1
This filing is made pursuant
to Rule 424(b)(4) under
the Securities Act of
1933 in connection with
3,100,000 SHARES Registration No. 333-4276
[REMEDYTEMP, INC. LOGO]
CLASS A COMMON STOCK
Of the 3,100,000 shares of Class A Common Stock offered hereby, 1,938,333
shares are being offered by RemedyTemp, Inc. (the "Company") and 1,161,667
shares are being offered by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders. The Company's authorized common stock
consists of Class A Common Stock, par value $0.01 per share (the "Class A Common
Stock"), and Class B Common Stock, par value $0.01 per share (the "Class B
Common Stock" and, together with the Class A Common Stock, the "Common Stock").
The Class A Common Stock and Class B Common Stock are identical, except that the
Class A Common Stock entitles its holders to one vote per share on all matters
submitted to a shareholder vote, whereas the Class B Common Stock entitles its
holders to no voting rights except with respect to certain amendments of the
Company's Articles of Incorporation, certain mergers and as otherwise required
by law. Class B Common Stock automatically converts into Class A Common Stock on
a share-for-share basis upon certain transfers to non-affiliates of the holder
thereof and certain other specified events. See "Description of Capital
Stock--Common Stock."
Prior to the Offering, there has been no public market for the Class A
Common Stock. See "Underwriting" for the factors considered in determining the
initial public offering price. The Class A Common Stock has been approved for
listing on the Nasdaq National Market under the symbol "REMX."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF CLASS A
COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 8-12.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS* COMPANY+ SHAREHOLDERS
Per Share................. $13.00 $0.91 $12.09 $12.09
Total++................... $40,300,000 $2,821,000 $23,434,446 $14,044,554
- ---------------
* The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
+ Before deducting expenses payable by the Company estimated to be $850,000.
++ The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 155,000 and 310,000 additional shares of
Class A Common Stock, respectively, on the same terms per share solely to
cover over-allotments, if any. If such option is exercised in full, the total
price to public will be $46,345,000, the total underwriting discounts and
commissions will be $3,244,150, the total proceeds to Company will be
$25,308,396 and the total proceeds to Selling Shareholders will be
$17,792,454. See "Underwriting."
------------------------
The Class A Common Stock is being offered by the Underwriters as set forth
under "Underwriting" herein. It is expected that the delivery of certificates
therefor will be made at the offices of Dillon, Read & Co. Inc., New York,
New York, on or about July 16, 1996. The Underwriters include:
DILLON, READ & CO. INC. THE ROBINSON-HUMPHREY
COMPANY, INC.
The date of this Prospectus is July 10, 1996
2
[GRAPHICS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and Financial Statements of
the Company, including the Notes thereto, appearing elsewhere in this
Prospectus. Except as otherwise indicated, the information presented in this
Prospectus assumes no exercise of the Underwriters' over-allotment option, and
gives effect to a 1.812 for 1 split of the Common Stock to be effected in
connection with this offering of shares of Class A Common Stock (the
"Offering"). References to "fiscal" years by date generally refer to the fiscal
year ending on the Sunday closest to September 30 of that calendar year.
THE COMPANY
The Company is a rapidly growing national provider of clerical and light
industrial temporary staffing services to industrial and service companies,
professional organizations and governmental agencies. The Company provides its
services in 34 states through a network of 156 offices, of which 67 are
Company-owned and 89 are independently-managed. During the twelve months ended
December 31, 1995, the Company placed approximately 92,000 temporary workers,
known as "associates," and provided over 24.4 million hours of staffing services
to over 13,000 clients. From the beginning of fiscal 1993 through the end of
fiscal 1995, the Company added 61 offices and increased revenues and income
before taxes at compound annual growth rates of 30.6% and 63.7%, respectively,
to $209.0 million and $6.5 million, respectively.
The Company has positioned itself to take advantage of trends in the
temporary staffing industry, such as increased integration of temporary workers
as a significant, long-term workforce component in both manufacturing and
service-oriented companies and increased outsourcing by companies of certain
staffing functions. The Company focuses on the clerical and light industrial
sectors of the nation's temporary workforce, which together comprise
approximately 60% of the nation's temporary staffing industry revenues,
according to Staffing Industry Analysts, Inc. ("SIA"), an independent staffing
industry publication company. Through the use of innovative technologies and
value-added services, the Company strives to partner with its clients to deliver
total solutions to their temporary staffing needs. The Company's expertise in
providing associates who possess the skills and attitudinal characteristics
necessary to "fit" into clients' organizations and perform at a superior level
distinguishes the Company as a premium provider of temporary staffing services.
Over the past three years, the Company has invested significant human and
financial resources in the development of proprietary technologies designed to
enable the Company to provide its clients with premium temporary workers and
unique value-added services. The Company's proprietary technologies are
maintained in three interactive systems: Human Performance Technology ("HPTSM"),
an innovative series of multimedia evaluations used to profile the attitudinal
characteristics of the Company's associates; IntellisearchSM, a computer
database used to classify, search and fit the Company's associates to job
openings using parameters based upon client needs; and Employee Data Gathering
and Evaluation ("EDGESM"), a turn-key, proprietary computer system installed at
client locations to coordinate scheduling and track job performance of a
client's entire temporary workforce and to customize invoices and utilization
reports. Management believes that these technologies give the Company advantages
over competing temporary staffing companies that do not provide similar
value-added services.
BUSINESS STRATEGY
The key components of the Company's business strategy are as follows:
Focus on Core Business Segments. The Company focuses on the clerical and
light industrial segments, which according to SIA are the two largest segments
of the temporary staffing industry (comprising 33% and 27%, respectively, of
total industry revenues) and have been growing at compound annual growth rates
of 16% and 24%, respectively, since 1991.
3
4
Expand Revenues and Profitability. The Company seeks to maximize revenues
and profitability by opening new offices and targeting clients in the middle
market (as opposed to the largest national accounts) where there is less
competition and price cutting. In addition, the Company can support premium
pricing by providing value-added services that are not currently offered by all
competitors. As a result, the Company's revenues grew at a compound annual rate
of 30.6% over the last three fiscal years, and its pretax income margin has
expanded from 1.5% to 3.1%.
Deliver Quality Associates. The Company utilizes a three-step approach to
staffing temporary workers, which enables the Company to provide quality
associates who are well-suited to clients' particular requirements. This
approach involves: Client Needs Assessment, a detailed study of clients'
temporary staffing requirements; HPTSM, an evaluative profile of the skills and
attitudinal characteristics of the Company's associates; and IntellisearchSM, a
screen of the Company's local databases used to fit appropriate associates with
clients' particular staffing needs.
Provide Value-Added Workforce Support. Clients look increasingly to
temporary staffing companies not only to provide workers, but to deliver total
staffing solutions that include certain human resource functions. To take
advantage of this trend, the Company has developed and installed with clients a
proprietary on-site employee management system, called EDGESM, that coordinates
scheduling and tracks job performance of temporary workers provided to clients
by the Company and other staffing companies. To meet clients' after-hours needs,
the Company is implementing Remedy Non-StopSM, a service initially available in
California that allows clients to contact the Company's national headquarters
for staffing assistance when most other temporary staffing companies are closed.
Invest in Innovative Technologies. Since the early 1990s, the Company has
made significant investments in technologies designed to provide superior client
services and position the Company as the "intelligent staffing" provider in the
temporary workforce industry. This investment has produced the HPT(SM),
Intellisearch(SM), and EDGE(SM) systems, which have enabled the Company to offer
total solutions to clients' temporary workforce needs and establish closer
client relationships by providing value-added services. The Company intends to
market its technological advantages more aggressively, using a multimedia sales
approach to attract new clients and offer expanded services to existing clients.
Future innovations include an expanded Internet site and a new World Wide Web
site for client marketing and associate recruiting and screening.
Provide Strong Support to Nationwide Office Network. The Company strives
to enhance the success of both the Company-owned and the independently-managed
offices by combining a decentralized and entrepreneurial environment with strong
headquarters support at the corporate and regional levels. The Company provides
operating procedures and capital, growth management, training, marketing, legal
and technical support to assure consistent delivery of quality services to
clients throughout its nationwide office network.
The Company believes it can continue to achieve growth by: (i) expanding
its national presence by opening additional offices in both new and existing
markets, (ii) marketing its proprietary technologies in a differentiated sales
approach, and (iii) developing additional partnering relationships with its
clients.
Founded in 1965, the Company is incorporated in California and its
principal executive offices are located at 32122 Camino Capistrano, San Juan
Capistrano, California 92675. The Company's telephone number is (714) 661-1211.
4
5
THE OFFERING
Class A Common Stock offered by the Company...................... 1,938,333 shares
Class A Common Stock offered by Selling Shareholders............. 1,161,667 shares(1)
------------------
Total Class A Common Stock offered.......................... 3,100,000 shares
------------------
------------------
Common Stock to be outstanding after the Offering................ 8,733,333 shares(2)(3)
Use of proceeds by the Company................................... To finance distributions
to the Pre-Offering Share-
holders of previously
undistributed Company
earnings for periods prior
to the Offering, and for
general corporate and
working capital purposes,
which are expected to
include branch network
expansion and enhancement
of technologies and
management information
systems. See "Use of
Proceeds."
Voting Rights................................ Holders of Class A Common Stock are entitled
to one vote per share on all matters submitted
to a shareholder vote and holders of Class B
Common Stock are entitled to no voting rights
except with respect to certain amendments of
the Company's Articles of Incorporation,
certain mergers and as otherwise required by
law. Class B Common Stock automatically
converts into Class A Common Stock on a
share-for-share basis upon the earliest to
occur of (i) certain transfers to
non-affiliates of the holder thereof, (ii) the
death or legal incapacity of Robert E.
McDonough, Sr., Chairman of the Company, and
(iii) the tenth anniversary of the closing of
the Offering. Except with respect to voting
rights and convertibility as described above,
the Class A Common Stock and Class B Common
Stock have identical rights. See "Description
of Capital Stock--Common Stock."
Nasdaq National Market symbol................ REMX
- ---------
(1) Offered by Robert E. McDonough, Sr. and R. Emmett McDonough and their
related trusts (the "Selling Shareholders"). These shares are Class B Common
Stock as long as they are held by the Selling Shareholders, but
automatically convert into Class A Common Stock upon sale in the Offering.
See "Certain Transactions--Reclassification of Common Stock" and
"Description of Capital Stock--Common Stock."
(2) Excludes 450,000 shares issuable upon exercise of stock options granted as
of the closing of the Offering to employees and non-employee directors of
the Company under the Company's 1996 Stock Incentive Plan. See
"Management--1996 Stock Incentive Plan."
(3) Consisting of 5,365,000 shares of Class A Common Stock and 3,368,333 shares
of Class B Common Stock (8,888,333 shares, consisting of 5,830,000 shares of
Class A Common Stock and 3,058,333 shares of Class B Common Stock, if the
Underwriters' over-allotment option is exercised in full). Upon the closing
of the Offering and assuming no exercise of the Underwriters' over-allotment
option, all of the Class B Common Stock and 2,265,000 shares of the Class A
Common Stock will be beneficially owned by Robert E. McDonough, Sr.
(Chairman of the Company), Paul W. Mikos (Chief Executive Officer, President
and a director of the Company, and the son-in-law of Robert E. McDonough,
Sr.), Susan McDonough Mikos (a director of the Company, the daughter of
Robert E. McDonough, Sr. and wife of Paul W. Mikos), and R. Emmett McDonough
and his wife (the son and daughter-in-law of Robert E. McDonough, Sr.), and
various trusts for the benefit of these individuals and their children (the
"Pre-Offering Shareholders"). See "Principal and Selling Shareholders."
RISK FACTORS
For a discussion of certain risks of an investment in the shares of Class A
Common Stock offered hereby, see "Risk Factors" on pages 8-12.
5
6
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
FISCAL YEAR ENDED(1) ----------------------
----------------------------------- APRIL 2, MARCH 31,
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
STATEMENT OF INCOME DATA:
Total revenues...................... $ 121,294 $ 153,005 $ 209,003 $ 94,431 $ 130,113
Total cost of sales................. 92,476 116,040 156,176 70,601 97,849
Licensees' share of gross profit.... 2,450 4,857 10,328 4,174 7,554
Selling and administrative.......... 24,245 27,581 35,667 17,218 18,839
Depreciation and amortization....... 848 1,436 1,453 627 939
-------- -------- -------- -------- --------
Operating income.................... 1,275 3,091 5,379 1,811 4,932
Other income, net................... 582 711 1,118 414 408
-------- -------- -------- -------- --------
Income before income taxes.......... 1,857 3,802 6,497 2,225 5,340
Provision for income taxes.......... 46 57 97 33 80
-------- -------- -------- -------- --------
Net income.......................... $ 1,811 $ 3,745 $ 6,400 $ 2,192 $ 5,260
======== ======== ======== ======== ========
PRO FORMA DATA(2):
Income before income taxes.......... $ 1,857 $ 3,802 $ 6,497 $ 2,225 $ 5,340
Provision for income taxes.......... 743 1,521 2,599 890 2,136
-------- -------- -------- -------- --------
Net income.......................... $ 1,114 $ 2,281 $ 3,898 $ 1,335 $ 3,204
======== ======== ======== ======== ========
Net income per common share(3)...... $0.52 $0.43
Weighted average common shares
outstanding(3).................... 7,435,000 7,435,000
SELECTED OPERATING DATA(4):
Number of offices(5)................ 94 119 142 133 151
Average hours billed per
office(6)......................... 141,765 150,936 162,096 80,442 89,598
Total systemwide billings(7)........ $ 146,388 $ 186,270 $ 247,118 $ 113,738 $ 149,965
Gross period billings per
office(8)......................... $ 1,557 $ 1,565 $ 1,740 $ 855 $ 993
MARCH 31, 1996
----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(9) ADJUSTED(10)
-------- ------------ ------------
BALANCE SHEET DATA:
Working capital.......................................... $ 18,220 $ 12,041 $ 34,625
Total assets............................................. 41,931 43,022 57,722
Total debt............................................... 1,324 1,324 1,324
Shareholders' equity..................................... 23,867 9,905 32,489
6
7
- ---------
(1) Beginning in fiscal 1992, the Company changed its fiscal year end from
September 30 to a 52- or 53-week period ending the Sunday closest to the
end of September. Thus, "fiscal 1993," "fiscal 1994" and "fiscal 1995"
refer to the Company's fiscal years ending September 30, 1991; September
27, 1992; October 3, 1993; October 2, 1994; and October 1, 1995,
respectively. All these fiscal years consisted of 52 weeks except for
fiscal 1993 which consisted of 53 weeks. The six month fiscal periods ended
April 2, 1995 and March 31, 1996 each consist of 26 weeks.
(2) Effective as of October 1, 1987, the Company elected to operate as an S
corporation under Subchapter S of the Internal Revenue Code and comparable
provisions of certain state income tax laws. The pro forma income statement
data reflect provisions for federal and state income taxes as if the
Company had been subject to federal and state income taxation as a C
corporation during each of the periods presented. See "Prior S Corporation
Status and Distributions--Accounting Effect," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Change in
Accounting Method; Charge to Earnings," and Note 1 of Notes to the
Financial Statements.
(3) Pro forma net income per share is computed by dividing pro forma net income
by 7,435,000, which is the weighted average number of shares of Common
Stock outstanding during the period after adjusting to include the
estimated 640,000 shares required to be sold by the Company to fund the pro
forma distribution payable to shareholders as described in "Prior S
Corporation Status and Distributions--Shareholder Distributions" and in
Note 9 of Notes to the Financial Statements.
(4) For a presentation of this information for Company-owned, licensed and
franchised offices, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--
Operations."
(5) Consists of all Company-owned, licensed and franchised offices at the end
of the relevant period.
(6) Total hours billed for the relevant period by all Company-owned, licensed
and franchised offices divided by the total number of offices systemwide at
the end of the relevant period.
(7) Consists of all services billed to clients by all Company-owned, licensed
and franchised offices. For Company-owned offices and licensed offices, all
billings are Company revenues; for franchised offices, Company revenues are
a royalty averaging approximately 6.3-7.0% of billings.
(8) Total gross billings for the relevant period by all Company-owned, licensed
and franchised offices divided by the total number of offices systemwide at
the end of the relevant period.
(9) Adjusted to reflect (i) a distribution of $5.0 million to the Pre-Offering
Shareholders paid in May 1996, (ii) a declared distribution (assumed to be
$2.5 million) to the Pre-Offering Shareholders in the amount of their tax
obligations related to the Company's undistributed S corporation earnings
from October 2, 1995 to March 31, 1996, and (iii) the accounting
adjustments required in connection with the Company's change from an S
corporation to a C corporation. See "Prior S Corporation Status and
Distributions." The assumed declared distribution and the accounting
adjustment associated with the change to C corporation status are based
upon the Company's financial position and results of operations as of March
31, 1996. The actual amounts of both may vary and will be determined as of
the actual date of termination of the Company's S corporation status.
(10) Reflects the sale of 1,938,223 shares of Class A Common Stock offered by
the Company hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
7
8
RISK FACTORS
Any investment in the shares of Class A Common Stock offered hereby
involves a high degree of risk. Prospective investors should consider carefully
the following factors in evaluating an investment in the Class A Common Stock.
FLUCTUATIONS IN THE GENERAL ECONOMY
Demand for temporary services is significantly affected by the general
level of economic activity in the country. When economic activity increases,
temporary employees are often added before full-time employees are hired.
Similarly, as economic activity slows, many companies reduce their use of
temporary employees before undertaking layoffs of their full-time employees.
Further, in an economic downturn, the Company may face pricing pressure from its
clients and increased competition from other staffing companies, which could
have a material adverse effect on the Company's business. Since the Company
currently derives more than half of its billings from the California market
(approximately 57% in fiscal 1995), an economic downturn in California would
have a greater impact on the Company than if the Company had a more widely
dispersed revenue base.
COMPETITIVE MARKET
The temporary services industry is highly competitive with limited barriers
to entry. The Company competes in national, regional and local markets with full
service agencies and with specialized temporary services agencies. Many
competitors are smaller than the Company but have an advantage over the Company
in discrete geographic markets because of their stronger local presence. Other
competitors are more well known and have greater marketing and financial
resources than the Company, which among other things could enable them to
attempt to maintain or increase their market share by reducing prices. The
Company expects the level of competition to remain high, and competitive pricing
pressures may have an adverse effect on the Company's operating margins. See
"Business--Competition."
ABILITY TO CONTINUE COMPANY GROWTH
The Company has grown rapidly in recent years by opening new offices and
increasing the volume of services provided through existing offices. There can
be no assurance that the Company will continue to be able to maintain or expand
its market presence in its current locations or to successfully enter other
markets. The ability of the Company to continue its growth will depend on a
number of factors including existing and emerging competition, the availability
of working capital to support such growth, and the Company's ability to maintain
margins in the face of pricing pressures, find and retain new qualified
licensees and office managers, recruit and train additional qualified temporary
personnel, and manage costs.
INDUSTRY RISKS
The Company is in the business of placing its employees in the work places
of other businesses. Attendant risks include possible claims by its employees of
discrimination, harassment and negligence by clients and other similar claims.
The Company is also exposed to liability for unintentional employment of illegal
aliens and for actions taken by its employees while on assignment, such as
damages caused by employee errors, misuse of client proprietary information or
theft of client property. The Company has policies and guidelines in place to
reduce its exposure to these risks, but a failure to follow these policies and
guidelines may result in negative publicity and the payment by the Company of
money damages or fines. The Company maintains insurance policies against certain
of these risks, but there can be no assurance that insurance coverage will
continue to be available on acceptable terms or that it will be adequate to
cover any such liability.
8
9
EMPLOYEE-RELATED COSTS; WORKERS' COMPENSATION
The Company is required to pay unemployment insurance premiums and workers'
compensation benefits for its temporary workers. Unemployment insurance premiums
are set annually by the states in which employees perform services and could
increase. The Company maintains workers' compensation insurance for its
employees under a self-insurance program with the State of California (in
support of which the Company is currently required to maintain a standby letter
of credit of at least $4.0 million) and an insured program in its remaining
areas of operation. With respect to the self-insurance program, the estimated
costs of existing and incurred but not yet reported claims are accrued based on
prior experience and may be subsequently revised based on developments related
to such claims. The Company's management believes that the recorded accrual for
workers' compensation obligations through the fiscal quarter ended March 31,
1996 is adequate, but there can be no assurance that the Company's actual future
workers' compensation obligations will not exceed the amount of its accrual.
