SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 2-98747-D
OXFORD CAPITAL CORP.
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(Name of small business issuer in its charter)
Nevada 87-0421454
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4245 North Central Expressway, Suite 300, Dallas, Texas 75205
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (214) 520-0100
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered under Section 12(g) of the Exchange Act:
None
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve (12) months (or
for such shorter period that the registrant was required to file such reports);
and (2) has been subject to such filing requirements for the past ninety (90)
days. Yes No X
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer had revenues of $82,506,548 for the fiscal year ended June 30,
1998.
As of December 10, 1998, 10,334,668 shares of Common Stock of the
Registrant were outstanding. Based on the closing price of the Common Stock on
December 10, 1998, the aggregate market value of voting and non-voting common
equity held by non-affiliates of the registrant was approximately $250,000.
DOCUMENTS INCORPORATED BY REFERENCE
No annual reports to security holders, proxy or information statements, or
prospectus filed pursuant to Rule 424(b) or (c) have been incorporated by
reference in this report.
Transitional Small Business Disclosure Format (Check one): Yes No X
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TABLE OF CONTENTS
Page
Number
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PART I
Item 1.Description of Business........................................ 4
Item 2.Description of Properties...................................... 15
Item 3.Legal Proceedings.............................................. 16
Item 4.Submission of Matters to a Vote of Security Holders............ 16
PART II
Item 5.Market for Common Equity and Related Stockholder Matters....... 17
Item 6.Management's Discussion and Analysis........................... 18
Item 7.Financial Statements........................................... 26
Item 8.Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 26
PART III
Item 9.Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............. 27
Item 10. Executive Compensation......................................... 28
Item 11. Security Ownership of Certain Beneficial Owners and Management 28
Item 12. Certain Relationships and Related Transactions................. 29
PART IV
Item 13. Exhibits and Reports of Form 8-K............................... 30
SIGNATURES.............................................................. 31
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PART I
The statements contained in this Annual Report on Form 10-KSB ("Annual
Report") which are not historical facts, including, but not limited to,
statements found in Item 1. "Business" and in Item 6. "Management's Discussion
and Analysis," are forward-looking statements that involve a number of risks and
uncertainties. All phases of the Company's operations are subject to a number of
uncertainties, risks and other influences. Therefore, the actual results of the
future events described in such forward-looking statements in this Annual
Report, or elsewhere, could differ materially from those stated in such
forward-looking statements. Among the factors that could cause actual results to
differ materially are the risks and uncertainties discussed in this Annual
Report, including, without limitation, the portions referenced above, and the
uncertainties set forth from time to time in the Company's other public reports
and filings and public statements, many of which are beyond the control of the
Company, and any of which, or a combination of which, could materially affect
the results of the Company's operations and whether forward-looking statements
made by the Company ultimately prove to be accurate.
ITEM 1. DESCRIPTION OF BUSINESS
The Company
Oxford Capital Corp., formerly Oxford Investment, Inc. ("Oxford"), was
incorporated on May 2, 1985 under the laws of the State of Nevada and was
originally a "blind pool" company. In November, 1985, Oxford completed an
initial public offering of 2,500,000 units at a price of $.20 per unit. Each
unit consisted of two shares of common stock and one warrant which authorized
the holder to purchase one share of common stock at a price of $.20.
From 1993 through September of 1996, Oxford was engaged in efforts to
identify and acquire or merge with an operating business. In October 1996,
Oxford acquired Rx Staffing Inc. ("Rx") and Safety & Fatigue Consultants
International, Inc. ("SFCI") for an aggregate of 27,401,606 shares of Oxford's
common stock and 2,329,300 warrants. Subsequently, in October of 1997, the
former shareholders of Rx and SFCI agreed to adjust the acquisition price of Rx
and SFCI by surrendering for cancellation 22,729,616 of the shares issued in
connection with the acquisitions.
Rx was incorporated in December 1995 and, in January of 1996, acquired the
employee leasing operations and other assets of Creative Employment Concepts,
Inc. ("CECI"). Pursuant to the terms of Rx's acquisitions of CECI, Rx agreed to
pay to CECI $6,700 per month until $1,068,000 is paid and, additionally, paid to
a stockholder from cash flow $600,000 pursuant to a covenant not to compete. Rx
is a professional employer organization ("PEO") providing small and medium-sized
businesses with an outsourcing solution to the complexities and costs related to
employment and human resources.
SFCI was organized in March of 1996 to provide consultation services and
training materials relating to safety and fatigue of truck drivers. The business
of SFCI was discontinued on December 31, 1997.
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During fiscal 1998, Oxford expanded its employee leasing operations through
the acquisitions of (1) PRC Enterprises, Inc. ("PRC"), (2) Crest Outsourcing,
Inc. ("Crest"), and (3) Webster Leasing, Inc. ("Webster") and through a
management arrangement with United Staffing Corporation ("USC"). Oxford and its
subsidiaries are collectively referred to as the "Company."
On September 2, 1997, but effective September 1, 1997, Oxford acquired 100%
of the issued and outstanding shares of PRC, headquartered in Houston, Texas, in
exchange for a note in the amount of $4,500,000. The note, which is
collateralized with the PRC stock, bears interest of 8% and is due as follows:
(i) principal and interest are due annually in an amount equal to the greater of
30% of the gross profits of PRC, as defined, or $450,000, and (ii) any unpaid
principal and interest is due three years from the date of execution. The PRC
note is convertible into shares of Oxford as follows: (i) the payee is entitled
to convert any unpaid principal at the then market price of the Oxford stock in
minimum amounts of $250,000 no more frequently than once during any one
six-month period, and (ii) after paying all accrued interest and principal
except $1,000,000, the outstanding $1,000,000 is convertible to shares of Oxford
at the then market price at the option of Oxford.
On February 14, 1997, Oxford agreed to acquire 100% of the issued and
outstanding shares of Crest. On March 1, 1997, Oxford guaranteed a Crest note
payable to Continental Casualty Company in the amount of $885,000. On September
30, 1997, Oxford amended the purchase agreement. Under the amended agreement,
Oxford agreed to issue 100,000 newly issued shares of a Series A Redeemable
Convertible Preferred Stock, a note in the amount of $250,000 and warrants to
purchase 250,000 common shares of Oxford. Each preferred stock share is
convertible into 1 share of common stock and warrants to acquire 1 newly issued
common share of Oxford at the following prices: 25,000 at $1 per share; 25,000
at $1.50 per share; and 50,000 at 80% of the then market price of Oxford's
common stock. The preferred shares are redeemable upon the sale of Crest, at the
option of the holders, at $10 per share. On the third anniversary of the
issuance of the preferred shares, Oxford shall have the option of redeeming the
preferred shares at $10 per share or converting each preferred share into 20
shares of common stock of Oxford. The preferred shares accrue dividends at the
rate of $.20 per share during the first year the shares are outstanding, $.40
per share during the second year and $.60 per share during the third year. The
$250,000 note payable bears 6% interest and is payable over a period of 58
months. The warrants to acquire 250,000 common shares are exercisable at $1 per
share for a period of three years. On October 1, 1997, the acquisition of Crest
was consummated. However, as of June 30, 1998, Oxford had not delivered the
preferred shares or warrants issuable in connection with the acquisition of
Crest.
On March 13, 1997, Oxford agreed to acquire 100% of the issued and
outstanding shares of Webster, in exchange for 772,393 shares of Oxford common
stock and the payment of $81,992 for a covenant not to compete. The former
owners of Webster continued to operate Webster under a management contract
pending completion of an audit of Webster's books and records. The acquisition
of Webster was concluded on December 1, 1997. However, as of June 30, 1998,
Oxford had not delivered the shares issuable in connection with the acquisition
of Webster.
Effective August 1, 1997, Oxford entered into a management contract to
operate USC, an employee leasing firm located in Beaverton, Oregon. Previously,
on July 31, 1997, Oxford had entered into an agreement to acquire substantially
all of the assets of Insource America, Inc. ("Insource"), an employee leasing
firm with operations in Portland, Oregon and Missoula, Montana. USC is successor
to the operations of Insource.
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A condition precedent to closing of the acquisition of Insource was the
successful completion of audits of the financial statements of Insource and its
subsidiary as of and for the years ended June 30, 1995 and 1996. Subsequently,
it was determined that audits could not be performed in accordance with
generally accepted auditing standards due to the inadequacy of accounting
records. Accordingly, the agreement to acquire Insource was terminated due to
failure of Insource to satisfy conditions precedent to closing. A promissory
note issued in connection with the proposed acquisition of Insource and
guaranteed by Oxford in the amount of $6,187,500 has been canceled. Oxford
entered into the management agreement, retroactive to July 31, 1997, with USC
for the duration of time that must pass to enable it to meet the filing
requirements of the Securities Exchange Act regarding audited financial
statements for businesses acquired. It is anticipated that the required audited
financial statements will be available on or before calendar year end 1999. Once
the audit is completed, Oxford will acquire the assets or stock of USC for a
price which is established by the product of the highest number of employees
under contract during the period from July 1, 1997 to July 1, 1999 multiplied by
$2,250 per employee.
Since completion of the acquisitions during fiscal 1997 and 1998, the
Company's operations have consisted principally of the employee leasing
operations of Rx, PRC, Crest and Webster. The Company's integrated
employment-related services consists of human resource administration,
employment regulatory compliance management, workers' compensation coverage,
health care and other employee benefits. The Company establishes a co-employer
relationship with its clients and contractually assumes substantial employer
responsibilities with respect to "workaday" employees. The Company believes its
services assist business owners in: (1) managing escalating costs associated
with workers' compensation, health insurance coverage, workplace safety
programs, and employee-related litigation, (2) providing employers with
administrative assistance, and (3) reducing the time and effort required by
business owners and executives to deal with the increasingly complex legal and
regulatory environment affecting employment. As of June 30, 1998, the Company
provided professional employer services to approximately 320 client
organizations with nearly 4,700 employees, primarily in Texas, New Mexico and
California.
Industry Background
According to the U.S. Small Business Administration, there were
approximately 6.0 million businesses in the United States with fewer than 500
employees in 1998. Collectively, these businesses employed an estimated 53
million persons and represented approximately $1.3 trillion in aggregate annual
payroll, implying a potential market for PEO services of $1.6 trillion (assuming
an average mark-up of approximately 20% for administration fees, workers'
compensation insurance and employee benefits). The PEO industry began to evolve
in the early 1980's largely in response to the burdens placed on small to
medium-sized employers by an increasingly complex legal and regulatory
environment. While various service providers, such as payroll processing firms,
benefits and safety consultants, and temporary services firms are available to
assist businesses with specific tasks, these organizations do not typically
provide a comprehensive range of services relating to the employer/employee
relationship. PEOs address this market void.
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The PEO industry has experienced significant growth in recent years.
Industry sources estimate that gross revenues in the PEO industry grew from $5
billion in 1991 to $18 billion in 1998, representing a compounded annual growth
rate of approximately 29%. The Company believes that the increasing willingness
of businesses to outsource non-core activities and functions, the low market
penetration of the PEO industry, and the growth in the number of small
businesses in the United States has contributed to the growing demand for PEO
services. The PEO industry is highly fragmented, with approximately 2,400 PEOs
operating in 1998. The Company believes that increasing industry regulatory
complexity and the increasing capital requirements associated with developing
larger service delivery infrastructures and management information systems
should lead to significant consolidation opportunities in the PEO industry.
The Company intends to strengthen its position as an industry leader by:
(1) providing employers with comprehensive outsourcing solutions to their human
resource needs, (2) targeting medium-sized businesses with 20 to 500 employees,
(3) aggressively managing health care and workers' compensation costs through
the development of vertically integrated managed care systems, (4) developing
proprietary information systems to provide a competitive advantage in managing
costs and delivering a full range of high quality services, (5) increasing
penetration of existing markets by hiring additional sales personnel and
increasing sales productivity, and (6) acquiring established, quality PEOs in
selected markets.
According to estimates by the U.S. Small Business Administration, the
management of an average small to medium-sized business devotes from 7% to 25%
of its time to employee-related matters, leaving management with less time to
focus on its core business. A National Federation of Independent Businesses
survey of small businesses in 1996 showed that six of the top 13 major problem
areas for small businesses are issues that can be addressed by PEOs. These
include (with their rank of importance) cost of health insurance (1), worker's
compensation costs (3), federal paperwork (7), frequent changes in federal tax
laws (9), finding qualified employees (11), and state/local paperwork (13).
An industry analyst's study indicated that 40% of the clients that
outsourced services with a PEO were able to upgrade their employee benefits
offerings and 25% of those clients were able to offer health care and other
benefits for the first time.
Principal Services
The Company provides professional employer services through four core
activities: (1) human resource administration, (2) employer regulatory
compliance management, (3) workers' compensation cost containment and safety
management, and (4) employee benefits administration. By engaging the Company to
provide these services, clients are able to concentrate their resources on their
core businesses. In addition, the Company leverages its managed care expertise
by offering certain specialty managed care services on a stand-alone basis to
health and workers' compensation insurance carriers, HMOs, managed care
providers and large self-insured employers.
