As filed with the Securities and Exchange Commission on August 13, 1999
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO SCHEDULE 13E-3
RULE 13e-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934)
WINSTON RESOURCES, INC.
SEYMOUR KUGLER
GREGG KUGLER
TODD KUGLER
ERIC KUGLER
1999 SY KAYE GRAT
(Name of Issuer)
WINSTON RESOURCES, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class of Securities)
975661109
(CUSIP Number of Class of Securities)
SEYMOUR KUGLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WINSTON RESOURCES, INC.
535 FIFTH AVENUE
NEW YORK, NEW YORK 10017
(212) 557-5000
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of Person(s) Filing Statement)
With a copy to:
JOEL A. KLARREICH, ESQ.
NEWMAN TANNENBAUM HELPERN
SYRACUSE & HIRSCHTRITT LLP
900 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 508-6700
This statement is filed in connection with (check the appropriate box):
a. |_| The filing of solicitation materials or an information statement subject
to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the Securities
Exchange Act of 1934.
b. |_| The filing of a registration statement under the Securities Act of 1933.
c. [x] A tender offer.
d. |_| None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: |x|
|_| Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
Amount Previously Paid: Filing Party:
Form or Registration No: Date Filed:
<PAGE>
INTRODUCTION
This Rule 13e-3 Transaction Statement on Schedule 13E-3 (the "Schedule
13E-3") is being filed by Winston Resources, Inc., a Delaware corporation (the
"Company") and Seymour Kugler, Gregg Kugler, Todd Kugler, Eric Kugler and
the 1999 Sy Kaye GRAT, pursuant to Section 13(e) of the Securities Exchange
Act of 1934, as amended, and Rule 13e-3 thereunder in connection with the tender
offer by the Company for all of its issued and outstanding shares of common
stock, $.01 par value per share (the "Shares"), at a price of $4.625 per Share,
net to the seller in cash, upon the terms and subject to the conditions set
forth in the Offer to Purchase dated August __, 1999 (the "Offer to
Purchase") and the related Letter of Transmittal (which, together with the Offer
to Purchase, constitute the "Offer"), copies of which are filed as Exhibits (d)
(1) and (d) (2) hereto respectively.
The following Cross-Reference Sheet prepared pursuant to General
Instruction F to Schedule 13E-3 shows the location in the Issuer Tender Offer
Statement on Schedule 13E-4 filed by the Company (the "Schedule 13E-4") with the
Securities and Exchange Commission on the date hereof of the information
required to be included in this Schedule 13E-3. The information set forth in
Schedule 13E-4, including all Exhibits thereto, is expressly incorporated herein
by reference as set forth in the Cross- Reference Sheet and the responses in
this Schedule 13E-3, and such responses are qualified in their entirety by
reference to the information contained in the Offer to Purchase and the annexes
thereto.
CROSS-REFERENCE SHEET
<TABLE>
<S> <C>
ITEM IN WHERE LOCATED
SCHEDULE 13E-3 IN SCHEDULE 13E-4
Item 1(a)............................................................................................... Item 1(a)
Item 1(b)............................................................................................... Item 1(b)
Item 1(c)............................................................................................... Item 1(c)
Item 1(d)...............................................................................................*
Item 1(e)...............................................................................................*
Item 1(f)...............................................................................................*
Item 2(a)...............................................................................................*
Item 2(b)...............................................................................................*
Item 2(c)...............................................................................................*
Item 2(d)...............................................................................................*
Item 2(e)...............................................................................................*
Item 2(f)...............................................................................................*
Item 2(g)...............................................................................................*
Item 3(a)...............................................................................................*
Item 3(b)...............................................................................................*
Item 4(a)...............................................................................................*
Item 4(b)...............................................................................................Item 5
Item 5..................................................................................................Item 3
Item 6(a)...............................................................................................Item 2(a)
Item 6(b)...............................................................................................*
Item 6(c)...............................................................................................Item2(b)
Item 6(d)...............................................................................................*
Item 7(a)...............................................................................................Item 3
Item 7(b)...............................................................................................*
2
<PAGE>
Item 7(c)...............................................................................................*
Item 7(d)...............................................................................................*
Item 8..................................................................................................*
Item 9..................................................................................................*
Item 10(a)..............................................................................................*
Item 10(b)..............................................................................................*
Item 11.................................................................................................Item 5
Item 12(a)..............................................................................................*
Item 12(b)..............................................................................................*
Item 13.................................................................................................*
Item 14.................................................................................................Item 7
Item 15(a)..............................................................................................*
Item 15(b)..............................................................................................Item 6
Item 16.................................................................................................*
Item 17.................................................................................................Item 9
</TABLE>
____________________
* The Item is located in Schedule 13E-3 only.
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION
(a)-(c) The response to Item 1(a)-(c) of Schedule 13E-4 is
incorporated herein by reference and the information set forth in the Offer to
Purchase under "The Tender Offer -- 6. Price Range of Shares; Dividends" is
incorporated herein.
(d) The information set forth in the Offer to Purchase under "The
Tender Offer -- 6. Price Range of Shares; Dividends" is incorporated herein by
reference.
(e) Not applicable.
(f) Not applicable.
ITEM 2. IDENTITY AND BACKGROUND
This statement is filed by the issuer of the equity securities that are the
subject of the Rule 13e-3 transaction. This statement also is filed by Seymour
Kugler, founder and Chairman of the issuer, Gregg Kugler and Todd Kugler, each
of whom is an officer and director of the issuer, Eric Kugler, who is an officer
of the issuer and the 1999 Sy Kaye GRAT, a trust of which Kugler family members
are beneficiaries. Gregg, Todd and Eric Kugler are sons of Seymour Kugler. The
response to Item 1(a) of the Schedule 13E-4 is incorporated herein by reference.
The information set forth in Schedule I to the Offer to Purchase is incorporated
herein by reference.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS
(a) Not applicable.
(b) The information set forth in the Offer to Purchase under "Special
Factors -- 1. Purpose and Background of the Offer; Certain Effects of the Offer;
Plans of the Company after the Offer" is incorporated herein by reference.
3
<PAGE>
ITEM 4. TERMS OF THE TRANSACTION
(a) The information set forth in the Offer to Purchase on the cover
page thereof and under "Introduction," "Special Factors -- 1. Purpose and
Background of the Offer; Certain Effects of the Offer; Plans of the Company
after the Offer," "The Tender Offer -- 1. Terms of the Offer; Expiration Date,"
"The Tender Offer -- 2. Acceptance for Payment and Payment for Shares," "The
Tender Offer -- 3. Procedures for Accepting the Offer and Tendering Shares," "
The Tender Offer -- 4. Withdrawal Rights, " " The Tender Offer -- 9. Dividends
and Distributions," " The Tender Offer -- 11. Certain Conditions of the Offer, "
" The Tender Offer -- 12. Certain Legal Matters and Regulatory Approvals" and
"The Tender Offer -- 14. Miscellaneous" is incorporated herein by reference.
(b) The response to Item 5 of the Schedule 13E-4 is incorporated
herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE
(a)-(g) The response to Item 3 of the Schedule 13E-4 is incorporated
herein by reference.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
(a) and (c) The response to Item 2 of the Schedule 13E-4 is
incorporated herein by reference.
(b) The information set forth in the Offer to Purchase in "Special
Factors -- 7. Fees and Expenses" and "The Tender Offer -- 13. Fees and Expenses"
is incorporated herein by reference.
(d) Not applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS
(a)-(d) The response to Item 3 of the Schedule 13E-4 is incorporated
herein by reference. The information set forth in the Offer to Purchase under
"Special Factors -- 4. Opinion of Houlihan Lokey Howard & Zukin Financial
Advisors, Inc." is incorporated herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION
(a)-(f) The information set forth in the Offer to Purchase under
"Introduction," "Special Factors -- 1. Purpose and Background of the Offer;
Certain Effects of the Offer; Plans of the Company after the Offer" and "Special
Factors -- 3. Recommendation of the Company's Board; Fairness of the Offer, "
and "Special Factors -- 4. Opinion of Houlihan Lokey Howard & Zukin Financial
Advisors, Inc." is incorporated herein by reference.
4
<PAGE>
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS
(a)-(c) The information set forth in the Offer to Purchase under
"Special Factors -- 1. Purpose and Background of the Offer; Certain Effects of
the Offer; Plans of the Company after the Offer" "Special Factors -- 3.
Recommendation of the Company's Board; Fairness of the Offer," "Special Factors
- -- 4. Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc." "The
Tender Offer -- 8. Financing the Offer and the Second-Step Transaction" and in
Schedule II is incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER
(a) The information set forth in the Offer to Purchase under "Special
Factors -- 6. Beneficial Ownership of Shares" and Schedule I is incorporated
herein by reference.
(b) On June 8, 1999, Seymour Kugler, the President and Chief Executive
Officer of the Company, transferred 245,000 shares held by him into the 1999 Sy
Kaye GRAT, a grantor retained annuity trust created on June 8, 1999, with such
shares to be held in trust for the benefit of Seymour Kugler and his
descendants.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO
THE ISSUER'S SECURITIES
The response to Item 5 of the Schedule 13E-4 is incorporated herein by
reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH
REGARD TO THE TRANSACTION
(a)-(b) The information set forth in the Offer to Purchase under
"Introduction," "Special Factors -- 1. Purpose and Background of the Offer;
Certain Effects of the Offer; Plans of the Company after the Offer," "Special
Factors -- 3. Recommendation of the Company's Board; Fairness of the Offer," "
Special Factors -- 5. Interests of Certain Persons in the Offer and the
Second-Step Transaction" and "Special Factors --6. Beneficial Ownership of
Shares" is incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION
(a) The information set forth in the Offer to Purchase under "Special
Factors - 2. Rights of Stockholders in the Event of the Second-Step Transaction"
and in Schedule III is incorporated herein by reference.
Not applicable.
(c) Not applicable.
5
<PAGE>
ITEM 14. FINANCIAL INFORMATION
(a) The information set forth in the Offer to Purchase under "The Tender
Offer -- 7. Certain Information Concerning the Company" is incorporated herein
by reference. In addition, the Company's audited financial statements as of
December 31, 1998 and December 31, 1997 and for each of the three years in the
period ended December 31, 1998 are included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, which is included in the Offer
to Purchase as Schedule IV thereto and is incorporated herein by reference.
Also, the Company's unaudited financial statements for the six month period
ended June 30, 1999 are included in the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1999, which is incorporated herein by reference.
(b) Not applicable.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED
(a) The information set forth in the Offer to Purchase under "Special
Factors -- 1. Purpose and Background of the Offer; Certain Effects of the Offer;
Plans of the Company after the Offer," "Special Factors -- 3. Recommendation of
the Company's Board; Fairness of the Offer and the Second-Step Transaction,"
"The Tender Offer -- 8. Financing of the Offer and the a Second-Step
Transaction," and "The Tender Offer -- 10. Effect of the Offer on the Market for
the Shares; Quotation and Exchange Act Registration" is incorporated herein by
reference.
(b) The response to Item 6 of the Schedule 13E-4 is incorporated
herein by reference.
ITEM 16. ADDITIONAL INFORMATION
The response to Item 8(e) of the Schedule 13E-4 is incorporated herein
by reference.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS
(a) Credit Agreement between the Company and The Bank of New York
dated August __, 1999.*
(b)(1) Opinion of Houlihan Lokey Howard & Zukin Financial Advisors,
Inc. ("Houlihan") dated June 16,1999.
(b)(2) Presentation of Houlihan to the Special Committee of the Board
of Directors dated June 16, 1999.*
(b)(3) Discussion Materials prepared by Peter J. Solomon Company
Limited dated May, 1999.*
(c) None.
7
<PAGE>
(d)(1) Form of the Offer to Purchase dated August __, 1999.
(d)(2) Form of the Letter of Transmittal.**
(d)(3) Form of Notice of Guaranteed Delivery.**
(d)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees to Clients.**
(d)(5) Form of Letter from Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees to Clients.**
(d)(6) Form of Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.**
(d)(7) Press Release Issued by the Company on June 16 , 1999.**
(e) Text of Section 262 of the Delaware General Corporation Law.
(f) None.
_______________
* To be filed by amendment.
** Filed as exhibits to Schedule 13E-3, which was filed with the Securities and
Exchange Commission on July 14, 1999.
7
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
Dated: August 12, 1999
WINSTON RESOURCES, INC.
By: /s/ Seymour Kugler
_________________________
Name: Seymour Kugler
Title: Chairman, President
and Chief Executive Officer
/s/ Seymour Kugler
__________________________
/s/ Gregg Kugler
__________________________
/s/ Todd Kugler
__________________________
/s/ Eric Kugler
__________________________
1999 SY KAYE GRAT
By: /s/ Joel A. Klarreich
____________________
Name: Joel A. Klarreich
Title: Trustee
8
<PAGE>
EXHIBIT INDEX
Description
(a) Credit Agreement between the Company and Bank of New York dated
August __, 1999*
(b)(1) Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
("Houlihan") dated June 16, 1999**
(b)(2) Presentation of Houlihan to the Special Committee of the Board
of Directors dated June 16, 1999.*
(b)(3) Discussion Materials prepared by Peter J. Solomon Company
Limited dated May, 1999.*
(d)(1) Form of the Offer to Purchase dated August __, 1999.
(d)(2) Form of the Letter of Transmittal.****
(d)(3) Form of Notice of Guaranteed Delivery.****
(d)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees to Clients.****
(d)(5) Form of Letter from Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees to Clients.****
(d)(6) Form of Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.****
(d)(7) Press Release Issued by the Company on June 16, 1999.****
(e) Text of Section 262 of the Delaware General Corporation Law***
____________________
* To be filed by amendment.
** Attached to the form of the Offer to Purchase, dated August __, 1999,
as Schedule II.
*** Attached to the form of the Offer to Purchase, dated August __, 1999,
as Schedule III.
**** Filed as exhibits to Schedule 13E-3, which was filed with the
Securities and Exchange Commission on July 14, 1999.
<PAGE>
EXHIBIT (d)(1)
OFFER TO PURCHASE FOR CASH BY
WINSTON RESOURCES, INC.
All Outstanding Shares of its Common Stock, $.01 par value per Share,
at
$4.625 Net Per Share
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
5:00 PM., NEW YORK CITY TIME, ON ____________ ___, 1999
UNLESS THE OFFER IS EXTENDED.
Winston Resources, Inc., a Delaware corporation (the "Company"), hereby
offers to purchase all of its issued and outstanding shares of common stock,
$.01 par value per share (the "Shares"), at a price of $4.625 per Share, net to
the seller in cash (the "Offer Price"), without interest thereon, upon the terms
and subject to the conditions set forth in this Offer to Purchase, dated July
___, 1999 (the "Offer to Purchase"), and in the related Letter of Transmittal
dated July ___, 1999 (which, together with this Offer to Purchase, constitutes
the "Offer"). The Offer is being made to all holders of Shares, including
Seymour Kugler, the Chairman of the Board of Directors (hereinafter, the "Board
of Directors" or the "Board"), President and Chief Executive Officer of the
Company, and certain members of his family owning Shares and a trust of which
Kugler family members are the beneficiaries (collectively, the "Remaining
Stockholders"). The Company has been advised that none of the Remaining
Stockholders intends to tender any Shares pursuant to the Offer. See "The Tender
Offer - 1. Terms of the Offer; Expiration Date."
The Offer is conditioned upon, among other things, there being validly
tendered and not withdrawn prior to the Expiration Date (as defined herein) not
less than 66-2/3% of the then outstanding Shares, on a fully diluted basis,
other than Shares beneficially owned by the Remaining Stockholders (the "Public
Shares"), or 1,142,403 Public Shares (the "Minimum Condition"), and the Company
obtaining the Debt Financing (as defined herein). See "Introduction" and "The
Tender Offer - 11. Certain Conditions of the Offer."
The Shares are traded on the American Stock Exchange ("AMEX") and are
quoted under the ticker symbol "WRS". On June 15, 1999, the last trading day
before the Company announced the Offer, the last reported bid price was $2.875
per share.
STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT
MARKET QUOTATION FOR THE SHARES.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE FAIRNESS OR MERITS OF SUCH TRANSACTION OR THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The Information Agent for the Offer is:
MORROW & CO., INC.
August ___, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Page
INTRODUCTION......................................................................................................2
SPECIAL FACTORS...................................................................................................7
1. PURPOSE AND BACKGROUND OF THE OFFER; CERTAIN EFFECTS OF THE OFFER; PLANS OF THE COMPANY AFTER
THE OFFER ................................. 7
2. RIGHTS OF STOCKHOLDERS IN THE EVENT OF THE SECOND-STEP TRANSACTION ........................... 19
3. RECOMMENDATION OF THE COMPANY'S BOARD; FAIRNESS OF THE OFFER ................................. 20
4. OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC. ........................... 22
5. INTERESTS OF CERTAIN PERSONS IN THE OFFER AND THE SECOND-STEP TRANSACTION ................... 27
6. BENEFICIAL OWNERSHIP OF SHARES.................................................................28
7. FEES AND EXPENSES..............................................................................33
THE TENDER OFFER.................................................................................................34
1. TERMS OF THE OFFER; EXPIRATION DATE............................................................34
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES..................................................35
3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES .....................................36
4. WITHDRAWAL RIGHTS..............................................................................39
5. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES...................................................40
6. PRICE RANGE OF SHARES; DIVIDENDS...............................................................43
7. CERTAIN INFORMATION CONCERNING THE COMPANY.....................................................44
8. FINANCING OF THE OFFER AND THE SECOND-STEP TRANSACTION.........................................49
9. DIVIDENDS AND DISTRIBUTIONS....................................................................51
10. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES; QUOTATION AND EXCHANGE ACT REGISTRATION .....51
11. CERTAIN CONDITIONS OF THE OFFER................................................................53
12. CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS.................................................54
13. FEES AND EXPENSES..............................................................................57
14. MISCELLANEOUS..................................................................................57
i
<PAGE>
SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY........................................................I-1
SCHEDULE II
OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN
FINANCIAL ADVISORS, INC...............................................................................II-1
SCHEDULE III
TEXT OF SECTION 262 OF THE GENERAL CORPORATION
LAW OF THE STATE OF DELAWARE.........................................................................III-1
SCHEDULE IV
ANNUAL REPORT ON FORM 10-K OF THE COMPANY FOR
THE YEAR ENDED DECEMBER 31, 1998......................................................................IV-1
</TABLE>
ii
<PAGE>
IMPORTANT
ANY STOCKHOLDER DESIRING TO TENDER ALL OR ANY PORTION OF SUCH
STOCKHOLDER'S SHARES SHOULD EITHER (1) COMPLETE AND SIGN THE LETTER OF
TRANSMITTAL (OR A FACSIMILE THEREOF) IN ACCORDANCE WITH THE INSTRUCTIONS IN THE
LETTER OF TRANSMITTAL AND MAIL OR DELIVER IT AND ANY OTHER REQUIRED DOCUMENTS TO
CONTINENTAL STOCK TRANSFER & TRUST COMPANY (THE "DEPOSITARY") (AT THE
DEPOSITARY'S ADDRESS SET FORTH ON THE BACK COVER OF THIS OFFER TO PURCHASE) AND
EITHER DELIVER THE CERTIFICATE(S) EVIDENCING THE TENDERED SHARES TO THE
DEPOSITARY ALONG WITH THE LETTER OF TRANSMITTAL OR DELIVER SUCH SHARES PURSUANT
TO THE PROCEDURE FOR BOOK-ENTRY TRANSFER SET FORTH IN THIS OFFER TO PURCHASE
UNDER "THE TENDER OFFER - 3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING
SHARES" OR (2) REQUEST SUCH STOCKHOLDER'S BROKER, DEALER, COMMERCIAL BANK, TRUST
COMPANY OR OTHER NOMINEE TO EFFECT THE TRANSACTION FOR SUCH STOCKHOLDER. ANY
STOCKHOLDER WHOSE SHARES ARE REGISTERED IN THE NAME OF A BROKER, DEALER,
COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE MUST CONTACT SUCH BROKER,
DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE IF SUCH STOCKHOLDER
DESIRES TO TENDER SUCH SHARES.
ANY STOCKHOLDER WHO DESIRES TO TENDER SHARES AND WHOSE CERTIFICATES
EVIDENCING SUCH SHARES ARE NOT IMMEDIATELY AVAILABLE, OR WHO CANNOT COMPLY WITH
THE PROCEDURE FOR BOOK-ENTRY TRANSFER ON A TIMELY BASIS, MAY TENDER SUCH SHARES
BY FOLLOWING THE PROCEDURE FOR GUARANTEED DELIVERY SET FORTH IN "THE TENDER
OFFER - 3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES."
QUESTIONS OR REQUESTS FOR ASSISTANCE MAY BE DIRECTED TO THE INFORMATION
AGENT AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ON THE BACK COVER OF THIS
OFFER TO PURCHASE. ADDITIONAL COPIES OF THIS OFFER TO PURCHASE, THE LETTER OF
TRANSMITTAL AND THE NOTICE OF GUARANTEED DELIVERY MAY ALSO BE OBTAINED FROM THE
INFORMATION AGENT OR FROM BROKERS, DEALERS, COMMERCIAL BANKS OR TRUST COMPANIES.
1
<PAGE>
To the Stockholders of Winston Resources, Inc.:
INTRODUCTION
Winston Resources, Inc., a Delaware corporation (the "Company"), hereby
offers to purchase all of its issued and outstanding shares of common stock,
$.01 par value per share (the "Shares"), at a price of $4.625 per Share, net to
the seller in cash (the "Offer Price"), without interest thereon, upon the terms
and subject to the conditions set forth in this Offer to Purchase, dated August
__, 1999 (the "Offer to Purchase"), and in the related Letter of Transmittal,
dated August __, 1999 (which, together with this Offer to Purchase, constitutes
the "Offer"). The Offer is being made to all holders of Shares, including
Seymour Kugler, the Chairman of the Board of Directors (hereinafter, the "Board
of Directors" or the "Board"), President and Chief Executive Officer of the
Company, certain members of his family including Gregg Kugler, Todd Kugler and
Eric Kugler, all officers of the Company, and a trust for the benefit of Kugler
family members, the 1999 Sy Kaye GRAT, (collectively, the "Remaining
Stockholders"). The Company has been advised that none of the Remaining
Stockholders intends to tender any Shares pursuant to the Offer. See "The Tender
Offer - 1. Terms of the Offer; Expiration Date."
Tendering stockholders will not be obligated to pay brokerage fees or
commissions or, except as otherwise provided in Instruction 6 of the Letter of
Transmittal, stock transfer taxes with respect to the Company's purchase of the
Shares pursuant to the Offer. The Company will pay all charges and expenses of
Continental Stock Transfer & Trust Company, which is acting as the depositary
for the Offer (the "Depositary"), and Morrow & Co., Inc., which is acting as the
information agent for the Offer (the "Information Agent"), incurred in
connection with the Offer. See "Special Factors-Fees and Expenses" and "The
Tender Offer - 13. Fees and Expenses."
The Offer is conditioned upon, among other things, there being validly
tendered and not withdrawn prior to the Expiration Date (as defined herein) not
less than 66 2/3% of the then outstanding Shares, on a fully diluted basis,
other than Shares beneficially owned by the Remaining Stockholders (the "Public
Shares"), or 1,142,403 Public Shares (the "Minimum Condition"), and the Company
obtaining the Debt Financing (as defined herein). See "The Tender Offer - 11.
Certain Conditions of the Offer," which sets forth in full the conditions of the
Offer.
The Shares are currently listed and traded on AMEX under the symbol
"WRS". On June 15, 1999, the last full day of trading prior to the announcement
of the Offer, the closing sale price of the Shares on AMEX was $2.875 per Share.
Stockholders are urged to obtain a current market quotation for the Shares.
The Company believes that the public trading market for the Shares has
been and will continue to be characterized by low prices and low trading volume.
For this reason, and because of the small stockholder base and certain other
factors described in this Offer to Purchase, the Company currently intends, to
2
<PAGE>
the extent possible, to seek to delist its common stock from trading on AMEX and
terminate the registration of the Shares under the Securities Exchange Act of
1934, as amended (the "Exchange Act") following consummation of the Offer or, if
necessary, the Second-Step Transaction (as defined herein). The purpose of the
Offer is thus to provide the holders of the Public Shares (the "Public
Stockholders") with liquidity for their Shares in light of the Company's
intentions at a price which the Company's Board of Directors has determined to
be fair, while at the same time, enable the Remaining Stockholders to retain the
entire equity interest in the Company. See "The Tender Offer - 10. Effect of the
Offer on the Market for Shares; Quotation and Exchange Act Registration."
At June 30, 1999, there were (i) 3,233,521 Shares issued and
outstanding, (ii) no Shares held in the treasury of the Company, and (iii)
597,009 Shares reserved for future issuance to certain key employees and
directors of the Company pursuant to outstanding stock options under the
Company's 1996 Stock Plan and 1990 Incentive Program (the "Stock Options"),
including Stock Options currently exercisable for 147,009 Public Shares. Prior
to the announcement of the Offer, there were approximately 101 holders of record
of the issued and outstanding Shares. As of June 30, 1999, the Remaining
Stockholders beneficially owned 1,519,918 Shares, or 47% of the outstanding
Shares, and the Company's directors and executive officers, other than those
which are also Remaining Stockholders, as a group, beneficially owned 157,037
Shares, or 4.9% of the Shares outstanding as of such date. The Company has been
informed by such directors and executive officers that they intend either to
tender all Shares beneficially owned by them to the Company pursuant to the
Offer or to vote such Shares in favor of the Second-Step Transaction.