Furthermore, there can be no assurance that the Company will be able to pass
along to its clients any increased costs related to unemployment and workers'
compensation insurance or that the Company will be able to obtain or renew on
acceptable terms workers' compensation insurance coverage or the requisite
standby letter of credit. See "Business--Workers' Compensation."
FRANCHISING AND LICENSING RISKS
The Company derives a substantial amount of its revenues (approximately 31%
in fiscal 1995) from franchised and licensed operations. The ownership of the
Company's franchises and licenses is concentrated, with the ten largest
franchisees and licensees together accounting for approximately 13% of the
Company's systemwide billings in fiscal 1995. The loss of one or more
significant franchisees or licensees would have an adverse effect on the
Company's results of operations. While the Company's franchise and license
agreements contain non-competition covenants, former franchisees and licensees
may nevertheless be able to compete with the Company. The Company must comply
with various state laws governing the sale of new licenses as well as its
ongoing franchisee and licensee relationships (including termination and
non-renewal of such relationships). See "Business--Operations" and
"--Governmental Regulation."
RELIANCE ON SENIOR MANAGEMENT, LICENSEES AND QUALIFIED ASSOCIATES
The success of the Company is highly dependent on the skills, experience
and efforts of its senior management team. The loss of the services of any of
these key personnel could adversely affect the Company's business and prospects.
See "Management." In addition, a significant portion of the Company's revenues
and growth plans depend upon the Company's ability to recruit and retain
talented licensees. See "Business--Operations." Finally, in periods of decreased
unemployment or heightened competition, the Company may incur increased
recruitment expenses and be unable to attract and retain sufficient numbers of
qualified temporary employees to support its clients and growth plans.
DISCRETIONARY USE OF PROCEEDS
A significant portion of the net proceeds to be received by the Company in
the Offering have not been designated for any specific use other than as general
working capital. Such proceeds may be utilized in the discretion of the Company.
See "Use of Proceeds."
CHANGE IN ACCOUNTING METHOD
In connection with the termination of the Company's S corporation status in
connection with the consummation of the Offering, the Company is required to
change its method of accounting for tax reporting purposes from the cash method
to the accrual method, resulting in a net charge to earnings in the fiscal
quarter in which the Offering closes. The actual amount of the charge will be
calculated as of the date of termination of the Company's S corporation status;
if the Company had ceased to be treated
9
10
as an S corporation as of March 31, 1996, the net charge would have been
approximately $6.5 million. The actual net charge to earnings could be greater,
depending upon the Company's results of operations and financial information as
of the date of termination of the Company's S corporation status. See "Prior S
Corporation Status and Distributions--Accounting Effect."
CONTROL BY PRINCIPAL SHAREHOLDER
Prior to the Offering, all of the issued and outstanding capital stock of
the Company was owned by the Pre-Offering Shareholders. Upon completion of the
Offering, Robert E. McDonough, Sr. will control Class A Common Stock
representing approximately 38.8% (35.7% if the Underwriters' over-allotment
option is exercised in full) of the combined voting power of the shareholders of
the Company with respect to substantially all matters submitted to a shareholder
vote. As a result, Mr. McDonough will be able to exercise significant influence
on the business and affairs of the Company, including the election of the
Company's directors and authorization of other corporate actions requiring
shareholder approval. Furthermore, after the closing of the Offering, the
Pre-Offering Shareholders will continue to own all of the issued and outstanding
shares of Class B Common Stock, which automatically converts into Class A Common
Stock upon the earliest to occur of (i) a transfer to a non-affiliate of the
holder thereof in a public offering pursuant to an effective registration
statement or Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), (ii) the death or legal incapacity of Robert E.
McDonough, Sr., and (iii) the tenth anniversary of the closing of the Offering.
If this conversion occurs and assuming no other issuances or transfers of any
capital stock of the Company, the Pre-Offering Shareholders will control Class A
Common Stock representing approximately 64.5% (59.9% if the Underwriters'
over-allotment option is exercised in full) of the combined voting power of the
shareholders of the Company. Potential testamentary dispositions by Robert E.
McDonough, Sr. of all of his shares of Common Stock solely to members of his
family would result in further concentration of the voting power of the
Company's shareholders in the hands of the Pre-Offering Shareholders other than
Robert E. McDonough, Sr. Actual testamentary dispositions by Mr. McDonough may
differ. See "Principal and Selling Shareholders" and "Description of Capital
Stock--Common Stock."
BENEFITS OF OFFERING TO EXISTING SHAREHOLDERS
Of the shares offered hereby, 1,161,667, representing net proceeds of
approximately $14.0 million, are for the account of the Selling Shareholders
(1,471,667, representing net proceeds of approximately $17.8 million, if the
Underwriters' over-allotment option is exercised in full). In addition, a
significant portion of the proceeds from the shares being sold by the Company in
the Offering will be used to finance distributions to the Pre-Offering
Shareholders of previously undistributed Company earnings in an amount equal to
$5.0 million plus an additional amount equal to the Pre-Offering Shareholders'
income tax obligations related to the Company's undistributed S corporation
earnings from October 2, 1995 through the date immediately preceding the date of
termination of the Company's S corporation status in connection with the
consummation of the Offering. The Company intends to make this additional
distribution in August 1996. If the Company's S corporation status had
terminated as of March 31, 1996, the amount of the additional distribution would
have been approximately $2.5 million. The actual amount of this distribution may
be significantly higher depending upon the Company's cash basis income for the
period from March 31, 1996 until the closing of the Offering. See "Prior S
Corporation Status and Distributions--Shareholder Distributions," "Use of
Proceeds," and "Certain Transactions--
Shareholder Distributions."
DILUTION
Purchasers of Class A Common Stock offered hereby will experience immediate
and substantial dilution in the net tangible book value of their shares of Class
A Common Stock. See "Dilution." If the Company issues additional shares of
Common Stock in the future, purchasers of Class A Common Stock in the Offering
may experience further dilution in the net tangible book value per share of the
Class A Common Stock.
10
11
NO PRIOR PUBLIC MARKET; DETERMINATION OF INITIAL PUBLIC OFFERING PRICE;
VOLATILITY OF CLASS A COMMON STOCK PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained. The initial public offering price of the Class A Common
Stock was determined by negotiations among the Company, the Selling Shareholders
and the Managing Underwriters (as defined herein) and may not be indicative of
the market price of the Class A Common Stock after the Offering. See
"Underwriting." The price of the Class A Common Stock in the future may be
volatile. A variety of events, including quarter-to-quarter variations in
operating results, news announcements, trading volume, general market trends and
other factors (some of which are unrelated to the Company's performance), could
result in wide fluctuations in the price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE IMPACT ON MARKET PRICE
Sales of substantial amounts of Class A Common Stock in the public market
following the Offering could adversely affect the price of the Class A Common
Stock and may make it more difficult for the Company to sell shares of Class A
Common Stock in the future at times and for prices that it deems appropriate.
The Company, the Selling Shareholders, all directors and executive officers, and
other shareholders of the Company have agreed, subject to certain exceptions,
not to offer, sell, transfer or otherwise encumber or dispose of, directly or
indirectly, any shares of Common Stock, or securities convertible into or
exchangeable for Common Stock, for a period of 180 days from the date of this
Prospectus without the prior written consent of Dillon, Read & Co. Inc.
Upon completion of the Offering, the Company will have outstanding
8,733,333 shares of Common Stock, consisting of 5,365,000 shares of Class A
Common Stock and 3,368,333 shares of Class B Common Stock (8,888,333 shares,
consisting of 5,830,000 shares of Class A Common Stock and 3,058,333 shares of
Class B Common Stock, if the Underwriters' over-allotment option is exercised in
full). Of such shares, the 3,100,000 shares of Class A Common Stock offered
hereby (3,565,000 shares if the Underwriters' over-allotment option is exercised
in full) will be freely tradable unless acquired by affiliates of the Company,
and 5,633,333 shares of Common Stock, consisting of 2,265,000 shares of Class A
Common Stock and 3,368,333 shares of Class B Common Stock (5,323,333 shares,
consisting of 2,265,000 shares of Class A Common Stock and 3,058,333 shares of
Class B Common Stock, if the Underwriters' over-allotment option is exercised in
full) will be subject to the 180-day lock-up agreements with the Underwriters.
Following the expiration of the 180-day lock-up period, such shares will be
available for sale as Class A Common Stock in the public market in registered
offerings or under Rule 144 promulgated under the Securities Act (subject to
compliance with certain volume limitations and other applicable requirements).
See "Description of Capital Stock--Common Stock." The Company intends shortly
after the completion of the Offering to file registration statements under the
Securities Act to register 900,000 shares of Class A Common Stock reserved for
issuance pursuant to its 1996 Employee Stock Incentive Plan and 250,000 shares
of Class A Common Stock reserved for issuance pursuant to its 1996 Employee
Stock Purchase Plan. In addition, Robert E. McDonough, Sr. has annual demand
registration rights with respect to approximately 2,700,000 shares of Common
Stock, and Robert E. McDonough, Sr. and R. Emmett McDonough have certain
"piggyback" registration rights with respect to a total of approximately
4,000,000 shares of Common Stock in future registrations by the Company. See
"Description of Capital Stock--Registration Rights of Certain Holders," "Shares
Eligible for Future Sale" and "Underwriting." Additional shares of Class A
Common Stock, including shares issuable upon exercise of options, will also
become eligible for sale in the public market from time to time in the future.
POSSIBLE ANTI-TAKEOVER EFFECTS
The Company's Amended and Restated Articles of Incorporation and Amended
and Restated Bylaws, which will be in effect upon the closing of the Offering,
contain provisions that could limit the ability of shareholders to remove
incumbent directors or approve transactions that they may deem to be
11
12
in their best interests (including transactions in which the shareholders might
otherwise receive a premium for their shares over then-current market prices),
and that could discourage, delay or prevent a change in control of the Company
and thereby limit the price that certain investors might be willing to pay in
the future for shares of Common Stock. Certain of these provisions (i) allow the
Company to issue preferred stock with rights senior to those of the Common
Stock, (ii) make it more difficult for shareholders to remove directors, (iii)
eliminate cumulative voting and provide for a classified Board of Directors with
staggered three-year terms when the Company becomes a "listed corporation"
within the meaning of the California Corporations Code (i.e., has at least 800
holders of its equity securities as of the record date of the Company's most
recent annual meeting of shareholders) and (iv) impose various procedural and
other requirements which could make it more difficult for shareholders to effect
certain corporate actions. In addition, the Company's Shareholders Rights
Agreement, which will be in effect upon the closing of the Offering, provides
for discount purchase rights to certain shareholders of the Company upon certain
acquisitions of Class A Common Stock and may inhibit a change in control of the
Company. See "Description of Capital Stock."
Pursuant to the Company's 1996 Stock Incentive Plan, options outstanding
thereunder may, in certain circumstances, become immediately exercisable in
connection with a change of control of the Company, which could adversely affect
the likelihood of such a change. See "Management--1996 Stock Incentive Plan."
12
13
PRIOR S CORPORATION STATUS AND DISTRIBUTIONS
Effective as of October 1, 1987, the Company elected to operate under
Subchapter S of the Internal Revenue Code and comparable provisions of certain
state income tax laws. An S corporation is generally not subject to income tax
at the corporate level (with certain exceptions under state income tax laws).
Instead, the S corporation's income generally passes through to the shareholders
and is taxed on their personal income tax returns. In connection with the
consummation of the Offering, the Company will elect to terminate its S
corporation status. As a result, the Company's earnings through the date of
termination of the Company's S corporation status will be taxed for federal and
state income tax purposes, with certain exceptions, directly to the Pre-Offering
Shareholders. As a C corporation, the Company will be subject to federal and
state income taxes on its earnings subsequent to the termination of its S
corporation status.
SHAREHOLDER DISTRIBUTIONS
Prior to the Offering, the Company declared a distribution to the
Pre-Offering Shareholders in an aggregate amount equal to $5.0 million plus an
additional amount equal to the Pre-Offering Shareholders' income tax obligations
related to the Company's undistributed S corporation earnings from October 2,
1995 through the date immediately preceding the date of termination of the
Company's S corporation status in connection with the consummation of the
Offering. The Company intends to make this additional distribution in August
1996. If the Company's S corporation status had terminated as of March 31, 1996,
the amount of the additional distribution would have been approximately $2.5
million. The actual amount of this distribution may be significantly higher
depending upon the Company's cash basis income for the period from March 31,
1996 until the closing of the Offering. The $5.0 million amount described above
represents previously undistributed Company earnings for periods prior to
October 2, 1995, and was paid to the Pre-Offering Shareholders in May 1996. The
distribution was financed through borrowings under the Company's line of credit
agreement, and will be repaid, together with payment of the additional
distribution, with proceeds of the Offering. See "Use of Proceeds" and "Certain
Transactions--Shareholder Distributions."
ACCOUNTING EFFECT
In connection with the termination of its S corporation status, the Company
is required by the Internal Revenue Code to change its method of accounting for
tax reporting purposes from the cash method to the accrual method. Such change
will result in a net charge to earnings in the fiscal quarter in which the
Offering closes resulting from differences in the tax treatment of certain of
the Company's assets and liabilities under the cash and accrual methods of
accounting and is reflected through (i) an increase in current and deferred
income tax liabilities, partially offset by (ii) an increase in the Company's
deferred tax assets. The actual current and deferred income tax assets and
liabilities and the offsetting related income tax provision will be recorded in
the Company's Financial Statements based on temporary differences as of the date
of termination of the Company's S corporation status. Based upon the Company's
unaudited results of operations and financial information as of and for the six
months ended March 31, 1996 and assuming the Company ceased to operate as an S
corporation as of such date, the net charge to earnings as a provision for
current and deferred income taxes would have been approximately $6.5 million.
This net charge is based upon adjusting taxable temporary differences of
approximately $27.9 million (the tax effect of which is approximately $10.9
million), which would be included in taxable income in four equal amounts for
tax years beginning with fiscal 1996. This adjustment is partially offset by the
establishment of deductible temporary differences totaling approximately $10.8
million (the tax effect of which is approximately $4.2 million). The actual net
charge to earnings could be greater, depending upon the Company's results of
operations and financial information as of the date of termination of the
Company's S corporation status.
13
14
USE OF PROCEEDS
The net proceeds from the sale of the 1,938,333 shares of Class A Common
Stock offered by the Company hereby are estimated to be approximately $22.6
million ($24.5 million if the Underwriters' over-allotment option is exercised
in full). The Company will not receive any of the net proceeds from the sale of
shares of Class A Common Stock by the Selling Shareholders in the Offering. See
"Principal and Selling Shareholders."
From the net proceeds, the Company intends to repay borrowings under the
Company's line of credit with Union Bank and Bank of America (which bears
interest at the prime rate or, at the Company's option, LIBOR plus 1.95% and
matures on February 28, 1997) incurred to finance $5.0 million in distributions
paid to the Pre-Offering Shareholders in May 1996 (representing previously
undistributed Company earnings for periods prior to October 2, 1995), and to pay
an additional distribution to the Pre-Offering Shareholders in the amount of
their income tax obligations related to the Company's undistributed S
corporation earnings from October 2, 1995 through the date immediately preceding
the date of termination of the Company's S corporation status in connection with
the consummation of the Offering. The Company intends to make this additional
distribution in August 1996. If the Company's S corporation status had
terminated as of March 31, 1996, the amount of the additional distribution would
have been approximately $2.5 million. The actual amount of this distribution may
be significantly higher depending upon the Company's cash basis income for the
period from March 31, 1996 until the closing of the Offering. See "Prior S
Corporation Status and Distributions--Shareholder Distributions," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain
Transactions--Shareholder Distributions." Assuming that the amount of the
additional distribution described above is $2.5 million, the remaining net
proceeds of approximately $15.1 million (approximately $17.0 million if the
Underwriters' over-allotment option is exercised in full) will be used for
working capital and other general corporate purposes, which are expected to
include: the opening of new independently-managed offices (approximately $6.3
million); the opening of new Company-owned offices (approximately $1.9 million);
the growth of existing Company-owned and independently-managed offices and
possible joint ventures with certain licensees and franchisees to expand their
existing operations in certain territories (approximately $3.4 million);
research and development expenditures relating to the further development of
HPTSM, including hardware, software, and development costs (approximately $1.5
million); other operational system upgrades required to integrate automated
billings (approximately $1.5 million); and the expansion of the EDGESM program,
including EDGESM computer hardware and installation costs expected to be
incurred if the Company is successful in increasing the number of clients that
use EDGESM systems (approximately $0.5 million). The amounts actually expended
for each purpose may vary significantly and are subject to change at the
Company's discretion depending upon certain factors, including economic
conditions, changes in the temporary staffing industry or the competitive
environment, and strategic opportunities that may arise. See "Business--Growth
Strategy." Pending application of the net proceeds as described above, the
Company intends to invest the net proceeds of the Offering in investment grade,
interest-bearing securities.
14
15
DIVIDEND POLICY
Other than distributions to the Company's Pre-Offering Shareholders in
connection with S corporation taxes and the termination of the Company's S
corporation status, the Company does not intend to declare or pay cash dividends
in the foreseeable future. The payment of dividends is subject to the discretion
of the Board of Directors of the Company and will depend on the Company's
results of operations, financial position and capital requirements, general
business conditions, restrictions imposed by financing arrangements, if any,
legal and regulatory restrictions on the payment of dividends, and other factors
the Company's Board of Directors deems relevant. During fiscal 1994, the Company
made no cash distributions to its shareholders. During fiscal 1995, the Company
made cash distributions to its shareholders of approximately $0.9 million in the
aggregate. In April 1996, the Company made cash distributions to the
Pre-Offering Shareholders of approximately $0.7 million in the aggregate
representing income tax obligations of the Pre-Offering Shareholders with
respect to the Company's fiscal 1995 earnings. In May 1996, the Company made
cash distributions to the Pre-Offering Shareholders of $5.0 million in the
aggregate representing the Company's previously undistributed earnings for
periods prior to October 2, 1995. With respect to additional distributions being
made by the Company to its Pre-Offering Shareholders in connection with S
corporation taxes and the termination of the Company's S corporation status, see
"Prior S Corporation Status and Distributions."
15
16
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 (i) on an actual basis, (ii) on a pro forma basis to give effect to
distributions to the Pre-Offering Shareholders in an aggregate amount of
approximately $7.5 million, the accounting adjustments required in connection
with the Company's change to C corporation status, and the reclassification of
remaining undistributed S corporation earnings to additional paid-in capital,
and (iii) pro forma as adjusted to give effect to the sale of 1,938,333 shares
of Class A Common Stock offered by the Company hereby, the application of the
estimated net proceeds to the Company therefrom and the conversion of 1,161,667
shares of Class B Common Stock to Class A Common Stock in connection with the
sale of such shares by the Selling Shareholders in the Offering. See "Prior S
Corporation Status and Distributions," "Use of Proceeds," "Description of
Capital Stock--Common Stock" and Note 9 of Notes to Financial Statements.
MARCH 31, 1996(1)
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(DOLLARS IN THOUSANDS)
Short-term debt:
Current portion of capitalized lease obligations....... $ 378 $ 378 $ 378
Distributions payable to shareholders.................. 7,461
------- ------- -------
Total short-term debt............................. $ 378 $ 7,839 $ 378
======= ======= =======
Long-term debt:
Capitalized lease obligations.......................... $ 946 $ 946 $ 946
------- ------- -------
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; no shares outstanding................... -- -- --
Class A Common Stock, $0.01 par value;
50,000,000 shares authorized; 2,265,000 shares
outstanding (actual and pro forma); 5,365,000 shares
outstanding (pro forma as adjusted)................. 23 23 54
Class B Common Stock, $0.01 par value;
4,530,000 shares authorized; 4,530,000 shares
outstanding (actual and pro forma); 3,368,333
outstanding
(pro forma as adjusted)............................. 45 45 34
Additional paid-in capital............................. 84 6,278 28,842
Retained earnings...................................... 23,715 3,559 3,559
------- ------- -------
Total shareholders' equity........................ 23,867 9,905 32,489
------- ------- -------
Total capitalization......................... $24,813 $10,851 $33,435
======= ======= =======
- ---------
(1) Excludes 450,000 shares issuable upon exercise of stock options granted as
of the closing of the Offering to employees and non-employee directors of
the Company under the Company's 1996 Stock Incentive Plan. See
"Management--1996 Stock Incentive Plan."