Human Resource Administration. The Company's human resource services reduce
the employment-related administrative burdens faced by its clients and provide
work-site employees with a wide array of benefits typically offered by large
employers. As a co-employer, the Company is responsible for payroll and
attendant record-keeping, payroll tax deposits, payroll tax reporting, employee
file maintenance, unemployment claims, and monitoring and responding to changing
regulatory requirements. The Company develops and administers customized
personnel policies and procedures for each of its clients, relating to, among
other things, recruiting, performance appraisals, discipline and terminations.
The Company also provides recruiting, orientation, training, counseling,
substance abuse awareness and out placement services for work-site employees.
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Employer Regulatory Compliance Management. Under its standard contract, the
Company assumes responsibility for complying with the many employment-related
regulatory requirements. In addition, the Company assists its clients in
understanding and complying with many employment-related requirements for which
the Company does not assume responsibility. Laws and regulations applicable to
employers include state and federal tax laws, immigration laws, discrimination,
sexual harassment and other civil rights laws. When a claim arises, the Company
provides assistance through either its in-house legal department or outside
legal counsel. To respond to such claims in a cost-effective manner, the Company
has entered into a capitalized fee arrangement with a national law firm
specializing in employment and labor issues.
Workers' Compensation Cost Containment and Safety Management. Workers'
compensation is a state mandated, comprehensive insurance program which requires
employers to fund medical expenses, lost wages and other costs resulting from
work-related injuries and illnesses, regardless of fault and without any
co-payment by the employee. See "Industry Regulation". The Company seeks to
control its workers' compensation costs through comprehensive risk evaluation of
prospective clients, the prevention of workplace injuries, early intervention in
each employee injury, intensive management of the medical costs related to such
injuries and the prompt return of employees to the workplace. The Company seeks
to prevent workplace injuries by implementing a wide variety of training, safety
and mandatory drug-free workplace programs (including pre-employment, random and
post-accident drug testing). Specific components of the Company's proprietary
managed care system include the prompt identification and reporting of injuries,
the use of Company designated health care providers, utilization and fee review,
telephone claims and case management, auditing of bills and other techniques
designed to reduce medical costs. The Company's efforts to quickly return
employees to the workplace involve both rehabilitation services and placement of
employees in transitional, modified duty position until they are able to resume
their former positions.
Employee Benefits and Related Administration. The Company currently offers
an employee benefits package which includes several health care options, such as
preferred provider organizations ("PPOs"), health maintenance organizations
("HMOs") and exclusive provider organizations ("EPOs"). Supplemental benefit
programs offer dental care, vision care, prescription drugs, and employee
assistance plan, mental health benefits and several life and disability
insurance options.
Specialty Managed Care Services
The growth in the Company's core PEO business has provided the Company with
significant expertise and experience in managing a wide range of employee health
care and disability costs. To further capitalize on that expertise, the Company
offers a variety of specialty managed care services (such as employee assistance
programs, behavioral health managed care, comprehensive workers' compensation
managed care services, risk management and loss containment services) on a stand
alone basis to health and workers' compensation insurance carriers, HMOs,
managed care providers and large self insured employers. The Company believes
that the continued expansion of its specialty managed care division will (1)
enhance its leverage in negotiating provider arrangements and create greater
economies of scale, (2) increase profit margins by using existing service
delivery infrastructures to generate additional revenue, and (3) benefit the
Company's PEO operations by making the Company's specialty managed care services
more cost effective, innovative and competitive. The Company believes that the
continued evolution of its specialty managed care services could require
structural and organizational modifications to the Company's traditional
relationships with other participants in the health care industry.
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PEO Services Agreement
The Company's standard PEO services agreement provides for an initial one
year term, subject to termination by the Company or the client at any time
during the first year upon 30 days prior written notice, and thereafter
annually. Revenues from professional employer services are based on a pricing
model that takes into account the gross pay of each employee and a mark up which
includes the estimated costs of federal and state employment taxes, workers'
compensation, employee benefits and human resource administrative services, as
well as a provision for profit. The specific mark up varies by client based on
the workers' compensation classification of the work site employees and their
eligibility for health care benefits. Accordingly, the Company's average mark up
percentage will fluctuate based on client mix, which cannot be predicted with
any degree of certainty.
Customers
At June 30, 1998, the Company served approximately 320 PEO client companies
and had approximately 4,700 active work site employees resulting in an average
of 15 work site employees per PEO client. The Company's customers are located
principally in Texas, New Mexico and California and are broadly distributed
throughout a wide variety of industries including services, wholesale trade,
manufacturing, construction, retail sales, professional (e.g., law and
accounting) and others.
The Company attempts to maintain diversity within its client base to lower
its exposure to downturns or volatility in any particular industry and to help
insulate the Company from general economic cyclicality. As part of its client
selection strategy, the Company does not offer its services to businesses in
certain industries that it believes present a higher risk of employee injury.
All prospective customers are evaluated individually on the basis of workers'
compensation risk, group medical history, unemployment history and operating
stability.
Client attrition experienced by the Company is attributable to a variety of
factors, including (1) client non-renewal due to price or service
dissatisfaction, (2) client business failure or downsizing, (3) termination by
the Company resulting from the client's inability to make timely payments, and
(4) sale or acquisition of the client.
Sales and Marketing
The Company markets its services through a direct sales force of eleven
(11) sales persons located at the Company's offices in Dallas and Houston, Texas
and Albuquerque, New Mexico. Marketing of services for USC are handled by a
sales person in Portland, Oregon and a sales person in Billings, Montana. The
Company's sales force averages approximately four years of experience in fields
related to one or more of the Company's core services. The background of the
Company's sales executives includes experience in industries such as payroll
services, health insurance, temporary services and workers' compensation
insurance. The Company's sales materials emphasize its broad range of high
quality services and the resulting benefits to clients and work site employees.
The Company's sales and marketing strategy is to hire additional sales
executives in its existing markets and to increase sales productivity.
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The Company generates sales leads from two primary sources: direct sales
efforts and referrals. The Company's sales personnel gather information about
the prospective client and its employees, including job classification, workers'
compensation claims history, health insurance claims history, salary and the
desired level of employee benefits. These various factors are reviewed in the
context of the Company's pricing model and client selection guidelines and a
proposal is prepared or the Company declines the opportunity. This prospective
client screening process plays a vital role in controlling the Company's costs
and limiting exposure to liability. Once a prospective client accepts the
Company's proposal, the client is quickly incorporated into the Company's
system. A Company human resources manager immediately assumes responsibility for
administering the client's personnel and benefits, coordinating the Company's
response for the client's needs including administrative support and responding
to questions or problems encountered by the client.
Information Technology
The Company's integrated state-of-the-art information systems provide a
competitive advantage in managing costs and delivering comprehensive high
quality services. The Company's proprietary systems allow real time reporting of
work site accidents and injuries, enabling the Company to promptly implement its
managed care techniques and thereby better control workers' compensation and
other health care costs. In addition, the Company has developed a proprietary
software product installed on PEO clients' computers which enables the clients
to directly enter payroll and other human resource management data, via modem
dial-in, and provides clients with other local reporting capabilities.
Competition
The Company's competitors include (1) traditional in house human resource
departments, (2) other PEOs and (3) providers of unbundled employment related
services such as payroll processing firms, temporary employment firms,
commercial insurance brokers, human resource consultants, workers' compensation
insurers, HMOs and other specialty managed care providers. Many of these
companies have greater financial and other resources than the Company, while
others are seeking to enter the professional employer services market.
Competition in the highly fragmented PEO industry is generally on a local
or regional basis. Management believes that the primary elements of competition
are quality of service, choice and quality of benefits, reputation and price.
The Company believes that name recognition, regulatory expertise, financial
resources, risk management and data processing capabilities distinguish leading
PEOs from the rest of the industry.
The Company believes that barriers to entry into the PEO industry are
increasing, including the following: (1) the complexity of the PEO business and
the need for expertise in multiple disciplines; (2) the three to five years of
experience required to establish experience ratings in key cost areas of
workers' compensation, health insurance and unemployment; and (3) the need for
sophisticated management information systems to track all aspects of business in
a high growth environment.
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Industry Regulation
Overview. The Company's professional employer and specialty managed care
operations are subject to extensive state and federal regulations that include
operating, fiscal, licensing and certification requirements. Adding complexity
to the Company's regulatory environment are (1) uncertainties resulting from the
non-traditional employment relationships created by PEOs; (2) variations in
state regulatory schemes, and (3) the ongoing evolution of regulations regarding
health care and workers' compensation.
Many of the federal and state laws and regulations relating to labor, tax
and employment matters applicable to employers were enacted prior to the
development of non-traditional employment relationships and accordingly, do not
specifically address the obligations and responsibilities of PEOs. Both PEOs and
specialty managed care services are regulated primarily at the state level.
Regulatory requirements regarding the Company's business therefore will vary
from state to state. As the Company enters new states it will be faced with new
regulatory and licensing environments. There can be no assurance that the
Company will be able to satisfy the licensing requirements or other applicable
regulations of any particular state in which it is not currently operating.
The application of certain rules and regulations to the Company's PEO
services will depend on whether the Company is considered an employer. The
common law test of the employment relationship is generally used to determine
employer status for benefit plan purposes under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), the workers laws of many states and
various state unemployment laws. This common law test involves an examination of
approximately 20 factors to ascertain whether an employment relationship exists
between a worker and a purported employer. Substantial weight is typically given
to the question of whether the purported employer has the right to direct and
control the details of an individual's work. Other factors include (1) the right
to fire and hire workers, (2) whether the workers are involved in distinct
occupations or businesses, (3) whether the kind of occupation involved is
generally performed by employees or by specialists who are independent
contractors, (4) whether the purported employer provides the instrumentalities,
tools and place of work, (5) the method of payment, (6) the length of time of
the arrangement, (7) the level of skill and/or training required, (8) whether
the work is part of the regular business of the purported employer, (9) whether
the principal is in business, and (10) whether the parties believe that they are
establishing a master-servant relationship. By contrast, certain statutes such
as those relating to PEO licensing and federal income tax withholding use
differing or more expansive definitions of employer. In addition, from time to
time there have been proposals to enact a statutory definition of employer.
Regulation in the health care and workers' compensation fields continues to
evolve. Sweeping reforms have been the subject of debate at both the federal and
state government levels. New legislation or new interpretations of current
licensing and regulatory requirements could impose operating or licensing
requirements on the Company which it may not be able to satisfy or which could
have a material adverse effect on the Company's financial condition and results
of operations. Additionally, interpretation of such legislation or regulation by
regulatory agencies with broad discretionary powers could require the Company to
modify its existing operations materially in order to comply with applicable
regulations. Health care reform at the state and federal level seeks solutions
to contain health care costs. These costs comprise a significant portion of the
Company's direct costs, and if the Company is not able to reflect promptly such
increased costs in its service fees, the legislation could have a material
adverse impact on the Company's future operations.
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While the Company cannot predict with certainty the development of federal
and state regulations, management will continue to pursue a proactive strategy
of educating administrative authorities as to the advantages of PEOs and
assisting in the development of regulation which appropriately accommodates
their legitimate business function.
PEO Licensing Requirements. A critical aspect of the growth of the PEO
industry has been increasing recognition and acceptance of PEOs by state
authorities. As the concept of PEO services became understood by regulatory
authorities, the regulatory environment began to shift from one of hostility and
skepticism to one of regulatory recognition. During the mid to late 1980's,
legitimate industry participants were challenged to overcome well publicized
failures of financially unsound and, in some cases, unscrupulous operators.
Given this environment, the Company and other industry leaders, in conjunction
with the National Association of Professional Employer Organizations, worked
with relevant government entities to establish a regulatory framework designed
to protect clients and employees and discourage unscrupulous and financially
unsound operators, thereby promoting the legitimacy and further development of
the industry.
While many states do not explicitly regulate PEOs, approximately one-third
of the states, including Texas, have passed laws that have licensing or
registration requirements for PEOs and several additional states are considering
such regulation. Such laws vary from state to state but generally provide for
monitoring the fiscal responsibility of PEOs. State regulation assists in
screening insufficiently capitalized PEO operations and, in the Company's view,
has the effect of legitimizing the PEO industry generally by resolving
interpretative issues concerning employee status for specific purposes under
applicable state law. However, because existing regulations are relatively new,
there is limited interpretive or enforcement guidance available. The development
of additional regulations and interpretation of existing regulations can be
expected to evolve over time. The Company has actively supported such regulatory
efforts.
In Texas, the Company's PEO operations are licensed under the Texas
Employee Leasing Licensing Act of 1993 (the "Texas Licensing Act"). The Texas
Licensing Act requires PEOs and their controlling persons to be licensed,
mandates reporting requirements and allocates several employer responsibilities.
The Texas Licensing Act also requires licensed PEOs to submit annual financial
statements and maintain a tangible accounting net worth and positive working
capital. The Texas Licensing Act also required PEOs to, among other things; (1)
reserve the right of direction and control over the leased employees, (2) enter
into a written agreement with the client company, (3) pay wages to the leased
employees, (4) pay and collect payroll taxes, (5) maintain authority to hire,
terminate, discipline and reassign employees, (6) reserve a right to direct and
control the management of safety, risk and hazard control at the work site, (7)
promulgate and administer employment and safety policies, and (8) manage
workers' compensation claims.