On July 7, 1999, the Company received an unsolicited letter from
American Claims Evaluation, Inc. ("American"), a Nasdaq listed company,
indicating that American was interested in purchasing 51% or more of the
Company's common stock for $5.25 per Share in cash, and further indicating that
American wanted to meet with the Company. On July 9, 1999, a special meeting of
the Board of Directors was called to consider and evaluate American's letter. At
such meeting, Seymour Kugler confirmed to the Board of Directors that none of
the Remaining Stockholders were interested in pursuing the proposal set forth in
American's letter and would not accept any offer from American of $5.25 per
Share in cash. At the special meeting, Seymour Kugler undertook to deliver, and
subsequently delivered, a letter on behalf of the Remaining Stockholders
confirming these statements. In addition, certain officers holding Shares
indicated their unwillingness to accept American's proposal, which they
subsequently confirmed to the Board in writing. Since such stockholders held in
the aggregate in excess of 56% of the Shares (assuming the exercise of currently
exerciseable stock options), it was apparent to the Board that the terms set
forth in American's letter could not be met by virtue of the unavailability for
purchase of at least 51% of the Company's Shares by American. The Company
advised American in writing to this effect and the Company's counsel confirmed
such advice in a telephone conversation with American's management on July 12,
1999. The Company has received no further communication from American since that
date. In light of the foregoing facts and circumstances, the Board of Directors
concluded that because American's inquiry represented an interest in purchasing
4
<PAGE>
control of the Company and since holders of 56% of the Shares had indicated that
they would not accept any offer from American of $5.25 per Share, the conditions
for success of American's proposal could not be satisfied, and therefore there
was no reason for the Independent Committee (as defined herein) or Houlihan
Lokey (as defined herein) to conduct any further assessment of fairness as a
result of the American offer. Accordingly, the Board did not refer the American
proposal to the Independent Committee for review. The recommendation of the
Offer by the Independent Committee and the opinion of its financial advisor,
Houlihan Lokey, were received prior to the receipt of the American letter and
none of the Board of Directors, the Independent Committee or its financial
advisor have confirmed their fairness assessments following receipt of the
American letter. See "SPECIAL FACTORS - 1. Purpose and Background of the Offer;
Certain Effects of the Offer; Plans of the Company after the Offer - Letter
Received from American Claims Evaluation, Inc."
Pursuant to the Offer, the Company seeks to acquire all Shares which are
held by the Public Stockholders. If less than all of the Shares owned by the
Public Stockholders are tendered pursuant to the Offer, the Company may merge,
consolidate or otherwise combine with an entity to be formed, which would be
wholly owned by the Remaining Stockholders (the "Merger"), or effect some other
form of corporate transaction such that the Shares not tendered by the Public
Stockholders will be converted into only the right to receive the Offer Price in
cash (the Merger or such other form of corporate transaction, the "Second-Step
Transaction"). If necessary, the Company will seek stockholder approval of the
Second-Step Transaction in accordance with applicable laws. The Remaining
Stockholders, who currently own 47% of the outstanding Shares, as well as the
directors and executive officers of the Company who are not Remaining
Stockholders and who do not tender their Shares, intend to vote all of their
Shares in favor of the Second-Step Transaction if a stockholder vote is
required. Following completion of the Second-Step Transaction, there would be
few, if any, Public Stockholders of the Company.
As part of the Transactions (as defined herein), all Stock Options held
by individuals other than the Remaining Stockholders, whether or not vested (the
"Public Stock Options"), will be surrendered in exchange for payment from the
Company (subject to any applicable withholding taxes) in cash equal to the
product of (x) the total number of Shares subject to any such Public Stock
Option and (y) the excess of the Offer Price over the exercise price per Share
subject to such Public Stock Option, without any interest thereon. None of the
Remaining Stockholders will be surrendering Stock Options owned by them in
connection with the Transactions, but the Remaining Stockholders may, in the
future, following the consummation of the Transactions (as defined herein),
cause the Company to convert such Stock Options into cash in the same manner as
Public Stock Options surrendered and exchanged pursuant to the Offer.
Except as otherwise agreed to in writing by the Company and the
Remaining Stockholders, the Stock Options and any other equity plans, and the
provisions in any other plan, program or arrangement providing for the issuance
or grant of any other interest in the capital stock of the Company, will be
terminated as part of the Transactions.
4
<PAGE>
In determining whether to approve the Offer, the Independent Committee
and Board of Directors considered a number of factors, several of which are
listed below (see "Special Factors - Position of the Company's Board; Fairness
of the Offer"):
- - The Company currently has a very small stockholder base for an
exchange-traded public company as indicated by its stockholders of
record, a number substantially below the 300 minimum which triggers the
obligation to file periodic financial reports and other information
pursuant to the Exchange Act.
- - The market for the Company's common stock provides limited liquidity for
stockholders to liquidate or add to their investments. Additionally,
because of the limited liquidity available, the Company has been unable
to utilize the public equity capital markets effectively as a source of
financing.
- - There are considerable costs associated with remaining a public company.
In addition to the time expended by the Company's management, the legal,
accounting and other expenses involved in the preparation, filing and
dissemination of annual and other periodic reports is considerable.
- - The reporting requirements of public companies can lead to disclosure of
sensitive information, resulting in a competitive disadvantage in the
marketplace.
- - The stated desire of the Remaining Stockholders not to consider a sale
of the Company or their interest in the Company, which made pursuit of
other potential alternatives (such as a sale of the Company as a going
concern) impracticable. (This factor may be deemed to have limited the
options available to the Independent Committee in exploring alternatives
that might benefit the unaffiliated Stockholders.)
In determining whether the Offer Price to be paid to the Company's
Public Stockholders is fair, the Independent Committee relied on the written
opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc., its financial
advisor ("Houlihan Lokey"), that a cash consideration of $4.625 net per share to
the Public Stockholders is fair to the Public Stockholders from a financial
point of view. See "Special Factors-Opinion of Houlihan Lokey Howard & Zukin
Financial Advisors, Inc." for further information concerning the opinion of
Houlihan Lokey. Such opinion was delivered prior to receipt of the American
letter and has not been confirmed since its delivery.
THE BOARD OF DIRECTORS OF THE COMPANY (THE "BOARD"), BY UNANIMOUS VOTE
OF ALL DIRECTORS PRESENT AND VOTING, BASED UPON, AMONG OTHER THINGS, THE
UNANIMOUS RECOMMENDATION AND APPROVAL OF THE DIRECTORS OF THE COMPANY WHO ARE
NOT OFFICERS OF THE COMPANY, HAS DETERMINED THAT THE OFFER IS FAIR TO, AND IN
5
<PAGE>
THE BEST INTERESTS OF, THE PUBLIC STOCKHOLDERS, AND RECOMMENDS THAT THE PUBLIC
STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER.
The Company has filed with the Securities and Exchange Commission (the
"Commission") pursuant to the Exchange Act an Issuer Tender Offer Statement on
Schedule 13E-4 ("Schedule 13E-4") and a Rule 13e-3 Transaction Statement on
Schedule 13E-3. The term, "Expiration Date," means 5:00 p.m., Eastern Daylight
Time, on ____________ ___, 1999, unless and until the Company, in its sole
discretion, shall have extended the period during which the Offer is open, in
which event the term "Expiration Date" shall mean the latest time and date at
which the Offer, as so extended by the Company, shall expire. See "The Tender
Offer - 1. Terms of the Offer; Expiration Date."
Winston Resources, Inc. is the successor to a personnel recruitment and
placement service business founded in 1967 by Seymour Kugler, its President and
Chief Executive Officer. The Company and its subsidiaries together provide a
wide range of personnel supply services to businesses, institutions and
governmental agencies, through their own offices and through offices operated by
independent franchisees under licenses from the Company. The Company also
provides recruitment advertising services to businesses and other institutions.
Through its own offices, the Company recruits and places employees in
entry-to-high-level full-time salaried positions in the New York City
metropolitan area (consisting of New York City, Nassau, Suffolk and Westchester
Counties, New York and parts of northern New Jersey and southern Connecticut)
and in the Fort Lauderdale area of Florida. Such services are provided on a
contingent fee basis under which the Company collects a fee only if it
successfully places a job candidate with a client. Through its Fisher-Todd
Associates division, the Company also provides services for business and
industry clients across the United States, recruiting upper level executives on
a retainer fee basis and on a contingency fee basis.
The Company also supplies temporary employees with professional,
secretarial, clerical, medical, allied health, nursing, light industrial,
information technology and word processing skills, to business clients and
governmental agencies in the New York City, Long Island and New Jersey areas, as
well as in Florida's Fort Lauderdale area. Temporary employees perform services
at the client's premises under the client's supervision and direction. For each
temporary employee, the client is charged an hourly rate that includes the
employee's direct labor rate, associated labor costs (such as payroll taxes and
insurance) and a mark-up to cover the Company's overhead and profit.
In addition to services furnished through its own offices, the Company
licenses independent franchisees to provide personnel services under the trade
names and service marks owned by the Company. Franchisees of the Company provide
full-time placement and executive search services under the name "Roth Young",
6
<PAGE>
permanent personnel recruitment and placement services under the names "Division
10", "Alpha" and "Winston Personnel" and temporary office support personnel
under the names "Division 10 Temps" and "Alpha Temps" in a total of sixteen
cities and towns across the United States.
This Offer to Purchase and the accompanying documents contain
information required to be disclosed by the Exchange Act and the rules and
regulations promulgated thereunder, including financial information regarding
the Company, a description of the terms, conditions and background of the Offer,
and the procedures for tendering Shares for purchase.
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION THAT SHOULD BE READ BEFORE ANY DECISION IS MADE WITH
RESPECT TO THE OFFER.
SPECIAL FACTORS
1. PURPOSE AND BACKGROUND OF THE OFFER; CERTAIN EFFECTS OF THE OFFER; PLANS
OF THE COMPANY AFTER THE OFFER
Purpose of the Offer. The Company has determined that it is in its best
interests and those of its stockholders to terminate the Company's status as a
public reporting company by delisting its common stock from AMEX and terminating
the registration of the Shares under the Exchange Act. Management believes that
the public trading market for the Shares has been and will continue to be
characterized by low prices and low trading volumes. As a result, there is a
limited market for the Shares and low trading volumes make it difficult for
stockholders to sell large blocks of Shares. Low prices mean stockholders who
wish to sell a small number of Shares may receive only a nominal return after
payment of commissions. The purpose of the Offer is to provide the Public
Stockholders with liquidity for their Shares prior to the intended delisting of
the Shares and the termination of Exchange Act registration by enabling them to
sell their Shares at a fair price and at a premium over recent market prices.
Completion of the Offer also would result in the Remaining Stockholders
retaining the entire equity interest in the Company. All Shares purchased in the
Offer will be held in the treasury of the Company until the completion of the
Second-Step Transaction, if necessary, at which time the Shares will be retired.
If less than all of the Shares owned by the Public Stockholders are
tendered pursuant to the Offer, the Company may seek to effect the Second-Step
Transaction. If necessary, the Company will seek stockholder approval of the
Second-Step Transaction in accordance with applicable laws. The Remaining
Stockholders, who currently own 47% of the outstanding Shares, as well as the
directors and executive officers of the Company who are not Remaining
Stockholders and who do not tender their Shares pursuant to the Offer, intend to
vote all of their Shares in favor of the Second-Step Transaction if a
stockholder vote is required. It is contemplated that the consideration which
would be payable to the Public Stockholders in the Second-Step Transaction would
be cash in an amount equal to the Offer Price. The net result of the Offer and
7
<PAGE>
the Second-Step Transaction (together, the "Transactions") would be that the
Company would become a private company, owned entirely or almost entirely by the
Remaining Stockholders with few, if any, Public Stockholders. See "The Tender
Offer - 10. Effect of the Offer on the Market for the Shares; Quotation and
Exchange Act Registration."
Consummation of the Transactions will permit the Remaining Stockholders
to receive all of the benefits that result from ownership of the entire equity
interest in the Company. Such benefits include management and investment
discretion with regard to the future conduct of the business of the Company, the
benefits of the profits generated by operations and any increase in the
Company's value. Similarly, the Remaining Stockholders will also bear the risk
of any decrease in the value of the Company.
Under the Delaware General Corporation Law (the "DGCL"), the approval of
the Board and the affirmative vote of the holders of a majority of the
outstanding Shares would be required to approve the Merger through a meeting of
the stockholders. Unless such Merger is consummated pursuant to the short-form
merger provisions of DGCL, as described below, the only other required corporate
action by the Company is the approval and adoption of the Merger by the
affirmative vote of the holders of a majority of the Shares. The Remaining
Stockholders have expressed an intention to vote all of their Shares in favor of
the Second-Step Transaction if a stockholder's vote is required, should such a
Second-Step Transaction be implemented.
Under the DGCL, an entity which owns 90% or more of a subsidiary entity
may effect a merger with such entity without submitting the merger to a vote of
the other stockholders of such entity (a "a short-form merger"). Accordingly, if
the Remaining Stockholders own 90% or more of the Shares that remain outstanding
after completion of the Offer, the Merger may be effected as a short-form
merger, without a vote of the Company's other stockholders. In such event, the
Remaining Stockholders and the Company intend to take all necessary and
appropriate action to cause the Merger to become effective in accordance with
the DGCL as promptly as practicable after consummation of the Offer, without a
meeting of the stockholders of the Company. If, however, the percentage of
ownership of the Remaining Stockholders after completion of the Offer is less
than 90% of the Shares then outstanding, a vote of the Company's stockholders
will be required under the applicable laws, and a significantly longer period of
time may be required to effect the Merger. See "Special Factors-Rights of
Stockholders in the Event of the Merger." Following consummation of the Offer
and, if necessary, the Second-Step Transaction, the Company will seek to delist
the Shares such that the Shares will no longer be quoted on AMEX, and the
registration of the Shares under the Exchange Act will be terminated.
Accordingly, following the Offer and, if necessary, the Second-Step Transaction,
there will be no publicly traded equity securities of the Company outstanding
and the Company will no longer be required to file periodic reports with the
Commission. See "The Tender Offer - Effect of the Offer on the Market for
Shares; Quotation and Exchange Act Registration."
8
<PAGE>
Reversion of the Company to private ownership will eliminate the
substantial general and administrative costs attendant to the Company's status
as a reporting company under the Exchange Act. In addition to the time expended
by Company management, the legal, accounting and other expenses involved in the
preparation of annual and other periodic reports are considerable. The Company
estimates that its total out-of-pocket expenses associated with maintaining its
public status are approximately $150,000 per year. These costs include the
review of periodic reports to the Securities and Exchange Commission (such as
Form 10-K and Form 10-Q), legal and accounting fees relating to such matters,
annual fees for the Company's transfer agent, fees relating to the listing of
its common stock on AMEX, directors' fees and costs associated with
communications with stockholders. These costs do not include the salaries and
time of employees of the Company who devote attention to these matters.
Additionally, the Company's management believes that required public disclosures
under the Exchange Act may have given its competitors, many of which are not
similarly burdened, certain information and insights about the Company's
operations which have helped them in competing with the Company.
Since becoming a public company in 1987, the Shares generally have
remained very thinly traded and have provided little liquidity for stockholders,
particularly those stockholders with larger equity positions in the Company. The
Company has been unable to utilize the Shares effectively for acquisitions or
financing because of its low market price and low trading volume and the
relatively higher valuation the marketplace has accorded many of the Company's
larger public competitors, which has enabled such competitors to finance
acquisitions and operations with relatively "cheaper" equity, and so has been
unable to realize one of the principal benefits of public ownership.
Background To The Offer. From time to time, the Company has considered
various approaches to enhancing stockholder value by improving the market price
for the Company's common stock. Such approaches have included, among other
things, stock splits, stock dividends, cash dividends, reverse stock splits and
various combinations of the foregoing. In each instance, these alternatives have
been rejected on the basis of the Board's conclusion that, given the low price
of the Company's common stock, the small float for its shares, the limited
number of public holders, the complete absence of research coverage, the virtual
lack of institutional following and the likely expense to be incurred, none of
such approaches would have the desired effect or could justify the expense of
implementation. The Board considered implementing stock dividends and stock
splits on several occasions between 1996 and 1998. In each instance, such action
was rejected for the reason that the effect of implementing such a stock split
or stock dividend might be to reduce the price of the Company's common stock to
a level at which the Company would be viewed as a "penny stock", thereby making
it even less attractive to new stockholders. The Company also considered
declaring and paying a cash dividend on several occasions, but decided not to do
9
<PAGE>
so because of the uncertainty of the Company's ability to sustain cash dividends
at a level that would maximize value to the Company's Stockholders. At no time
did the Board consider sale of the Company to a third party, since the Company's
Chairman and other members of his family, including certain officers and
directors of the Company, who in the aggregate 47% of the Shares, repeatedly
indicated that they were not interested in any such sale. As the Company's
operating performance continued to improve from 1996 through 1998, and the
Company's stock price increased, reflecting both such improved performance and
the improvement of stock prices of publicly held staffing industry companies,
the Board felt that the most prudent course of action was to defer any decision
about a stock split or dividend until the price of the Company's stock had
further increased to a level where a meaningful stock split could be
implemented.
The Company's management has been increasingly frustrated, since
mid-1998, at the continuing decline in the price of the Company's common stock
in the face of continuing reported record increases in the net operating results
of the Company. Following the release of results for the third quarter of fiscal
1998, in which the Company reported a 12% increase in net earnings and a 10%
increase in revenues, the price of the Company's common stock dropped from 6 1/4
on the date of release of such report to 3 3/4. Likewise, following the release
of results for the fourth quarter of fiscal 1998, in which the Company reported
a 22% increase in net earnings and a 26% increase in revenues, the price of the
Company's common stock dropped from 3? on the date of release of such report to
3.
Given the recent deterioration in the Company's operating performance,
in which both revenues and net income declined in the most recent quarter from
the prior year's levels, and are anticipated to decline for the current fiscal
year from the prior year's levels, and also given the recent changes adversely
affecting the staffing industry and the resulting dramatic reduction in share
prices of many publicly held staffing industry companies, the Board now believes
that it is unlikely, in the foreseeable future, that the Company's share price
would increase to a level that would permit a stock split or a stock dividend to
be implemented.
As recently reported in a leading staffing industry publication,
Staffing Industry Report ("SIR"), shares of publicly held staffing industry
companies, which enjoyed considerable gains during most of 1998, have
significantly underperformed the market in recent months. After reaching an all
time high in April 1998, SIR's index of staffing industry stocks declined to a
three year low by March, 1999. By comparison, major market averages, including
the Standard & Poor's 500 and the Dow Jones Industrials, have surged to new
highs. Among those factors which SIR cited as a basis for such declines are the
trend of investors to avoid small cap stocks, a category which includes many
public staffing industry companies, and a slowing of staffing industry growth,
caused in large part by a tight labor market. One industry analyst, Matthew V.
Roswell of Legg Mason Wood Walker, Inc., points to the growing commoditization
of staffing services and believes that staffing companies will be faced with
further margin contraction, a more difficult operating environment and reduced
profitability. Mr. Roswell also predicts that employers will increasingly
utilize the internet to bypass staffing companies altogether in addressing
staffing needs.
10
<PAGE>
In light of the foregoing and communications by the Company with
stockholders of the Company, including those unaffiliated with the Remaining
Stockholders, in which such stockholders requested that the Company consider
ways in which it could enhance stockholder value, the Company's founder,
Chairman of the Board of Directors, and principal stockholder, Seymour Kugler,
in late 1998, decided to investigate the feasibility of making an offer to
purchase all of the Company's shares not held by Mr. Kugler or members of his
family. On January 19, 1999 the Company contacted The Bank of New York ("BONY"),
its principal lender, regarding the availability of financing for the Company to
purchase all of the Public Shares. On February 24, 1999, BONY informally advised
the Company that, subject to satisfying customary conditions, BONY would commit
to provide the Company with financing in order to fund the Offer.
On February 24, 1999, the Company's Board of Directors held a special
meeting at which Mr. Kugler proposed that the Company make a cash tender offer
(the "Proposal") to stockholders for the purpose of taking the Company private
at a price 15% above the market price for the Company's common stock at the time
of commencement of such offer. Based on the last trade of the Company's common
stock on AMEX on February 23, 1999, at a price of $3.125 per share, the price
per share of the Proposal would have equaled $3.59 per share. Mr. Kugler noted
that, overall, since the Company went public in 1987, the public market had not
responded to sustained profitability of the Company and its common stock had
remained thinly traded and had provided very little liquidity for stockholders.
He further noted that the Company had been unable to use its stock effectively
for acquisitions, financing or employee incentives because of low market price
and low trading volume. He stated his belief that if the Company reverted to
private ownership, it could eliminate substantial general and administrative
costs of being a reporting Company under the securities laws, and noted that the
diversion of management's time and attention to matters of public reporting and
the expenses of legal, accounting and transfer agent activities involved in
remaining public were considerable.
Following such remarks, Mr. Kugler recommended that the Board appoint a
committee (the "Independent Committee") composed of the Board's independent
directors, Martin Wolfson, Martin Fischer, Martin Simon and Norton Sperling to
consider the Proposal on behalf of the Public Stockholders and make a
recommendation to the Board. After the Board unanimously approved the
Independent Committee, Mr. Kugler requested that Newman Tannenbaum Helpern
Syracuse & Hirschtritt LLP, counsel to the Company ("Newma Tannenbaum"), advise
the directors, and, in particular, the Independent Committee, of their
responsibilities in connection with the Proposal. Newman Tannenbaum thereupon
advised the Board that the Independent Committee should report back to
management once they had met and selected independent counsel and an independent
financial advisor so that the activities of such counsel and financial advisor
could be coordinated and expedited.
Newman Tannenbaum recommended that the Independent Committee meet
separately for the purposes of reviewing and evaluating the transaction and that
at such meeting, the Independent Committee should consider the factors leading
11
<PAGE>
to the proposal to take the Company private, including the costs to the Company
of being a public entity, lack of an active trading market for the Company's
common stock and resulting lack of liquidity for Stockholders. Newman Tannenbaum
also recommended that the Committee review, among other things, the Company's
financial condition, conditions generally in the staffing industry, and the
prospects for the future of the Company, including whether it was practical or
probable that the Company would be able to achieve future acquisitions either
with Company stock or to use Company stock to raise cash for such acquisitions.
Newman Tannenbaum also stressed that the Independent Committee should
understand that there were no limitations imposed upon its review of the
proposal, or on the investigations or procedures to be followed in reaching a
conclusion regarding fairness, provided that the Independent Committee should
understand that the Kugler family was unwilling to consider a sale of their
interest in the Company and that it would therefore be unnecessary for the
Independent Committee to consider the possibility of seeking alternative values
for shareholders by soliciting offers to purchase the Company or its assets from
third parties.
Following the Board meeting, the Independent Committee held a meeting
and decided on a process for identification and engagement of independent
counsel and independent financial advisors to the Independent Committee. The
Independent Committee also elected Martin Wolfson as Chairman.
On March 10, 1999, Newman Tannenbaum corresponded with the members of
the Independent Committee providing an explanation for the terms of the
Company's Proposal, noting that the 15% premium over market price was based on
the Company's own research regarding recent cash tender offers by other public
companies, believed to be comparable to the Company.
During March 1999, the Independent Committee interviewed several law
firms and investment banking firms to serve as legal and financial advisors to
the Independent Committee. On March 15, 1999, the Independent Committee retained
Paul, Hastings, Janofsky & Walker LLP ("Paul Hastings"), as counsel to the
Independent Committee, and in April 1999, retained Houlihan Lokey as financial
advisor to the Independent Committee.
On April 28, 1999, Martin Wolfson advised Newman Tannenbaum that
Houlihan Lokey was in the process of completing its due diligence investigation
of the Company and had a scheduled visit with the Company to review certain
financial information. He indicated that, based on his conversations with
Houlihan Lokey, the Committee might receive Houlihan Lokey's preliminary report
as early as the following week but that at that time he had no indication what
Houlihan Lokey's conclusions would be.
12
<PAGE>
During the week of May 10, 1999, Mr. Wolfson advised Newman Tannenbaum
that the Committee expected to receive a preliminary report from Houlihan Lokey
during that week and requested that a special meeting of the Board of Directors
be convened immediately following the meeting of the Board scheduled for May 19,
1999, immediately following the Company' s annual meeting of stockholders.
On May 12, 1999, the Independent Committee met with representatives of
Houlihan Lokey and Paul Hastings to discuss the results of Houlihan's analysis
of the Proposal. Houlihan Lokey presented its report to the Independent
Committee, describing the procedures used to evaluate the Proposal price,
including, among other things, analysis of the Company's stock price and the
premium reflected in the Proposal. Based on the analysis performed, Houlihan
Lokey's report concluded that the Proposal was not fair to the Public
Stockholders from a financial point of view. The Independent Committee agreed to
present the results of the Houlihan Lokey report to management.
On May 19, 1999, the Board met with representatives of Paul Hastings.
Martin Wolfson, as Chairman of the Independent Committee, reviewed the basis for
Houlihan Lokey's assessment of the Company's stock price, as well as certain
analysis done by Houlihan Lokey of a variety of bases for valuation and certain
comparative analysis of the valuation of other public companies in the staffing
industry. Based on its analysis, Houlihan Lokey concluded that a 15% premium
over the then current market price for the Company's common stock would not be a
fair price for the Proposal from a financial point of view. During the course of
such presentation, management indicated that because of recent changes adversely
affecting the staffing industry, generally, and the Company, specifically,
including the loss of a significant volume of business from certain of its major
customers, the Company had revised the projections for 1999 given to Houlihan
Lokey, which projections had been developed in October 1998, to more closely
reflect the recent deterioration in operating results.
The original projections provided to Houlihan Lokey were prepared in the
fall of 1998 as part of the Company's normal year-end budget forecasting.
Information utilized to prepare the projections is compiled and finalized in the
fall of each year in order to provide an opportunity for each of the Company's
business units to identify their goals for the forthcoming year. The forecasted
information is derived solely from sales and gross profit forecasts, anticipated
staffing levels and anticipated commissions. Based upon either actual or
historical information available and compiled in the ordinary course of
business, management then derives other general and administrative costs and
expenses. Those involved in the forecasting process include the Company's
Chairman, Seymour Kugler, Vice Presidents Todd Kugler, Gregg Kugler, Alan Wolf,
Michael Gallo, Douglas Russell and Raymond McCourt, the President of the
Company's advertising division, Bruce Papkin, the Company's Secretary, Eric
Kugler, and the Company's Chief Financial Officer, Jesse Ulezalka, and Assistant
Controller, Anthony Fata.