16
17
DILUTION
The net tangible book value of the Company as of March 31, 1996 was
approximately $23.4 million, or approximately $3.44 per share of Common Stock,
based upon 6,795,000 shares of Common Stock outstanding. See "Certain
Transactions." Net tangible book value per share represents the amount of total
tangible assets of the Company reduced by the amount of its total liabilities
and divided by the number of shares of Common Stock outstanding at that date.
After giving effect to distributions to the Pre-Offering Shareholders in an
assumed aggregate amount of $7.5 million and the accounting adjustments required
in connection with the Company's change to C corporation status, which will
result in a net charge to earnings in the fiscal quarter in which the Offering
closes in conjunction with the consummation of the Offering (see "Prior S
Corporation Status and Distributions"), but without giving effect to the sale of
the shares of Class A Common Stock offered by the Company hereby, the pro forma
tangible net book value of the Company as of March 31, 1996 would have been
approximately $9.4 million, or approximately $1.39 per share of Common Stock,
based upon 6,795,000 shares of Common Stock outstanding. After giving effect to
the sale by the Company of the 1,938,333 shares of Class A Common Stock offered
by the Company hereby and the application of the estimated net proceeds
therefrom, the pro forma net tangible book value of the Company as of March 31,
1996 would have been approximately $32.5 million, or approximately $3.72 per
share of Common Stock, based upon 8,733,333 shares of Common Stock outstanding.
This represents an immediate increase in net tangible book value of
approximately $2.33 per share to existing shareholders and an immediate dilution
of approximately $9.28 per share to new investors purchasing shares in the
Offering. The following table illustrates this per-share dilution as of March
31, 1996:
Initial public offering price per share........................... $13.00
Pro forma net tangible book value per share before the
Offering.................................................... $1.39
Increase attributable to new investors....................... 2.33
-----
Pro forma net tangible book value per share after the Offering.... 3.72
------
Dilution per share to new investors............................... $ 9.28
======
The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company for those shares, and the average price paid
by the existing shareholders and by new investors purchasing shares in the
Offering:
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- --------------
Existing Shareholders(1)(2)....... 6,795,000 77.8% $ 152,000 0.6% $ 0.02
New Investors(2).................. 1,938,333 22.2% 25,198,329 99.4% 13.00
--------- ----- ----------- -----
Total........................ 8,733,333 100.0% $25,350,329 100.0% $ 2.90
========= ===== =========== =====
- ---------
(1) The foregoing calculations exclude 450,000 shares of Class A Common Stock
issuable upon exercise of stock options granted as of the closing of the
Offering to employees and non-employee directors of the Company under the
Company's 1996 Stock Incentive Plan. See "Management-- Executive
Compensation," and "Description of Capital Stock--Stock Options."
(2) Sales by the Selling Shareholders in the Offering will reduce the number of
shares of Common Stock held by existing shareholders to 5,633,333 shares or
64.5% (5,323,333 shares or 59.9% if the Underwriters' over-allotment option
is exercised in full) of the total number of shares of Common Stock
outstanding after the Offering, and will increase the number of shares of
Common Stock held by new investors after the Offering to 3,100,000 shares or
35.5% (3,565,000 shares or 40.1% if the Underwriters' over-allotment option
is exercised in full) of the total number of shares of Common Stock
outstanding after the Offering. See "Principal and Selling Shareholders."
17
18
SELECTED FINANCIAL DATA
The selected financial data with respect to the Company set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto included elsewhere in this Prospectus. The following selected
financial information (other than "Selected Operating Data") as of and for the
fiscal years ended September 30, 1991, September 27, 1992, October 3, 1993,
October 2, 1994 and October 1, 1995 has been derived from the audited financial
statements of the Company. The selected financial information as of April 2,
1995 and March 31, 1996 and for the six months then ended has been derived from
the Company's unaudited financial statements which have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, reflect all adjustments which are only of a normal recurring nature
necessary for a fair presentation of the financial position and results of
operations for such periods. The results for the fiscal quarter ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
entire year. The pro forma statement of operations data set forth below does not
purport to be indicative of the results of operations that would have occurred
had the Company's S corporation status terminated at October 1, 1990, or which
may be expected to occur in the future. See "Certain
Transactions--Reclassification."
SIX MONTHS ENDED(1)
FISCAL YEAR ENDED(1) ------------------------
---------------------------------------------------------- APRIL 2, MARCH 31,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues
Direct sales........................ $ 76,417 $ 85,651 $103,219 $119,042 $ 144,646 $ 67,520 $ 83,202
Licensee sales...................... 2,596 6,472 16,036 31,201 61,377 25,387 45,525
Franchise royalties................. 970 1,608 1,938 2,462 2,751 1,422 1,347
Initial license fees................ 48 102 101 300 229 102 39
------- -------- -------- -------- --------- --------- ---------
Total revenues.................. 80,031 93,833 121,294 153,005 209,003 94,431 130,113
Cost of direct sales................ 57,426 66,386 80,195 92,022 110,159 51,467 63,620
Cost of licensee sales.............. 1,827 4,831 12,281 24,018 46,017 19,134 34,229
Licensees' share of gross profit.... 469 1,073 2,450 4,857 10,328 4,174 7,554
Selling and administrative
expenses.......................... 20,419 19,685 24,245 27,581 35,667 17,218 18,839
Depreciation and amortization....... 1,028 819 848 1,436 1,453 627 939
------- -------- -------- -------- --------- --------- ---------
Operating income (loss)............. (1,138) 1,039 1,275 3,091 5,379 1,811 4,932
Other income, net................... 174 441 582 711 1,118 414 408
------- -------- -------- -------- --------- --------- ---------
Income (loss) before income taxes... (964) 1,480 1,857 3,802 6,497 2,225 5,340
Provision for income taxes.......... 37 46 57 97 33 80
------- -------- -------- -------- --------- --------- ---------
Net income (loss)................... $ (964) $ 1,443 $ 1,811 $ 3,745 $ 6,400 $ 2,192 $ 5,260
======= ======== ======== ======== ========= ========= =========
PRO FORMA DATA(2):
Income (loss) before income taxes... $ (964) $ 1,480 $ 1,857 $ 3,802 $ 6,497 $ 2,225 $ 5,340
Provision for (benefit from) income
taxes............................. (386) 592 743 1,521 2,599 890 2,136
------- -------- -------- -------- --------- --------- ---------
Net income (loss)................... $ (578) $ 888 $ 1,114 $ 2,281 $ 3,898 $ 1,335 $ 3,204
======= ======== ======== ======== ========= ========= =========
Net income per common share(3)...... $0.52 $0.43
Weighted average common shares
outstanding(3).................... 7,435,000 7,435,000
SELECTED OPERATING DATA(4):
Number of offices(5)................ 75 81 94 119 142 133 151
Average hours billed per
office(6)......................... 107,964 129,000 141,765 150,936 162,096 80,442 89,598
Total systemwide billings(7)........ $ 93,990 $115,035 $146,388 $186,270 $ 247,118 $ 113,738 $ 149,965
Gross period billings per
office(8)......................... $ 1,253 $ 1,420 $ 1,557 $ 1,565 $ 1,740 $ 855 $ 993
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 541 $ 792 $ 688 $ 1,330 $ 2,204 $ 1,238 $ 0
Working capital..................... 4,685 6,719 6,344 10,610 14,649 12,627 18,220
Total assets........................ 14,464 17,687 21,816 30,490 43,496 34,615 41,931
Long-term debt...................... 0 0 0 851 1,142 1,345 946
Shareholder equity.................. 7,610 9,053 10,084 13,829 19,308 16,021 23,867
18
19
- ---------
(1) Beginning in fiscal 1992, the Company changed its fiscal year end from
September 30 to a 52- or 53-week period ending the Sunday closest to the end
of September. Thus, "fiscal 1991," "fiscal 1992," "fiscal 1993," "fiscal
1994" and "fiscal 1995" refer to the Company's fiscal years ending September
30, 1991; September 27, 1992; October 3, 1993; October 2, 1994; and October
1, 1995, respectively. All these fiscal years consisted of 52 weeks except
for fiscal 1993 which consisted of 53 weeks. The six month fiscal periods
ended April 2, 1995 and March 31, 1996 each consisted of 26 weeks.
(2) Effective as of October 1, 1987, the Company elected to operate as an S
corporation under Subchapter S of the Internal Revenue Code and comparable
provisions of certain state income tax laws. The pro forma income statement
data reflect provisions for federal and state income taxes as if the Company
had been subject to federal and state income taxation as a C corporation
during each of the periods presented. See "Prior S Corporation Status and
Distributions--Accounting Effect," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Change in Accounting Method;
Charge to Earnings" and Note 1 of Notes to the Financial Statements.
(3) Pro forma net income per share is computed by dividing pro forma net income
by 7,435,000, which is the weighted average number of shares of Common Stock
outstanding during the period after adjusting to include the estimated
640,000 shares required to be sold by the Company to fund the pro forma
distribution payable to shareholders as described in "Prior S Corporation
Status and Distributions--Shareholder Distributions" and in Note 9 of Notes
to the Financial Statements.
(4) For a presentation of this information for Company-owned, licensed and
franchised offices, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Operations."
(5) Consists of all Company-owned, licensed and franchised offices at the end of
the relevant period.
(6) Total hours billed for the relevant period by all Company-owned, licensed
and franchised offices divided by the total number of offices systemwide at
the end of the relevant period.
(7) Consists of all services billed to clients by all Company-owned, licensed
and franchised offices. For Company-owned offices and licensed offices, all
billings are Company revenues; for franchised offices, Company revenues are
a royalty averaging approximately 6.3-7.0% of billings.
(8) Total gross billings for the relevant period by all Company-owned, licensed
and franchised offices divided by the total number of offices systemwide at
the end of the relevant period.
19
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Financial Statements
of the Company and Notes thereto and other financial information appearing
elsewhere in this Prospectus.
GENERAL
The Company provides temporary staffing services to industrial and service
companies, professional organizations and governmental agencies. During the
twelve months ended December 31, 1995, the Company placed approximately 92,000
temporary workers and provided over 24.4 million hours of staffing services to
over 13,000 clients. From the beginning of fiscal 1993 through the end of fiscal
1995, the Company added 61 offices and increased revenues and income before
taxes at compound annual growth rates of 30.6% and 63.7%, respectively, to
$209.0 million and $6.5 million, respectively.
The Company's fiscal year is a 52- or 53-week period ending on the Sunday
nearest September 30. The fiscal years ended October 1, 1995 and October 2, 1994
included 52 weeks and the fiscal year ended October 3, 1993 included 53 weeks.
The fiscal year ending September 29, 1996 will include 52 weeks. The six-month
fiscal periods ended April 2, 1995 and March 31, 1996, each consisted of 26
weeks.
OPERATIONS
The Company's revenues are derived from Company-owned offices (direct
sales) and independently-managed offices (licensee sales and franchise
royalties). Under the Company's franchise arrangements, the franchisee pays all
lease and working capital costs relating to its office, including funding
payroll and collecting clients' accounts. The franchisee pays the Company an
initial franchise fee and royalties equal to approximately 7% of its gross
billings. The Company processes payroll and invoices clients, and the franchisee
employs all management staff and temporary personnel affiliated with its office.
Under the Company's license arrangements, the licensee pays the Company an
initial license fee and pays all lease and working capital costs relating to its
office. The licensee employs all management staff affiliated with its office,
but the Company acts as the employer of all temporary personnel affiliated with
the licensee's office, handles invoicing and collecting clients' accounts, and
remits to the licensee 60-70% of the office's gross profit (depending upon hours
billed by the licensee in the prior contract year). As of June 1, 1996, there
were 21 of the Company's independently-managed offices operating as franchises
and 68 operating as licenses. Independently-managed offices opened from 1987 to
1990 are operated as franchises, and independently-managed offices opened since
1990 are operated as licenses. The Company switched from franchise to license
format to exercise more control over the collection and tracking of the
receivables of the independently-managed offices and to allow the Company to
grow without being limited by the financial resources of franchisees. The number
of licensee offices is expected to increase because new independently-managed
offices will be opened in license format and offices currently operated as
franchises may, depending upon various factors, be converted to license format
upon renewal of their franchise agreements. As the number of franchisee offices
decreases, royalty income will decrease.
20
21
The table below shows the number of Company-owned, franchised and licensed
offices and customer billings associated with each as of the end, and for each,
of the last five fiscal years and for the first half of fiscal 1995 and fiscal
1996. Total systemwide billings consists of all services billed to clients by
all Company-owned and independently-managed offices. For the Company-owned
offices and licensed offices, all billings are Company revenues; for franchised
offices, Company revenues are a royalty averaging approximately 6.3-7.0% of
gross billings. The Company's long-term revenue growth depends in part upon its
ability to continue to open new offices, as well as its ability to enhance the
sales of existing offices beyond historical levels.
SIX MONTHS ENDED
--------------------
FISCAL YEAR ENDED MARCH
-------------------------------------------------------- APRIL 2, 31,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
COMPANY-OWNED OFFICES
Number of offices...... 46 49 53 59 63 63 66
Average hours billed
per office........... 139,112 153,365 172,292 192,857 217,907 102,164 116,227
Total billings......... $ 76,417 $ 85,651 $103,219 $119,042 $144,646 $ 67,520 $83,202
Average billings
per office........... $ 1,661 $ 1,748 $ 1,948 $ 2,018 $ 2,296 $ 1,072 $ 1,261
LICENSED OFFICES
Number of offices...... 7 14 21 39 58 47 64
Average hours billed
per office........... 34,176 43,480 74,383 80,801 96,545 50,282 62,930
Total billings......... $ 2,596 $ 6,472 $ 16,036 $ 31,201 $ 61,377 $ 25,387 $45,525
Average billings
per office........... $ 371 $ 462 $ 764 $ 800 $ 1,058 $ 540 $ 711
Initial license fees... $ 48 $ 102 $ 101 $ 300 $ 229 $ 102 $ 39
FRANCHISED OFFICES
Number of Offices...... 22 18 20 21 21 23 21
Average hours billed
per office........... 66,306 129,214 131,621 163,402 175,699 82,564 87,165
Total billings......... $ 14,977 $ 22,912 $ 27,133 $ 36,027 $ 41,095 $ 20,831 $21,238
Average billings
per office........... $ 681 $ 1,273 $ 1,357 $ 1,716 $ 1,957 $ 906 $ 1,011
Royalties.............. $ 970 $ 1,608 $ 1,938 $ 2,462 $ 2,751 $ 1,422 $ 1,347
TOTAL OFFICES............ 75 81 94 119 142 133 151
TOTAL SYSTEMWIDE
BILLINGS............... $ 93,990 $115,035 $146,388 $186,270 $247,118 $113,738 $149,965
TOTAL COMPANY REVENUES... $ 80,031 $ 93,833 $121,294 $153,005 $209,003 $ 94,431 $130,113
CHANGE IN ACCOUNTING METHOD; CHARGE TO EARNINGS
In connection with the termination of the Company's S corporation status in
connection with the consummation of the Offering, the Company is required to
change its method of accounting for tax reporting purposes from the cash method
to the accrual method, resulting in a net charge to earnings in the fiscal
quarter in which the Offering closes. The actual amount of the charge will be
calculated as of the date the S corporation status terminates; if the Company
had ceased to be treated as an S corporation as of March 31, 1996, the net
charge would have been approximately $6.5 million. The actual net charge to
earnings could be greater, depending upon the Company's results of operations
and financial information as of the date of termination of the Company's S
corporation status in connection with the consummation of the Offering. See
"Prior S Corporation Status and Distributions--Accounting Effect."
21
22
RESULTS OF OPERATIONS
The table below shows certain information from the Company's statements of
operations expressed as a percentage of revenues for the periods indicated.
SIX MONTHS ENDED
-------------------
FISCAL YEAR ENDED APRIL MARCH
------------------------- 2, 31,
1993 1994 1995 1995 1996
----- ----- ----- ------- --------
Total revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Total cost of direct and licensee sales...... 76.2 75.8 74.7 74.8 75.2
Licensees' share of gross profit............. 2.0 3.2 4.9 4.4 5.8
Selling, general and administrative
expenses................................... 20.7 19.0 17.8 18.9 15.2
----- ----- ----- ------- --------
Operating income............................. 1.1 2.0 2.6 1.9 3.8
Other income, net............................ 0.5 0.5 0.5 0.4 0.3
----- ----- ----- ------- --------
Income before income taxes................... 1.5% 2.5% 3.1% 2.4% 4.1%
===== ===== ===== ======= =========
Total revenues equals all billings by Company-owned and licensed offices,
royalties averaging approximately 6.3-7.0% of franchise office billings and
initial license fees. Cost of direct and licensee sales consists primarily of
salary and other direct employment expenses for temporary employees. Licensees'
share of gross profit reflects the Company's payment to licensees of 60-70% of
their gross profit (depending upon the volume of business generated by these
offices in the prior fiscal year). The Company does not anticipate any
significant changes in the rate structure for the licensee offices. However, the
number of licensee offices, volume of business and level of gross profit
generated by all licensee offices may change in the future as the Company
strives to open new licensee offices. The Company's other income consists of
revenues from finance charges to past due accounts, interest income net of
interest expense and other miscellaneous income.
First Half of Fiscal 1996 Compared to First Half of Fiscal 1995
Total revenues increased 37.8% or $35.7 million from $94.4 million for the
first half of fiscal 1995 to $130.1 million for the first half of fiscal 1996,
primarily attributable to volume increases. The volume increases were primarily
attributable to increased billings at existing offices primarily from increases
in billings in the light industrial business segment and expansion of services,
including EDGE, and to 18 new offices opened since the prior period. The
Company's ability to continue to increase revenues depends upon many factors,
including existing and emerging competition, the availability of working capital
to support such growth, and the Company's ability to maintain margins in the
face of pricing pressures, find and retain new qualified licensees and office
managers, recruit and train additional qualified temporary personnel, and manage
costs. There can be no assurance that the Company's revenues will continue to
increase.
Total cost of direct and licensee sales increased 38.6% or $27.2 million
from $70.6 million for the first half of fiscal 1995 to $97.8 million for the
first half of fiscal 1996. Total cost of direct and licensee sales as a
percentage of revenues increased from 74.8% for the first half of fiscal 1995 to
75.2% for the first half of fiscal 1996 due to the conversion of two franchises
to licenses and the commensurate decline in franchise royalty revenues (which
have no cost of sales and minimal related operating expenses). The Company's
business mix, cost of direct sales as a percentage of direct sales, and cost of
licensee sales as a percentage of licensee sales remained relatively stable.
Many factors, including increased wage costs or other employment expenses, could
have an adverse effect on the Company's cost of direct and licensee sales.
Licensees' share of gross profit represents the net payments to licensees
based upon a percentage of gross profit generated by the licensee operation.
Licensees' share of gross profit increased 81.0% or $3.4 million from $4.2
million for the first half of fiscal 1995 to $7.6 million for the first half of
fiscal 1996. Licensees' share of gross profit as a percentage of total revenues
increased from 4.4% for the first
22
23
half of fiscal 1995 to 5.8% for the first half of fiscal 1996. This increase
resulted from an increase from 26.9% to 35.0% in the percentage of total
revenues derived from licensees as a percentage of total revenue.
Selling, general and administrative expenses increased 10.8% or $1.9
million from $17.8 million for the first half of fiscal 1995 to $19.8 million
for the first half of fiscal 1996. Selling, general and administrative expenses
as a percentage of total revenues decreased from 18.9% for the first half of
fiscal 1995 to 15.2% for the first half of fiscal 1996, largely due to the
Company's total revenues expanding more rapidly than selling, general and
administrative expenses. The Company has implemented several cost saving
measures to maintain or reduce its level of selling, general and administrative
expenses as a percentage of total revenue. Such measures include the
installation of a Company-wide expense budgeting program to make corporate
managers more accountable for their operating expenditures and the initiation of
a profit sharing plan at the office level to pay to office and area managers
based on office location operating profit. There can be no assurance that
selling, general and administrative expenses will not increase in the future,
both in absolute terms and as a percentage of total revenue, and increases in
these expenses could adversely affect the Company's profitability.
