYMENTS TO NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 4.3. SUBROGATION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 4.4. AUTHORIZATION TO EFFECT SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 4.5. NOTICE TO TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 4.6. TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 4.7. NO IMPAIRMENT OF SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 4.8. CERTAIN CONVERSIONS DEEMED PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 4.9. ARTICLE APPLICABLE TO PAYING AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.10. SENIOR INDEBTEDNESS ENTITLED TO RELY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.11. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT . . . . . . . . . . . . . . . . . . 29
SECTION 4.12. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
SECTION 4.13. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR INDEBTEDNESS;
PRESERVATION OF TRUSTEE'S RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE V PARTICULAR COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 5.1. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 5.2. MAINTENANCE OF OFFICE OR AGENCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 5.3. APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S OFFICE . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 5.4. PROVISIONS AS TO PAYING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 5.5. CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 5.6. STAY, EXTENSION AND USURY LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE VI NOTEHOLDERS' LISTS AND REPORTS BYTHE COMPANY AND THE TRUSTEE . . . . . . . . . . . . . . . . . . . 32
SECTION 6.1. NOTEHOLDERS' LISTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 6.2. PRESERVATION AND DISCLOSURE OF LISTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 6.3. REPORTS BY TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 6.4. REPORTS BY COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 6.5. CALCULATION OF ORIGINAL ISSUE DISCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE VII REMEDIES OF THE TRUSTEE AND NOTEHOLDERS ON AN EVENT OF DEFAULT . . . . . . . . . . . . . . . . . . 34
SECTION 7.1. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 7.2. PAYMENTS OF NOTES ON DEFAULT; SUIT THEREFOR . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 7.3. APPLICATION OF MONIES COLLECTED BY TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 7.4. PROCEEDINGS BY NOTEHOLDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 7.5. PROCEEDINGS BY TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 7.6. REMEDIES CUMULATIVE AND CONTINUING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 7.7. DIRECTION OF PROCEEDINGS AND WAIVER OF DEFAULTS BY
MAJORITY OF NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 7.8. STATEMENT BY OFFICERS AS TO DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 7.9. NOTICE OF DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 7.10. UNDERTAKING TO PAY COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE VIII CONCERNING THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 8.1. DUTIES AND RESPONSIBILITIES OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 8.2. RELIANCE ON DOCUMENTS, OPINIONS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.3. NO RESPONSIBILITY FOR RECITALS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C>
SECTION 8.4. TRUSTEE, PAYING AGENTS, CONVERSION
AGENTS OR REGISTRAR MAY OWN NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 8.5. MONIES TO BE HELD IN TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 8.6. COMPENSATION AND EXPENSES OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 8.7. OFFICERS CERTIFICATE AS EVIDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 8.8. CONFLICTING INTERESTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 8.9. ELIGIBILITY OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 8.10. RESIGNATION OR REMOVAL OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 8.11. ACCEPTANCE BY SUCCESSOR TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 8.12. SUCCESSION BY MERGER, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 8.13. LIMITATION ON RIGHTS OF TRUSTEE AS CREDITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE IX CONCERNING THE NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 9.1. ACTION BY NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 9.2. PROOF OF EXECUTION BY NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 9.3. WHO ARE DEEMED ABSOLUTE OWNERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 9.4. COMPANY-OWNED NOTES DISREGARDED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 9.5. REVOCATION OF CONSENTS; FUTURE HOLDERS BOUND . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
ARTICLE X NOTEHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 10.1. PURPOSES OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 10.2. CALL OF MEETINGS BY TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 10.3. CALL OF MEETINGS BY COMPANY OR NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 10.4. QUALIFICATIONS FOR VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 10.5. REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 10.6. VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 10.7. NO DELAY OF RIGHTS BY MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
ARTICLE XI SUPPLEMENTAL INDENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 11.1. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 11.2. SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 11.3. EFFECT OF SUPPLEMENTAL INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 11.4. NOTATION ON NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 11.5. EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL
INDENTURE TO BE FURNISHED TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
ARTICLE XII CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 12.1. COMPANY MAY CONSOLIDATE ETC. ON CERTAIN TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 12.2. SUCCESSOR CORPORATION TO BE SUBSTITUTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
</TABLE>
v
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<TABLE>
<S> <C>
SECTION 12.3. OPINION OF COUNSEL TO BE GIVEN TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
ARTICLE XIII SATISFACTION AND DISCHARGE OF INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 13.1. DISCHARGE OF INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 13.2. DEPOSITED MONIES TO BE HELD IN TRUST BY TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 13.3. PAYING AGENT TO REPAY MONIES HELD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 13.4. RETURN OF UNCLAIMED MONIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 13.5. REINSTATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ARTICLE XIV IMMUNITY OF INCORPORATORS,
STOCKHOLDERS, OFFICERS AND DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 14.1. INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 58
ARTICLE XV CONVERSION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 15.1. RIGHT TO CONVERT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 15.2. EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON STOCK
ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS . . . . . . . . . . . . . . . . . 59
SECTION 15.3. CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 15.4. CONVERSION RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 15.5. ADJUSTMENT OF CONVERSION RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 15.6. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE . . . . . . . . . . . . . . . . . . . . . 69
SECTION 15.7. TAXES ON SHARES ISSUED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 15.8. RESERVATION OF SHARES; SHARES TO BE FULLY PAID; COMPLIANCE
WITH GOVERNMENTAL REQUIREMENTS; LISTING OF COMMON STOCK . . . . . . . . . . . . . . . . . 70
SECTION 15.9. RESPONSIBILITY OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 15.10.NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
ARTICLE XVI MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 16.1. PROVISIONS BINDING ON COMPANY'S SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 16.2. OFFICIAL ACTS BY SUCCESSOR CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 16.3. ADDRESSES FOR NOTICES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 16.4. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 16.5. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT;
CERTIFICATES TO TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 16.6. LEGAL HOLIDAYS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 16.7. TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 16.8. NO SECURITY INTEREST CREATED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 16.9. BENEFITS OF INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 16.10.TABLE OF CONTENTS, HEADINGS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
</TABLE>
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<TABLE>
<S> <C>
SECTION 16.11.AUTHENTICATING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 16.12.EXECUTION IN COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
</TABLE>
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<PAGE> 9
INDENTURE dated as of August ___, 1997, between CORESTAFF,
Inc., a Delaware corporation (hereinafter sometimes called the "Company," as
more fully set forth in Section 1.1), and The Bank of New York, a New York
banking corporation, as trustee hereunder (hereinafter sometimes called the
"Trustee," as more fully set forth in Section 1.1).
W I T N E S S E T H:
WHEREAS, for its lawful corporate purposes, the Company has
duly authorized the issue of its___% Convertible Subordinated Notes due 2004
(hereinafter sometimes called the "Notes"), in an aggregate principal amount
not to exceed $207,000,000 and, to provide the terms and conditions upon which
the Notes are to be authenticated, issued and delivered, the Company has duly
authorized the execution and delivery of this Indenture; and
WHEREAS, the Notes, the certificate of authentication to be
borne by the Notes, a form of assignment, a form of option to elect repayment
upon a Fundamental Change, a form of conversion notice and a certificate of
transfer to be borne by the Notes are to be substantially in the forms
hereinafter provided for; and
WHEREAS, all acts and things necessary to make the Notes, when
executed by the Company and authenticated and made available for delivery by
the Trustee or a duly authorized authenticating agent in the manner provided in
this Indenture, the valid, binding and legal obligations of the Company, and to
constitute these presents a valid agreement according to its terms, have been
done and performed, and the execution of this Indenture and the issue hereunder
of the Notes have in all respects been duly authorized.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which
the Notes are, and are to be, authenticated, issued and made available for
delivery, and in consideration of the premises and of the purchase and
acceptance of the Notes by the holders thereof, the Company covenants and
agrees with the Trustee for the equal and proportionate benefit of the
respective holders from time to time of the Notes (except as otherwise provided
below), as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITIONS. The terms defined in this
Section 1.1 (except as herein otherwise expressly provided or unless the
context otherwise requires) for all purposes of this Indenture and of any
indenture supplemental hereto shall have the respective meanings specified in
this Section 1.1. All other terms used in this Indenture that are defined in
the Trust Indenture Act or which are by reference therein defined in the
Securities Act (except as herein otherwise expressly provided or unless the
context otherwise requires) shall have the meanings assigned to such terms
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<PAGE> 10
in said Trust Indenture Act and in said Securities Act as in force at the date
of the execution of this Indenture. The words "herein," "hereof," "hereunder,"
and words of similar import refer to this Indenture as a whole and not to any
particular Article, Section or other Subdivision. The terms defined in this
Article include the plural as well as the singular.
Affiliate: The term "Affiliate" of any specified Person shall
mean any other Person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified Person. For the
purposes of this definition, "control,"when used with respect to any specified
Person means the power to direct or cause the direction of the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
Applicable Price: The term "Applicable Price" shall mean (i)
in the event of a Fundamental Change in which the holders of the 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
arithmetic average of the Closing Price for the Common Stock (determined as set
forth in Section 15.5(g)) during the ten (10) Trading Days (as defined in
Section 15.5(g)) 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 no 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.
Board of Directors: The term "Board of Directors" shall mean
the Board of Directors of the Company or a committee of such Board duly
authorized to act for it hereunder.
Business Day: The term "Business Day" means each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which the banking
institutions in The City of New York or the city in which the Corporate Trust
Office is located are authorized or obligated by law or executive order to
close or be closed.
Closing Price: The term "Closing Price" shall have the
meaning specified in Section 15.5(g).
Commission: The term "Commission" shall mean the Securities
and Exchange Commission.
Common Stock: The term "Common Stock" shall mean any stock of
any class of the Company which has no preference in respect of dividends or of
amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company and which is not subject to redemption
by the Company. Subject to the provisions of Section 15.6, however, shares
issuable on conversion of Notes shall include only shares of the class
designated as common
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<PAGE> 11
stock of the Company at the date of this Indenture or shares of any class or
classes resulting from any reclassification or reclassifications thereof and
which have no preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Company and which are not subject to redemption by the Company; provided,
that if at any time there shall be more than one such resulting class, the
shares of each such class then so issuable shall be substantially in the
proportion which the total number of shares of such class resulting from all
such reclassifications bears to the total number of shares of all such classes
resulting from all such reclassifications.
Company: The term "Company" shall mean CORESTAFF, Inc., a
Delaware corporation and, subject to the provisions of Article XII, shall
include its successors and assigns.
Conversion Rate: The term "Conversion Rate" shall have the
meaning specified in Section 15.4.
Corporate Trust Office: The term "Corporate Trust Office" or
other similar term, shall mean the principal office of the Trustee at which at
any particular time its corporate trust business shall be principally
administered, which office is, at the date as of which this Indenture is dated,
located at 101 Barclay Street, Floor 21W, New York, New York 10286.
Current Market Price: The Term "Current Market Price has the
meaning specified in Section 15.5(g).
Custodian: The term "Custodian" shall mean The Bank of New
York, as custodian with respect to the Notes in global form, or any successor
entity thereto.
Default: The term "default" shall mean any event that is, or
after notice or passage of time, or both, would be, an Event of Default.
Depositary: The term "Depositary" means, with respect to the
Notes issuable or issued in whole or in part in global form, the person
specified in Section 2.5(d) as the Depositary with respect to such Notes, until
a successor shall have been appointed and become such pursuant to the
applicable provisions of this Indenture, and thereafter, "Depositary" shall
mean or include such successor.
Designated Senior Indebtedness: 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). If any payment made to any holder of any Designated Senior
Indebtedness or its Representative with respect to such Designated Senior
Indebtedness is
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<PAGE> 12
rescinded or must otherwise be returned by such holder or Representative upon
the insolvency, bankruptcy or reorganization of the Company or otherwise, the
reinstated Indebtedness of the Company arising as a result of such rescission
or return shall constitute Designated Senior Indebtedness effective as of the
date of such rescission or return.
Distributed Securities: The term "Distributed Securities" has
the meaning specified in Section 15.5(d).
DTC: The term "DTC" shall mean The Depositary Trust Company.
Exchange Act: The term "Exchange Act" shall mean the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder, as in effect from time to time.
Expiration Time: The term "Expiration Time" has the meaning
specified in Section 15.5(f).
Event of Default: The term "Event of Default" shall mean any
event specified in Section 7.1(a), (b), (c), (d) or (e).
Fair Market Value: The term "fair market value" has the
meaning specified in Section 15.5(g).
Fundamental Change: The term "Fundamental Change" means the
occurrence of any transaction or event in connection with which all or
substantially all the 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 which is (or, upon consummation of or
immediately following such transaction or event, will be) listed on a United
States national securities exchange or approved for quotation in the Nasdaq
National Market or any similar United States system of automated dissemination
of quotations or securities prices.
Fundamental Change Repurchase Date: The term "Fundamental
Change Repurchase Date" has the meaning specified in Section 3.7.
Fundamental Change Repurchase Price: The term "Fundamental
Change Repurchase Price" has the meaning specified in Section 3.7.
Global Note: The term "Global Note" shall mean any Note
evidenced in global form as described in Section 2.5(b).
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<PAGE> 13
Indebtedness: The term "Indebtedness" means, with respect to
any Person, 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
services), (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).
Indenture: The term "Indenture" shall mean this instrument as
originally executed or, if amended or supplemented as herein provided, as so
amended or supplemented.
Issue Price: The term "Issue Price" means with respect to any
Note (or any portion thereof) _____% of the principal amount at maturity of
such Note (or such portion thereof).
NASD: The term "NASD" means the National Association of
Securities Dealers, Inc.
Note or Notes: The term "Note" or "Notes" shall mean any
Note or Notes, as the case may be, authenticated and delivered under this
Indenture, including any Global Note.
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<PAGE> 14
Noteholder or holder: The terms "Noteholder" or "holder" as
applied to any Note, or other similar terms (but excluding the term "beneficial
holder"), shall mean any person in whose name at the time particular Note is
registered on the Note registrar's books.
Note register: The term "Note register" shall have the
meaning specified in Section 2.5.
Note registrar: The term "Note registrar" shall habe the
meaning specified in Section 2.5.
Notes Representatives: The term "Notes Representatives" means
Morgan Stanley & Co. Incorporated, Alex, Brown & Sons Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co., Montgomery
Securities and The Robinson-Humphrey Company, Inc., as representatives of the
several underwriters in connection with the public offering of the Notes.
Officers' Certificate: The term "Officers' Certificate", when
used with respect to the Company, shall mean a certificate signed by both (a)
the President, the Chief Executive Officer Executive or Senior Vice President
or any Vice President (whether or not designated by a number or numbers or word
or words added before or after the title "Vice President") and (b) by the
Treasurer or any Assistant Treasurer or Secretary or any Assistant Secretary of
the Company.
Opinion of Counsel: The term "Opinion of Counsel" shall mean
an opinion in writing signed by legal counsel, who may be an employee of or
counsel to the Company, or other counsel acceptable to the Trustee.
Original Issue Discount: The term "Original Issue Discount" of
any Note means the difference between the Issue Price and the principal amount
at maturity of the Note as set forth on the face of the Note. For purposes of
this Indenture and the Notes, accrual of Original Issue Discount shall be
calculated on the basis of a 360-day year of twelve 30-day months, on a
semi-annual bond equivalent basis.
Outstanding: The term "outstanding", when used with reference
to Notes, shall, subject to the provisions of Section 9.4, mean, as of any
particular time, all Notes authenticated and made available for delivery by the
Trustee under this Indenture, except
(a) Notes theretofore canceled by the Trustee or delivered
to the Trustee for cancellation;
(b) Notes, or portions thereof, for the redemption of which
monies in the necessary amount shall have been deposited in trust with the
Trustee or with any paying agent (other than the Company) or shall have
been set aside and segregated in trust by the Company (if the Company shall
act as its own paying agent); provided, that if such Notes are to be
6
<PAGE> 15
redeemed prior to the maturity thereof, notice of such redemption shall
have been given as provided in Article III, or provision satisfactory to
the Trustee shall have been made for giving such notice;
(c) Notes in lieu of which, or in substitution for which,
other Notes shall have been authenticated and delivered pursuant to the
terms of Section 2.6 unless proof satisfactory to the Trustee is presented
that any such Notes are held by bona fide holders in due course; and
(d) Notes converted into Common Stock pursuant to Article XV
and Notes deemed not outstanding pursuant to Article III.
Payment Blockage Notice: The term "Payment Blockage Notice"
has the meaning specified in Section 4.2.
Person: The term "Person" shall mean a corporation, an
association, a partnership, an individual, a joint venture, a joint stock
company, a trust, an unincorporated organization or a government or an agency
or a political subdivision thereof.
Predecessor Note: The term "Predecessor Note" of any
particular Note shall mean every previous Note evidencing all or a portion of
the same debt as that evidenced by such particular Note; and, for the purposes
of this definition, any Note authenticated and delivered under Section 2.6 in
lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same
debt as the lost, destroyed or stolen Note that is replaces.
Purchased Shares: The term "Purchased Shares" has the meaning
specified in Section 15.5(f).
record date: The term "record date" has the meaning specified
in Section 15.5(g).
Redemption Price: With respect to any Note, the term
"Redemption Price" means the applicable Redemption Price as set forth in such
Note, including any accrued Original Issue Discount referred to therein.
Reference Market Price: The term "Reference Market Price"
shall initially mean $___________ and in the event of any adjustment to the
Conversion Rate pursuant to Section 15.5, 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 immediately prior to such
adjustment multiplied by a fraction, the numerator of which is the Conversion
Rate immediately prior to such adjustment and the denominator of which is the
Conversion Rate after such adjustment.
Registration Statement: The term "Registration Statement"
means the registration statement on Form S-3 (No. 333-315-09) filed by the
Company with the Commission.
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<PAGE> 16
Representative: The term "Representative" means the (a)
indenture trustee or other trustee, agent or representative for any Senior
Indebtedness or (b) with respect to any Senior Indebtedness that does not have
any such trustee, agent or other representative, (i) in the case of such Senior
Indebtedness issued pursuant to an agreement providing for voting arrangements
as among the holder or owners of such Senior Indebtedness, any holder or owner
of such Senior Indebtedness acting with the consent of the required persons
necessary to bind such holders or owners of such Senior Indebtedness and (ii)
in the case of all other such Senior Indebtedness, the holder or owner of such
Senior Indebtedness.
Responsible Officer: The term "Responsible Officer", when
used with respect to the Trustee, shall mean an officer of the Trustee in the
Corporate Trust Office assigned and duly authorized by the Trustee to
administer its corporate trust matters.
Restricted Securities: The term "Restricted Securities" has
the meaning specified in Section 2.5.
Securities Act: The term "Securities Act" shall mean the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder.
Senior Indebtedness: 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, costs,
expenses and other amounts accrued or due on or in connection with,
Indebtedness 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. If
any payment made to any holder of any Senior Indebtedness or its Representative
with respect to such Senior Indebtedness is rescinded or must otherwise be
returned by such holder or Representative upon the insolvency, bankruptcy or
reorganization of the company or otherwise, the reinstated Indebtedness of the
Company arising as a result of such rescission or return shall constitute
Senior Indebtedness effective as of the date of such rescission or return.
Subsidiary: The term "Subsidiary" means, with respect to any
person, (i) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of capital stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or
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<PAGE> 17
indirectly, by such person or one or more of the other subsidiaries of that
person (or a combination thereof) and (ii) any partnership (a) the sole general
partner or managing general partner of which is such person or a subsidiary of
such person or (b) the only general partners of which are such person or of one
or more subsidiaries of such person (or any combination thereof).
Trading Day: The term "Trading Day" shall have the meaning
specified in Section 15.5(g)(v).
Trigger Event: The term "Trigger Event" shall have the
meaning specified in Section 15.5(h).
Trust Indenture Act: The term "Trust Indenture Act" shall
mean the Trust Indenture Act of 1939, as amended, as it was in force at the
date of execution of this Indenture, except as provided in Sections 11.3 and
15.6; provided, however, that in the event the Trust Indenture Act of 1939 is
amended after the date hereof, the term "Trust Indenture Act" shall mean, to
the extent required by such amendment, the Trust Indenture Act of 1939 as so
amended.
Trustee: The term "Trustee" shall mean The Bank of New York
and its successors and any corporation resulting from or surviving any
consolidation or merger to which it or its successors may be a party and any
successor trustee at the time serving as successor trustee hereunder.
The definitions of certain other terms are as specified in
Section 2.5 and 3.5 and Article XV.
ARTICLE II
ISSUE, DESCRIPTION, EXECUTION,
REGISTRATION AND EXCHANGE OF NOTES
SECTION 2.1. DESIGNATION AMOUNT AND ISSUE OF NOTES. The
Notes shall be designated as "___% Convertible Subordinated Notes due 2004."
Notes not to exceed the aggregate principal amount at maturity of $180,000,000
(or $207,000,000 if the over-allotment option set forth in the Underwriting
Agreement dated _________, 1997 (as amended from time to time by the parties
thereto) by and between the Company and the Notes Representatives is exercised
in full) (except pursuant to Sections 2.5, 2.6, 3.3, 3.5 and 15.2 hereof) upon
the execution of this Indenture, or from time to time thereafter, may be
executed by the Company and delivered to the Trustee for authentication, and
the Trustee shall thereupon authenticate and make available for delivery said
Notes to or upon the written order of the Company, signed by its (a) President,
Executive or Senior Vice President or any Vice President (whether or not
designated by a number or numbers or word or words added before or after the
title "Vice President") and (b) Treasurer or Assistant Treasurer or its
Secretary or any Assistant Secretary, without any further action by the Company
hereunder.
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SECTION 2.2. FORM OF NOTES. The Notes and the Trustee's
certificate of authentication to be borne by such Notes shall be substantially
in the form set forth in Exhibit A, which is incorporated in and made a part of
this Indenture.
Any of the Notes may have such letters, numbers or other marks
of identification and such notations, legends and endorsements as the officers
executing the same may approve (execution thereof to be conclusive evidence of
such approval) and as are not inconsistent with the provisions of this
Indenture, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any
securities exchange or automated quotation system on which the Notes may be
listed, or to conform to usage.
Any Note in global form shall represent such of the
outstanding Notes as shall be specified therein and shall provide that it shall
represent the aggregate amount of outstanding Notes from time to time endorsed
thereon and that the aggregate amount of outstanding Notes represented thereby
may from time to time be increased or reduced to reflect transfers or exchanges
permitted hereby. Any endorsement of a Note in global form to reflect the
amount of any increase or decrease in the amount of outstanding Notes
represented thereby shall be made by the Trustee or the Custodian, at the
direction of the Trustee, in such manner and upon instructions given by the
holder of such Notes in accordance with this Indenture.
Payment of any principal amount at maturity, Redemption Price,
Fundamental Change Repurchase Price and interest on any Note in global form
shall be made to the holder of such Note.
The terms and provisions contained in the form of Note
attached as Exhibit A hereto shall constitute, and are hereby expressly made, a
part of this Indenture and, to the extent applicable, the Company and the
Trustee, by their execution and delivery of this Indenture, expressly agree to
such terms and provisions and to be bound thereby.
SECTION 2.3. DATE AND DENOMINATION OF NOTES; PAYMENTS OF
INTEREST. The Notes shall be issuable in registered form without coupons in
denominations of $1,000 principal amount at maturity and integral multiples
thereof. Every Note shall be dated the date of its authentication and shall
bear interest from the applicable date in each case as specified on the face of
the form of Note attached as Exhibit A hereto. Interest on the Notes shall be
computed on the basis of a 360-day year comprised of twelve 30-day months.
The person in whose name any Note (or its Predecessor Note) is
registered at the close of business on any record date with respect to any
interest payment date shall be entitled to receive the interest payable on such
interest payment date, except (i) that the interest payable 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
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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 in Section 3.7) 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 pursuant to Section 3.4 or 3.7 hereof 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 principal amount so converted. Interest
may, at the option of the Company, 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 account maintained by such person located in the United
States; provided, however, that payments to DTC will be made by wire transfer of
immediately available funds to the account of DTC or its nominee. The term
"record date" with respect to any interest payment date shall mean the _______
or _________ preceding said _________ or ___________ , respectively.
Any interest on any Note which is payable, but is not
punctually paid or duly provided for, on any said _______ or ________ (herein
called "Defaulted Interest") shall forthwith cease to be payable to the
Noteholder on the relevant record date by virtue of his having been such
Noteholder; and such Defaulted Interest shall be paid by the Company, at its
election in each case, as provided in clause (1) or (2) below;
(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Notes (or their respective
Predecessor Notes) are registered at the close of business on a special
record date for the payment of such Defaulted Interest, which shall be
fixed in the following manner. The Company shall notify the Trustee in
writing of the amount of Defaulted Interest to be paid on each Note and the
date of the payment (which shall be not less than twenty-five (25) days
after the receipt by the Trustee of such notice, unless the Trustee shall
consent to an earlier date), and at the same time the Company shall deposit
with the Trustee an amount of money equal to the aggregate amount to be
paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this
clause provided. Thereupon the Trustee shall fix a special record date for
the payment of such Defaulted Interest which shall be not more than fifteen
(15) days and not less than ten (10) days prior to the date of the proposed
payment and not less than ten (10) days after the receipt by the Trustee of
the notice payment. The Trustee shall promptly notify the Company at the
expense of the Company, shall cause notice of the proposed payment of such
Defaulted Interest and the special record date therefor to be mailed,
first-class postage prepaid, to each Noteholder at this address as it
appears in the Note register, not less than ten (10) days prior to such
special record date. Notice of the proposed payment of such Defaulted
Interest and the special record date therefor having been so mailed, such
Defaulted Interest shall be paid to the Persons in whose names the Notes
(or their respective Predecessor Notes) were
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registered at the close of business on such special record date and shall
no longer be payable pursuant to the following clause (2).