13
<PAGE>
The Company revised its projections (the "Revised Projections") in May,
1999, when it became apparent that, based upon actual year-to-date results,
revenue growth was slowing so that the Fall 1998 projections were not
achievable. The Revised Projections prepared in May, 1999, were prepared by
Seymour Kugler, Gregg Kugler, Todd Kugler, Eric Kugler, Jesse Ulezalka and
Anthony Fata. The primary difference in the Revised Projections from the Fall
1998 projections was that revenue projections were not being attained as a
result of a loss of significant business from some of the Company's clients and
new business was sufficient merely to offset, rather than augment, such lost
revenues, and that, based on actual year-to-date results, current revenues were
being attained at lower margin percentages because of heightened competition and
increased pricing pressures in the marketplace. As a response to the foregoing
factors, the Company has reduced certain costs in general and administrative
expenses in contemplation of lower revenue results and certain expenses have
been reduced as a direct result of decreased revenues, primarily bonuses,
commissions and related payroll taxes and fringe benefits. The Company has
increased compensation for new salespeople, and increased investment in new
business development in order to sustain revenue levels in a market of increased
competition. The net result of these trends and actions has been a decline in
both net income and cash flow. The Company believes this cycle will continue for
the remainder of the current fiscal year, putting pressure on results.
At the conclusion of the May 19 meeting, the Independent Committee
indicated that it would ask Houlihan Lokey to apply the necessary due diligence
procedures to the new projections in order to determine if their report to the
Independent Committee should be revised. The Independent Committee also asked
the Company to consider (i) increasing the offer in light of the Houlihan Lokey
report and (ii) retaining an investment banking firm to advise the Company in
connection with its evaluation of any revised offer.
Following such Board meeting, the Company engaged the investment banking
firm of Peter J. Solomon Co. Ltd. ("Solomon") as the financial advisor to the
Company, to work with the Company to formulate an offer acceptable to the
Independent Committee and to act as an intermediary with Houlihan Lokey in order
to assist such firm in completing its valuation of the Company for the
Independent Committee.
The Company selected Solomon to be its financial advisor in connection
with the Offer because Solomon is a prominent investment banking and financial
advisory firm with experience in the valuation of businesses and their
securities in connection with mergers and acquisitions. Solomon has had no prior
investment advisory or corporate finance relationship with the Company or the
Remaining Stockholders. Pursuant to the terms of a letter agreement dated May
27, 1999 between Solomon and the Company, the Company agreed to pay Peter J.
Solomon $50,000 upon the execution of the letter agreement and an additional fee
of $50,000 upon the earlier of (i) initial approval of the Offer by the Special
Committee or (ii) if earlier, commencement of the Offer. In addition, the
Company also agreed to reimburse Solomon for its reasonable out-of-pocket
14
<PAGE>
expenses up to a maximum of $2,000. The Company also agreed to indemnify Solomon
and its affiliates, counsel and other professional advisors, and the respective
directors, officers, controlling persons, agents and employees of each of the
foregoing against certain liabilities related to or arising out of the
engagement of Solomon under the letter agreement or any transaction or conduct
in connection therewith.
Solomon initiated conversations with Houlihan Lokey in late May
discussing Solomon's role in the potential transaction. Solomon defined its role
to Houlihan Lokey as giving its perspective as to the value of the Company.
Solomon also pointed out that the projections used by Houlihan Lokey in their
analysis of the Proposal had been revised as described above and may not
accurately reflect the Company's recent performance and prospects. A
representative of Houlihan Lokey indicated that Houlihan Lokey would undertake a
due diligence investigation of the new projections. Houlihan Lokey indicated
that it would advise Paul Hastings and the Independent Committee of its
discussions with Solomon and subsequently arrange a meeting with Solomon.
On June 4, 1999 a meeting was held at the offices of Houlihan Lokey
among representatives of Houlihan Lokey and Solomon. Solomon presented to
Houlihan Lokey at the meeting its perspective as to the value of the Company.
Solomon noted that the implied multiple of the Company's net income for the
trailing 12 months based on the initial proposal price of $3.59 was close to the
net income multiples of public companies in comparable businesses of much larger
size and whose securities trade with significantly greater liquidity than those
of the Company. Solomon also stressed the magnitude of the premium being offered
over the market price of the Company's stock on the date preceding the offer.
Houlihan Lokey responded that it was focused more on the intrinsic value of the
Company. As one method of determining intrinsic value, Houlihan Lokey applied a
traditional leverage buyout analysis to determine the ability of the Company to
finance an offer at a higher price, and they indicated that they believed, based
on such valuation analysis, a higher price could be financed. Solomon responded
that such an analysis needed to take into account the recent deterioration in
the Company's results and concerns about current economic conditions. Solomon
and Houlihan Lokey also discussed and reviewed the Revised Projections. Given
the scope of the role of both Solomon and Houlihan Lokey, the discussion was
focused more on the appropriate methodologies for valuing the Company's offer
than on negotiation of offer price, since neither Solomon nor Houlihan Lokey was
authorized to engage in such negotiations at this time.
Houlihan Lokey indicated at the conclusion of the meeting that they
would review their analysis and then meet with the Independent Committee to
discuss Houlihan Lokey's conclusion regarding valuation in light of the new
financial information and the meeting with Solomon.
Between June 5 and June 10, 1999 Solomon held conversations with
Houlihan Lokey, and during those conversations, Solomon relayed to Houlihan
Lokey that Mr. Kugler might consider a revised offer of $4.50 per share.
On June 10, 1999, the Company formally presented the Independent
Committee with a new offer, to purchase all outstanding shares of the Company's
15
<PAGE>
common stock not held by the Kugler family at a price of $4.50 per share.
Following delivery of such proposal, Mr. Wolfson contacted Mr. Kugler on June
11, 1999, to arrange a meeting of the Board of Directors of the Company on June
16, 1999 to discuss the new proposal.
On June 15, 1999, the Independent Committee convened a telephonic
meeting with representatives of Houlihan Lokey and Paul Hastings to discuss the
revised offer and Houlihan Lokey's review of the revised projections prepared by
the Company's management. Houlihan Lokey indicated that they had conducted
sufficient procedures to conclude that the revised projections prepared by the
Company's management were appropriate to use as a basis for their analysis of
the revised offer. Notwithstanding the use of the revised projections, Houlihan
Lokey indicated that the revised offer of $4.50 per Share was below the midpoint
of its concluded range of prices that would be fair to the Public Stockholders
from a financial point of view.
On June 16, 1999, the Board of Directors met with representatives of
Houlihan Lokey, Paul Hastings, Solomon and Newman Tannenbaum to discuss the
Company's revised proposal. Mr. Wolfson, on behalf of the Independent Committee,
thanked the Company for substantially increasing the proposed offer, but
indicated that the Committee believed that a higher offer was appropriate.
Representatives of Solomon and Houlihan then outlined for the Independent
Committee and the other directors those variables which they believed to be most
important in determining a fair valuation of the Company. A representative of
Solomon reiterated that industry multiples used in a comparable company
valuation analysis to calculate the intrinsic value of the Company must be
discounted to the extent the comparables are larger companies with more liquid
trading markets than the Company. It was further pointed out that all industry
valuations had deteriorated significantly, reflecting the deterioration in
business prospects for staffing companies, generally, as a result of increased
competition, consolidation and resulting reductions of operating margin and
projected growth. At this point, the meeting recessed so that the parties could
meet with their respective financial and legal advisors to discuss the current
status of the negotiations. After some discussions, representatives of Solomon
and Houlihan Lokey met to discuss a possible mutually agreeable transaction.
Houlihan Lokey then met with the Independent Committee to indicate that they
believed the Company would be willing to increase its offer to $4.625 per share
and that Houlihan Lokey was prepared to opine that this increased offer would be
fair to the Public Stockholders from a financial point of view. After the Board
reconvened, Mr. Kugler stated that the Company would be willing to increase the
offer to $4.625 and, if the Independent Committee would approve an offer at
$4.625 per share, he would recommend to the Board of Directors that it authorize
the Company to proceed with such an offer. Following such statement, the
Independent Committee unanimously agreed, based in part on the opinion of
Houlihan Lokey, that an offer of $4.625 per share was fair from a financial
point of view to, and in the best interests of the Public Stockholders and
recommended that the Board approve the Offer.
Following the action of the Independent Committee, the Board, by
unanimous vote of all Directors present and voting, based in part on unanimous
recommendation and approval of the Independent Committee, determined that the
Offer is fair to and in the best interests of the Public Stockholders of the
16
<PAGE>
Company and recommended that all Public Stockholders accept the Offer and tender
their Shares pursuant to the Offer, and the Company issued a press release
regarding the Offer.
During the course of its engagement, Solomon prepared discussion
materials which it utilized in its meeting with Houlihan Lokey on June 4, 1999.
Solomon did not prepare any other analysis or report or deliver any opinion in
connection with its engagement. A copy of Solomon's discussion materials is
available for inspection and copying at the principal executive offices of the
Company during its regular business hours by any interested stockholder of the
Company or any representative of such stockholder who has been so designated in
writing. A copy of such discussion materials will be transmitted by the Company
to any such stockholder or representative upon written request and at the
expense of the requesting stockholder.
In preparing its discussion materials and preparing for its assignment,
Solomon reviewed the financial performance of the Company as well as both the
Fall 1998 projections and the Revised Projections. In addition, Solomon
undertook a series of valuation analyses which considered, among other things,
(i) the liquidity of the Company's securities, in which it determined that the
stockholders of the Company have substantially less ability to realize liquidity
than shareholders of public companies of larger size engaged in similar
businesses, (ii) the Company's earnings growth, in which it determined that the
Company's projected growth rate and earnings lags behind its public comparables,
(iii) the Company's EBITDA margin, in which it determined that the Company's
EBITDA margin is in the lower end of the range compared to its public
comparables and (iv) the market value and sales of the Company, in which it
determined that the Company is substantially smaller than other public companies
in the staffing industry. Solomon also analyzed typical multiples for mergers
and acquisitions involving "small cap" companies and multiples paid in small
"going private" transactions. As a result of these analyses, Solomon concluded
that the appropriate multiple for acquisition of the Company should be at a
discount to the trading multiples of larger public staffing companies as well as
the multiples for acquisitions of larger copmanies engaged in the staffing
business.
Letter Received From American Claims Evaluation, Inc.: On July 7, 1999
the Company received an unsolicited letter from American, which identified
itself as a Nasdaq (National Association of Securities Dealers, Inc. Automated
Quotation System)/Small Cap listed company. The letter indicated that American
was interested in purchasing 51% or more of the Company's common stock for $5.25
per share in cash and wanted to meet with the Company. On July 9, 1999 a special
meeting of the Board of Directors was called to consider and evaluate American's
letter. The telephonic meeting was attended by all members of the Board of
Directors, including those members comprising the Independent Committee, as well
as by representatives of Houlihan Lokey, Solomon, Paul Hastings and Newman
Tannenbaum. At the meeting, Seymour Kugler confirmed to the Board of Directors
that, consistent with their earlier statement that they were unwilling to
consider a sale of their interests in the Company, none of the Remaining
Stockholders were interested in pursuing the proposal set forth in American's
17
<PAGE>
letter and would not accept an offer from American of $5.25 per Share in cash.
In addition, certain officers holding Shares, including Alan E. Wolf and David
Silver, indicated their unwillingness to accept the American proposal, which
they subsequently confirmed to the Board in writing, thereby making, together
with the Shares beneficially held by the Remaining Stockholders, in excess of
56% (including currently exercisable Stock Options) of the Shares unavailable
for purchase in connection with American's proposal. After deliberation, the
Board concluded that since the terms set forth in American's letter could not be
met by virtue of the unavailability for purchase of Shares owned by the
Remaining Stockholders and certain officers, the Company should respond in
writing to American's letter advising it that stockholders holding more than 51%
of the Shares had advised the Board that they were not interested in pursuing
American's proposal and would not accept an offer from American of $5.25 per
Share in cash. The Company responded accordingly by letter dated July 9, 1999.
Because the Board concluded that the American proposal could not succeed, the
Board decided that there was no reason for the Board, the Independent Committee
or Houlihan Lokey to conduct any further assessment of fairness. Accordingly,
the Board did not refer the proposal to the Independent Committee for review.
The recommendation of the Offer by the Independent Committee and the opinion of
its financial advisor, Houlihan Lokey, were received prior to the receipt of the
American letter and none of the Board of Directors, the Independent Committee or
its financial advisor have confirmed their fairness assessments following
receipt of the American letter. On July 12, 1999, the Company's counsel
confirmed the advice set forth in the Company's July 9, 1999 response in a
telephone conversation with American's management. The Company has received no
further communications from American since that date.
Certain Effects of the Offer; Plans of the Company after the Offer. The
Remaining Stockholders have informed the Independent Committee that, assuming
the completion of the Transactions, they have no present intention to cause the
Company to change its fundamental business, sell or otherwise dispose of any
material part of its business, merge, liquidate or otherwise wind-up its
business. Nevertheless, the Remaining Stockholders may initiate a review of the
Company and its assets, corporate structure, capitalization, operations,
properties and personnel to determine what changes, if any, might then be
desirable.
Management believes that consummation of the Transactions will result in
substantially greater flexibility for the Company in the utilization of assets
and in the planning of its future. If the Offer, and, if necessary, the
Second-Step Transaction are completed, the Remaining Stockholders will be
permitted to receive the benefits that result from the ownership of all, or a
significant amount, of the equity interest in the Company, but will also bear
the risk of any decrease in the value of the Company. As a result of the
borrowing incurred in connection with the financing of the Offer and, if
necessary, the Second-Step Transaction, the consolidated indebtedness of the
Company will be substantially greater. See "The Tender Offer - 8. Financing of
the Offer and the Second-Step Transaction."
18
<PAGE>
The Company anticipates that the Remaining Stockholders will replace all
of the current directors comprising the Independent Committee as soon as
practicable as directors of the Company following the consummation of the Offer
and, if necessary, the Second-Step Transaction. The persons who are presently
officers of the Company will continue in their same positions following
consummation of the Offer and, if necessary, the Second-Step Transaction.
Following consummation of the Second-Step Transaction, the Shares will
no longer be traded on AMEX, and the registration of the Shares under the
Exchange Act will be terminated and, accordingly, the Company will no longer be
required to file periodic reports with the Commission.
2. RIGHTS OF STOCKHOLDERS IN THE EVENT OF THE SECOND-STEP TRANSACTION
No appraisal rights are available in connection with the Offer. However,
if the Second-Step Transaction is consummated, stockholders who have not
tendered their Shares will have certain rights to dissent and demand appraisal
of, and to receive payment in cash of the fair value of their Shares.
If a dissenting stockholder were to exercise such appraisal rights in
connection with the Second-Step Transaction, and if the Company and such
stockholder were unable to agree on the fair value of the Shares, a court would
determine the fair value of the Shares, as of the day prior to the date on which
the stockholders' vote was taken approving the Second-Step Transaction. The fair
value of the Shares would be paid in cash to such dissenting stockholder. In
determining the fair value of the Shares, the court is required to take into
account all relevant factors. Accordingly, such determination could be based
upon considerations other than, or in addition to, the market value of the
Shares, including, among other things, asset values and earning capacity.
Therefore, the value so determined in any appraisal proceeding could be the same
as, or more or less than, the price received in the Second-Step Transaction.
The foregoing summary of the rights of dissenting stockholders does not
purport to be a complete statement of the procedures to be followed by
stockholders desiring to exercise any available appraisal rights and is
qualified in its entirety by reference to the full text of Section 262 of the
DGCL included in Schedule III attached hereto. The preservation and exercise of
appraisal rights are conditioned on strict adherence to such Section 262.
19
<PAGE>
3. RECOMMENDATION OF THE COMPANY'S BOARD; FAIRNESS OF THE OFFER
Recommendation of the Company's Board. On June 16, 1999, the Board, by
unanimous vote of all directors present and voting, based in part on the
unanimous recommendation and approval of the Independent Committee, determined
that the Offer is fair to and in the best interests of the Public Stockholders
of the Company, subject only to receipt of a firm commitment from the Company's
principal lender to provide the Debt Financing (as defined herein). The Board,
by a unanimous vote of all directors present and voting, has recommended that
all Public Stockholders accept the Offer and tender their Shares pursuant to the
Offer.
Fairness of the Offer. In reaching its determinations referred to
immediately above, the Board considered the following factors, each of which, in
the view of the Independent Committee as well as the other members of the Board,
supported such determinations. In addition, the Board, as well as the
Independent Committee and the Remaining Shareholders, adopted the analysis of
Houlihan Lokey described below under captions "Opinion of Houlihan Lokey Howard
& Zukin Financial Advisors, Inc."
a. The Independent Committee considered the historical market prices and
recent trading activity of the Shares, including the fact that the $4.625 net
per Share cash consideration to be paid to the Public Stockholders in the Offer
represents a premium of approximately 61% per Share over the last reported sales
price on June 15, 1999, the last full trading day preceding the public
announcement of the Offer, and a premium of approximately 44% and 51% over the
average closing price for the one-month and three-month periods, respectively,
preceding such date and the fact that such price would be payable in cash, thus
eliminating any uncertainties in valuing the consideration to be received by the
Company's Public Stockholders.
b. The Independent Committee considered the opinion of Houlihan Lokey
that the consideration to be offered to the Public Stockholders is fair to such
stockholders from a financial point of view and the report and analysis
presented by Houlihan Lokey, which included discussion and analysis of
historical trading volume and market prices, multiples of historical and
forecasted net income from operations, cash flow from operations, book value and
various other factors. With respect to the matters contained in the opinion of
Houlihan Lokey, the Independent Committee reviewed the report and the analysis
contained therein and considered the other factors set forth herein in
determining that the Offer is fair.
c. The Independent Committee reviewed the market price for the Shares as
compared to the performance of the Company.
d. The Independent Committee reviewed the nature of the Company's
business and the industry in which the Company operates, including information
received by the Board regarding trends in the permanent and temporary staffing
industries and various uncertainties associated with current and potential
20
<PAGE>
future industry and market conditions. The Company operates in a cyclical
industry that has just enjoyed several years of continuous expansion, outlasting
most prior upward cycles. The Company has recently begun to experience a
softening in demand in certain markets which it serves, a reduction in the rate
of growth from recent quarters in other markets and more competitive pricing for
new business, resulting in erosion of profit margins. Each of these factors
could be expected to put further pressure on the price of the Company's shares
for the foreseeable future. See "Special Factors - Purpose and Background of the
Offer; Certain Effects of the Offer; Plans of the Company after the Offer."
e. The Independent Committee considered the opportunity provided by the
Offer for a substantial number of stockholders to realize a premium for their
Shares in the near future as compared to market prices that, absent the Offer
and, if necessary, the Second-Step Transaction, are likely to continue to be
significantly below the Offer price.
f. The Independent Committee considered the structure of the
transaction, which is designed, among other things, to result in the receipt by
the Public Stockholders of cash consideration at the earliest practicable time
without any brokerage fees.
g. The Independent Committee considered the stated desire of the
Remaining Stockholders not to consider a sale of their majority interest in the
Company, which made pursuit of other potential alternatives (such as a sale of
the Company as a going concern) impracticable.
h. The Independent Committee considered the intention of the Remaining
Stockholders to continue the business as a going concern, which makes any
consideration of liquidation of the Company or values that ultimately might be
obtained from such a liquidation highly speculative.
i. The Independent Committee considered the availability of dissenters'
rights under the DGCL in the event of the Second-Step Transaction.
The members of the Board, including the Independent Committee, evaluated
the various factors listed above in light of their knowledge of the business,
financial condition and prospects of the Company and considered Houlihan Lokey's
analysis and opinion. In light of the number and variety of factors that the
Board and the Independent Committee considered in connection with their
evaluation of the Offer, neither the Board nor the Independent Committee found
it practicable to assign relative weights to the foregoing factors, and,
accordingly, neither the Board nor the Independent Committee did so. The
Independent Committee and the Board, however, gave significant weight to the
factors specified in clauses (a) through (f), inclusive, above.
In addition to the factors listed above, the Board and the Independent
Committee each had considered the fact that consummation of the Offer would
eliminate the opportunity of the Public Stockholders to participate in any
21
<PAGE>
potential future growth in the value of the Company, but determined that this
loss of opportunity was ameliorated in part by the price of $4.625 net per Share
to be paid in the Offer. See "Special Factors - Purpose and Background of the
Offer; Certain Effects of the Offer; Plans of the Company after the Offer."
It should be noted that neither the Board nor the Independent Committee
considered the American letter in assessing the fairness of the Offer for the
following reasons: First, the recommendation of the Independent Committee and
the opinion of its financial advisor, Houlihan Lokey, were received prior to the
receipt of the American letter. Second, American expressed an interest in
acquiring 51% or more of the outstanding shares of the Company, which
represented a controlling position in the Company. Satisfaction of such
condition was impossible, given the stated unwillingness of the Remaining
Stockholders and certain other officers of the Company to sell their Shares
(representing a majority of the outstanding shares of the Company, including
shares subject to currently exerciseable options) to American.
In addition, the Independent Committee determined that the Offer is
procedurally fair to the stockholders of the Company because, among other things
(i) the Independent Committee, consisting entirely of independent directors, was
formed to evaluate and negotiate the terms of the Offer on behalf of the Public
Stockholders, (ii) the Independent Committee retained Houlihan Lokey to render a
fairness opinion with respect to the Offer, (iii) there were deliberations
pursuant to which the Independent Committee evaluated the Offer, and (iv) a
$1.035 per Share increase in the initial offer price resulted from active
arm's-length bargaining between the Independent Committee and its
representatives and the Remaining Stockholders. However, it should be noted
that, because the range of alternatives available to the Board, and therefore
the Independent Committee, did not involve a sale of the Company to a third
party, the options available for the Independent Committee to explore on behalf
of the unaffiliated shareholders may have been limited. Although the Independent
Committee discussed alternatives to the Offer, the unwillingness of the
Stockholders referred to above to sell their Shares led the Independent
Committee to conclude that a sale of the Company to a third party was not a
feasible alternative.
4. OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Introduction. The preparation of a fairness opinion is a complex process
and is not necessarily susceptible to partial analysis or summary description.
The following is a brief summary and general description of the valuation
methodologies utilized by Houlihan Lokey. The summary does not purport to be a
complete statement of the analyses and procedures applied, the judgements made
or the conclusion reached by Houlihan Lokey or a complete description of its
presentation. Houlihan Lokey believes, and so advised the Board, that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all factors
and analyses, could create an incomplete view of the process underlying its
analyses and opinions.
22
<PAGE>
The Company retained Houlihan Lokey on behalf of the Independent
Committee of the Board of Directors to render an opinion as to the fairness,
from a financial point of view, of the Offer to the Public Stockholders. At the
June 16, 1999 meeting of the Board, Houlihan Lokey presented its analysis as
hereinafter described and delivered its written opinion that as of such date and
based on the matters described therein, the Offer is fair to the Public
Stockholders from a financial point of view.
THE COMPLETE TEXT OF HOULIHAN LOKEY'S OPINION IS ATTACHED HERETO AS
SCHEDULE II. THE SUMMARY OF THE OPINION SET FORTH BELOW IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH OPINION. THE STOCKHOLDERS ARE URGED TO READ SUCH
OPINION CAREFULLY IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED,
THE FACTORS CONSIDERED AND THE ASSUMPTIONS MADE BY HOULIHAN LOKEY.
Houlihan Lokey's opinion to the Independent Committee addresses only the
fairness from a financial point of view of the Offer, and does not constitute a
recommendation to the Public Stockholders as to how such stockholders should
vote at a meeting of the Stockholders should one be necessary. Houlihan Lokey's
opinion does not address the Company's underlying business decision to effect
the Offer. Houlihan Lokey has not been requested to, and did not, solicit third
party indications of interest in acquiring all or part of the Company.
In connection with the preparation of its opinion, Houlihan Lokey made
such reviews, analyses and inquiries as they deemed necessary and appropriate
under the circumstances. Among other things, Houlihan Lokey: (i) reviewed the
Company's audited financial statements on Form 10-K for the three fiscal years
ended December 31, 1998, the Form 10-Q for the fiscal quarter ended March 31,
1999, and an internally prepared income statement for the four months ended
April 30, 1999, which the Company's management has identified as being the most
current financial statements available; (ii) met with certain members of senior
management of the Company to discuss the operations, financial condition, future
prospects and projected operations and performance of the Company; (iii)
reviewed forecasts and projections dated May 24, 1999 prepared by the Company's
management with respect to the Company for the year ended December 31, 1999;
(iv) reviewed the historical market prices and trading volume for the Company's
publicly traded securities; (v) reviewed publicly available financial data for
certain companies that it deemed comparable to the Company, and publicly
available prices and premiums paid in other transactions that it considered
similar to the Offer; and (vi) conducted such other studies, analyses and
inquiries as it deemed appropriate.
In assessing the financial fairness of the Offer to the Company's Public
Stockholders Houlihan Lokey: (i) analyzed the reasonableness of the trading
value of the Company's publicly traded equity securities; (ii) independently
valued the common equity of the Company using widely accepted valuation
methodologies; (iii) analyzed the reasonableness of the consideration being
offered in the Offer; and (v) reviewed the valuation implications to the
Company's Public Stockholders of various alternatives to the Offer.
23
<PAGE>
Valuation of the Company.
Assessment of Winston Resources' Public Stock Price. As part of its
analysis, Houlihan Lokey analyzed the trading price and volume of the Company's
common stock.
As indicated in the above graph changes in the Company's common stock
price over the last twelve months have followed a similar pattern to changes in
common stock prices of a group of comparable public companies. The Company's 30
day average stock price prior to announcement of the Offer was $3.27, which was
52.3% of its high price over the preceding twelve months. The composite 30 day
average price of the group of comparable public companies was 52.2% of the
composite high price over the preceding twelve months. The Company's closing
price the day prior to the announcement was $2.875, which is 46.0% of the high
price over the preceding twelve months, as compared to 47.5% for the group of
comparable public companies.
Houlihan Lokey calculated the ratio of the Company's average daily
volume (over the most recent 90 days) for the Company's common stock to its
float and total shares outstanding. Houlihan Lokey then compared the Company's
ratios to similar ratios of comparable publicly traded companies.
Based on these analyses, it was Houlihan Lokey's opinion that the
Company's common stock (i) has traded in a similar fashion to the group of
comparable public companies, (ii) has a smaller public float than the comparable
public companies, (iii) does not trade as actively as the comparable public
companies, and (iv) has less analyst coverage than most of the comparable public
companies.
Estimation of the Company's Fully Distributed Stock Price. Houlihan
Lokey completed an independent valuation of the Company using the market
multiple approach. This approach involved the multiplication of various earnings
and cash flow measures by appropriate risk-adjusted multiples. Multiples were
determined through an analysis of certain publicly traded companies, selected on
the basis of operational and economic similarity with the principal business
operations of the Company. Earnings and cash flow multiples were calculated for
the comparable companies based upon daily trading prices. A comparative risk
analysis between the Company and the public companies formed the basis for the
selection of appropriate risk adjusted multiples for the Company. The risk
analysis incorporated both quantitative and qualitative risk factors which
relate to, among other things, the nature of the industry in which the Company
and the comparable companies are engaged.