Operating income increased 172.3% or $3.1 million from $1.8 million for the
first half of fiscal 1995 to $4.9 million for the first half of fiscal 1996 due
to factors described above. Operating income as a percentage of revenues
increased from 1.9% for the first half of fiscal 1995 to 3.8% for the first half
of fiscal 1996.
Income before income taxes increased 140.0% or $3.1 million from $2.2
million for the first half of fiscal 1995 to $5.3 million for the first half of
fiscal 1996 due to the factors described above. As a percentage of total
revenues, income before income taxes increased from 2.4% in the first half of
fiscal 1995 to 4.1% in the first half of fiscal 1996.
Fiscal 1995 Compared to Fiscal 1994
Total revenues increased 36.6% or $56.0 million from $153.0 million for
fiscal 1994 to $209.0 million for fiscal 1995, primarily attributable to volume
increases. The average billing rate remained relatively stable throughout the
period. The volume increases were primarily attributable to increased billings
at existing offices resulting from increases in billings in the light industrial
business segment, expansion of services, including EDGESM, and 23 new offices
opened since the prior period.
Total cost of direct and licensee sales increased 34.6% or $40.1 million
from $116.0 million for fiscal 1994 to $156.2 million for fiscal 1995. Total
cost of direct and licensee sales as a percentage of total revenues decreased
from 75.8% in fiscal 1994 to 74.7% in fiscal 1995 due to a favorable business
mix.
Licensees' share of gross profit increased 112.6% or $5.5 million from $4.9
million for fiscal 1994 to $10.3 million for fiscal 1995, mainly due to an
increase in licensees' revenues. As a percentage of total revenues, licensees'
share of gross profit increased from 3.2% in fiscal 1994 to 4.9% in fiscal 1995,
due primarily to an increase in sales by licensed offices, partly offset by a
slight decrease in the percentage of licensees' gross profit that the Company
remitted to licensees from 67.6% in fiscal 1994 to 67.2% in fiscal 1995.
Selling, general and administrative expenses increased 27.9% or $8.1
million from $29.0 million for fiscal 1994 to $37.1 million for fiscal 1995.
Selling, general and administrative expenses as a percentage of total revenues
decreased from 19.0% in fiscal 1994 to 17.8% in fiscal 1995, primarily because
the Company's total revenues expanded more rapidly than selling, general and
administrative expenses. Included in general and administrative expenses in
fiscal 1995 was a one-time special bonus of $1.3 million paid to the Company's
founder, Mr. Robert E. McDonough. Excluding this special bonus, selling, general
and administrative expenses as a percentage of total revenues would have been
17.2% in fiscal 1995.
Operating income increased 74.0% or $2.3 million from $3.1 million for
fiscal 1994 to $5.4 million for fiscal 1995 due to the factors described above.
Operating income as a percentage of total revenues increased from 2.0% in fiscal
1994 to 2.6% in fiscal 1995. Excluding the one-time special bonus of
23
24
$1.3 million described above, operating income increased to $6.7 million or 3.2%
of total revenues for fiscal 1995.
Income before income taxes increased 70.9% or $2.7 million from $3.8
million for fiscal 1994 to $6.5 million for fiscal 1995 due to the factors
described above. As a percentage of total revenues, income before income taxes
increased from 2.5% in fiscal 1994 to 3.1% in fiscal 1995.
Fiscal 1994 Compared to Fiscal 1993
Total revenues increased 26.1% or $31.7 million from $121.3 million for
fiscal 1993 to $153.0 million for fiscal 1994, primarily attributable to volume
increases. The average billing rate remained relatively stable. The volume
increases were primarily attributable to increased billings at existing offices
resulting from increases in billings in the light industrial business segment,
and 25 new offices opened since the prior period.
Total cost of direct and licensee sales increased 25.5% or $23.6 million
from $92.5 million for fiscal 1993 to $116.0 million for fiscal 1994. Total cost
of direct and licensee sales as a percentage of total revenues decreased from
76.2% in fiscal 1993 to 75.8% in fiscal 1994 due to a favorable business mix.
Licensees' share of gross profit increased 98.2% or $2.4 million from $2.5
million for fiscal 1993 to $4.9 million for fiscal 1994. As a percentage of
total revenues, licensees' share of gross profit increased from 2.0% in fiscal
1993 to 3.2% in fiscal 1994, due primarily to an increase in sales by licensed
offices and an increase in the percentage of licensees' gross profit that the
Company remitted to licensees from 65.2% in fiscal 1993 to 67.6% in fiscal 1994.
Selling, general and administrative expenses increased 15.6% or $3.9
million from $25.1 million for fiscal 1993 to $29.0 million for fiscal 1994.
Selling, general and administrative expenses as a percentage of total revenues
decreased from 20.7% in fiscal 1993 to 19.0% in fiscal 1994, primarily because
the Company's total revenues expanded more rapidly than selling, general and
administrative expenses.
Operating income increased 142.4% or $1.8 million from $1.3 million for
fiscal 1993 to $3.1 million for fiscal 1994 due to the factors described above.
Operating income as a percentage of total revenues increased from 1.1% in fiscal
1993 to 2.0% in fiscal 1994.
Income before income taxes increased 104.7% or $1.9 million from $1.9
million for fiscal 1993 to $3.8 million for fiscal 1994 due to the factors
described above. As a percentage of total revenues, income before income taxes
increased from 1.5% in fiscal 1993 to 2.5% in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity depends primarily upon its net income, accounts
receivable, accounts payable and accrued expenses. Historically, the Company has
financed its operations through cash generated by operating activities and bank
lines of credit. The principal use of cash is for financing of accounts
receivable, particularly during periods of growth. As of March 31, 1996, the
Company had $34.2 million in gross accounts receivables outstanding, with
approximately 70% of the balance less than 30 days old, 19% 30-60 days old, 5%
60-90 days old and 6% over 90 days outstanding. The nature of the Company's
business requires payment of wages to its temporary personnel on a weekly basis
and to its other employees on a bi-weekly or semi-monthly basis, while payments
from clients are generally received 30 to 60 days after billing. Due to this
timing difference, as revenues have grown, trade receivables and working capital
requirements have increased. The Company anticipates increasing needs for
working capital as an accrual basis taxpayer in connection with the termination
of the Company's S corporation status. See "Prior S Corporation Status and
Distributions." Additional uses of cash have been for development of the
Company's technologies, capital expenditures, repayment of debt and
distributions to shareholders for payment of their tax obligations associated
with S corporation earnings. The Company anticipates increased expenditures of
working capital to finance the opening of new offices and the continued
development and implementation of its technologies. During the 12 months
following the Offering, the Company expects to spend approximately
24
25
$1.9 million to finance the opening of new Company-owned offices, which have
historically taken two to eight months to become profitable, and approximately
$6.3 million to finance the opening of new independently-managed offices, which
have historically taken six to 18 months to become profitable for the Company.
There can be no assurance that the Company will be able to open new offices as
anticipated. There also can be no assurance that the cost of opening new offices
will not be greater than anticipated or that the time required until they become
profitable will not be longer than anticipated, and increases in these costs or
delays in profitability will increase the Company's working capital needs and
could have an adverse effect on the Company's financial condition and results of
operations. Furthermore, during the 12 months following the Offering, the
Company expects to spend approximately $3.4 million to finance the growth of
existing Company-owned and independently-managed offices and possible joint
ventures with certain licensees and franchisees to expand their existing
operations in certain territories; approximately $1.5 million on research and
development expenditures relating to the further development of HPTSM, including
hardware, software, and development costs; approximately $1.5 million to fund
other operational system upgrades required to integrate automated billings; and
approximately $0.5 million to fund the expansion of the EDGESM program,
including EDGESM computer hardware and installation costs expected to be
incurred if the Company is successful in increasing the number of clients that
use EDGESM systems. In addition, the Company has commitments related to leased
office space and certain equipment, and anticipates increased lease commitments
in the future resulting from openings of new Company-owned offices and
acquisition of additional headquarters space. In addition to rent, lease
commitments include tax, insurance, and certain other operating expenses
applicable to leased properties. See Note 6 of Notes to Financial Statements.
Net cash flow from operating activities was $705,000 and $(120,000) in
fiscal 1995 and fiscal 1994, respectively, and $6.4 million and $3.2 million for
the first half of fiscal 1996 and fiscal 1995, respectively. The increase in the
cash flow from operating activities for fiscal 1995 as compared to fiscal 1994
was due to improved net income and increases in accrued expenses. This increase
was partially offset by increased funding of accounts receivable resulting from
strong revenue growth during fiscal 1995. The increase in cash flow from
operating activities for the first half of fiscal 1996 as compared to the same
period in fiscal 1995 was due to an increase in net income and a decline in the
rate of increase of accounts receivable, prepaids and accrued expenses.
Cash used for purchases of fixed assets, which are generally for computers
and peripherals and office furniture and equipment, totaled $2.9 million and
$1.4 million for fiscal 1995 and fiscal 1994, respectively, and $1.7 million and
$1.3 million for the first half of fiscal 1996 and fiscal 1995, respectively.
The increase during fiscal 1995 primarily reflects expenditures for computers,
related software and peripheral equipment. During fiscal 1995, the Company
incurred additional borrowings of $3.6 million primarily to fund capital
expenditures. Distributions of approximately $0.9 million were also made in
fiscal 1995 to enable the Company's shareholders to pay federal and state income
taxes on the Company's S corporation earnings. The Company expects capital
expenditures to be approximately $3.0 million over the next 12 months due to
anticipated openings of new Company-owned offices and further investments in the
Company's computer-based technologies.
In connection with the termination of the Company's S corporation status in
connection with the consummation of the Offering, the Company is required to
change its method of accounting for tax reporting purposes from the cash to the
accrual method, resulting in a net charge to earnings in the fiscal quarter in
which the Offering closes. The actual amount of the charge will be calculated as
of the date that the Company elects to terminate its S corporation status. If
the Company had ceased to be treated as an S corporation as of March 31, 1996,
the net charge would have been approximately $6.5 million. The actual net charge
to earnings could be greater, depending upon upon the Company's results of
operations and financial information as of the date of termination of the
Company's S corporation status. See "Prior S Corporation Status and
Distributions--Accounting Effect."
Prior to the Offering, the Company declared a distribution to the
Pre-Offering Shareholders in an aggregate amount equal to $5.0 million plus an
additional amount equal to the Pre-Offering Sharehold-
25
26
ers' income tax obligations related to the Company's undistributed S corporation
earnings from October 2, 1995 through the date immediately preceding the date of
termination of the Company's S corporation status in connection with the
consummation of the Offering. The Company intends to make this additional
distribution in August 1996. If the Company's S corporation status had
terminated as of March 31, 1996, the amount of the additional distribution would
have been approximately $2.5 million. The actual amount of this distribution may
be significantly higher depending upon the Company's cash basis income for the
period from March 31, 1996 until the closing of the Offering. The $5.0 million
amount described above represents previously undistributed Company earnings for
periods prior to October 2, 1995, and was paid to the Pre-Offering Shareholders
in May 1996. The distribution was financed through borrowings under the
Company's line of credit agreement and will be repaid, together with payment of
the additional distribution, with proceeds of the Offering. See "Use of
Proceeds" and "Prior S Corporation Status and Distributions--Shareholder
Distributions."
The Company has a revolving line of credit agreement with Bank of America
and Union Bank providing for aggregate borrowings and letters of credit of $25.0
million. Interest on outstanding borrowings is payable monthly at the prime rate
or, at the Company's discretion, LIBOR plus 1.95%. The line of credit is
unsecured and expires on February 28, 1997. The principal use of the line of
credit has been to finance receivables, to provide a letter of credit required
in connection with the Company's California workers' compensation self-insurance
program to meet regulatory requirements and to finance distributions made to
shareholders. The Company had $6.7 million outstanding under its line of credit
and $4.8 million in undrawn letters of credit as of October 1, 1995. There were
no borrowings under its line of credit and $4.0 million in undrawn letters of
credit as of March 31, 1996. The bank agreements governing the lines of credit
require the Company to maintain certain financial ratios and comply with certain
restrictive covenants. See Note 3 to Notes to Financial Statements.
The Company borrowed under its line of credit to finance the $5.0 million
in distributions to the Pre-Offering Shareholders described above. The Company
intends to use a portion of the proceeds from the Offering to repay such
borrowings. After any such repayment, the Company would have approximately $21.0
million available under its credit facilities.
The Company believes that funds provided from operations, available
borrowings under the Company's line of credit and the net proceeds from the
Offering will be sufficient to meet its currently anticipated working capital
needs for approximately 18-24 months after the closing of the Offering.
SEASONALITY
The Company's quarterly operating results are affected by the number of
billing days in the quarter and the seasonality of its clients' businesses. The
first fiscal quarter has been historically strong as a result of manufacturing
and retail emphasis on holiday sales. The second fiscal quarter, from January
through March, historically shows little to no growth in comparable revenues
from the first fiscal quarter. Revenue growth has historically accelerated in
each of the third and fourth fiscal quarters as manufacturers, retailers and
service businesses increase their level of business activity.
INFLATION
The effects of inflation on the Company's operations were not significant
during the periods presented in the financial statements.
26
27
BUSINESS
GENERAL
The Company is a rapidly growing national provider of clerical and light
industrial temporary staffing services to industrial and service companies,
professional organizations and governmental agencies. The Company provides its
services in 34 states through a network of 156 offices, of which 67 are
Company-owned and 89 are independently-managed. During the twelve months ended
December 31, 1995, the Company placed approximately 92,000 temporary workers,
known as "associates," and provided over 24.4 million hours of staffing services
to over 13,000 clients. From the beginning of fiscal 1993 through the end of
fiscal 1995, the Company added 61 offices and increased revenues and income
before taxes at compound annual growth rates of 30.6% and 63.7%, respectively,
to $209.0 million and $6.5 million, respectively.
The Company has positioned itself to take advantage of trends in the
temporary staffing industry, such as increased integration of temporary workers
as a significant, long-term workforce component in both manufacturing and
service-oriented companies and increased outsourcing by companies of certain
staffing functions. The Company focuses on the clerical and light industrial
sectors of the nation's temporary workforce, which together comprise
approximately 60% of the nation's temporary staffing industry revenues,
according to SIA. Through the use of innovative technologies and value-added
services, the Company strives to partner with its clients to deliver total
solutions to their temporary staffing needs. The Company's expertise in
providing associates who possess the skills and attitudinal characteristics
necessary to "fit" into clients' organizations and perform at a superior level
distinguishes the Company as a premium provider of temporary staffing services.
Over the past three years, the Company has invested significant human and
financial resources in the development of proprietary technologies designed to
enable the Company to provide its clients with premium temporary workers and
unique value-added services. The Company's proprietary technologies are
maintained in three interactive systems: Human Performance Technology ("HPTSM"),
an innovative series of multimedia evaluations used to profile the attitudinal
characteristics of the Company's associates; IntellisearchSM, a computer
database used to classify, search and fit the Company's associates to job
openings using parameters based upon client needs; and Employee Data Gathering
and Evaluation ("EDGESM"), a turn-key, proprietary computer system installed at
client locations to coordinate scheduling and track job performance of a
client's entire temporary workforce and to customize invoices and utilization
reports. Management believes that these technologies give the Company advantages
over competing temporary staffing companies that do not provide similar value-
added services.
THE STAFFING INDUSTRY
Revenues for the United States temporary staffing services industry were
projected by SIA, an independent staffing industry publication company, to have
exceeded $41 billion in 1995. This represents an increase of approximately 15.4%
over 1994 and, since 1991, industry revenues have increased at a compound annual
rate of approximately 17.7%. Economic and social factors have increased the
portion of the non-farm U.S. workforce working on a temporary basis from 1.0% in
1991 to 1.8% in 1995, according to National Association of Temporary and
Staffing Services ("NATSS"), an independent trade organization for the staffing
industry. NATSS estimates that there are now approximately 2.2 million workers
employed nationwide by temporary staffing services providers. According to
NATSS, more than 90% of all United States businesses utilize staffing services.
Information in this Prospectus attributed to SIA or NATSS is generally available
through those organizations and was not prepared for the Company or for use in
this Prospectus. Neither SIA nor NATSS has consented to be named as an expert in
this Prospectus.
The staffing services industry was once used predominately as a short-term
solution for greater workforce needs during peak production periods and to
replace workers who were abruptly terminated or who were absent due to illness
or vacation. Since the late 1980s, the use of temporary services has
27
28
evolved into a permanent and significant component of the staffing plans of many
employers. Corporate restructurings, government regulations, advances in
technology, and the desire by many companies to shift employee costs from a
fixed to a variable expense have resulted in the use of a wide range of staffing
alternatives by businesses. In addition, the high cost of recruitment and the
risk of employment litigation have led to increased use of temporary staffing as
a means of evaluating the qualifications of personnel before hiring them on a
full-time basis, as well as accomplishing reductions in workforce without the
risk of wrongful termination liability.
The clerical and light industrial sectors represent the largest two sectors
of the temporary staffing industry. A staffing industry report by SIA for 1995
forecasted that the office and clerical sector would account for $13.5 billion
or approximately 33% of the temporary staffing industry revenues, while the
light industrial sector would account for $11.0 billion or approximately 27% of
industry revenues. According to SIA, from 1991 through 1995, industry revenues
for the office and clerical sector increased by approximately $6.1 billion,
representing a compound annual growth rate of approximately 16%, and industry
revenues for the light industrial sector increased by approximately $6.3
billion, representing a compound annual growth rate of approximately 24%. In the
aggregate, these two sectors constituted approximately 63% of the $19.7 billion
increase in industry revenues during the period.
The temporary staffing industry in the United States is highly fragmented
with over 7,000 firms operating approximately 17,000 offices. The Company
believes that no single competitor has more than a 10% share of the national
temporary services market.
BUSINESS STRATEGY
The key components of the Company's business strategy are as follows:
Focus on Core Business Segments. The Company focuses on the clerical and
light industrial segments, which according to SIA are the two largest segments
of the temporary staffing industry (comprising 33% and 27%, respectively, of
total industry revenues) and have been growing at compound annual rates of 16%
and 24%, respectively, since 1991. Both segments represent large portions of the
current workforce in both small and large corporations. Furthermore, these
positions are often the first to be impacted in any corporate transition or
expansion, and the Company anticipates increasing use of temporary workers to
fill these positions or outsourcing of staffing functions for these departments
to independent service providers.
Expand Revenues and Profitability. The Company seeks to maximize revenues
and profitability by opening new offices and targeting clients in the middle
market (as opposed to the largest national accounts) where there is less
competition and price cutting. In addition, the Company can support premium
pricing by providing value-added services that are not currently offered by all
competitors. As a result, the Company's revenues have grown at a compound annual
rate of 30.6% over the last three years, and its pretax income margin has
expanded from 1.5% to 3.1%.
Deliver Quality Associates. The Company utilizes a three-step approach to
staffing temporary workers, which enables the Company to provide quality
associates who are well-suited to clients' particular requirements. This
approach involves: Client Needs Assessment, a detailed study of clients'
temporary staffing requirements; HPTSM, an evaluative profile of the skills and
attitudinal characteristics of the Company's associates; and IntellisearchSM, a
screen of the Company's local databases used to fit appropriate associates with
clients' particular staffing needs.
28
29
Provide Value-Added Workforce Support. Clients look increasingly to
temporary staffing companies not only to provide workers, but to deliver total
staffing solutions that include certain human resource functions. To take
advantage of this trend, the Company has developed and installed with clients a
proprietary on-site employee management system, called EDGESM, that coordinates
scheduling and tracks job performance of temporary workers. EDGESM is designed
to not only replace paper-based time and attendance methods, but also to provide
fields for supervisors to evaluate workers and generate utilization reports that
can be customized to meet clients' requirements. The system also can create
invoices and automate the payroll process. EDGESM can be managed either remotely
from the local Company office or on the client's premises by dedicated Company
personnel. Through EDGESM, the Company can manage its associates as well as
temporary workers provided by other staffing companies and in certain cases the
client's own employees. To meet clients' after-hours needs, the Company is
implementing Remedy Non-StopSM, a service initially available in California that
allows clients to contact the Company's national headquarters for staffing
assistance when most other temporary staffing companies are closed.