(2) The Company may make payment of any Defaulted Interest
in any other lawful manner not inconsistent with the requirements of any
securities exchange and automated quotation system on which the Notes may
be listed or designated for issuance, and upon such notice as may be
required by such exchange and automated quotation system, if, after notice
given by the Company to the Trustee of the proposed payment pursuant to
this clause, such manner of payment shall be deemed practicable by the
Trustee.
SECTION 2.4. EXECUTION OF NOTES. The Notes shall be
signed in the name and on behalf of the Company by the manual or facsimile
signature of its President, any Executive or Senior Vice President or any Vice
President (whether or not designated by a number or numbers or word or words
added before or after the title "Vice President") and attested by the manual or
facsimile signature of its Secretary or any of its Assistant Secretaries (which
may be printed, engraved or otherwise reproduced thereon, by facsimile or
otherwise). Only such Notes as shall bear thereon a certificate of
authentication substantially in the form set forth on the form of Note attached
as Exhibit A hereto, manually executed by the Trustee (or an authenticating
agent appointed by the Trustee as provided by Section 16.11), shall be entitled
to the benefits of this Indenture or be valid or obligatory for any purpose.
Such certificate by the Trustee (or such an authenticating agent) upon any Note
executed by the Company shall be conclusive evidence that the Note so
authenticated has been duly authenticated and delivered hereunder and that the
holder is entitled to the benefits of this Indenture.
In case any officer of the Company who shall have signed any
of the Notes shall cease to be such officer before the Notes so signed shall
have been authenticated and delivered by the Trustee, or disposed of by the
Company, such Notes nevertheless may be authenticated and delivered or disposed
of as though the person who signed such Notes had not ceased to be such officer
of the Company; and any Note may be signed on behalf of the Company by such
persons as, at the actual date of the execution of such Note, shall be the
proper officers of the Company, although at the date of the execution of this
Indenture any such person was not such an officer.
SECTION 2.5. EXCHANGE AND REGISTRATION OF TRANSFER OF
NOTES: RESTRICTIONS ON TRANSFER DEPOSITARY.
(a) The Company shall cause to be kept at the Corporate
Trust Office a register (the register maintained in such office and in any
other office or agency of the Company designated pursuant to Section 5.2 being
herein sometimes collectively referred to as the "Note register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Notes and of transfers of Notes. The Note
register shall be in written form or in any form capable of being converted
into written form within a reasonably prompt period of time. The Trustee is
hereby appointed "Note registrar" for the purpose of registering Notes and
transfers of
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Notes as herein provided. The Company may appoint one or more co-registrars in
accordance with Section 5.2.
Upon surrender for registration of transfer of any Note to the
Note registrar or any co-registrar, and satisfaction of the requirements for
such transfer set further in this Section 2.5, the Company shall execute, and
the Trustee shall authenticate and make available for delivery, in the name of
the designated transferee or transferees, one or more new Notes of any
authorized denominations and of a like aggregate principal amount and bearing
such restrictive legends as may be required by this Indenture.
Notes may be exchanged for other Notes of any authorized
denominations and of a like aggregate principal amount, upon surrender of the
Notes to be exchanged at any such office of agency maintained by the Company
pursuant to Section 5.2. Whenever any Notes are so surrendered for exchange,
the Company shall execute, and the trustee shall authenticate and make
available for delivery, the Notes which the Noteholder making the exchange is
entitled to receive bearing registration numbers not contemporaneously
outstanding.
All Notes issued upon any registration of transfer or exchange
of Notes shall be the valid obligations of the Company, evidencing the same
Debt Securities, and entitled to the same benefits under this Indenture, as the
Notes surrendered upon such registration of transfer or exchange.
All Notes presented or surrendered for registration of
transfer or for exchange, redemption or conversion shall (if so required by the
Company or the Note registrar) be duly endorsed, or be accompanied by a written
instrument or instruments of transfer in form satisfactory to the Company, and
the Notes shall be duly executed by the Noteholder thereof or his attorney duly
authorized in writing.
No service charge shall be made for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any tax, assessment or other governmental charge that may
be imposed in connection with any registration of transfer or exchange of
Notes.
Neither the Company nor the Trustee nor any Note registrar or
any Company registrar shall be required to exchange or register a transfer of
(a) any Notes for a period of fifteen (15) days next preceding any selection of
Notes to be redeemed or (b) any Notes or portions thereof called for redemption
pursuant to Article III or (c) any Notes or portion thereof surrendered for
conversion pursuant to Article XV.
(b) So long as the Notes are eligible for book-entry
settlement with the Depositary, or unless otherwise required by law, all Notes
that are so eligible may be represented by one or more Notes in global form (a
"Global Note") registered in the name of the Depositary or the nominee of the
Depositary, except as otherwise specified below. The transfer and exchange of
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beneficial interests in any such Global Note shall be effected through the
Depositary in accordance with this Indenture and the procedures of the
Depositary therefor.
Transfers of interests in the Notes between any Global Note
and any other Note will be made in accordance with the standing instructions
and procedures of the Depositary and its participants. The Trustee shall make
appropriate endorsements to reflect increases or decreases in the principal
amounts of such Global Notes as set forth on the face of the Note ("Principal
Amount") to reflect any such transfers.
Except as provided below, beneficial owners of a Global Note
shall 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 Holders of such Notes in global
form.
(c) Any Note in global form may be endorsed with or have
incorporated in the text thereof such legends or recitals or changes not
inconsistent with the provisions of this Indenture as may be required by the
Custodian, the Depositary or by the National Association of Securities Dealers,
Inc. in order for the Notes to be tradeable on the Nasdaq National Market or as
may be required for the Notes to be tradeable on any other market developed for
trading of such securities or required to comply with any applicable law or any
regulation thereunder or with the rules and regulations of any securities
exchange or automated quotation system upon which the Notes may be listed or
traded or to conform with any usage with respect thereto, or to indicated any
special limitations or restrictions to which any particular Notes are subject.
(d) As used in Sections 2.5(d) and 2.5(e), the term
"transfer" encompasses any sale, pledge, transfer or other disposition
whatsoever of any Note.
Notwithstanding any other provisions of this Indenture (other
than the provisions set forth in the second paragraph of Section 2.5(b) and in
this Section 2.5(d)), a Note in global form may not be transferred as a whole
or in part except by the Depositary to a nominee of the Depositary or by a
nominee of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary or any such nominee to a successor Depositary
or a nominee of such successor Depositary.
The Depositary shall be a clearing agency registered under the
Exchange Act. The Company initially appoints DTC to act as Depositary with
respect to the Notes in global form. Initially, any Global Note shall be issued
to the Depositary, registered in the name of Cede & Co., as the nominee of the
Depositary, and deposited with the Custodian for Cede & Co.
If at any time the Depositary for a Global Note notifies the
Company that it is unwilling or unable to continue as Depositary for such Note,
the Company may appoint a successor Depositary with respect to such Note. If a
successor Depositary is not appointed by the Company within ninety (90) days
after the Company receives such notice, the Company will execute, and the
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Trustee, upon receipt of an Officers' Certificate for the authentication and
delivery of Notes, will authenticate and make available for delivery, Notes in
certificated form, in aggregate principal amount equal to the principal amount
of such Note in global form, in exchange for such Note in global form.
If a Note in certificated form is issued in exchange for any
portion of a Global Note after the close of business at the office or agency
where such exchange occurs on any record date and before the opening of
business at such office or agency on the next succeeding interest payment date,
interest will not be payable on such interest payment date in respect of such
Note, but will be payable on such interest payment date, subject to the
provisions of Section 2.3, only to the person to whom interest in respect of
such portion of such Global Note is payable in accordance with the provisions
of this Indenture.
Notes in certificated form issued in exchange for all or a
part of a Note in global form pursuant to this Section 2.5 shall be registered
in such names and in such authorized denominations as the Depositary, pursuant
to instructions from its direct or indirect participants or otherwise, shall
instruct the Trustee. Upon execution and authentication, the Trustee shall make
available for delivery such Notes in certificated form to the persons in whose
names such Notes in certificated form are so registered.
At such time as all interests in a Note in global form have
been redeemed, converted, canceled, exchanged for Notes in certificated form,
or transferred to a transferee who receives Notes in certificated form thereof,
such Note in global form shall, upon receipt thereof, be canceled by the
Trustee in accordance with standing procedures and instructions existing
between the Depositary and the Custodian. At any time prior to such
cancellation, if any interest in a Global Note is exchanged for Notes in
certificated form, redeemed, converted, repurchased or canceled, exchanged for
Notes in certified form or transferred to a transferee who receives Notes in
certificated form therefor or any Note in certificated form is exchanged or
transferred for part of a Note in global form, the principal amount at maturity
of such Note in global form shall, in accordance with the standing procedures
and instructions existing between the Depositary and the Custodian, be
appropriately reduced or increased, as the case may be, and an endorsement
shall be made on such Global Note, by the Trustee or the Custodian, at the
direction of the Trustee, to reflect such reduction or increase.
SECTION 2.6. MUTILATED, DESTROYED, LOST OR STOLEN NOTES.
In case any Note shall become mutilated or be destroyed, lost or stolen, the
Company in its discretion may execute, and upon its request the Trustee or an
authenticating agent appointed by the Trustee shall authenticate and make
available for delivery, a new Note, bearing a number not contemporaneously
outstanding, in exchange and substitution for the mutilated Note, or in lieu of
and in substitution for the Note so destroyed, lost or stolen. In every case
the applicant for a substituted Note shall furnish to the Company, to the
Trustee and, if applicable, to such authenticating agent such security or
indemnity as may be required by them to save each of them harmless for any
loss, liability, cost or expense caused by or connected with such substitution,
and, in every case of destruction, loss or theft, the
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applicant shall also furnish to the Company, to the Trustee and, if applicable,
to such authenticating agent evidence to their satisfaction of the destruction,
loss or theft of such Note and of the ownership thereof.
The Trustee or such authenticating agent may authenticate any
such substituted Note and deliver the same upon the receipt of such security or
indemnity as the Trustee, the Company and, if applicable, such authenticating
agent may require. Upon the issuance of any substituted Note, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses connected
therewith. In case any Note which has matured or is about to mature or has been
called for redemption or is about to be converted into Common Stock shall
become mutilated or be destroyed, lost or stolen, the Company may, instead of
issuing a substitute Note, pay or authorize the payment of or convert or
authorize the conversion of the same (without surrender thereof except in the
case of a mutilated Note), as the case may be, if the applicant for such
payment or conversion shall furnish to the Company, to the Trustee and, if
applicable, to such authenticating agent such security or indemnity as may be
required by them to save each of them harmless for any loss, liability, cost or
expense caused by or connected with such substitution, and, in case of
destruction, loss or theft, evidence satisfactory to the Company, the Trustee
and, if applicable, any paying agent or conversion agent of the destruction,
loss or theft or such Note and of the ownership thereof.
Every substituted Note issued pursuant to the provisions of
this Section 2.6 by virtue of the fact that any Note is destroyed, lost or
stolen shall constitute an additional contractual obligation of the Company,
whether or not the destroyed, lost or stolen Note shall be found at any time,
and shall be entitled to all the benefits of (but shall be subject to all the
limitations set forth in) this Indenture equally and proportionately with any
and all other Notes duly issued hereunder. To the extent permitted by law, all
Notes shall be held and owned upon the express condition that the foregoing
provisions are exclusive with respect to the replacement or payment or
conversion of mutilated, destroyed, lost or stolen Notes and shall preclude any
and all other rights or remedies notwithstanding any law or statute existing or
hereafter enacted to the contrary with respect to the replacement or payment or
conversion of negotiable instruments or other securities without their
surrender.
SECTION 2.7. TEMPORARY NOTES. Pending the preparation
of Notes in certificated forms, the Company may execute and the Trustee or an
authenticating agent appointed by the Trustee shall, upon the written request
of the Company, authenticate and make available for delivery temporary Notes
(printed or lithographed). Temporary Notes shall be issuable in any authorized
denomination, and substantially in the form of the Notes in certificated form,
but with such omissions, insertions and variations as may be appropriate for
temporary Notes, all as may be determined by the Company. Every such temporary
Note shall be executed by the Company and authenticated by the Trustee or such
authenticating agent upon the same conditions and in substantially the same
manner, and with the same effect, as the Notes in certificated form. Without
unreasonable delay the Company will execute and deliver to the Trustee or such
authenticating agent Notes in certificated form (other than in the case of
Notes in global form) and thereupon any or all
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temporary Notes (other than any such Note in global form) may be surrendered in
exchange therefor, at each office or agency maintained by the Company pursuant
to Section 5.2 and the Trustee or such authenticating agent shall authenticate
and deliver in exchange for such temporary Notes an equal aggregate principal
amount of Notes in certificated form. Such exchange shall be made by the
Company at its own expense and without any charge therefor. Until so exchanged,
the temporary Notes shall in all respects be entitled to the same benefits and
subject to the same limitations under this Indenture as Notes in certificated
form authenticated and made available for delivery hereunder.
SECTION 2.8. CANCELLATION OF NOTES PAID, ETC. All Notes
surrendered for the purpose of payment, redemption, conversion, exchange or
registration of transfer, shall, if surrendered to the Company or any paying
agent or any Note registrar or any conversion agent, be surrendered to the
Trustee and promptly canceled by it, or, if surrendered to the Trustee, shall
be promptly canceled by it, and no Notes shall be issued in lieu thereof except
as expressly permitted by any of the provisions of this Indenture. After such
cancellation, the Trustee shall, if requested by the Company, deliver such
cancelled Notes to the Company. If the Company shall acquire any of the Notes,
such acquisition shall not operate as a redemption or satisfaction of the
indebtedness represented by such Notes unless and until the same are delivered
to the Trustee for cancellation.
SECTION 2.9. CUSIP NUMBERS. The Company in issuing the
Notes may use "CUSIP" numbers (if then generally in use), and, if so, the
Trustee shall use CUSIP numbers in notices of redemption as a convenience to
Holders; provided, that any such notice may state that no representation is
made as to the correctness of such numbers either as printed on the Notes or as
contained in any notice of a redemption and that reliance may be placed only on
the other identification numbers printed on the Notes, and any such redemption
shall not be affected by any defect in or omission of such numbers. The Company
will promptly notify the Trustee of any change in the CUSIP numbers.
ARTICLE III
REDEMPTION OF NOTES
SECTION 3.1 REDEMPTION PRICES. The Company may not
redeem the Notes prior to August ___, 2000. On or after that date, the Company
may, at its option, redeem all or from time to time any part of the Notes on
any date prior to maturity, upon notice as set forth in Section 3.3, and 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.
SECTION 3.2 NOTICE OF TRUSTEE. If the Company elects to
redeem Notes pursuant to Section 3.1, it shall notify the Trustee in writing of
the redemption date and the principal amount
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of Notes to be redeemed, as least 45 days before the redemption date (unless a
shorter period shall be satisfactory to the Trustee).
SECTION 3.3 NOTICE OF REDEMPTION; SELECTION OF NOTES. In
case the Company shall desire to exercise the right to redeem all or, as the
case may be, any part of the Notes pursuant to Section 3.1 for redemption, it
or, at its request, the Trustee in the name of and at the expense of the
Company, shall mail or cause to be mailed a notice of such redemption at least
30 and not more than 60 days prior to the date fixed for redemption to the
holders of Notes so to be redeemed as a whole or in part at their last
addresses as the same appear on the registry books of the Company. Such
mailing shall be by first class mail. The notice if mailed in the manner
herein provided shall be conclusively presumed to have been duly given, whether
or not the holder receives such notice. In any case, failure to give such
notice by mail or any defect in the notice to the holder of any Note designated
for redemption as a whole or in part shall not affect the validity of the
proceedings for the redemption of any other Note.
Each such notice of redemption shall identify the Notes to be
redeemed (including CUSIP number), specify the principal amount at
maturity of each Note to be redeemed, the date fixed for redemption, the
Redemption Price at which Notes are to be redeemed, the place or places of
payment, that payment will be made upon presentation and surrender of such
Notes, that interest and Original Issue Discount accrued to the date fixed for
redemption will be paid as specified in said notice, and that on and after said
date interest and Original Issue Discount thereon or on the portions thereof to
be redeemed will cease to accrue, unless the Company defaults in the payment of
the Redemption Price. Such notice shall also state the current Conversion Rate
and the date on which the right to convert such Notes or portions thereof into
Common Stock will expire. If fewer than all the Notes are to be redeemed, the
notice of redemption shall identify the Notes to be redeemed. In case any Note
is to be redeemed in part only, the notice of redemption shall state the
portion of the principal amount at maturity thereof to be redeemed and shall
state that on and after the date fixed for redemption, upon surrender of such
Note, a new Note or Notes in principal amount at maturity equal to the
unredeemed portion thereof will be issued.
No later than the Business Day prior to the redemption date
specified in the notice of redemption given as provided in this Section, the
Company will deposit with the Trustee or with one or more Paying Agents (or, if
the Company is acting as its own Paying Agent, set aside, segregate and hold in
trust as provided in Section 5.4) an amount of money sufficient to redeem on
the redemption date all the Notes so called for redemption (other than those
theretofore surrendered for conversion into Common Stock) at the appropriate
Redemption Price, together with accrued interest to the date fixed for
redemption. If any Note called for redemption is converted pursuant hereto,
any money deposited with the Trustee or any Paying Agent or so segregated and
held in trust for the redemption of such Note shall be paid to the Company upon
its request, or, if then held by Company shall be discharged from such trust.
If fewer than all the Notes are to be redeemed, the Trustee
shall select, by lot, pro rata or in such other manner as the Trustee shall
deem equitable and fair, the Notes or portions thereof
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(in integral multiples of $1,000 principal amount at maturity) to be redeemed.
If any Note selected for partial redemption is converted in part after such
selection, the converted portion of such Note shall be deemed (so far as it may
be) to be the portion to be selected for redemption. The Notes (or portions
thereof) so selected shall be deemed duly selected for redemption for all
purposes hereof, notwithstanding that any such Note is converted as a whole or
in part before the mailing of the notice of redemption.
Upon any redemption of less than all Notes, the Company and
the Trustee may treat as outstanding any Notes surrendered for conversion
during the period of 15 days next preceding the mailing of a notice of
redemption and need not treat as outstanding any Note authenticated and
delivered during such period in exchange for the unconverted portion of any
Note converted in part during such period.
SECTION 3.4. PAYMENT OF NOTES CALLED FOR REDEMPTION. If
notice of redemption has been given as above provided, the Notes or portions of
Notes with respect to which such notice has been given shall, unless
theretofore converted into Common Stock pursuant to the terms hereof, become
due and payable on the date and at the place or places stated in such notice at
the applicable Redemption Price, together with interest accrued to the date
fixed for redemption, and on and after said date (unless the Company shall
default in the payment of such Notes at the Redemption Price, together with
interest accrued to said date) Original Issue Discount and interest on the
Notes or portions of Notes so called for redemption shall cease to accrue and
such Notes shall cease after the date fixed for redemption to be convertible
into Common Stock and, except as provided in Sections 8.5 and 13.4, to be
entitled to any benefit or security under this Indenture, and the holders
thereof shall have no right in respect of such Notes except the right to
receive the Redemption Price thereof and unpaid interest to the date fixed for
redemption. On presentation and surrender of such Notes at a place of payment
in said notice specified, the said Notes or the specified portions thereof
shall be paid and redeemed by the Company at the applicable Redemption Price,
together with interest accrued thereon to 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
as such on the relevant record date subject to the terms and provisions of
Section 2.2 hereof.
Upon presentation of any Note redeemed in part only, the
Company shall execute and the Trustee shall authenticate and deliver to the
holder thereof, at the expense of the Company, a new Note or Notes, of
authorized denominations, in principal amount at maturity equal to the
unredeemed portion of the Note so presented.
Notwithstanding the foregoing, the Trustee shall not redeem
any Notes or mail any notice of optional redemption during the continuance of a
default in payment of principal amount at maturity, Redemption Price,
Fundamental Change Repurchase Price or interest in respect of the Notes or of
any Event of Default. If any Note called for redemption shall not be so paid
upon surrender thereof for redemption, the Redemption Price and, to the extent
legally permitted, interest, if any, in respect thereof shall, until paid or
duly
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provided for, bear interest from the date fixed for redemption at the rate
borne by the Note (treating the accrual of Original Issue Discount as if it
were interest) and such Note shall remain convertible into Common Stock until
the Redemption Price shall have been paid or duly provided for.
SECTION 3.5 NO SINKING FUND. The Notes shall not be
entitled to the benefit of any sinking fund.
SECTION 3.6 CONVERSION ARRANGEMENT ON CALL FOR
REDEMPTION. In connection with any redemption of Notes, the Company may
arrange for the purchase and conversion of any Notes by an agreement with one
or more investment bankers or other purchasers to purchase such Notes by paying
to the Trustee in trust for the Noteholders, on or before the close of business
on the date fixed for redemption, an amount not less than the applicable
Redemption Price, together with interest accrued to the date fixed for
redemption, of such Notes. Notwithstanding anything to the contrary contained
in this Article III, the obligation of the Company to pay the Redemption
Price of such Notes, together with interest accrued to the date fixed for
redemption, shall be deemed to be satisfied and discharged to the extent such
amount is so paid by such purchasers. If such an agreement is entered into, a
copy of which will be filed with the Trustee prior to the date fixed for
redemption, any Notes not duly surrendered for conversion by the holders
thereof may, at the option of the Company, be deemed, to the fullest extent
permitted by law, acquired by such purchasers from such holders and
(notwithstanding anything to the contrary contained in Article XV)
surrendered by such purchasers for conversion, all as of immediately prior to
the close of business on the date fixed for redemption (and the right to convert
any such Notes shall be extended through such time), subject to payment of the
above amount as aforesaid. At the direction of the Company, the Trustee shall
hold and dispose of any such amount paid to it in the same manner as it would
monies deposited with it by the Company for the redemption of Notes. Without the
Trustee's prior written consent, no arrangement between the Company and such
purchasers for the purchase and conversion of any Notes shall increase or
otherwise affect any of the powers, duties, responsibilities or obligations of
the Trustee as set forth in this Indenture, and the Company agrees to indemnify
the Trustee from, and hold it harmless against, any loss, liability or expense
arising out of or in connection with any such arrangement for the purchase and
conversion of any Notes between the Company and such purchasers to which the
Trustee has not consented in writing, including the costs and expenses incurred
by the Trustee in the defense of any claim or liability arising out of or in
connection with the exercise or performance of any of its powers, duties,
responsibilities or obligations under this Indenture.
SECTION 3.7. REDEMPTION AT OPTION OF HOLDERS.
(a) If there shall occur a Fundamental Change at any time
prior to ________, 2004, then each Noteholder shall have the right, at such
holder's option, to require the Company to redeem all of such holder's Notes,
or any portion thereof that is an integral multiple of $1,000 principal amount
at maturity, on the date (the "Fundamental Change Repurchase Date") that is
thirty (30) days after the date of the Company Notice (as defined in Section
3.7(b) below) of such Fundamental Change (or, if such 30th day is not a
Business Day, the next succeeding Business Day).
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Any such redemption of Notes shall be made on the Fundamental Change Repurchase
Date at a price (the "Fundamental Change Repurchase Price") equal to the Issue
Price plus accrued Original Issue Discount to the Fundamental Change Repurchase
Date; provided, that if the Applicable Price with respect to the Fundamental
Change is less than the Reference Market Price, 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 to such holders accrued
interest to, but excluding, the Fundamental Change Date on the redeemed Notes;
provided, that if such repayment date is an interest payment date, then the
interest payable on such date shall be paid to the holder of record of the Note
on the next preceding record date.
Upon presentation of any Note redeemed in part only, the
Company shall execute and the Trustee shall authenticate and deliver to the
holder thereof, at the expense of the Company, a new Note or Notes, of
authorized denominations, in principal amount equal to the unredeemed portion
of the Notes so presented.
(b) On or before the tenth day after the occurrence of a
Fundamental Change, the Company, or, at its request (which must be received by
the Trustee at least five (5) Business Days prior to the date the Trustee is
requested to give notice as described below), the Trustee in the name of and at
the expense of the Company, shall mail or cause to be mailed to all holders of
record on the date of the Fundamental Change a notice (the "Company Notice") of
the occurrence of such Fundamental Change and of the redemption right at the
option of the holders arising as a result thereof. Such notice shall be mailed
in the manner and with the effect set forth in the first paragraph of Section
3.3. The Company shall also deliver a copy of the Company Notice to the
Trustee at such time as it is mailed to Noteholders.
Each Company Notice shall specify the circumstances
constituting the Fundamental Change, the Fundamental Change Repurchase Date,
the price at which the Company shall be obligated to redeem Notes, the latest
time on the Fundamental Change Repurchase Date by which the holder must
exercise the redemption right (the "Fundamental Change Expiration Time"), that
the holder shall have the right to withdraw any Notes surrendered prior to the
Fundamental Change Expiration Time, a description of the procedure which a
Noteholder must follow to exercise such redemption right and to withdraw any
surrendered Notes, the place or places where the holder is to surrender such
holder's Notes, and the amount of Original Issue Discount and interest accrued
on each Note to the Fundamental Change Repurchase Date.
No failure of the Company to give the foregoing notices and no
defect therein shall limit the Noteholders' redemption rights or affect the
validity of the proceedings for the repurchase of the Notes pursuant to this
Section 3.7.
(c) For a Note to be so repaid at the option of the
holder, the Company must receive at the office or agency of the Company
maintained for that purpose in the Borough of Manhattan, The City of New York
or, at the option of such holder, the Corporate Trust Office, such
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Note with the form entitled "Option to Elect Repayment Upon A Fundamental
Change" on the reverse thereof duly completed, together with such Notes duly
endorsed for transfer, on or before the Fundamental Change Expiration Time. All
questions as to the validity, eligibility (including time of receipt) and
acceptance of any Note for repayment shall be determined by the Company, whose
determination shall be final and binding absent manifest error.