24
<PAGE>
For purposes of this analysis, Houlihan Lokey selected seven publicly
traded, domestic companies involved in the personnel staffing industry. The
companies included Barrett Business Services, Inc., Joule, Inc., On Assignment,
Inc., Personnel Group of America, Inc., Romac International, Inc., SOS Staffing
Services, Inc., and Westaff, Inc. Houlihan Lokey informed the Board that,
because the market multiple approach is based upon publicly traded prices of
equity securities, the resulting valuation indications are on a fully
distributed, publicly traded equivalent basis. Houlihan Lokey's market multiple
approach produced indications of value for the Company's common stock in the
range of $4.30 to $4.90 per share, on a fully distributed, freely traded basis.
Fairness of Consideration.
Acquisition Premium Analysis. Houlihan Lokey analyzed the acquisition
premiums (the difference between the acquisition price and unaffected trading
price) paid in nine acquisitions of controlling interest of companies in the
personnel staffing industry that occurred between January 1, 1996 and June 10,
1999. Houlihan Lokey noted that the four-week acquisition premiums ranged from a
low of 20.6% to a high of 116.7% with a mean of 48.0% and a median of 39.2%.
Houlihan Lokey noted that the acquisition premium implied by the Purchase Offer
was (i) 60.9% relative to the Company's stock price of $2.88 on June 15, 1999,
(ii) 41.4% relative to the Company's four-week average stock price, (iii) 117.7%
relative to the 52 week low price and (iv) a 35.1% discount to the 52 week high
price. Based on this analysis, Houlihan Lokey noted that it was their conclusion
that the Offer represents a reasonable acquisition premium.
Houlihan Lokey further noted that the Company's stock price achieved its
52 week high on July 29, 1998, and that this was approximately the same period
that the companies deemed by Houlihan Lokey to be comparable to the Company
reached their respective highs. Due to the significant amount of time between
the 52 week high and the date of the Offer, Houlihan Lokey concluded that the 52
week high was not relevant to the current value of the Company. Houlihan Lokey
concluded that the more relevant indications were the 30 day average closing
price prior to the Offer ($3.27 per share), the 60 day average closing price
prior to the Offer ($3.21 per share) and the 90 day average closing price prior
to the Offer ($3.12 per share). The Offer represents 41.4%, 44.1% and 48.2%
premiums over the 30, 60 and 90 day average closing prices, respectively.
In addition to assessing the acquisition premium implied by the Offer in
the transaction, Houlihan Lokey performed an independent valuation analysis to
determine the value of the Company on a controlling interest basis.
Comparable Transaction Multiples. The comparable sales approach involved
multiples of earnings and cash flow. Multiples utilized in this approach were
determined through an analysis of acquisitions of controlling interests in
companies with operations deemed to be reasonably comparable to the Company's
principal business operations. For purposes of this analysis Houlihan Lokey
analyzed 36 completed transactions between January 1, 1996 and June 10, 1999.
25
<PAGE>
Based on the foregoing, Houlihan Lokey concluded that the controlling
interest value of the Company's common stock was reasonably stated in the range
of $4.70 to $5.20 per share which Houlihan Lokey noted was more than the Offer
Price of $4.625 per share. Houlihan Lokey noted that while the theoretical
controlling interest value was above the Offer Price, the Offer Price
represented a substantial premium to actual trading value and theoretical fully
distributed trading value. Houlihan Lokey gave more weight to the premium to
actual trading price and fully distributed analysis in evaluating the fairness
of the Offer from a financial point of view.
Assessment of Winston Resources' Strategic Alternatives to the Purchase
Offer. In evaluating the fairness of the Offer, from a financial point of view,
Houlihan Lokey considered the expected value to the Company's Public
Stockholders of completing the Offer and certain alternatives to the Offer. With
regard to each alternative, Houlihan Lokey's analysis qualitatively considered
the valuation implications to the Company's Public Stockholders, the probability
of successfully completing each alternative, and the cost and time to implement.
For purposes of this analysis Houlihan Lokey considered the following
strategic alternatives: (i) status quo; (ii) sale or merger with a strategic
buyer, (iii) sale to a financial buyer; (iv) liquidation of business units; and
(v) the Offer. Houlihan Lokey noted that of the strategic alternatives
considered, the Offer appears to provide the greatest value to the Company's
Public Stockholders on a present value, risk-adjusted basis. Houlihan was not
asked to evaluate the American letter, which was received after Houlihan had
delivered its report, or to reconsider its evaluation in light of such letter.
Houlihan Lokey relied upon and assumed, without independent verification,
that the financial forecasts and projections provided to them, and as adjusted
based on their discussions with management, were reasonably prepared and
reflected the best currently available estimates of the future financial results
and condition of the Company, and that there had been no material change in the
assets, financial condition, business or prospects of the Company since the date
of the most recent financial statements made available to them.
Houlihan Lokey has not independently verified the accuracy and completeness
of the information supplied to them with respect to the Company and does not
assume any responsibility with respect to it. The Company has not made any
independent appraisal of any of the properties or assets of the Company.
Houlihan Lokey's opinion was necessarily based on business, economic, market and
other conditions as they existed and could be evaluated by them at the date of
their letter.
Houlihan Lokey is a nationally recognized investment banking firm with
special expertise in, among other things, valuing businesses and securities and
rendering fairness opinions. Houlihan Lokey is continually engaged in the
26
<PAGE>
valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, private placements of debt and debt and equity,
corporate reorganizations, employee stock ownership plans, corporate and other
purposes. The Independent Committee selected Houlihan Lokey because of its
experience and expertise in performing valuation and fairness analysis. Houlihan
Lokey does not beneficially own nor has it ever beneficially owned any interest
in the Company.
Fees and Expenses. Pursuant to an agreement dated April 26, 1999, Houlihan
Lokey was retained by the Company to analyze the fairness of the Offer to the
Public Stockholders of the Company, from a financial point of view. The Company
has agreed to pay Houlihan Lokey a fee of $125,000 plus its reasonable
out-of-pocket expenses incurred in connection with the rendering of a fairness
opinion. The Company has further agreed to indemnify Houlihan Lokey against
certain liabilities and expenses in connection with the rendering of its
services.
5. INTERESTS OF CERTAIN PERSONS IN THE OFFER AND THE SECOND-STEP TRANSACTION
In considering the recommendation of the Board and the Independent
Committee with respect to the Offer and the fairness of the consideration to be
received in the Offer and the Second-Step Transaction (if necessary),
stockholders should be aware that certain officers and directors of the Company
have interests in the Offer that are described below and which may present them
with certain potential conflicts of interest. As of June 30, 1999, the Remaining
Stockholders, who informed the Company that they would not tender any Shares in
the Offer, as a group and including shares issuable to them under currently
exercisable Stock Options had a 52.31% beneficial ownership interest, or
1,879,919 Shares. Even if no Shares are tendered in the Offer, the Remaining
Stockholders, together, own more than a majority of the outstanding Shares and,
if acting together, will be able to control all matters requiring approval of
the Company's stockholders, including the election of directors.
In connection with the Independent Committee's consideration of the Offer
on behalf of the Public Stockholders, the Company and the Independent Committee
have agreed that each member of the Independent Committee will receive a base
fee of $5,000 plus an additional fee of $500 for each meeting involving the
Independent Committee attended by such member. As of the date of this Offer to
Purchase, the members of the Independent Committee have earned, in the
aggregate, fees equal to $34,500.
The Board was aware of these actual and potential conflicts of interest and
considered them along with the other matters described under "Special Factors
- -Recommendation of the Company's Board; Fairness of the Offer." The Company
expects that employees of the Company who are not affiliated with the Remaining
Stockholders will tender their Shares pursuant to the Offer.
27
<PAGE>
Under the DGCL, corporations organized under the laws of the State of
Delaware are permitted to indemnify their current and former directors,
officers, employees and agents under certain circumstances against certain
liabilities and expenses incurred by them by reason of their serving in such
capacities. The Company's by-laws provide that each director and officer will be
indemnified by the Company against liabilities and expenses incurred in
connection with any threatened, pending or completed legal action or proceeding
to which he or she may be made a party or threatened to be made a party by
reason of being a director of the Company or a predecessor company, or serving
any other enterprise as a director or officer at the request of the Company. The
Company also has purchased directors' and officers' liability insurance for the
benefit of these persons.
6. BENEFICIAL OWNERSHIP OF SHARES
The following table sets forth certain information, as of June 30, 1999,
regarding the ownership of Shares by each person known by the Company to be the
beneficial owner of more than 5% of the outstanding Shares, each director of the
Company, the Chief Executive Officer of the Company, the other executive
officers of the Company, and all executive officers and Directors of the Company
as a group:
<TABLE>
<S> <C> <C>
Number of Percentage of
Name and Address Shares (1) Outstanding Shares
Directors and Officers
Seymour Kugler (2)(3)
c/o Winston Resources, Inc.
535 Fifth Avenue
New York, New York 10017................................ 1,145,456 33.91%
Joel A. Klarreich, Esq., as trustee (4)
c/o Newman Tannenbaum Helpern
Syracuse & Hirschtritt LLP
900 Third Avenue 245,000 7.25%
New York, New York 10022............................
Gregg Kugler (3)(5)
c/o Winston Resources, Inc.
535 Fifth Avenue
New York, New York 10017................................ 206,729 6.22%
Todd Kugler(3)(6)
c/o Winston Resources, Inc.
535 Fifth Avenue
New York, New York 10017............................. 180,691 5.45%
28
<PAGE>
Number of Percentage of
Name and Address Shares (1) Outstanding Shares
Alan E. Wolf (3)(7)
c/o Winston Resources, Inc.
535 Fifth Avenue
New York, New York 10017................................ 138,291 4.24%
David Silver (3)(8)
c/o Winston Resources, Inc.
535 Fifth Avenue
New York, New York 10017................................ 49,900 1.54%
Eric Kugler (3)(9)
c/o Winston Resources, Inc.
535 Fifth Avenue
New York, New York 10017................................ 102,043 3.12%
Martin Wolfson (10)
c/o Concord Fabrics Inc.
1359 Broadway
New York, New York 10018................................ 4,667 *
Martin A. Fischer (11)
West Center Associates
30-00 47 Avenue
Long Island City, New York 11101........................ 9,667 *
Martin J. Simon (12)
360 Merrick Road
Lynbrook, New York 11563 ............................... 10,667 *
Norton W. Sperling 0 *
1025 Seawane Drive
Hewlett Harbor, New York 11557
All directors and executive officers as
A group (10 persons) (13)............................... 2,093,111 57.20%
Other Beneficial Owners
Heartland Advisors, Inc.
790 North Milwaukee Street
Milwaukee, Wisconsin 53202 ............................. 301,600 9.33%
FMR Corp.
82 Devonshire Street
Boston, Massachusetts 02109 ............................ 288,900 8.94%
</TABLE>
29
<PAGE>
* Represents less than 1% of outstanding shares.
30
<PAGE>
(1) All shares are beneficially owned and, unless otherwise stated, the sole
voting power and investment power is held by the persons named.
(2) The amount set forth above includes 145,001 shares currently issuable
upon the exercise of stock options.
(3) For the year ended December 31, 1998 such person was a "Named Executive
Officer" of the Company within the meaning of Item 402(a)(3) of
Regulation S-K of the Securities Act of 1933, as amended (the
"Securities Act").
(4) Represents Shares held in trust for the benefit of Seymour Kugler and
his descendants, with respect to which Mr. Klarreich, a partner at the
law firm of Newman Tannenbaum Helpern Syracuse & Hirschtritt LLP, serves
as sole trustee. Under the Trust Agreement, Mr. Klarreich has voting and
dispositive power, subject only to the beneficiary's right to withdraw
the Shares under certain circumstances.
(5) The amount set forth above includes 90,000 shares currently issuable
upon the exercise of stock options. Mr. Gregg Kugler disclaims
beneficial ownership of 36,000 shares owned by his children.
(6) The amount set forth above includes 85,000 shares currently issuable
upon the exercise of stock options issued to Mr. Todd Kugler and his
wife. Mr. Todd Kugler disclaims beneficial ownership of 9,500 shares
owned by his child.
(7) The amount set forth above includes 25,334 shares currently issuable
upon the exercise of stock options.
(8) The amount set forth includes 16,800 shares currently issuable upon the
exercise of stock options.
(9) The amount set forth includes 40,000 shares currently issuable upon the
exercise of stock options.
(10) The amount set forth includes 4,667 shares currently issuable upon the
exercise of stock options.
(11) The amount set forth above includes 2,687 shares currently issuable upon
the exercise of stock options.
(12) The amount set forth above includes 6,667 shares currently issuable upon
the exercise of stock options.
31
<PAGE>
(13) The amount set forth above includes 416,156 shares currently issuable
upon the exercise of stock options. 7.
32
<PAGE>
7. FEES AND EXPENSES
The following is an estimate of expenses incurred or to be incurred in
connection with the Offer. Also see "The Tender Offer - 13. Fees and Expenses."
<TABLE>
<S> <C>
Legal Fees....................................................................... $ (1)
Printing and Mailing............................................................. 25,000
Filing Fees...................................................................... 1,586
Depositary Fees and Expenses..................................................... 5,000
Information Agent Fees and Expenses.............................................. 15,000
Investment Bankers' Fees......................................................... 225,000
Accountants' Fees................................................................ 10,000
Financing Fees................................................................... 217,000
Fees of the Independent Committee................................................ 34,500
Miscellaneous.................................................................... 50,000
Total............................................................................ (1)
</TABLE>
The Company will be responsible for all expenses incurred in connection
with the Offer, whether or not the Offer is consummated.
__________________
(1) To be filed by amendment.
33
<PAGE>
THE TENDER OFFER
1. TERMS OF THE OFFER; EXPIRATION DATE
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of such extension or
amendment), the Company will accept for payment, and will pay for, all Shares
validly tendered prior to the Expiration Date (as hereinafter defined) and not
withdrawn as permitted by "The Tender Offer - 4. Withdrawal Rights." The term
"Expiration Date" means 5:00 p.m., New York City time, on _______, ________,
1999, unless and until the Company, in its sole discretion shall have extended
the period during which the Offer is open, in which event the term "Expiration
Date" shall mean the latest time and date at which the Offer, as so extended by
the Company, shall expire.
The Company expressly reserves the right, in its sole discretion, at any
time and from time to time, to extend for any reason the period of time during
which the Offer is open, including the occurrence of any of the conditions
specified in "The Tender Offer - 11. Certain Conditions of the Offer," by giving
oral or written notice of such extension to the Depositary. During any such
extension, all Shares previously tendered and not withdrawn will remain subject
to the Offer, subject to the rights of a tendering stockholder to withdraw such
stockholder's Shares. See "The Tender Offer - 4. Withdrawal Rights."
Subject to the applicable regulations of the Commission, the Company also
expressly reserves the right, in its sole discretion, at any time and from time
to time, (i) to delay acceptance for payment of, or, regardless of whether such
Shares were theretofore accepted for payment, payment for, any Shares, pending
receipt of any regulatory approval specified in "The Tender Offer - 12. Certain
Legal Matters and Regulatory Approvals," (ii) to terminate the Offer and not
accept for payment any Shares upon the occurrence of any of the conditions
specified in "The Tender Offer - 11. Certain Conditions of the Offer" and (iii)
to waive any condition, extend the offer period or otherwise amend the Offer in
any respect, by giving oral or written notice of such delay, termination, waiver
or amendment to the Depositary and by making a public announcement thereof. The
Company acknowledges that (i) Rule 13e-4(f) under the Exchange Act requires the
Company to pay the consideration offered or return the Shares tendered promptly
after the termination or withdrawal of the Offer and (ii) the Company may not
delay acceptance for payment of, or payment for (except as provided in clause
(i) of the first sentence of this paragraph), any Shares upon the occurrence of
any of the conditions specified in "The Tender Offer - 11. Certain Conditions of
the Offer" without extending the period of time during which the Offer is open.
Any such extension, delay, termination, waiver or amendment will be
followed as promptly as practicable by public announcement thereof, such
announcement in the case of an extension to be made no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
34
<PAGE>
If the Company makes a material change in the terms of the Offer or other
information concerning the Offer, or if it waives a material condition of the
Offer, the Company will extend the Offer to the extent required by Rules
13e-3(e)(2), 13e-4(e)(2) and 13e-4(f) under the Exchange Act.
If, prior to the Expiration Date, the Company should decide to decrease the
number of Shares being sought or to increase or decrease the consideration being
offered in the Offer, such decrease in the number of Shares being sought or such
increase or decrease in the consideration being offered will be applicable to
all stockholders whose Shares are accepted for payment pursuant to the Offer
and. if at the time notice of any such decrease in the number of Shares being
sought or such increase or decrease in the consideration being offered is first
published, sent or given to holders of such Shares, the Offer is scheduled to
expire at any time earlier than the period ending on the tenth business day from
and including the date that such notice is first so published, sent or given,
the Offer will be extended at least until the expiration of such ten business
day period. For purposes of this Offer, a "business day" means any day other
than a Saturday, Sunday or Federal holiday and consists of the time period from
12:01 a.m. through 12:00 midnight, New York City time.
This Offer to Purchase and the related Letter of Transmittal will be mailed
to record holders of Shares whose names appear on the Company's stockholder list
and will be furnished, for subsequent transmittal to beneficial owners of
Shares, to brokers, dealers, commercial banks, trust companies and similar
persons whose names, or the names of whose nominees, appear on the stockholder
list or, if applicable, who are listed as participants in a clearing agency's
security position listing.
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such extension
or amendment), the Company will accept for payment, and will pay for promptly
after the Expiration Date, all Shares validly tendered prior to the Expiration
Date and not properly withdrawn in accordance with "The Tender Offer - 11.
Certain Conditions of the Offer." Subject to applicable rules of the Commission,
the Company expressly reserves the right to delay acceptance for payment of, or
payment for, Shares pending receipt of any regulatory approvals specified in
"The Tender Offer - 12. Certain Legal Matters and Regulatory Approvals" or in
order to comply in whole or in part with any other applicable law.
In all cases, payment for Shares tendered and accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of (i) the
certificates evidencing such Shares (the "Share Certificates") or timely
confirmation (a "Book-Entry Confirmation") of a book-entry transfer of such
Shares into the Depositary's account at The Depository Trust Company
(hereinafter referred to as the "Book-Entry Transfer Facility") pursuant to the
procedures set forth in "The Tender Offer - 3. Procedures for Accepting the
Offer and Tendering Shares," (ii) the Letter of Transmittal (or a facsimile
thereof), properly completed and duly executed, with any required signature
guarantees or, in the case of a book-entry transfer, an Agent's Message (as
35
<PAGE>
defined below) in lieu of the Letter of Transmittal, and (iii) any other
documents required under the Letter of Transmittal.
For purposes of the Offer, the Company will be deemed to have accepted for
payment (and thereby purchased) Shares validly tendered and not properly
withdrawn as, if and when the Company gives oral or written notice to the
Depositary of the Company's acceptance for payment of such Shares pursuant to
the Offer. Upon the terms and subject to the conditions of the Offer, payment
for Shares accepted for payment pursuant to the Offer will be made by deposit of
the purchase price therefor with the Depositary, which will act as agent for
tendering stockholders for the purpose of receiving payments from the Company
and transmitting such payments to tendering stockholders whose Shares have been
accepted for payment. Under no circumstances will interest on the purchase price
for Shares be paid, regardless of any delay in making such payment.
If any tendered Shares are not accepted for payment for any reason pursuant
to the terms and conditions of the Offer, or if Share Certificates are submitted
evidencing more Shares than are tendered, Share Certificates evidencing
unpurchased Shares will be returned, without expense to the tendering
stockholder (or, in the case of Shares tendered by book-entry transfer into the
Depositary's account at a Book-Entry Transfer Facility pursuant to the procedure
set forth in "The Tender Offer - 3. Procedures for Accepting the Offer and
Tendering Shares," such Shares will be credited to an account maintained at such
Book-Entry Transfer Facility), as promptly as practicable following the
expiration or termination of the Offer.
If, prior to the Expiration Date, the Company shall increase the
consideration offered to any holders of Shares pursuant to the Offer, such
increased consideration will be paid to all holders of Shares that are purchased
pursuant to the Offer, whether or not, such Shares were tendered prior to such
increase in consideration.
The Company reserves the right to transfer or assign, in whole or from time
to time in part, to one or more of its affiliates, the right to purchase all or
any portion of the Shares tendered pursuant to the Offer, but any such transfer
or assignment will not relieve the Company of its obligations under the Offer
and will in no way prejudice the rights of tendering stockholders to receive
payment for Shares validly tendered and accepted for payment pursuant to the
Offer.
3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES
In order for a holder of Shares to validly tender Shares pursuant to the
Offer, the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, together with any required signature guarantees (or, in the
case of a book-entry transfer, an Agent's Message (as defined below) in lieu of
the Letter of Transmittal) and any other documents required by the Letter of
Transmittal, must be received by the Depositary at one of its addresses set
forth on the back cover of this Offer to Purchase and either (i) the Share
Certificates evidencing tendered Shares must be received by the Depositary at
such address or such Shares must be tendered pursuant to the procedure for
book-entry transfer described below and a Book-Entry Confirmation must be
received by the Depositary (including an Agent's Message if the tendering
36
<PAGE>
stockholder has not delivered a Letter of Transmittal), in each case prior to
the Expiration Date, or (ii) the tendering stockholder must comply with the
guaranteed delivery procedures described below. The term "Agent's Message" means
a message, transmitted by a Book-Entry Transfer Facility to, and received by,
the Depositary and forming a part of a Book-Entry Confirmation, which states
that such Book-Entry Transfer Facility has received an express acknowledgment
from the participant in such Book-Entry Confirmation, that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal and
that the Company may enforce such agreement against such participant.
THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED
DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT
THE OPTION AND RISK OF THE TENDERING STOCKHOLDER, AND THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN SUCH DOCUMENTS ARE ACTUALLY RECEIVED BY THE DEPOSITARY. IF
DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY.
Book-Entry Transfer. The Depositary will establish accounts with respect to
the Shares at the Book-Entry Transfer Facilities for purposes of the Offer
within two business days after the date of this Offer to Purchase. Any financial
institution that is a participant in the system of Book-Entry Transfer Facility
may make a book-entry delivery of Shares by causing such Book-Entry Transfer
Facility to transfer such Shares into the Depositary's account at such
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for such transfer. However, although delivery of Shares
may be effected through book-entry transfer at a Book-Entry Transfer Facility,
either the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, together with any required signature guarantees, or an
Agent's Message in lieu of the Letter of Transmittal, and any other required
documents, must, in any case, be received by the Depositary at one of its
addresses set forth on the back cover of this Offer to Purchase prior to the
Expiration Date, or the tendering stockholder must comply with the guaranteed
delivery procedure described below. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY
TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
Signature Guarantees. Signatures on all Letters of Transmittal must be
guaranteed by a firm that is a member of the Medallion Signature Guarantee
Program, or by any other "eligible guarantor institution," as such term is
defined in Rule l7Ad-15 under the Exchange Act (each of the foregoing referred
to as an "Eligible Institution"), except in cases where Shares are tendered (i)
by a registered holder of Shares who has not completed either the box entitled
"Special Payment Instructions" or the box entitled "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. If a Share Certificate is registered in the name of a
person other than the signer of the Letter of Transmittal, or if payment is to
be returned, to a person other than the registered holder(s), then the Share
Certificate must be endorsed or accompanied by appropriate stock powers, in
either case signed exactly as the name(s) of the registered holder(s) appear on
the Share Certificate, with the signature(s) on such Share Certificate or stock
powers guaranteed by an Eligible Institution. See Instructions 1 and 5 of the
Letter of Transmittal.
37
<PAGE>
Guaranteed Delivery. If a stockholder desires to tender Shares pursuant to
the Offer and the Share Certificates evidencing such stockholder's Shares are
not immediately available or such stockholder cannot deliver the Share
Certificates and all other required documents to the Depositary prior to the
Expiration Date, or such stockholder cannot complete the procedure for delivery
by book-entry transfer on a timely basis, such Shares may nevertheless be
tendered, provided that all the following conditions are satisfied:
i. such tender is made by or through an Eligible Institution;
ii. a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form made available by the Company is
received prior to the Expiration Date by the Depositary as provided
below; and
iii. the Share Certificates (or a Book-Entry Confirmation) evidencing
all tendered Shares, in proper form for transfer, in each case together
with the Letter of Transmittal (or a facsimile thereof), properly
completed and duly executed, with any required signature guarantees, and
any other documents required by the Letter of Transmittal are received
by the Depositary within three AMEX trading days after the date of
execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or mail or
transmitted by telegram or facsimile transmission to the Depositary and must
include a guarantee by an Eligible Institution in the form set forth in the form
of Notice of Guaranteed Delivery made available by the Company.
In all cases, payment for Shares tendered and accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of the
Share Certificates evidencing such Shares, or a Book-Entry Confirmation of the
delivery of such Shares, and the Letter of Transmittal (or a facsimile thereof),
properly completed and duly executed, with any required signature guarantees,
and any other documents required by the Letter of Transmittal.
Determination Of Validity. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance for payment of any tender
of Shares will be determined by the Company in its sole discretion, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance for payment of which may, in the opinion of its
counsel, be unlawful. The Company also reserves the absolute right to waive any
condition of the Offer or any defect or irregularity in the tender of any Shares
of any particular stockholder, whether or not similar defects or irregularities
are waived in the case of other stockholders. No tender of Shares will be deemed
to have been validly made until all defects and irregularities have been cured
or waived. Neither the Company, the Depositary, the Information Agent nor any
other person will be under any duty to give notification of any defects or
irregularities in tenders or will incur any liability for failure to give any
such notification. The Company's interpretation of the terms and conditions of
the Offer (including the Letter of Transmittal and the instructions thereto)
will be final and binding.