Federal and State Employment Taxes. The Company assumes the sole
responsibility and liability for payment of federal and state employment taxes
with respect to wages and salaries paid to its employees, including work site
employees. There are essentially three types of federal employment tax
obligations; (1) income tax withholding requirements, (2) social security
obligations under FICA, and (3) unemployment obligations under FUTA. Under these
provisions, the employer has the obligation to withhold and remit the employer
portion and, where applicable, the employee portion of these taxes.
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To date, the Internal Revenue Service ("IRS") has relied extensively on the
common law test of employment in determining employer status and the resulting
liability for failure to withhold. However, the IRS has formed a Market Segment
Study Group for the stated purpose of examining whether PEOs, such as the
Company, are the employers of the work site employees under the provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), applicable to
federal employment taxes and, consequently, whether they are exclusively
responsible for payment of employment taxes on wages and salaries paid to such
employees. Another stated purpose of the Market Segment Study Group is to
determine whether owners of client companies can by employees of PEOs under the
federal employment tax laws.
The interpretive uncertainties raised by the Market Segment Study Group may
impact the Company's ability to report employment taxes on its own account
rather than for the accounts of its clients and would increase administrative
burdens on the Company's payroll service function. In addition, while the
Company believes that it can contractually assume the client company's
withholding obligations, in the event the Company fails to meet these
obligations the client company may be held jointly and severally liable
therefor. The Company's management believes that the economic strength and
reputation of the Company has prevented this potential liability from
discouraging prospective clients.
Workers' Compensation. Workers' compensation is a state mandated,
comprehensive insurance program that requires employers to fund medical
expenses, lost wages and other costs resulting from work related injuries and
illnesses. In exchange for providing workers' compensation coverage for
employees, employers are not subject to litigation by employees for benefits in
excess of those provided by the relevant state statute. In most states, the
extensive benefits coverage (for both medical costs and lost wages) is provided
through the purchase of commercial insurance from private insurance companies,
participation in state run insurance funds or employer self insurance. Workers'
compensation benefits and arrangements vary on a state by state basis and are
often highly complex. These laws establish the rights of workers to receive
benefits and to appeal benefit denials. Workers' compensation laws also regulate
the methods and procedures which the Company may employ in its workers'
compensation managed care programs. For example, workers' compensation laws
prohibit medical co-payment and deductible payment by employees. In addition,
certain states restrict employers' rights to select health care providers and
establish maximum fee levels for treatment of injured workers.
Provider reimbursement methods also vary from state to state. A majority of
states, including Texas, have adopted fee schedules pursuant to which all health
care providers are uniformly reimbursed. In states without fee schedules, health
care providers are reimbursed based on usual, customary and reasonable fees
charged in the particular state in which the services are provided.
The Company's ability to use comprehensive workers' compensation managed
care techniques in its PEO operations depends on its ability to contract with or
create networks of health care providers. The Company requires that injured
workers use the Company's network of providers. Laws regulating the operation of
managed care provider networks have been adopted by a number of states. These
laws may apply to managed care provider networks having contracts with the
Company or to provider networks which the Company may organize. To the extent
the Company is governed by these regulations, it may be subject to additional
licensing requirements, financial oversight and procedural standards for
beneficiaries and providers.
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Other Employer Related Requirements. As an employer, the Company is subject
to a wide variety of federal and state laws and regulations governing
employer-employee relationships, including the Immigration Reform and Control
Act, the Americans with Disabilities Act, The Family Medical Leave Act, the
Occupational Safety and Health Act, wage and hour regulations and comprehensive
state and federal civil rights laws and regulations, including those prohibiting
discrimination and sexual harassment. The definition of employer may be broadly
interpreted under these laws.
Responsibility for complying with various state and federal laws and
regulations is allocated by agreement between the Company and its clients, or in
some cases is the joint responsibility of both. Because the Company acts as a
co-employer with the client company, it is possible that the Company could incur
liability for violations of laws even though the Company is not contractually or
otherwise responsible for the conduct giving rise to such liability. The
Company's standard client agreement generally provides that the client will
indemnify the Company for liability incurred as a result of an act of negligence
of a work site employee under the direction and control of the client or to the
extent the liability is attributable to the client's failure to comply with any
law or regulation for which it has specified contractual responsibility.
However, there can be no assurance that the Company will be able to enforce such
indemnification and the Company may therefore be ultimately responsible for
satisfying the liability in question.
Business Strategy
The Company intends to strengthen its position as an industry leader by
pursuing the following business strategies:
-- Provide Employers with Comprehensive Outsourcing Solutions to Human
Resource Needs. By offering a broad and increasing range of high quality
services, the Company believes it is attractive to employers who are seeking a
single source solution to their human resource needs. Once a relationship is
established, the Company's direct distribution channels afford access to both
the client and the "workaday" employee. Through these distribution channels, the
Company can add new services and products which provide additional revenue
sources and improve margins. These comprehensive services foster long term
relationships which promote a high level of client loyalty and retention, raise
competitive barriers and generate a recurring revenue stream.
-- Target Medium-Sized Clients. The Company targets and tailors its
services to meet the needs of medium-sized businesses (with 20 to 500
employees). As of June 30, 1998, the Company's PEO clients had an average of
approximately 15 "workaday" employees, compared to an estimated 1994 industry
wide average of 13 "workaday" employees. The Company believes that medium-sized
businesses are more likely than small businesses to (1) desire the wide range of
employee benefits offered by the Company, (2) recognize the costs of human
resource administration, (3) have greater employment related regulatory burdens,
and (4) be financially stable. In addition, the Company believes that targeting
medium-sized clients results in greater marketing efficiency, lower business
turnover due to client business failure, and less exposure to credit risk.
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-- Develop Proprietary Information Systems. The Company continues to
develop its proprietary information systems which enable the Company to
integrate all aspects of the administration of human resources, workers'
compensation and employee benefits, thereby providing a significant competitive
advantage in managing costs and delivering a full range of high quality
services. Benefits of the Company's user friendly systems include real time case
management, provider credentialing, managing insurance claims and the ability to
track outcome data and facilitate provider bench marking.
-- Increase Penetration of Existing Markets. The Company intends to
increase its client base in its existing markets by hiring additional sales
personnel and increasing sales productivity. Emphasis on increasing penetration
in existing regions will allow the Company to enhance its current economies of
scale, principally through its managed care activities, thereby increasing cost
effectiveness and profit margins.
-- Expand Through Acquisitions. The PEO industry is highly fragmented, with
approximately 2,400 PEOs operating in the United States, resulting in
opportunities for consolidation. The Company believes that this industry
consolidation will be driven by increasing industry and regulatory complexity,
increasing capital requirements and the significant economies of scale available
to PEOs with a regional concentration of clients. The Company intends to expand
in current markets and to enter selected new markets by acquiring established
quality PEOs to provide a platform for future regional consolidation. The
Company has identified certain fundamental attributes which characterize
attractive potential new markets such as; (1) proximity to a major metropolitan
area, (2) regulatory receptivity to PEOs, (3) prior successful introduction of
the PEO concept, (4) favorable economic conditions, (5) high workers'
compensation rates and health care costs, and (6) a high concentration of small
to medium-sized businesses.
Employees
The Company at June 30, 1998 had approximately ten corporate office,
marketing and administrative employees (excluding client employees). The Company
believes that its relations with its employees are good. None of the Company's
corporate office, marketing or administrative employees are covered by
collective bargaining agreements.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate offices are located in 14,586 square feet of leased
office space at 4245 North Central Expressway in Dallas, Texas. The lease on
this facility expires in 2001.
In connection with the acquisition of various PEO operations in fiscal year
1998, the Company also leases sales and support offices in Albuquerque, New
Mexico, Portland, Oregon, and Houston, Texas.
The Company believes that its facilities are adequate to support the
Company's operations for the foreseeable future. The Company expects to lease
additional facilities in existing and new markets as needed to support future
growth and acquisitions.
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ITEM 3. LEGAL PROCEEDINGS
On February 25, 1998, suit was filed by the Company in the U.S. District
Court for the Northern District of Texas in a case styled, Oxford Capital Corp.
v. United States, (Docket No. 3-98CV0501-AH). In that suit, the Company sought
injunctive relief from an alleged wrongful levy against the Company by the
Internal Revenue Service ("IRS") relating to alleged payroll tax obligations of
the Company's subsidiary, Rx Staffing Corporation. The IRS had, prior to the
filing of the suit, levied bank accounts of Oxford Capital Corp. alleging that
it was the nominee, alter ego, agent and/or holder of a beneficial interest of
Rx Staffing. The alleged payroll tax deficiency of Rx Staffing is in excess of
$4 million.
The court issued a temporary restraining order on March 9, 1998, which was
then superceded after hearing, by the court's denial of a temporary injunction
on March 19, 1998. After a trial on the merits on August 7, 1998, the court
denied the Company a permanent injunction and found that the levy was
appropriate. The Company filed a notice of appeal on October 5, 1998, and is
appealing the judgment to the Fifth Circuit Court of Appeals.
In February of 1998, suit was filed against the Company's subsidiaries, Rx
Staffing, PRC, and Webster, in the District Court of Dallas County, Texas, 191st
Judicial District, in a case styled, Liberty Mutual Fire Insurance Co. v. Rx
Staffing Corporation, et al. (Cause No. DV 98-1321). In that suit, the plaintiff
is seeking $1.9 million based on claims for unpaid workers' compensation and
employers' liability insurance premiums. Management believes that the Company
has good defenses and offsets against the claim and is vigorously contesting the
matter.
In addition to the foregoing, the Company is subject to threatened and
pending litigation and disputes arising in the normal course of business. Other
than the foregoing, management believes that any such threatened or pending
actions will not materially affect the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders through
the solicitation of proxies or otherwise, during the fourth quarter of the
Company's fiscal year ended June 30, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ Electronic Bulletin
Board under the symbol "OXFO". The following table sets forth the high and low
bid price per share for the Company's Common Stock for each quarterly period
within the two most recent fiscal years.
High Low
------ -----
Quarter ended September 30, 1996 9/16 1/2
Quarter ended December 31, 1996 9/16 1/2
Quarter ended March 31, 1997 3/8 3/8
Quarter ended June 30, 1997 3/16 3/16
Quarter ended September 30, 1997 3/8 3/16
Quarter ended December 31, 1997 1/4 1/16
Quarter ended March 31, 1998 3/16 1/8
Quarter ended June 30, 1998 3/16 1/8
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
As of October 31, 1998, there were approximately 250 holders of record of
the Common Stock of the Company.
At October 31, 1998, the bid price of the Common Stock was $0.03.
The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to pay any such dividend in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The statements contained in this Annual Report on Form 10-KSB ("Annual
Report") which are not historical facts, including, but not limited to,
statements found in Item 1. "Business" and in this Item 6. "Management's
Discussion and Analysis," are forward-looking statements that involve a number
of risks and uncertainties. All phases of the Company's operations are subject
to a number of uncertainties, risks and other influences. Therefore, the actual
results of the future events described in such forward-looking statements in
this Annual Report, or elsewhere, could differ materially from those stated in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are the risks and uncertainties discussed in this
Annual Report, including, without limitation, the portions referenced above, and
the uncertainties set forth from time to time in the Company's other public
reports and filings and public statements, many of which are beyond the control
of the Company, and any of which, or a combination of which, could materially
affect the results of the Company's operations and whether forward-looking
statements made by the Company ultimately prove to be accurate.
Overview
The Company provides small and medium-sized businesses with an outsourcing
solution to the complexities and costs related to employment and human
resources. The Company's integrated employment related services consist of human
resource administration, employment regulatory compliance management, workers'
compensation coverage, health care and other employee benefits. The Company
establishes a co-employer relationship with its clients and contractually
assumes substantial employer responsibilities with respect to work site
employees. In addition, the Company offers certain specialty managed care
services on a stand alone basis to health and workers' compensation insurance
companies, HMOs, managed care providers and large, self insured employers.
Financial Presentation
The Company conducted no operating business activities from 1993 through
September of 1996. In October of 1996, the Company acquired Rx and SFCI in
transactions accounted for as a reverse acquisition. As a result of such
transactions, the financial results for all periods presented reflect the
operations and results of Rx and SFCI for all such periods as if the
transactions had occurred at the beginning of such periods. In September,
October and December of 1997, the Company acquired PRC, Crest and Webster,
respectively, and in September of 1997 the operations of SFCI were discontinued.
As a result of the transactions during fiscal 1997 and 1998, the Company's
operations consisted of the operations of Rx and SFCI during fiscal 1997 and the
operations of Rx, PRC, Crest and Webster during fiscal 1998. See "Item 1.
Description of Business -- The Company."
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the foregoing and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual Report.