(d) On or prior to the Fundamental Change Repurchase Date,
the Company will deposit with the Trustee or with one or more paying agents
(or, if the Company is acting as its own paying agent, set aside, segregate and
hold in trust as provided in Section 5.4) an amount of money sufficient to
repay on the Fundamental Change Repurchase Date all the Notes to be repaid on
such date at the appropriate redemption price, together with accrued Original
Issue Discount and interest to (but excluding) the Fundamental Change
Repurchase Date; provided, that if such payment is made on the Fundamental
Change Repurchase Date it must be received by the Trustee or paying agent, as
the case may be, by 10:00 a.m. New York City time, on such date. Payment for
Notes surrendered for redemption (and not withdrawn) prior to the Fundamental
Change Expiration Time will be made promptly (but in no event more than three
Business Days) following the Fundamental Change Repurchase Date by mailing
checks for the amount payable to the holders of such Notes entitled thereto as
they shall appear on the registry books of the Company.
(e) In the case of consolidation, merger, conveyance,
transfer or lease to which Section 15.6 applies, in which the Common Stock of
the Company is changed or exchanged as a result into the right to receive
securities, cash or other property which includes shares of Common Stock of the
Company or another Person that are, or upon issuance will be, traded on a
United States national securities exchange or approved for trading on an
established automated over-the-counter trading market in the United States and
such shares constitute at the time such change or exchange becomes effective in
excess of 50% of the aggregate fair market value of such securities, cash and
other property (as determined by the Company, which determination shall be
conclusive and binding), then the Person formed by such consolidation or
resulting from such merger or which acquires such assets, as the case may be,
shall execute and deliver to the Trustee a supplemental indenture (which shall
comply with the Trust Indenture Act as in force at the date of execution of
such supplemental indenture) modifying the provisions of this Indenture
relating to the right of holders of the Notes to cause the Company to
repurchase the Notes following a Fundamental Change, including without
limitation the applicable provisions of this Section 3.7 and the definitions of
the Applicable Price, Common Stock, Fundamental Change and Reference Market
Price, as appropriate, as determined in good faith by the Company (which
determination shall be conclusive and binding), to make such provisions apply
to the common stock and the issuer thereof if different from the Company and
Common Stock of the Company (in lieu of the Company and the Common Stock of the
Company).
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ARTICLE IV
SUBORDINATION OF NOTES
SECTION 4.1 AGREEMENT OF SUBORDINATION. The Company
covenants and agrees, and each holder of Notes issued hereunder by his
acceptance thereof likewise covenants and agrees, that all Notes shall be
issued subject to the provisions of this Article IV; and each Person holding
any Note, whether upon original issue or upon transfer, assignment or exchange
thereof, accepts and agrees to be bound by such provisions.
The payment of the principal of, premium, if any, and interest
on all Notes (including, but not limited to, the Redemption Price with respect
to the Notes called for redemption in accordance with Section 3.3 or the
Fundamental Change Repurchase Price with respect to the Notes submitted for
redemption in accordance with Section 3.7, as the case may be, as provided in
the Indenture) issued hereunder shall, to the extent and in the manner
hereinafter set forth, be subordinated and subject in right of payment to the
prior payment in full of all Senior Indebtedness, whether outstanding at the
date of this Indenture or thereafter incurred.
No provision of this Article IV shall prevent the occurrence
of any default or Event of Default hereunder.
SECTION 4.2. PAYMENTS TO NOTEHOLDERS. No payment shall be
made with respect to the principal of, or premium, if any, or interest on the
Notes (including, but not limited to, the Redemption Price with respect to the
Notes to be called for redemption in accordance with Section 3.3 or the
Fundamental Change Repurchase Price with respect to Notes submitted for
redemption in accordance with Section 3.7, as the case may be, as provided in
the Indenture), except payments and distributions made by the Trustee as
permitted by the first or second paragraph of Section 4.5, if:
(i) a default in the payment of principal, premium, if
any, interest, rent or other obligations in respect of Senior
Indebtedness occurs and is continuing (or, in the case of Senior
Indebtedness for which there is a period of grace, in the event of such
a default that continues beyond the period of grace, if any, specified
in the instrument or lease evidencing such Senior Indebtedness),
unless and until such default shall have been cured or waived or shall
have ceased to exist; or
(ii) a default, other than a payment default, on Designated
Senior Indebtedness occurs and is continuing that then permits holders
of such Designated Senior Indebtedness to accelerate its maturity and
the Trustee receives a notice of the default (a "Payment Blockage
Notice") from a Representative or the Company.
If the Trustee receives any Payment Blockage Notice pursuant to clause (ii)
above, no subsequent Payment Blockage Notice shall be effective for purposes of
this Section unless and until (A) at least
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365 days shall have elapsed since the initial effectiveness of the immediately
prior Payment Blockage Notice, and (B) all scheduled payments of principal
amount at maturity, Redemption Price, Fundamental Change Repurchase Price and
interest on the Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice.
The Company may and shall resume payments on and distributions
in respect of the Notes upon the earlier of:
(1) the date upon which the default is cured or waived or
ceases to exist, or
(2) in the case of a default referred to in clause (ii)
above, 179 days after the Payment Blockage Notice is received if the maturity
of such Designated Senior Indebtedness has not been accelerated, unless this
Article IV otherwise prohibits the payment or distribution at the time of such
payment or distribution.
Upon any payment by the Company, or distribution of assets of
the Company of any kind or character, whether in cash, property or securities,
to creditors upon any dissolution or winding-up or liquidation or
reorganization of the Company, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all amounts due or
to become due upon all Senior Indebtedness shall first be paid in full in cash
or other payment satisfactory to the holders of such Senior Indebtedness, or
payment thereof in accordance with its terms provided for in cash or other
payment satisfactory to the holders of such Senior Indebtedness before any
payment is made on account of the principal of, premium, if any, or interest on
the Notes (except payments made pursuant to Article XIII from monies deposited
with the Trustee pursuant thereto prior to commencement of proceedings for such
dissolution, winding-up, liquidation or reorganization); and upon any such
dissolution or winding-up or liquidation or reorganization of the Company or
bankruptcy, insolvency, receivership or other proceeding, any payment by the
Company, or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, to which the holders of the Notes or
the Trustee would be entitled, except for the provisions of this Article IV,
shall (except as aforesaid) be paid by the Company or by any receiver, trustee
in bankruptcy, liquidating trustee, agent or other Person making such payment
or distribution, or by the holders of the Notes or by the Trustee under this
Indenture if received by them or it, directly to the holders of Senior
Indebtedness (pro rata to such holders on the basis of the respective amounts
of Senior Indebtedness held by such holders, or as otherwise required by law or
a court order) or their representative or representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments evidencing any
Senior Indebtedness may have been issued, as their respective interests may
appear, to the extent necessary to pay all Senior Indebtedness in full, in cash
or other payment satisfactory to the holders of such Senior Indebtedness, after
giving effect to any concurrent payment or distribution to or for the holders
of Senior Indebtedness, before any payment or distribution is made to the
holders of the Notes or to the Trustee.
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For purposes of this Article IV, the words, "cash, property or
securities" shall not be deemed to include shares of stock of the Company as
reorganized or readjusted, or securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment, the
payment of which is subordinated at least to the extent provided in this
Article IV with respect to the Notes to the payment of all Senior Indebtedness
which may at the time be outstanding; provided, that (i) the Senior
Indebtedness is assumed by the new corporation, if any, resulting from any
reorganization or readjustment, and (ii) the rights of the holders of Senior
Indebtedness (other than leases which are not assumed by the Company or the new
corporation, as the case may be) are not, without the consent of such holders,
altered by such reorganization or readjustment. The consolidation of the
Company with, or the merger of the Company into, another corporation or the
liquidation or dissolution of the Company following the conveyance or transfer
of its property as an entirety, or substantially as an entirety, to another
corporation upon the terms and conditions provided for in Article XII shall not
be deemed a dissolution, winding-up, liquidation or reorganization for the
purposes of this Section 4.2 if such other corporation shall, as a part of such
consolidation, merger, conveyance or transfer, comply with the conditions
stated in Article XII.
In the event of the acceleration of the Notes because of an
Event of Default, no payment or distribution shall be made to the Trustee or
any holder of Notes in respect of the principal of, premium, if any, or
interest on the Notes (including, but not limited to, the Redemption Price with
respect to the Notes called for redemption in accordance with Section 3.3 or
the Fundamental Change Repurchase Price with respect to Notes submitted for
redemption in accordance with Section 3.7, as the case may be, as provided in
the Indenture), except payments and distributions made by the Trustee as
permitted by the first or second paragraph of Section 4.5, until all Senior
Indebtedness has been paid in full in cash or other payment satisfactory to the
holders of Senior Indebtedness or such acceleration is rescinded in accordance
with the terms of this Indenture. If payment of the Notes is accelerated
because of an Event of Default, the Company shall promptly notify holders of
Senior Indebtedness of the acceleration.
In the event that, notwithstanding the foregoing provisions,
any payment or distribution of assets of the Company or any kind or character,
whether in cash, property or securities (including, without limitation, by way
of setoff or otherwise), prohibited by the foregoing, shall be received by the
Trustee or the holders of the Notes before all Senior Indebtedness is paid in
full in cash or other payment satisfactory to the holders of such Senior
Indebtedness, or provision is made for such payment thereof in accordance with
its terms in cash or other payment satisfactory to the holders of such Senior
Indebtedness, such payment or distribution shall be held in trust for the
benefit of and shall be paid over or delivered to the holders of Senior
Indebtedness or their representative or representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments evidencing any
Senior Indebtedness may have been issued, as their respective interests may
appear, as calculated by the Company, for application to the payment of a
Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior
Indebtedness in full in cash or other payment satisfactory to the holders of
such Senior Indebtedness, after giving effect to any concurrent payment or
distribution to or for the holders of such Senior Indebtedness.
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Nothing in this Section 4.2 shall apply to claims of, or
payments to, the Trustee under or pursuant to Section 8.6. This Section 4.2
shall be subject to the further provisions of Section 4.5.
SECTION 4.3. SUBROGATION OF NOTES. Subject to the payment
in full of all Senior Indebtedness, the rights of the holders of the Notes
shall be subrogated to the extent of the payments or distributions made to the
holders of such Senior Indebtedness pursuant to the provisions of this Article
IV (equally and ratably with the holders of all indebtedness of the Company
which by its express terms is subordinated to other indebtedness of the Company
to substantially the same extent as the Notes are subordinated and is entitled
to like rights of subrogation) to the rights of the holders of Senior
Indebtedness to receive payments or distributions of cash, property or
securities of the Company applicable to the Senior Indebtedness until the
principal, premium, if any, and interest on the Notes shall be paid in full;
and, for the purposes of such subrogation, no payments or distributions to the
holders of the Senior Indebtedness of any cash, property or securities to which
the holders of the Notes or the Trustee would be entitled except for the
provisions of this Article IV, and no payment over pursuant to the provisions
of this Article IV, to or for the benefit of the holders of Senior Indebtedness
by holders of the Notes or the Trustee, shall, as between the Company, its
creditors other than holders of Senior Indebtedness, and the holders of the
Notes, be deemed to be a payment by the Company to or on account of the Senior
Indebtedness; and no payments or distributions of cash, property or securities
to or for the benefit of the holders of the Notes pursuant to the subrogation
provisions of this Article IV, which would otherwise have been paid to the
holders of Senior Indebtedness, shall be deemed to be a payment by the Company
to or for the account of the Notes. It is understood that the provisions of
this Article IV are and are intended solely for the purposes of defining the
relative rights of the holders of the Notes, on the one hand, and the holders
of the Senior Indebtedness, on the other hand.
Nothing contained in this Article IV or elsewhere in this
Indenture or in the Notes is intended to or shall impair, as among the Company,
its creditors other than the holders of Senior Indebtedness, and the holders of
the Notes, the obligation of the Company, which is absolute and unconditional,
to pay to the holders of the Notes the principal of (and premium, if any) and
interest on the Notes as and when the same shall become due and payable in
accordance with their terms, or is intended to or shall affect the relative
rights of the holders of the Notes and creditors of the Company other than the
holders of the Senior Indebtedness, nor shall anything herein or therein
prevent the Trustee or the holder of any Note from exercising all remedies
otherwise permitted by applicable law upon default under this Indenture,
subject to the rights, if any, under this Article IV of the holders of Senior
Indebtedness in respect of cash, property or securities of the Company received
upon the exercise of any such remedy.
Upon any payment or distribution of assets of the Company
referred to in this Article IV, the Trustee, subject to the provisions of
Section 8.1, and the holders of the Notes shall be entitled to rely upon any
order or decree made by any court of competent jurisdiction in which such
bankruptcy, dissolution, winding-up, liquidation or reorganization proceedings
are pending, or a certificate of the receiver, trustee in bankruptcy,
liquidating trustee, agent or other person making such payment or distribution,
delivered to the Trustee or to the holders of the Notes, for the
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purpose of ascertaining the persons entitled to participate in such
distribution, the holders of the Senior Indebtedness and other indebtedness of
the Company, the amount thereof or payable thereon and all other facts
pertinent thereto or to this Article IV.
SECTION 4.4. AUTHORIZATION TO EFFECT SUBORDINATION. Each
holder of a Note by the holder's acceptance thereof authorizes and directs the
Trustee on the holder's behalf to take such action as may be necessary or
appropriate to effectuate the subordination as provided in this Article IV and
appoints the Trustee to act as the holder's attorney-in-fact for any and all
such purposes. If the Trustee does not file a proper proof of claim or proof of
debt in the form required in any proceeding referred to in the third paragraph
of Section 7.2 hereof at least 30 days before the expiration of the time to
file such claim, the holders of any Senior Indebtedness or their
representatives are hereby authorized to file an appropriate claim for and on
behalf of the holders of the Notes.
SECTION 4.5. NOTICE TO TRUSTEE. The Company shall give
prompt written notice in the form of an Officers' Certificate to a Responsible
Officer of the Trustee and to any paying agent of any fact known to the Company
which would prohibit the making of any payment of monies to or by the Trustee
or any paying agent in respect of the Notes pursuant to the provisions of this
Article IV. Notwithstanding the provisions of this Article IV or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts which would prohibit the making of any payment of
monies to or by the Trustee in respect of the Notes pursuant to the provisions
of this Article IV, unless and until a Responsible Officer of the Trustee shall
have received written notice thereof at the Corporate Trust Office from the
Company (in the form of an Officers' Certificate) or a Representative or a
holder or holders of Senior Indebtedness or from any trustee thereof; and
before the receipt of any such written notice, the Trustee, subject to the
provisions of Section 8.1, shall be entitled in all respects to assume that no
such facts exist; provided, that if on a date not fewer than one Business Day
prior to the date upon which by the terms hereof any such monies may become
payable for any purpose (including, without limitation, the payment of the
principal of, or premium, if any, or interest on any Note) the Trustee shall
not have received, with respect to such monies, the notice provided for in this
Section 4.5, then, anything herein contained to the contrary notwithstanding,
the Trustee shall have full power and authority to receive such monies and to
apply the same to the purpose for which they were received, and shall not be
affected by any notice to the contrary which may be received by it on or after
such prior date.
Notwithstanding anything in this Article IV to the contrary,
nothing shall prevent any payment by the Trustee to the Noteholders of monies
deposited with it pursuant to Section 13.1, and any such payment shall not be
subject to the provisions of Section 4.1 or 4.2.
The Trustee, subject to the provisions of Section 8.1, shall
be entitled to rely on the delivery to it of a written notice by a
Representative or a person representing himself to be a holder of Senior
Indebtedness (or a trustee on behalf of such holder) to establish that such
notice has been given by a Representative or a holder of Senior Indebtedness or
a trustee on behalf of any such holder or holders. In the event that the
Trustee determines in good faith that further evidence is
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required with respect to the right of any person as a holder of Senior
Indebtedness to participate in any payment or distribution pursuant to this
Article IV, the Trustee may request such person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such person, the extent to which such person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
such person under this Article IV, and if such evidence is not furnished the
Trustee may defer any payment to such person pending judicial determination as
to the right of such person to receive such payment.
SECTION 4.6. TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS.
The Trustee in its individual capacity shall be entitled to all the rights set
forth in this Article IV in respect of any Senior Indebtedness at any time held
by it, to the same extent as any other holder of Senior Indebtedness, and
nothing in Section 8.13 or elsewhere in this Indenture shall deprive the
Trustee of any of its rights as such holder.
With respect to the holders of Senior Indebtedness, the
Trustee undertakes to perform or to observe only such of its covenants and
obligations as are specifically set forth in this Article IV, and no implied
covenants or obligations with respect to the holders of Senior Indebtedness
shall be read into this Indenture against the Trustee. The Trustee shall not
be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and,
subject to the provisions of Section 8.1, the Trustee shall not be liable to
any holder of Senior Indebtedness if it shall pay over or deliver to holders of
Notes, the Company or any other person money or assets to which any holder of
Senior Indebtedness shall be entitled by virtue of this Article IV or
otherwise.
SECTION 4.7. NO IMPAIRMENT OF SUBORDINATION. No right of
any present or future holder of any Senior Indebtedness to enforce
subordination as herein provided shall at any time in any way be prejudiced or
impaired by any act or failure to act on the part of the Company or by any act
or failure to act, in good faith, by any such holder, or by any noncompliance
by the Company with the terms, provisions and covenants of this Indenture,
regardless of any knowledge thereof which any such holder may have or otherwise
be charged with.
SECTION 4.8. CERTAIN CONVERSIONS DEEMED PAYMENT. For the
purposes of this Article IV only, (1) the issuance and delivery of junior
securities upon conversion of Notes in accordance with Article XV shall not be
deemed to constitute a payment or distribution on account of the principal of
(or premium, if any) or interest on Notes or on account of the purchase or
other acquisition of Notes, and (2) the payment, issuance or delivery of cash
(except in satisfaction of fractional shares pursuant to Section 15.3),
property or securities (other than junior securities) upon conversion of a Note
shall be deemed to constitute payment on account of the principal of such Note.
For the purposes of this Section 4.8, the term "junior securities" means (a)
shares of any stock of any class of the Company, or (b) securities of the
Company which are subordinated in right of payment to all Senior Indebtedness
which may be outstanding at the time of issuance or delivery of such securities
to substantially the same extent as, or to a greater extent than, the Notes are
so subordinated as provided in this Article. Nothing contained in this Article
IV or elsewhere in this Indenture or in the Notes is intended to or shall
impair, as among the Company, its creditors other
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than holders of Senior Indebtedness and the Noteholders, the right, which is
absolute and unconditional, of the Holder of any Note to convert such Note in
accordance with Article XV.
SECTION 4.9. ARTICLE APPLICABLE TO PAYING AGENTS. If at
any time any paying agent other than the Trustee shall have been appointed by
the Company and be then acting hereunder, the term "Trustee" as used in this
Article shall (unless the context otherwise requires) be construed as extending
to and including such paying agent within its meaning as fully for all intents
and purposes as if such paying agent were named in this Article in addition to
or in place of the Trustee; provided, however, that the first paragraph of
Section 4.5 shall not apply to the Company or any Affiliate of the Company if
it or such Affiliate acts as paying agent.
SECTION 4.10. SENIOR INDEBTEDNESS ENTITLED TO RELY. The
holders of Senior Indebtedness (including, without limitation, Designated
Senior Indebtedness) shall have the right to rely upon this Article IV, and no
amendment or modification of the provisions contained herein shall diminish the
rights of such holders unless such holders shall have agreed in writing
thereto.
SECTION 4.11. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF
LIQUIDATING AGENT. Upon any payment or distribution of assets of the Company
referred to in this Article, the Trustee, subject to the provisions of Section
7.1, and the Holders of the Notes shall be entitled to rely upon any order or
decree entered by any court of competent jurisdiction in which such insolvency,
bankruptcy, receivership, liquidation, reorganization, dissolution, winding up
or similar case or proceeding is pending, or a certificate of the trustee in
bankruptcy, liquidating trustee, custodian, receiver, assignee for the benefit
of creditors, agent or other person making such payment or distribution,
delivered to the Trustee or to the Holders of the Notes, for the purpose of
ascertaining the persons entitled to participate in such payment or
distribution, the holders of Senior Indebtedness and other indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article.
SECTION 4.12. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR
INDEBTEDNESS. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders if
the Trustee shall in good faith mistakenly pay over or distribute to Holders of
the Notes or to the Company or to any other person cash, property or securities
to which any holders of Senior Indebtedness shall be entitled by virtue of this
Article or otherwise. The Trustee shall not be charged with knowledge of the
existence of Senior Indebtedness or of any facts that would prohibit any
payment hereunder unless a Trust Officer of the Trustee shall have received
notice to that effect at the address of the Trustee set forth herein. With
respect to the holders of Senior Indebtedness, the Trustee undertakes to
perform or to observe only such of its covenants or obligations as are
specifically set forth in this Article and no implied covenants or obligations
with respect to holders of Senior Indebtedness shall be read into this
Indenture against the Trustee.
SECTION 4.13. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR
INDEBTEDNESS; PRESERVATION OF TRUSTEE'S RIGHTS. The Trustee or any
authenticating agent in its individual capacity shall be
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entitled to all the rights set forth in this Article with respect to any Senior
Indebtedness which may at any time be held by it, to the same extent as any
other holder of Senior Indebtedness, and nothing in this Indenture shall
deprive the Trustee or any authenticating agent of any of its rights as such
holder.
Nothing in this Article shall apply to claims of, or payments
to, the Trustee under or pursuant to Section 8.6.
ARTICLE V
PARTICULAR COVENANTS OF THE COMPANY
SECTION 5.1. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
The Company covenants and agrees that it will duly and punctually pay or cause
to be paid the principal amount at maturity, Issue Price, accrued Original
Issue Discount, Redemption Price, Fundamental Change Repurchase Price, and
interest on each of the Notes at the places, at the respective times and in the
manner provided herein and in the Notes. Each installment of interest on the
Notes due on any semi-annual interest payment date may 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 account maintained by such person
located in the United States; provided, however, that payments to DTC will be
made by wire transfer of immediately available funds to the account of DTC or
its nominee.
SECTION 5.2. MAINTENANCE OF OFFICE OR AGENCY. The Company
will maintain in the Borough of Manhattan, The City of New York, an office or
agency where the Notes may be surrendered for registration of transfer or
exchange or for presentation for payment or for conversion or redemption and
where notices and demands to or upon the Company in respect of the Notes and
this Indenture may be served. The Company will give prompt written notice to
the Trustee of the location, and any change in the location, of such office or
agency not designated or appointed by the Trustee. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office or the
office or agency of the Trustee in the Borough of Manhattan, The City of New
York.
The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided, that no such designation or rescission shall in any manner relieve
the Company of its obligation to maintain an office or agency in the Borough of
Manhattan, The City of New York, for such purposes. The Company will give
prompt written notice to any such designation or rescission and of any change
in the location of any such other office or agency.
The Company hereby initially designates the Trustee as paying
agent, Note registrar, Custodian and conversion agent, and each of the
Corporate Trust Office of the Trustee and the office
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of the Trustee in the Borough of Manhattan, The City of New York (which shall
initially be 101 Barclay Street, New York, New York 10286.
So long as the Trustee is the Note registrar, the Trustee
agrees to mail, or cause to be mailed, the notices set forth in Section 8.10(a)
and the third paragraph of Section 8.11.
SECTION 5.3. APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S
OFFICE. The Company, whenever necessary to avoid or fill a vacancy in the
office of Trustee, will appoint, in the manner provided in Section 8.10, a
Trustee, so that there shall at all times be a Trustee hereunder.
SECTION 5.4. PROVISIONS AS TO PAYING AGENT.
(a) If the Company shall appoint a paying agent other than
the Trustee, or if the Trustee shall appoint such a paying agent, it will cause
such paying agent to execute and deliver to the Trustee an instrument in which
such agent shall agree with the Trustee, subject to the provisions of this
Section 5.4:
(1) that it will hold all sums held by it as such
agent for the payment of the principal amount at maturity,
Issue Price, accrued Original Issue Discount, Redemption
Price, Fundamental Change Repurchase Price or interest on the
Notes (whether such sums have been paid to it by the Company
or by any other obligor on the Notes) in trust for the benefit
of the holders of the Notes;
(2) that it will give the Trustee notice of any
failure by the Company (or by any other obligor on the Notes)
to make any payment of the principal amount at maturity, Issue
Price, accrued Original Issue Discount, Redemption Price,
Fundamental Change Repurchase Price or interest on the Notes
when the same shall be due and payable; and
(3) that at any time during the continuance of an
Event of Default, upon request of the Trustee, it will
forthwith pay to the Trustee all sums so held in trust.
The Company shall, on or before each due date of the principal
amount at maturity, Issue Price, accrued Original Issue Discount, Redemption
Price, Fundamental Change Repurchase Price or interest in respect of the Notes,
deposit with the paying agent a sum sufficient to pay such amounts, and
(unless such paying agent is the Trustee) the Company will promptly notify the
Trustee of any failure to take such action; provided, that if such deposit is
made on the due date, such deposit shall be received by the paying agent by
10:00 a.m. New York City time, on such date.
(b) If the Company shall act as its own paying agent, it
will, on or before each due date of the principal amount at maturity, Issue
Price, accrued Original Issue Discount, Redemption
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Price, Fundamental Change Repurchase Price or interest on the Notes, set aside,
segregate and hold in trust for the benefit of the holders of the Notes a sum
sufficient to pay such amounts so becoming due and will notify the Trustee of
any failure to take such action and of any failure by the Company (or any other
obligor under the Notes) to make any payment of the principal amount at
maturity, Issue Price, accrued Original Issue Discount, Redemption Price,
Fundamental Change Repurchase Price or interest on the Notes when the same
shall become due and payable.