38
<PAGE>
Other Requirements. By executing the Letter of Transmittal as set forth
above, a tendering stockholder irrevocably appoints designees of the Company as
such stockholder's proxies, each with full power of substitution, in the manner
set forth in the letter of transmittal, to the full extent of such stockholder's
rights with respect to the Shares tendered by such stockholder and accepted for
payment by the Company (and with respect to any and all Shares or other
securities issued or issuable in respect of such Shares on or after June 16,
1999). All such proxies shall be considered coupled with an interest in the
tendered Shares. Such appointment will be effective when, and only to the extent
that, the Company accepts such Shares for payment. Upon such acceptance for
payment, all prior proxies given by such stockholder with respect to such Shares
(and such other Shares and securities) will be revoked without further action,
and no subsequent proxies may be given nor any subsequent written consent
executed by such stockholder (and, if given or executed, will not be deemed to
be effective) with respect thereto. The designees of the Company will, with
respect to the Shares for which the appointment is effective, be empowered to
exercise all voting and other rights of such stockholder as they in their sole
discretion may deem proper at any annual or special meeting of the Company's
stockholders or any adjournment or postponement thereof, by written consent in
lieu of any such meeting or otherwise.
The acceptance for payment by the Company of Shares pursuant to any of the
procedures described above will constitute a binding agreement between the
tendering stockholder and the Company upon the terms and subject to the
conditions of the Offer.
TO PREVENT BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO PAYMENT TO
CERTAIN STOCKHOLDERS OF THE PURCHASE PRICE OF SHARES PURCHASED PURSUANT TO THE
OFFER, EACH SUCH STOCKHOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH STOCKHOLDER'S
CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY THAT SUCH STOCKHOLDER IS NOT
SUBJECT TO BACKUP FEDERAL INCOME TAX WITHHOLDING BY COMPLETING THE SUBSTITUTE
FORM W-9 IN THE LETTER OF TRANSMITTAL. IF BACKUP WITHHOLDING APPLIES WITH
RESPECT TO A STOCKHOLDER, THE DEPOSITARY IS REQUIRED TO WITHHOLD 31% OF ANY
PAYMENTS MADE TO SUCH STOCKHOLDER. SEE INSTRUCTION 9 OF THE LETTER OF
TRANSMITTAL.
4. WITHDRAWAL RIGHTS
39
<PAGE>
Tenders of Shares made pursuant to the Offer are irrevocable except that
such Shares may be withdrawn at any time prior to the Expiration Date and,
unless theretofore accepted for payment by the Company pursuant to the Offer,
may also be withdrawn at any time after _____________ ___, 1999. If the Company
extends the Offer, is delayed in its acceptance for payment of Shares or is
unable to accept Shares for payment pursuant to the Offer, the Depositary may,
nevertheless, on behalf of the Company, retain tendered Shares, and such Shares
may not be withdrawn except to the extent that tendering stockholders are
entitled to withdrawal rights as described in this Section 4.
For a withdrawal to be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Depositary at
one of its addresses set forth on the back cover page of this Offer to Purchase.
Any such notice of withdrawal must specify the name of the person who tendered
the Shares to be withdrawn, the number of Shares to be withdrawn and the name of
the registered holder of such Shares, if different from that of the person who
tendered such Shares. If Share Certificates evidencing Shares to be withdrawn
have been delivered or otherwise identified to the Depositary, then, prior to
the physical release of such Share Certificates, the serial numbers shown on
such Share Certificates must be submitted to the Depositary and the signature(s)
on the notice of withdrawal must be guaranteed by an Eligible Institution,
unless such Shares have been tendered for the account of an Eligible
Institution. If Shares have been tendered pursuant to the procedure for
book-entry transfer as set forth in the "The Tender Offer - 3. Procedures for
Accepting the Offer and Tendering Shares," any notice of withdrawal must specify
the name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn Shares.
All questions as to the form and validity (including the time of receipt)
of any notice of withdrawal will be determined by the Company, in its sole
discretion, whose determination will be final and binding. Neither the Company,
the Information Agent nor any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give any such notification.
Any Shares properly withdrawn will thereafter be deemed not to have been
validly tendered for purposes of the Offer. However, withdrawn Shares may be
re-tendered at any time prior to the Expiration Date by following one of the
procedures described in "The Tender Offer - 3. Procedures for Accepting the
Offer and Tendering Shares."
5. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
Sales of Shares by stockholders pursuant to the Offer will be taxable
transactions for federal income tax purposes and may also be taxable
transactions under applicable state, local, foreign and other tax laws. The
Federal income tax consequences to a stockholder may vary depending upon the
stockholder's particular facts and circumstances. Under section 302 of the
Internal Revenue Code of 1986, as amended (the "Code"), a sale of Shares
pursuant to the Offer will, as a general rule, be treated as a sale or exchange
40
<PAGE>
if the receipt of cash upon such sale (a) is "substantially disproportionate"
with respect to the stockholder, (b) results in a "complete redemption" of the
stockholder's interest in the Company or (c) is "not essentially equivalent to a
dividend" with respect to the stockholder. If any of those three tests is
satisfied, a tendering stockholder will recognize gain or loss equal to the
difference between the amount of cash received by the stockholder pursuant to
the Offer and the stockholder's tax basis in the Shares sold pursuant to the
Offer. Recognized gain or loss will be capital gain or loss, assuming the Shares
are held as capital assets, which will be long-term capital gain or loss if the
Shares are held for more than one year.
Net capital gain recognized by an individual upon the sale of, or otherwise
attributable to, a capital asset that has been held for more than one year will
generally be subject to tax at a rate not to exceed 20%. Capital gain recognized
from the sale of, or otherwise attributable to, a capital asset held for one
year or less will be subject to tax at the ordinary income tax rates. In
addition, capital gain recognized by a corporate taxpayer will continue to be
subject to tax at the ordinary income tax rates applicable to corporations. The
deductibility of capital losses is subject to certain limitations.
In determining whether any of the tests under Section 302 of the Code is
satisfied, stockholders must take into account not only the shares of common
stock they actually own, but also any shares of common stock they are deemed to
own pursuant to the constructive ownership rules of Section 318 of the Code.
Pursuant to those constructive ownership rules, a stockholder is deemed to own
common stock actually owned, and in some cases constructively owned, by certain
related individuals or entities, and any common stock that the stockholder has
the right to acquire by exercise of an option or by conversion or exchange of a
security. The receipt of cash will be "substantially disproportionate" with
respect to a stockholder if, among other things, the percentage of the
outstanding common stock actually and constructively owned by the stockholder
immediately following the sale of Shares pursuant to the Offer (treating as no
longer outstanding all Shares purchased pursuant to the Offer) is less than 80%
of the percentage of the outstanding common stock actually and constructively
owned by such stockholder immediately before the sale of Shares pursuant to the
Offer (treating as outstanding all Shares purchased pursuant to the Offer).
Stockholders should consult their tax advisors with respect to the application
of the "substantially disproportionate" test to their particular facts and
circumstances.
The receipt of cash by a stockholder will result in a "complete redemption"
of the stockholder's interest in the Company if either (a) all the common stock
actually and constructively owned by the stockholder is sold pursuant to the
Offer or otherwise or (b) all the common stock actually owned by the stockholder
is sold pursuant to the Offer or otherwise and the stockholder is eligible to
waive and does effectively waive attribution of all Common Stock constructively
owned by the stockholder in accordance with Section 302(c) of the Code.
41
<PAGE>
Even if the receipt of cash by a stockholder fails to satisfy the
"substantially disproportionate" test or the "complete redemption" test, such
stockholder may nevertheless satisfy the "not essentially equivalent to a
dividend" test, if the stockholder's sale of Shares pursuant to the Offer
results in a "meaningful reduction" in the stockholder's proportionate interest
in the Company. Whether the receipt of cash by a stockholder will be "not
essentially equivalent to a dividend" will depend upon the individual
stockholder's facts and circumstances. In certain circumstances, even a small
reduction in a stockholder's proportionate interest may satisfy this test. For
example, the Internal Revenue Service ("IRS") has indicated in a published
ruling that a 3.3% reduction in the proportionate interest of a small minority
26 30 (substantially less than 1%) stockholder in a publicly held corporation
who exercises no control over corporate affairs constitutes such a "meaningful
reduction." Stockholders expecting to rely upon the "not essentially equivalent
to a dividend" test should, therefore, consult their tax advisors as to its
application in their particular situations. If none of the three tests under
Section 302 is satisfied then, to the extent the Company has sufficient earnings
and profits, the tendering stockholder will be treated as having received a
dividend includible in gross income (and treated as ordinary income) in an
amount equal to the entire amount of cash received by the stockholder pursuant
to the Offer (without regard to gain or loss, if any).
In the case of a corporate stockholder, if the cash paid is treated as a
dividend, the dividend income may be eligible for the 70% dividends-received
deduction. The dividends-received deduction is subject to certain limitations,
and may not be available if the corporate stockholder does not satisfy certain
holding period requirements with respect to the Shares or if the Shares are
treated as "debt financed portfolio stock" within the meaning of Section 246A(c)
of the Code. Generally, if a dividends-received deduction is available, it is
expected that the dividend will be treated as an "extraordinary dividend" under
Section 1059(a) of the Code, in which case such corporate stockholder's tax
basis in Shares retained by such stockholder would be reduced, but not below
zero, by the amount of the nontaxed portion of the dividend. Any amount of the
nontaxed portion of the dividend in excess of the stockholder's basis will
generally be treated as capital gain and will be recognized in the taxable year
in which the extraordinary dividend is received. If a redemption of Shares from
a corporate stockholder pursuant to the Offer is treated as a dividend as a
result of the stockholder's constructive ownership of other common stock that it
has an option or other right to acquire, the portion of the extraordinary
dividend not otherwise taxed because of the dividends-received deduction would
reduce the stockholder's adjusted tax basis only in its Shares sold pursuant to
the Offer, and any excess of such non-taxed portion over such basis would be
currently taxable as gain on the sale of such Shares. Corporate stockholders
should consult their tax advisors as to the availability of the
dividends-received deduction and the application of Section 1059 of the Code.
"Backup withholding" at a rate of 31% will apply to payments made to
stockholders pursuant to the Offer unless the stockholder has furnished its
taxpayer identification number in the manner prescribed in applicable Treasury
regulations, has certified that such number is correct, has certified as to no
loss of exemption from backup withholding and meets certain other conditions.
42
<PAGE>
Any amounts withheld from a stockholder of Shares under the backup withholding
rules generally will be allowed as a refund or a credit against such
stockholder's United States federal income tax liability, provided the required
information is furnished to the IRS. The foregoing discussion may not apply to
Shares acquired pursuant to certain compensation arrangements with the Company.
THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN TYPES OF
STOCKHOLDERS, INCLUDING BROKER-DEALERS, STOCKHOLDERS WHO ACQUIRED SHARES
PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION,
INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES AND FOREIGN
CORPORATIONS.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED UPON PRESENT LAW STOCKHOLDERS ARE URGED TO CONSULT
THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE OFFER TO
THEM, INCLUDING THE APPLICATION AND EFFECT OF THE ALTERNATIVE MINIMUM TAX, AND
STATE, LOCAL AND FOREIGN TAX LAWS.
6. PRICE RANGE OF SHARES; DIVIDENDS
The Shares are listed and principally traded on AMEX under the ticker
symbol "WRS". The following table sets forth the high and low sales prices per
Share during the quarters indicated:
43
<PAGE>
<TABLE>
<S> <C> <C>
High Low
Year Ended December 31, 1997:
First Quarter: 4 1/4 3 1/8
Second Quarter: 4 3 1/8
Third Quarter: 6 3/8 3 3/8
Fourth Quarter: 6 3/4 5 1/4
Year Ended December 31, 1998:
First Quarter: 6 3/8 4 1/2
Second Quarter: 6 9/16 5 1/8
Third Quarter: 6 1/4 4 1/2
Fourth Quarter: 4 3/8 3 1/4
Year Ended December 31, 1999:
First Quarter 3 3/4 2 1/2
Second Quarter (through June 15, 1999) 3 1/2 2 7/8
</TABLE>
The foregoing figures, which were obtained from AMEX monthly statistical
reports, do not reflect retail markups or markdowns and may not represent actual
trades. At June 16, 1999, the Shares were held by 101 stockholders of record.
The Company has not paid any dividends since becoming a public company and
has no plans to do so in the near term. The Company currently intends to retain
any future earnings for the development of its business, subject to any future
Federal and state tax planning considerations. Payments of dividends in the
future will be within the discretion of the Board of Directors and will depend
upon, among other factors, earnings and the operating and financial condition of
the business.
On June 15, 1999, the last full trading day prior to the announcement of
the Offer, the closing price per Share as reported on the AMEX was $2.875 per
share. Stockholders are urged to obtain a current market quotation for the
Shares.
7. CERTAIN INFORMATION CONCERNING THE COMPANY
Except as otherwise set forth herein, the information concerning the
Company contained in this Offer to Purchase, including financial information,
has been furnished by the Company.
General. The Company is a Delaware corporation with its principal
executive offices located at 535 Fifth Avenue, New York, New York 10017. The
Company, founded in 1967, is an integrated network of companies dedicated to
44
<PAGE>
assisting their clientele in the recruitment of staff in all disciplines.
Working together, the Company's various divisions form one of the most
comprehensive recruitment organizations in the United States.
Recent Developments. For the six months ended June 30, 1999, the Company
reported that revenues increased by 1% to $29,773,000 and net income decreased
by 3% to $777,000 as compared to the six months ended June 30, 1998. For the
quarter ended June 30, 1999, net income was $417,000 on revenues of $14,967,000,
as compared to net income for the second quarter of 1998 of $445,000, a decrease
of approximately 6%, on revenues for such period of $15,098,800, a decrease of
approximately 1%. Selling, general and administrative expenses decreased
slightly as compared to the corresponding period in 1998. Interest expense net
of interest income increased slightly in 1999. There were no borrowings under
the Company's credit facility in 1999 and 1998.
The decrease in revenues in the quarter ended June 30, 1999 is primarily
due to a decrease in advertising and placement fee revenue offset by an increase
in temporary staffing revenue as compared to the corresponding periods in 1998.
The decrease in net income reflects decreased revenues being partially offset by
a decrease in operating expenses. Profitability was affected by increased
compensation for new hires, including additional sales people and investment in
new business development. Results reflect an overall deterioration in recent
operating results arising from the Company's loss of a significant volume of
business from a portion of its major customers, certain of which the Company has
found, and anticipates will be, difficult to replace with business at comparable
margins.
Financial Information. Set forth below is certain selected financial
information relating to the Company which has been excerpted or derived from the
audited financial statements contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 (the "Form 10-K") and the unaudited
financial statements contained in the Company's report on Form 10-Q for the six
months ended June 30, 1999 (the "Form 10-Q"). More comprehensive financial
information is included in the Form 10 K and Form 10-Q (including management's
discussion and analysis of financial condition and results of operations) and
other documents filed by the Company with the Commission. The financial
information that follows is qualified in its entirety by reference to such
reports and other documents, including the financial statements and related
notes contained therein. Such reports and other documents may be examined and
copies may be obtained from the offices of the Commission in the manner set
forth below. In addition, Schedule IV attached hereto sets forth the Form 10-K.
The Company is subject to the informational filing requirements of the
Exchange Act and, in accordance therewith, is required to file periodic reports,
proxy statements and other information with the Commission relating to its
business, financial condition and other matters. Information as of particular
dates concerning the Company's directors and officers, their remuneration, stock
options granted to them, the principal holders of the Company's securities and
any material interest of such persons in transactions with the Company is
45
<PAGE>
required to be disclosed in proxy statements distributed to the Company's
stockholders and filed with the Commission. Such reports, proxy statements and
other information should be available for inspection at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W,
Washington, D.C. 20549, and also should be available for inspection at the
Commission's regional offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048 and the Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may also be obtained by
mail, upon payment of the Commission's customary fees, by writing to its
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. These
materials filed by the Company with the Commission are also available at the web
site of the Commission at http:"www.sec.gov". The information is also available
for inspection at the American Stock Exchange, 86 Trinity Place, New York, New
York 10006.
46
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<S> <C> <C> <C> <C>
Year ended December 31 Six months ended June 30
Income Statement Data: 1998 1997 1999 1998
(In thousands, except for per share data)
Revenue:
Placement fees and related income $60,850 $49,199 $29,773 $29,506
Operating expenses:
Compensation and other benefits 48,191 37,735 23,739 23,197
Selling, general and administrative 9,455 8.917 4,592 4,857
57,646 46,652 28,331 28,054
Income from operations 3,204 2,547 1,442 1,452
Interest expense (income) net 44 33 4 (30)
Income before provision for income taxes 3,248 2,580 1,438 1,482
Provision for income taxes 1,419 1,136 661 682
Net income 1,829 1,444 777 800
Basic earnings per share $.57 $.45 $0.24 $0.25
Diluted earnings per share $.52 $.41 $0.23 $0.23
Balance Sheet Data: December 31 June 30
1998 1997 1999
(In thousands, except for per share data)
Working Capital $6,296 $4,696 $ 6,821
Total assets 12,919 9,451 13,319
Long-term debt 17 35 7
Stockholders' equity 7,287 5,404 8,083
Stockholders' equity per share $2.26 $1.68 $2.50
</TABLE>
47
<PAGE>
Certain Estimates Prepared By The Company. In June, 1999, the Company's
management provided Solomon and Houlihan Lokey with certain information about
the Company which is not publicly available. The information provided included a
financial forecast of operations for the balance of the 1999 fiscal year. Such
forecast projected that the Company would have gross revenues of approximately
$61,388,000, income from operations of approximately $3,226,000 and net income
of approximately $1,641,000. Such results would represent an approximately 1%
increase in gross revenues and income from operations by comparison to the
Company's 1998 fiscal year results, and a decline in net income of approximately
10% from the 1998 fiscal year to the 1999 fiscal year. The projected 1999
results reflect the loss of a significant volume of business from a portion of
the Company's major customers certain of which, due to heightened competition
and increased pricing pressures, the Company has found, and anticipates will be,
difficult to replace with business at comparable margins. The Company's
profitability has also been affected by the increased compensation for new
hires, including additional sales people, and investment in new business
development. The Company and the staffing industry in general have recently
experienced several years of robust growth and healthy margins. In the most
recent two quarters, however, the staffing industry as a whole has experienced a
slowing in demand and an increase in competition, which the Company believes,
given the stage of the current economic cycle, is likely to continue for at
least the remainder of the current fiscal year and, in all likelihood, for some
period thereafter. The continuation of such economic trends would continue to
put pressure on quarter-to-quarter and year-to-year comparisons in the near
future.
Special Cautionary Notice Regarding Forward-Looking Statements. The
Company does not, as a matter of course, publicly disclose forward-looking
information (such as the financial forecasts referred to above) as to future
revenues, earnings or other financial information. Forecasts of this type are
based on estimates and assumptions that are inherently subject to significant
economic, industry and competitive uncertainties and contingencies, all of which
are difficult to predict and many of which are beyond the control of the
Company. Accordingly, there can be no assurance that the forecasted results
would be realized or that actual results would not be significantly higher or
lower than those forecasted. In addition, these forecasts were prepared by the
Company solely for internal use and not for publication or with a view to
complying with the published guidelines of the Commission regarding projections
or with guidelines established by the American Institute of Certified Public
Accountants for prospective financial statements and are included in this Offer
to Purchase only because they have been furnished to certain third parties in
connection with the Offer. The financial forecasts necessarily make numerous
assumptions with respect to industry performance, general business and economic
conditions, access to markets, availability of personnel and sales people and
other matters, all of which are inherently subject to significant risks,
uncertainties and contingencies and many of which are beyond the Company's
control. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated or
expected. One cannot predict whether the assumptions made in preparing the
financial forecasts will be accurate, and actual results may be materially
higher or lower than those contained in the forecasts. The inclusion of this
forward-looking information
48
<PAGE>
should not be regarded as fact or an indication that the Company, the
Independent Committee, the Remaining Stockholders or anyone who received this
information considered it a reliable predictor of future results, and this
information should not be relied on as such. Neither the Company's independent
auditors, nor any other independent accountants or financial advisors, have
compiled, examined, or performed any procedures with respect to the prospective
financial information contained herein, nor have they expressed any opinion or
any form of assurance on such information or its achievability, and to assume no
responsibility for, and disclaim any association with, the prospective financial
information.
8. FINANCING OF THE OFFER AND THE SECOND-STEP TRANSACTION
The total amount of funds required by the Company to consummate the
Offer and, if necessary, the Second-Step Transaction (and to pay related fees
and expenses estimated to be approximately $______), assuming that 1,713,603
Shares are validly tendered and not withdrawn and Public Stock Options,
exercisable for Shares at a price below the Offer Price, are exercised, is
approximately $10,200,000. The Company plans to finance the Offer and the
Second-Step Transaction, if necessary, through borrowings (the "Debt Financing")
from The Bank of New York ("BONY") under a $6.5 million term loan (the "Term
Loan") and a $10 million revolving line of credit facility (the "Revolving
Credit Loan") (the Term Loan and the Revolving Credit Loan are referred to
collectively as the "BONY Loans"). The Company plans to repay the BONY Loans
from funds generated from its operations.
BONY is not required to fund the BONY Loans unless certain objective and
subjective conditions precedent have been satisfied. There can be no assurance
that such conditions will be satisfied or that the BONY Loans will be funded.
The BONY Loans will be guaranteed by all of the Company's existing and
future subsidiaries (the "Guarantors"), and will be secured by a "first
priority" security interest in substantially all of the assets of the Company
and each of the Guarantors.
Advances under the Revolving Credit Loan are not to exceed the lesser of
$10 million or the sum of up to 85% of the book value of eligible accounts
receivable ("Eligible Accounts") of the Company and/or the Guarantors other than
those arising out of permanent placements, plus up to 50% of the book value of
Eligible Accounts of the Company and/or the Guarantors arising out of permanent
placements. The BONY loan documents expressly exclude amounts due from
franchisees and certain other accounts from the definition of Eligible Accounts.
BONY has substantial discretion in determining what constitutes an Eligible
Account and also has the ability to reduce advance rates based on the overall
credit quality of the accounts.
Unless sooner paid in full, the BONY Loans mature on _______, 2005.
Interest on the BONY Loans is due and payable no less frequently than quarterly
and could, depending on the interest period selected by the Company, be payable
as frequently as monthly.
Only interest on the Term Loan is due and payable for the initial
____-month period after closing (the "Interest-Only Period"). After the
49
<PAGE>
Interest-Only Period, the Term Loan shall be repaid in quarterly installments of
principal based on a ___ amortization schedule plus interest. The BONY credit
agreement mandates that the BONY Loans be prepaid upon the receipt of proceeds
in connection with certain asset sales, equity issuances and casualties.
Pre-default interest on the BONY Loans shall accrue at an interest rate
equal to either, as selected by the Company, (a) the one, two, three or six-
month London Interbank Offered Rate (LIBOR) chosen by the Company (and as
adjusted for Federal Reserve Board reserve requirements) plus the Applicable
Margin or (b) the Applicable Margin plus the greater of the federal funds rate
plus 1/2% or the BONY prime rate. LIBOR, the prime rate and federal funds rate
shall be determined by BONY pursuant to the criteria set forth in the BONY
credit agreement. The Applicable Margin shall range from 2.75% to 1% for LIBOR
Loans and 1.50% to 0% for prime/federal funds loans depending upon the Leverage
Ratio of the Company and the Guarantors at the applicable time, on a
consolidated basis (the ratio of (x) indebtedness and certain contingent
obligations of the Company and the Guarantors to (y) Consolidated EBITDA of the
Company and the Guarantors for the four most recent fiscal quarters) (as defined
in the BONY documents) tested not more frequently than quarterly. The initial
Applicable Margin on LIBOR loans shall be 2.50% for the Revolving Credit Loan
and 2.75% for the Term Loan. In certain cases specified in the BONY credit
agreement, LIBOR borrowings may be unavailable to the Company. In addition, the
Company will have to indemnify BONY for changes in law which reduce BONY's
return or result in increased costs in connection with LIBOR loans. The Company
will also pay an annual fee until maturity or the earlier termination of the
Revolving Credit Loan commitment ranging from .45% to .150% on the unused
portion of the Revolving Credit Loan (depending on the Leverage Ratio), and a
commitment fee on the BONY Loans of $217,000.
The BONY loan documents contain restrictive covenants which impose on the
Company and the Guarantor limitations on, among other things: (i) indebtedness
for borrowed money; (ii) the creation of mortgages, security interests and other
liens; (iii) the making of loans, guaranties, advances and investments; (iv)
transactions with affiliates; (v) dividends; (vi) capital expenditures; (ix)
acquisitions of all or substantially all of the assets of any person; (viii)
mergers; (ix) dispositions of material assets; (x) creation or acquisition of
subsidiaries; and (xi) certain significant changes of control of the Company.
Under the BONY loan documents, the Company and the Guarantors are required to
maintain certain specified minimum ratios relating to their ability to cover
fixed charges and debt service payments. The BONY Loans also contain various
event of default provisions, covering, among other things, default in payment of
principal or interest on the BONY Loans, material misrepresentations, default in
compliance with other terms of the BONY Loans, bankruptcy of the Company or any
Guarantor, default in other indebtedness, failure to satisfy or stay certain
judgments or orders entered against the Company or the Guarantors, the
occurrence of certain events with respect to employee benefit plans, and certain
changes in senior management.
50
<PAGE>
9. DIVIDENDS AND DISTRIBUTIONS
If, on or after June 16, 1999, the Company should declare or pay any
dividend on the Shares or make any other distribution (including the issuance of
additional shares of capital stock pursuant to a stock dividend or stock split,
the issuance of other securities or the issuance of rights for the purchase of
any securities) with respect to the Shares that is payable or distributable to
stockholders of record on a date prior to the transfer to the name of the
Company on the Company's stock transfer records of the Shares purchased pursuant
to the Offer, then, without prejudice to the Company's rights under "The Tender
Offer - 11. Certain Conditions of the Offer," (i) the purchase price per Share
payable by the Company pursuant to the Offer will be reduced to the extent any
such dividend or distribution is payable in cash; and (ii) any non-cash
dividend, distribution or right shall be received and held by the tendering
stockholder for the account of the Company and will he required to be promptly
remitted and transferred by each tendering stockholder to the Depositary for the
account of the Company, accompanied by appropriate documentation of transfer. No
such dividends are contemplated.
10. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES; QUOTATION AND
EXCHANGE ACT REGISTRATION
The purchase of Shares by the Company pursuant to the Offer will reduce the
number of Shares that might otherwise trade publicly and will reduce the number
of holders of Shares, which could adversely affect the liquidity and market
value of the remaining Shares held by the public. If consummated, the Offer
alone, or the Offer followed by the Second-Step Transaction, if necessary, would
also result in a change in the capitalization of the Company.
The Shares are currently listed for trading on AMEX. As of June 30, 1999,
there were 3,233,521 Shares issued and outstanding and 101 holders of record of
the outstanding Shares. Pursuant to AMEX's published guidelines, shares of
common stock are not eligible to be included for listing if, among other things,
the number of shares publicly held falls below 250,000, the number of record and
beneficial holders of shares falls below 300 or the aggregate market value of
such publicly held shares is less than $1,000,000. In addition, under Section
12(g) of the Exchange Act, registration under the Exchange Act may be terminated
by the issuer if there are fewer than 300 holders of record of a class of
security. At June 15, 1999, the Company had only 101 holders of record of its
51
<PAGE>
Shares. Accordingly, even before commencing the Offer, the Company could delist
the Shares from AMEX because of the failure to meet the listing requirement and
could cause the termination of registration of the Shares under the Exchange
Act. Shares held directly or indirectly by an officer or director of the issuer
or by any beneficial owner of more than 5% of the shares of the issuer will
ordinarily not be considered as being publicly held for this purpose. In the
event the Shares were no longer listed on AMEX, price quotations might still be
available from other sources. The extent of the public market for the Shares and
the availability of such quotations would, however, depend upon the number of
holders of Shares remaining at such time, the interest in maintaining a market
in the Shares on the part of securities firms, the termination of registration
under the Exchange Act as described below and other factors.
The Shares are currently "margin securities" under the rules of the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"). Among
other things, this has the effect of allowing brokers to extend credit on the
collateral of such Shares. Depending upon factors similar to those described
above regarding listing and market quotations, it is likely that, following the
tender and purchase of the Shares pursuant to the Offer, the Shares will no
longer constitute "margin securities" for purposes of the Federal Reserve
Board's margin regulations. In such event, Shares could no longer be used as
collateral for margin loans made by brokers.
The Shares are currently registered under the Exchange Act, which requires,
among other things, that the Company furnish certain information to its
stockholders and to the Commission and comply with the Commission's proxy rules
in connection with meetings of the Company's stockholders. Registration of the
Shares under the Exchange Act will be terminated upon application by the Company
to the Commission if the Shares are not listed on a national securities exchange
and there are fewer than 300 holders of record of the Shares.
The termination of the registration of the Shares under the Exchange Act
would substantially reduce the information required to be furnished by the
Company to its stockholders and to the Commission and would render inapplicable
certain provisions of the Exchange Act, including requirements that the Company
file periodic reports (including financial statements), the requirements of Rule
13e-3 under the Exchange Act with respect to "going private" transactions,
requirements that the Company's officers, directors and ten-percent stockholders
file certain reports concerning ownership of the Company's equity securities and
provisions that any profit by such officers, directors and stockholders realized
through purchases and sales of the Company's equity securities within any
six-month period may be recaptured by the Company. In addition, the ability of
"affiliates" of the Company and other persons to dispose of Shares which are
"restricted securities" under Rule 144 under the Securities Act may be impaired
or eliminated. If registration of the Shares under the Exchange Act were
terminated, the Shares would no longer be "margin securities" or eligible for
listing on AMEX. Except as disclosed in this section and elsewhere in this Offer
to Purchase, the Company has no other present plans or proposals that relate to
or would result in (i) the acquisition by any person of additional securities of
the Company, or the disposition of securities of the Company, (ii) any
extraordinary corporate transaction, such as a merger, reorganization,
liquidation or sale or transfer of a material amount of assets, involving the
Company, (iii) any material change in the present dividend policy or
52
<PAGE>
indebtedness or capitalization of the Company, (iv) any other material change in
the Company's corporate structure or business, or (v) any change in the
Company's certificate of incorporation, by-laws or instruments corresponding
thereto or any other actions which may impede the acquisition of control of the
Company by any person.
The Company anticipates that following the Offer and, if necessary, the
Second-Step Transaction, the Remaining Stockholders will cause the Company to
change the composition of the Board of Directors to include only certain of the
Remaining Stockholders who are also officers of the Company. The persons who are
presently officers of the Company will continue in their same positions
following consummation of the Offer and, if necessary, the Second-Step
Transaction.
11. CERTAIN CONDITIONS OF THE OFFER
Notwithstanding any other provision of the Offer, and in addition to the
conditions that the Minimum Condition has been satisfied and the Public Stock
Options have been surrendered and exchanged, as described herein, the Company
shall not be required to accept for payment or pay for any Shares tendered
pursuant to the Offer, and may terminate or amend the Offer and may postpone the
acceptance for payment of, and payment for, Shares tendered, if prior to the
Expiration Date, any of the following conditions exist:
a. the Company shall not have received the proceeds from the Debt Financing
sufficient to finance the Offer and the Second-Step Transaction, if necessary;
b. an order shall have been entered in any action or proceeding before any
federal or state court or governmental agency or other regulatory body or a
permanent injunction by any federal or state court of competent jurisdiction in
the United States shall have been issued and remain in effect making illegal the
purchase of, or payment for, any Shares by the Company;
c. there shall have been any federal or state statute, rule or regulation
enacted or promulgated on or after the date of the Offer that could reasonably
be expected to result, directly or indirectly, in any of the consequences
referred to in paragraph (a) above;
d. there shall have occurred and be remaining in effect (i) any general
suspension of, or limitation on prices for, trading in securities of the Company
on AMEX, (ii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States, (iii) a commencement of a war
or armed hostilities or other national or international calamity, directly or
indirectly, involving the United States or (iv) in the case of any of the
foregoing existing on the date hereof, a material acceleration or worsening
thereof; and
e. the Company (with the approval of a majority of the Independent
Committee) shall have agreed that the Company shall terminate the Offer or
postpone the acceptance for payment of or payment for Shares thereunder; which,
in the reasonable judgment of the Company in any such case, and regardless of
53
<PAGE>
the circumstances giving rise to any such condition, makes it inadvisable to
proceed with such acceptance for payment or payment; and
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right; the waiver of any such right with respect to particular facts and other
circumstances shall not be deemed a waiver with respect to any other facts and
circumstances; and each such right shall be deemed an ongoing right that may be
asserted at any time and from time to time.
12. CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS
General. The Company is not aware of any license or other regulatory permit
that appears to be material to the business of the Company that might be
adversely affected by the acquisition of Shares by the Company pursuant to the
Offer. Should any such approval or other action be required, it is the Company's
present intention to seek such approval or action. There can be no assurance
that any such approval or other action, if needed, would be obtained without
substantial conditions or that adverse consequences might not result to the
business of the Company, or that certain parts of the businesses of the Company,
might not have to be disposed of or held separate or other substantial
conditions complied with in order to obtain such approval or other action or in
the event that such approval was not obtained or such other action was not
taken. The Company's obligation under the Offer to accept for payment and pay
for Shares is subject to certain conditions, including conditions relating to
the legal matters discussed in this Section 12. See "The Tender Offer - Section
11. Certain Conditions of the Offer."
State Takeover Laws.
Delaware Business Combination Statute. Section 203 of Delaware General
Corporation Law (the "DGCL"), in general, prohibits a Delaware corporation such
as the Company, from engaging in a "Business Combination" (defined as a variety
of transactions, including mergers, as set forth below) with an "Interested
Stockholder" (defined generally as a person that is the beneficial owner of 15%
or more of a corporation's outstanding voting stock) for a period of three years
following the date that such person became an Interested Stockholder unless (i)
prior to the date such person became an Interested Stockholder, the board of
directors of the corporation approved either the Business Combination or the
transaction that resulted in the stockholder becoming an Interested Stockholder,
(ii) upon consummation of the transaction that resulted in the stockholder
54
<PAGE>
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding stock held by directors who are also officers
of the corporation and employee stock ownership plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer or (iii) on or
subsequent to the date such person became an Interested Stockholder, the
Business Combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders, and not by written consent, by the
affirmative vote of the holders of at least 66 2/3% of the outstanding voting
stock of the corporation not owned by the Interested Stockholder.
Under Section 203, the restrictions described above do not apply if, among
other things (a) the corporation's original certificate of incorporation
contains a provision expressly electing not to be governed by Section 203; (b)
the corporation, by action of its stockholders, adopts an amendment to its
certificate of incorporation or by-laws expressly electing not to be governed by
Section 203, provided that, in addition to any other vote required by law, such
amendment of the certificate of incorporation or by-laws must be approved by the
affirmative vote of a majority of the shares entitled to vote, which amendment
would not be effective until 12 months after the adoption of such amendment and
would not apply to any Business Combination between the corporation and any
person who became an Interested Stockholder of the corporation on or prior to
the date of such adoption (a bylaw amendment adopted pursuant to this paragraph
shall not be further amended by the board of directors); (c) the corporation
does not have a class of voting stock that is (i) listed on a national
securities exchange, (ii) authorized for quotation on an inter-dealer quotation
system of a registered national securities association or (iii) held of record
by more than 2,000 stockholders, unless any of the foregoing results from action
taken, directly or indirectly, by an Interested Stockholder or from a
transaction in which a person became an Interested Stockholder; or (d) a
stockholder became an Interested Stockholder and thereafter divests itself of a
sufficient number of shares so that such stockholder ceases to be an Interested
Stockholder. Under Section 203, the restrictions described above also do not
apply to certain Business Combinations proposed by an Interested Stockholder
following the announcement or notification of one of certain extraordinary
transactions involving the corporation and a person who had not been an
Interested Stockholder during the previous three years or who became an
Interested Stockholder with the approval of a majority of the corporation's
directors.
Section 203 provides that, during such three-year period, the corporation
may not merge or consolidate with an Interested Stockholder or any affiliate or
associate thereof, and also may not engage in certain other transactions with an
Interested Stockholder or any affiliate or associate thereof, including, without
limitation, (a) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets (except proportionately as a stockholder of the
corporation) having an aggregate market value equal to 10% or more of the
aggregate market value of all assets of the corporation determined on a
consolidated basis or the aggregate market value of all the outstanding stock of
a corporation; (b) any transaction which results in the issuance or transfer by
the corporation or by certain subsidiaries thereof of any stock of the
55
<PAGE>
corporation or such subsidiaries to the Interested Stockholder, except pursuant
to a transaction that effects a pro rata distribution to all stockholders of the
corporation; (c) any transaction involving the corporation or certain
subsidiaries thereof which has the effect of increasing the proportionate share
of the stock of any class or series, or securities convertible into the stock of
any class or series, of the corporation or any such subsidiary which is owned
directly or indirectly by the Interested Stockholder (except as a result of
immaterial changes due to fractional share adjustments); or (d) any receipt by
the Interested Stockholder of the benefit (except proportionately as a
stockholder of such corporation) of any loans, advances, guarantees, pledges or
other financial benefits provided by or through the corporation. The Board of
Directors has approved the Offer and the execution of one or more transactions
constituting the Second-Step Transaction, if necessary, so that the provisions
of Section 203 of the DGCL will not apply to the Transactions.
Other State Takeover Laws. A number of states have adopted laws and
regulations applicable to attempts to acquire securities of corporations which
are incorporated, or have substantial assets, stockholders, principal executive
offices or principal places of business, or whose business operations otherwise
have substantial economic effects, in such states. In Edgar v. MITE Corp., the
Supreme Court of the United States invalidated on constitutional grounds the
Illinois Business Takeover Statute, which, as a matter of state securities law,
made takeovers of corporations meeting certain requirements more difficult.
However, in 1987 in CTS Corp. v. Dynamics Corp. of America, the Supreme Court
held that the State of Indiana may, as a matter of corporate law and, in
particular, with respect to those aspects of corporate law concerning corporate
governance, constitutionally disqualify a potential acquiror from voting on the
affairs of a target corporation without the prior approval of the remaining
stockholders. The state law before the Supreme Court was by its terms applicable
only to corporations that had a substantial number of stockholders in the state
and were incorporated there.
The Company conducts business in a number of other states throughout the
United States, some of which have enacted takeover laws and regulations. The
Company does not know whether any or all of these takeover laws and regulations
will by their terms apply to the Offer, and, except as set forth above with
respect to Section 203 of the DCCL, the Company has not currently complied with
any other state takeover statute or regulation. The Company reserves the right
to challenge the applicability or validity of any state law purportedly
applicable to the Offer and nothing in this Offer to Purchase or any action
taken in connection with the Offer is intended as a waiver of such right. If it
is asserted that any state takeover statute is applicable to the Offer and an
appropriate court does not determine that it is inapplicable or invalid as
applied to the Offer, the Company might be required to file certain information
with, or to receive approvals from, the relevant state authorities, and the
Company might be unable to accept for payment or pay for Shares tendered
pursuant to the Offer, or may be delayed in consummating the Offer. In such
case, the Company may not be obligated to accept for payment or pay for any
Shares tendered pursuant to the Offer.
56
<PAGE>
Antitrust. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
and the rules that have been promulgated thereunder by the Federal Trade
Commission (the "FTC"), certain transactions may not be consummated unless
certain information has been furnished to the Antitrust Division of the
Department of Justice and the FTC and certain waiting period requirements have
been satisfied. The acquisition of Shares by the Company pursuant to the Offer,
however, is not subject to such requirements. See "The Tender Offer-Section 2.
Acceptance for Payment and Payment for Shares."
Litigation. To the best knowledge of the Company, no lawsuits have been
filed relating to the Offer or the Second-Step Transaction since June 16, 1999,
the date of the announcement by the Company that it proposed to acquire the
Shares from the Public Stockholders.
13. FEES AND EXPENSES
Except as set forth below, the Company will not pay any fees or commissions
to any broker, dealer or other person for soliciting tenders of Shares pursuant
to the Offer.
The Company has retained Morrow & Co., Inc., as the Information Agent, and
Continental Stock Transfer & Trust Company, as the Depositary, in connection
with the Offer. The Information Agent may contact holders of Shares by mail,
telephone, telecopy, telegraph and personal interview and may request banks,
brokers, dealers and other nominee stockholders to forward materials relating to
the Offer to beneficial owners.
As compensation for acting as Information Agent in connection with the
Offer, Morrow & Co., Inc. will be paid estimated fees and expenses of $15,000.
The Information Agent will also be reimbursed for certain of its out-of-pocket
expenses and may be indemnified against certain liabilities and expenses in
connection with the Offer, including certain liabilities under the Federal
securities laws. The Company will pay the Depositary fees and expenses of
$[2,000] for its services in connection with the Offer, plus reimbursement for
its out-of-pocket expenses, and will indemnify the Depositary against certain
liabilities and expenses in connection therewith, including certain liabilities
under the Federal securities laws. Brokers, dealers, commercial banks and trust
companies will be reimbursed by the Company for customary handling and mailing
expenses incurred by them in forwarding material to their customers.
14. MISCELLANEOUS
The Company is not aware of any jurisdiction in which the making of the
Offer is prohibited by any administrative or judicial action pursuant to any
valid state statute. If the Company becomes aware of any valid state statute
prohibiting the making of the Offer or the acceptance of Shares pursuant
thereto, the Company will make a good faith effort to comply with any such state
statute. If, after such good faith effort, the Company cannot comply with any
57
<PAGE>
such state statute, the Offer will not be made to (nor will tenders be accepted
from or on behalf of) the holders of Shares in such state. In any jurisdiction
where the securities, blue sky or other laws require the Offer to be made by a
licensed broker or dealer, the Offer shall be deemed to be made on behalf of the
Company by one or more registered brokers or dealers licensed under the laws of
such jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF THE COMPANY NOT CONTAINED IN THIS OFFER TO PURCHASE
OR IN THE LETTER OF TRANSMITTAL, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
Pursuant to Rule 13e-3 and Rule 13e-4 of the General Rules and Regulations
under the Exchange Act, the Company has filed with the Commission the Schedule
13E-3 and the Schedule 13E-4 together with exhibits, furnishing additional
information with respect to the Offer and may file amendments thereto. Such
statements, including exhibits and any amendments thereto, which furnish certain
additional information with respect to the Offer, may he inspected at, and
copies may he obtained from, the same places and in the same manner as set forth
in "The Tender Offer - 7. Certain Information Concerning the Company" (except
that they will not be available at the regional offices of the Commission).
WINSTON RESOURCES, INC.
August ___, 1999
58
<PAGE>
SCHEDULE I
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
EXECUTIVE OFFICERS
The following table sets forth the names and ages of the executive
officers of the Company as of June 30, 1999 and the year in which they were
first elected. Each executive officer of the Company serves at the pleasure of
the Board of Directors. The business address for each executive officer is 535
Fifth Avenue, New York, New York 10017. Each individual listed below is a
citizen of the United States.
<TABLE>
<S> <C> <C>
Year Became an
Name and Age Position Executive Officer
Seymour Kugler Chairman, President 1967
62 and Chief Executive Officer
Jesse Ulezalka Chief Financial Officer 1995
50
Alan E. Wolf Vice President 1974
54
Todd Kugler Vice President 1995
33
Gregg S. Kugler Vice President 1993
36
David Silver Vice President 1992
67
Eric Kugler Vice President and Secretary 1998
39
</TABLE>
1
<PAGE>
DIRECTORS
The following sets forth the names and ages of the members of the Board of
Directors as of June 30, 1999 and the year in which they were first elected
directors of the Company. All directors of the Company hold office until the
next Annual Meeting of the Stockholders and until the election and qualification
of their successors. Each individual listed below is a citizen of the United
States.
Name, Address* and Age Year Became a Director
Seymour Kugler 1967
62
Alan E. Wolf 1974
54
Gregg S. Kugler 1992
36
Norton Sperling 1998
1025 Seawane Drive
Hewlett Harbor, New York 11557
64
Todd Kugler 1998
33
Martin Wolfson 1987
1359 Broadway
New York, New York 10018
63
Martin A. Fischer 1987
30-00 47th Avenue
Long Island City, New York 11101
62
Martin J. Simon 1992
360 Merrick Road
Lynbrook, New York 11563
79
______________
*If not 535 Fifth Avenue, New York, New York 10017
2
<PAGE>
BIOGRAPHICAL INFORMATION
Certain information about the executive officers and the directors of the
Company is set forth below. This information has been furnished to the Company
by the individuals named.
Mr. Seymour Kugler, who is generally known to employees of the Company as
Sy Kaye, founded the Company in 1967 and has been its Chief Executive Officer
since that time.
Mr. Ulezalka has been the Chief Financial Officer of the Company since
August 4, 1995. Prior thereto he was Chief Financial Officer of Consultants for
Architects, Inc. from April 1995 - August 1995, a financial consultant from
April 1994 - April 1995, CFO, Vice President - Finance of ECCO Staffing
Services, Inc. from March 1992 - April 1994.
Mr. Wolf has been a Vice President of the Company since September 17, 1987
and has been an Executive Vice President of the Company's permanent placement
division since 1974.
Mr. Todd Kugler (who is known generally to clients and employees of the
Company as Todd Kaye) has been employed by the Company since 1988. He became a
Vice President of the Company and its temporary staffing division on November
23, 1995. Mr. Kugler is Sy Kaye's son.
Mr. Gregg Kugler (who is known generally to clients and employees of the
Company as Gregg Kaye) has been employed by the Company since 1983. He became a
Vice President of the Company on August 12, 1993 and is President of its
permanent placement division. Mr. Kugler is Sy Kaye's son.
Mr. Silver has been Vice President - Administration/Human Resources of the
Company since November 1987. Mr. Silver also served as Secretary of the Company
from December 1991 until May 1998.
Mr. Eric Kugler (who is known generally to clients and employees of the
Company as Eric Kaye) has been employed by the Company since April, 1994. He
became Vice President of Corporate Development in April, 1994 and became
Secretary of the Company in May 1998. Mr. Kugler is Sy Kaye's son.
Mr. Wolfson, a certified public accountant, is Senior Vice President, Chief
Financial Officer and a director of Concord Fabrics, Inc., New York, New York,
which develops, designs, styles and produces woven and knitted fabrics for sale
to clothing manufacturers and fabric retailers. He has been employed by that
corporation since 1966, has been an officer and a director since 1973 and was
first elected to his present offices in 1981.
Mr. Fischer is a member of the Board of Trustees of Brooklyn Law School. He
is an attorney and is Vice Chairman and a member of the Board of Directors of
the Berkshire Bank, New York. Mr. Fischer was counsel to the law firm of Warshaw
Burstein Cohen Schlesinger & Kuh from 1986 to 1997.
3
<PAGE>
Mr. Simon served as the Chairman of the Board and President of First
Central Financial Corporation and First Central Insurance Company from August
1985 and August 1980, respectively, through February, 1997, at which time he
resigned from such positions. Mr. Simon is counsel to the law firm of Dienst &
Serrins, LLP and also serves as a consultant to DBP International, an
international freight forwarding operation and to Simon Agency NY, Inc., a
managing general insurance agency. Mr. Simon also serves as Secretary of the
Board of Trustees of Brookdale University Hospital and Medical Center.
Mr. Sperling was President of Finity Apparel Group from 1997 to 1998, when
he retired. He was President and Vice Chairman of Norton McNaughton from 1981 to
1997. Finity and Norton McNaughton are makers of fine moderately priced women's
sportswear, dresses and casual knitwear. Mr. Sperling was a founder of Norton
McNaughton.
4
<PAGE>
SCHEDULE II
June 16, 1999
To The Board of Directors
Winston Resources, Inc.
Gentlemen:
We understand that Winston Resources, Inc. ("Winston Resources" or the
"Company") is making an offer to purchase all of the shares of common stock of
the Company not owned by Seymour Kugler and members of his family at a price of
$4.625 per share. Such transaction is referred to herein as the "Transaction."
It is our understanding that the Board of Directors of the Company has formed a
special committee (the "Committee") to consider certain matters relating to the
Transaction. Houlihan Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan
Lokey") has been retained to act as financial advisors to the Committee, and to
provide an opinion (the "Opinion") as to whether the Transaction is fair, from a
financial point of view, to the Company's public stockholders (the "Public
Stockholders").
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the Company.
Furthermore, at your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's audited financial statements on Form 10-K for
the three fiscal years ended December 31, 1998, the Form 10-Q for the
fiscal quarter ended March 31, 1999, and an internally prepared income
statement for the four months ended April 30, 1999, which the
Company's management has identified as being the most current
financial statements available;
2. met with certain members of the senior management of the Company to
discuss the operations, financial condition, future prospects and
projected operations and performance of the Company;
3. visited certain business offices of the Company;
4. reviewed forecasts and projections dated May 24, 1999 prepared by the
Company's management with respect to the Company for the year ended
December 31, 1999;
1
<PAGE>
5. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
6. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company, and publicly
available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
7. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition, business or prospects of the Company since
the date of the most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
The Company, like other companies and any business entities analyzed by Houlihan
Lokey or which are otherwise involved in any manner in connection with this
Opinion, could be materially affected by complications that may occur, or may be
anticipated to occur, in computer-related applications as a result of the year
change from 1999 to 2000 (the "Y2K Issue"). In accordance with long-standing
practice and procedure, Houlihan Lokey's services are not designed to detect the
likelihood and extent of the effect of the Y2K Issue, directly or indirectly, on
the financial condition and/or operations of a business. Further, Houlihan Lokey
has no responsibility with regard to the Company's efforts to make its systems,
or any other systems (including its vendors and service providers), Year 2000
compliant on a timely basis. Accordingly, Houlihan Lokey shall not be
responsible for any effect of the Y2K Issue on the matters set forth in this
Opinion.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
consideration to be received by the Public Stockholders of the Company in
connection with the Transaction is fair to them from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
2
<PAGE>
SCHEDULE III
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
Section 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of such stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to section 251 (other than a merger effected pursuant to
section 251(g) of this title), section 252, section 254, section 257, section
258, section 263 or section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to sections 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
1
<PAGE>
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for the approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
2
<PAGE>
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to section 228 or
253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. If such notice did not notify stockholders of the effective date of the
merger or consolidation, either (i) each such constituent corporation shall send
a second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the effective
date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
3
<PAGE>
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
4
<PAGE>
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(l) From and after the effective date of the merger or consolidation, no
stockholder who has demanded such stockholder's appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
such stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
5
<PAGE>
The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
6
<PAGE>
SCHEDULE IV
ANNUAL REPORT ON FORM 10-K OF THE COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1998.
<PAGE>
SCHEDULE IV
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the transition period ________________________ to _________________________
Commission File No. 1-9629
WINSTON RESOURCES, INC.
(Name of small business issuer in its charter)
Delaware 13-3134278
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
535 Fifth Avenue, New York, New York 10017
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (212) 557-5000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
Common Stock, $.01 par value American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained in this form, and no disclosure will
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-K
or any amendment to this Form 10-K. [ ]
On March 19, 1999, (i) the aggregate market value of Common Stock held
by non-affiliates of the registrant was approximately $4,387,115 and (ii) there
were 3,228,521 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(i) Part III, Definitive Proxy Statement of the registrant to be filed
with the Commission on or before April 30, 1999.
-1-
<PAGE>
PART I
Item 1. Business
Winston Resources, Inc., a Delaware corporation (the "Company"), is
the successor to a personnel recruitment and placement service business founded
in 1967. The Company and its subsidiaries (collectively, the "Company" or the
"Winston Companies") together provide a wide range of personnel supply services
to businesses, institutions and governmental agencies, through their own offices
and through offices operated by independent franchisees under licenses from the
Company. The Company also provides recruitment advertising services to
businesses and other institutions.
Through its own offices, the Company recruits and places employees in
entry-to-high-level permanent salaried positions in the New York City
metropolitan area (consisting of New York City, Nassau, Suffolk and Westchester
Counties, New York and parts of northern New Jersey and southern Connecticut)
and in the Fort Lauderdale area of Florida. Such services are provided on a
contingent fee basis under which the Company collects a fee only if it
successfully places a job candidate with a client. Through its Fisher- Todd
Associates division, the Company also provides services for business and
industry clients across the United States, recruiting upper level executives on
a retainer fee basis and on a contingency fee basis.
The Company also supplies temporary employees with professional,
secretarial, clerical, medical, allied health, nursing, light industrial,
information technology and word processing skills, to business clients and
governmental agencies in the New York City, Long Island and New Jersey areas, as
well as in Florida's Fort Lauderdale area. Temporary employees perform services
at the client's premises under the client's supervision and direction. For each
temporary employee, the client is charged an hourly rate that includes the
employee's direct labor rate, associated labor costs (such as payroll taxes and
insurance) and a mark-up to cover the Company's overhead and profit.