Invest in Innovative Technologies. Since the early 1990s, the Company has
made significant investments in technologies designed to provide superior
services to its clients and position the Company as the "intelligent staffing"
provider in the temporary workforce industry. This investment has produced the
HPTSM, IntellisearchSM, and EDGESM systems, which have enabled the Company to
offer total solutions to clients' temporary workforce needs and establish closer
client relationships by providing value-added services. The Company intends to
market its technological advantages more aggressively, using a multimedia sales
approach to attract new clients and offer expanded services to existing clients.
Future innovations include an expanded Internet site and a new World Wide Web
site for client marketing and associate recruiting and screening.
Provide Strong Support to Nationwide Office Network. The Company strives to
enhance the success of both the Company-owned and the independently-managed
offices by combining a decentralized and entrepreneurial environment with strong
headquarters support at the corporate and regional levels. The Company provides
operating procedures and capital, growth management, training, marketing, legal
and technical support to assure consistent delivery of quality services to
clients throughout its nationwide office network. The Company also provides back
office functions (payroll and internal support systems) to its licensed and
Company-owned offices. Training, often coordinated through the Company's
national headquarters, is especially important because it provides exposure to
Company policies, ensures the proper roll-out of new technologies, and enhances
sales and marketing strategies.
GROWTH STRATEGY
In conjunction with its business strategy, the Company has developed a
comprehensive strategy for continued growth that incorporates the following
components:
Expand National Presence. The Company seeks to expand its national presence
through the opening of new offices. As of June 1, 1996, the Company had 156
offices, and since the end of fiscal 1992, the Company has opened 75 new offices
both in existing markets and in 13 states where it had not previously operated.
Of the new offices, 18 are Company-owned, while 57 are independently-managed.
The Company intends to continue opening Company-owned and independently-managed
offices; its goal is to open 20-30 new offices per year for the next three
years. Fourteen new offices have been opened in fiscal 1996. The Company
believes that its decentralized and entrepreneurial environment will continue to
attract new licensees to new geographic territories. In addition, the Company
will pursue a "fill-in" strategy of opening Company-owned offices and
independently-managed offices in existing territories. The Company may assist
existing franchisees and licensees in entering new markets and opening new
offices in existing markets through joint venture relationships with the
Company.
29
30
Market Proprietary Technologies in Differentiated Sales Approach. The
Company has developed a unique multimedia sales approach that highlights its
proprietary technologies and competitive advantages. Traditionally, temporary
staffing companies used price-oriented sales presentations targeted at middle to
lower management. As temporary staffing has become a strategic issue for
clients, the decision-making process has migrated to a more senior executive
level. The Company has responded by developing a computerized marketing and
sales program that enables sales representatives to tailor marketing
presentations to clients' needs in real time. Through a series of interactive
screens integrating over 300 separate graphic slides, film clips, and an
operational spreadsheet, the Company's sales personnel can respond to most
questions asked by potential clients, demonstrate the Company's HPTSM,
IntellisearchSM and EDGESM systems, and show the cost advantages of the
Company's services. This system became operational in October 1995 and is now
available throughout the Company's 156 offices.
Develop Partnering Relationships with Clients. The Company seeks to form
partnering relationships with existing and new clients by providing a broad
range of value-added services and total temporary workforce solutions. For
example, when the Company provides a client with a large number of temporary
workers, generally serving light industrial functions, the Company also offers
to provide its on-site management system, EDGESM, to support the workforce. As
of June 1, 1996, the Company had 65 client EDGESM installations. Clients using
EDGESM systems accounted for $45.3 million in systemwide billings for fiscal
1995, and the Company's experience has been that clients often respond to the
installation of an EDGESM system by increasing their use of the Company's
services. EDGESM also provides a major value-added service that is attractive to
new clients. The Company anticipates that 50 additional EDGESM sites will be
added during the next twelve months. Other services include Non-StopSM, a
service initially available in California that allows clients to contact the
Company's national headquarters for staffing assistance when most other
temporary staffing companies are closed. In addition, further development of the
Company's nationwide network of offices will enhance its ability to offer large
companies associates at multiple sites and serve as a "one-stop" preferred
vendor.
SERVICES PROVIDED
The Company offers temporary staffing solutions tailored to specific client
needs. The services provided by the Company range from traditional, short-term
and long-term services to value-added, on-site management services within both
the clerical and light industrial industry sectors.
Short-Term Staffing. Through short-term staffing, also known as project or
peak-period staffing, the Company can help clients meet fluctuating staffing
requirements quickly and easily and maintain high levels of productivity without
the need to add permanent staff. Short-term staffing is typically an assignment
of less than six months and involves one-time, seasonal or recurring use of
temporary employees.
Long-Term Staffing. Through long-term staffing, the Company provides and
supervises temporary employees for functions or departments on an extended
basis. Long-term staffing typically involves staffing specific positions for six
months or more.
On-Site Management. Through on-site management programs that utilize the
EDGESM technology, the Company assumes administrative responsibility for
coordinating all temporary personnel services throughout a client location or
organization, including short-term and long-term staffing. On-site management
can provide the Company's clients with cost savings and improved productivity,
and also can eliminate the time and effort the client would normally spend
managing and coordinating multiple temporary staffing companies.
30
31
Placement Services. The Company also provides placement services through
its "Temporary-to-Permanent" program, pursuant to which employers are able to
avoid recruitment and screening costs and evaluate workers on a temporary basis
before committing to permanent employment.
The Company provides temporary personnel in two industry segments: clerical
and light industrial.
Clerical Services. As use of temporary staffing has become more prevalent,
the range of clerical positions addressed by the Company has expanded beyond
traditional secretarial staff to include a broad range of general business
environment personnel. Clerical services include secretaries, word processors,
office automation workers, data entry operators, receptionists, accountants,
bookkeepers, telemarketers, hosts, computer operators, and other general office
staff.
Light Industrial Services. Light industrial services personnel are
furnished for a variety of assignments including assembly work (such as
mechanical assemblers, general assemblers, solderers and electronic assemblers),
factory work (including merchandise packagers, machine operators, and pricing
and tagging personnel), warehouse work (such as general laborers, stock clerks,
material handlers, order pullers, forklift operators, palletizers and
shipping/receiving clerks), technical work (such as lab technicians, quality
control technicians, bench technicians, test operators, electronic technicians,
inspectors, drafters, checkers, designers, expeditors, buyers, electronic
engineers and mechanical engineers) and general services (such as maintenance
and repair personnel, janitors and food service workers).
OPERATIONS
Office Organization. The Company provides its services through a network
of 156 office locations, 67 of which are owned and operated by the Company and
89 of which are operated by franchisees or licensees. The table below shows the
geographic distribution of the Company-owned and independently-managed offices.
COMPANY-OWNED LICENSED AND TOTAL
OFFICES FRANCHISED OFFICES OFFICES
------------- ------------------ -------
California......................... 60 1 61
Western Region(1).................. 5 11 16
Midwestern Region(2)............... 0 27 27
Southeastern Region(3)............. 2 35 37
Northeastern Region(4)............. 0 15 15
-- --
---
Total.............................. 67 89 156
== == ===
- ---------
(1) Includes Arizona, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oregon, Utah,
and Washington.
(2) Includes Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Ohio, and
Wisconsin.
(3) Includes Arkansas, Florida, Georgia, Kentucky, Louisiana, North Carolina,
Oklahoma, Tennessee, Texas, and Virginia.
(4) Includes Connecticut, Maryland, Massachusetts, New Jersey, New York, and
Pennsylvania.
Company-Owned Offices
The Company-owned offices are concentrated in California, with locations in
five other states. These offices are organized into three regions, each managed
by a Regional Vice President and other regional staff who provide operational
support for the offices in their regions. Each Company-owned office has an
on-site manager who is accountable for the day-to-day operations and
profitability of that office.
Managers report to their Regional Vice Presidents, and together they are
responsible for sales, client development and retention, recruitment, placement
and retention of associates, and general administration for their respective
offices and regions. The Company believes that its decentralized
31
32
structure contributes to the initiative and commitment of its management team
and that its incentive compensation approach motivates managers to increase
profits.
Company-owned offices had average sales of approximately $2.3 million for
fiscal 1995. The Company often pursues a "fill-in" strategy to expand its market
penetration by transferring clients on the periphery of an existing office's
territory to a newly opened office, which can then use those established
accounts as a base for further expansion. The density of Company-owned offices
in certain areas also enables the Company to spread fixed costs such as
advertising, recruiting and administration over a larger revenue base, and also
to share associates and provide clients with superior coverage and service
capabilities. In addition, the Company has divided highly successful
Company-owned offices into separate clerical and light industrial offices,
allowing each to specialize and further penetrate its market.
Independently-Managed Offices
Independently-managed offices, structured in either franchise or license
format, have been an important element of the Company's growth strategy over the
last eight years. Such offices have enabled the Company to expand into new
markets with highly qualified licensees and without significant capital
expenditures. Most of the Company's offices outside California are
independently-managed. Independent office agreements have ten-year terms and are
renewable for successive five-year terms. Such agreements cover exclusive
geographic territories and contain minimum revenue performance standards.
Franchises. The Company employed a traditional franchise model from 1987
until 1990 and, as of June 1, 1996, 21 of the Company's 89 independently-managed
office locations were franchises. Franchisees pay all lease and working capital
costs, fund payroll and collect clients' accounts. Franchisees pay the Company
an initial franchise fee and royalties equal to approximately 7% of gross
billings. Franchisees employ all office management staff and all temporary
personnel affiliated with their offices. The Company provides training, the
right to use the Company's service marks and business model, proprietary
computer programs, and operational support.
Licenses. Since 1990, the Company has recruited new independent office
managers as licensees. The Company switched from franchise format to license
format for its new independently-managed offices to exercise more control over
the collection and tracking of the receivables of the independently-managed
offices and to allow the Company to grow without being limited by the financial
resources of franchisees. As of June 1, 1996, 68 of the Company's 89
independently-managed office locations were licenses. The license format differs
from the franchise format in that the Company acts as the employer of all
temporary personnel affiliated with the office. The Company funds payroll,
collects customer accounts, and remits to licensees 60-70% of gross margin,
depending on hours billed by the particular licensee in the prior contract year.
Recruitment of Licensees. Licensees perform an important function for the
Company by opening new offices and applying their managerial talents and
financial resources to increase Company revenues. The Company therefore seeks
licensees with significant business experience, a record of achievement, and the
resources and entrepreneurial drive to apply the Company's proven business model
to new territories and operate multiple offices. Most new licensees are
identified through Company advertisements in The Wall Street Journal. The
Company recruits talented licensee prospects by offering them significant
earnings potential and the opportunity to manage their own network of offices
autonomously within the Company's policies and standards while receiving
valuable operational support from the Company's national headquarters.
Company Support. The Company's internal Franchise/License Department
coordinates the Company's expansion into new markets through recruitment of new
licensees, and provides operational field support to all licensees and
franchisees to maximize their opportunities for success and ensure compliance
with the Company's operating system. All regional support team members report to
the Vice President, Franchise/License Operations, who is responsible for the
overall management and
32
33
growth of the Company's independently-managed offices, maintenance of consistent
quality standards and compliance with the Company's policies. The
Franchise/License Department also operates a corporate training program to
provide licensees and franchisees with training in established sales techniques
and recruiting methods, operational procedures, and the use of the Company's
technologies and products to build sales volume and a pool of qualified
associates. The Company believes that its dedication of resources to, and
careful oversight and support of, its franchisees and licensees has contributed
to the integration of independently-managed and Company-owned offices into a
cohesive nationwide organization.
National Headquarters Support
Through its national headquarters in San Juan Capistrano, California, the
Company provides extensive services to Company-owned and independently-managed
offices throughout the country. For example, the Intellisearch(SM) and HPT(SM)
capabilities, as well as the EDGE(SM) system, were developed by the Company's
national headquarters. Non-Stop(SM) is being developed by national headquarters
as well, and when fully implemented it will be managed through national
headquarters.
The Company's national headquarters handles all client collections, as well
as all payroll functions and benefits administration for temporary personnel for
all of the Company-owned and licensed offices. For all of the franchised
offices, these same services are performed, with the exception of collections.
This relieves office managers and licensees of significant administrative
burdens and allows them to concentrate on marketing, sales, and client service.
National headquarters also creates advertising and promotional campaigns
and materials for use nationwide, and employs dedicated support personnel who,
under the direction of the Vice President, Marketing, are available to assist
local office managers, franchisees and licensees in formulating marketing
programs and sales presentations to important potential clients. This
facilitates the sales efforts of independently-managed offices and contributes
to a consistent corporate image across the country.
Many clients and potential clients have multiple locations in different
parts of the country. The Company's national headquarters staff provides
centralized sales and services administration for these clients so that
Company-owned and independently-managed offices in locations corresponding to
the clients' sites can be strategically coordinated into a network capable of
providing customized staffing solutions throughout the clients' systems.
The Company maintains a risk management and insurance department that not
only administers the Company's California workers' compensation self-insurance
program, but also works closely with offices, managers, franchisees and
licensees in evaluating job assignments to promote sales while effectively
managing safety risks. In some cases, the Company may employ the services of
professional loss control engineers. These capabilities not only can limit
safety risk, but also benefit clients and provide a valuable sales tool for
local offices.
Remedy Non-Stop(SM). As the strategic role of staffing services has
increased, so have the demands placed upon staffing service providers. The
Company identified this as an opportunity to differentiate itself by being more
accessible to clients than its competitors, and recently introduced on a
selected basis in California a service called "Non-Stop(SM)." This service
offers clients access to the Company after-hours by forwarding local office
calls to the Company's national headquarters. The calls are answered at national
headquarters and associate placements can be made through direct access to the
local office's Intellisearch(SM) system.
33
34
STAFFING PERSONNEL
The Company's temporary personnel are typically individuals between jobs or
careers, individuals re-entering the job market or individuals who prefer the
flexibility and variety of temporary work assignments, and are recruited through
local and national advertising and through referrals by other associates.
All associates undergo two types of evaluation procedures. First, like
other temporary staffing companies, the Company evaluates its temporary
personnel for job skills. The Company calls this "can-do" testing because it
evaluates associates' proficiency at relevant job skills. Second, the Company
has developed HPT(SM) to create attitudinal profiles of its associates. The
Company believes that attitude is the most important characteristic of temporary
workers, and that different job classifications and work environments require
different attitudinal characteristics. Accordingly, HPT(SM) helps the Company
fit associates to staffing assignments to which they are suited. The Company's
experience has been that this not only can help assure client satisfaction, but
can also enhance the quality of associates' work experiences. The Company
believes it is the only temporary staffing provider that uses attitudinal
profiles as part of the temporary employee placement process.
The Company's philosophy is that treating its associates not only as
employees, but also as clients, enables it to compete successfully in attracting
and retaining quality temporary employees. This in turn helps assure client
satisfaction. The Company therefore offers associates competitive compensation
and benefits, opportunities for training, and job placements in which they are
likely to achieve success and satisfaction.
Compensation. The Company utilizes over 300 skill codes to match
associates' skills and experience to positions and payrates. Comprehensive wage
surveys are conducted each year to establish competitive pay scales. In
addition, the Company pays periodic longevity bonuses of up to $500 and
compensates associates for good safety records and referrals. The Company has
found that these programs help it to recruit and retain qualified associates.
Safety. The Company trains associates in injury avoidance and inspects
client workplaces in an effort to maintain a safe and healthy work environment
for all associates. Risk management and safety services developed by the Company
are often provided to clients as a value-added service.
Training. Every office is equipped with computerized tutorials covering the
latest office systems and computer applications, including various database,
word processing, and spreadsheet applications and other technical skills.
Certain light industrial skills training is also available to associates.
Job Placement. The Company has a "Temporary-to-Permanent" program through
which clients may hire temporary associates for permanent positions. This helps
the Company recruit qualified associates who are seeking permanent assignments
and also helps address the hiring needs of the Company's clients.
Benefits. The Company is not required to provide medical insurance or other
employee benefits to its associates, but nevertheless offers them the
opportunity to purchase comprehensive medical and dental insurance that is 100%
employee funded. Associates with at least one year of Company service are
eligible to participate in a 401(k) Retirement Savings Plan in which the Company
has no matching commitment.
PROPRIETARY TECHNOLOGIES
The Company is committed to the development of new technologies to increase
its efficiency, enhance its effectiveness and profitability, and transform its
business practices to maintain a competitive edge in the staffing business.
Since 1993, the Company has invested substantial human and financial resources
in the development of its HPT(SM), EDGE(SM) and Intellisearch(SM) systems. The
Company intends to continue to refine and update these systems and plans to
develop its next
34
35
generation of innovative products and service offerings, including further
utilization of the Internet and the World Wide Web in client marketing and
employee recruiting and screening.
Employee Profiles; Human Performance Technology. The Company believes,
based upon detailed client studies and its own experiences over 30 years in the
staffing business, that a temporary employee's attitude is the most important
factor in determining whether he or she will perform well on the job and be
perceived by the client as successful. These client perceptions in turn
determine whether clients view the Company's services as having provided value.
Accordingly, a key aspect of the Company's formula for providing premium
staffing services is to hire the best available workers and fit them carefully
to specific positions so that clients receive personnel who are not only
qualified to perform the tasks required by the job, but also have the attitudes
required to integrate into the client's workforce, complement other employees
and respond well to the particular challenges that characterize the client's
business.
The Company profiles attitudes through its proprietary HPT(SM) system.
Associates view a series of videotaped scenarios depicting realistic situations
likely to be encountered in the client's workplace. The associate is required to
rate the effectiveness of various potential ways of handling each situation, and
the associate's responses enable the Company to develop a profile of the
associate's attitudes in two main categories, work habits and team performance.
The work habits profile measures characteristics like conscientiousness,
punctuality, attention to detail, initiative, ability to work without close
supervision, and tendency to follow policies and procedures, avoid hostile
behaviors, adhere to drug and alcohol policies, observe safety rules, and avoid
careless mistakes. The team performance profile gauges the probability that the
associate will focus on clients' needs, communicate with co-workers, solve
problems cooperatively, avoid conflict, adapt to different situations, and work
productively in various environments.
The HPT(SM) profile is then used to fit the associate to client
environments in which he or she is likely to succeed, and to avoid client
demands that the associate is unlikely to handle well. The Company believes that
it is the only staffing services provider that conducts scientific attitudinal
evaluations of its staffing personnel, and that this gives the Company a
competitive advantage by enhancing its ability to provide workers who are likely
to succeed in the client's workplace.
HPT(SM) was developed by the Company in conjunction with HRStrategies,
Inc., a prominent human resources consulting firm with a sophisticated clientele
including some of the nation's largest corporations. The goal was to design a
system that could develop an accurate profile of workers' attitudes and enable
the Company to predict reliably how those workers would handle various workplace
challenges. The development of the system involved a detailed analysis, based
upon client interviews and the Company's industry experience, of the skills,
knowledge and personal characteristics required for success in each of the
various types of positions the Company's associates fill.
The Company validated the predictive value of the system by testing a
sample of approximately 4,000 workers. The HPT(SM) attitudinal profiles of the
workers were used in staffing temporary assignments, and the clients and workers
were then polled to determine their perceptions of the workers' performances.
The Company has continued to refine the system, and empirical results to date
indicate that HPT(SM) is a useful predictive tool that will enhance the
Company's ability to provide clients with workers who are well-suited to their
temporary assignments.
Client Assignments; Intellisearch(SM). The Intellisearch(SM) system
automates the process of fitting workers to clients' temporary staffing needs.
Intellisearch(SM) is a proprietary computer system that is installed in each
office and contains profiles and a detailed dossier on each associate, which
includes that person's HPT(SM) profile and the results of skills testing,
interview analysis, and performance ratings from previous assignments.
Intellisearch(SM) can then be used to search for workers with specified
characteristics, place workers in appropriate positions, and fit client needs
with the most qualified available temporary personnel using various parameters.
When a fit is made, the program prints a detailed placement report that gives
35
36
the associate and client relevant information about each other. The placement
data is then automatically transferred to the administrative side of the system,
which allows the Company to monitor the placement.
The Intellisearch(SM) system is a key component of the Company's success
because it enables the Company to accurately screen a large database of
available associates and to deliver to its clients personnel who have the skills
and attitudinal characteristics that make them likely to succeed on the job.
Associates who move to a new city can easily sign on with a local Company
office, which helps retain qualified personnel in the Company's system.