(c) Anything in this Section 5.4 to the contrary
notwithstanding, the Company may, at any time, for the purpose of obtaining a
satisfaction and discharge of this Indenture, or for any other reason, pay or
cause to be paid to the Trustee all sums held in trust by the Company or any
paying agent hereunder as required by this Section 5.4, such sums to be held by
the Trustee upon the trusts herein contained and upon such payment by the
Company or any paying agent to the Trustee, the Company or such paying agent
shall be released from all further liability with respect to such sums.
(d) Anything in this Section 5.4 to the contrary
notwithstanding, the agreement to hold sums in trust as provided in this
Section 5.4 is subject to Sections 13.3 and 13.4.
SECTION 5.5. CORPORATE EXISTENCE. Subject to Article XII,
the Company will do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence.
SECTION 5.6. STAY, EXTENSION AND USURY LAWS. The Company
covenants (to the extent that it may lawfully do so) that it shall not at any
time insist upon, plead, or in any manner whatsoever claim or take the benefit
or advantage of, any stay, extension or usury law or other law which would
prohibit or forgive the Company from paying all or any portion of the principal
of or interest on the Notes as contemplated herein, wherever enacted, now or at
any time hereafter in force, or which may affect the covenants or the
performance of this Indenture and the Company (to the extent it may lawfully do
so) hereby expressly waives all benefit or advantage of any such law, and
covenants that it will not, by resort to any such law, hinder, delay or impede
the execution of any power herein granted to the Trustee, but will suffer and
permit the execution of every such power as though no such law has been
enacted.
ARTICLE VI
NOTEHOLDERS' LISTS AND REPORTS BY
THE COMPANY AND THE TRUSTEE
SECTION 6.1. NOTEHOLDERS' LISTS. The Company covenants
and agrees that it will furnish or cause to be furnished to the Trustee,
semiannually, not more than fifteen (15) days after each _______ and _________
in each year beginning with ________ , 1998, and at such other
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times as the Trustee may request in writing, within thirty (30) days after
receipt by the Company of any such request (or such lesser time as the Trustee
may reasonably request in order to enable it to timely provide any notice to be
provided by it hereunder), a list in such form as the Trustee may reasonably
require of the names and addresses of the holders of Notes as of a date not
more than fifteen (15) days (or such other date as the Trustee may reasonably
request in order to so provide any such notices) prior to the time such
information is furnished, except that no such list need be furnished so long as
the Trustee is acting as Note registrar.
SECTION 6.2. PRESERVATION AND DISCLOSURE OF LISTS.
(a) The Trustee shall preserve, in as current a form as is
reasonably practicable, all information as to the names and addresses of the
holders of Notes contained in the most recent list furnished to is as provided
in Section 6.1 or maintained by the Trustee in its capacity as note registrar,
if so acting. The Trustee may destroy any list furnished to it as provided in
Section 6.1 upon receipt of a new list so furnished.
(b) The rights of Noteholders to communicate with other
holders of Notes with respect to their rights under this Indenture or under the
Notes, and the corresponding rights and duties of the Trustee, shall be as
provided by the Trust Indenture Act.
(c) Every Noteholder, by receiving and holding the same,
agrees with the Company and the Trustee that neither the Company nor the
Trustee nor any agent of either of them shall be held accountable by reason of
any disclosure of information as to names and addresses of holders of Notes
made pursuant to the Trust Indenture Act.
SECTION 6.3. REPORTS BY TRUSTEE.
(a) Within sixty (60) days after of each year
commencing with the year 1998, the Trustee shall transmit to holders of Notes
such reports dated as of of the year in which such reports are made
concerning the Trustee and its actions under this Indenture as may be required
pursuant to the Trust Indenture Act at the times and in the manner provided
pursuant thereto.
(b) A copy of such report shall, at the time of such
transmission to holders of Notes, be filed by the Trustee with each stock
exchange and automated quotation system upon which the Notes are listed and
with the Company. The Company will notify the Trustee within a reasonable time
when the Notes are listed on any stock exchange and automated quotation system.
SECTION 6.4. REPORTS BY COMPANY.
(a) The Company shall file with the Trustee (and the
Commission if at any time after the Indenture becomes qualified under the Trust
Indenture Act), and transmit to holders of Notes, such information, documents
and other reports and such summaries thereof, as may be
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required pursuant to the Trust Indenture Act at the times and in the manner
provided pursuant to such Act; provided, that any such information, documents
or reports required to be filed with the Commission pursuant to Section 13 or
15(d) of the Exchange Act will be field with the Trustee within fifteen (15)
days after the same is so required to be filed with the Commission.
Delivery of such information, documents and reports to the
Trustee is for informational purposes only and the Trustee's receipt of such
shall not constitute constructive notice of any information contained therein
or determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
(b) The Company will deliver to the Trustee annually,
commencing , 1998, a certificate, from its principal executive officer,
principal financial officer or principal accounting officer, stating whether or
not to the knowledge of the signer thereof the Company is in compliance
(without regard to periods of grace or notice requirements) with all conditions
and covenants under this Indenture, and if the Company shall not be in
compliance, specifying such non-compliance and the nature and status thereof of
which such signer may have knowledge.
SECTION 6.5. CALCULATION OF ORIGINAL ISSUE DISCOUNT. The
Company shall file with the Trustee promptly at the end of each calendar year a
written notice specifying the amount of Original Issue Discount (including
daily rates and accrual periods) accrued on outstanding Notes as of the end of
such year.
ARTICLE VII
REMEDIES OF THE TRUSTEE AND
NOTEHOLDERS ON AN EVENT OF DEFAULT
SECTION 7.1. EVENTS OF DEFAULT. In case one or more of
the following Events of Default (whatever the reason for such Event of Default
and whether it shall be voluntary or involuntary or be effected by operation of
law or pursuant to any judgment, decree or order of any court or any order,
rule or regulation of any administrative or governmental body) shall have
occurred and be continuing:
(a) default in the payment of any installment of interest upon
any of the Notes as and when the same shall become due and payable, and
continuance of such default for a period of thirty (30) days, whether or not
such payment is permitted under Article IV hereof; or
(b) default in the payment of the principal amount at
maturity, Redemption Price, Fundamental Change Repurchase Price in respect of
any of the Notes as and when the same shall become due and payable either at
maturity or in connection
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with any redemption pursuant to Article III, by acceleration or otherwise,
whether or not such payment is permitted under Article IV hereof; or
(c) failure on the part of the Company duly to observe or
perform any other of the covenants or agreements on the part of the Company in
the Notes or in this Indenture (other than a covenant or agreement a default in
whose performance or whose breach is elsewhere in this Section 7.1 specifically
dealt with) continued for a period of thirty (30) days after the date on which
written notice of such failure, requiring the Company to remedy the same, shall
have been given to the Company by the Trustee, or to the Company and a
Responsible Officer of the Trustee by the holders of at least 25 percent in
aggregate principal amount of the Notes at the time outstanding determined in
accordance with Section 9.4; or
(d) the Company shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now
or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part
of its property, or shall consent to any such relief or to the appointment of
or taking possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its debts as they become
due; or
(e) an involuntary case or other proceeding shall be
commenced against the Company seeking liquidation, reorganization or other
relief with respect to it or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of ninety (90) consecutive
days; then, and in each and every such case (other than an Event of Default
specified in Section 7.1(d) or (e)), unless the principal of all of the Notes
shall have already become due and payable, either the Trustee or the holders of
not less than 25 percent in aggregate principal amount of the Notes then
outstanding hereunder determined in accordance with Section 9.4, by notice in
writing to the Company (and to the Trustee if given by Noteholders), may
declare the sum of the Issue Price of the Notes, plus the accrued Original
Issue Discount from the date of original issue of the Notes to the date of
declaration and the interest accrued thereon, to be due and payable
immediately, and upon any such declaration the same shall become and shall be
immediately due and payable, anything in this Indenture or in the Notes
contained to the contrary notwithstanding. If an Event of Default specified in
Section 7.1(d) or (e) occurs, the principal of all the Notes, plus the accrued
Original Issue Discount and the interest accrued thereon shall be immediately
and automatically due and payable without necessity of further action. This
provision, however, is subject to the conditions that if, at any time after the
principal of the Notes shall have been so declared due and payable, and before
any judgment or decree for the payment of the monies due shall have been
obtained or entered as hereinafter provided, the Company shall pay or shall
deposit with the Trustee a sum sufficient to pay all matured installments of
interest upon all Notes and the principal amount at maturity, Issue Price,
accrued Original Issue Discount, Redemption Price, Fundamental Change
Repurchase Price and interest in respect of any and all Notes which shall
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have become due otherwise than by acceleration (with interest on overdue
installments of interest (to the extent that payment of such interest is
enforceable under applicable law) and on such principal amount at maturity,
Issue Price, accrued Original Issue Discount, Redemption Price and Fundamental
Change Repurchase Price at the rate borne by the Notes, to the date of such
payment or deposit) and amounts due to the Trustee pursuant to Section 8.6, and
if any and all defaults under this Indenture, other than the nonpayment of the
principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, Fundamental Change Repurchase Price and accrued interest
thereon which shall have become due by acceleration, shall have been cured or
waived pursuant to Section 7.7, then and in every such case the holders of a
majority in aggregate principal amount at maturity of the Notes then
outstanding, by written notice to the Company and to the Trustee, may waive all
defaults or Events of Default and rescind and annul such declaration and its
consequences; but no such waiver or rescission and annulment shall extend to or
shall affect any subsequent default or Event of Default, or shall impair any
right consequent thereon. The Company shall notify a Responsible Officer of the
Trustee, promptly upon becoming aware thereof, of any Event of Default.
In case the Trustee shall have proceeded to enforce any right
under this Indenture and such proceedings shall have been discontinued or
abandoned because of such waiver or rescission and annulment or for any other
reason or shall have been determined adversely to the Trustee, then and in
every such case the Company, the holders of Notes, and the Trustee shall be
restored respectively to their several positions and rights hereunder, and all
rights, remedies and powers of the Company, the holders of the Notes, and the
Trustee shall continue as though no such proceeding had been taken.
SECTION 7.2. PAYMENTS OF NOTES ON DEFAULT; SUIT THEREFOR.
The Company covenants that (a) in case default shall be made in the payment of
any installment of interest upon any of the Notes as and when the same shall
become due and payment, and such default shall have continued for a period of
thirty (30) days, or (b) in case default shall be made in the payment of the
principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price or Fundamental Change Repurchase Price in respect of the Notes
as and when the same shall have become due and payable, whether at maturity of
the Notes or in connection with any redemption, by or under this Indenture
declaration or otherwise, then, upon demand of the Trustee, the Company will
pay to the Trustee, for the benefit of the holders of the Notes, the whole
amount that then shall have become due and payable on all such Notes for
principal amount at maturity or interest, or both, as the case may be, with
interest upon the overdue principal amount at maturity and (to the extent that
payment of such interest is enforceable under applicable law) upon the overdue
installments of interest at the rate borne by the Notes; and, in addition
thereto, such further amount as shall be sufficient to cover the costs and
expenses of collection, including reasonable compensation to the Trustee, its
agents, attorneys and counsel, and any expenses or liabilities incurred by the
Trustee hereunder other than through its negligence or bad faith. Until such
demand by the Trustee, the Company may pay the principal amount at maturity,
Issue Price, accrued Original Issue Discount, Redemption Price, Fundamental
Change Repurchase Price and interest on the Notes to the registered holders,
whether or not the Notes are overdue.
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In case the Company shall fail forthwith to pay such amounts
upon such demand, the Trustee, in its own name and as trustee of an express
trust, shall be entitled and empowered to institute any actions or proceedings
at law or in equity for the collection of the sums so due and unpaid, and may
prosecute any such action or proceeding to judgment or final decree, and may
enforce any such judgment or final decree against the Company or any other
obligor on the Notes and collect in the manner provided by law out of the
property of the Company or any other obligor on the Notes wherever situated the
monies adjudged or decreed to be payable.
In the case there shall be pending proceedings for the
bankruptcy or for the reorganization of the Company or any other obligor on the
Notes under Title 11 of the United States Code, or any other applicable law, or
in case a receiver, assignee or trustee in bankruptcy or reorganization,
liquidator, sequestrator or similar official shall have been appointed for or
taken possession of the Company or such other obligor, the property of the
Company or such other obligor, or in the case of any other judicial proceedings
relative to the Company or such other obligor upon the Notes, or to the
creditors or property of the Company or such other obligor, the Trustee,
irrespective of whether the principal of the Notes shall then be due and
payable as therein expressed or by declaration or otherwise and irrespective of
whether the Trustee shall have made any demand pursuant to the provisions of
this Section 7.2, shall be entitled and empowered, by intervention in such
proceedings or otherwise, to file and prove a claim or claims for the whole
amount of principal, premium, if any, and interest owing and unpaid in respect
of the Notes, and, in case of any judicial proceedings, to file such proofs of
claim and other papers or documents as may be necessary or advisable in order
to have the claims of the Trustee and of the Noteholders allowed in such
judicial proceedings relative to the Company or any other obligor on the Notes,
its or their creditors, or its or their property, and to collect and receive
any monies or other property payable or deliverable on any such claims, and to
distribute the same after the deduction of any amounts due the Trustee under
Section 8.6; and any receiver, assignee or trustee in bankruptcy or
reorganization, liquidator, custodian or similar official is hereby authorized
by each of the Noteholders to make such payments to the Trustee, and, in the
event that the Trustee shall consent to the making of such payments directly to
the Noteholders, to pay to the Trustee any amount due it for reasonable
compensation, expenses, advances and disbursements, including counsel fees
incurred by it up to the date of such distribution. To the extent that such
payment of reasonable compensation, expenses, advances and disbursements out of
the estate in any such proceedings shall be denied for any reason, payment of
the same shall be secured by a lien on, and shall be paid out of, any and all
distributions, dividends, monies, securities and other property which the
holders of the Notes may be entitled to receive in such proceedings, whether in
liquidation or under any plan of reorganization or arrangement or otherwise.
All rights of action and of asserting claims under this
Indenture, or under any of the Notes, may be enforced by the Trustee without
the possession of any of the Notes, or the production thereof at any trial or
other proceeding relative thereto, and any such suit or proceeding instituted
by the Trustee shall be brought in its own name as trustee of an express trust,
and any recovery of judgment shall, after provision for the payment of the
reasonable compensation, expenses,
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disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the holders of the Notes.
In any proceedings brought by the Trustee (and in any
proceedings involving the interpretation of any provision of this Indenture to
which the Trustee shall be a party) the Trustee shall be held to represent all
the holders of the Notes, and it shall not be necessary to make any holders of
the Notes parties to any such proceedings.
SECTION 7.3. APPLICATION OF MONIES COLLECTED BY TRUSTEE.
Any monies collected by the Trustee pursuant to this Article VII shall be
applied in the order following, at the date or dates fixed by the Trustee for
the distribution of such monies, upon presentation of the several Notes, and
stamping thereon the payment, if only partially paid, and upon surrender
thereof, if fully paid:
First: To the payment of all amounts due the Trustee under
Section 8.6;
Second: Subject to the provisions of Article IV, in case the
principal of the outstanding Notes shall not have become due and be
unpaid, to the payment of interest on the Notes in default in the order
of the maturity of the installments of such interest, with interest (to
the extent that such interest has been collected by the Trustee) upon
the overdue installments of interest at the rate borne by the Notes,
such payments to be made ratably to the persons entitled thereto;
Third: Subject to the provisions of Article IV, in case the
principal of the outstanding Notes shall have become due, by
declaration or otherwise, and be unpaid to the payment of the whole
amount then owing and unpaid upon the Notes for principal and premium,
if any, and interest, with interest on the overdue principal and
premium, if any, and (to the extent that such interest has been
collected by the Trustee) upon overdue installments of interest at the
rate borne by the Notes; and in case such monies shall be insufficient
to pay in full the whole amounts so due and unpaid upon the Notes, then
to the payment of such principal and premium, if any, and interest
without preference or priority of principal and premium, if any, over
interest, or of interest over principal and premium, if any, or of any
installment of interest over any other installment of interest, or of
any Note over any other Note, ratably to the aggregate of such
principal and premium, if any, and accrued and unpaid interest; and
Fourth: Subject to the provisions of Article IV, to the
payment of the remainder, if any, to the Company or any other person
lawfully entitled thereto.
SECTION 7.4. PROCEEDINGS BY NOTEHOLDER. No holder of any
Note shall have any right by virtue of or by availing of any provision of this
Indenture to institute any suit, action or proceeding in equity or at law upon
or under or with respect to this Indenture, or for the appointment of a
receiver, trustee, liquidator, custodian or other similar official, or for any
other remedy
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hereunder, unless such holder previously shall have given to the Trustee
written notice of an Event of Default and of the continuance thereof, as
hereinbefore provided, and unless also the holders of not less than 25 percent
in aggregate principal amount at maturity of the Notes then outstanding shall
have made written request upon the Trustee to institute such action, suit or
proceeding in its own name as Trustee hereunder and shall have offered to the
Trustee such reasonable indemnity as it may require against the costs, expenses
and liabilities to be incurred therein or thereby, and the Trustee for sixty
(60) days after its receipt of such notice, request and offer of indemnity,
shall have neglected or refused to institute any such action, suit or
proceeding and no direction inconsistent with such written request shall have
been given to the Trustee pursuant to Section 7.7; it being understood and
intended, and being expressly covenanted, by the taker and holder of every Note
with every other taker and holder and the Trustee, that no one or more holders
of Notes shall have any right in any manner whatever by virtue of or by
availing of any provision of this Indenture to affect, disturb or prejudice the
rights of any other holder of Notes, or to obtain or seek to obtain priority
over or preference to any other such holder, or to enforce any right under this
Indenture, except in the manner herein provided and for the equal, ratable and
common benefit of all holders of Notes (except as otherwise provided herein).
For the protection and enforcement of this Section 7.4, each and every
Noteholder and the Trustee shall be entitled to such relief as can be given
either at law or in equity.
Notwithstanding any other provision of this Indenture and any
provision of any Note, the right of any holder of any Note to receive payment
of the principal amount at maturity, accrued Original Issue Discount and
interest on such Note, on or after the respective due dates expressed in such
Note, or to institute suit for the enforcement of any such payment on or after
such respective dates against the Company shall not be impaired or affected
without the consent of such holder.
Anything in this Indenture or the Notes to the contrary
notwithstanding, the holder of any Note, without the consent of either the
Trustee or the holder of any other Note, in his own behalf and for his own
benefit, may enforce, and may institute and maintain any proceeding suitable to
enforce, his rights of conversion as provided herein.
SECTION 7.5. PROCEEDINGS BY TRUSTEE. In case of an Event
of Default the Trustee may in its discretion proceed to protect and enforce the
rights vested in it by this Indenture by such appropriate judicial proceedings
as the Trustee shall deem most effectual to protect and enforce any of such
rights, either by suit in equity or by action at law or by proceeding in
bankruptcy or otherwise, whether for the specific enforcement of any covenant
or agreement contained in this Indenture or in aid of the exercise of any power
granted in this Indenture, or to enforce any other legal or equitable right
vested in the Trustee by this Indenture or by law.
SECTION 7.6. REMEDIES CUMULATIVE AND CONTINUING. Except
as provided in Section 2.6, all powers and remedies given by this Article VII
to the Trustee or to the Noteholders shall, to the extent permitted by law, be
deemed cumulative and not exclusive of any thereof or of any other powers and
remedies available to the Trustee or the holders of the Notes, by judicial
proceedings or otherwise, to enforce the performance or observance of the
covenants and agreements
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contained in this Indenture, and no delay or omission of the Trustee or of any
holder of any of the Notes to exercise any right or power accruing upon any
default or Event of Default occurring and continuing as aforesaid shall impair
any such right or power, or shall be construed to be a waiver of any such
default or any acquiescence therein; and, subject to the provisions of Section
7.4, every power and remedy given by this Article VII or by law to the Trustee
or to the Noteholders may be exercised from time to time, and as often as shall
be deemed expedient, by the Trustee or by the Noteholders.
SECTION 7.7. DIRECTION OF PROCEEDINGS AND WAIVER OF
DEFAULTS BY MAJORITY OF NOTEHOLDERS. The holders of a majority in aggregate
principal amount of the Notes at the time outstanding determined in accordance
with Section 9.4 shall have the right to direct the time, method, and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee; provided, however, that (a) such
direction shall not be in conflict with any rule of law or with this Indenture,
and (b) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction. The holders of a majority in
aggregate principal amount of the Notes at the time outstanding determined in
accordance with Section 9.4 may on behalf of the holders of all of the Notes
waive any past default or Event of Default hereunder and its consequences
except (i) a default in the payment of interest or premium, if any, on, or the
principal of, the Notes, (ii) a failure by the Company to convert any Notes
into Common Stock, (iii) a default in the payment of redemption price pursuant
to Article III or (iv) a default in respect of a covenant or provisions hereof
which under Article XI cannot be modified or amended without the consent of the
holders of all Notes then outstanding. Upon any such waiver the Company, the
Trustee and the holders of the Notes shall be restored to their former
positions and rights hereunder; but no such waiver shall extend to any
subsequent or other default or Event of Default or impair any right consequent
thereon. Whenever any default or Event of Default hereunder shall have been
waived as permitted by this Section 7.7, said default or Event of Default shall
for all purposes of the Notes and this Indenture be deemed to have been cured
and to be not continuing; but no such waiver shall extend to any subsequent or
other default or Event of Default or impair any right consequent thereon.
SECTION 7.8. STATEMENT BY OFFICERS AS TO DEFAULT. The
Company shall deliver to the Trustee, as soon as possible and in any event
within five days after the Company becomes aware of the occurrence of any Event
of Default or an event which, with notice or the lapse of time or both, would
constitute an Event of Default, an Officers' Certificate setting forth the
details of such Event of Default or default and the action which the Company
proposes to take with respect thereto.
SECTION 7.9. NOTICE OF DEFAULTS. The Trustee shall,
within ninety (90) days after it has knowledge of the occurrence of a default,
mail to all Noteholders, as the names and addresses of such holders appear upon
the Note register, notice of all defaults known to a Responsible Officer,
unless such defaults shall have been cured or waived before the giving of such
notice; and provided, that, except in the case of default in the payment of the
principal of, or premium, if any, or interest on any of the Notes, the Trustee
shall be protected in withholding such notice if and so long as a trust
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committee of directors and/or Responsible Officers of the Trustee in good faith
determine that the withholding of such notice is in the interests of the
Noteholders.
SECTION 7.10. UNDERTAKING TO PAY COSTS. All parties to
this Indenture agree, and each holder of any Note by such holder's acceptance
thereof shall be deemed to have agreed, that any court may, in its discretion,
require, in any suit for the enforcement of any right or remedy under this
Indenture, or in any suit against the Trustee for any action taken or omitted
by it as Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; provided,
that the provisions of this Section 7.9 (to the extent permitted by law) shall
not apply to any suit instituted by the Trustee, to any suit instituted by any
Noteholder, or group of Noteholders, holding in the aggregate more than ten
percent in principal amount of the Notes at the time outstanding determined in
accordance with Section 9.4, or to any suit instituted by any Noteholder for
the enforcement of the payment of the principal of or premium, if any, or
interest on any Note on or after the due date expressed in such Note or to any
suit for the enforcement of the right to convert any Note in accordance with
the provision of Article XV.
ARTICLE VIII
CONCERNING THE TRUSTEE
SECTION 8.1. DUTIES AND RESPONSIBILITIES OF TRUSTEE. The
Trustee, prior to the occurrence of an Event of Default and after the curing of
all Events of Default which may have occurred, undertakes to perform such
duties and only such duties as are specifically set forth in this Indenture. In
case an Event of Default has occurred (which has not been cured or waived) the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent Person would exercise or use under the circumstances in the conduct of
such Person's own affairs.
No provision of this Indenture shall be construed to relieve
the Trustee from liability for its own negligent action, its own negligent
failure to act or its own willful misconduct, expect that
(a) prior to the occurrence of an Event of Default and
after the curing or waiving of all Events of Default which may have occurred:
(1) the duties and obligations of the Trustee shall be
determined solely by the express provisions of this Indenture and the
Trust Indenture Act, and the Trustee shall not be liable except for the
performance of such duties and obligations as are specifically set
forth in this Indenture and no implied covenants or obligations shall
be read into this Indenture and the Trust Indenture Act against the
Trustee; and
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(2) in the absence of bad faith and willful misconduct on
the part of the Trustee, the Trustee may conclusively rely, as to the
truth of the statements and the correctness of the opinions expressed
therein, upon any certificates or opinions furnished to the Trustee and
conforming to the requirements of this Indenture; but, in the case of
any such certificates or opinions which by any provisions hereof are
specifically required to be furnished to the Trustee, the Trustee shall
be under a duty to examine the same to determine whether or not they
conform to the requirements of this Indenture (but need not confirm or
investigate the accuracy of mathematical calculations or other facts
stated therein);
(b) the Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer or Officers of the
Trustee, unless the Trustee was negligent in ascertaining the pertinent facts;
(c) the Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance with the
direction of the holders of not less than a majority in principal amount of the
Notes at the time outstanding determined as provided in Section 9.4 relating to
the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred upon the
Trustee, under this Indenture; and
(d) whether or not therein provided, every provision of
this Indenture relating to the conduct or affecting the liability of, or
affording protection to, the Trustee shall be subject to the provisions of this
Section.