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The Company's revenues include (1) employee leasing revenues and (2)
management fees. Employee leasing revenues include all amounts billed to clients
for gross salaries and wages, related employment taxes, and health care and
workers' compensation coverage of work site employees. The Company is obligated
to pay the gross salaries and wages, related employment taxes as well as health
care and workers' compensation costs of its work site employees whether or not
the Company's clients pay the Company on a timely basis, or at all. The Company
believes that including such amounts as revenues appropriately reflects the
responsibility which the Company bears for such amounts and is consistent with
industry practice. In addition, the Company's revenues are subject to
fluctuations as the result of (1) changes in the volume of work site employees
serviced by the Company, (2) changes in the wage base and employment tax rates
of work site employees, and (3) changes in the mark up charge by the Company for
its services.
Management fees are derived from contractual arrangements pursuant to which
the Company provides certain insurance and management services to other employee
leasing firms. The Company began providing management services and receiving
management fees during fiscal 1998 in anticipation of the acquisition of Crest
and USC. Management services to Crest, and the receipt of management fees from
Crest, terminated in October of 1997 upon the Company's acquisition of Crest.
See "Item 1. Description of Business -- The Company."
The Company's primary direct costs are (1) salaries, wages, the employer's
portion of social security, Medicare premiums and federal unemployment taxes,
(2) health care and workers' compensation costs, and (3) state unemployment
taxes and other direct costs. The Company can significantly impact its gross
profit margin by actively managing the direct costs described in items (2) and
(3).
The Company's health care costs consist of medical insurance premiums,
payments of and reserves for claims subject to deductibles and the costs of
vision care, disability, employee assistance and other similar benefit plans.
The Company's health care benefit plans consist of a mixture of fully insured,
minimum premium arrangements, partially self insured plans and guaranteed cost
programs. Under minimum premium arrangements and partially self insured plans,
liabilities for health care claims are recorded based on the Company's health
care loss history.
Workers' compensation costs include medical costs and indemnity payments
for lost wages, administrative costs and insurance premiums related to the
Company's workers' compensation coverage. The Company is insured under a large
deductible insurance plan. Workers' compensation costs include reserves for
claims which have been incurred but not reported and for anticipated loss
development.
The Company's primary operating expenses are administrative personnel
expenses, other general and administrative expenses, and sales and marketing
expenses. Administrative personnel expenses include compensation, fringe
benefits and other personnel expenses related to internal administrative
employees. Other general and administrative expenses include rent, office
supplies and expenses, legal and accounting fees, insurance and other operation
expenses. Sales and marketing expenses include compensation of sales executives
and the marketing staff, as well as marketing and advertising expenses.
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Results of Operations
The following table sets forth, for the periods indicated, certain selected
income statement data expressed as a percentage of revenues:
Twelve Months Ended June 30
---------------------------
1998 1997
------ ------
Employee leasing revenue............... 99.3% 100.0%
Management fees........................ 0.7 0.0
------ ------
Total revenues......................... 100.0 100.0
Direct cost............................ 94.7 94.1
------ ------
Gross profit........................... 5.3 5.9
Operating expenses:
General and administrative........... 5.7 8.8
Sales and marketing.................. 0.6 2.1
------ ------
Total operating expenses............. 6.3 10.9
------ ------
Operating loss......................... (1.0) (5.0)
Other expenses (net)................... (2.3) (8.7)
Loss from discontinued operations...... (0.2) (5.5)
------ ------
Net loss............................... (3.5) (19.2)
====== ======
Revenues. Total revenues for the fiscal year ended June 30, 1998 were $82.5
million compared to $18.9 million for the fiscal year ended June 30, 1997, an
increase of 337.4%. Employee leasing revenues increased by 334.4% from $18.9
million in fiscal 1997 to $81.9 million in fiscal 1998. Management fees
increased from $0 in fiscal 1997 to $569,000 in fiscal 1998. The increase in
total revenues and employee leasing revenues was attributable to the acquisition
of PRC, Crest and Webster, which accounted for an aggregate of $68.1 million of
employee leasing revenues during fiscal 1998. Partially offsetting the increase
in employee leasing revenues attributable to acquisitions during fiscal 1998 was
a $5.1 million decrease in employee leasing revenues of Rx Staffing during the
current period which was attributable to the termination (because of excessive
workers compensation losses and a high incident of State unemployment claims)
during the period of one client which accounted for approximately 25% of Rx
Staffing's business in the 1997 period. The increase in management fees during
fiscal 1998 was attributable to the commencement of management services
performed during the year pending completion of acquisitions (Crest -- $190,000;
USC -- $379,000). The average number of worksite employees paid per month during
fiscal 1998 was 4,300 as compared to 975 during fiscal 1997 while monthly
revenue per worksite employee was $1,588 during fiscal 1998 as compared to
$1,616 during fiscal 1997.
On a pro forma basis, assuming the acquisitions of PRC, Crest and Webster
as of July 1, 1996, total revenues during fiscal 1997 would have been $94.5
million as compared to fiscal 1998 pro forma revenues of $100.6 million. The
increase in pro forma revenues from fiscal 1997 to fiscal 1998 was primarily
attributable to a $12.4 million increase in PRC revenues which was partially
offset by the aforementioned decrease in revenues of Rx Staffing.
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Gross Profit. Gross profit was $4.4 million during fiscal 1998 compared to
$1.1 million during fiscal 1997, an increase of 292.8%. Gross profit was 5.3% of
revenues during fiscal 1998 compared to 5.9% during fiscal 1997.
The increase in gross profits was primarily attributable to the acquisition
of PRC, Crest and Webster during fiscal 1998 and a moderate increase in fees to
clients which was partially offset by a $0.4 million decrease in gross profits
from Rx resulting from the aforementioned decrease in Rx revenues.
Monthly gross mark-up per worksite employee totaled $84 during fiscal 1998
as compared to $99 during fiscal 1997. The decrease in gross profit percentage
during fiscal 1998 was principally attributable to the lower gross margins
(2.6%) generated by Crest.
General and Administrative Expense. General and administrative expenses
("G&A") were $4.7 million during fiscal 1998 compared to $1.7 million during
fiscal 1997, a 186% increase. As a percentage of revenues, G&A decreased from
8.8% to 5.7%. The increase in G&A was attributable to the acquisitions of PRC,
Crest and Webster and associated costs of supporting such operations and a
number of unusual and non-recurring expenses such as (1) legal fees associated
with the Company's ongoing litigation with the IRS, litigation with a former
workers' compensation insurance carrier and the acquisitions of PRC, Crest and
Webster ($250,000), (2) other expenses incurred in connection with the
acquisitions such as accounting fees ($100,000), consulting fees ($50,000) and
travel costs ($100,000), and (3) excess wages for employees of acquired
companies whose employment has since been terminated ($100,000). The decrease in
G&A as a percentage of revenues was attributable to efficiencies associated with
operations on a larger scale.
Sales and Marketing Expense. Sales and marketing costs were $519,000 during
fiscal 1998 compared to $398,000 during fiscal 1997, an increase of 30.5%. As a
percentage of revenues, sales and marketing expense decreased from 2.1% to 0.6%.
The increase in sales and marketing expense was attributable to the acquisition
of PRC, Crest and Webster and associated costs of supporting such operations.
The decrease in sales and marketing expense as a percentage of revenues was
attributable to efficiencies associated with operations on a larger scale.
Other Expense (Net). The Company reported other expenses (net) totaling
$1.9 million during fiscal 1998 as compared to other expenses (net) of $1.6
million during fiscal 1997. Other expense (net) during fiscal 1998 included
amortization expense ($715,000), depreciation expense ($140,000), IRS penalties
and interest ($634,000), interest expense ($426,000) and interest income
($44,000). Other expense (net) during fiscal 1997 included impairment of
long-lived assets ($881,000), amortization expense ($154,000), depreciation
expense ($28,000), IRS penalties and interest ($500,000), interest expense
($83,000) and interest income ($175).
The increase in amortization expense during fiscal 1998 was attributable to
the amortization of goodwill associated with the acquisitions of PRC and Crest
and the amortization of a covenant not to compete associated with the
acquisition of Webster during fiscal 1998. Offsetting the increase in
amortization expense during fiscal 1998 was the decrease in impairment of
long-lived assets which reflects the write-off, during fiscal 1997, of
unamortized goodwill and a covenant not to compete relating to the acquisition
of Rx. The impairment loss recorded during fiscal 1997 was the result of the
lack of profitability of Rx and the determination that the operations of Rx
would not recoup the Company's investment therein.
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The increase in depreciation expense during fiscal 1998 was attributable to
the acquisitions of PRC, Crest and Webster.
The increase in interest expense during fiscal 1998 was attributable to
promissory notes issued in connection with the acquisition of PRC and Crest by
the Company.
Loss from Discontinued Operations. The Company recorded a loss from
discontinued operations of $138,000 during fiscal 1998 as compared to a loss
from discontinued operations of $1.0 million during fiscal 1997. The loss from
discontinued operations relates to the termination, during fiscal 1998, of the
operations of SFCI.
Net Loss. The Company reported a net loss of $2.9 million during fiscal
1998 as compared to a loss of $3.6 million during fiscal 1997.
On a pro forma basis, assuming the acquisitions of PRC, Crest and Webster
as of July 1, 1996, net loss during fiscal 1997 would have been $4.6 million as
compared to fiscal 1998 pro forma net loss of $3.2 million.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $47,000 and a deficit in
working capital of $11.9 million at June 30, 1998 compared to a cash balance of
$437,000 and a deficit in working capital of $3.7 million at June 30, 1997. The
decrease in cash was primarily attributable to the loss incurred during fiscal
1998. The increase in the Company's working capital deficit was attributable to
the loss incurred during fiscal 1998 and the issuance of $4.6 million of
promissory notes in connection with the acquisitions of PRC and Crest and
includes $4.9 million of payroll taxes payable in July of 1998.
The Company's operating activities used $58,000 of cash in fiscal 1998 as
compared to providing $1.1 million of cash during fiscal 1997. The decrease in
operating cash flows during fiscal 1998 compared to fiscal 1997 reflects a
substantially larger increase in receivables ($2.2 million) during fiscal 1998
as compared to fiscal 1997 which was partially offset by a smaller loss for the
period and a slightly larger increase in payables and accrued expenses
($476,000) during fiscal 1998 compared to fiscal 1997.
Cash flows used in investing activities totaled $105,000 during fiscal 1998
as compared to $414,000 during fiscal 1997. Approximately $100,000 of the cash
used in investing activities in fiscal 1997 related to payments pursuant to a
non-compete agreement entered into in connection with the acquisition of Rx. The
balance of the funds used in investing activities in fiscal 1997 related to
purchases of furniture and equipment and costs and expenditures incurred in
connection with acquisitions which were pending at June 30, 1997. Investing
activities during fiscal 1998 were attributable to purchases of furniture and
equipment. In addition to its cash investing activities during fiscal 1997, the
Company converted $170,000 of debentures, including accrued interest, into
357,286 shares of common stock and 75,000 warrants and converted $758,000 of
accounts payable, including $686,000 payable to a company controlled by the
Company's chairman, into 1,426,490 warrants.
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Cash flows used in financing activities totaled $228,000 for fiscal 1998 as
compared to cash used in financing activities of $273,000 in fiscal 1997. Cash
flows used in financing activities during the period consisted of $269,000 of
reduction of debt, partially offset by an increase in the Company's bank
overdraft of $42,000. The use of cash in financing activities during fiscal 1997
reflects the reduction of debt in the amount of $200,000 and a reduction of the
bank overdraft balance of $224,000 which was partially offset by the receipt of
loan proceeds in the amount of $150,000 and a capital contribution of $1,000.
At June 30, 1998, the Company's principal obligations, other than those
relating to meeting its ongoing working capital needs, consisted of (1) a
non-interest bearing note payable in connection with the Company's acquisition
of Rx, (2) a note payable in connection with the acquisition of PRC, and (3) a
note payable in connection with the acquisition of Crest.
The note relating to the acquisition of Rx is unsecured and provides for
monthly payments of $6,700 until $1,068,000 has been paid. The note was
originally recorded at a discounted value of $533,650, reflecting a 12% discount
rate. The discounted balance of the note payable at June 30, 1998 was $487,000.
The note relating to the acquisition of PRC is in the amount of $4.5
million, is secured by shares of PRC and bears interest at 8%. The note requires
annual payments of principal and interest in an amount equal to the greater of
$450,000 or 30% of the gross profits of PRC. Any unpaid principal and interest
is due in September, 2000. The note provides for certain conversion rights in
favor of both the holder and the Company. No payments were made under the note
during fiscal 1998 and, at November 15, 1998, the note was in default and notice
had been given by the holders of their intent to foreclose. Negotiations are
presently ongoing with respect to curing the default on the note.
The note relating to the acquisition of Crest was in the original amount of
$250,000, bears interest at 6% per annum and provides for monthly installments
of $5,000. The Company has been paying certain debts of the former owners of
Crest owed to the IRS and has offset those payments against amounts payable
under the note. The balance of the note at June 30, 1998 was $137,112. As of
November 15, 1998, the Company may have been in default under certain loan
covenants.