Employee Data Gathering and Evaluation (EDGE(SM)). In 1992, the Company
introduced EDGE(SM), its Employee Data Gathering and Evaluation program.
EDGE(SM) is a real time, UNIX-based computer system that is installed on-site
at client facilities to coordinate scheduling and track performance of the
Company's associates and temporary personnel of other service providers.
The Company issues each associate on the EDGE(SM) system a plastic card
with a magnetic data strip, and the associate swipes this card through the
EDGE(SM) reader upon arrival at the client's job site, and again upon departure.
The EDGE(SM) system acts as a time card system by automatically tracking the
time worked by each temporary employee, and performs other valuable functions.
For example, through EDGE(SM) the local Company office can determine if an
associate is late or absent, allowing the Company to replace the worker
promptly. EDGE(SM) also can generate detailed reports based on client-specified
parameters, including head counts, project costing, productivity and
forecasting, that can help clients manage their labor costs more efficiently.
EDGE(SM) can also print client invoices based upon the data collected on-site
through the system. This feature reduces the Company's expenses and accelerates
the collection of accounts by eliminating the cost and delay of preparing
invoices and verifying them against traditional time records.
The Company believes the availability of this system gives it an advantage
in competing for clients, and that the installation of an EDGE(SM) system
enhances client retention. As of June 1, 1996, EDGE(SM) was installed at 65
client locations. The Company expects its use to increase significantly in
response to enhanced marketing efforts.
MARKETING AND SALES
The Company's sales and marketing department coordinates nationwide sales
efforts from the Company's national headquarters in California. This approach
and the Company's broad network of offices enables the Company to pursue
national clients, who generally desire to work with vendors capable of meeting
their needs in more than one locale, and gives the Company an advantage over
competitors that cannot provide staffing in as many markets as the Company.
Local accounts are developed by the Company's offices primarily through customer
referrals, community involvement and direct contacts with prospective clients.
Early in the 1990s, the Company observed that clients were increasingly
using temporary staffing services as a proactive strategy to manage employment
overhead costs and risks and maximize productivity. While traditional temporary
help was purchased as a commodity by buyers at relatively low levels within
client organizations, staffing in the 1990's has become a more strategic
decision, focusing on controlling employment costs and maximizing productivity.
This evolution has pushed decision-making regarding the utilization of temporary
services to higher levels in client organizations and given the Company the
opportunity to differentiate itself on the basis of value-added services.
Sales Process. In response, the Company developed a structured,
consultative sales process called "3-D Selling." This process is designed for
sophisticated, executive-level buyers and divides the sales process into three
steps: define, develop and deliver. The definitional step in the system is a
"Client Needs Assessment," a formal survey that is conducted by a Company
representative to identify the client's business focus, critical concerns and
any opportunities for improvement. Every Company vice president, office manager,
franchisee, licensee and salesperson receives formal training in the assess-
36
37
ment process through the Company's national headquarters. This assures that the
Company's approach to clients is consistent nationwide. The local Company
representative reviews all available information about the client, visits the
client's facility and interviews client representatives. On the basis of the
information gathered from the client and the Company's own experiences in the
industry, the Company develops a detailed assessment of the client's staffing
needs.
Based upon the Client Needs Assessment, the Company then undertakes the
development step through its "service design" process, in which it structures a
staffing proposal designed specifically to address the client's particular
needs. The Company strives to apply its experience in the staffing business to
help clients identify or clarify their needs and to design appropriate staffing
solutions using HPT(SM), EDGE(SM) and other value-added services.
The Company's Client Needs Assessment and service design proposal are then
presented to the client in an interactive selling process that utilizes a
computerized marketing and sales program developed by the Company to enable its
sales representatives to tailor marketing presentations to clients' needs in
real time. Through a series of interactive screens integrating over 300 separate
graphics, film clips, and an operational spreadsheet, sales personnel can
respond to most questions asked by potential clients, demonstrate virtually any
aspect of the Company's services, including its HPT(SM) and Intellisearch(SM)
capabilities and EDGE(SM) system, show the cost advantages of the Company's
services and print client-specific sales materials. The Company provides
training to office personnel on the use of this system and continually updates
and refines it based on field experiences and feedback from its sales
representatives. This selling process enables the Company, in partnership with
the new client, to develop staffing solutions tailored to that client's specific
needs.
The final step in the Company's sales process, delivery, is also the first
step in client retention. By delivering premium customer-specific services
according to the initial proposal, the Company reinforces its value to the
client and markets its ongoing relationship. To reinforce this partnering
relationship, the Company offers all of its clients the "Remedy Guarantee," an
unconditional guarantee that clients need not pay if, for any reason, they are
not satisfied with the work performed by an associate.
Direct Marketing and Advertising. In addition to supporting the selling
process, the Company conducts direct marketing and image building at a national
level. The Company has developed a database profile of the type of client that
represents volume business at attractive gross profit levels. This profile is
used with a national database to target potential clients in addition to those
already identified by the field sales organization. Direct marketing campaigns
supported by advertising are then conducted using these databases. Campaigns are
targeted at specific industries where a strong need for the Company's services
is perceived.
The Company's advertising strategy encompasses both national and local
activities. In the Company's experience, many of the largest nationwide users of
staffing services tend to view temporary services as a commodity and select
providers on the basis of price. Accordingly, the Company focuses its marketing
efforts on medium and smaller accounts, which generally purchase approximately
$250,000 to $2 million in temporary services per year. In the Company's
experience, these clients are more receptive to the Company's efforts to compete
on the basis of service rather than price alone. The Company also pursues larger
accounts, but typically only through mature offices that have fully developed
their smaller and medium-sized clientele.
The Company is currently using the Internet in its direct marketing and
advertising and expects to launch a World Wide Web page by the end of fiscal
1996. The Company's in-house multimedia capability will allow for continuous
development of new Internet processes, and internal marketing and recruiting
support will also be made available to all Company locations through an internal
computer network being rolled-out shortly after the Web site.
37
38
CLIENTS
During the twelve months ended December 31, 1995, the Company served
approximately 13,000 clients nationwide. The Company's ten highest volume
clients in fiscal 1995 accounted for less than 12% of the Company's systemwide
gross billings. No single client accounted for more than 1.9% of the Company's
revenues or systemwide gross billings for fiscal 1995.
COMPETITION
The temporary services industry is highly competitive with limited barriers
to entry. The Company believes that no single competitor has more than a 10%
share of the national temporary services market. The largest competitors of the
Company include Adia Services, Inc., Interim Services, Inc., Kelly Services,
Inc., Manpower Inc., Norrell Corporation, Robert Half International, Inc. and
The Olsten Corporation. These and other large competitors have nationwide
operations and substantially greater resources than the Company, which among
other things could enable them to attempt to maintain or increase their market
share by reducing prices. In addition, there are a number of other medium-sized
firms that are regional or emphasize specialized niches and compete with the
Company in certain markets where they have a stronger presence. Finally,
numerous small or single-office firms compete effectively with the Company's
offices in their limited areas.
The Company's management believes that the most important competitive
factors in obtaining and retaining its targeted clients are an understanding of
a customer's specific job requirements, the ability to provide qualified
temporary personnel in a timely manner and the quality and price of services.
The primary competitive factors in obtaining qualified candidates for temporary
employment assignments are wages, benefits and responsiveness to work schedules.
The Company expects ongoing vigorous competition and pricing pressure from
both national and local providers, and there is no assurance that the Company
will be able to maintain or increase its market share or gross margins.
WORKERS' COMPENSATION
As the legal employer of its associates (other than those employed by
franchisees), the Company is responsible for providing them with workers'
compensation benefits. In the past, the costs of these benefits have increased
as various states in which the Company has conducted operations have raised
benefit levels and liberalized allowable claims. The Company maintains workers'
compensation insurance for its employees under a self-insurance program with the
State of California (in support of which the Company is currently required to
maintain a standby letter of credit of at least $4.0 million) and an insured
program in its remaining areas of operation. Workers' compensation insurance is
state regulated and insurance rates are market-driven and based on the
employers' experience as well as state schedules. The Company bases its workers'
compensation costs on estimates of the costs of future claims. With respect to
the self-insurance program, the estimated costs of existing and incurred but not
yet reported claims are accrued based on prior experience and may be
subsequently revised based on developments related to such claims. The Company
seeks to minimize its workers' compensation costs by focusing on risk management
and safety training.
EMPLOYEES
As of December 31, 1995, the Company had a staff of approximately 400
individuals (excluding temporary associates). Approximately 92,000 temporary
employees were placed by the Company during calendar 1995, of which
approximately 74,000 were employed by the Company and approximately 18,000 were
employed by franchisees. At any given time during 1995, only a portion of these
employees were assigned. The Company has no collective bargaining agreements and
believes its
employee relations are good.
38
39
FACILITIES
The Company does not own any real property. The Company leases its 13,185
square foot national headquarters building in San Juan Capistrano, California
from Robert E. McDonough, Sr., the Company's Chairman and a Selling Shareholder
in the Offering. The cost of the leased space is $25,052 per month ($1.90 per
square foot per month). Management believes that the Company's lease with Mr.
McDonough contains terms that are at least as favorable as those terms that the
Company might have obtained for the lease of similar premises available from an
unaffiliated party at the time the lease was executed. The lease term expires in
August 1996. The Company has the option to renew the lease for an additional
five-year period. See "Certain Transactions." The Company anticipates needing
additional headquarters space in the foreseeable future.
As of June 1, 1996, the Company leased the space occupied by all 67 of its
Company-owned offices. See Note 6 of Notes to Financial Statements regarding the
Company's lease commitments. The Company selects the sites for these offices by
evaluating proximity to potential clients and available temporary personnel. The
Company assists its franchisees and licensees in selecting sites for
independently managed offices, but presently does not own and is not obligated
under any leases at these sites.
GOVERNMENTAL REGULATION
The Company's marketing and sale of franchises and licenses is regulated by
the Federal Trade Commission and by authorities in 19 states. Additionally, 15
of the 34 states in which the Company provides its services require franchisors
to file a registration application, provide notice or qualify for an exemption.
The Company has filed the appropriate registration application or provided
notice in seven of these states and has obtained an exemption from such
registration requirements in the remaining eight states. The Company files and
distributes to prospective franchisees and licensees Franchise Offering
Circulars and other materials in order to comply with such registration and
disclosure requirements. The Offering will require an amendment to the Company's
state franchise registrations and to the Company's offering circulars. In
addition, the Company's ongoing relationships with its franchisees and licensees
are regulated by applicable federal and state franchise laws.
LEGAL PROCEEDINGS
From time to time, the Company becomes a party to litigation incidental to
its business. The Company maintains insurance coverage that management believes
is reasonable and prudent for the business risks the Company faces, and in
management's opinion no pending legal proceeding is likely to have a material
adverse effect on the Company.
PROPRIETARY RIGHTS AND SYSTEMS
The Company has developed, either internally or through hired consultants,
its HPTSM, EDGESM, and IntellisearchSM computer systems. These proprietary
systems are trade secrets of the Company and the Company has copyrights in
certain software used in these systems.
The Company has registered the service marks REMEDY(R), REMEDY TEMPORARY
SERVICES(R), REMEDYTEMP(R), HIRE INTELLIGENCE(R) and THE INTELLIGENT
TEMPORARY(R) with the U.S. Patent & Trademark Office. In addition, the Company
asserts ownership of, and has filed applications with the U.S. Patent &
Trademark Office to register, the service marks HPT(SM), EDGE(SM), STARS(SM),
NON-STOP(SM), INTELLIGENT STAFFING(SM), INTELLISEARCH(SM), WE WON'T SEND YOU A
DUMMY(SM), and V(SM)(SM). These marks are used by the Company and its licensees
and franchisees.
39
40
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and key employees of the Company and
their ages as of the date of this Prospectus are set forth below.
NAME AGE POSITION(S) HELD
- ----------------------- --- ---------------------------------------------------
Robert E. McDonough, 73 Chairman of the Board of Directors
Sr.
Paul W. Mikos 51 Chief Executive Officer, President and Director
Alan M. Purdy 56 Vice President and Chief Financial Officer
William M. Herbster 44 Vice President, Marketing
Rosemary F. Beck 49 Vice President, Operations--Northern Region
Alice M. Bowers 45 Vice President, Operations--Southwest Region
Jeffrey A. Elias 39 Vice President, Human Resources and Risk Management
Warren Heeg, Jr. 59 Vice President, Client Relations
Norman H. Leibson 51 Vice President, Information Technology Systems
Delza de Avellar Neblett 44 Vice President, Operations and Systems
Joseph J. Pulaski 62 Vice President, Light Industrial/Technical Division
Richard G. Rhydderch 58 Vice President, Franchise/License Development
Karin Somogyi 37 Vice President, Franchise/License Operations
Susan McDonough Mikos 49 Director, Corporate Secretary
John P. Unroe 48 Director
John B. Zaepfel 59 Director
James L. Doti, Ph.D.* 49 Director
- ---------------
* Dr. Doti is expected to be nominated by the Board of Directors of the Company
to become a director after the closing of the Offering.
The Board of Directors of the Company currently consists of five members
and has two vacancies. It is expected that the Board of Directors of the Company
will nominate James L. Doti to fill one of the two vacancies, and that Dr. Doti
will agree to serve as a director of the Company after the closing of the
Offering. Directors are elected annually and hold office until the next annual
meeting of shareholders or until their successors have been elected and
qualified. However, the Company's Amended and Restated Bylaws, which will be in
effect upon the closing of the Offering, provide that when the Company becomes a
"listed corporation" within the meaning of the California Corporations Code
(i.e., has at least 800 holders of its equity securities as of the record date
of its most recent annual meeting of shareholders), the board will be divided
into three classes, initially elected for one, two and three years,
respectively, and thereafter being elected every three years for three-year
terms. Officers serve at the pleasure of the Board of Directors of the Company,
subject to any employment agreement between the Company and such officer.
Robert E. McDonough, Sr. has served as Chairman of the Board of Directors
since August 1978. Mr. McDonough founded the Company in 1965 and has been
continuously involved in the management and long-term operation and planning of
the Company since that time. For 29 years, until May 1994, he served as the
Company's Chief Executive Officer. Mr. McDonough is the father of Susan
McDonough Mikos and the father-in-law of Paul W. Mikos.
Paul W. Mikos has served in various positions in the Company since 1977,
including as President since 1985. Mr. Mikos has served as Chief Executive
Officer of the Company since January 1996 and as a Director of the Company since
May 1993. From May 1994 until January 1996, he served as co-Chief Executive
Officer of the Company. Prior to joining the Company, Mr. Mikos worked for ARA
as a Regional Sales Director from August 1976 until October 1977. From July 1968
until August 1976,
40
41
Mr. Mikos worked for IBM in sales management. Mr. Mikos is the husband of Susan
McDonough Mikos, the brother of Alice Bowers and the son-in-law of Robert E.
McDonough, Sr.
Alan M. Purdy has served as Vice President and Chief Financial Officer
since February 1994. From January 1993 until December 1993, he was Senior Vice
President and Chief Financial Officer of Builder's Emporium, a division of
Collins and Aikman Group, Inc. From March 1988 until August 1992, he was Senior
Vice President and Chief Financial Officer of HUB Distributing, Inc. (dba
Millers Outpost), a subsidiary of American Retail Group. From January 1986 until
October 1987, he was Senior Vice President and Chief Financial Officer of
Robinson's of Florida, a subsidiary of The May Department Stores Company. From
April 1983 until January 1986, he served as Senior Vice President and Chief
Financial Officer of B. Dalton Booksellers, a subsidiary of the Dayton Hudson
Corp.
William M. Herbster has served as Vice President, Marketing since January
1994. From January 1985 until January 1994, he was with Manpower, Inc., a
temporary staffing company, as Director of U.S. Marketing from April 1990 to
January 1994, Manager of Office Automation Services from September 1987 to April
1990, and Marketing Manager, Great Lakes and Northeast Region from January 1985
to September 1987.
Rosemary F. Beck has served as Vice President, Operations--Northern Region
since February 1992. Ms. Beck came to the Company in 1992 after fourteen years
in the temporary staffing industry with Adia Services, Inc., a temporary
staffing company, where she held various positions including Senior Area Vice
President.
Alice M. Bowers has served as Vice President, Operations--Southwest Region
since March 1995. Ms. Bowers began her tenure at the Company in June 1978 as a
Branch Manager and has served as an Area Leader, Regional Manager, Assistant
Vice President, Operations and Consultant to the Company. Ms. Bowers is the
sister of Paul W. Mikos.
Jeffrey A. Elias has served as Vice President, Human Resources and Risk
Management since December 1992. From January 1991 to December 1992, he was
Director, Human Resources and Risk Management for Adia Services, Inc.
Warren J. Heeg, Jr. has served as Vice President, Client Relations since
April 1996. From July 1994 until March 1996, Mr. Heeg was the Company's Vice
President, Franchise Sales and, from November 1989 until June 1994, he served as
the Company's Vice President, National Accounts.
Norman H. Leibson has served as Vice President, Information Technology
Systems since November 1994. From March 1992 until November 1994, Mr. Leibson
was a Vice President of HUB Distributing, Inc. (dba Millers Outpost), a
subsidiary of American Retail Group, and from November 1983 until August 1992,
he was a Vice President of Carter Hawley Hale.
Delza de Avellar Neblett has served as Vice President, Operations and
Systems since January 1996. Ms. Neblett began her career with the Company in
1988. From August 1992 to October 1994 she served as a Vice President of the
Company, designing and implementing the Company's Intellisearch(SM), HPT(SM)
and Non-Stop(SM) systems.
Joseph J. Pulaski has served as Vice President, Light Industrial/Technical
Division since 1990. He began his career with the Company in 1976 and has at
various times held the positions of Director of Marketing and President of the
Company.
Richard G. Rhydderch has served as Vice President, Franchise/License
Development since May 1988. From April 1986 until April 1988, Mr. Rhydderch was
Vice President, Franchise Marketing/Sales for Snelling & Snelling, Inc., an
employment services company. From March 1985 until April 1986, he was National
Franchise Sales Director for Tender Sender, Inc., a shipping and giftwrap
company.
Karin Somogyi has served as Vice President, Franchise/License Operations
since November 1995. From October 1993 until October 1995, she was the Company's
Assistant Vice President, Franchise
41
42
Operations. Before joining the Company, Ms. Somogyi was with Adia Services,
Inc., first as Director of Franchise Services from January 1991 until September
1993, and then as Franchise Sales Executive from January 1990 until January
1991.
Susan McDonough Mikos has served as the Company's Corporate Secretary since
January 1996 and has been a Director of the Company since November 1992. For the
past five years, Ms. Mikos has been a homemaker. Ms. Mikos is the daughter of
Robert E. McDonough, Sr., and the wife of Paul W. Mikos.
John P. Unroe has been a director of the Company since January 1993. Since
August 1992, he has served as the President and Chief Executive Officer of
Judicial Arbitration and Mediation Services/Endispute, an alternative dispute
resolution company. From June 1988 to July 1992, Mr. Unroe was a Senior Vice
President with Adia Services, Inc., a temporary staffing company, where he was
responsible for its U.S. operations. From 1969 until 1988, Mr. Unroe worked for
Xerox Corporation in various positions including Vice President, West Coast
Region Manager.
John B. Zaepfel has been a director of the Company since June 1995. From
1974 until 1985, Mr. Zaepfel was President and Chief Executive Officer of
Chartpak-Picket Industries, Inc., a wholly-owned subsidiary of The Times Mirror
Company. In 1985, Mr. Zaepfel founded CPG International, Inc., a graphics art
and engineering firm, and served as its President and Chief Executive Officer
from 1985 until its sale in 1989. Since 1989, Mr. Zaepfel has been a private
investor and a self-employed consultant. Mr. Zaepfel is Chairman of the Board of
Directors of Acordia of Southern California, Inc. and a director of American
Lock & Supply, Inc. and Pro-Dex, Inc.
James L. Doti, Ph.D. is expected to be nominated by the Board of Directors
of the Company to become a director of the Company after the closing of the
Offering. Since July 1991, Dr. Doti has served as the president of Chapman
University. Dr. Doti has been a member of the Chapman University faculty since
1974 and is a member of the Boards of Directors of Fleetwood Enterprises,
Standard Pacific Corp. and First American Financial Corporation.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has an Audit Committee and a
Compensation Committee, each composed of Messrs. Unroe and Zaepfel. The Audit
Committee meets with the Company's independent accountants, makes
recommendations to the Board of Directors concerning the acceptance of the
reports of such accountants and the accounting policies and procedures of the
Company, and reviews financial plans and operating results of the Company. The
Compensation Committee meets with the Company's management and makes
recommendations to the Board of Directors concerning the annual salary and
incentive compensation for executive officers and key employees of the Company.
