<PAGE> 1
PROSPECTUS
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
AUGUST 11, 1997, THE LAST SALE PRICE OF THE COMMON STOCK AS REPORTED ON THE
NASDAQ NATIONAL MARKET WAS $28 7/8 PER SHARE.
------------------------
CONCURRENTLY WITH THE STOCK OFFERINGS BY THE SELLING STOCKHOLDERS, THE COMPANY
IS OFFERING $200,000,000 ($230,000,000 IF THE OVER-ALLOTMENT OPTION TO THE
UNDERWRITERS IS EXERCISED IN FULL) AGGREGATE PRINCIPAL AMOUNT OF 2.94%
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 $29.00 PER SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO AND SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDERS(2)
------------- -------------- ---------------
<S> <C> <C> <C>
Per Share........................................... $29.00 $1.23 $27.77
Total(3)............................................ $174,000,000 $7,380,000 $166,620,000
</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 $200,100,000, $8,487,000 and $191,613,000,
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 15, 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.
August 11, 1997
<PAGE> 2
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
<TABLE>
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Page
----
<S> <C>
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
</TABLE>
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> 3
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> 4
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> 5
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> 6
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> 7
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 $200,000,000 ($230,000,000 if the
over-allotment option to the underwriters is
exercised in full) 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 4,747,940 (5,460,131
if the over-allotment option to the underwriters is exercised in full)
shares issuable upon conversion of the Notes, initially at a conversion rate
of 23.7397 shares per $1,000 principal amount at maturity of the Notes.
RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Common Stock should carefully consider the matters set forth
under "Risk Factors."
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from
services.............. $ 3,093 $163,351 $344,548 $596,101 $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 4.8
Supplemental pro
forma(6)............ 4.2 2.9 4.4
</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>
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(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.
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<PAGE> 9
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> 10
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> 11
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> 12
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> 13
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 $200 million
($230 million if the over-allotment option to the underwriters is exercised in
full) aggregate principal amount of 2.94% Convertible Subordinated Notes due
2004. The net proceeds of the Notes Offering are estimated to be approximately
$163.3 million ($187.9 million if the over-allotment option to the underwriters
is exercised in full), 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. 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 23.7397 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 August 11, 1997).......................... 25.88 32.38
</TABLE>
On August 11, 1997, the closing sale price of the Common Stock as reported
on the Nasdaq National Market was $28 7/8.
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> 14
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 $163.3 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
---------------------
AS
ADJUSTED
ACTUAL (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 $ 53,268
Notes............................................................. -- 163,332
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> 15
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 SIX MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, JUNE 30, YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------------ ------------------- DECEMBER 31, -------------------
1993 1994 1995 1996 1996 1997 1996 1996 1997
------------ -------- -------- -------- -------- -------- ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues from
services.............. $ 3,093 $163,351 $344,548 $596,101 $237,545 $458,299 $811,965 $367,399 $481,076
Cost of services........ 2,345 129,543 262,092 451,505 179,225 348,271 608,872 275,449 360,810
------------ -------- -------- -------- -------- -------- ------------ -------- --------
Gross profit............ 748 33,808 82,456 144,596 58,320 110,028 203,093 91,950 120,266
Operating costs and
expenses.............. 1,136 28,932 64,649 107,871 44,134 82,030 146,481 67,860 87,953
------------ -------- -------- -------- -------- -------- ------------ -------- --------
Operating income
(loss)................ (388) 4,876 17,807 36,725 14,186 27,998 56,612 24,090 32,313
Other income
(expense)(1).......... (7) (2,165) (6,860) (5,722) (2,624) (5,304) 19,360 (10,512) (7,032)
------------ -------- -------- -------- -------- -------- ------------ -------- --------
Income (loss) before
income taxes.......... (395) 2,711 10,947 31,003 11,562 22,694 37,252 13,578 25,281
Provision (benefit) for
income taxes.......... (142) 1,162 4,590 13,609 4,855 9,532 16,233 5,702 10,620
------------ -------- -------- -------- -------- -------- ------------ -------- --------
Income (loss) before
extraordinary loss.... (253) 1,549 6,357 17,394 6,707 13,162 21,019 7,876 14,661
Extraordinary loss(2)... -- -- -- (940) -- -- (940) -- --
------------ -------- -------- -------- -------- -------- ------------ -------- --------
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(3)(4):
Before extraordinary
loss................ $ (0.01) $ 0.07 $ 0.29 $ 0.57 $ 0.24 $ 0.41 $ 0.69 $ 0.28 $ 0.45
Extraordinary
loss(2)............. -- -- -- (0.03) -- -- (0.03) -- --
------------ -------- -------- -------- -------- -------- ------------ -------- --------
Net income (loss)..... $ (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(5)............... $ (276) $ 6,920 $ 22,140 $ 42,241 $ 17,528 $ 33,426 $ 66,794 $ 30,224 $ 38,457
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 4.8
Supplemental pro
forma(8)............ 4.2 2.9 4.4
</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> 16
- ---------------
(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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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
23
<PAGE> 25
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.