None of the provisions contained in this Indenture shall
require the Trustee to expend or risk its own funds or otherwise incur personal
financial liability in the performance of any of its duties or in the exercise
of any of its rights or powers, if there is reasonable ground for believing
that the repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
SECTION 8.2. RELIANCE ON DOCUMENTS, OPINIONS, ETC. Except
as otherwise provided in Section 8.1:
(a) the Trustee may rely and shall be protected in acting
upon any resolution, certificate, statement, instrument, opinion, report,
notice, request, consent, order, bond, debenture, note, coupon or other paper
or document believed by it in good faith to be genuine and to have been signed
or presented by the proper party or parties;
(b) any request, direction, order or demand of the Company
mentioned herein shall be sufficiently evidenced by an Officers' Certificate
(unless other evidence in respect thereof be herein specifically prescribed);
and any resolution of the Board of Directors may be evidenced to the Trustee by
a copy thereof certified by the Secretary or an Assistant Secretary of the
Company;
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(c) the Trustee may consult with counsel of its selection
and any advice or Opinion of Counsel shall be full and complete authorization
and protection in respect of any action taken or omitted by it hereunder in
good faith and in accordance with such advice or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Indenture at the request,
order or direction of any of the Noteholders pursuant to the provisions of this
Indenture, unless such Noteholders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby;
(e) the Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture or other paper or document, but the Trustee, in its
discretion, may make such further inquiry or investigation into such facts or
matters as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the books,
records and premises of the Company, personally or by agent or attorney;
provided, however, that if the payment within a reasonable time to the Trustee
of the costs, expenses or liabilities likely to be incurred by it in the making
of such investigation is, in the opinion of the Trustee, not reasonably assured
to the Trustee by the security afforded to it by the terms of this Indenture,
the Trustee may require reasonable indemnity against such expenses or liability
as a condition to so proceeding; the reasonable expenses of every such
examination shall be paid by the Company or, if paid by the Trustee or any
predecessor Trustee, shall be repaid by the Company upon demand;
(f) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys and the Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed by it with due
care hereunder;
(g) the Trustee shall not be deemed to have notice of any
Event of Default unless a Responsible Officer of the Trustee has actual
knowledge thereof or unless written notice of any event which is in fact such a
default is received by the Trustee at the Corporate Trust Office of the
Trustee, and such notice references the Notes and this Indenture;
(h) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad faith on
its part, conclusively rely upon an Officers' Certificate; and
(i) The Trustee, any authenticating agent, any paying
agent, any Note registrar or any other agent of the Company, in its individual
or any other capacity, may become the owner
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or pledgee of the Notes, may otherwise deal with the Company with the same
rights it would have if it were not Trustee, authenticating agent, paying
agent, Note registrar or such other agent.
SECTION 8.3. NO RESPONSIBILITY FOR RECITALS, ETC. The
recitals contained herein and in the Notes (except in the Trustee's certificate
of authentication) shall be taken as the statements of the Company, and the
Trustee assumes no responsibility for the correctness of the same. The Trustee
makes no representations as to the validity or sufficiency of this Indenture or
of the Notes. The Trustee shall not be accountable for the use or application
by the Company of any Notes or the proceeds of any Notes authenticated and
delivered by the Trustee in conformity with the provisions of this Indenture.
SECTION 8.4. TRUSTEE, PAYING AGENTS, CONVERSION AGENTS OR
REGISTRAR MAY OWN NOTES. The Trustee, any paying agent, any conversion agent
or Note registrar, in its individual or any other capacity, may become the
owner or pledgee of Notes with the same rights it would have if it were not
Trustee, paying agent, conversion agent or Note registrar.
SECTION 8.5. MONIES TO BE HELD IN TRUST. Subject to the
provisions of Section 13.4, all monies received by the Trustee shall, until
used or applied as herein provided, be held in trust for the purposes for which
they were received. Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The Trustee
shall be under no liability for interest on any money received by it hereunder
except as may be agreed from time to time by the Company and the Trustee.
SECTION 8.6. COMPENSATION AND EXPENSES OF TRUSTEE. The
Company covenants and agrees to pay to the Trustee from time to time, and the
Trustee shall be entitled to, such compensation as shall be agreed to in
writing by the Company and the Trustee for all services rendered by it
hereunder in any capacity (which shall not be limited by any provision of law
in regard to the compensation of a trustee of an express trust), and the
Company will pay or reimburse the Trustee upon its request for all reasonable
expenses, disbursements and advances reasonably incurred or made by the Trustee
in accordance with any of the provisions of this Indenture (including the
reasonable compensation and the expenses and disbursements of its counsel and
of all persons not regularly in its employ) except any such expense,
disbursement or advance as may arise from its negligence, willful misconduct,
recklessness or bad faith. The Company also covenants to indemnify the Trustee
in any capacity under this Indenture and its agents and any authenticating
agent for, and to hold them harmless against, any loss, liability or expense,
including taxes (other than taxes based upon, measured by or determined by the
income of the Trustee) incurred without negligence, willful misconduct,
recklessness, or bad faith on the part of the Trustee or such agent or
authenticating agent, as the case may be, and arising out of or in connection
with the acceptance or administration of this trust or in any other capacity
hereunder, including the costs and expenses of defending themselves against any
claim of liability in the premises. The obligations of the Company under this
Section 8.6 to compensate or indemnify the Trustee and to pay or reimburse the
Trustee for expenses, disbursements and advances shall be secured by a lien
prior to that of the Notes upon all property and funds held or collected by the
Trustee as such, except funds held in trust for
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the benefit of the holders of particular Notes. The obligation of the Company
under this Section shall survive the satisfaction and discharge of this
Indenture.
When the Trustee and its agents and any authenticating agent
incur expenses or render services after an Event of Default specified in
Section 7.1(d) or (e) occurs, the expenses and the compensation for the
services are intended to constitute expenses of administration under any
bankruptcy, insolvency or similar laws.
The provisions of this Section shall survive the termination of this Indenture.
SECTION 8.7. OFFICERS CERTIFICATE AS EVIDENCE. Except as
otherwise provided in Section 8.1, whenever in the administration of the
provisions of this Indenture the Trustee shall deem it necessary or desirable
that a matter be proved or established prior to taking or omitting any action
hereunder, such matter (unless other evidence in respect thereof be herein
specifically prescribed) may, in the absence of negligence, willful misconduct,
recklessness, or bad faith on the part of the Trustee, be deemed to be
conclusively proved and established by an Officers' Certificate delivered to
the Trustee.
SECTION 8.8. CONFLICTING INTERESTS OF TRUSTEE. If the
Trustee has or shall acquire a conflicting interest within the meaning of the
Trust Indenture Act, the Trustee shall either eliminate such interest or
resign, to the extent and in the manner provided by, and subject to the
provisions of, the Trustee Indenture Act and this Indenture.
SECTION 8.9. ELIGIBILITY OF TRUSTEE. There shall at all
times be a Trustee hereunder which shall be a Person that is eligible pursuant
to the Trust Indenture Act to act as such and has a combined capital and
surplus of at least $50,000,000. If such person publishes reports of condition
at least annually, pursuant to law or to the requirements of any supervising or
examining authority, then for the purposes of this Section, the combined
capital and surplus of such person shall be deemed to be its combined capital
and surplus as set forth in its most recent report of condition so published.
If at any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section, it shall resign immediately in the manner and with
the effect hereinafter specified in this Article.
SECTION 8.10. RESIGNATION OR REMOVAL OF TRUSTEE.
(a) The Trustee may at any time resign by giving written
notice of such resignation to the Company and to the holders of Notes. Upon
receiving such notice of resignation, the Company shall promptly appoint a
successor trustee by written instrument, in duplicate, executed by order of the
Board of Directors, one copy of which instrument shall be delivered to the
resigning Trustee and one copy to the successor trustee. If no successor
trustee shall have been so appointed and have accepted appointment thirty (30)
days after the mailing of such notice of resignation to the Noteholders, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee, or any Noteholder who has been a bona fide
holder of a Note or
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Notes for at least six (6) months may, subject to the provisions of Section
7.9, on behalf of himself and all others similarly situated, petition any such
court for the appointment of a successor trustee. Such court may thereupon,
after such notice, if any, as it may deem proper and prescribe, appoint a
successor trustee.
(b) In case at any time any of the following shall occur:
(1) the Trustee shall fail to comply with Section
8.8 after written request therefor by the Company or by any Noteholder
who has been a bona fide holder of a Note or Notes for at least six (6)
months; or
(2) the Trustee shall cease to be eligible in
accordance with the provisions of Section 8.9 and shall fail to resign
after written request therefor by the Company or by any such
Noteholder; or
(3) the Trustee shall become incapable of acting,
or shall be adjudged a bankrupt or insolvent, or a receiver of the
Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation;
then, in any such case, the Company may remove the Trustee and appoint a
successor trustee by written instrument, in duplicate, executed by order of the
Board of Directors, one copy of which instrument shall be delivered to the
Trustee so removed and one copy to the successor trustee, or, subject to the
provisions of Section 7.9, any Noteholder who has been a bona fide holder of a
Note or Notes for at least six (6) months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor trustee. If no
successor trustee shall have been so appointed and have accepted appointment
thirty (30) days after the mailing of such notice of removal to the Trustee,
the removed Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee. In either case, such court may thereupon,
after such notice, if any, as it may deem proper and prescribe, remove the
Trustee and appoint a successor trustee.
(c) The holders of a majority in aggregate principal
amount of the Notes at the time outstanding may at any time remove the Trustee
and nominate a successor trustee which shall be deemed appointed as successor
trustee unless within ten (10) days after notice to the Company of such
nomination the Company objects thereto, in which case the Trustee so removed or
any Noteholder, upon the terms and conditions and otherwise as in Section
8.10(a) provided, may petition any court of competent jurisdiction for an
appointment of a successor trustee.
(d) Any resignation or removal of the Trustee and
appointment of a successor trustee pursuant to any of the provisions of this
Section 8.10 shall become effective upon acceptance of appointment by the
successor trustee as provided in Section 8.11.
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SECTION 8.11. ACCEPTANCE BY SUCCESSOR TRUSTEE. Any
successor trustee appointed as provided in Section 8.10 shall execute,
acknowledge and deliver to the Company and to its predecessor trustee an
instrument accepting such appointment hereunder, and thereupon the resignation
or removal of the predecessor trustee shall become effective and such successor
trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, duties and obligations of its predecessor hereunder,
with like effect as if originally named as trustee herein; but, nevertheless,
on the written request of the Company or of the successor trustee, the trustee
ceasing to act shall, upon payment of any amounts then due it pursuant to the
provisions of Section 8.6, execute and deliver an instrument transferring to
such successor trustee all the rights and powers of the trustee so ceasing to
act. Upon request of any such successor trustee, the Company shall execute any
and all instruments in writing for more fully and certainly vesting in and
confirming to such successor trustee all such rights and powers. Any trustee
ceasing to act shall, nevertheless, retain a lien upon all property and funds
held or collected by such trustee as such, except for funds held in trust for
the benefit of holders of particular Notes, to secure any amounts then due it
pursuant to the provisions of Section 8.6.
No successor trustee shall accept appointment as provided in
this Section 8.11 unless at the time of such acceptance such successor trustee
shall be qualified under the provisions of Section 8.8 and be eligible under
the provisions of Section 8.9.
Upon acceptance of appointment by a successor trustee as
provided in this Section 8.11, the Company (or the former trustee, at the
written direction of the Company) shall mail or cause to be mailed notice of
the succession of such trustee hereunder to the holders of Notes at their
addresses as they shall appear on the Note register. If the Company fails to
mail such notice within ten (10) days after acceptance of appointment by the
successor trustee, the successor trustee shall cause such notice to be mailed
at the expense of the Company.
SECTION 8.12. SUCCESSION BY MERGER, ETC. Any corporation
into which the Trustee may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Trustee shall be a party, or any corporation
succeeding to all or substantially all of the corporate trust business of the
Trustee (including any trust created by this Indenture), shall be the successor
to the Trustee hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided, that in the
case of any corporation succeeding to all or substantially all of the corporate
trust business of the Trustee such corporation shall be qualified under the
provisions of Section 8.8 and eligible under the provisions of Section 8.9.
In case at the time such successor to the Trustee shall
succeed to the trusts created by this Indenture, any of the Notes shall have
been authenticated but not delivered, any such successor to the Trustee may
adopt the certificate of authentication of any predecessor trustee or
authenticating agent appointed by such predecessor trustee, and deliver such
Notes so authenticated; and in case at that time any of the Notes shall not
have been authenticated, any successor to the Trustee or an authenticating
agent appointed by such successor trustee may authenticate such Notes either in
the
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name of any predecessor trustee hereunder or in the name of the successor
trustee; and in all such cases such certificates shall have the full force
which it is anywhere in the Notes or in this Indenture provided that the
certificate of the Trustee shall have; provided, however, that the right to
adopt the certificate of authentication of any predecessor Trustee or
authenticate Notes in the name of any predecessor Trustee shall apply only to
its successor or successors by merger, conversion or consolidation.
SECTION 8.13. LIMITATION ON RIGHTS OF TRUSTEE AS CREDITOR.
If and when the Trustee shall be or become a creditor of the Company (or any
other obligor upon the Notes), the Trustee shall be subject to the provisions
of the Trust Indenture Act regarding the collection of the claims against the
Company (or any such other obligor).
ARTICLE IX
CONCERNING THE NOTEHOLDERS
SECTION 9.1. ACTION BY NOTEHOLDERS. Whenever in this
Indenture it is provided that the holders of a specified percentage in
aggregate principal amount of the Notes may take any action (including the
making of any demand or request, the giving of any notice, consent or waiver or
the taking of any other action), the fact that at the time of taking any such
action, the holders of such specified percentage have joined therein may be
evidenced (a) by any instrument or any number of instruments of similar tenor
executed by Noteholders in person or by agent or proxy appointed in writing, or
(b) by the record of the holders of Notes voting in favor thereof at any
meeting of Noteholders duly called and held in accordance with the provisions
of Article X, or (c) by a combination of such instrument or instruments and any
such record of such a meeting of Noteholders. Whenever the Company or the
Trustee solicits the taking of any action by the holders of the Notes, the
Company or the Trustee may fix in advance of such solicitation, a date as the
record date for determining holders entitled to take such action. The record
date shall be not more than fifteen (15) days prior to the date of commencement
of solicitation of such action.
SECTION 9.2. PROOF OF EXECUTION BY NOTEHOLDERS. Subject
to the provisions of Section 8.1, 8.2 and 10.5, proof of the execution of any
instrument by a Noteholder or his agent or proxy shall be sufficient if made in
accordance with such reasonable rules and regulations as may be prescribed by
the Trustee or in such manner as shall be satisfactory to the Trustee. The
holding of Notes shall be proved by the registry of such Notes or by a
certificate of the Note registrar.
The record of any Noteholders' meeting shall be proved in the
manner provided in Section 10.6.
SECTION 9.3. WHO ARE DEEMED ABSOLUTE OWNERS. The Company,
the Trustee, any paying agent, any conversion agent and any Note registrar may
deem the person in whose name such Note shall be registered upon the Note
register to be, and may treat him as, the absolute owner of
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such Note (whether or not such Note shall be overdue and notwithstanding any
notation of ownership or other writing thereon) for the purpose of receiving
payment of or on account of the principal amount at maturity, Issue Price,
accrued Original Issue Discount, Redemption Price, Fundamental Change
Repurchase Price and interest in respect of such Note, for conversion of such
Note and for all other purposes; and neither the Company nor the Trustee nor
any paying agent nor any conversion agent nor any Note registrar shall be
affected by any notice to the contrary. All such payments so made to any holder
for the time being, or upon his order, shall be valid, and, to the extent of
the sum or sums so paid, effectual to satisfy and discharge the liability for
monies payable upon any such Note.
SECTION 9.4. COMPANY-OWNED NOTES DISREGARDED. In
determining whether the holders of the requisite aggregate principal amount at
maturity of Notes have concurred in any direction, consent, waiver or other
action under this Indenture, Notes which are owned by the Company or any other
obligor on the Notes or by any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company or
any other obligor on the Notes shall be disregarded and deemed not to be
outstanding for the purpose of any such determination; provided, that for the
purposes of determining whether the Trustee shall be protected in relying on
any such direction, consent, waiver or other action only Notes which a
Responsible Officer knows are so owned shall be so disregarded. Notes so owned
which have been pledged in good faith may be regarded as outstanding for the
purposes of this Section 9.4 if the pledgee shall establish to the satisfaction
of the Trustee the pledgee's right to vote such Notes and that the pledgee is
not the Company, any other obligor on the Notes or a person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the Company or any such other obligor. In the case of a dispute as
to such right, any decision by the Trustee taken upon the advice of counsel
shall be full protection to the Trustee. Upon request of the Trustee, the
Company shall furnish to the Trustee promptly an Officers' Certificate listing
and identifying all Notes, if any, known by the Company to be owned or held by
or for the account of any of the above described persons; and, subject to
Section 8.1, the Trustee shall be entitled to accept such Officers' Certificate
as conclusive evidence of the facts therein set forth and of the fact that all
Notes not listed therein are outstanding for the purposes of any such
determination.
SECTION 9.5. REVOCATION OF CONSENTS; FUTURE HOLDERS BOUND.
At any time prior to (but not after) the evidencing to the Trustee, as provided
in Section 9.1, of the taking of any action by the holders of the percentage in
aggregate principal amount of the Notes specified in this Indenture in
connection with such action, any holder of a Note which is shown by the
evidence to be included in the Notes the holders of which have consented to
such action may, by filing written notice with the Trustee at its Corporate
Trust Office and upon proof of holding as provided in Section 9.2, revoke such
action so far as concerns such Note. Except as aforesaid, any such action taken
by the holder of any Note shall be conclusive and binding upon such holder and
upon all future holders and owners of such Note and of any Notes issued in
exchange or substitution therefor, irrespective of whether any notation in
regard thereto is made upon such Note or any Note issued in exchange or
substitution therefor.
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ARTICLE X
NOTEHOLDERS' MEETINGS
SECTION 10.1. PURPOSES OF MEETINGS. A meeting of
Noteholders may be called at any time and from time to time pursuant to the
provisions of this Article X for any of the following purposes:
(1) to give any notice to the Company or to the Trustee or
to give any directions to the Trustee permitted under this Indenture,
or to consent to the waiving of any default or Event of Default
hereunder and its consequences, or to take any other action authorized
to be taken by Noteholders pursuant to any of the provisions of Article
VII;
(2) to remove the Trustee and nominate a successor trustee
pursuant to the provisions of Article VIII.
(3) to consent to the execution of an indenture or
indentures supplemental hereto pursuant to the provisions of Section
11.2; or
(4) to take any other action authorized to be taken by or
on behalf of the holders of any specified aggregate principal amount of
the Notes under any other provision of this Indenture or under
applicable law.
SECTION 10.2. CALL OF MEETINGS BY TRUSTEE. The Trustee may
at any time call a meeting of Noteholders to take any action specified in
Section 10.1, to be held at such time and at such place at a location within 10
miles of the Corporate Trust Office or the Borough of Manhattan, The City of
New York, as the Trustee shall determine. Notice of every meeting of the
Noteholders, setting forth the time and the place of such meeting and in
general terms the action proposed to be taken at such meeting and the
establishment of any record date pursuant to Section 9.1, shall be mailed to
holders of Notes at their addresses as they shall appear on the Note register.
Such notice shall also be mailed to the Company. Such notices shall be mailed
not less than twenty (20) nor more than ninety (90) days prior to the date
fixed for the meeting.
Any meeting of Noteholders shall be valid without notice if
the holders of all Notes then outstanding are present in person or by proxy or
if notice is waived before or after the meeting by the holders of all Notes
outstanding, and if the Company and the Trustee are either present by duly
authorized representatives or have, before or after the meeting, waived notice.
SECTION 10.3. CALL OF MEETINGS BY COMPANY OR NOTEHOLDERS.
In case at any time the Company, pursuant to a resolution of its Board of
Directors, or the holders of at least ten percent in aggregate principal amount
of the Notes then outstanding, shall have requested the Trustee to call a
meeting of Noteholders, by written request setting forth in reasonable detail
the action proposed
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to be taken at the meeting, and the Trustee shall not have mailed the notice of
such meeting within twenty (20) days after receipt of such request, then the
Company or such Noteholders may determine the time and the place at any
location within 10 miles of the Corporate Trust Office or the Borough of
Manhattan, The City of New York for such meeting and may call such meeting to
take any action authorized in Section 10.1, by mailing notice thereof as
provided in Section 10.2.
SECTION 10.4. QUALIFICATIONS FOR VOTING. To be entitled to
vote at any meeting of Noteholders a person shall (a) be a holder of one or
more Notes on the record date pertaining to such meeting or (b) be a person
appointed by an instrument in writing as proxy by a holder of one or more
Notes. The only persons who shall be entitled to be present or to speak at any
meeting of Noteholders shall be the persons entitled to vote at such meeting
and their counsel and any representatives of the Trustee and its counsel and
any representatives of the Company and its counsel.
SECTION 10.5. REGULATIONS. Notwithstanding any other
provisions of this Indenture, the Trustee may make such reasonable regulations
as it may deem advisable for any meeting of Noteholders, in regard to proof of
the holding of Notes and of the appointment of proxies, and in regard to the
appointment and duties of inspectors of votes, the submission and examination
of proxies, certificates and other evidence of the right to vote, and such
other matters concerning the conduct of the meeting as it shall think fit.
The Trustee shall, by an instrument in writing, appoint a
temporary chairman of the meeting, unless the meeting shall have been called by
the Company or by Noteholders as provided in Section 10.3, in which case the
Company or the Noteholders calling the meeting, as the case may be, shall in
like manner appoint a temporary chairman. A permanent chairman and a permanent
secretary of the meeting shall be elected by vote of the holders of a majority
in principal amount of the Notes represented at the meeting and entitled to
vote at the meeting.
Subject to the provisions of Section 9.4, at any meeting each
Noteholder or proxy holder shall be entitled to one vote for each $1,000
principal amount at maturity of Notes held or represented by him; provided,
however, that no vote shall be cast or counted at any meeting in respect of any
Note challenged as not outstanding and ruled by the chairman of the meeting to
be not outstanding. The chairman of the meeting shall have no right to vote
other than by virtue of Notes held by him or instruments in writing as
aforesaid duly designating him as the proxy to vote on behalf of other
Noteholders. Any meeting of Noteholders duly called pursuant to the provisions
of Section 10.2 or 10.3 may be adjourned from time to time by the holders of
majority of the aggregate principal amount of Notes represented at the meeting,
whether or not constituting a quorum, and the meeting may be held as so
adjourned without further notice.
SECTION 10.6. VOTING. The vote upon any resolution
submitted to any meeting of Noteholders shall be by written ballot on which
shall be subscribed the signatures of the holders of Notes or of their
representatives by proxy and the principal amount of the Notes held or
represented by them. The permanent chairman of the meeting shall appoint two
inspectors of votes who shall
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count all votes cast at the meeting for or against any resolution and who shall
make and file with the secretary of the meeting their verified written reports
in duplicate of all votes cast at the meeting. A record in duplicate of the
proceedings of each meeting of Noteholders shall be prepared by the secretary
of the meeting and there shall be attached to said record the original reports
of the inspectors of votes on any vote by ballot taken thereat and affidavits
by one or more persons having knowledge of the facts setting forth a copy of
the notice of the meeting and showing that said notice was mailed as provided
in Section 10.2. The record shall show the principal amount of the Notes voting
in favor of or against any resolution. The record shall be signed and verified
by the affidavits of the permanent chairman and secretary of the meeting and
one of the duplicates shall be delivered to the Company and the other to the
Trustee to be preserved by the Trustee, the latter to have attached thereto the
ballots voted at the meeting.
Any record so signed and verified shall be conclusive evidence
of the matters therein stated.
SECTION 10.7. NO DELAY OF RIGHTS BY MEETING. Nothing in
this Article X contained shall be deemed or construed to authorize or permit,
by reason of any call of a meeting of Noteholders or any rights expressly or
impliedly conferred hereunder to make such call, any hindrance or delay in the
exercise of any right or rights conferred upon or reserved to the Trustee or to
the Noteholders under any of the provisions of this Indenture or of the Notes.
ARTICLE XI
SUPPLEMENTAL INDENTURES
SECTION 11.1. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF
NOTEHOLDERS. The Company, when authorized by the resolutions of the Board of
Directors, and the Trustee may from time to time and at any time enter into an
indenture or indentures supplemental hereto for one or more of the following
purposes:
(a) to make provision with respect to the conversion
rights of the holders of Notes pursuant to the requirements of Section 15.6 and
the redemption obligations of the Company pursuant to the requirements of
Section 3.5(e).
(b) subject to Article IV, to convey, transfer, assign,
mortgage or pledge to the Trustee as security for the Notes, any property or
assets;
(c) to evidence the succession of another corporation to
the Company, or successive successions, and the assumption by the successor
corporation of the covenants, agreements and obligations of the Company
pursuant to Article XII.
(d) to add to the covenants of the Company such further
covenants, restrictions or conditions as the Board of Directors and the Trustee
shall consider to be for the benefit of the
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holders of Notes, and to make the occurrence, or the occurrence and
continuance, of a default in any such additional covenants, restrictions or
conditions a default or an Event of Default permitting the enforcement of all
or any of the several remedies provided in this Indenture as herein set forth;
provided, however, that in respect of any such additional covenant, restriction
or condition such supplemental indenture may provide for a particular period of
grace after default (which period may be shorter or longer than that allowed in
the case of other defaults) or may provide for an immediate enforcement upon
such default or may limit the remedies available to the Trustee upon such
default.