Additionally, the Board of Directors has established an Executive Committee
composed of Messrs. McDonough, Unroe and Zaepfel. The Executive Committee is
responsible for strategic planning and review, including evaluation of
performance of the Company's executive officers.
42
43
EXECUTIVE COMPENSATION
The table below sets forth the compensation paid to each person serving as
Chief Executive Officer of the Company and the four other most highly paid
executive officers of the Company for the fiscal year ended October 1, 1995 (the
"Named Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
---------------------------------------------
NAME AND OTHER ANNUAL
PRINCIPAL POSITION SALARY BONUS COMPENSATION
- ------------------------------------------------- -------- ---------- -------------
Robert E. McDonough, Sr.(1) $527,887 $1,250,000 $70,127
Chairman
Paul W. Mikos(2)(3) 300,700 75,000 92,462
Chief Executive Officer
R. Emmett McDonough(2)(4) 300,391 75,000 85,401
Chief Executive Officer
Alan M. Purdy 163,302 50,000 *
Vice President and Chief Financial Officer
Joseph Pulaski 115,243 131,781 *
Vice President, Light Industrial Division
Leslie Merrow(5) 150,212 71,018 *
Vice President, Southwest Region
- ---------------
* Less than 10% of salary plus bonus.
(1) Bonus represents a one-time special bonus following Robert E. McDonough,
Sr.'s retirement as CEO in consideration of approximately 30 years of
service during which he was deemed by the Board of Directors to have been
undercompensated. Other Annual Compensation represents $55,535 in life
insurance premiums paid by the Company and $14,592 in use of Company-owned
vehicles. Insurance premiums cover life insurance policies with cash
surrender values owned by Mr. McDonough and death benefits payable to Mr.
McDonough's beneficiaries. Upon termination of certain of the policies, a
portion of the premiums paid is refundable to the Company.
(2) Paul W. Mikos and R. Emmett McDonough served as co-CEOs during the fiscal
year ended October 1, 1995 and until January 1996, when R. Emmett McDonough
resigned as an officer and director of the Company. Mr. Mikos is now the
Company's sole CEO, and R. Emmett McDonough continues as an employee of the
Company working on special projects.
(3) Other Annual Compensation represents $68,631 in life insurance premiums paid
by the Company and $23,831 in use of Company-owned vehicles. Insurance
premiums cover life insurance policies with cash surrender values owned by
Mr. Mikos and death benefits payable to Mr. Mikos' beneficiaries.
(4) Other Annual Compensation represents $57,318 in life insurance premiums paid
by the Company and $28,083 in use of Company-owned vehicles. Insurance
premiums cover life insurance policies with cash surrender values owned by
R. Emmett McDonough and death benefits payable to R. Emmett McDonough's
beneficiaries. R. Emmett McDonough is the son of Robert E. McDonough, Sr.
and the brother-in-law of Paul W. Mikos.
(5) Ms. Merrow resigned from her position with the Company in February 1996.
COMPENSATION MATTERS
Prior to the Offering, the Company has not issued any stock options. In
connection with the Offering, the Company is issuing options to purchase up to
an aggregate of 450,000 shares of Class A Common Stock to employees and
non-employee directors pursuant to the Company's 1996 Stock
43
44
Incentive Plan, and expects periodic option grants to be made under such plan in
the future. See "--1996 Stock Incentive Plan."
AGREEMENTS RELATING TO EMPLOYMENT
The Company has an employment agreement with Paul W. Mikos that expires in
April 1999, pursuant to which the Company employs Mr. Mikos as its Chief
Executive Officer and President. The agreement provides for a base salary of
$390,000 per year and an annual performance bonus of up to $390,000 based upon
satisfaction of certain performance goals set annually by the Executive
Committee of the Board of Directors of the Company. Pursuant to the employment
agreement, if the Company terminates Mr. Mikos' employment as the Company's
Chief Executive Officer and President, he will be entitled to receive severance
payments consisting of $390,000 per year for two years, payable on a
semi-monthly basis.
The Company has an employment agreement with Robert E. McDonough, Sr. that
expires on December 4, 2001, pursuant to which the Company employs Mr. McDonough
as Chairman of the Board. The agreement provides for a base salary of $390,000
per year and annual bonuses, not less than $160,000 or more than $390,000 per
year, based upon his performance and the Company's satisfaction of certain
performance goals set annually by the Compensation Committee of the Board of
Directors. Additionally, pursuant to the terms of the employment agreement, Mr.
McDonough is entitled to annual demand registration rights and certain
"piggyback" registration rights in future registrations by the Company of its
securities. See "Description of Capital Stock--Registration Rights of Certain
Holders."
The Company entered into an employment and consulting agreement with R.
Emmett McDonough effective February 6, 1996. Under the terms of the agreement,
R. Emmett McDonough will act as Vice Chairman--Special Projects of the Company
for a six-month period commencing February 6, 1996, for which he will receive a
base salary of $150,000 during such six-month period and a one-time cash bonus
payment of $150,000. Thereafter, for a period of three years, R. Emmett
McDonough will serve as a consultant to the Company and will receive annual
compensation of $350,000. During his tenure as Vice Chairman--Special Projects
and as a consultant to the Company, R. Emmett McDonough will be entitled to
receive the same employee benefits that he received as Co-Chief Executive
Officer of the Company prior to his resignation. See "Certain
Transactions--Allocation Agreement."
The Company has employment agreements with Alan M. Purdy and Jeffrey A.
Elias providing for a severance payment of at least 12 months' salary and bonus
if employment with the Company is terminated within 24 months of certain changes
in ownership or management.
DIRECTOR COMPENSATION
Non-employee directors of the Company receive an annual retainer of $18,000
plus compensation of $2,000 per board meeting attended and $750 for each meeting
of a committee of the board. Additionally, non-employee directors receive
reimbursement for out-of-pocket expenses relating to Company business and will
receive certain stock option grants. See "--1996 Stock Incentive Plan."
Directors of the Company who are officers or employees of the Company do not
receive additional compensation for serving on the board.
1996 STOCK INCENTIVE PLAN
A total of 900,000 shares of Class A Common Stock have been reserved for
issuance to officers, directors, key employees and consultants of the Company
under the Company's 1996 Stock Incentive Plan (the "1996 Plan"); in connection
with the Offering, options to purchase an aggregate of up to 450,000 shares of
Class A Common Stock are being granted to employees and non-employee directors
of the Company under the 1996 Plan at exercise prices equal to the price to the
public in the Offering. It is anticipated that further grants under the 1996
Plan will be made from time to time in the future. The
44
45
1996 Plan is intended to satisfy the conditions of Section 16 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to Rule 16b-3
promulgated thereunder ("Rule 16b-3").
Employee Awards. The 1996 Plan enables the Company to grant a variety of
stock-based incentive awards, including incentive and nonstatutory stock
options, restricted stock, stock payments, performance shares, stock
appreciation rights, dividend equivalents and other stock-based benefits. An
award may consist of one such arrangement or benefit or two or more of them in
tandem or in the alternative. The 1996 Plan permits the Committee (as defined
below) to select eligible persons to receive awards and generally to determine
the terms and conditions of awards (except that awards of stock options to the
Company's non-employee directors are automatic and nondiscretionary). Under the
1996 Plan, options to purchase shares of Class A Common Stock (other than
non-employee director options) may be granted with an exercise price below the
market value of such stock on the grant date. Vesting of awards accelerates if
the recipient's employment with the Company terminates in connection with a
change in control, and the Committee may accelerate or extend the vesting or
exercise period of any awards in its discretion. In general, Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), imposes a $1.0
million limit on the amount of compensation that may be deducted by the Company
in any tax year with respect to each of the chief executive officer of the
Company and its other four most highly compensated employees, including any
compensation relating to an award under the 1996 Plan. To prevent compensation
relating to an award under the 1996 Plan from being subject to the $1.0 million
limit of Section 162(m), the Committee may limit grants of awards in any one
calendar year and condition the grant, vesting, or exercisability of awards on
the attainment of pre-established objective performance goals.
Non-Employee Director Awards. Under the 1996 Plan, upon the consummation
of the Offering the Company's current non-employee directors, Messrs. Unroe and
Zaepfel, will receive one-time grants of options to purchase up to 15,000 and
10,000 shares of Class A Common Stock, respectively, at an exercise price per
share equal to the price to the public in the Offering. These options will vest
upon grant. Future non-employee directors will automatically receive an initial
one-time grant of an option to purchase up to 10,000 shares of Class A Common
Stock. These initial options will vest and become exercisable with respect to
50% of the underlying shares on the grant date and with respect to an additional
50% of the underlying shares on the date of the next annual shareholders'
meeting following the grant date (or, if an annual meeting of shareholders
occurs within six months after the grant date, then on the date of the second
annual shareholders' meeting after the grant date), if the recipient has
remained a director since the grant date. In addition to an initial grant, each
non-employee director will also receive, upon each re-election to the Company's
Board of Directors (or immediately following an annual meeting at which the
director is continuing without being re-elected due to the classification of the
board), an automatic grant of an option to purchase up to 5,000 additional
shares of Class A Common Stock. These additional options will vest and become
exercisable upon the earlier to occur of (i) the first anniversary of the grant
date, or (ii) immediately prior to the annual meeting of shareholders of the
Company next following the grant date, if the director has served as a director
from the grant date to such earlier date. All non-employee director options will
have a term of ten years and an exercise price equal to the fair market value of
a share of Class A Common Stock on the date of grant. Vesting of non-employee
director options accelerates if the recipient of the option ceases to be a
director of the Company or its successor in connection with a change in control.
Administration. The 1996 Plan provides that the exercise price of options
may be paid by Company loan or withholding of underlying stock, or deferred
until completion of broker-assisted exercise and sale transactions. The 1996
Plan is administered by the Compensation Committee of the Board of Directors
(the "Committee"), which consists of directors of the Company who are
disinterested within the meaning of Rule 16b-3 and who will be eligible to
receive only automatic, nondiscretionary stock option awards thereunder. The
Board of Directors or the Committee may suspend or terminate the 1996 Plan at
any time, and may also amend the 1996 Plan in any respect at any time, subject
to shareholder approval only to the extent required to comply with applicable
laws or regulations. However, only the Committee may take actions affecting
selection of award recipients or the timing, pricing and amounts of any awards
(other than non-employee director options, which are fixed,
45
46
automatic and non-discretionary), and the provisions of the Plan regarding
grants of stock options to non-employee directors generally are not subject to
amendment.
1996 EMPLOYEE STOCK PURCHASE PLAN
In connection with the Offering, the Company is implementing its 1996
Employee Stock Purchase Plan (the "Purchase Plan"), which is intended to qualify
under the provisions of Sections 421 and 423 of the Internal Revenue Code, as
amended (the "Code"). Subject to certain limitations imposed by Section 423 of
the Code, employees of the Company (including associates other than associates
employed by franchisees) who have been full-time employees for at least six
months are eligible to participate in the Purchase Plan. Participation is
voluntary and is dependent on each eligible employee's election to participate
and his or her determination as to the level of payroll deductions (from 1% to
10%) to be allocated to the purchase of shares of Class A Common Stock under the
Purchase Plan.
The Purchase Plan is implemented by a series of consecutive and overlapping
24-month offering periods commencing on each August 1 and February 1. Each
offering period is generally composed of four six-month purchase periods. At the
end of each purchase period, each participating employee purchases (subject to
certain limitations) the number of shares of Class A Common Stock that can be
purchased with the employee's payroll deductions accumulated over the preceding
six months. The purchase price for these shares is an amount equal to 85% of the
fair market value of a share of Class A Common Stock on the exercise date or on
the enrollment date for that offering period, whichever is lower. If the fair
market value of a share of Class A Common Stock on any exercise date is lower
than the fair market value of a share of Class A Common Stock on the enrollment
date for that offering period, then all participants in that offering period
will be automatically withdrawn from that offering period and re-enrolled in the
immediately following offering period, thereby giving participants the benefit
of the new lower baseline price.
A participant may withdraw from an offering period by written notice to the
Company. Upon withdrawal and generally upon termination of employment, all of
the a participant's payroll deductions not yet applied to the purchase of shares
under the Purchase Plan will be paid (without interest) to such participant.
No more than 250,000 shares of Class A Common Stock may be issued under the
Purchase Plan. The Purchase Plan is administered by the Compensation Committee
of the Company's Board of Directors, which is entitled to terminate the Purchase
Plan or amend it in certain respects and which has allocated ministerial
responsibilities to the Company.
401(K) PLAN
The Company's 401(k) Plan permits certain employees who have been employed
by the Company for at least one year to defer and contribute to the 401(k) Plan
up to 20% of their total salary each pay period (subject to applicable limits
imposed by federal tax law). The Company does not match employee contributions
or otherwise contribute to the 401(k) Plan.
All participant contributions are credited to separate accounts maintained
in trust for each participant and are invested, at the participant's direction,
in one or more of the investment funds available under the 401(k) Plan. All
account balances are adjusted at least annually to reflect the investment
earnings and losses of the trust fund.
Each participant is fully vested in his or her deferred salary
contributions and net investment returns. Distributions may be made from a
participant's accounts under the 401(k) Plan in a lump-sum or in installments
during employment in the event of financial hardship or attainment of age
59 1/2, or upon termination of employment, retirement, disability or death. The
401(k) Plan is administered by the Company with the assistance of an independent
third-party administrator.
46
47
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company established the Compensation
Committee on September 25, 1995. Currently, the Compensation Committee is
composed of Messrs. Unroe and Zaepfel. Prior to the establishment of the
Compensation Committee, Robert E. McDonough, Sr. (the Company's Chairman of the
Board of Directors), Paul W. Mikos (the Company's CEO and President), R. Emmett
McDonough (the Company's former co-CEO), and Susan McDonough Mikos (the
Company's Corporate Secretary) all participated in deliberations of the
Company's Board of Directors concerning executive officer compensation.
CERTAIN TRANSACTIONS
RECLASSIFICATION OF COMMON STOCK
In connection with the Offering, the outstanding shares of the Company's
pre-Offering voting common stock and non-voting common stock will be
reclassified as Class A Common Stock and Class B Common Stock, respectively (the
"Reclassification"). As a result of the Reclassification, the rights associated
with the outstanding shares of the Company's pre-Offering non-voting common
stock will be modified so that such shares will automatically convert into Class
A Common Stock upon certain future transfers to non-affiliates and certain other
specified events. The shares being offered for sale by the Selling Shareholders
in the Offering are shares of Class B Common Stock as long as such shares are
held by the Selling Shareholders, but such shares will automatically convert
into Class A Common Stock upon sale in the Offering. See "Description of Capital
Stock--Common Stock."
SHAREHOLDER DISTRIBUTIONS
Prior to the Offering, the Company declared a distribution to the
Pre-Offering Shareholders in an aggregate amount equal to $5.0 million plus an
additional amount equal to the Pre-Offering Shareholders' income tax obligations
related to the Company's undistributed S corporation earnings from October 2,
1995 through the date immediately preceding the date of termination of the
Company's S corporation status in connection with the consummation of the
Offering. The Company intends to make this additional distribution in August
1996. If the Company's S corporation status had terminated as of March 31, 1996,
the amount of the additional distribution would have been approximately $2.5
million. The actual amount of this distribution may be significantly higher
depending upon the Company's cash basis income for the period from March 31,
1996 until the closing of the Offering. The $5.0 million amount described above
represents previously undistributed Company earnings for periods prior to
October 2, 1995, and was paid to the Pre-Offering Shareholders in May 1996. The
distribution was financed through borrowings under the Company's line of credit
agreement, and will be repaid, together with payment of the additional
distribution, with proceeds of the Offering. In April 1996, the Company paid
cash distributions to the Pre-Offering Shareholders of approximately $0.7
million in the aggregate representing income tax obligations of the Pre-Offering
Shareholders with respect to the Company's fiscal 1995 earnings.
ALLOCATION AGREEMENT
In February 1996, the Company entered into an agreement (the "Allocation
Agreement") with R. Emmett McDonough, his wife Jadzia McDonough, and their
related trusts (the "Emmett McDonough Family Shareholders"). R. Emmett McDonough
is a former director and executive officer of the Company and is the son of
Robert E. McDonough, Sr., the Company's Chairman. Pursuant to the Allocation
Agreement, R. Emmett McDonough resigned as a director and executive officer of
the Company but is continuing as an employee of the Company until August 6, 1996
to assist with the Offering and other special projects. During this six-month
employment period, R. Emmett McDonough is continuing to receive the base salary
paid to him prior to the agreement. At the end of this six-month employment
period, he will receive a one-time bonus payment from the Company of $150,000.
Thereafter, he will be available to serve as a consultant to the Company for a
period of three years, pursuant to which he will be paid $350,000 per year and
receive benefits comparable to those that he
47
48
received as an executive officer of the Company. See "Management--Agreements
Relating to Employment."
The Allocation Agreement also entitles the Emmett McDonough Family
Shareholders to their pro rata share of the cash distributions to the
Pre-Offering Shareholders made in connection with the Offering. See "Prior S
Corporation Status and Distributions."
The Allocation Agreement also gives the Emmett McDonough Family
Shareholders "piggyback" registration rights to include Company stock owned
directly or indirectly by them in the Offering and subsequent public offerings,
provided that if Robert E. McDonough, Sr. is selling at least ten percent of the
shares to be sold in a public offering, the Emmett McDonough Family Shareholders
may be limited to selling only one share for every two shares sold by Robert E.
McDonough, Sr. The Company is required, pursuant to the Allocation Agreement, to
pay the Emmett McDonough Family Shareholders' expenses (other than underwriting
discounts and commissions) as selling shareholders in any public offering of the
Company's equity securities. See "Description of Capital Stock--Registration
Rights of Certain Holders."
TRANSACTIONS WITH MANAGEMENT
The Company leases its 13,185 square foot national headquarters building in
San Juan Capistrano, California from Robert E. McDonough, Sr., the Company's
Chairman and a Selling Shareholder in the Offering. The cost of the leased space
is $25,052 per month ($1.90 per square foot per month). Management believes that
the Company's lease with Mr. McDonough contains terms that are at least as
favorable as those terms that the Company might have obtained for the lease of
similar premises available from an unaffiliated party at the time the lease was
executed. The lease term expires in August 1996. The Company has the option to
renew the lease for an additional five-year period.
In May 1995, the Company loaned $500,000 to Paul W. Mikos, the Company's
CEO and a member of the Company's Board of Directors at an interest rate of
6.62% per annum. As of June 1, 1996, the total amount of indebtedness
outstanding on this loan was $250,000. The remaining amount of indebtedness is
due and payable by Mr. Mikos to the Company upon the earlier of (i) May 1, 1998
and (ii) a transfer of shares of Common Stock in which Mr. Mikos receives cash
consideration of at least $200,000.
In April 1996, the Company advanced $210,000 to Robert E. McDonough, Sr.,
and $37,129 to Paul W. Mikos. These advances represent a portion of the
anticipated distribution to the Pre-Offering Shareholders relating to their
income tax obligations in connection with the Company's undistributed S
corporation earnings from October 2, 1995 through the date immediately preceding
the date of termination of the Company's S corporation status in connection with
the consummation of the Offering. See "Prior S Corporation Status and
Distributions--Shareholder Distributions." The advances are interest-free and
become due and payable once such distribution has been made. The Company intends
to make such distribution in August 1996.
In August 1993, the Company advanced an interest-free $60,000 management
education scholarship to Meghan Mikos, an employee of the Company from June 1992
to July 1995 and the daughter of Paul W. Mikos. The entire amount of the
scholarship remains outstanding and will be forgiven if Ms. Mikos works for the
Company for at least three years after receipt of an M.B.A. degree.
48
49
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock on June 1, 1996 (on an actual basis and
as adjusted to reflect the sale of shares offered hereby) by (i) each Selling
Shareholder, (ii) each person who owns beneficially more than five percent of
the Company's Common Stock, (iii) each of the Company's directors, (iv) each of
the Named Officers and (v) all executive officers and directors as a group.