On July 31, 1997, the Company amended 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 Company intends to repay a portion of the outstanding
borrowings under the Credit Agreement with the net proceeds from the Notes
Offering.
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.
24
<PAGE> 26
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> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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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<PAGE> 35
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> 36
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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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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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
43
<PAGE> 45
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
44
<PAGE> 46
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 4,747,940 (5,460,131 if the over-allotment option to
the underwriters is exercised in full) 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.
45
<PAGE> 47
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.................................. 1,287,000
Goldman, Sachs & Co................................................ 858,000
Alex. Brown & Sons Incorporated.................................... 357,500
Donaldson, Lufkin & Jenrette Securities Corporation................ 357,500
Montgomery Securities.............................................. 357,500
The Robinson-Humphrey Company, Inc................................. 357,500
Bear, Stearns & Co. Inc............................................ 150,000
William Blair & Company, L.L.C..................................... 75,000
J.C. Bradford & Co................................................. 75,000
Cleary Gull Reiland & McDevitt Inc................................. 75,000
A.G. Edwards & Sons, Inc........................................... 150,000
Gerard Klauer Manison & Co., Inc................................... 75,000
Janney Montgomery Scott Inc........................................ 75,000
Jefferies & Company, Inc........................................... 75,000
Legg Mason Wood Walker, Incorporated............................... 75,000
Rauscher Pierce Refsnes, Inc....................................... 75,000
Sanders Morris Mundy Inc........................................... 75,000
Smith Barney Inc................................................... 150,000
Stephens Inc....................................................... 75,000
Unterberg Harris, L.P.............................................. 75,000
Wasserstein Perella Securities, Inc................................ 150,000
---------
Subtotal................................................... 5,000,000
=========
International Underwriters:
Morgan Stanley & Co. International Limited......................... 166,666
Goldman Sachs International........................................ 166,670
Alex. Brown & Sons Incorporated.................................... 166,666
Donaldson, Lufkin & Jenrette International......................... 166,666
Montgomery Securities.............................................. 166,666
The Robinson-Humphrey Company, Inc................................. 166,666
---------
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
46
<PAGE> 48
obligated to take and pay for all of the shares of Common Stock offered hereby
(other than those covered by the U.S. Underwriters' over-allotment described
below) if any such shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions, (i)
it is not purchasing any Shares for the account of anyone other than a United
States or Canadian Person (as defined herein) and (ii) it has not offered or
sold, and will not offer or sell, directly or indirectly, any Shares or
distribute any prospectus relating to the Shares outside the United States or
Canada or to anyone other than a United States or Canadian Person. Pursuant to
the Agreement between U.S. and International Underwriters, each International
Underwriter has represented and agreed that, with certain exceptions, (i) it is
not purchasing any Shares for the account of any United States or Canadian
person and (ii) it has not offered or sold, and will not offer or sell, directly
or indirectly, any Shares or distribute any prospectus relating to the Shares in
the United States or Canada or to any United States or Canadian person. With
respect to any Underwriter that is a U.S. Underwriter and an International
Underwriter, the foregoing representations and agreements (i) made by it in its
capacity as a U.S. Underwriter apply only to it in its capacity as a U.S.
Underwriter and (ii) made by it in its capacity as an 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
47
<PAGE> 49
of the Shares to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or is a person to whom such document may otherwise be lawfully issued or passed
on.
The Underwriters initially propose to offer part of the Shares directly to
the public at the public offering price set forth on the cover page hereof and
part to certain dealers at a price which represents a concession not in excess
of $0.70 per share under the public offering price. An Underwriter may allow,
and such dealers may reallow, a concession not in excess of $0.10 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
48
<PAGE> 50
maintain the market price of the Common Stock above independent market levels.
Underwriters and dealers are not required to engage in passive market making and
may end passive market making activities at any time.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Underwriters have engaged in transactions with and performed various
investment banking and other services for the Company in the past, and may do so
from time to time in the future.
The Company has provided staffing services to Morgan Stanley & Co.
Incorporated in the past, and may continue to do so in the future.
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.
49
<PAGE> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
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> 70
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> 71
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.
On July 31, 1997, the Company amended 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 (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.
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,
F-21
<PAGE> 72
CORESTAFF INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and the
sale of 6.0 million shares of its common stock by certain selling stockholders.
On August 11, 1997, the Company filed a registration statement on Form S-3 with
the Securities and Exchange Commission to increase the offering to $200,000,000
aggregate principal amount of convertible subordinated notes due 2004
($230,000,000 if the over-allotment option is exercised in full) (the "Notes
Offering"). 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> 73
[CORESTAFF, INC. LOGO]