Additionally, at June 30, 1998, the Company was involved in legal
proceedings with the IRS in connection with the IRS's efforts to collect some
$3,721,504 of delinquent payroll taxes which it contends are owed by Oxford
Capital. The alleged payroll tax deficiency relates to operations of Rx Staffing
between September of 1996 and June of 1997. The Company obtained a temporary
restraining order on March 9, 1998, which was then superceded after hearing, by
the court's denial of a temporary injunction on March 19, 1998. After a trial on
the merits on August 7, 1998, the court denied the Company a permanent
injunction and found that the IRS's levy against Oxford was appropriate. The
Company filed a notice of appeal on October 5, 1998, and is appealing the
judgment to the Fifth Circuit Court of Appeals. In the event the Company is
unsuccessful in its efforts to settle the alleged payroll tax deficiencies, the
Company does not have the financial resources to pay the amounts allegedly owing
and support its ongoing operations.
At June 30, 1998, the Company was also obligated under leases covering its
principal offices expiring December 31, 2003 and two leases for office equipment
expiring December 31, 1999 and 2000. The Company's lease obligations at June 30,
1998 provided for minimum annual payments of $422,000 for the year ending June
30, 1999 declining to $46,000 for the year ending June 30, 2003.
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While the Company experienced a number of nonrecurring and unusual expenses
in fiscal 1998 as described above, it nonetheless again incurred substantial
operating losses during fiscal 1998 as was true for fiscal 1997. As a result of
those losses and the deficit in the Company's working capital, the Company's
auditors have qualified their opinion regarding the Company's financial
statements to reflect doubt as to the Company's ability to continue as a going
concern. In order to ensure that the Company remains in operation, management is
working to reduce expenses, negotiate favorable terms with creditors, raise
additional capital or sell assets. In order to meet its working capital needs
and to satisfy obligations coming due on or before July 31, 1999, management
estimates that the Company will require approximately $9 million of additional
third party financing during fiscal 1999.
If the Company is unable to substantially improve operating results, secure
additional financing, negotiate more favorable payment terms with its creditors
or sell assets on favorable terms, the Company may be unable to continue its
present operations. The Company is presently negotiating with the IRS and the
former shareholders of PRC to secure more favorable terms with respect to
payment of amounts owed to such creditors. Absent an agreement in that regard,
the former shareholders of PRC may foreclose on their security interest and the
Company would lose its ownership interest in PRC and the IRS may levy against
assets of the Company to satisfy delinquent payroll tax obligations.
Year 2000 Issue
As the Company's operations rely on several internal computer systems and
third party vendor relationships, the Company believes that the Year 2000 issue
presents potentially significant operational issues if not properly addressed.
The Year 2000 issue generally describes the various problems that may result
from the failure of computer and other mechanical systems to properly process
certain dates and date sensitive information.
Costs to address Year 2000 issues. The Company has not incurred and does
not expect to incur significant costs related to Year 2000 issues other than the
time of internal personnel to complete the Company's Year 2000 plans.
Risks associated with Year 2000 issues. The Company believes that the risks
associated with Year 2000 issues would primarily affect the areas of payroll
processing, electronic funds transfers and the dissemination of benefits
appropriate planning and testing are: the inability to transmit direct deposit
payroll through banking systems to deposit funds into worksite employees' bank
accounts; the inability to collect funds electronically in payment of the
Company's service fees; the failure to properly calculate payroll information;
the untimely transmission of benefits enrollment or claims data to and from
benefit providers; and the inability to deliver payroll checks to employees due
to failure in transportation or courier systems. As a result, the Company's
plans, including the testing of its systems, vendor assessment and contingency
planning, will be focused in these areas.
Contingency Planning. The Company has previously developed a disaster
recovery plan to be used in the event of unexpected business interruptions. The
Company is currently developing specific contingency plans, to complement its
disaster recovery plan, for those processes that are considered crucial in
preventing an interruption of business operations as a result of Year 2000
issues.
24
<PAGE>
The Company's Year 2000 plans, as discussed above, represent an ongoing
process which will continue throughout 1999. Although the Company believes it is
taking the appropriate courses of action to ensure that material interruptions
in business operations do not occur as a result of the Year 2000 conversion,
there can be no assurances that the action discussed herein will have the
anticipated results or that the Company's financial condition or results of
operations will not be adversely affected as a result of Year 2000 issues. Among
the factors which might affect the success of the Company's Year 2000 plans are:
(1) the Company's ability to properly identify deficient systems; (2) the
ability of third parties to adequately address Year 2000 issues or to notify the
Company of potential deficiencies; (3) the Company's ability to adequately
address any such internal or external deficiencies; (4) the Company's ability to
complete its Year 2000 plans in a timely manner; and (5) unforeseen expenses
related to the Company's Year 2000 plans.
Seasonality, Inflation and Quarterly Fluctuations
Historically, the Company's earnings pattern has included losses in the
first calendar quarter (the Company's third quarter ended March 31), followed by
improved profitability in subsequent quarters throughout the calendar year. This
pattern is due to the effects of employment-related taxes which are based on
each employee's cumulative earnings up to specified wage levels, causing
employment-related taxes to be highest in the first quarter and then decline
over the course of the year. Since the Company's revenues related to an
individual employee are generally earned and collected at a relatively constant
rate throughout each year, payment of such employment-related tax obligations
has a substantial impact on the Company's financial condition and results of
operations during the first six months of each calendar year. Other factors that
affect direct costs could mitigate or enhance this trend.
Certain Factors Affecting Forward-Looking Statements
The statements contained in this Annual Report which are not historical
facts are forward looking statements that involve a number of risks and
uncertainties. In the normal course of business, the Company, in an effort to
help keep its stockholders and the public informed about the Company's
operations, may from time to time issue such forward looking statements, either
orally or in writing. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies, or projections involving anticipated revenues, earnings or
other aspects of operating results. All phases of the Company's operations are
subject to a number of uncertainties, risks and other influences. Therefore, the
actual results of the future events described in such forward looking statements
could differ materially from those stated in such forward looking statements.
Among the factors that could cause actual results to differ materially are: (1)
regulatory and tax developments including the ongoing audit of the Company's
401(k) Plan and related compliance issues, and possible adverse application of
various federal, state and local regulations; (2) changes in the Company's
direct costs and operating expenses including increases in health insurance
premiums, workers' compensation rates and state unemployment tax rates,
liabilities for employee and client actions or payroll-related claims, changes
in the costs of expanding into new markets, and failure to manage growth of the
Company's operations; (3) changes in the competitive environment in the PEO
industry or new market entrants; (4) inability of the Company to arrive at a
satisfactory resolution with respect to payroll tax obligations alleged by the
IRS to be owing by Oxford with respect to Rx Staffing; and (5) inability of the
Company to make payments due, or to arrive at a satisfactory resolution with
respect to amounts owed, relating to the Company's acquisition of PRC. Any of
these factors, or a combination of such factors, could materially affect the
results of the Company's operations and whether forward looking statements made
by the Company ultimately prove to be accurate.
25
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company, together with the
independent auditors' report thereon of Cheshier & Fuller, L.L.P., appears on
pages F-1 through F-25 of this report. See Index to Financial Statements on page
32.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Following the acquisition of Rx and SFCI by the Company, on August 7, 1996,
the Company's Board of Directors selected the firm of Thomas Leger & Co., L.L.P.
to serve as its new independent accountants and dismissed D. Brian Macbeth,
Certified Public Accountant, of Spring, Texas, which previously served as the
independent accountant for the Company.
D. Brian Macbeth's reports on the financial statements of the Company for
the fiscal years ended December 31, 1994 and 1995 contain no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. In connection with its audits for fiscal
years 1994 and 1995 and through August 7, 1996, there were no disagreements with
D. Brian Macbeth on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of D. Brian Macbeth, would have caused him to
make reference thereto in his reports on the financial statements for such
years.
The information described above regarding the Company's decision to dismiss
D. Brian Macbeth as its independent accountants and select Thomas Leger & Co.,
L.L.P. as its new independent accountants, along with a letter from D. Brian
Macbeth stating that he agrees with the above information regarding the
Company's change of accountants, was fully disclosed in a Form 8-K filed with
the SEC on August 7, 1996.
Thomas Leger & Co. L.L.P., declined to stand for re-election as the
independent accountants for the Company on October 13, 1997 and the board of
directors appointed Cheshier & Fuller, L.L.P., of Dallas, Texas, as the
Company's new independent accountants.
Thomas Leger & Co. L.L.P.'s report on the financial statements of the
Company for the period ended June 30, 1996 contains no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope, or accounting principles. In connection with its audit for the period
ended June 30, 1996 and through October 13, 1997, there were no disagreements
with Thomas Leger & Co. L.L.P. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Thomas Leger & Co. L.L.P.
would have caused them to make reference thereto in their report on the
financial statements for such period.
26
<PAGE>
The information described above regarding the decision of Thomas Leger &
Co. L.L.P. not to stand for re-election as the Company's independent accountants
and the Company's selection of Cheshier & Fuller, L.L.P. as its new independent
accountants, along with a letter from Thomas Leger & Co. L.L.P. stating that
they agree with the above information regarding the Company's change of
accountants, was fully disclosed in a Form 8-K filed with the SEC on October 13,
1997.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Identification of Directors, Executive Officers and Certain Significant
Employees
The following table sets forth certain information regarding the directors
and executive officers of the Company.
Name Age Position
Robert Cheney........ 57 Chairman, Chief Executive Officer and Director
Rick Tarell.......... 47 President, Chief Operating Officer and Director
Jerry Stovall........ 36 Executive Vice President, Chief Financial Officer
and Director
Terms of Office
The directors of the Company hold office until the next annual meeting of
stockholders of the Company or until their successors in office are elected and
duly qualified. All officers serve at the discretion of the Board of Directors
except as set forth in employment agreements.
Business Experience
Robert Cheney has served as Chairman of the Board and Chief Executive
Officer of the Company since January of 1994. Mr. Cheney also served as
President of the Company from January of 1994 until the acquisition of Rx in
September of 1996. Prior to joining the Company, Mr. Cheney served as a
consultant assisting troubled companies in securing debt and equity financing,
acquisitions, turnaround strategies and other managerial functions.
Rick Tarell has served as President, Chief Operating Officer and a Director
of the Company since the acquisition of Rx in September of 1996. Prior to
joining the Company, Mr. Tarell served as head of operations for the two
predecessor employee leasing companies of Rx.
Jerry Stovall has served as Executive Vice President, Chief Financial
Officer and a Director of the Company since the acquisition of Rx in September
of 1996. Prior to joining the Company, Mr. Stovall was self-employed as a
Certified Public Accountant.
Compliance With Section 16(a) of the Exchange Act
Not applicable.
27
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
No officers of the Company were paid compensation in excess of $100,000
during any of the three years ended June 30, 1998. While Mr. Cheney, the
Company's Chairman and Chief Executive Officer, received no salary or other
similar compensation from the Company during the three years ended June 30,
1998, a company controlled by Mr. Cheney is paid consulting fees and reimbursed
for expenses incurred in providing management and administrative services to the
Company. During the year ended June 30, 1998, the Company paid to such firm
consulting fees totaling $195,000 and reimbursed expenses totaling $125,000.
During the year ended June 30, 1997, the Company paid to such firm consulting
fees totaling $195,000 and reimbursed expenses totaling $36,000. See "Certain
Relationships and Related Transactions."
Director's Compensation
No compensation has been paid to any directors for service in such capacity
in the past and no such compensation is presently payable to directors. At such
time as the Board of Directors deems appropriate, the Company intends to adopt
an appropriate policy to compensate non-employee directors in order to attract
and retain the services of qualified non-employee directors.
Employment Agreements
The Company has no employment agreements with any of its officers or
employees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock
The following table is furnished as of December 10, 1998 to indicate
beneficial ownership of shares of the Company's Common Stock by (1) each
shareholder of the Company who is known by the Company to be a beneficial owner
of more than 5% of the Company's Common Stock, (2) each director and named
officer of the Company, individually, and (3) all officers and directors of the
Company as a group. The information set out in the following table was supplied
by such persons.
<TABLE>
Name and Address of Number of Shares
Beneficial Owner (1) Beneficially Owned(2) Percent
- --------------------- ----------------------- ---------
<S> <C> <C>
Jerry Stovall (5).................................... 2,164,650 (3) 18.8%
Rick Tarell (5)...................................... 2,164,650 (4) 18.8%
Atlas Overseas Investments Limited (6)............... 750,000 5.9%
Overseas Limited (7)................................. 750,000 5.9%
Penguin Investments Limited (6)...................... 700,000 5.9%
All officers and directors as a group (3 persons).... 4,329,300 (8) 34.2%
</TABLE>
28
<PAGE>
- ------------------
(1) Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to the shares shown opposite the
name of such person or group.
(2) Includes shares of Common Stock not outstanding, but which are subject to
options and warrants exercisable within 60 days of the date of the
information set forth in this table, which are deemed to be outstanding for
the purpose of computing the shares held and percentage of outstanding
Common Stock with respect to the holder of such options. Such shares are
not, however, deemed to be outstanding for the purpose of computing the
percentage of any other person.
(3) Includes 1,164,650 shares of common stock issuable upon exercise of
warrants held by Mr. Stovall.
(4) Includes 1,164,650 shares of common stock issuable upon exercise of
warrants held by Mr. Tarrell.