In addition to services furnished through its own offices, the Company
licenses independent franchisees to provide personnel services under the trade
names and service marks owned by the Company. Franchisees of the Company provide
permanent placement and executive search services under the name "Roth Young",
permanent personnel recruitment and placement services under the names "Division
10", "Alpha" and "Winston Personnel" and temporary office support personnel
under the names "Division 10 Temps" and "Alpha Temps" in a total of sixteen
cities and towns across the United States.
The Company does not have any client which accounts for more than ten
percent of its net revenues.
Permanent Recruitment and Placement Services
The Company provides recruitment and placement services for
entry-level to high-level professional and management positions at all salary
levels on a contingent fee basis.
-2-
<PAGE>
The Company employs placement counselors who specialize in recruiting
and placing job candidates in particular industries or professions. The Company
provides permanent placement services in all major industries, however, the
Company primarily recruits and places personnel with skills in accounting,
finance, office support, information technology and health care services and
recruits and places executives and professionals with skills in banking,
insurance, publishing, real estate, securities, human resources, marketing and
market research, management services, corporate facilities and architecture, as
well as lawyers and paralegals.
The Company creates and maintains a data-base of qualified job
candidates based on interviewing and screening procedures. Upon receiving a job
order from a client, the Company attempts to match the specifications required
by the client with qualified candidates from its data base and also recruits
additional qualified candidates. It then arranges interviews between the client
and qualified candidates. If the Company successfully places a candidate, it
charges a fee as a percentage of the candidate's estimated annual salary for the
first year of his or her employment. The fees are always paid by the employer.
During the year ended December 31, 1998, the Company placed applicants
in permanent positions with approximately 700 clients. Approximately fifty
percent of the Company's contingent fee permanent placement clients during that
year were repeat customers.
Through its Fisher-Todd Associates (executive search) division, the
Company specializes in recruiting executives to meet specific requirements of
clients on both a contingent and retainer basis. Fisher- Todd Associates
specializes in recruiting candidates for upper level executive positions,
generally at salaries in excess of $65,000 per year. The division employs
recruiting specialists who work closely with each client to define the
requirements of the position and establish candidate specifications. The Company
then contacts appropriate candidates who are identified through extensive
research, networking, data base searches and, where required, advertisements.
Such candidates are screened through interviews and other procedures and those
most qualified are referred to the clients. The Company assists the client in
evaluating each candidate, in determining an appropriate compensation package
and, in some cases, negotiating the final agreement.
Temporary Staffing Services
The Company furnishes to businesses, on a temporary basis, the
services of individuals with accounting, legal and paralegal, banking,
secretarial, clerical, office support, word processing, informational
technology, health care, light industrial and other professional skills.
Temporary staffing assignments usually last from one day to several months, and
often longer. Such assignments are generally made to fill vacancies in a
client's permanent work force or to supplement the client's normal work force to
meet peak work loads, handle special projects or provide special expertise. In
all cases, the work is performed at the client's facilities under the client's
supervision and direction. The client is charged an hourly rate comprised of the
direct labor rate of the personnel provided, associated labor costs (such as
payroll taxes and insurance) and a mark-up to cover the Company's overhead and
profit. All employees on temporary assignment to the Company's clients are on
the Company's payroll only during the periods of their assignments. Clients that
hire a temporary employee on a permanent basis pay a fee to the Company.
-3-
<PAGE>
By using the Company's temporary staffing services, clients are able
to shift to the Company the cost and inconvenience associated with the
employment of temporary personnel, including advertising, interviewing,
screening, testing, record keeping, payroll taxes and insurance. The Company is
able to absorb such costs more effectively than its clients because its
employees, once recruited, are generally assigned to a succession of temporary
positions with different clients.
The Company screens its temporary personnel through personal
interviews, testing, certificate and licensing verification and other procedures
and maintains continuously updated records on job performance. These procedures
enable it to classify its temporary personnel by preference for job location,
hours of employment and work environment and by suitability for particular types
of assignments. Persons who do temporary work usually are registered with more
than one temporary help firm at any one time.
During 1998, the Company provided the services of temporary employees
to approximately 1400 clients. The Company believes that a majority of the
clients to whom it supplied temporary staffing during 1998 were repeat
customers.
Franchise Operations
The Company also has eighteen franchised offices which provide
permanent placement and executive search services under the name "Roth Young",
permanent recruitment and placement services under the names "Division 10",
"Alpha" and "Winston Personnel", and temporary office support personnel under
the names "Division 10 Temps" and "Alpha Temps".
At March 19, 1999, there were fourteen Roth Young, one Division 10,
one Division 10 Temps, one Alpha and one Winston franchise in a total of sixteen
cities in the United States.
All franchisees operate their businesses autonomously, subject to the
requirements of their respective franchise agreements. The agreements provide
for monthly payments of royalties to the Company based on the franchise's cash
collections and generally cover a specified term renewable at the franchisee's
option. Each franchisee pays the Company royalties for the license of the
Company's know-how and tradenames. The Company is not currently actively engaged
in the marketing of new franchises and has no current plans to do so.
Franchisees operating under Roth Young licenses generally provide
permanent placement and executive search services, principally to the food,
drug, hospitality, retail and health care industries, although licensees are
encouraged to expand their services to other industries.
-4-
<PAGE>
The Company believes that its relationship with its independent
franchisees generally is satisfactory.
Recruitment Advertising
The Company's recruitment advertising division places recruitment
advertisements in publications on behalf of the Company, the Company's clients
and other third parties. The Company believes that the services offered by this
division enhances its competitive position in the temporary staffing and
permanent placement markets by broadening the scope of the services it offers to
clients. For the year ended December 31, 1998, the Company served approximately
250 clients through this division.
Marketing
The Company's marketing efforts for its temporary staffing services
and for most permanent recruitment and placement services are largely
concentrated within the areas contiguous to its offices. The services of the
Company's executive search division are marketed nationally. The Company relies
primarily on telephone and direct visit solicitation to existing and prospective
clients and, to a lesser extent, on direct mail, and advertising.
Recruiting
The Company recruits qualified applicants for permanent positions and
temporary employees primarily through direct recruitment, referrals from other
applicants and newspaper advertising.
Competition
The staffing industry is highly competitive, with clients generally
using more than one company to satisfy their personnel requirements. In the
permanent recruitment and placement market, the Company and its franchisees
compete with numerous local and regional firms and, to a lesser extent, a small
number of national firms. In the temporary staffing industry there is intense
competition from national temporary staffing service firms as well as from local
and regional firms. All of the national and many of the regional firms have
substantially greater resources than the Company.
The principal competitive factors in the personnel services industry
are the availability and quality of permanent job applicants and temporary
staff, the level and integrity of the service provided by individual offices
and, to varying degrees, the prices of such services. The Company believes that
its ability to offer a fully integrated personnel service, providing temporary
help, permanent recruitment and placement services, executive recruitment and
recruitment advertising, enhances its competitive position in those markets.
-5-
<PAGE>
Regulation
The Company's operations are, in some states, subject to state laws
and regulations which may require employment agencies and/or temporary help
services to be licensed. The principal requirements of such laws and regulations
are satisfactory prior experience and good moral character. The Company has
obtained all necessary licenses and registrations in the states where it
conducts business.
Trademarks and Service Marks
The Company owns a number of trademarks, service marks and tradenames,
including the names, "Winston", "Winston Resources", "Winston Personnel" (with
its logo consisting of a sunburst design and stylized letter W), "Win-Temps",
"Roth Young" and "Division 10", which are registered with the U.S. Patent and
Trademark Office.
Employees
At December 31, 1998, the Company employed approximately 123 permanent
employees, including 39 placement counsellors for its permanent placement
services, in its headquarters and branch offices, not including temporary
employees on assignment to clients. The Company is responsible for all workers'
compensation and disability insurance, state and Federal unemployment taxes,
social security taxes, and fringe benefits for its temporary employees. As a
service business, the Company depends to a material degree on its ability to
hire and retain skilled and motivated personnel.
Item 2. Properties
The Company leases a total of approximately 19,000 square feet in an
office building at 535 Fifth Avenue, New York, New York. The lease was entered
into in August 1990 and renegotiated in 1992, 1993 and 1997, and expires in
2003. The Company also leases office space in Rutherford, Edison and Parsippany,
New Jersey, in Westbury, New York and in Fort Lauderdale, Florida, under leases
expiring between 1999 and 2002.
Item 3. Legal Proceedings
NONE
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1998.
-6-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Company is traded principally on the American
Stock Exchange (ticker symbol "WRS"). The following table shows, for each
quarter of the Company's last two fiscal years and through March 19, 1999, the
high and low sales prices of the common stock of the Company as reported on the
American Stock Exchange.
<TABLE>
<S> <C> <C>
Price Range
High Low
1999
First Quarter $ 3 3/4 $ 2 1/2
1998
First Quarter $ 6 3/8 $ 4 1/2
Second Quarter 6 9/16 5 1/8
Third Quarter 6 1/4 4 1/2
Fourth Quarter 4 3/8 3 1/4
1997
First Quarter $ 4 1/4 $ 3 1/8
Second Quarter 4 3 1/8
Third Quarter 6 3/8 3 3/8
Fourth Quarter 6 3/4 5 1/4
</TABLE>
The Company had 108 holders of record of its common stock on March 19,
1999.
The Company has never paid a cash dividend on the Common Stock and
anticipates that for the foreseeable future, earnings will be retained for use
in its business.
-7-
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1998 1997 1996 1995 1994
Income Statement Data:
(In thousands, except for per share data and number of shares)
Combined sales:
By Company offices $60,466 $48,986 $39,247 $30,657 $23,822
By franchise 3,193 2,586 2,957 4,175 6,403
Total combined sales 63,659 51,572 42,204 34,832 30,225
Net revenue* 60,850 49,199 39,390 30,989 24,297
Income (loss) from operations 3,204 2,547 1,585 (401)(1) 865
Net income (loss) 1,829 1,444 1,138 (432)(1) 636
Basic earnings (loss) per common share .57 .45 .37 (.15) .22
Diluted earnings (loss) per share .52 .41 .34 (.15) .20
Weighted average shares - basic 3,220,473 3,191,825 3,065,719 2,917,662 2,913,886
Weighted average shares - diluted 3,523,266 3,488,180 3,323,679 2,917,662 3,152,530
*Represents sales by Company, income from franchises and other income
(1) Includes one-time write off of restrictive covenant costs and related assets
associated with franchise operations of $1.1 million
Year ended December 31,
1998 1997 1996 1995 1994
Balance Sheet Data:
(In thousands, except for per share data)
Working capital $6,296 $4,696 $3,248 $ 3,028 $2,201
Total assets 12,919 9,451 8,438 7,146 7,123
Long-term debt 17 35 51 606 579
Stockholders' equity 7,287 5,404 3,862 2,654 3,055
Stockholders' equity per share 2.26 1.68 1.22 .91 1.05
</TABLE>
-8-
<PAGE>
Quarterly Financial Data (Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Quarter Quarter Quarter Quarter
ended ended ended ended
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
Revenue $ 14,409,000 $ 15,098,000 $ 14,823,000 $ 16,520,000
Operating expenses 13,765,000 14,290,000 13,992,000 15,599,000
Net income 355,000 445,000 458,000 571,000
Basic earnings per share 0.11 0.14 0.14 0.18
Diluted earnings per share 0.10 0.13 0.13 0.16
Quarter Quarter Quarter Quarter
ended ended ended ended
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
Revenue $ 10,782,000 $ 11,837,000 $ 13,434,000 $ 13,146,000
Operating expenses 10,371,000 11,220,000 12,711,000 12,350,000
Net income 226,000 343,000 408,000 467,000
Basic earnings per share 0.07 0.11 0.13 0.15
Diluted earnings per share 0.07 0.10 0.12 0.13
</TABLE>
-9-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
1998 Compared to 1997
Revenues increased by approximately $11,651,000 or 24% to $60,850,000
as compared to $49,199,000 in 1997. The increase is primarily due to the
increase in temporary staffing revenues of 31% and permanent placement revenues
of 3%, as compared to 1997.
Operating expenses increased approximately 24% as compared to 1997.
Compensation and other benefits increased approximately 28% mainly due to
increased compensation and compensation related costs associated with the
increase in revenues. Selling, general and administrative expenses increased 6%
due to additions to the sales force, commissions related to increased revenues
and other costs related to maintaining the Company' branch operations.
Interest expense decreased during 1998 as a result of there being no
borrowings under the Company's credit facility when compared to 1997.
The effective tax rate was approximately 44% for the twelve month
period ended December 31, 1998 and December 31, 1997.
Net income for the twelve month period ended December 31, 1998 was
approximately $1,829,000 or $.57 basic earnings per common share and $.52
diluted earnings per common share as compared to a net income of approximately
$1,444,000 or $.45 basic earnings per common share and $.41 diluted earnings per
common share for the prior year. The increase in net income and earnings per
share is primarily due to increased revenues, partially offset by the related
increases in operating expenses.
1997 Compared to 1996
Revenues increased by approximately $9,809,000 or 25% to $49,199,000
as compared to $39,390,000 in 1996. The increase is primarily due to the
increase in temporary staffing revenues of 31% and permanent placement revenues
of 14%, as compared to 1996.
Operating expenses increased approximately 23% as compared to 1996.
Compensation and other benefits increased approximately 28% mainly due to
increased compensation and compensation related costs associated with the
increase in revenues. Selling, general and administrative expenses increased 6%
due to additions to the sales force and commissions related to increased
revenues and advertising, and other costs related to maintaining the Company's
branch operations.
Interest expense decreased during 1997 due mainly to the lower average
balance on borrowings under the Company's credit facility when compared to 1996.
-10-
<PAGE>
The effective tax rate was 44% for the twelve month period ended
December 31, 1997 as compared to 22% in 1996. The lower prior year rate was
attributable to an income tax benefit as a result of a reduction in the
valuation allowance for certain deferred tax assets that were determined to be
realizable.
Net income for the twelve month period ended December 31, 1997 was
approximately $1,444,000 or $.45 basic earnings per common share and $.41
diluted earnings per common share as compared to a net income of approximately
$1,138,000 or $.37 basic earnings per common share and $.34 diluted earnings per
common share for the prior year. The increase in net income and earnings per
share is primarily due to increased revenues, partially offset by the related
increases in operating expenses and increase in effective tax rate.
Liquidity and Capital Resources
Cash provided by operating activities was $1,913,000 in 1998. In
addition to net income, cash flow from operating activities was affected by an
increase in accounts receivable due to the significant growth in revenues offset
by increased accounts payable, accrued expenses and income taxes payable. In
1997, cash generated from operating activities was $190,000. Working capital on
December 31, 1998 was approximately $6,296,000 as compared to $4,696,000 on
December 31, 1997. Cash used in investing activities was $316,000 due to the
purchase of property and equipment and financing activities provided cash of
$5,000 (exercise of options offset by the repayment of capital lease
obligations) in 1998. The Company has no material commitments for capital
expenditures during 1999.
The Company has a secured credit facility providing for short-term
advances to a maximum of $6,000,000 based on up to 80% of eligible accounts
receivable, as defined under which no amounts are outstanding.
Management believes that the cash available from the Company's credit
facility and cash from its operations will be sufficient to support current
operations and any currently foreseeable increase in activities.
Inflation
To date, the impact of inflation and changing prices on the Company's
business has been minimal. The Company charges its customers fixed percentages
of the salaries and wages of permanent and temporary employees, which causes its
fee income to increase proportionately as salary and wages increase.
Year 2000 Issues
The Company has assessed its computer information systems and has
taken necessary steps to ensure its systems are Year 2000 compliant. The
Company's computer systems consultants have represented to the Company in
writing that, as presently configured, the Company's systems are Year 2000
compliant. No special costs were incurred in order to make the systems
compliant, and the cost of testing such compliance which was completed at
December 31, 1998, was not material.
The Company also is in the process of determining the extent to which
it may be vulnerable to any failures by its service providers to resolve their
own Year 2000 issues. The Company has initiated formal communications with such
providers and, at this time, has received formal written responses from a number
of such providers indicating that their systems are Year 2000 compliant. The
Company is continuing to collect such responses and will be developing such
contingency plans as it believes are warranted, based on such responses. At this
time, the Company is unable to estimate the extent of any adverse impact from
failure by these service providers with regard to Year 2000 compliance, and the
nature by which their problems might materially affect the Company's business,
financial condition or results of operations.
-11-
<PAGE>
The Company is currently implementing a contingency plan involving
creation of a back-up computer capability as a result of which all of its
systems and files will be redundant so that if its principal offices in New York
City become inaccessible, its operations may be conducted from other Company
offices located in New Jersey. Such contingency plan should be implemented
during the first half of 1999.
Failure by the Company to eliminate Year 2000 problems could result in
a possible failure or miscalculations, causing disruption of operations. Under a
worst case scenario, such problems would be addressed by manually processing
data and transactions. However, this would cause delays and additional costs to
the administrative process. Further contingency plans are being developed to
address this issue.
Based upon the current information, the Company does not anticipate
that, in the aggregate, costs associated with the Year 2000 issue will have a
material financial impact. However there can be no assurances that, despite the
steps taken by the Company to insure that it and its customers and vendors are
Year 2000 compliant, there will not be interruptions or other limitations of
systems functionality or that the Company will not incur significant costs to
avoid such interruptions or limitations. The Company's expectations about future
costs associated with the Year 2000 issue are subject to uncertainties that
could cause actual events to have a greater financial impact than currently
anticipated. Factors that could influence the amount and timing of future costs
include unanticipated vendor delays, technical difficulties, the impact of tests
of vendors' and customers' systems and similar events. If, despite the Company's
efforts under its Year 2000 planning, there are Year 2000-related failures that
create substantial disruptions to the Company's business, the adverse impact on
the business could be material.
Market Risk and Risk Management Policies
The Company currently does not have exposure to market risk. The
Company will develop policies and procedures to manage market risk in the future
as deemed necessary.
Impact of Recently Issued Accounting Standards
In June 1998 the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which is required to be adopted
in years beginning after June 15, 1999. The Statement permits early adoption as
of the beginning of any fiscal quarter after its issuance. The Company expects
to adopt the new Statement effective January 1, 2000. The Statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not anticipate that the
adoption of this Statement will have a significant effect on its results of
operations or financial position.
Forward-Looking Statements
This report contains forward-looking statements and information that
is based on management's beliefs and assumptions, as well as information
currently available to management. Such beliefs and assumptions are based on,
among other things, the Company's operating and financial performance over
recent years and its expectations about its business for the current fiscal
year. Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Such statements are subject to certain
risks, uncertainties and assumptions, including, but not limited to, the
possibility that (a) prevailing economic
-12-
<PAGE>
conditions may significantly deteriorate, thereby reducing the demand for the
Company's services, (b) the Company might experience a significant deterioration
in its collection of accounts receivable and (c) regulatory or legal changes
might affect an employer's decision to utilize the Company's services, although
none of such risks is anticipated at the present time. Should one or more of
these or any other risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or expected.
Item 8. Financial Statements and Supplementary Data
See Item 14 for a list of Winston Resources, Inc. and Subsidiaries
Financial Statements and Schedules filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
-13-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by
reference to the material under the caption "ELECTION OF DIRECTORS" in the
Company's definitive Proxy Statement to be filed on or before April 30, 1999
(the "1999 Proxy Statement").
Item 11. Executive Compensation
The information required by this term is incorporated herein by
reference to the material under the caption "EXECUTIVE COMPENSATION" in the 1999
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by
reference to the material under the caption "ELECTION OF DIRECTORS" in the 1999
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference to the material under the caption "ELECTION OF DIRECTORS - Certain
Transactions" in the 1999 Proxy Statement.
-14-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1,2 The information required by this subsection of this Item is
presented in the index to the Financial Statements on Page
F-1
<PAGE>
Form 10-K - Item 14 (a) (1) and (2)
Winston Resources, Inc. and Subsidiaries
List of Financial Statements and
Financial Statement Schedules
The following consolidated financial statements of Winston Resources, Inc. and
Subsidiaries are included in Item 8:
<TABLE>
<S> <C>
Report of Independent Auditors....................................................................... F-2
Consolidated Balance Sheets - December 31, 1998 and 1997............................................. F-3
Consolidated Statements of Income - Years Ended
December 31, 1998, 1997 and 1996.................................................................. F-4
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1998, 1997 and 1996.................................................................. F-5
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996.................................................................. F-6
Notes to Consolidated Financial Statements........................................................... F-7
The following consolidated financial statement schedule of Winston Resources, Inc.
and Subsidiaries is included in Item 14 (a) (2):
Schedule II - Valuation and Qualifying Accounts....................................................... F-21
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instruction or are inapplicable and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders of
Winston Resources, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Winston
Resources, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. Our audits also included the financial statement schedule listed in the
index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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 consolidated financial position of Winston
Resources, Inc. and Subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
February 26, 1999
F-2
<PAGE>
Winston Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
December 31
1998 1997
----------------------------------
Assets
Current assets:
Cash and cash equivalents $2,047,000 $445,000
Accounts receivable - trade, less allowances for doubtful
accounts of $200,000 and $100,000 9,036,000 7,341,000
Prepaid expenses and other current assets 118,000 227,000
Securities available-for-sale 455,000 392,000
----------------------------------
Total current assets 11,656,000 8,405,000
Property and equipment, net 649,000 540,000
Deferred income taxes 234,000 185,000
Security deposits and other assets 380,000 321,000
----------------------------------
Total assets $12,919,000 $9,451,000
==================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $5,200,000 $3,668,000
Capital lease obligations 18,000 16,000
Income taxes payable 142,000 25,000
----------------------------------
Total current liabilities 5,360,000 3,709,000
Deferred rent 255,000 303,000
Long-term portion of capital lease obligations 17,000 35,000
----------------------------------
Total liabilities 5,632,000 4,047,000
Commitments and contingencies
Stockholders' equity:
Preferred stock - $100 par value: authorized 2,000,000 shares,
no shares issued
Common stock - $.01 par value: authorized 10,000,000 shares;
issued and outstanding 3,228,121 shares (3,215,120 in 1997) 32,000 32,000
Additional paid-in capital 4,456,000 4,435,000
Retained earnings 2,612,000 783,000
Accumulated other comprehensive income 187,000 154,000
----------------------------------
Total stockholders' equity 7,287,000 5,404,000
----------------------------------
Total liabilities and stockholders' equity $12,919,000 $9,451,000
==================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Winston Resources, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<S> <C> <C> <C>
Year ended December 31
1998 1997 1996
----------------------------------------------------------
Revenue:
Placement fees and related income $60,850,000 $49,199,000 $39,390,000
----------------------------------------------------------
Operating expenses:
Compensation and other benefits 48,191,000 37,735,000 29,414,000
Selling, general and administrative 9,455,000 8,917,000 8,391,000
----------------------------------------------------------
57,646,000 46,652,000 37,805,000
----------------------------------------------------------
Income from operations 3,204,000 2,547,000 1,585,000
----------------------------------------------------------
Other income (expense):
Interest expense (5,000) (36,000) (187,000)
Interest and other income 49,000 69,000 52,000
----------------------------------------------------------
44,000 33,000 (135,000)
----------------------------------------------------------
Income before provision for income taxes 3,248,000 2,580,000 1,450,000
Provision for income taxes 1,419,000 1,136,000 312,000
----------------------------------------------------------
Net income $1,829,000 $1,444,000 $1,138,000
==========================================================
Basic earnings per share $.57 $.45 $.37
==========================================================
Diluted earnings per share $.52 $.41 $.34
==========================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Winston Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Common Stock
$.01 Par Value Retained Accumulated
--------------------------- Additional Earnings Other
Number Paid-in (Accumulated Comprehensive
of Shares Amount Capital Deficit) Income Total
------------------------------------------------------------------------------------------
Balance - December 31, 1995 2,920,833 $29,000 $4,396,000 $(1,799,000) $28,000 $2,654,000
Exercise of common stock options 273,060 3,000 115,000 - - 118,000
Retirement of treasury stock (16,789) - (98,000) - - (98,000)
Comprehensive income:
Net income - - - 1,138,000 - 1,138,000
Unrealized gain on securities
available-for-sale, net - - - - 50,000 50,000
-----------
Comprehensive income 1,188,000
------------------------------------------------------------------------------------------
Balance - December 31, 1996 3,177,104 32,000 4,413,000 (661,000) 78,000 3,862,000
Exercise of common stock options 38,016 - 22,000 - - 22,000
Comprehensive income:
Net income - - - 1,444,000 - 1,444,000
Unrealized gain on securities
available-for-sale, net - - - - 76,000 76,000
-----------
Comprehensive income 1,520,000
------------------------------------------------------------------------------------------
Balance - December 31, 1997 3,215,120 32,000 4,435,000 783,000 154,000 5,404,000
Exercise of common stock options 13,001 - 21,000 - - 21,000
Comprehensive income:
Net income - - - 1,829,000 - 1,829,000
Unrealized gain on securities
available-for-sale, net - - - - 33,000 33,000
----------
Comprehensive income 1,862,000
-------------------------------------------------------------------------------------------
Balance - December 31, 1998 3,228,121 $32,000 $4,456,000 $2,612,000 $187,000 $7,287,000
===========================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Winston Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<S> <C> <C> <C>
Year ended December 31
1998 1997 1996
----------------------------------------------------------
Cash flows from operating activities
Net income $1,829,000 $1,444,000 $1,138,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense 285,000 41,000 125,000
Depreciation and amortization 207,000 172,000 129,000
Deferred rent (48,000) (47,000) (29,000)
Deferred tax (benefit) expense (75,000) 224,000 (349,000)
Changes in assets and liabilities:
Accounts receivable (1,980,000) (1,527,000) (164,000)
Prepaid expenses and other current assets 109,000 11,000 66,000
Other assets (63,000) (80,000) (38,000)
Accounts payable, accrued expenses and
income taxes payable 1,649,000 (428,000) 1,364,000
----------------------------------------------------------
Net cash provided by (used in) operating activities 1,913,000 (190,000) 2,242,000
----------------------------------------------------------
Cash flows from investing activities
Purchases of property and equipment (316,000) (401,000) (87,000)
----------------------------------------------------------
Cash flows from financing activities
Repayment on credit facility debt - - (1,182,000)
Proceeds from exercise of options 21,000 22,000 20,000
Repayment of capital leases (16,000) (54,000) (69,000)
----------------------------------------------------------
Net cash provided by (used in) financing activities 5,000 (32,000) (1,231,000)
----------------------------------------------------------
Net increase (decrease) in cash and cash 1,602,000 (623,000) 924,000
equivalents
Cash and cash equivalents - beginning of year 445,000 1,068,000 144,000
----------------------------------------------------------
Cash and cash equivalents - end of year $2,047,000 $445,000 $1,068,000
==========================================================
Supplemental disclosures of cash flow
information
Cash payments for interest $5,000 $36,000 $176,000
==========================================================
Cash payments for income taxes $1,384,000 $1,405,000 $128,000
==========================================================
Supplemental disclosures of noncash investing
and financing activities
Retirement of treasury stock $- $- $98,000
==========================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Principal Business Activity and Summary of Significant Accounting Policies
Business Activity
Winston Resources, Inc. and Subsidiaries (the "Company") provide a wide variety
of temporary staffing specialties, permanent placement services, executive
search recruitment, and recruitment advertising to the business community.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Winston Resources, Inc. and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of
credit risk include cash and cash equivalents and accounts receivable arising
from its normal business activities. The Company places its cash and cash
equivalents with high credit quality financial institutions. Approximately 99%
and 91% of cash and cash equivalents at December 31, 1998 and 1997,
respectively, was on deposit at one financial institution.