(e) to provide for the issuance under this Indenture of
Notes in coupon form (including Notes registrable as to principal only) and to
provide for exchangeability of such Notes with the Notes issued hereunder in
fully registered form and to make all appropriate changes for such purpose;
(f) to cure any ambiguity or to correct or supplement any
provision contained herein or in any supplemental indenture which may be
defective or inconsistent with any other provision contained herein or in any
supplemental indenture, or to make such other provisions in regard to matters
or questions arising under this Indenture which shall not materially adversely
affect the interests of the holders of the Notes;
(g) to evidence and provide for the acceptance of
appointment hereunder by a successor Trustee with respect to the Notes; or
(h) to modify, eliminate or add to the provisions of this
Indenture to such extent as shall be necessary to effect or maintain the
qualifications of this Indenture under the Trust Indenture Act, or under any
similar federal statute hereafter enacted.
The Trustee is hereby authorized to join with the Company in
the execution of any such supplemental indenture, to make any further
appropriate agreements and stipulations which may be therein contained and to
accept the conveyance, transfer and assignment of any property thereunder, but
the Trustee shall not be obligated to, but may in its discretion, enter into
any supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
Any supplemental indenture authorized by the provisions of
this Section 11.1 may be executed by the Company and the Trustee without the
consent of the holders of any of the Notes at the time outstanding,
notwithstanding any of the provisions of Section 11.2.
SECTION 11.2. SUPPLEMENTAL INDENTURES WITH CONSENT OF
NOTEHOLDERS. With the consent (evidenced as provided in Article IX) of the
holders of not less than a majority in aggregate principal amount at maturity
of the Notes at the time outstanding, the Company, when authorized by the
resolutions of the Board of Directors, and the Trustee may from time to time
and at any time enter into an indenture or indentures supplemental hereto for
the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Indenture or any
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supplemental indenture or of modifying in any manner the rights of the holders
of the Notes; provided, however, that no such supplemental indenture shall (i)
extend the fixed maturity of any Note, or reduce the rate or extend the time of
payment of interest thereon, change the rate of accrual or extend the time of
payment in connection with the Original Issue Discount, or reduce the principal
amount at maturity, accrued Original Issue Discount, Issue Price, Redemption
Price, Fundamental Change Redemption Price or interest, change the obligation
of the Company to repurchase any Note upon the happening of a Fundamental
Change in a manner adverse to holders of Notes, impair the right of any
Noteholder to institute suit for the payment thereof, make the principal amount
at maturity thereof, or accrued Original Issue Discount, Redemption Price,
Fundamental Change Repurchase Price or interest thereon, payable in any coin or
currency other than that provided in the Notes, or modify the provisions of
this Indenture with respect to the subordination of the Notes in a manner
adverse to the Noteholders in any material respect, without the consent of the
holder of each Note so affected, or (ii) reduce the aforesaid percentage of
Notes, the holders of which are required to consent to any such supplemental
indenture, without the consent of the holders of all Notes then outstanding.
Upon the request of the Company, accompanied by a copy of the
resolutions of the Board of Directors certified by its Secretary or Assistant
Secretary authorizing the execution of any such supplemental indenture, and
upon the filing with the Trustee of evidence of the consent of Noteholders as
aforesaid, the Trustee shall join with the Company in the execution of such
supplemental indenture unless such supplemental indenture affects the Trustee's
own rights, duties or immunities under this Indenture or otherwise, in which
case the Trustee may in its discretion, but shall not be obligated to, enter
into such supplemental indenture.
It shall not be necessary for the consent of the Noteholders
under this Section 11.2 to approve the particular form of any proposed
supplemental indenture, but it shall be sufficient if such consent shall
approve the substance thereof.
SECTION 11.3. EFFECT OF SUPPLEMENTAL INDENTURE. Any
supplemental indenture executed pursuant to the provisions of this Article XI
shall comply with the Trust Indenture Act, as then in effect; provided, that
this Section 11.3 shall not require such supplemental indenture or the Trustee
to be qualified under the Trust Indenture Act prior to the time such
qualification is in fact required under the terms of the Trust Indenture Act or
the Indenture has been qualified under the Trust Indenture Act, nor shall it
constitute any admission or acknowledgment by any party to such supplemental
indenture that any such qualification is required prior to the time such
qualification is in fact required under the terms of the Trust Indenture Act or
the Indenture has been qualified under the Trust Indenture Act. Upon the
execution of any supplemental indenture pursuant to the provisions of this
Article XI, this Indenture shall be and be deemed to be modified and amended in
accordance therewith and the respective rights, limitation of rights,
obligations, duties and immunities under this Indenture of the Trustee, the
Company and the holders of Notes shall thereafter be determined, exercised and
enforced hereunder subject in all respects to such modifications and amendments
and all the terms and conditions of any such supplemental indenture
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shall be and be deemed to be part of the terms and conditions of this Indenture
for any and all purposes.
SECTION 11.4. NOTATION ON NOTES. Notes authenticated and
delivered after the execution of any supplemental indenture pursuant to the
provisions of this Article XI may bear a notation in form approved by the
Trustee as to any matter provided for in such supplemental indenture. If the
Company or the Trustee shall so determine, new Notes so modified as to conform,
in the opinion of the Trustee and the Board of Directors, to any modification
of this Indenture contained in any such supplemental indenture may, at the
Company's expense, be prepared and executed by the Company, authenticated by
the Trustee (or an authenticating agent duly appointed by the Trustee pursuant
to Section 16.11) and delivered in exchange for the Notes then outstanding,
upon surrender of such Notes then outstanding.
SECTION 11.5. EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL
INDENTURE TO BE FURNISHED TRUSTEE. The Trustee, subject to the provisions of
Sections 8.1 and 8.2, may receive an Officers' Certificate and an Opinion of
counsel as conclusive evidence that any supplemental indenture executed
pursuant hereto complies with the requirements of this Article XI.
ARTICLE XII
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE
SECTION 12.1. COMPANY MAY CONSOLIDATE ETC. ON CERTAIN
TERMS. Subject to the provisions of Section 12.2, nothing contained in this
Indenture or in any of the Notes shall prevent any consolidation or merger of
the Company with or into any other corporation or corporations (whether or not
affiliated with the Company), or successive consolidations or mergers in which
the Company or its successor or successors shall be a party or parties, or
shall prevent any sale, conveyance or lease (or successive sales, conveyances
or leases) of all or substantially all of the property of the Company, to any
other corporation (whether or not affiliated with the Company), authorized to
acquire and operate the same and which shall be organized under the laws of the
United States of America, any state thereof or the District of Columbia;
provided, that upon any such consolidation, merger, sale, conveyance or lease,
the due and punctual payment of the principal amount at maturity, Issue Price,
accrued Original Issue Discount, Redemption Price, Fundamental Change
Repurchase Price and interest in respect of all of the Notes, according to
their tenor, and the due and punctual performance and observance of all of the
covenants and conditions of this Indenture to be performed by the Company,
shall be expressly assumed, by supplemental indenture satisfactory in form to
the Trustee, executed and delivered to the Trustee by the corporation (if other
than the Company) formed by such consolidation, or into which the Company shall
have been merged, or by the corporation which shall be acquired or leased such
property, and such supplemental indenture shall provide for the applicable
conversion rights set forth in Section 15.6.
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SECTION 12.2. SUCCESSOR CORPORATION TO BE SUBSTITUTED. In
case of any such consolidation, merger, sale, conveyance or lease and upon the
assumption by the successor corporation, by supplemental indenture, executed
and delivered to the Trustee and satisfactory in form to the Trustee, of the
due and punctual payment of the principal amount at maturity, Issue Price,
accrued Original Issue Discount, Redemption Price, Fundamental Change
Repurchase Price and interest in respect of all of the Notes and due and
punctual performance of all of the covenants and conditions of this Indenture
to be performed by the Company, such successor corporation shall succeed to and
be substituted for the Company, with the same effect as if it had been named
herein as the party of the first part. Such successor corporation thereupon may
cause to be signed, and may issue either in its own name or in the name of
CORESTAFF, Inc. any or all of the Notes issuable hereunder which theretofore
shall not have been signed by the Company and delivered to the Trustee; and,
upon the order of such successor corporation instead of the Company and subject
to all the terms, conditions and limitations in this Indenture prescribed, the
Trustee shall authenticate and shall deliver, or cause to be authenticated and
delivered, any Notes which previously shall have been signed and delivered by
the officers of the Company to the Trustee for authentication, and any Notes
which such successor corporation thereafter shall cause to be signed and
delivered to the Trustee for that purpose. All the Notes so issued shall in all
respects have the same legal rank and benefit under this Indenture as the Notes
theretofore or thereafter issued in accordance with the terms of this Indenture
as though all of such Notes had been issued at the date of the execution
hereof. In the event of any such consolidation, merger, sale, conveyance or
lease, the person named as the "Company" in the first paragraph of this
Indenture or any successor which shall thereafter have become such in the
manner prescribed in this Article XII may be dissolved, wound up and liquidated
at any time thereafter and such person shall be released from its liabilities
as obligor and maker of the Notes and from its obligations under this
Indenture.
In case of any such consolidation, merger, sale, conveyance or
lease, such changes in phraseology and form (but not in substance) may be made
in the Notes thereafter to be issued as may be appropriate.
SECTION 12.3. OPINION OF COUNSEL TO BE GIVEN TRUSTEE. The
Trustee, subject to Sections 8.1 and 8.2, shall receive an Officers'
Certificate and an Opinion of Counsel as conclusive evidence that any such
consolidation, merger, sale, conveyance or lease and any such assumption
complies with the provisions of this Article XII.
ARTICLE XIII
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 13.1. DISCHARGE OF INDENTURE. When (a) the Company
shall deliver to the Trustee for cancellation all Notes theretofore
authenticated (other than any Notes which have been destroyed, lost or stolen
and in lieu of or in substitution for which other Notes shall have been
authenticated and delivered) and not theretofore canceled, or (b) all the Notes
not theretofore
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canceled or delivered to the Trustee for cancellation shall have become due and
payable, or are by their terms to become due and payable within one year or are
to be called for redemption within one year under arrangements satisfactory to
the Trustee for the giving of notice of redemption, and the Company shall
deposit with the Trustee, in trust, funds sufficient to pay at maturity or upon
redemption of all the Notes (other than any Notes which shall have been
mutilated, destroyed, lost or stolen and in lieu of or in substitution for
which other Notes shall have been authenticated and delivered) not theretofore
canceled or delivered to the Trustee for cancellation, including principal
amount at maturity, Issue Price, accrued Original Issue Discount, Redemption
Price, Fundamental Change Repurchase Price and interest due or to become due to
such date of maturity or redemption date, as the case may be, and if in either
case the Company shall also pay or cause to be paid all other sums payable
hereunder by the Company, then this Indenture shall cease to be of further
effect (except as to (i) remaining rights of registration of transfer,
substitution and exchange and conversion of Notes, (ii) rights hereunder of
Noteholders to receive payments of principal amount at maturity, Issue Price,
accrued Original Issue Discount, Redemption Price, Fundamental Change
Repurchase Price and interest in respect of the Notes and the other rights,
duties and obligations of Noteholders, as beneficiaries hereof with respect to
the amounts, if any, so deposited with the Trustee and (iii) the rights,
obligations and immunities of the Trustee hereunder), and the Trustee, on
demand of the Company accompanied by an Officers' Certificate and an Opinion of
Counsel as required by Section 16.5 and at the cost and expense of the Company,
shall execute proper instruments acknowledging satisfaction of and discharging
this Indenture; the Company, however, hereby agreeing to reimburse the Trustee
for any costs or expenses thereafter reasonably and properly incurred by the
Trustee and to compensate the Trustee for any services thereafter reasonably
and properly rendered by the Trustee in connection with this Indenture or the
Notes.
SECTION 13.2. DEPOSITED MONIES TO BE HELD IN TRUST BY
TRUSTEE. Subject to Section 13.4, all monies deposited with the Trustee
pursuant to Section 13.1 and not in violation of Article IV shall be held in
trust for the sole benefit of the Noteholders and not to be subject to the
subordination provisions of Article IV, and such monies shall be applied by the
Trustee to the payment, either directly or through any paying agent (including
the Company if acting as its own paying agent), to the holders of the
particular Notes for the payment or redemption of which such monies have been
deposited with the Trustee, of all sums due and to become due thereon for
principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, Fundamental Change Repurchase Price and interest, if any.
SECTION 13.3. PAYING AGENT TO REPAY MONIES HELD. Upon the
satisfaction and discharge of this Indenture, all monies then held by any
paying agent of the Notes (other than the Trustee) shall, upon written request
of the Company, be repaid to it or paid to the Trustee, and thereupon such
paying agent shall be released from all further liability with respect to such
monies.
SECTION 13.4. RETURN OF UNCLAIMED MONIES. Subject to the
requirements of applicable law, any monies deposited with or paid to the
Trustee for payment of the principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price, Fundamental Change Repurchase Price
or interest in respect of Notes and not applied but remaining unclaimed
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by the holders of Notes for two years after the date upon which such amount in
respect of such Notes, as the case may be, shall have become due and payable,
shall be repaid to the Company by the Trustee on demand and all liability of
the Trustee shall thereupon cease with respect to such monies; and the holder
of any of the Notes shall thereafter look only to the Company for any payment
which such holder may be entitled to collect unless an applicable abandoned
property law designates another Person.
SECTION 13.5. REINSTATEMENT. If the Trustee or the paying
agent is unable to apply any money in accordance with Section 13.2 by reason of
any order or judgment of any court or governmental authority enjoining,
restraining or otherwise prohibiting such application, the Company's
obligations under this Indenture and the Notes shall be revived and reinstated
as though no deposit had occurred pursuant to Section 13.1 until such time as
the Trustee or the paying agent is permitted to apply all such money in
accordance with Section 13.2; provided, however, that if the Company makes any
payment of principal amount at maturity, Issue Price, accrued Original Issue
Discount, Redemption Price, Fundamental Change Repurchase Price or interest in
respect of any Note following the reinstatement of its obligations, the Company
shall be subrogated to the rights of the holders of such Notes to receive such
payment from the money held by the Trustee or paying agent.
ARTICLE XIV
IMMUNITY OF INCORPORATORS,
STOCKHOLDERS, OFFICERS AND DIRECTORS
SECTION 14.1. INDENTURE AND NOTES SOLELY CORPORATE
OBLIGATIONS. No recourse for the payment of the principal amount at maturity,
Issue Price, accrued Original Issue Discount, Redemption Price, Fundamental
Change Repurchase Price or interest on any Note, or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of the Company in this Indenture or in any supplemental
indenture or in any Note, or because of the creation of any indebtedness
represented thereby, shall be had against any incorporator, stockholder,
employee, agent, officer, or director or subsidiary, as such, past, present or
future, of the Company or of any successor corporation, either directly or
through the Company or any successor corporation, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment
or penalty or otherwise; it being expressly understood that all such liability
is hereby expressly waived and released as a condition of, and as a
consideration for, the execution of this Indenture and the issue of the Notes.
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ARTICLE XV
CONVERSION OF NOTES
SECTION 15.1. RIGHT TO CONVERT. Subject to and upon
compliance with the provisions of this Indenture, the holder of any Note shall
have the right, at his or her option, at any time after ninety (90) days
following the latest date of original issuance of the Notes (without taking
into account any over-allotment option granted to the Notes Representatives as
described in the Registration Statement) and prior to the close of business on
August _______ , 2004 (except that, with respect to any Note or portion of a
Note which shall be called for redemption, such right shall terminate, except
as provided in Section 15.2 or Section 3.4, at the close of business on the
Business Day next preceding the date fixed for redemption of such Note or
portion of a Note unless the Company shall default in payment due upon
redemption thereof) to convert the principal amount at maturity of any such
Note, or any portion of such principal amount at maturity which is $1,000 or an
integral multiple thereof, into that number of fully paid and non-assessable
shares of Common Stock (as such shares shall then be constituted) obtained by
dividing the principal amount at maturity of the Note or portion thereof
surrendered for conversion by $1,000 and multiplying the result so obtained by
the Conversion Rate in effect at such time, by surrender of the Note so to be
converted in whole or in part in the manner provided, together with any
required funds, in Section 15.2. A holder of Notes is not entitled to any
rights of a holder of Common Stock until such holder has converted his Notes to
Common Stock, and only to the extent such Notes are deemed to have been
converted to Common Stock under this Article XV.
SECTION 15.2. EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF
COMMON STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS. In order
to exercise the conversion privilege with respect to any Note in certificated
form, the holder of any such Note to be converted in whole or in part shall
surrender such Note, duly endorsed, at an office or agency maintained by the
Company pursuant to Section 5.2, accompanied by the funds, if any, required by
the penultimate paragraph of this Section 15.2, and shall give written notice
of conversion in the form provided on the Notes (or such other notice which is
acceptable to the Company) to the office or agency that the holder elects to
convert such Note or the portion thereof specified in said notice. Such notice
shall also state the name or names (with address or addresses) in which the
certificate or certificates for shares of Common Stock which shall be issuable
on such conversion shall be issued, and shall be accompanied by transfer taxes,
if required pursuant to Section 15.7. Each such Note surrendered for conversion
shall, unless the shares issuable on conversion are to be issued in the same
name as the registration of such Note, be duly endorsed by, or be accompanied
by instruments of transfer in form satisfactory to the Company duly executed
by, the holder or his duly authorized attorney.
In order to exercise the conversion privilege with respect to
any interest in a Note in global form, the beneficial holder must complete the
appropriate instruction form for conversion pursuant to the Depository's book-
entry conversion program, deliver by book-entry delivery an interest in such
Note in global form, furnish appropriate endorsements and transfer documents if
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required by the Company or the Trustee or conversion agent, and pay the funds,
if any, required by this Section 15.2 and any transfer taxes if required
pursuant to Section 15.7.
As promptly as practicable after satisfaction of the
requirements for conversion set forth above, subject to compliance with any
restrictions on transfer if shares issuable on conversion are to be issued in a
name other than that of the Noteholder (as if such transfer were a transfer of
the Note or Notes (or portion thereof) so converted), the Company shall issue
and shall deliver to such holder at the office or agency maintained by the
Company for such purpose pursuant to Section 5.2, a certificate or certificates
for the number of full shares of Common Stock issuable upon such conversion of
such Note or portion thereof in accordance with the provisions of this Article
and a check or cash in respect of any fractional interest in respect of a share
of Common Stock arising upon such conversion, as provided in Section 15.3. In
case any Note of a denomination greater than $1,000 shall be surrendered for
partial conversion, and subject to Section 2.3, the Company shall execute and
the Trustee shall authenticate and deliver to the holder of the Note so
surrendered, without charge to him, a new Note or Notes in authorized
denominations in an aggregate principal amount equal to the unconverted portion
(including Original Issue Discount) of the surrendered Note.
Each conversion shall be deemed to have been effected as to
any such Note (or portion thereof) on the date on which the requirements set
forth above in this Section 15.2 have been satisfied as to such Note (or
portion thereof), and the person in whose name any certificate or certificates
for shares of Common Stock shall be issuable upon such conversion shall be
deemed to have become on said date the holder of record of the shares
represented thereby; provided, however, that any such surrender on any date
when the stock transfer books of the Company shall be closed shall constitute
the person in whose name the certificates are to be issued as the record holder
thereof for all purposes on the next succeeding day on which such stock
transfer books are open, but such conversion shall be at the Conversion Rate in
effect on the date upon which such Note shall be surrendered.
Except as described in this Section, holders of the Notes will
not be entitled to any payment or adjustment on account of accrued Original
Issue Discount or accrued and unpaid interest upon conversion of the Notes.
The Company's delivery of the fixed number of shares of Common Stock into which
the Notes are convertible will be deemed to satisfy the Company's obligation to
pay the principal amount at maturity of the Notes and all accrued interest and
Original Issue Discount that has not previously been (or is not simultaneously
being) paid. The Common Stock is treated as issued first in payment of accrued
interest and Original Issue Discount and then in payment of principal.
Any Note or portion thereof surrendered for conversion during
the period from the close of business on the record date for any interest
payment date to the close of business on the Business Day next preceding the
following interest payment date shall (unless such Note or portion thereof
being converted shall have been called for redemption during the period from
the close of business on such record date to the close of business on the
Business Day next preceding the
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following interest payment date) be accompanied by payment, in New York
Clearing House funds or other funds acceptable to the Company, of an amount
equal to the interest otherwise payable on such interest payment date on the
principal amount being converted; provided, however, that no such payment need
be made if there shall exist at the time of conversion a default in the payment
of interest on the Notes. Except as provided above in this Section 15.2, no
payment or other adjustment shall be made for accrued Original Issue Discount
or interest accrued on any Note converted or for dividends on any shares issued
upon the conversion of such Note as provided in this Article.
Upon the conversion of an interest in a Note in global form,
the Trustee, or the Custodian at the direction of the Trustee, shall make a
notation on such Note in global form as to the reduction in the principal
amount at maturity represented thereby.
SECTION 15.3. CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES.
No fractional shares of Common Stock or scrip representing fractional shares
shall be issued upon conversion of Notes. If more than one Note shall be
surrendered for conversion at one time by the same holder, the number of full
shares which shall be issuable upon conversion shall be computed on the basis
of the aggregate principal amount at maturity of the Notes (or specified
portions thereof to the extent permitted hereby) so surrendered. If any
fractional share of stock would be issuable upon the conversion of any Note or
Notes, the Company shall make an adjustment and payment therefor in cash at the
current market value thereof to the holder of Notes. The current market value
of a share of Common Stock shall be the Closing Price on the first Business Day
immediately preceding the day on which the Notes (or specified portions
thereof) are deemed to have been converted.
SECTION 15.4. CONVERSION RATE. The conversion rate shall
be as specified in the form of Note (herein called the "Conversion Rate")
attached as Exhibit A hereto, subject to adjustment as provided in this Article
XV.
SECTION 15.5. ADJUSTMENT OF CONVERSION RATE. The
Conversion Rate shall be adjusted from time to time by the Company as follows:
(a) In case the Company shall pay a dividend or make a
distribution, in shares of its Common Stock, on its Common Stock, the
Conversion Rate in effect at the opening of business on the date
following the date fixed for the determination of stockholders entitled
to receive such dividend or other distribution shall be increased by
multiplying such Conversion Rate by a fraction of which the denominator
shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination and the numerator
shall be the sum of such number of shares and the total number of
shares constituting such dividend or other distribution, such increase
to become effective immediately after the opening of business on the
day following the date fixed for such determination. The Company will
not pay any dividend or make any distribution on shares of Common Stock
held in the treasury of the Company. If any dividend or distribution
of the type described in this Section 15.5(a) is declared but is not so
paid or made and not required to be so paid or made, the Conversion
Rate shall again be adjusted to the
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Conversion Rate which would then be in effect if such dividend or
distribution had not been declared.
(b) In case the Company shall issue rights or warrants to
all holders of its Common Stock entitling them (for a period expiring within 45
days after the date fixed for determination of stockholders entitled to receive
such rights or warrants) to subscribe for or purchase Common Stock at a price
per share less than the Current Market Price per share of Common Stock (as
defined in Section 15.5(g) below) at the record date for the determination of
stockholders entitled to receive such rights or warrants, the Conversion Rate
in effect immediately prior thereto shall be adjusted so that the same shall
equal the rate determined by multiplying the Conversion Rate in effect
immediately prior to the date fixed for determination of stockholders entitled
to receive such rights or warrants by a fraction the denominator of which shall
be the number of shares of Common Stock outstanding at the close of business on
the date fixed for determination of stockholders entitled to receive such
rights or warrants plus the number of shares which the aggregate offering price
of the total number of shares so offered would purchase at such Current Market
Price and the numerator of which shall be the number of shares of Common Stock
outstanding on the date fixed for determination of stockholders entitled to
receive such rights or warrants plus the number of additional shares of Common
Stock offered for subscription or purchase. Such adjustment shall be made
successively whenever any such rights or warrants are issued, and shall become
effective immediately after the opening of business on the day following the
record date for the determination of the stockholders entitled to receive such
rights or warrants. In determining whether any rights or warrants entitle the
holders to subscribe for or purchase shares of Common Stock at less than such
Current Market Price, and in determining the aggregate offering price of such
shares of Common Stock, there shall be taken into account any consideration
received by the Company for such rights or warrants, the value of such
consideration, if other than cash, to be determined by the Board of Directors.
To the extent that shares of Common Stock are not delivered or required to be
delivered after the expiration of such rights or warrants, the Conversion Rate
shall be readjusted to the Conversion Rate which would then be in effect had
the adjustments made upon the issuance of such rights or warrants been made on
the basis of delivery of only the number of shares of Common Stock actually
delivered. If such rights or warrants are not so issued and not required to be
so issued, the Conversion Rate shall again be adjusted to be the Conversion
Rate which would then be in effect if such record date for the determination of
stockholders entitled to receive such rights or warrants had not been fixed.
(c) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion Rate
in effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately increased, and
conversely, in case outstanding shares of Common Stock shall be combined into a
smaller number of shares of Common Stock, the Conversion Rate in effect at the
opening of business on the day following the day upon which such combination
becomes effective shall be proportionately reduced, such reduction or increase,
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as the case may be, to become effective immediately after the opening of
business on the day following the day upon which such subdivision or
combination becomes effective.