(5) Address is 4245 N. Central Expressway, Suite 300, Dallas, Texas 75205.
(6) Address is P. O. Box N-10144, Bitco Building East, Nassau, Bahamas.
(7) Address is 22 Markham Street, London, England SW3
(8) Includes 2,329,300 warrants held by officers and directors.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since 1994, TDF, Ltd. ("TDF"), a company controlled by the Company's
Chairman, has provided management and administrative services to the Company
pursuant to a consulting agreement. The consulting agreement provides for the
payment of monthly consulting fees and reimbursement of out-of-pocket expenses.
The monthly consulting fee accrued at $17,000 per month through December 31,
1996 at which time the consulting fee was reduced to $15,000 per month. The
consulting fee was increased to$17,500 on July 1, 1997.
Through June 30, 1996, the Company had accrued and unpaid consulting fees
and reimbursable expenses due to TDF totaling $685,630. During fiscal 1997, TDF
agreed to convert the amount receivable from the Company at June 30, 1996 into
warrants exercisable through August 31, 1998 to purchase 1,290,719 shares of
common stock of the Company at $0.5312 per share. The warrants issued to TDF
expired on August 31, 1998.
During fiscal 1998, the Company paid consulting fees to TDF totaling
$195,000 and reimbursed expenses totaling $125,000. During fiscal 1998, the
Company also advanced funds to TDF on an unsecured non-interest bearing basis.
At June 30, 1998, the total amount of advances owed by TDF to the Company was
$124,000. As of December 1998, all amounts advanced to TDF by the Company had
been repaid in full through offsets against fees and expenses payable to TDF by
the Company and the Company owed approximately $30,000 to TDF for unpaid fees
and expenses.
All of the above transactions are believed by management to be on terms at
least as favorable to the Company as may have been obtained from unaffiliated
third parties. The Company has no present policy governing related party
transactions but intends to implement a policy such that all future and ongoing
transactions between the Company and its directors, officers, principal
stockholders or affiliates will be on terms no less favorable to the Company
than may be obtained from unaffiliated third parties, and any such transactions
will be approved by a majority of disinterested directors of the Company.
29
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------- ------------------------
2.1 Share Purchase Agreement dated September 1, 1997 between Oxford
Capital and the Shareholders of PRC Enterprises, Inc. (1)
2.2 Exchange Agreement between Oxford Capital and Rx Staffing, Inc. (2)
2.3 Exchange Agreement between Oxford Capital and Safety and Fatigue
Consultants International, Inc. (2)
2.4 Exchange Agreement with the Shareholder of Crest Outsourcing, Inc. (7)
2.5 First Amendment to Exchange Agreement re: Crest Outsourcing, Inc. (8)
3.1 Articles of Incorporation (5)
3.2 Bylaws (5)
4.1 Certificate of Designations re: Series A Convertible Redeemable
Preferred Stock (8)
4.2 Common Stock Purchase Warrant re: Crest (8)
4.3 Common Stock Conversion Warrant (8)
9.1 Voting Trust Agreement re: PRC Enterprises (1)
10.1 Promissory Note re: PRC Enterprises acquisition (1)
10.2 Consulting Services Agreement with TDF, Ltd. (5)
10.3 Management Agreement re: United Staffing Corporation (6)
10.4 Promissory Note to shareholders of Crest (8)
16.1 Letter from D. Brian Macbeth re: change of accountants (3)
16.2 Letter from Thomas Leger & Co. L.L.P. re: change of accountants (4)
21.1 Subsidiaries (5)
27.1* Financial Data Schedules
- ----------------------
* Filed herewith
(1) Incorporated by reference to the Current Report on Form 8-K dated September
2, 1997.
(2) Incorporated by reference to the Current Report on Form 8-K dated October
4, 1996.
(3) Incorporated by reference to the Current Report on Form 8-K dated August 7,
1996.
(4) Incorporated by reference to the Current Report on Form 8-K dated October
13, 1997.
(5) Incorporated by reference to the Annual Report on Form 10-KSB for the year
ended June 30, 1997.
(6) Incorporated by reference to the Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1998.
(7) Incorporated by reference to the Current Report on Form 8-K dated February
21, 1997.
(8) Incorporated by reference to the Current Report on Form 8-K dated October
15, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OXFORD CAPITAL CORP.
By: /s/ Robert Cheney
-------------------------------------
Robert Cheney
Chairman and Chief Executive Officer
Dated: January 7, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
----------- ------- ------
/s/ Robert Cheney Chairman of the Board, Chief January 7, 1999
- ------------------- Executive Officer (Principal
Robert Cheney Executive Officer) and Director
/s/ Rick Tarell President, Chief Operating January 7, 1999
- ------------------- Officer and Director
Rick Tarell
/s/ Jerry Stovall Executive Vice President, January 7, 1999
- ------------------- Chief Financial Officer (Principal
Jerry Stovall Accounting and Financial Officer)
and Director
31
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
------
Report of Independent Auditors........................................ F-1
Consolidated Balance Sheets........................................... F-2
Consolidated Statements of Income..................................... F-4
Consolidated Statements of Changes in Stockholders' Equity............ F-6
Consolidated Statements of Cash Flows................................. F-7
Notes to Consolidated Financial Statements............................ F-9
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Oxford Capital Corp.
We have audited the accompanying consolidated balance sheet of Oxford Capital
Corp. and Subsidiaries as of June 30, 1998, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the years
ended June 30, 1998 and 1997. These consolidated financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these consolidated 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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Oxford Capital Corp.
and Subsidiaries as of June 30, 1998 and the results of their operations and
their cash flows for the years ended June 30, 1998 and 1997 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Companies will continue as a going concern. As discussed in Note 17 to
the consolidated financial statements, the Companies have suffered recurring
losses from operations and have a working capital deficiency, which raises
substantial doubt about their ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 17. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Cheshier & Fuller
-------------------------
CHESHIER & FULLER, L.L.P.
Dallas, Texas
November 10, 1998
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1998
ASSETS
-------
Current assets
Cash and cash equivalents $ 47,488
Accrued payroll receivable 2,313,668
Accounts receivable - clients, net of allowance for
doubtful accounts of $9,693 610,476
Prepaid expenses 64,194
Net assets of discontinued operations and assets
held for disposition 32,325
---------
Total current assets 3,068,151
Furniture and equipment, net of accumulated
depreciation of $345,829 427,119
Other assets
Goodwill, net of accumulated amortization of
$983,015 5,122,589
Covenant not to compete, net of accumulated
amortization of $50,000 31,991
Receivable from related party 124,388
---------
TOTAL ASSETS $8,774,238
=========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1998
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities
Bank overdraft $ 201,497
Accrued payroll payable 2,246,288
Accounts payable - trade 232,099
Accrued expenses 1,867,419
Payroll taxes payable 4,922,187
Payable to related parties 733,311
Current portion of capital lease obligation 5,150
Current portion of other long-term obligation 23,215
Notes payable 4,696,836
----------
Total current liabilities 14,928,002
Long-term debts:
Capital lease obligation 12,343
Other obligation 463,739
----------
Total liabilities 15,404,084
----------
Preferred stock, par value $.001, 1,000,000 shares
authorized, none issued -0-
Common stock, par value $.001, 50,000,000 shares
authorized, 10,334,668 shares issued and outstanding 10,335
Additional paid-in capital 1,393,204
Retained deficit (8,033,385)
----------
Total stockholders' deficit (6,629,846)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 8,774,238
==========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended June 30, 1998 and 1997
1998 1997
------ ------
Management fees $ 569,167 $ --
Employee leasing revenue 81,937,381 18,861,045
---------- -----------
82,506,548 18,861,045
Cost of sales 78,146,881 17,751,385
---------- -----------
Gross profit 4,359,667 1,109,660
General and administrative 4,726,014 1,652,220
Selling expenses 519,170 397,834
---------- -----------
(885,517) (940,394)
Impairment of long-lived assets -- 881,385
Amortization 715,257 154,177
Depreciation 139,766 28,216
IRS penalties and interest 634,145 499,540
Other income (43,554) (175)
Interest expense 425,999 83,313
---------- ----------
(2,757,130) (2,586,850)
Income tax expense -- --
---------- ----------
Net loss from continuing operations (2,757,130) (2,586,850)
Loss from discontinued operations (137,822) (1,034,888)
---------- ----------
Net loss $(2,894,952) $(3,621,738)
========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended June 30, 1998 and 1997
1998 1997
Weighted average number of
shares outstanding 16,222,197 32,882,689
========== ==========
Loss per share:
Loss from continuing operations $ (0.17) $ (0.08)
========== ==========
Net loss $ (0.18) $ (0.11)
========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Deficit
For the Years Ended June 30, 1998 and 1997
<TABLE>
Additional
Common Paid-In Retained
Shares Stock Capital Deficit Total
-------- -------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1996 5,155,392 $ 5,155 $ 449,753 $(1,516,695) $(1,061,787)
Issuance of stock in exchange for 100%
of equity of SFCI 23,293,005 23,293 (23,293) -0-
Issuance of stock in exchange for 100%
of equity of Rx Staffing 4,108,601 4,109 (4,109) -0-
Capital contributed 1,000 1,000
Conversion of loan payable to stock 357,286 357 189,522 189,879
Issuance of warrants to acquire common
stock in exchange for accounts payable 757,752 757,752
Issuance of stock as consideration for
making a short-term loan to the Companies 150,000 150 (150) -0-
Net loss (3,621,738) (3,621,738)
----------- ----------- ---------- ---------- ----------
Balance, June 30, 1997 33,064,284 33,064 1,370,475 (5,138,433) (3,734,894)
Return of shares with regard to the
purchase of Rx Staffing and SFCI (22,729,616) (22,729) 22,729 -0-
Net loss (2,894,952) (2,894,952)
------------ ------------ ---------- --------- ----------
Balance, June 30, 1998 10,334,668 $ 10,335 $ 1,393,204 $(8,033,385) $(6,629,846)
============ ============ ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1998 and 1997
<TABLE>
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,894,952) $(3,621,738)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 855,023 182,393
Impairment loss -- 881,385
(Increase) decrease in:
Accrued payroll receivable (1,897,808) (67,732)
Accounts receivable (469,266) (74,376)
Accounts receivable - related party (32,964) (46,284)
Inventory and prepaid expenses 3,201 (67,396)
Net assets of discontinued operations (32,325) --
Other assets 337 (337)
Increase (decrease) in:
Accrued payroll payable 1,959,232 49,681
Accounts payable - trade 141,350 (65,907)
Payroll taxes payable 884,586 3,868,048
Payable to related parties 733,311 -0-
Accrued expenses 692,502 82,680
---------- ----------
Net cash provided by (used in) operating activities (57,773) 1,120,417
---------- ----------
Cash flows from investing activities
Purchase of deferred acquisition costs -- (81,991)
Increase in accounts receivable - Crest -- (45,140)
Purchase of covenants not to compete -- (100,687)
Purchase of furniture and equipment (104,596) (186,491)
---------- -----------
Net cash used in investing activities (104,596) (414,309)
---------- -----------
Cash flows from financing activities
Increase (decrease) in bank overdraft 41,854 (223,955)
Proceeds from issuance of promissory note -- 150,000
Reduction of debt (269,407) (200,104)
Contributed capital -- 1,000
---------- -----------
Net cash provided by (used in) financing activities (227,553) (273,059)
---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1998 and 1997
<TABLE>
1998 1997
------ ------
<S> <C> <C>
Net (decrease) increase in cash and cash equivalents (389,922) 433,049
Cash and cash equivalents balance
at beginning of period 437,410 4,361
--------- ----------
Cash and cash equivalents balance
at end of period $ 47,488 $ 437,410
========= ==========
Supplemental disclosures of cash flow information
Interest paid $ 55,523 $ 88,580
========= ==========
Income taxes paid $ -- $ --
========= ==========
Non cash investing and financing activities
Debentures payable converted to shares
of common stock $ -- $ 169,789
========= ==========
Accounts payable converted to warrants to
acquire common stock $ -- $ 757,752
========= ==========
Purchase of goodwill by issuance
of long-term debt $ -- $ 512,650
========= ==========
Purchase of goodwill by assumption
of debt $ 5,787,846 $ --
========= ==========
Purchase of furniture and equipment
by assumption of debt $ 282,996 $ --
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Nature of Business and Significant Accounting Policies
------------------------------------------------------
Organization
Oxford Capital Corp. (Oxford) was organized under the laws of Nevada
in May, 1985. From inception until 1993, Oxford was not engaged in an
active trade or business. From 1993 through September, 1996, Oxford
was engaged in efforts to identify and acquire or merge with an
operating business. During October, 1996 Oxford acquired Rx Staffing
(Rx) and Safety and Fatigue Consultants International, Inc. (SFCI). In
September, October and December, 1997, Oxford acquired PRC
Enterprises, Inc. (PRC), Crest Outsourcing, Inc. (Crest) and Webster
Leasing, Inc. (Webster), respectively. Rx, SFCI, PRC, Crest, and
Webster are wholly-owned subsidiaries of Oxford and all of these
entities will collectively be referred to as "the Companies".