The Company believes that its credit risk regarding accounts receivable is
limited due to the large number of entities comprising the Company's customer
base. In addition, the Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk of its customers,
establishes an allowance for uncollectible accounts, where appropriate.
F-7
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Securities Available-for-Sale
Investments, which consist of common stocks, are stated at fair value as
determined by quoted market price. The Company has classified its securities as
investments available-for-sale pursuant to Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, any unrealized gain or loss on the investments, net of
deferred taxes thereon, is reported as a component of accumulated other
comprehensive income.
Depreciation and Amortization
Depreciation and amortization of property and equipment are provided on the
straight-line and declining balance methods over the estimated useful lives of
the assets.
Revenue Recognition
Permanent placement revenue is recognized when a candidate is accepted for
employment. Provisions are made for estimated losses in realization (principally
due to applicants not remaining in employment for the guaranteed period).
Temporary placement revenue is recognized when the temporary personnel provide
the services. Nonrefundable retainer revenue is recognized according to the
terms of the search contract.
Advertising Costs
The Company expenses advertising costs upon the first showing of the
advertisements. Advertising expenses for the years ended December 31, 1998, 1997
and 1996 totaled approximately $952,000, $871,000 and $711,000, respectively.
F-8
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's net
income or stockholders' equity. Statement 130 requires unrealized gains or
losses on securities available-for-sale which, prior to adoption, were reported
separately in stockholders' equity, to be included in other comprehensive
income.
Segment Information
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information. Statement 131 superseded FASB Statement No. 14, Financial Reporting
for Segments of a Business Enterprise. Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. Statement 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption of
Statement 131 did not affect results of operations or financial position, but
did affect the disclosure of segment information (see Note 10).
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 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-9
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<S> <C> <C> <C>
December 31 Estimated
1998 1997 Useful Life
-----------------------------------------------------------
Furniture, fixtures and equipment $970,000 $804,000 3 to 7 years
Leasehold improvements 346,000 349,000 Life of lease
---------------------------------------
1,316,000 1,153,000
Less accumulated depreciation 667,000 613,000
---------------------------------------
$649,000 $540,000
=======================================
</TABLE>
Included in property and equipment at December 31, 1998 are assets recorded
under capital leases with a cost of approximately $216,000 and accumulated
amortization of approximately $196,000. Amortization of assets recorded under
capital leases is included with depreciation expense.
3. Financing Arrangements
a. Credit Facility
The Company has a secured credit facility providing for short-term advances
to a maximum of $6,000,000, based on up to 80% of eligible accounts
receivable, as defined. The Company pays interest on advances at the bank's
alternate base rate, as defined, or at LIBOR plus 2.5% (7.5% and 8.5% at
December 31, 1998 and 1997, respectively). The credit facility is
collateralized by the accounts receivable of the Company and expires on
October 31, 1999. The Company had no borrowings under this facility for the
year ended December 31, 1998.
F-10
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Financing Arrangements (continued)
b. Capital Lease Obligations
The Company has leased telephone equipment, software and computer equipment
under capital leases which are included in property and equipment (see Note
2). The following is a schedule of the future minimum lease payments,
together with the present value of the minimum lease payments as of
December 31, 1998:
<TABLE>
<S> <C>
Year ending December 31:
1999 $21,000
2000 17,000
----------------------
Total 38,000
Less amount representing interest (effective rate 11%) 3,000
----------------------
Present value of the minimum lease payments 35,000
Less current portion of capital lease obligations 18,000
----------------------
$17,000
======================
</TABLE>
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<S> <C> <C>
December 31
1998 1997
-----------------------------------------------
Accounts payable - trade $739,000 $686,000
Accrued compensation and payroll taxes 3,003,000 1,750,000
Accrued commissions 1,143,000 904,000
Other accrued expenses 315,000 328,000
-----------------------------------------------
Total $5,200,000 $3,668,000
===============================================
</TABLE>
F-11
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Taxes
The provision for income taxes consists of:
<TABLE>
<S> <C> <C> <C>
Year ended December 31
1998 1997 1996
--------------------------------------------------------------
Current:
Federal $952,000 $720,000 $535,000
State and local 542,000 192,000 126,000
Deferred (75,000) 224,000 (349,000)
--------------------------------------------------------------
$1,419,000 $1,136,000 $312,000
==============================================================
A reconciliation of the federal statutory tax rate to the actual effective rate is as follows:
Year ended December 31
1998 1997 1996
------------------------------------------------------------
Statutory rate 34.0% 34.0% 34.0%
State and local income taxes, net of
federal benefit 10.7 4.3 4.8
Change in valuation allowance (1.0) 1.8 (17.1)
Permanent differences 1.6 2.4 1.8
Other (1.6) 1.5 (2.0)
------------------------------------------------------------
43.7% 44.0% 21.5%
============================================================
</TABLE>
F-12
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
The deferred income taxes are comprised of the following:
<TABLE>
<S> <C> <C>
December 31
1998 1997
------------------------------------------
Assets
Provision for doubtful accounts $80,000 $40,000
Intangible assets written off 230,000 224,000
Accrued rent 102,000 121,000
Net operating losses for state and local tax purposes 91,000 127,000
------------------------------------------
Deferred tax asset 503,000 512,000
------------------------------------------
Liabilities
Unrealized gain on securities (182,000) (156,000)
Other (30,000) (44,000)
------------------------------------------
Deferred tax liability (212,000) (200,000)
------------------------------------------
291,000 312,000
Valuation allowance (57,000) (127,000)
------------------------------------------
$234,000 $185,000
==========================================
</TABLE>
The valuation allowance (decreased) increased by ($70,000), $52,000 and
$(333,000), respectively, during the years ended December 31, 1998, 1997 and
1996.
6. Commitments and Contingencies
Operating Leases
The Company leases office space under noncancelable operating leases which
expire at various dates through 2003. These leases are subject to escalations
for increases in real estate taxes and other expenses.
F-13
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Commitments and Contingencies (continued)
The aggregate future minimum lease payments required under these leases are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1999 $783,000
2000 791,000
2001 743,000
2002 699,000
2003 398,000
----------------------
Total $3,414,000
======================
</TABLE>
Rental expense under operating leases, including escalation charges for the
years ended December 31, 1998, 1997 and 1996, approximated $839,000, $726,000
and $700,000, respectively.
Pursuant to one of the Company's leases, rent expense charged to operations
differs from rent paid because of the effect of free rent periods and scheduled
rent increases. Accordingly, the Company has recorded deferred rent payable of
$255,000 and $303,000 at December 31, 1998 and 1997, respectively. Rent expense
is calculated by allocating total rental payments, including those attributable
to scheduled rent increases, on a straight-line basis, over the lease term.
The Company has been released from a portion of its rent obligation on certain
premises which it had been subleasing through 2003; however, in the event of
default by the sublessee, it would remain liable for the balance of the rent
obligation which, at December 31, 1998, aggregated $464,000.
Executive Employment Agreement
An employment agreement with the chief executive officer expiring in August 2002
provides for an annual salary of approximately $446,000, plus incentive bonuses
based on pre-tax income. In addition, the officer is entitled, under certain
circumstances, to termination benefits.
F-14
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Retirement Plan
The Company has a defined contribution plan under Section 401(k) of the Internal
Revenue Code ("IRC") which provides that eligible employees may make
contributions, subject to IRC limitations. The Company may choose to make
contributions to the Plan in an amount determined by the Company at its
discretion. No contributions were made for the years ended December 31, 1998 and
1997. The Company made a contribution to the Plan of $25,000 for the year ended
December 31, 1996.
8. Stock Option Plans
Under the Company's 1996 Stock Plan (the "Plan") a committee of the Board of
Directors is authorized to issue to officers, directors, key employees and
consultants stock options (both incentive stock options ("ISOs") and
nonqualified options), restricted stock and directors' options. In 1998, the
number of options issuable under the Plan was increased from 400,000 to 800,000.
The Company also has an Incentive Program (the "Program") under which it may
issue to officers, directors, key employees, and certain consultants stock
options (both ISOs and nonqualified options), stock appreciation rights ("SARs")
(in tandem with stock options or free-standing), restricted stock and directors'
options issuable pursuant to a formula. Up to 575,000 shares are issuable under
the Program either as outright grants or upon exercise of options or SARs
awarded thereunder.
Directors of the Company who are not employees are eligible to participate
solely in the nondiscretionary directors' option portion of the Program. All
administrative powers of the Option Committee of the Broad of Directors (the
"Committee") with respect to directors' options may be exercised, at the
discretion of the Board of Directors, by an Alternate Committee comprised of
persons not eligible to receive directors' options, one of whom must be a
director. Moreover, in no event, may the number of shares subject to directors'
options issuable to any qualified director in any year exceed 25,000.
F-15
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plans (continued)
The selection of participants from among employees and officers and the
determination of the type and amount of awards (except as to the directors'
options) is entirely within the discretion of the Committee. There is no limit
on the number or amount of awards which may be granted to any one person under
the Program, except that the fair market value (determined as of the date of
grant) of shares with respect to which ISOs are first exercisable in any one
year as to any participant may not exceed $100,000.
All options granted have five or ten year terms and vest and become fully
exercisable at the end of three years of continued employment.
Restricted stock may be awarded under the Program either at no cost to the
recipient or for such cost as specified by the grant. Unless waived in whole or
in part by the Committee, once a holder of record of restricted stock ceases to
be an employee, officer or director of the Company, all shares of restricted
stock then held and still subject to restriction will be forfeited by such
holder and reacquired by the Company.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its employee stock options. Under APB
25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its stock options under the fair
value method estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1997 and 1996 (no
options were granted in 1998), risk-free interest rates of 5.6% in 1997 and 5.9%
to 6.0% in 1996; volatility factors of the expected market price of the
Company's common stock of .72 and .75. The weighted-average expected life of the
options is three years. Dividends are not expected in the future.
F-16
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plans (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
------------------------------------------------------------
Pro forma net income $1,712,000 $1,363,000 $979,000
Pro forma basic income per share $.53 $.43 $.32
Pro forma diluted income per share $.50 $.40 $.30
</TABLE>
Stock option activity is summarized as follows:
<TABLE>
<S> <C> <C>
Weighted-
Average
Shares Exercise Price
---------------------------------------------
Balance at January 1, 1996 518,317 $.97
Granted 304,500 $2.14
Exercised (273,060) $.43
Cancelled (5,107) $.43
---------------------------------------------
Balance at December 31, 1996 (137,759
exercisable at option prices $.4875 to $2.20) 544,650 $1.90
Granted 113,500 $5.34
Exercised (38,016) $.58
Cancelled (2,124) $.85
---------------------------------------------
Balance at December 31, 1997 (272,938 exercisable
at option prices $.4375 to $5.775) 618,010 $2.62
Exercised (13,001) $1.63
Cancelled (333) $1.50
---------------------------------------------
Balance at December 31, 1998 (428,396 exercisable
at option prices $.4375 to $5.775) 604,676 $2.64
=============================================
</TABLE>
F-17
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plans (continued)
The weighted average fair value of options granted during 1997 and 1996 was
$2.03 and $1.07, respectively. The exercise prices for options outstanding as of
December 31, 1998 ranged from $.4375 to $5.775. The weighted average remaining
contractual life of those options is 6.63 years.
At December 31, 1998, 432,850 options are available for grant.
9. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
----------------------------------------------------------------
Numerator:
Net income $1,829,000 $1,444,000 $1,138,000
----------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share-weighted-average shares 3,220,473 3,191,825 3,065,719
Effect of dilutive securities:
Stock options 302,793 296,355 257,960
----------------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed 3,523,266 3,488,180 3,323,679
conversions
----------------------------------------------------------------
Basic earnings per share $.57 $.45 $.37
================================================================
Diluted earnings per share $.52 $.41 $.34
================================================================
</TABLE>
F-18
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Segment Information
The Company derives all of its revenues from businesses located in the United
States and classifies its business into two fundamental areas: placement
services and recruitment advertising. Placement services consist of the
placement of temporary and permanent employees. Recruitment advertising consists
of the placement of recruitment advertising on behalf of the Company, clients
and other third parties.
The Company evaluates performance based on the segments' profit or loss. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies (see Note 2). Inter-segment
sales and transfers are recorded at the Company's cost; there is no intercompany
profit or loss on inter- segment sales or transfers.
<TABLE>
<S> <C> <C> <C>
Year ended December 31, 1998
-------------------------------------------------------
Placement Recruitment
Services Advertising Total
-----------------------------------------------------------
Placement fees and related income $55,259,000 $6,423,000 $61,682,000
Inter-segment placement fees and related 71,000 761,000 832,000
income
Interest expense 5,000 - 5,000
Depreciation and amortization 195,000 12,000 207,000
Income tax expense 1,407,000 12,000 1,419,000
Segment profit 1,814,000 15,000 1,829,000
Segment assets 12,330,000 589,000 12,919,000
Expenditures for long-lived assets 299,000 17,000 316,000
Year ended December 31, 1997
-------------------------------------------------------
Placement Recruitment
Services Advertising Total
-----------------------------------------------------------
Placement fees and related income $43,684,000 $6,239,000 $49,923,000
Inter-segment placement fees and related 27,000 697,000 724,000
income
Interest expense - 36,000 36,000
Depreciation and amortization 163,000 9,000 172,000
Income tax expense 1,081,000 55,000 1,136,000
Segment profit 1,376,000 68,000 1,444,000
Segment assets 8,959,000 492,000 9,451,000
Expenditures for long-lived assets 392,000 9,000 401,000
</TABLE>
F-19
<PAGE>
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Segment Information (continued)
<TABLE>
<S> <C> <C> <C>
Year ended December 31, 1996
Placement Recruitment
Services Advertising Total
-----------------------------------------------------------
Placement fees and related income $34,230,000 $5,768,000 $39,998,000
Inter-segment placement fees and related 40,000 568,000 608,000
income
Interest expense 172,000 15,000 187,000
Depreciation and amortization 122,000 7,000 129,000
Income tax expense (benefit) 336,000 (24,000) 312,000
Segment profit (loss) 1,226,000 (88,000) 1,138,000
Segment assets 7,858,000 580,000 8,438,000
Expenditures for long-lived assets 82,000 5,000 87,000
</TABLE>
F-20
<PAGE>
Winston Resources, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<S> <C> <C> <C> <C>
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Balance at
the Beginning Costs and End
of the Period Expenses Deductions of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $100,000 $285,000 $185,000 (1) $200,000
Year ended December 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $109,000 $41,000 $50,000 (1) $100,000
Year ended December 31, 1996
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $82,000 $125,000 $98,000 (1) $109,000
</TABLE>
Uncollectible accounts written off, net of recoveries.
F-21
<PAGE>
(a)3 Exhibits
Exhibit No. Description
* 3.1.1 Restated Certificate of Incorporation of the Company, as
filed with the Secretary of State of Delaware on April 6,
1987 [Registration Statement No. 33-14913, Exhibit 3.1]
* 3.1.2 Agreement and Plan of Merger dated as of April 15, 1987,
between Winston Resources, Inc. (New York) and the Company,
as filed with the Secretary of State of Delaware on April
20, 1987 [Registration Statement No. 33-14813, Exhibit 3.2]
* 3.1.3 Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of Delaware on June 11, 1993 [Form 10-KSB (1993)]
* 3.1.4 Composite Copy of Restated Certificate of Incorporation of
the Company, as amended [Form 10-K (1987), Exhibit 3.3]
* 3.2 By-laws of the Company, as amended June 11, 1993 [Form
10-KSB (1993)]
* 9 Stockholders' Voting Agreement, dated June 8, 1987, among
Seymour Kugler, Alec Peters and Melvin Winograd
[Registration Statement No. 33-14913, Exhibit 9]
10.1 Amended and Restated Employment Agreement, dated January 1,
1997, between the Company and Seymour Kugler
* 10.2 Supplemental Excess Profit Sharing Plan, dated December 12,
1984 [Registration Statement No. 33-14913, Exhibit 10.3]
* 10.3 Incentive Program of the Company [Registration Statement on
Form S-8 No. 33- 37476, Exhibit 4]
____________________
* Incorporated by reference and not filed herewith.
-15-
<PAGE>
Exhibit No. Description
* 10.4 Winston Resources, Inc. 1996 Stock Plan [1996 Proxy
Statement, Exhibit A]
* 10.5 Agreement of Lease, dated as of August 8, 1990 (the
"Lease"), between Nineteen New York Properties Limited
Partnership, and the Company, as tenant [Form 10- K (1990),
Exhibit 10.11]
* 10.6 First Amendment of Lease dated as of March 1, 1992, between
Nineteen New York Properties Limited Partnership and the
Company [Form 10-KSB (1992), Exhibit 10.6]
* 10.7 Second Amendment of Lease dated as of January 29, 1993,
between Nineteen New York Properties Limited Partnership and
the Company [Form 10-KSB (1992), Exhibit 10.7]
* 10.8 Third Amendment of Lease dated as of February 19, 1993,
between Nineteen New York Properties Limited Partnership and
the Company [Form 10-KSB (1992), Exhibit 10.8]
10.9 Fifth Amendment of Lease dated as of March 14, 1997 between
535 Fifth Avenue LLC (the successor in interest to Nineteen
New York Properties Limited Partnership) and the Company, as
tenant
10.10 Secured Line of Credit Agreement dated November 4, 1996
between Winston Resources, Inc. and The Bank of New York
10.11 Promissory Note dated November 26, 1996 made by Winston
Resources, Inc. in favor of The Bank of New York
10.12 Security Agreement dated as of November 26, 1996 by and
among Winston Resources, Inc., WIN-PAY, Inc., Winston
Professional Staffing, Inc., Winston Cosmopolitan, Inc.,
Roth Young Personnel Services, Inc., Winston Personnel of
Boca Raton, Inc., Winston Personnel Inc. of New Jersey,
Winston Staffing Services, Inc. and The Bank of New York
10.13 Extension by The Bank of New York of term of Line of Credit
through October 31, 1999
____________________
* Incorporated by reference and not filed herewith.
-16-
<PAGE>
Exhibit No. Description
22 Subsidiaries of the Company:
Delta 10, Inc. (a New Jersey corporation)
Winston Personnel of Boca Raton, Inc. (a Florida
corporation)
Winston Personnel, Inc. of New Jersey (a New Jersey
corporation)
Winston Professional Staffing, Inc. (a New Jersey
corporation)
Winston Staffing Services, Inc. (a New York
corporation)
WIN-PAY, Inc. (a New York corporation)
23.1 Consent of Ernst & Young LLP, independent auditors
27 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K have been
filed during the quarter ended December 31, 1998.
-17-
<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.
Date: March 25, 1999
WINSTON RESOURCES, INC.
By: /s/ Seymour Kugler
Seymour Kugler, Chairman of
the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
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
<TABLE>
<S> <C> <C>
/s/ Seymour Kugler Chairman of the Board and March 25, 1999
Seymour Kugler President; Principal Executive
Officer; Director
/s/ Jesse Ulezalka Chief Financial Officer March 25, 1999
Jesse Ulezalka
/s/Gregg Kugler Director March 25, 1999
Gregg Kugler
/s/Todd Kugler Director March 25, 1999
Todd Kugler
/s/ Martin Fischer Director March 25, 1999
Martin Fischer
/s/ Alan E. Wolf Director March 25, 1999
Alan E. Wolf
/s/ Martin Wolfson Director March 25, 1999
Martin Wolfson
/s/ Norton Sperling Director March 25, 1999
Norton Sperling
/s/ Martin J. Simon Director March 25, 1999
Martin J. Simon
</TABLE>
-18-
<PAGE>
EXHIBIT 10.13
THE BANK OF NEW YORK
NEW YORK'S FIRST BANK - FOUNDED IN 784 BY ALEXANDER HAMILTON
1290 Avenue of the Americas, New York, N.Y 10104
Mr. Sy Kaye, Chairman,
Winston Resources, Inc.
535 Fifth Avenue,
New York, N.Y. 10017
10/30/98
Dear Sir,
This is to confirm that the advised Line of Credit available for Winston
Resources, Inc. is extended to October 31, 1999. All the terms and conditions
remain the same.
Sincerely,
Sanjay S Shirali
Vice President.
<PAGE>
EXHIBIT
THE BANK OF NEW YORK
NEW YORK'S FIRST BANK - FOUNDED IN 784 BY ALEXANDER HAMILTON
1290 Avenue of the Americas, New York, N.Y 10104
October 13, 1998
Winston Resources, Inc.
535 Fifth Avenue
New York, New York 10017
Attention: Sy Kaye
Chief Executive Officer
Gentlemen/Ladies:
The Bank of New York (the "Bank") is pleased to confirm that it has
extended the period of availability of the $6,000,000 secured line of credit
that the Bank holds available to Winston Resources, Inc.
Notwithstanding the foregoing, the aggregate outstanding principal
amount of all advances under this line of credit shall not exceed the lesser of
$6,000,000 or an amount equal to the sum of the following:
1. 80% of each account receivable of the Company (including the
Company's Winston Advertising Agency division) or any of Winston Personnel of
Boca Raton, Inc., WIN- PAY, Inc., Winston Personnel Inc. of New Jersey, Winston
Professional Staffing, Inc., Winston Staffing Services, Inc., Winston
Cosmopolitan, Inc., Winston Franchise Corp. and Roth Young Personnel Services,
Inc. (collectively, the "Subsidiaries") (i) which was generated in connection
with the placement of temporary employees or in connection with advertising,
(ii) in respect of which the Bank has a perfected first priority security
interest and (iii) in respect of which no amount is unpaid for more than 90 days
(or in the case of an account receivable, the relevant account debtor on which
is a hospital, 120 days) past the date of the related invoice; plus
2. 50% of each account receivable of the Company or any of the
Subsidiaries (i) which was generated in connection with the placement of
permanent employees, (ii) in respect of which the Bank has a perfected first
priority security interest and (iii) in respect of which no amount is unpaid for
more than 90 days past the date of the related invoice.
Advances under this line of credit shall be evidenced by, shall be
payable as provided in, and shall bear interest at the rate specified in, the
Promissory Note dated November 26, 1996 made by the Company to the order of the
Bank in the principal amount of $6,000,000.
<PAGE>
2
All obligations of the Company to the Bank with respect to this line
of credit shall be jointly and severally guaranteed by the Subsidiaries pursuant
to the Guaranty Agreement dated November 26, 1996 between the Subsidiaries and
the Bank. In addition, all obligations of the Company and the Subsidiaries to
the Bank with respect to this line of credit shall be secured pursuant to the
Security Agreement dated November 26, 1996 among the Company, the Subsidiaries
and the Bank which grants the Bank a first and prior security interest in all
accounts receivable of the Company and the Subsidiaries.
For so long as this line of credit is held available or the Company
has any obligations outstanding under this line of credit, there shall be
delivered to the Bank the following, each in form and content satisfactory to
the Bank:
a. Within 5 business days after the filing thereof, copies of all
documents, including financial statements, filed by the Company or any of the
Subsidiaries with the Securities and Exchange Commission;
b. Within 15 days after the end of each month, a borrowing base
certificate and an aging schedule of the accounts receivable of the Company and
the Subsidiaries, in each case as of the end of such month; and
c. Promptly upon the Bank's request therefor, such other information
as the Bank may reasonably request from time to time.
As you know lines of credit are cancellable at any time by either
party and, in addition, any advance under this line of credit is subject to the
Bank's satisfaction, at the time of such advance, with the condition (financial
and otherwise), business, prospects, properties, assets, ownership, management
and operations of each of the Company and each of the Subsidiaries and with the
collateral for this line of credit. Unless cancelled earlier as provided in the
first sentence of this paragraph, this line of credit shall be held available
until October 9, 1999.
Very truly yours,
THE BANK OF NEW YORK
By _________________
Sanjay S Shirali
Vice President
<PAGE>
EXHIBIT - 27
WINSTON RESOURCES, INC. AND SUBSIDIARIES
FINANCIAL DATA SCHEDULES
FOR THE YEAR ENDED DECEMBER 31, 1998
/LEGEND
Multiplier 1
TABLE
S C
Period-Type Year
Fiscal-Year-End DEC-31-1998
Period-End DEC-31-1998
Cash 2,047,000
Securities 455,000
Receivables 9,236,000
Allowances 200,000
Inventory 0
Current-Assets 11,656,000
PP&E 1,316,000
Depreciation 667,000
Total-Assets 12,919,000
Current-Liabilities 5,360,000
Bonds 0
Preferred-Mandatory 0
Preferred 0
Common 32,000
Other-SE 7,255,000
Total-Liability-and-Equity 12,919,000
Sales 60,850,000
Total-Revenues 60,850,000
CGS 0
Total-Costs 48,191,000
Other-Expenses 9,455,000
Loss-Provision 0
Interest-Expense 0
Income-Pretax 3,248,000
Income-Tax 1,419,000
Income-Continuing 1,829,000
Discontinued 0
Extraordinary 0
Changes 0
Net-Income 1,829,000
EPS-Primary .57
EPS-Diluted .52