(d) In case the Company shall distribute to all holders of
its Common Stock shares of any class of capital stock of the Company (other
than Common Stock) or evidences of its indebtedness or assets (excluding cash
dividends or other distributions to the extent paid from retained earnings of
the Company) or rights or warrants to subscribe for or purchase any of its
securities (excluding those referred to in Section 15.5(b) above) (any of the
foregoing hereinafter in this Section 15.5(d) called the "Distributed
Securities"), then in each such case the Conversion Rate shall be adjusted so
that the same shall equal the rate determined by multiplying the Conversion
Rate in effect on the record date with respect to such distribution by a
fraction of which the denominator shall be the Current Market Price per share
of the Common Stock on such record date less the fair market value on such
record date (as determined by the Board of Directors of the Company, whose
determination shall be conclusive, and described in a certificate filed with
the Trustee) of the Distributed Securities applicable to one share of Common
Stock and the numerator of which shall be the Current Market Price per share of
the Common Stock on the record date for the determination of shareholders
entitled to receive such distribution; such adjustment shall become effective
immediately prior to the opening of business on the day following such record
date. Notwithstanding the foregoing, in the event the then fair market value
(as so determined) of the portion of the Distributed Securities applicable to
one share of Common Stock is equal to or greater than the Current Market Price
of the Common Stock on the relevant record date, in lieu of the foregoing
adjustment, adequate provision shall be made so that each Noteholder shall have
the right to receive upon conversion the amount of Distributed Securities such
holder would have received had such holder converted each Note on such record
date. In the event that such distribution is not so paid or made, the
Conversion Rate shall again be adjusted to the Conversion Rate which would then
be in effect if such distribution had not been declared. If the Board of
Directors determines the fair market value of any distribution for purposes of
this subsection (d) by reference to the actual or when issued trading market
for any securities, it must in doing so consider the prices in such market over
the same period used in computing the Current Market Price of the Common Stock.
Notwithstanding the foregoing provisions of this subsection
(d), no adjustment shall be made thereunder for any distribution of Distributed
Securities if the Company makes proper provision so that each holder of a Note
who converts such Note (or any portion thereof) after the record date for such
distribution shall be entitled to receive upon such conversion, in addition to
the shares of Common Stock issuable upon such conversion, the amount and kind
of Distributed Securities that such holder would have been entitled to receive
if such holder had, immediately prior to such record date, converted such Note
into Common Stock, provided that, with respect to any Distributed Securities
that are convertible, exchangeable or exercisable, the foregoing provision
shall only apply to the extent (and so long as) the Distributed Securities
receivable upon conversion of such Note would be
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convertible, exchangeable or exercisable, as applicable, without any loss of
rights or privileges for a period of at least 60 days following conversion of
such Note.
(e) In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock cash (excluding (x) any quarterly
cash dividend on the Common Stock to the extent the aggregate cash dividend per
share of Common Stock in any fiscal quarter does not exceed the greater of (A)
the amount per share of Common Stock of the next preceding quarterly cash
dividend on the Common Stock to the extent such preceding quarterly dividend
did not require any adjustment of the Conversion Rate pursuant to this Section
15.05(e) (as adjusted to reflect subdivisions or combinations of the Common
Stock), and (B) 3.75% of the average of the last reported sales price of the
Common Stock (determined as provided in Section 15.05(g)) during the ten
Trading Days (as defined in Section 15.05(g)) next preceding the date of
declaration of such dividend and (y) any dividend or distribution in connection
with the liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary), then, in such case, unless the Company elects to
reserve such cash for distribution to the holders of the Notes upon the
conversion of the Notes so that any such holder converting Notes will receive
upon such conversion, in addition to the shares of Common Stock to which such
holder is entitled, the amount of cash which such holder would have received if
such holder had, immediately prior to the record date for such distribution of
cash, converted its Notes into Common Stock, the Conversion Rate shall be
adjusted so that the same shall equal the rate determined by multiplying the
Conversion Rate in effect immediately prior to the close of business on such
record date by a fraction of which the denominator shall be such Current Market
Price of the Common Stock on the record date less the amount of cash so
distributed (and not excluded as provided above) applicable to one share of
Common Stock and the numerator of which shall be the Current Market Price of
the Common Stock on such record date; such adjustment to be effective
immediately prior to the opening of business on the day following the record
date; provided, however, that in the event the portion of the cash so
distributed applicable to one share of Common Stock is equal to or greater than
the Current Market Price of the Common Stock on the record date, in lieu of the
foregoing adjustment, adequate provision shall be made so that each Noteholder
shall have the right to receive upon conversion the amount of cash such holder
would have received had such holder converted each Note on the record date. If
such dividend or distribution is not so paid or made, the Conversion Rate shall
again be adjusted to be the Conversion Rate which would then be in effect if
such dividend or distribution had not been declared.
If any adjustment is required to be made as set forth in this
subsection (e) as a result of a distribution that is a quarterly dividend, such
adjustment shall be based upon the amount by which such distribution exceeds
the amount of the quarterly cash dividend permitted to be excluded pursuant
hereto. If an adjustment is required to be made as set forth in this
subsection (e) above as a result of a distribution that is not a quarterly
dividend, such adjustment shall be based upon the full amount of the
distribution.
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(f) In case a tender or exchange offer made by the Company
or any subsidiary of the Company for all or any portion of the Common Stock
shall expire and such tender or exchange offer shall involve the payment by the
Company or such subsidiary of consideration per share of Common Stock having a
fair market value (as determined by the Board of Directors or, to the extent
permitted by applicable law, a duly authorized committee thereof, whose
determination shall be conclusive, and described in a resolution of the Board
of Directors or such duly authorized committee thereof, as the case may be, at
the last time (the "Expiration Time") tenders or exchanges may be made pursuant
to such tender or exchange offer (as it shall have been amended), that exceeds
the Current Market Price of the Common Stock on the Trading Day next succeeding
the Expiration Time, the Conversion Rate shall be adjusted so that the same
shall equal the rate determined by multiplying the Conversion Rate in effect
immediately prior to the Expiration Time by a fraction of which the denominator
shall be the number of shares of Common Stock outstanding (including any
tendered or exchanged shares) on the Expiration Time multiplied by the Current
Market Price of the Common Stock on the Trading Day next succeeding the
Expiration Time and the numerator of which shall be the sum of (x) the fair
market value (determined as aforesaid) of the aggregate consideration payable
to stockholders based on the acceptance (up to any maximum specified in the
terms of the tender or exchange offer) of all shares validly tendered or
exchanged and not withdrawn as of the Expiration Time (the shares deemed so
accepted up to any such maximum, being referred to as the "Purchased Shares")
and (y) the product of the number of shares of Common Stock outstanding (less
any Purchased Shares) on the Expiration Time and the Current Market Price of
the Common Stock on the Trading Day next succeeding the Expiration Time; such
adjustment to become effective immediately prior to the opening of business on
the day following the Expiration Time. If the Company is obligated to purchase
shares pursuant to any such tender or exchange offer, but the Company is
permanently prevented by applicable law from effecting any such purchases or
all such purchases are rescinded, the Conversion Rate shall again be adjusted
to be the Conversion Rate which would then be in effect if such tender or
exchange offer had not been made.
(g) For purposes of this Section 15.5, the following terms
shall have the meaning indicated:
(i) "Current Market Price" per share of Common
Stock at any date shall be deemed to be the
average of the last reported sale prices for
the ten (10) consecutive Trading Days (as
defined below) preceding the day before the
record date with respect to any distribution,
issuance or other event requiring such
computation.
(ii) "Closing Price" with respect to any
securities on any day shall mean the closing
sale price regular way on such day or, in
case no such sale takes place on such day,
the average of the reported closing bid and
asked prices, regular way, in each case on
the Nasdaq National
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Market or New York Stock Exchange, or, if such security is
not listed or admitted to trading on such
quotation system or exchange, on the
principal national security exchange or
quotation system on which such security is
quoted or listed or admitted to trading, or,
if not quoted or listed or admitted to
trading on any national securities exchange
or quotation system, the average of the
closing bid and asked prices of such security
on the over-the-counter market on the day in
question as reported by the National
Quotation Bureau Incorporated, or a similar
generally accepted reporting service, or if
not so available, in such manner as furnished
by any New York Stock Exchange member firm
selected from time to time by the Board of
Directors for that purpose, or a price
determined in good faith by the Board of
Directors, whose determination shall be
conclusive and described in a Board
Resolution.
(iii) "fair market value" shall mean the amount
which a willing buyer under no compulsion to
buy would pay a willing seller under no
compulsion to sell in an arm's length
transaction.
(iv) "record date" shall mean, with respect to any
dividend, distribution or other transaction
or event in which the holders of Common Stock
have the right to receive any cash,
securities or other property or in which the
Common Stock (or other applicable security)
is exchanged for or converted into any
combination of cash, securities or other
property, the date fixed for determination of
stockholders entitled to receive such cash,
securities or other property (whether such
date is fixed by the Board of Directors or by
statute, contract or otherwise).
(v) "Trading Day" shall mean (x) if the
applicable security is quoted on the Nasdaq
National Market, a day on which trades may be
made on thereon or (y) if the applicable
security is listed or admitted for trading on
the New York Stock Exchange or another
national security exchange, a day on which
the New York Stock Exchange or another
national security exchange is open for
business or (z) if the applicable security is
not so listed, admitted for trading or
quoted, any day other than a Saturday or
Sunday or a day on which banking institutions
in the State of New York are authorized or
obligated by law or executive order to close.
(h) Rights or warrants distributed by the Company to all
holders of Common Stock entitling the holders thereof to subscribe for or
purchase shares of the Company's capital stock (either initially or under
certain circumstances), which rights or warrants, until the occurrence of a
specified event or events ("Trigger Event"):
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(i) are deemed to be transferred with such shares of Common Stock,
(ii) are not exercisable, and
(iii) are also issued in respect of future issuances of Common Stock,
shall not be deemed distributed for purposes of this Section 15.5 until the
occurrence of the earliest Trigger Event. In addition, in the event of any
distribution of rights or warrants, or any Trigger Event with respect thereto,
that shall have resulted in an adjustment to the Conversion Rate under this
Section 15.5, (1) in the case of any such rights or warrants which shall all
have been redeemed or repurchased without exercise by any holders thereof, the
Conversion Rate shall be readjusted upon such final redemption or repurchase to
give effect to such distribution or Trigger Event, as the case may be, as
though it were a cash distribution, equal to the per share redemption or
repurchase price received by a holder of Common Stock with respect to such
rights or warrants (assuming such holder had retained such rights or warrants),
made to all holders of Common Stock as of the date of such redemption or
repurchase, and (2) in the case of any such rights or warrants all of which
shall have expired without exercise by any holder thereof, the Conversion Rate
shall be readjusted as if such issuance had not occurred.
(i) No adjustment to the Conversion Rate shall be required
unless such adjustment would require an increase or decrease of at least 1% in
such rate; provided, however, that any adjustments which by reason of this
subsection (i) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Article
Fifteen shall be made by the Company and shall be made to the nearest cent or
to the nearest one hundredth of a share, as the case may be. Anything in this
Section 15.5 to the contrary notwithstanding, the Company shall be entitled to
make such increases in the Conversion Rate, in addition to those required by
this Section 15.5, as it in its discretion shall determine to be advisable in
order that any stock dividends, subdivision of shares, distribution of rights
to purchase stock or securities, or any distribution of securities convertible
into or exchangeable for stock hereafter made by the Company to its
stockholders shall not be taxable. To the extent permitted by applicable law,
the Company from time to time may increase the Conversion Rate by any amount
for any period of time if the period is at least 20 days, the increase is
irrevocable during the period and the Board of Directors shall have made a
determination that such increase would be in the best interests of the Company,
which determination shall be conclusive. Whenever the Conversion Rate is so
increased, the Company shall mail to Noteholders and file with the Trustee and
the conversion agent a notice of the increase. The Company shall mail the
notice at least 15 days before the date the increased Conversion Rate takes
effect. The notice shall state the increased Conversion Rate and the period it
will be in effect.
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(j) Whenever the Conversion Rate is adjusted, as herein
provided, the Company shall promptly file with the Trustee and any conversion
agent other than the Trustee an Officers' Certificate setting forth the
Conversion Rate after such adjustment and setting forth a brief statement of
the facts requiring such adjustment. Promptly after delivery of such
certificate, the Company shall prepare a notice of such adjustment of the
Conversion Rate setting forth the adjusted Conversion Rate and the date on
which such adjustment becomes effective and shall mail such notice of such
adjustment of the Conversion Rate to each Noteholder at its last address
appearing on the Note register provided for in Section 2.5 of this Indenture,
within twenty (20) days after execution thereof. Failure to deliver such
notice shall not affect the legality or validity of any such adjustment.
(k) In any case in which this Section 15.5 provides that
an adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event (i) issuing to
the holder of any Note converted after such record date and before the
occurrence of such event the additional shares of Common Stock issuable upon
such conversion by reason of the adjustment required by such event over and
above the Common Stock issuable upon such conversion before giving effect to
such adjustment and (ii) paying to such holder any amount in cash or additional
shares in lieu of any fractional share pursuant to Section 15.3.
(l) In case of a tender or exchange offer made by a Person
other than the Company or any subsidiary for an amount which increases the
offeror's ownership of Common Stock to more than 25% of the Common Stock
outstanding and shall involve the payment by such Person of consideration per
share of Common Stock having a fair market value (as determined by the Board of
Directors, whose determination shall be conclusive, and described in a
resolution of the Board of Directors) at the Expiration Time that exceeds the
Current Market Price of the Common Stock on the Trading Day next succeeding the
Expiration Time, and in which, as of the Expiration Time the Board of Directors
is not recommending rejection of the offer, the Conversion Rate shall be
increased so that the same shall equal the price determined by multiplying the
Conversion Rate in effect immediately prior to the Expiration Time by a
fraction of which the denominator shall be the number of shares of Common Stock
outstanding (including any tendered or exchange shares) on the Expiration Time
multiplied by the Current Market Price of the Common Stock on the Trading Day
next succeeding the Expiration Time and the numerator shall be the sum of (x)
the fair market value (determined as aforesaid) of the aggregate consideration
payable to stockholders based on the acceptance (up to any maximum specified in
the terms of the tender or exchange offer) of all Purchased Shares and (y) the
product of the number of shares of Common Stock outstanding (less any Purchased
Shares) on the Expiration Time and the Current Market Price of the Common Stock
on the Trading Day next succeeding the Expiration Time, such increase to become
effective immediately prior to the opening of business on the day following the
Expiration Time. In the event that such Person is obligated to purchase shares
pursuant to any such tender or exchange offer, but such Person is permanently
prevented by applicable law from effecting any such purchases or all such
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purchases are rescinded, the Conversion Rate shall again be adjusted to be the
Conversion Rate which would then be in effect if such tender or exchange offer
had not been made. Notwithstanding the foregoing, the adjustment described in
this Section 15.5(l) shall not be made if, as of the Expiration Time, the
offering documents with respect to such offer disclose a plan or intention to
cause the Company to engage in any transaction described in Article XII.
SECTION 15.6. EFFECT OF RECLASSIFICATION, CONSOLIDATION,
MERGER OR SALE. If any of the following events occur, namely (i) any
reclassification or change of the outstanding shares of Common Stock (other
than a subdivision or combination to which Section 15.5(c) applies), (ii) any
consolidation, merger or combination of the Company with another corporation as
a result of which holders of Common Stock shall be entitled to receive stock,
securities or other property or assets (including cash) with respect to or in
exchange for such Common Stock, or (iii) any sale or conveyance of the
properties and assets of the Company as, or substantially as, an entirety to
any other corporation as a result of which holders of Common Stock shall be
entitled to receive stock, securities or other property or assets (including
cash) with respect to or in exchange for such Common Stock, then the Company or
the successor or purchasing corporation, as the case may be, shall execute with
the Trustee a supplemental indenture (which shall comply with the Trust
Indenture Act as in force at the date of execution of such supplemental
indenture) providing that such Note shall be convertible into the kind and
amount of shares of stock and other securities or property or assets (including
cash) receivable upon such reclassification, change, consolidation, merger,
combination, sale or conveyance by a holder of a number of shares of Common
Stock issuable upon conversion of such Notes (assuming, for such purposes, a
sufficient number of authorized shares of Common Stock available to convert all
such Notes) immediately prior to such reclassification, change, consolidation,
merger, combination, sale or conveyance assuming such holder of Common Stock
did not exercise his rights of election, if any, as to the kind or amount of
securities, cash or other property receivable upon such consolidation, merger,
statutory exchange, sale or conveyance (provided, that, if the kind or amount
of securities, cash or other property receivable upon such consolidation,
merger, statutory exchange, sale or conveyance is not the same for each share
of Common Stock in respect of which such rights of election shall not have been
exercised ("nonelecting-share")), then for the purposes of this Section 15.6
the kind and amount of securities, cash or other property receivable upon such
consolidation, merger, statutory exchange, sale or conveyance for each non-
electing share shall be deemed to be the kind and amount so receivable per
share by a plurality of the non-electing shares. Such supplemental indenture
shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article.
The Company shall cause notice of the execution of such
supplemental indenture to be mailed to each holder of Notes, at his address
appearing on the Note register provided for in Section 2.5 of this Indenture,
within twenty (20) days after execution thereof. Failure to deliver such notice
shall not affect the legality or validity of such supplemental indenture.
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The above provisions of this Section shall similarly apply to
successive reclassifications, changes, consolidations, mergers, combinations,
sales and conveyances.
If this Section 15.6 applies to any event or occurrence,
Section 15.5 shall not apply.
SECTION 15.7. TAXES ON SHARES ISSUED. The issue of stock
certificates on conversions of Notes shall be made without charge to the
converting Noteholder for any tax in respect of the issue thereof. The Company
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of stock in any name other
than that of the holder of any Note converted, and the Company shall not be
required to issue or deliver any such stock certificate unless and until the
person or persons requesting the issue thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
SECTION 15.8. RESERVATION OF SHARES; SHARES TO BE FULLY
PAID; COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS; LISTING OF COMMON STOCK. The
Company shall provide, free from preemptive rights, out of its authorized but
unissued shares or shares held in treasury, sufficient shares of Common Stock
to provide for the conversion of the Notes from time to time as such Notes are
presented for conversion.
Before taking any action which would cause an adjustment
reducing the Conversion Price below the then par value, if any, of the shares
of Common Stock issuable upon conversion of the Notes, the Company will take
all corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue shares of such Common
Stock at such adjusted Conversion Price.
The Company covenants that all shares of Common Stock which
may be issued upon conversion of Notes will upon issue be fully paid and
non-assessable by the Company and free from all taxes, liens and charges with
respect to the issue thereof.
The Company covenants that if any shares of Common Stock to be
provided for the purpose of conversion of Notes hereunder require registration
with or approval of any governmental authority under any federal or state law
before such shares may be validly issued upon conversion, the Company will in
good faith and as expeditiously as possible endeavor to secure such
registration or approval, as the case may be.
The Company further covenants that if at any time the Common
Stock shall be listed on the Nasdaq National Market, the New York Stock
Exchange or any other national securities exchange or automated quotation
system the Company will, if permitted by the rules of such exchange or
automated quotation system, list and keep listed, so long as the Common Stock
shall be so listed on such exchange or automated quotation system, all Common
Stock issuable upon conversion of the Notes; provided, however, that if rules
of such exchange or automated quotation system permit the Company to defer the
listing of
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such Common Stock until the first conversion of the Notes into Common Stock in
accordance with the provisions of this Indenture, the Company covenants to list
such Common Stock issuable upon conversion of the Notes in accordance with the
requirements of such exchange or automated quotation system at such time.
SECTION 15.9. RESPONSIBILITY OF TRUSTEE. The Trustee and
any other conversion agent shall not at any time be under any duty or
responsibility to any holder of Notes to determine whether any facts exist
which may require any adjustment of the Conversion Price, or with respect to
the nature or extent or calculation of any such adjustment when made, or with
respect to the method employed, or herein or in any supplemental indenture
provided to be employed, in making the same. The Trustee and any other
conversion agent shall not be accountable with respect to the validity or value
(or the kind or amount) of any shares of Common Stock, or of any securities or
property, which may at any time be issued or delivered upon the conversion of
any Note; and the Trustee and any other conversion agent make no
representations with respect thereto. Subject to the provisions of Section 8.1,
neither the Trustee nor any conversion agent shall be responsible for any
failure of the Company to issue, transfer or deliver any shares of Common Stock
or stock certificates or other securities or property or cash upon the
surrender of any Note for the purpose of conversion or to comply with any of
the duties, responsibilities or covenants of the Company contained in this
Article. Without limiting the generality of the foregoing, neither the Trustee
nor any conversion agent shall be under any responsibility to determine the
correctness of any provisions contained in any supplemental indenture entered
into pursuant to Section 15.6 relating either to the kind or amount of shares
of stock or securities or property (including cash) receivable by Noteholders
upon the conversion of their Notes after any event referred to in such Section
15.6 or to any adjustment to be made with respect thereto, but, subject to the
provisions of Section 8.1, may accept as conclusive evidence of the correctness
of any such provisions, and shall be protected in relying upon, the Officers'
Certificate (which the Company shall be obligated to file with the Trustee
prior to the execution of any such supplemental indenture) with respect
thereto.
SECTION 15.10. NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS.
In case:
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock that would require an adjustment in the
Conversion Price pursuant to Section 15.5; or
(b) the Company shall authorize the granting to the
holders of its Common Stock of rights or warrants to subscribe for or purchase
any share of any class or any other rights or warrants; or
(c) of any reclassification or reorganization of the
Common Stock of the Company (other than a subdivision or combination of its
outstanding Common Stock, or a change in par value, or from par value to no par
value, or from no par value to par value), or
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of any consolidation or merger to which the Company is a party and for which
approval of any shareholders of the Company is required, or of the sale or
transfer of all or substantially all of the assets of the Company; or
(d) of the voluntary or involuntary dissolution,
liquidation or winding -up of the Company;
the Company shall cause to be filed with the Trustee and to be mailed
to each holder of Notes at his address appearing on the Note register provided
for in Section 2.5 of this Indenture, as promptly as possible but in any event
at least fifteen (15) days prior to the applicable date hereinafter specified,
a notice stating (x) the date on which a record is to be taken for the purpose
of such dividend, distribution or rights or warrants, or, if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution or rights are to be determined, or (y)
the date on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up is expected to become effective or
occur, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of such
dividend, distribution, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up.
ARTICLE XVI
MISCELLANEOUS PROVISIONS
SECTION 16.1. PROVISIONS BINDING ON COMPANY'S SUCCESSORS.
All the covenants, stipulations, promises and agreements by the Company
contained in this Indenture shall bind its successors and assigns whether so
expressed or not.
SECTION 16.2. OFFICIAL ACTS BY SUCCESSOR CORPORATION. Any
act or proceeding by any provision of this Indenture authorized or required to
be done or performed by any board, committee or officer of the Company shall
and may be done and performed with like force and effect by the like board,
committee or officer of any corporation that shall at the time be the lawful
sole successor of the Company.
SECTION 16.3. ADDRESSES FOR NOTICES, ETC. Any notice or
demand which by any Indenture is required or permitted to be given or served by
the Trustee or by the holders of Notes on the Company shall be deemed to have
been sufficiently given or made, for all purposes, if given or served by being
deposited postage prepaid by registered or certified mail in a post office
letter box addressed (until another address is filed by the Company with the
Trustee) to CORESTAFF, Inc., Five Post Oak Park, 4400 Post Oak Parkway, Suite
1130, Houston, Texas 77027, Attention: Treasurer. Any notice, direction,
request or demand
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hereunder to or upon the Trustee shall be deemed to have been sufficiently
given or made, for all purposes, if given or served by being deposited postage
prepaid by registered or certified mail in a post office letter box addressed
to the Corporate Trust Office, which office is, at the date as of which this
Indenture is dated, 101 Barclay Street, Floor 21 West, New York, New York
10286.
The Trustee, by notice to the Company, may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Noteholder shall be
mailed to him by first class mail, postage prepaid, at his address as it
appears on the Note register and shall be sufficiently given to him if so
mailed within the time prescribed.
Failure to mail a notice or communication to a Noteholder or
any defect in it shall not affect its sufficiency with respect to other
Noteholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
SECTION 16.4. GOVERNING LAW. This Indenture and each Note
shall be deemed to be a contract made under the laws of New York, and for all
purposes shall be construed in accordance with the laws of New York, without
regard to principles of conflicts of laws.
SECTION 16.5. EVIDENCE OF COMPLIANCE WITH CONDITIONS
PRECEDENT; CERTIFICATES TO TRUSTEE. Upon any application or demand by the
Company to the Trustee to take any action under any of the provisions of this
Indenture, the Company shall furnish to the Trustee an Officers' Certificate
stating that all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with, and an Opinion of
Counsel stating that, in the opinion of such counsel, all such conditions
precedent have been complied with.
Each certificate or opinion provided for in this Indenture and
delivered to the Trustee with respect to compliance with a condition or
covenant provided for in this Indenture shall include (1) a statement that the
person making such certificate or opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statement or opinion contained in such certificate
or opinion is based; (3) a statement that, in the opinion of such person, he
has made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and (4) a statement as to whether or not, in the opinion of
such person, such condition or covenant has been complied with.
SECTION 16.6. LEGAL HOLIDAYS. In any case where the date
of maturity of interest on or principal of the Notes or the date fixed for
redemption of any Note will not be a Business Day, then payment of such
interest on or principal of the Notes need not be made on such
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<PAGE> 82
date, but may be made on the next succeeding Business Day with the same force
and effect as if made on the date of maturity or the date fixed for redemption,
and no interest shall accrue for the period from and after such date.
SECTION 16.7. TRUST INDENTURE ACT. This Indenture is
hereby made subject to, and shall be governed by, the provisions of the Trust
Indenture Act required to be part of and to govern indentures qualified under
the Trust Indenture Act; provided, however, that, unless otherwise required by
law, notwithstanding the foregoing, this Indenture and the Notes issued
hereunder shall not be subject to the provisions of subsections (a)(1), (a)(2),
and (a)(3) of Section 314 of the Trust Indenture Act as now in effect or as
hereafter amended or modified; provided, further, that this Section 16.7 shall
not require this Indenture or the Trustee to be qualified under the Trust
Indenture Act prior to the time such qualification is in fact required under
the terms of the Trust Indenture Act, nor shall it constitute any admission or
acknowledgment by any party to such supplemental indenture that any such
qualification is required prior to the time such qualification is in fact
required under the terms of the Trust Indenture Act. If any provision hereof
limits, qualifies or conflicts with another provision hereof which is required
to be included in an indenture qualified under the Trust Indenture Act, such
required provision shall control.