Operations
Rx was organized during December, 1995, and is engaged in providing
employee leasing services primarily in the state of Texas. SFCI was
organized during March, 1996, and is engaged in providing consultation
services and training materials on safety and fatigue of truck
drivers. PRC and Webster provide employee-leasing services primarily
in the state of Texas. Crest provides employee-leasing services
primarily in New Mexico and California.
The results of marketing and sales efforts of SFCI have not met
expectations and, accordingly, in an effort to reduce operating costs
and overhead, management discontinued operations of that subsidiary
effective December 31, 1997.
Consolidation Policy
The acquisitions of Rx and SFCI were accounted for as reverse
acquisitions. As such, the activities of Rx and SFCI were
retroactively presented from their inceptions. The acquisitions of
PRC, Crest, and Webster were accounted for as purchases. All
intercompany profits and transactions have been eliminated in
consolidation.
Financial Presentation
The Companies' revenues include amounts billed and accrued for
unbilled revenue to clients for gross salaries and wages, related
employment taxes, and health care and workers' compensation coverage
of work site employees. The Companies are obligated to pay the gross
salaries and wages, related employment
F-9
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Nature of Business and Significant Accounting Policies, continued
-----------------------------------------------------------------
Financial Presentation
taxes as well as health care and workers' compensation costs of their
work site employees whether or not the Companies' clients pay the
Companies on a timely basis, or at all. The Companies believe that
including such amounts as revenues appropriately reflects the
responsibility, which the Companies bear for such amounts and is
consistent with industry practice. In addition, the Companies'
revenues are subject to fluctuations as the result of (i) changes in
the volume of work site employees serviced by the Companies, (ii)
changes in the wage base and employment tax rates of work site
employees, and (iii) changes in the mark up charged by the Companies
for these services.
The Companies' primary direct costs are (i) salaries, wages and the
employer's portion of social security taxes, medicare premiums and
federal unemployment taxes, (ii) health care and workers' compensation
costs, and (iii) state unemployment taxes and other direct costs. The
Companies can significantly impact its gross profit margin by actively
managing the direct costs described in items (ii) and (iii). The
Companies' health care cost consists of medical insurance premiums,
payment of and reserves for claims subject to deductibles and the
costs of vision care, disability, employee assistance and other
similar benefit plans. The Companies' health care benefit plans
consist of a mixture of fully insured, minimum premium arrangements,
partially self-insured plans and guaranteed cost programs. Under the
minimum premium arrangements and partially self-insured plans,
liabilities for health care claims are recorded based on the
Companies' health care loss history.
Workers' compensation costs include medical costs and indemnity
payments for lost wages, administrative costs and insurance premiums
related to the Companies' workers' compensation coverage. Workers'
compensation costs for fiscal 1998 and 1997 also include reserve for
claims, which have been incurred but not reported, and for anticipated
losses.
The Companies' primary operating expenses are administrative
personnel, other general and administrative expenses and sales and
marketing expenses. Administrative personnel expenses include
compensation, fringe benefits and other personnel expenses related to
internal administrative employees. Other general and administrative
expenses include rent, office supplies and expenses, legal and
accounting fees, insurance and other operation expenses. Sales and
marketing expenses include commissions, marketing and advertising
expenses which are expensed when incurred.
F-10
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Nature of Business and Significant Accounting Policies, continued
-----------------------------------------------------------------
Goodwill
The cost of goodwill is generally being expensed using the
straight-line method over ten years. If, in the opinion of management,
the unamortized cost of goodwill exceeds the value of the business
purchased, an impairment loss is reflected.
Covenant Not To Compete
The cost of covenants not to compete is amortized using the
straight-line method over the life of the covenant. If, in the opinion
of management, the unamortized cost of a covenant exceeds the value of
that covenant, an impairment loss is reflected.
Furniture and Equipment
Furniture and equipment are recorded at cost. Maintenance and repairs
are charged to expense as incurred. When assets are sold or retired,
the related cost and any accumulated depreciation are removed from the
accounts and any gain or loss is included in income. Significant
additions and betterments are capitalized. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets of five years.
Allowance for Bad Debts
The Companies provide an allowance for uncollectible accounts based
upon prior experience and management's assessment of the
collectibility of existing specific accounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-11
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Nature of Business and Significant Accounting Policies, continued
-----------------------------------------------------------------
Income Taxes
Deferred tax assets and deferred tax liabilities, if any, are
recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and their
tax bases as well as the effect of net operating loss carryforwards.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effect of changes in tax
laws and rates on the date of enactment.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Companies consider all cash
accounts which are not subject to withdrawal restrictions or penalties
and interest bearing accounts with original maturities of 90 days or
less to be cash or cash equivalents.
Fair Value of Financial Instruments
The carrying values of financial instruments reported on the
Companies' balance sheet approximate fair value. Fair value is
estimated using published market values for similar types of
instruments.
Loss Per Share
Loss per share is calculated by dividing net loss by the average
shares of common stock outstanding during each period presented.
Outstanding warrants and convertible preferred stock were not a factor
in computing weighted average shares outstanding as their inclusion
would be antidilutive.
Revenue Recognition
The Companies account for revenue and the related direct payroll costs
using the accrual method. Under the accrual method, revenue is
recognized as accrued sales and the related direct payroll costs are
accrued as liabilities during the period in which wages are earned by
the worksite employees.
F-12
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 2 - Purchase of Subsidiaries
------------------------
Acquisitions of RX and SFCI
Effective January 1, 1996, Rx entered into an agreement with Creative
Employment Concepts, Inc. ("CECI") to acquire all the employee leasing
contracts and furniture and equipment in the possession of CECI as of
that date. Effective January 1, 1996, Rx also entered into an
agreement with a stockholder of CECI, whereby, for $600,000 the
stockholder agreed not to compete with Rx for a period of five years.
The acquisition resulted in the following costs:
Furniture and equipment $ 21,000
Goodwill 512,650
Covenant not to compete 600,000
----------
Total cost $ 1,133,650
==========
Because of a lack of profitability of Rx, the Companies reflected an
impairment loss of $881,385 during the fiscal year ended June 30,
1997. The impairment loss represents the difference in the unamortized
cost of goodwill and the covenant not to compete associated with the
acquisition of Rx and the estimated fair market value of Rx.
Management determined the fair market value of Rx based on the
discounted present value of expected cash flow from the operation of
Rx.
Oxford issued 4,108,601 shares of common stock and warrants to acquire
465,860 shares of common stock in exchange for all of the issued and
outstanding common shares of Rx in October 1996. The transaction was
accounted for as a reverse acquisition.
Oxford also issued 23,293,005 shares of common stock and warrants to
acquire 1,863,440 shares of common stock in exchange for all of the
issued and outstanding common shares of SFCI in October 1996. The
transaction was accounted for as a reverse acquisition.
During the fiscal year ended June 30, 1998, the parties from whom Rx
and SFCI were acquired tendered 22,729,616 shares of Oxford common
stock to the Companies' treasury in order to reduce the number of
shares outstanding. The Companies agreed to reduce the exercise price
of the warrants to acquire 2,329,300 common shares of Oxford held by
the parties from $2 and $3 per share to $1 and $2 per share,
respectively. The expiration date of the warrants was also extended
from August 31, 1998 to August 31, 1999.
F-13
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 2 - Purchase of Subsidiaries, continued
------------------------------------
Acquisition of PRC
Oxford acquired 100% of the issued and outstanding common shares of
PRC in exchange for a note of $4,500,000 in September 1997. The
transaction was accounted for as a purchase.
Upon the acquisition of PRC, the Companies reflected the following
costs:
Goodwill $4,461,103
Fair market value of other assets less
liabilities assumed 38,897
----------
Total cost $4,500,000
==========
Acquisition of Crest
Oxford acquired 100% of the issued and outstanding common shares of
Crest in October 1997 under an agreement whereby Oxford would issue
100,000 shares of Series A $10 Redeemable Convertible Preferred Stock,
warrants to purchase 250,000 common shares of Oxford and a $250,000
note. The transaction was accounted for as a purchase.
The Companies have not delivered the 100,000 newly issued shares of
Series A $10 Redeemable Convertible Preferred Stock and warrants to
purchase 250,000 common shares which were given in exchange for Crest.
Because of lack of marketability of Crest and the preferred shares and
warrants, no value has been reflected relative to these shares and
warrants. The shares are not shown as issued or outstanding at June
30, 1998.
The preferred shares shall be convertible at the option of the holder,
based on the face value of the preferred stock of $10 per share, into
fully paid and non-assessable common stock of Oxford and warrants to
purchase common stock of Oxford at the following conversion prices:
1. 25,000 shares of preferred stock convertible into common stock
and warrants to purchase 25,000 common shares at $1.00 per share.
2. 25,000 shares of preferred stock convertible into common stock
and warrants to purchase 25,000 common shares at $1.50 per share.
F-14
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 2 - Purchase of Subsidiaries, continued
-----------------------------------
3. All remaining preferred stock convertible into common stock and
warrants to purchase 50,000 common shares at a price equal to 80%
of the average price of the common shares.
Upon sale of the business of Crest to a third party, the holder of the
preferred shares shall have the option to convert the preferred
shares, as set forth above, or to have Oxford redeem the unconverted
preferred shares at $10 per share. On the third anniversary of the
issuance of the preferred shares, all preferred shares remaining
outstanding and unconverted shall, at Oxford's option, be redeemed at
$10 per share or converted into common stock at the rate of twenty
shares of common stock for each preferred share. Upon liquidation, the
holders of the preferred stock shall receive liquidation preference to
the common stockholders of $10 per share plus cumulative dividends.
Dividends on the preferred stock accumulate as follows: (1) $0.20 per
share during the first year outstanding, (2) $0.40 per share during
the second year outstanding, (3) $0.60 per share during the third year
outstanding, and (4) nothing each year after being outstanding for
three years. The preferred stockholders have voting rights equal to
common stockholders at the rate of one preferred share equaling the
vote of ten shares of common shares.
The warrants to purchase 250,000 shares of common stock are
exercisable at $1.00 per share for a period of three years.
Upon the acquisition of Crest, the Companies reflected the following
costs:
Goodwill $1,326,743
Excess of liabilities assumed over fair
market of other assets acquired (1,076,743)
---------
Total cost $ 250,000
=========
Acquisition of Webster
Oxford acquired 100% of the issued and outstanding common shares of
Webster in December 1997 under an agreement whereby Oxford would issue
772,393 shares of its common stock and pay $81,992 in cash for a
covenant not to compete. The transaction was accounted for as a
purchase.
F-15
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 2 - Purchase of Subsidiaries, continued
-----------------------------------
The Companies have not delivered the 772,393 shares of Oxford common
stock which was given in exchange for Webster nor has it received the
outstanding Webster shares. Because of a lack of marketability of
Webster and the 772,393 shares, no value has been reflected relative
to these shares. The 772,393 shares are not shown as issued or
outstanding at June 30, 1998.
Upon the acquisition of Webster, the Companies reflected the following
costs:
Covenant not to compete $ 81,991
---------
Total cost $ 81,991
========
Summary
The aggregate costs of goodwill and covenants not to compete were
accounted for as follows:
<TABLE>
Covenant Not to
Goodwill Compete Total
---------- ---------------- -------
<S> <C> <C> <C>
Balance as of July 1, 1996 $ 495,562 $ 540,000 $1,035,562
Amortization (34,177) (120,000) (154,177)
Impairment of long lived assets (461,385) (420,000) (881,385)
--------- --------- ----------
Balance as of June 30, 1997 -0- -0- -0-
Acquisitions 5,787,846 81,991 5,869,837
Amortization (665,257) (50,000) (715,257)
---------- --------- ----------
Balance as of June 30, 1998 $5,122,589 $ 31,991 $5,154,580
========== ========= ==========
</TABLE>
Because the transactions to acquire PRC, Webster, and Crest were
accounted for as purchases, the operations and financial position of
each of the subsidiaries were not accounted for in the consolidated
financial statements of the Companies until the acquisition date of
each of the respective subsidiaries. The following unaudited proforma
summary presents the consolidated results of operations of the
Companies as if the business of PRC, Webster, and Crest had occurred
on the first day of each fiscal year:
F-16
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 2 - Purchase of Subsidiaries, continued
-----------------------------------
Summary
<TABLE>
1998 1997
------ ------
<S> <C> <C>
Revenue $100,578,135 $ 94,542,433
=========== ===========
Net loss from continuing operations $ (3,050,389) $ (3,599,598)
Loss from discontinued operations (137,822) (1,034,888)
----------- ------------
Net loss $ (3,188,211) $ (4,634,486)
=========== ============
Loss from continuing operations
per share $ (0.19) $ (0.11)
=========== ============
Net loss per share $ (0.20) $ (0.14)
=========== ============
</TABLE>
Note 3 - Discontinued Operations
-----------------------
As stated in Note 1, management discontinued the operations of SFCI
during the fiscal year ended June 30, 1998. In accordance with
generally accepted accounting principles, the financial results for
the safety and fatigue segment are reported as "Discontinued
Operations" and the Companies' financial results of prior periods were
restated. Condensed results of the discontinued operations were as
follows:
1998 1997
------ ------
Net sales $ 53,313 $ 52,675
======== =========
Loss before income tax expense $ (137,822) $(1,034,888)
Income tax expense -- --
-------- ---------
Net loss $ (137,822) $(1,034,888)
======== =========
F-17
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 - Management Fees
---------------
During fiscal year ended June 30, 1998, the Companies entered into an
agreement to acquire employee leasing firms with operations in Oregon,
Montana and Utah. These acquisitions were not completed, but the
Companies were retained to provide certain insurance and management
services for the employee leasing firms. As a result of this
agreement, $379,400 was earned as a management fee during the fiscal
year ended June 30, 1998.
Prior to the purchase of Crest in October, 1997, the Companies were
retained to provide certain insurance and management services for
Crest. As a result, $189,767 was earned as a management fee during the
fiscal year ended June 30, 1998.
Note 5 - Outstanding Warrants
--------------------
As of June 30, 1998, outstanding warrants to purchase common stock of
Oxford were as follows:
<TABLE>
Number of Share
Common Exercise
Origin Shares Price Expiration Date
-------- ----------- ---------- -----------------
<S> <C> <C> <C>
Acquisition of Crest 250,000 $1 October 15, 2000
Merger with 232,930 $1 August 31, 1999
Rx Staffing 232,930 $2 August 31, 1999
Merger with 931,720 $1 August 31, 1999
SFCI 931,720 $2 August 31, 1999
Note payable extension and
conversion to equity 75,000 $0.5312 August 31, 1998
Accounts payable
conversion to equity 1,426,490 $0.5312 August 31, 1998
Issued in exchange for
short-term loan 150,000 $1.50 September 24, 1998
</TABLE>
F-18
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 6 - Debt Converted to Equity
------------------------
In 1994, by means of a Private Placement, Oxford sold 3 of their units
for $50,000 per unit, or an aggregate of $150,000. Each unit consisted
of a $50,000 12% note, due April 1, 1995, 50,000 shares of the common
stock, and 25,000 warrants to purchase a like number of shares of
common stock at $2.00 per share, exercisable at any time up to two
years from the date of issue. The repayment of the notes, including
accrued interest, had been extended to December 31, 1995. In
consideration for the extension, the note holders received 36,000
shares of the Oxford's common stock. During the year ended June 30,
1997, the note holders converted their notes payable, including
accrued interest, into 357,286 shares of Oxford's common stock. At the
same time, the existing warrants were canceled and new warrants to
purchase 75,000 shares were issued.
During the year ended June 30, 1997, Oxford issued warrants to acquire
1,426,490 shares of common stock in exchange for unsecured,
non-interest bearing debt in the amount of $757,752.
Note 7 - Related Parties
---------------
Of the $757,752 in debt converted to equity as explained in Note 6,
$685,630 was debt owed to a corporation owned by the chairman of the
board of directors.
General and administrative expenses included, the following amounts
relative to amounts paid the above corporation:
Year
Amount Ended Description
$194,525 June 30, 1997 Management & Administrative Services
$ 36,376 June 30, 1997 Reimbursed Expenses
$195,000 June 30, 1998 Management & Administrative Services
$124,840 June 30, 1998 Reimbursed Expenses
As of June 30, 1998, the Companies have also advanced the above
corporation $124,338 on a non-interest bearing, unsecured loan.
During March, 1998, the Companies entered into an agreement with an
affiliate whereby the affiliate is to provide health care and workers'
compensation
F-19
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 7 - Related Parties, continued
--------------------------
payment services, risk management and loss control services, and
administrative services. Under that agreement, the Companies have
reflected additional cost of sales in the amount of $1,764,624 of
which $644,856 was reflected as payable to related parties as of June
30, 1998.
The Companies have an unsecured note payable due to an officer of PRC
in the amount of $88,455 at June 30, 1998. The note was renewed on
December 31, 1997, is due December 31, 1998, and has a stated interest
rate of 8.25% per annum.
Note 8- Employee Benefits
----------------
PRC and Crest have defined contribution plans for all of their
eligible employees. All eligible employees are permitted to defer
compensation up to certain maximums, which are subject to limitations
imposed by the Internal Revenue Code. PRC and Crest are not required
to make any contributions and did not make any contributions to the
plans for the fiscal period ended June 30, 1998.
Note 9 - Long-Term Debt Obligation
-------------------------
At June 30, 1998, the Companies were obligated on an unsecured,
non-interest bearing obligation payable with regard to the acquisition
by Rx from CECI as explained in Note 2. The obligation is payable
$6,700 monthly until $1,068,000 is paid. The non-interest obligation
was discounted at 12% per annum and reflected in the initial amount of
$533,650.
The following are maturities of the obligation at June 30, 1996, using
the 12% per annum discount.
Year Ending
June 30,
------------
1999 $ 23,215
2000 26,159
2001 29,477
2002 33,215
2003 37,427
Thereafter 337,461
---------
$ 486,954
=========
F-20
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 10 - Notes Payable
-------------
Notes payable as of June 30, 1998, consisted of the following:
Note payable to former owners of PRC
The note, which is collateralized with
PRC stock and bears interest of 8% per
annum, is due as follows: $4,500,000
(i) Principal and interest are due annually in an amount
equal to the greater of 30% of the gross profits
of PRC, as defined, or $450,000.
(ii) Any unpaid principal and interest is due three
years from the date of execution.
The holder of the PRC note is entitled to convert any unpaid
principal at the then market price of the Oxford stock in
minimum amounts of $250,000 no more frequently than once
during any one six-month period.
After paying all accrued interest and principal except
$1,000,000, the outstanding $1,000,000 is convertible to
shares of Oxford at the then market price at the option of
the Companies.
100% of the outstanding stock of PRC is held as
collateral by the noteholder.
As of November 15, 1998, the Companies are in default
on this note.
Note payable to the former owners of Crest
Outsourcing, Inc. 137,112
Note bears interest of 6% per annum. Principal
is payable in monthly installments of $5,000.
As of November 15, 1998, the Companies
may have been in default on loan covenants.
Other notes payable 59,724
---------
$4,696,836
=========
F-21
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 11 - Operating Lease Commitments
---------------------------
As of June 30, 1998, the Companies are obligated under three leases
for office space which expire at various periods through December 31,
2002, and leases for office equipment which expire at various periods
through December 31, 2000. Under the leases the Companies are
obligated to pay the following minimum annual rents:
Year Ending
June 30,
-------------
1999 $ 422,153
2000 342,263
2001 381,065
2002 220,004
2003 45,569
---------
$1,411,054
Total rent and lease expenses were $300,435 and $180,532 for the years
ended June 30, 1998 and 1997, respectively.
Note 12 - Capital Lease Obligation
-------------------------
The Companies are obligated under one lease which was accounted for as
a capital lease. The lease, which terminates in 2001, currently
requires aggregate monthly payments of about $581, and includes
interest of approximately 12% per annum. Following is a schedule by
year of future minimum lease payments under the capital lease together
with the present value of the minimum lease payments as of June 30,
1998.
Year Ending
June 30,
-----------
1999 $ 6,972
2000 6,972
2001 6,972
------
Total minimum lease payments 20,916
Less amount representing interest 3,423
------
Present value of minimum lease payments 17,493
Less current portion 5,150
------
Non-current portion of capital lease obligation $ 12,343
======
F-22
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 12 - Capital Lease Obligation, continued
-----------------------------------
Assets recorded under capital leases and the accumulated amortization
thereon are set out below. The capitalization leases are included in
the caption "furniture and equipment" in the accompany balance sheet.
Capitalized lease amounts $ 17,494
Accumulated amortization ( 1,015)
---------
Net capitalized leases $ 16,479
=========
Note 13 - Concentration of Credit Risk
----------------------------
At times, cash deposits at banks exceeded federally insured limits.
Note 14 - Contingencies
-------------
CECI sold substantially all of its assets to the Companies in the
transaction explained in Note 2. A stockholder of CECI also entered
into a covenant not to compete agreement with the Companies as
explained in Note 2. At the time these agreements were executed, CECI
and the stockholder had significant payroll tax liabilities. There is
a risk that this transfer could be challenged by the Internal Revenue
Service. Management of the Companies believes that the consideration
given represents fair value for the assets and other consideration
received. No provision has been made in the financial statements for
this contingency.
Note 15 - Income Taxes
------------
Because of tax losses, the Companies did not pay income taxes for the
years ended June 30, 1998 and 1997.
Reconciliation of income tax computed by applying the expected
statutory rates to net loss is as follows:
1998 1997
------ ------
Benefit at expected statutory rates $1,129,031 $1,412,478
Fines and penalties (247,317) (194,820)
Nondeductible expenses (19,500) -0-
Write off of intangible assets 28,929 (343,740)
Bad debt differences 22,205 (25,985)
F-23
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 15 - Income Taxes, continued
-----------------------
Amortization differences (272,307) (31,200)
Depreciation differences -0- 10,725
Net operating loss carryforward (641,733) (819,314)
Other 692 (8,144)
-------- --------
Provision for income taxes $ -0- $ -0-
======== ========
The net deferred tax benefit and liabilities consist of the following
components as of June 30, 1998:
Net operating loss carryforward $1,920,149
Write off of intangible assets 330,811
Amortization of intangible assets 303,507
Other 6,979
---------
2,561,446
Valuation allowance (2,553,264)
---------
8,182
Depreciation (8,182)
---------
$ -0-
=========
As of June 30, 1998, the Companies had a tax loss of over $4,950,000
that will begin to expire in 2000. The realization of income tax
benefits from this loss is limited by certain sections of the Internal
Revenue Code.
Note 16 - Threatened and Pending Litigation
---------------------------------
Rx is in arrears on payroll taxes in excess of $4,000,000. In
February, 1998, the Internal Revenue Service ("IRS") levied bank
accounts of Oxford pursuant to a Notice of Levy which alleged that
Oxford was the "nominee, alter ego, agent and/or holder of a
beneficial interest of Rx Staffing Corporation." On February 25, 1998,
Oxford filed a lawsuit against the IRS for wrongful levy and requested
injunctive relief. The Court issued a temporary restraining order on
March 9, 1998, which was then superceded after hearing, by the Court's
denial of a temporary injunction on March 19, 1998. After a trial on
the merits on August 7, 1998, the Court denied Oxford a permanent
injunction and found that the levy was appropriate. Oxford filed a
Notice of Appeal on October 5, 1998, and has
F-24
<PAGE>
OXFORD CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 16 - Threatened and Pending Litigation
---------------------------------
requested that the transcript and statement of facts of the case be
sent to the Appellate Court. Oxford will then file its appellate brief
with the Fifth Circuit Court of Appeals claiming that the Trial Court
failed to properly apportion the burden of proof amongst the parties
and that the evidence was legally and factually insufficient to
support a judgment in favor of the IRS. While counsel feels there is a
possibility that Oxford will prevail in its appeal, it is impossible
to predict with any certainty.
The Companies are named defendants in a litigation brought by a
workers' compensation carrier. The claim is in the amount of more than
$1,900,000. While the likelihood of some loss is probable, legal
counsel has stated that the Companies have a good defense and offsets
to the amounts being sought by the carrier. Management's estimate of
any loss was accrued as of June 30, 1998.
In the normal course of business, there are various other outstanding
contingent liabilities associated with employee claims. Management has
reviewed pending and threatened litigation with legal counsel and
believes that those actions are without merit or that the ultimate
liability, if any, resulting from them will not materially affect the
Companies' financial position.
Note 17 - Liquidity
---------
The Companies incurred losses of $2,894,952 and $3,621,738 during the
years ended June 30, 1998 and 1997, respectively. As of June 30, 1998,
the Companies had a working capital deficit of $11,859,851 and deficit
stockholders' equity of $6,629,846. These factors raise substantial
doubt about the Companies' ability to continue as a going concern.
Management is working to reduce expenses, negotiate favorable terms
with creditors and to raise additional equity capital. There can be no
assurance that the Companies will be successful in its efforts to
alleviate its liquidity problems. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Note 18 - Subsequent Event
----------------
During November, 1998, the Companies were informed by the former
owners of PRC that it was their intent to foreclose on the $4,500,000
note payable to them explained in Note 10. Upon such foreclosure, the
Companies could lose ownership of PRC. The Companies are still in
negotiations relative to this matter.
F-25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 47,488
<SECURITIES> 0
<RECEIVABLES> 2,933,837
<ALLOWANCES> 9,693
<INVENTORY> 0
<CURRENT-ASSETS> 3,068,151
<PP&E> 772,948
<DEPRECIATION> 345,829
<TOTAL-ASSETS> 8,774,238
<CURRENT-LIABILITIES> 14,928,002
<BONDS> 0
0
0
<COMMON> 10,335
<OTHER-SE> (6,640,181)
<TOTAL-LIABILITY-AND-EQUITY> 8,774,238
<SALES> 81,937,381
<TOTAL-REVENUES> 82,506,548
<CGS> 78,146,881
<TOTAL-COSTS> 78,146,881
<OTHER-EXPENSES> 5,245,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 425,999
<INCOME-PRETAX> (2,757,130)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,757,130)
<DISCONTINUED> (137,822)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,894,952)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