SECTION 16.8. NO SECURITY INTEREST CREATED. Nothing in
this Indenture or in the Notes, expressed or implied, shall be construed to
constitute a security interest under the Uniform Commercial Code or similar
legislation, as now or hereafter enacted and in effect, in any jurisdiction
where property of the Company or its subsidiaries is located.
SECTION 16.9. BENEFITS OF INDENTURE. Nothing in this
Indenture or in the Notes, expressed or implied, shall give to any Person,
other than the parties hereto, any paying agent, any authenticating agent, any
Note registrar and their successors hereunder, the holders of Notes and the
holders of Senior Indebtedness, any benefit or any legal or equitable right,
remedy or claim under this Indenture.
SECTION 16.10. TABLE OF CONTENTS, HEADINGS, ETC. The table
of contents and the titles and headings of the articles and sections of this
Indenture have been inserted for convenience of reference only, are not to be
considered a part hereof, and shall in no way modify or restrict any of the
terms or provisions hereof.
SECTION 16.11. AUTHENTICATING AGENT. The Trustee may appoint
an authenticating agent which shall be authorized to act on its behalf and
subject to its direction in the authentication and delivery of Notes in
connection with the original issuance thereof and transfers and exchanges of
Notes hereunder, including under Sections 2.4, 2.5, 2.6, 2.7, 3.3 and 3.5, as
fully to all intents and purposes as though the authenticating agent had been
expressly authorized by this Indenture and those Sections to authenticate and
deliver Notes. For all purposes of this Indenture, the authentication and
delivery of Notes by the authenticating agent shall be deemed to be
authentication and delivery of such Notes "by the
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<PAGE> 83
Trustee" and a certificate of authentication executed on behalf of the Trustee
by an authenticating agent shall be deemed to satisfy any requirement hereunder
or in the Notes for the Trustee's certificate of authentication. Such
authenticating agent shall at all times be a person eligible to serve as
trustee hereunder pursuant to Section 8.9.
Any corporation into which any authenticating agent may be
merged or converted or with which it may be consolidated, or any corporation
resulting from any merger, consolidation or conversion to which any
authenticating agent shall be a party, or any corporation succeeding to the
corporate trust business of any authenticating agent, shall be the successor of
the authenticating agent hereunder, if such successor corporation is otherwise
eligible under this Section 16.11, without the execution or filing of any paper
or any further act on the part of the parties hereto or the authenticating
agent or such successor corporation.
Any authenticating agent may at any time resign by giving
written notice of resignation to the Trustee and to the Company. The Trustee
may at any time terminate the agency of any authenticating agent by giving
written notice of termination to such authenticating agent and to the Company.
Upon receiving such a notice of resignation or upon such a termination, or in
case at any time any authenticating agent shall cease to be eligible under this
Section, the Trustee shall either promptly appoint a successor authenticating
agent or itself assume the duties and obligations of the former authenticating
agent under this Indenture, and upon such appointment of a successor
authenticating agent, if made, shall give written notice of such appointment of
a successor authenticating agent to the Company and shall mail notice of such
appointment of a successor authenticating agent to all holders of Notes as the
names and addresses of such holders appear on the Note register.
The Trustee agrees to pay to the authenticating agent from
time to time reasonable compensation for its services (to the extent
pre-approved by the Company in writing), and the Trustee shall be entitled to
be reimbursed for such pre-approved payments, subject to Section 8.6.
The provisions of Sections 8.2, 8.3, 8.4, 9.3 and this Section
16.11 shall be applicable to any authenticating agent.
SECTION 16.12. EXECUTION IN COUNTERPARTS. This Indenture may
be executed in any number of counterparts, each of which shall be an original,
but such counterparts shall together constitute but one and the same
instrument.
The Bank of New York hereby accepts the trusts in this
Indenture declared and provided, upon the terms and conditions hereinabove set
forth.
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<PAGE> 84
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly signed, and their respective corporate seals to be
hereunto affixed and attested, all as of the date first written above.
<TABLE>
<S> <C>
CORESTAFF, INC.
By:_________________________________
Name: Michael T. Willis
Title: President
THE BANK OF NEW YORK, as Trustee
By:_________________________________
Name:______________________________
Title: Vice President
</TABLE>
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<PAGE> 85
EXHIBIT A
[For global Note only:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
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<PAGE> 86
CORESTAFF, INC.
___% CONVERTIBLE SUBORDINATED NOTE DUE 2004
No. ______ CUSIP
CORESTAFF, Inc., a corporation duly organized and validly
existing under the laws of the State of Delaware (herein called the "Company"),
which term includes any successor corporation under the Indenture referred to
on the reverse hereof, for value received hereby promises to pay to CEDE & CO.
or registered assigns, the principal sum of _________ ($_____) on _______ ,
2004, at the office or agency of the Company maintained for that purpose in the
Borough of Manhattan, The City of New York, or, at the option of the holder of
this Note, at the Corporate Trust Office, in such coin or currency of the
United States of America as at the time of payment shall be legal tender for
the payment of public and private debts, and to pay interest, semi-annually on
_________ and __________ of each year, commencing _______ , 1998, on said
principal sum at said office or agency, in like coin or currency, at the rate
per annum of __%, from ___________ or __________ , as the case may be, next
preceding the date of this Note to which interest has been paid or duly
provided for, unless the date hereof is a date to which interest has been paid
or duly provided for, in which case from the date of this Note, or unless no
interest has been paid or duly provided for on the Notes, in which case from
______ , 1997, until payment of said principal sum has been made or duly
provided for. Notwithstanding the foregoing, if the date hereof is after any
_______ or _______ , as the case may be, and before the following _______ or
________ , this Note shall bear interest from such _______ or ________ ;
provided, however, that if the Company shall default in the payment of interest
due on such _______ or __________ , then this Note shall bear interest from
the next preceding _______ or __________ to which interest has been paid or
duly provided for or, if no interest has been paid or duly provided for on such
Note, from _________, 1997. The interest payable on the Note pursuant to the
Indenture on any _______ or __________, will be paid to the person entitled
thereto as it appears in the Note register at the close of business on the
record date, which shall be the ________ or ________ (whether or not a
Business Day) next preceding such ________ or _________ , as provided in the
Indenture; provided, that any such interest not punctually paid or duly
provided for shall be payable as provided in the Indenture. Interest may, at
the option of the Company, be paid by check mailed to the registered address of
such person.
Reference is made to the further provisions of this Note set
forth on the reverse hereof, including, without limitation, provisions
subordinating the payment of principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price, Fundamental Change Repurchase Price
and interest on the Notes to the prior payment in full of all Senior
Indebtedness, as defined in the Indenture, and provisions giving the holder of
this Note the right to convert this Note into Common Stock of the Company on
the terms and subject to the limitations referred to on the reverse hereof and
as more fully specified in the Indenture. Such further provisions shall for all
purposes have the same effect as though fully set forth at this place.
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<PAGE> 87
This Note shall be deemed to be a contract made under the laws
of New York, and for all purposes shall be construed in accordance with and
governed by the laws of New York, without regard to principles of conflicts of
laws.
This Note shall not be valid or become obligatory for any
purpose until the certificate of authentication hereon shall have been manually
signed by the Trustee or a duly authorized authenticating agent under the
Indenture.
IN WITNESS WHEREOF, the Company has caused this Note to be
duly executed under its corporate seal.
CORESTAFF, INC.
By:______________________________
Name:
Title:
Attest:____________________________
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Notes described in the
within-named Indenture.
Dated:
__________________________, as Trustee
By:______________________________
Authorized Signatory
By:______________________________
As Authenticating Agent (if different
from Trustee)
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<PAGE> 88
[FORM OF REVERSE OF NOTE]
CORESTAFF, INC.
___% CONVERTIBLE SUBORDINATED NOTE DUE 2004
This Note is one of a duly authorized issue of Notes of the
Company, designated as its ___% Convertible Subordinated Notes due 2004 (herein
called the "Notes"), limited to the aggregate principal amount at maturity of
$207,000,000 all issued or to be issued under and pursuant to an indenture
dated as of __________, 1997 (herein called the "Indenture"), between the
Company and The Bank of New York, as trustee (herein called the "Trustee"), to
which Indenture and all indentures supplemental thereto reference is hereby
made for a description of the rights, limitations of rights, obligations,
duties and immunities thereunder of the Trustee, the Company and the holders of
the Notes.
In case an Event of Default, as defined in the Indenture,
shall have occurred and be continuing, the Issue Price, and accrued Original
Issue Discount and accrued interest, if any, through the date of declaration on
all Notes may be declared, and upon such declaration shall become, due and
payable, in the manner, with the effect and subject to the conditions provided
in 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
aggregate principal amount at maturity of the Notes at the time outstanding,
evidenced as in the Indenture provided, to execute supplemental indentures
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of any supplemental indenture or modifying in
any manner the rights of the holders of the Notes; provided, however, that as
provided in the Indenture, no such supplemental indenture shall (i) extend the
fixed maturity of any Note, or reduce the rate or extend the time of payment of
interest thereon, or reduce the principal amount at maturity thereof or
Original Issue Discount thereon, or reduce any amount payable on redemption or
repurchase thereof, or impair the right of any Noteholder to institute suit for
the payment thereof, or make the principal amount at maturity thereof or
Original Issue Discount, Redemption Price, Fundamental Change Repurchase Price
or interest thereon payable in any coin or currency other than that provided in
the Note, or modify the provisions of the Indenture with respect to the
subordination of the Notes in a manner adverse to the Noteholders in any
material respect, or change the obligation of the Company to make redemption of
any Note upon the happening of a Fundamental Change in a manner adverse to the
holder of the Notes, or impair the right to convert the Notes into Common Stock
subject to the terms set forth in the Indenture, including Section 15.6
thereof, without the consent of the holder of each Note so affected or (ii)
reduce the aforesaid percentage of Notes, the holders of which are required to
consent to any such supplemental indenture, without the consent of the holders
of all Notes then outstanding. It is also provided in the Indenture that, prior
to any declaration accelerating the maturity of the Notes, the holders of a
majority in aggregate principal amount of the Notes at the time outstanding may
on behalf of the holders of all of the Notes waive any past default or Event of
Default under the Indenture and its consequences except a default in the
payment of principal
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<PAGE> 89
amount at maturity, Redemption Price, Fundamental Change Repurchase Price or
interest in respect of any of the Notes or a failure by the Company to convert
any Notes into Common Stock of the Company. Any such consent or waiver by the
holder of this Note (unless revoked as provided in the Indenture) shall be
conclusive and binding upon such holder and upon all future holders and owners
of this Note and any Notes which may be issued in exchange or substitute
hereof, irrespective of whether or not any notation thereof is made upon this
Note or such other Notes.
The indebtedness evidenced by the Notes is, to the extent and
in the manner provided in the Indenture, expressly subordinate and subject in
right of payment to the prior payment in full of all Senior Indebtedness of the
Company, as defined in the Indenture, whether outstanding at the date of the
Indenture or thereafter incurred, and this Note is issued subject to the
provisions of the Indenture with respect to such subordination. Each holder of
this Note, by accepting the same, agrees to and shall be bound by such
provisions and authorizes the Trustee on his behalf to take such action as may
be necessary or appropriate to effectuate the subordination so provided and
appoints the Trustee his attorney-in-fact for such purpose.
No reference herein to the Indenture and no provision of this
Note or of the Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal amount at maturity,
Issue Price, accrued Original Issue Discount, Redemption Price, Fundamental
Change Repurchase Price and interest on this Note at the place, at the
respective times, at the rate and in the coin or currency herein prescribed.
Interest on the Notes shall be computed on the basis of a year
of a 360-day year or twelve 30-day months. Accrual of Original Issue Discount
shall be calculated on the basis of a 360-day year or twelve 30-day months,
compounded semi-annually. 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 recorded 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
Redemption Date 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 at maturity so converted.
The Notes are issuable in registered form without coupons in
denominations of $1,000 principal amount at maturity and any integral multiple
thereof. At the office or agency of the Company referred to on the face
hereof, and in the manner and subject to the limitations provided in the
Indenture, but without payment of any service charge (but with payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration or exchange of Notes), Notes may be exchanged
for a like aggregate principal amount at maturity of Notes of other authorized
denominations.
The Notes will not be redeemable at the option of the Company
prior to _________, 2000. At any time on or after _________, 2000, and prior
to maturity, the Notes may be redeemed at the option of the Company as a whole,
or from time to time in part, upon mailing a notice of such redemption not less
than 30 days and not more than 60 days before the date fixed for redemption to
the holders of Notes at their last registered addresses, all as provided in the
Indenture, at the following Redemption Prices per $1,000 principal amount at
maturity (which prices reflect accrued Original Issue Discount calculated to
each such date), together in each case with accrued interest to the date fixed
for redemption. The Redemption Price of a Note redeemed between such dates
will
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<PAGE> 90
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 Accrued Original Redemption Price
Redemption Date Issue Price Issue Discount (1) + (2)
--------------- ----------- -------------- ---------
<S> <C> <C> <C> <C>
_________, 2000 $ $ $
_________, 2001
_________, 2002
_________, 2003
_________, 2004 1,000.00
</TABLE>
Notwithstanding the foregoing, if the date fixed for redemption is a ______ or
_______, then the interest payable on such date shall be paid to the holder of
record on the next preceding ________ or _________.
The Notes are not subject to redemption through the operation
of any sinking fund.
If there shall occur a Fundamental Change at any time prior to
________, 2004, then each Noteholder shall have the right, at such holder's
option, to require the Company to redeem all of such holder's Notes, or any
portion thereof that is an integral multiple of $1,000 principal amount at
maturity, on the date (the "Fundamental Change Repurchase Date") that is thirty
(30) days after the date of the Company's notice of such Fundamental Change (or,
if such 30th day is not a Business Day, the next succeeding Business Day). Any
such redemption of Notes shall be made on the Fundamental Change Repurchase Date
at a price (the "Fundamental Change Repurchase Price") equal to the Issue Price
plus accrued Original Issue Discount to the Fundamental Change Redemption Date;
provided, that if the Applicable Price (as defined in the Indenture) with
respect to the Fundamental Change is less than the Reference Market Price (as
defined in the Indenture), 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 to such holders accrued interest to, but excluding, the
Fundamental Change Redemption Date on the redeemed Notes; 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 Note
on the next preceding record date. The Company shall 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 10th day after
the occurrence of such Fundamental Change. For a Note to be so repaid at the
option of the holder, the Company must receive at the office or agency of the
Company maintained for that purpose in the Borough of Manhattan, The City of New
York, such Note with the form entitled "Option to Elect Repayment Upon a
Fundamental Change" on the reverse thereof duly completed, together with such
Notes duly
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<PAGE> 91
endorsed for transfer, on or before the 30th day after the date of such notice
(or if such 30th day is not a Business Day, the immediately preceding Business
Day).
Subject to the provisions of the Indenture, the holder hereof
has the right, at its option, at any time after 90 days following the latest
date of original issuance of the Notes and prior to the close of business on
_________ , 2004, or, as to all or any portion hereof called for redemption,
prior to the close of business on the Business Day immediately preceding the
date fixed for redemption (unless the Company shall default in payment due upon
redemption thereof), to convert the principal hereof or any portion of such
principal which is $1,000 principal amount at maturity or an integral multiple
thereof, into that number of fully paid and nonassessable shares of Company's
Common Stock, as said shares shall be constituted at the date of conversion,
obtained by dividing the principal amount at maturity of this Note or portion
thereof to be converted by $1,000 and multiplying the result so obtained by
_______ (the "Conversion Rate") or such Conversion Rate as adjusted from time
to time as provided in the Indenture, upon surrender of this Note, together
with a conversion notice as provided in the Indenture, to the Company at the
office or agency of the Company maintained for that purpose in the Borough of
Manhattan, The City of New York, or at the option of such holder, the Corporate
Trust Office, and, unless the shares issuable on conversion are to be issued in
the same name as this Note, duly endorsed by, or accompanied by instruments of
transfer in form satisfactory to the Company duly executed by, the holder or by
his duly authorized attorney. No adjustment in respect of accrued Original
Issue Discount, interest or dividends will be made upon any conversion;
provided, however, that if this Note shall be surrendered for conversion during
the period from the close of business on any record date for the payment of
interest to the close of business on the Business Day preceding the interest
payment date, this Note (unless it or the portion being converted shall have
been called for redemption during the period from the close of business on any
record date for the payment of interest to the close of business on the
Business Day preceding the interest payment date) must be accompanied by an
amount, in New York Clearing House funds or other funds acceptable to the
Company, equal to the interest payable on such interest payment date on the
principal amount at maturity being converted. No fractional shares will be
issued upon any conversion, but an adjustment in cash will be made, as provided
in the Indenture, in respect of any fraction of a share which would otherwise
be issuable upon the surrender of any Note or Notes for conversion.
Any Notes called for redemption, unless surrendered for
conversion on or before the close of business on the date fixed for redemption,
may be deemed to be purchased from the holder of such Notes at an amount equal
to the applicable Redemption Price, together with accrued interest to the date
fixed for redemption, by one or more investment bankers or other purchasers who
may agree with the Company to purchase such Notes from the holders thereof and
convert them into Common Stock of the Company and to make payment for such
Notes as aforesaid to the Trustee in trust for such holders.
Upon due presentment for registration of transfer of this Note
at the office or agency of the Company in the Borough of Manhattan, The City of
New York, or at the option of the holder of this Note, at the Corporate Trust
Office, a new Note or Notes of authorized denominations for an
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<PAGE> 92
equal aggregate principal amount at maturity will be issued to the transferee
in exchange thereof, subject to the limitations provided in the Indenture,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company, the Trustee, any authenticating agent, any paying
agent, any conversion agent and any Note registrar may deem and treat the
registered holder hereof as the absolute owner of this Note (whether or not
this Note shall be overdue and notwithstanding any notation of ownership or
other writing hereon made by anyone other than the Company or any Note
registrar), for the purpose of receiving payment hereof, or on account hereof,
for the conversion hereof and for all other purposes, and neither the Company
nor the Trustee nor any other authenticating agent nor any paying agent nor any
other conversion agent nor any Note registrar shall be affected by any notice
to the contrary. All payments made to or upon the order of such registered
holder shall, to the extent of the sum or sums paid, satisfy and discharge
liability for monies payable on this Note.
No recourse for the payment of the principal amount at
maturity, Issue Price, accrued Original Issue Discount, Redemption Price,
Fundamental Change Repurchase Price or any interest on this Note, or for any
claim based hereon or otherwise in respect hereof, and no recourse under or upon
any obligation, covenant or agreement of the Company in the Indenture or any
indenture supplemental thereto or in any Note, or because of the creation of any
indebtedness represented thereby, shall be had against any incorporator,
stockholder, employee, agent, officer or director or subsidiary, as such, past,
present or future, of the Company or of any successor corporation, either
directly or through the Company or any successor corporation, whether by virtue
of any constitution, statute or rule of law or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issue hereof, expressly waived
and released.
This Note shall be deemed to be a contract made under the laws
of New York, and for all purposes shall be construed in accordance with the
laws of New York, without regard to principles of conflicts of laws.
Terms used in this Note and defined in the Indenture are used
herein as therein defined.
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<PAGE> 93
ABBREVIATIONS
The following abbreviations, when used in the inscription of
the face of this Note, shall be construed as though they were written out in
full according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in UNIF GIFT MIN ACT --
common
TEN ENT -- as tenants by the _________________ Custodian
entireties (Cust)
JT TEN -- as joint tenants _____________________ under
with right of survivorship and (Minor)
not as tenants in common
Uniform Gifts to Minors Act
____________________(State)
</TABLE>
Additional abbreviations may also be used
though not in the above list.
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<PAGE> 94
CONVERSION NOTICE
To: CORESTAFF, INC.
The undersigned registered owner of this Note hereby
irrevocably exercises the option to convert this Note, or the portion hereof
(which is $1,000 principal amount at maturity or an integral multiple thereof)
below designated, into shares of Common Stock of CORESTAFF, Inc. in accordance
with the terms of the Indenture referred to in this Note, and directs that the
shares issuable and deliverable upon such conversion, together with any check
in payment for fractional shares and any Notes representing any unconverted
principal amount hereof, be issued and delivered to the registered holder
hereof unless a different name has been indicated below. If shares or any
portion of this Note not converted are to be issued in the name of a person
other than the undersigned, the undersigned will check the appropriate box
below and pay all transfer taxes payable with respect thereto. Any amount
required to be paid to the undersigned on account of interest accompanies this
Note.
Dated:
<TABLE>
<S> <C>
* Sign exactly as name appears on the other side
of the Note:
----------------------------------------
Signature(s)
----------------------------------------
Signature Guarantee
Fill in for registration of shares of
Common Stock if to be issued, and
Notes if to be delivered, other than
to and in the name of the registered holder:
- ---------------------------------
(Name)
- ---------------------------------
(Street Address)
- ---------------------------------
(City, State and Zip Code)
Please print name and address
Principal amount at maturity to be converted
(if less than all): $___________
----------------------------------
Social Security or Other Taxpayer
Identification Number
</TABLE>
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<PAGE> 95
ASSIGNMENT
For value received _____________________ hereby sell(s),
assign(s) and transfer(s) unto ______________________ (Please insert social
security or other Taxpayer Identification Number of assignee) the within Note,
and hereby irrevocably constitutes and appoints ____________________ attorney
to transfer the said Note on the books of the Company, with full power of
substitution in the premises.
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<PAGE> 96
OPTION TO ELECT REPAYMENT
UPON A FUNDAMENTAL CHANGE
TO: CORESTAFF, INC.
The undersigned registered owner of this Note hereby
irrevocably acknowledges receipt of a notice from CORESTAFF, Inc. (the
"Company") as to the occurrence of a Fundamental Change with respect to the
Company and requests and instructs the Company to repay the entire principal
amount at maturity of this Note, or the portion thereof (which is $1,000
principal amount at maturity or an integral multiple thereof) below designated,
in accordance with the terms of the Indenture referred to in this Note at the
redemption price, together with accrued interest to, but excluding, such date,
to the registered holder hereof.
----------------------------
Dated:
--------------- ----------------------------
Signature(s)
NOTICE: The above signatures of
the holder(s) hereof must
correspond with the name as
written upon the face of the
Note in every particular without
alteration or enlargement or
any change whatever.
Principal amount at maturity to be
repaid (if less than all):
$_______________
_________________________________
Social Security or Other Taxpayer
Identification Number
88
<PAGE> 1
EXHIBIT 12.1
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Inception
(July 16,
1993)
through Six Months
December 31, Year Ended December 31, Ended June 30,
------------ ----------------------- ---------------
1993 1994 1995 1996 1996 1997
----------- ----- ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated pretax income
from continuing operations $ (395) $2,711 $10,947 $31,003 $11,562 $22,694
Fixed charges per below 27 2,786 8,358 6,210 3,421 6,519
Less interest capitalized during the period - - - (115) - (292)
-------- ------ ------- ------- ------- -------
Earnings $ (368) $5,497 $19,305 $37,098 $14,983 $28,921
-------- ------ ------- ------- ------- -------
Revolver Interest 16 2,276 6,978 4,025 2,469 4,995
Non-Revolver Interest - - - 327 181 33
Interest portion of rental expense 11 408 834 1,439 594 1,146
Net amortization of debt issuance costs - 102 546 304 177 53
Interest capitalized during the period - - - 115 - 292
-------- ------ ------- ------- ------- -------
Fixed Charges $ 27 $2,786 $ 8,358 $ 6,210 $ 3,421 $ 6,519
-------- ------ ------- ------- ------- -------
Ratio of Earnings to Fixed Charges (13.6) 2.0 2.3 6.0 4.4 4.4
======== ====== ======= ======= ======= =======
Consolidated pretax income
from continuing operations $31,003 $11,562 $22,694
Fixed charges per below 5,485 2,984 6,198
Interest expense difference 725 437 321
Less interest capitalized during the period (115) - (292)
------- ------- -------
Earnings $37,098 $14,983 $28,921
------- ------- -------
Interest (2) $ 3,300 $ 2,032 $ 4,674
Non-Revolver Interest 327 181 33
Interest portion of rental expense 1,439 594 1,146
Net amortization of debt issuance costs 304 177 53
Interest capitalized during the period 115 - 292
------- ------- -------
Fixed Charges $ 5,485 $ 2,984 $ 6,198
------- ------- -------
Pro Forma Ratio of Earnings to Fixed Charges 6.8 5.0 4.7
======= ======= =======
Consolidated pro forma pretax income
from continuing operations(1) $37,252 $13,578 $25,281
Fixed charges per below 13,968 8,813 7,719
Interest expense difference 6,760 3,035 663
Less interest capitalized during the period (115) - (292)
------- ------- -------
Earnings $57,865 $25,426 $33,371
------- ------- -------
Interest $11,192 $ 7,537 $ 6,138
Non-Revolver Interest 327 181 33
Interest portion of rental expense 2,030 918 1,203
Net amortization of debt issuance costs 304 177 53
Interest capitalized during the period 115 - 292
------- ------- -------
Fixed Charges $13,968 $ 8,813 $ 7,719
------- ------- -------
Supplemental Pro Forma Ratio of Earnings to Fixed Charges 4.1 2.9 4.3
======= ======= =======
</TABLE>
- ------------
(1) Gives effect to businesses acquired by the Company through June 30, 1997 as
if such acquisitions were consummated as of the beginning of the periods
presented. 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 Amendment No. 1 to 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 22, 1997