Except as otherwise indicated, the persons named in the table have sole voting
and investment power with respect to all shares beneficially owned, subject to
community property laws. See "Certain Transactions" for a discussion of certain
transactions between the Company and certain Selling Shareholders, officers and
directors.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING(1)(2) AFTER THE OFFERING(1)(2)(3)
------------------------------------------ -------------------------------------------
CLASS A CLASS B CLASS A CLASS B
COMMON STOCK COMMON STOCK NUMBER OF COMMON STOCK COMMON STOCK
------------------- ------------------- SHARES ---------------------- -------------------
NUMBER PERCENT NUMBER PERCENT BEING NUMBER PERCENT NUMBER PERCENT
BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS OFFERED(4) OF SHARES OF CLASS(5) OF SHARES OF CLASS
- -------------------------- --------- -------- --------- -------- ----------- --------- ----------- --------- --------
Robert E. McDonough,
Sr.(6) 2,083,800 92.0% 1,375,852 30.4% 700,000 2,083,800 38.7% 675,852 20.0%
R. Emmett McDonough(6)(7) 99,660 4.4 1,639,678 36.2 461,667 99,660 1.8 1,178,011 35.0
Paul W. Mikos(6)(7)(8) 81,540 3.6 1,514,470 33.4 -- 81,540 1.5 1,514,470 45.0
Alan M. Purdy -- -- -- -- -- -- -- -- --
Joseph Pulaski -- -- -- -- -- -- -- -- --
Leslie Merrow(9) -- -- -- -- -- -- -- -- --
Susan M. Mikos(6)(7)(8) 81,540 3.6 1,514,470 33.4 -- 81,540 1.5 1,514,470 45.0
John P. Unroe(2)(10) -- -- -- -- -- 15,000 * -- --
John Zaepfel(2)(10) -- -- -- -- -- 10,000 * -- --
All directors and
executive officers
as a group (16 persons) 2,165,340 95.6 2,890,317 63.8 700,000 2,190,340 40.6 2,190,322 65.0
- ---------
* Less than 1%
(1) The information contained in this table (i) reflects "beneficial ownership"
as defined in Rule 13d-3 promulgated under the Exchange Act, (ii) gives
effect to a 1.812 for 1 split of the Company's Common Stock effected in
connection with the Offering and (iii) assumes no exercise of the
Underwriters' over-allotment option. Options granted to executive officers
in connection with the Offering will not vest within 60 days after the date
hereof, and are therefore not listed.
(2) Percentage figures prior to the Offering are based on 2,265,000 shares of
Class A Common Stock and 4,530,000 shares of Class B Common Stock
outstanding. Percentage figures after the Offering (other than for all
directors and executive officers as a group) are based on 5,365,000 shares
of Class A Common Stock (including the 3,100,000 shares being sold in the
Offering) and 3,368,333 shares of Class B Common Stock outstanding. The
percentage figures after the Offering for all directors and executive
officers as a group are based on 5,390,000 shares of Class A Common Stock
(including 25,000 shares issuable upon exercise of vested stock options
being granted to non-employee directors) and 3,368,333 shares of Class B
Common Stock outstanding.
(3) If the Class B Common Stock converted into Class A Common Stock and no
other changes in share ownership occurred, the total percentage ownership
of the Company's voting shares by the Pre-Offering Shareholders would be
approximately 64.5%, distributed among the persons listed as follows:
Robert E. McDonough, Sr., 31.6%; R. Emmett McDonough, 14.6%; and Paul W.
Mikos and Susan McDonough Mikos, 18.3%. Potential testamentary dispositions
by Robert E. McDonough, Sr. of all of his Common Stock solely to members of
his family would result in further concentration of the Company's voting
power in the hands of the Pre-Offering Shareholders other than Mr.
McDonough. Actual testamentary dispositions by Robert E. McDonough, Sr. may
differ.
(4) Does not include 206,667 shares beneficially owned by Robert E. McDonough,
Sr. and 103,333 shares beneficially owned by R. Emmett McDonough that are
subject to the Underwriters' over-allotment option.
(5) These percentages reflect voting power of the Company assuming no
conversion of the Class B Common Stock; see footnote 3 for voting control
percentages assuming conversion of the Class B Common Stock into Class A
Common Stock.
(6) Includes shares of Common Stock held by certain trusts established for the
benefit of the shareholder and/or the shareholder's family.
(7) Includes shares held as community property.
(8) Paul W. Mikos and Susan McDonough Mikos have beneficial ownership of the
same shares.
(9) Ms. Merrow resigned from her position with the Company in February 1996.
(10) Shares beneficially owned after the Offering reflect vested stock options
being granted in connection with the Offering.
49
50
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Prior to the closing of the Offering, the Company will amend and restate
its Articles of Incorporation to give effect to the Reclassification and change
its authorized capital stock to 50,000,000 shares of Class A Common Stock,
4,530,000 shares of Class B Common Stock, 54,530 shares of Series A Junior
Participating Preferred Stock and 4,945,470 shares of undesignated preferred
stock, par value $0.01 per share. The following summary description of the
capital stock of the Company is qualified in its entirety by reference to the
Company's Amended and Restated Articles of Incorporation and the Amended and
Restated Bylaws, a copy of each of which is filed as an exhibit to the
Registration Statement (as defined below).
COMMON STOCK
As of June 1, 1996 and after giving effect to the Reclassification and a
1.812 for 1 split of the Company's Common Stock effected in connection with the
Offering, there were 2,265,000 shares of Class A Common Stock and 4,530,000
shares of Class B Common Stock outstanding held of record by ten shareholders,
including trusts affiliated with individual shareholders. There will be
5,365,000 shares of Class A Common Stock and 3,368,333 shares of Class B Common
Stock (5,830,000 shares of Class A Common Stock and 3,058,333 shares of Class B
Common Stock if the Underwriters' over-allotment option is exercised in full)
outstanding after giving effect to the sale of the shares of Class A Common
Stock offered hereby. Upon closing of the Offering, the Class B Common Stock
will be owned only by the Pre-Offering Shareholders; purchasers in the Offering
will receive only Class A Common Stock. The Company does not intend to issue any
additional shares of Class B Common Stock in the future.
The shares of Class A Common Stock (including any Class A Common Stock that
may be issued upon conversion of Class B Common Stock) and Class B Common Stock
are identical in all respects except with respect to voting rights and
convertibility as described below.
Holders of Class A Common Stock are entitled to one vote per share on all
matters submitted to a shareholder vote. Holders of Class B Common Stock are not
entitled to any vote on matters submitted to a shareholder vote except as to
certain amendments of the Company's Amended and Restated Articles of
Incorporation, certain mergers and as otherwise required by law.
The Class B Common Stock automatically converts into Class A Common Stock
on a share-for-share basis upon the earliest to occur of (i) a transfer to a
non-affiliate of the holder thereof in a public offering pursuant to an
effective registration statement or Rule 144 promulgated under the Securities
Act, (ii) the death or legal incapacity of Robert E. McDonough, Sr., and (iii)
the tenth anniversary of the closing of the Offering, but is not otherwise
convertible.
The Company's Amended and Restated Bylaws provide that when the Company
becomes a "listed corporation" within the meaning of the California Corporations
Code (i.e., has at least 800 holders of its equity securities as of the record
date of its most recent annual meeting of shareholders) cumulative voting rights
will be eliminated and the Company's Board of Directors will be divided into
three classes, initially elected for one, two, and three years, respectively,
and thereafter being elected every three years for three-year terms. As a
result, holders of a majority of the outstanding shares of Class A Common Stock
will then be able to elect all of the Company's directors.
Subject to the rights of any preferred stock that may be issued in the
future, holders of Class A Common Stock and Class B Common Stock are entitled to
receive dividends when, as and if declared by the Company's Board of Directors
out of funds legally available therefor. Any dividends or distributions must be
paid equally on a per share basis on the Class A Common Stock and the Class B
Common Stock. In the event of a liquidation, dissolution or winding up of the
Company, holders of Class A Common Stock and Class B Common Stock will be
entitled to share equally on a per share basis in all assets remaining after
payment of the Company's liabilities and the liquidation preference of any
outstanding preferred stock. All outstanding shares of Class A Common Stock and
Class B Common
50
51
Stock are, and the shares of Class A Common Stock being issued and sold by the
Company hereby and the shares of Class A Common Stock being sold by the Selling
Shareholders hereby upon conversion of Class B Common Stock will be, fully paid
and nonassessable. No preemptive, subscription, conversion or redemption rights
are applicable to the Class A Common Stock or (except for the conversion rights
described herein) the Class B Common Stock.
PREFERRED STOCK
The Company's Board of Directors is authorized, without further vote or
action by the shareholders, to issue up to 5,000,000 shares of preferred stock
in one or more series and to fix the relative rights, preferences, privileges,
qualifications, limitations and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series. The Board of Directors of the
Company could, without the approval of the shareholders, issue preferred stock
having voting or conversion rights that could adversely affect the voting power
of, or have liquidation rights superior to those of, the holders of Common
Stock. In addition, the issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the shareholders. At present, the Company has no plans to
issue any shares of preferred stock. The Company's Board of Directors has
designated 54,530 shares of the preferred stock as Series A Junior Participating
Preferred Stock in connection with the Company's Shareholder Rights Plan. See
"--Preferred Stock Purchase Rights."
STOCK OPTIONS
Prior to the Offering, the Company has not granted any stock options. In
connection with the Offering, the Company is issuing options to purchase up to
an aggregate of 450,000 shares of Class A Common Stock to employees and
non-employee directors under its 1996 Employee Stock Incentive Plan at exercise
prices equal to the price to the public in the Offering. It is anticipated that
further grants of options under this plan will be made from time to time in the
future. See "Management-- 1996 Stock Incentive Plan."
PREFERRED STOCK PURCHASE RIGHTS
Pursuant to the Company's Shareholder Rights Agreement, which will be in
effect upon the closing of the Offering, each share of Class A Common Stock and
Class B Common Stock (including all shares outstanding before the Offering and
all shares offered hereby) will include an associated preferred stock purchase
right (a "Right"). Until the Distribution Date (as defined below), the Rights
will not be exercisable, the Rights will be attached to and trade only together
with shares of Common Stock, and stock certificates representing shares of
Common Stock will also represent the Rights attached thereto. Upon the close of
business on the Distribution Date, the Rights will separate from the Common
Stock and become separately tradable, Rights certificates will be issued and the
Rights will become exercisable to purchase Preferred Shares (as defined below).
The "Distribution Date" is the earliest of the close of business on the
tenth day after (i) the first date of public announcement by the Company or an
Acquiring Person (as defined below) that an Acquiring Person has become such or
such earlier date as a majority of the Company's directors shall become aware of
such Acquiring Person (the "Stock Acquisition Date"), or (ii) the date that a
tender or exchange offer by any person (other than certain exempt persons) is
first published or sent or given within the meaning of Rule 14d-2(a) promulgated
under the Exchange Act, if upon consummation thereof, such Person (together with
such person's affiliates) would be an Acquiring Person (whether or not any
shares are actually purchased pursuant to such offer). The Company's Board of
Directors may extend the time period prior to which the Distribution Date occurs
as described below.
An "Acquiring Person" is generally any person who or which, together with
all affiliates and associates of such person, without the prior approval of the
Company's Board of Directors, becomes the
51
52
Beneficial Owner (as defined below) of 15% or more of the shares of Class A
Common Stock then outstanding. However, a shareholder owning 15% or more of the
shares of Class A Common Stock outstanding prior to the closing of the Offering
(an "Original 15% Shareholder"), or a shareholder who becomes the Beneficial
Owner of 15% or more of the shares of Class A Common Stock then outstanding as a
result of a bequest by Robert E. McDonough, Sr., or the automatic conversion of
shares of Class B Common Stock owned by such shareholder into shares of Class A
Common Stock on the tenth anniversary of the closing of the Offering or upon the
death or legal incapacity of Mr. McDonough (an "Excluded Shareholder"), will be
an Acquiring Person only upon becoming the Beneficial Owner of that percentage
of the outstanding shares of Class A Common Stock (the "Threshold Percentage")
equal to 15% plus the percentage of the Class A Common Stock owned by such
Original 15% Shareholder as of the closing of the Offering or by such Excluded
Shareholder immediately after the event causing such shareholder to become an
Excluded Shareholder, as the case may be (thus, for example, an Original 15%
Shareholder or Excluded Shareholder owning 20% of the Class A Common Stock as of
the closing of the Offering or immediately after such event, as the case may be,
would be an Acquiring Person only upon becoming the Beneficial Owner of 35% of
the outstanding shares of Class A Common Stock). In calculating the percentage
of the outstanding shares of Class A Common Stock beneficially owned by any
person, such person will generally be deemed to "Beneficially Own" any
securities: (i) which such person or any of such person's affiliates or
associates, directly or indirectly, has the right to acquire (whether such right
is exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in writing) or upon the
exercise of conversion rights, exchange rights, rights, warrants or options, or
otherwise; (ii) which such person or any of such person's affiliates or
associates, directly or indirectly, has the right to vote or dispose of or has
"beneficial ownership" of (as determined pursuant to Rule 13d-3 promulgated
under the Exchange Act), including pursuant to any agreement, arrangement or
understanding, whether or not in writing; or (iii) which are beneficially owned,
directly or indirectly, by any other person (or any affiliate or associate
thereof) with which such person (or any of such person's affiliates or
associates) has any agreement, arrangement or understanding (whether or not in
writing), for the purpose of acquiring, holding, voting or disposing of any
voting securities of the Company.
As promptly as practicable following the Distribution Date, separate
certificates representing only Rights will be mailed to the holders of record of
shares of Common Stock as of the close of business on the Distribution Date, and
such separate Right certificates alone will represent such Rights from and after
the Distribution Date.
The Rights will expire on the tenth anniversary of the closing of the
Offering, unless earlier redeemed, exchanged or exercised. Unless the Rights
have expired or been redeemed or exchanged, they may be exercised, at the option
of their holders, as set forth in paragraphs (a), (b), and (c) below. No Right
may be exercised more than once or pursuant to more than one of such paragraphs.
From and after the first event of the type described in paragraphs (b) or (c)
below, each Right that is Beneficially Owned by an Acquiring Person or that was
attached to a share of Class A Common Stock that is subject to an option
Beneficially Owned by an Acquiring Person shall be void.
(a) From and after the close of business on the Distribution Date, each
Right (other than a Right that has become void) will be exercisable to purchase
one one-thousandth of a share of Series A Junior Participating Preferred Stock,
par value $0.01 per share, of the Company (the "Preferred Shares"), at an
exercise price of $65 (the "Exercise Price"). Prior to the Distribution Date,
the Company may substitute for all or any portion of the Preferred Shares that
would otherwise be issuable upon exercise of the Rights, cash, assets or other
securities having the same aggregate value as such Preferred Shares. The
Preferred Shares are nonredeemable and, unless otherwise provided in connection
with the creation of a subsequent series of preferred stock, are subordinate to
any other series of the Company's preferred stock, whether issued before or
after the issuance of the Preferred Shares. The Preferred Shares may not be
issued except upon exercise of the Rights. The holder of one whole Preferred
Share is entitled to receive when, as and if declared, 1,000 times the dividends
declared on each share of Common Stock. In the event of liquidation, the holders
of Preferred Shares will be entitled to receive a
52
53
liquidation payment in an amount equal to $1,000 per whole Preferred Share plus
all accrued and unpaid dividends and distributions on the Preferred Shares. Each
whole Preferred Share entitles the holder thereof to 1,000 votes, voting
together with the holders of Common Stock. In the event of any merger,
consolidation or other transaction in which shares of Common Stock are
exchanged, the holder of a Preferred Share shall be entitled to receive 1,000
times the amount received per share of Common Stock. The rights of the Preferred
Shares as to dividends, voting and liquidation preferences are protected by
antidilution provisions. It is anticipated that the value of one one-thousandth
of a Preferred Share should approximate the value of one share of Common Stock.
(b) At any time after a person (other than certain exempt persons or an
Original 15% Shareholder or an Excluded Shareholder), alone or with affiliates,
becomes Beneficial Owner of 15% or more of the Class A Common Stock then
outstanding, or after an Original 15% Shareholder or an Excluded Shareholder,
alone or with affiliates, becomes the Beneficial Owner of the Threshold
Percentage or more of the Class A Common Stock then outstanding, each Right
(other than a Right that has become void) will be exercisable to purchase, in
lieu of one one-thousandth of a Preferred Share, at the Exercise Price
(initially $65), shares of Class A Common Stock with an aggregate market value
equal to two times the Exercise Price. If the Company does not have a sufficient
number of shares of Class A Common Stock available for all Rights to be
exercised, the Company will substitute for all or any portion of the shares of
Class A Common Stock that would otherwise be issuable upon the exercise of the
Rights, cash, assets or other securities having the same aggregate value as such
Class A Common Stock.
(c) If, after the first date of public announcement by the Company or an
Acquiring Person that an Acquiring Person has become such or such earlier date
as a majority of the directors shall become aware of such Acquiring Person, the
Company is subject to (i) a merger or consolidation in which the Company is not
the surviving corporation, (ii) a merger or consolidation in which the Company
is the surviving corporation but all or part of its shares are exchanged for or
changed into stock or assets of another person, or (iii) a sale or transfer of
at least 50% of the Company's assets or earning power, then each Right (other
than a Right that has become void) shall thereafter be exercisable to purchase,
at the Exercise Price (initially $65), common stock of the surviving corporation
or purchaser, respectively, with an aggregate market value equal to two times
the Exercise Price.
The Exercise Price, the number of outstanding Rights and the number of
Preferred Shares and shares of Class A Common Stock issuable upon exercise of
the Rights are subject to adjustment from time to time as set forth in the
Shareholder Rights Agreement in order to prevent dilution.
With certain exceptions, no adjustment in the Exercise Price will be
required until cumulative adjustments require an adjustment of at least 1%. No
fractional securities will be issued upon exercise of a Right (other than
fractions of Preferred Shares that are integral multiples of one one-thousandth
of a Preferred Share and that may, at the election of the Company, be evidenced
by depositary receipts) and in lieu thereof, an adjustment in cash will be made
based on the market price of such securities on the last trading date prior to
the date of exercise.
At any time prior to the earlier of the close of business on (i) the tenth
day after the first date of public announcement by the Company or an Acquiring
Person that an Acquiring Person has become such or such earlier date as a
majority of the directors shall become aware of such Acquiring Person or (ii)
the tenth anniversary of the closing of the Offering (the "Final Expiration
Date"), the Company's Board of Directors may, at its option, call the Rights for
redemption in whole, but not in part, at a price of $0.01 per Right (the
"Redemption Price"), and the Company shall so redeem the Rights; provided,
however, that after a person becomes an Acquiring Person, such redemption must
be authorized by a majority of directors not associated with an Acquiring Person
("Continuing Directors"). Immediately upon the calling of the Rights for
redemption (the date of such action being the "Redemption Date"), the right to
exercise Rights will terminate and the only right of the holders of Rights
thereafter shall be to receive the Redemption Price. The Redemption Date can be
extended by the Company's Board of Directors as described below.
53
54
At any time after the occurrence of any event described in paragraph (b) or
(c) above, and prior to the first date upon which such person becomes the
beneficial owner of at least 50% of the outstanding shares of Class A Common
Stock (or, if such person is an Original 15% Shareholder or Excluded
Shareholder, the Threshold Percentage of the outstanding shares of Class A
Common Stock if such Threshold Percentage is greater than 50%), the Company may,
by majority vote of each of the Company's Board of Directors and the Continuing
Directors, exchange all of the outstanding Rights (other than those that have
become void) for shares of Class A Common Stock at an exchange ratio of one
share of Class A Common Stock per Right, appropriately adjusted for splits,
dividends, and similar transactions (the "Ratio of Exchange"). Immediately upon
such action the right to exercise such Rights will terminate and the only right
of the holders of such Rights thereafter shall be to receive the number of
shares of Class A Common Stock equal to the Ratio of Exchange.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company (other than rights resulting from such
holder's ownership of shares of Common Stock), including, without limitation,
the right to vote or to receive dividends.
The Company may, from time to time, without the approval of any holder of
Rights, and the Rights Agent shall, if the Company so directs, supplement or
amend any provisions of the agreements governing the Rights in any manner,
whether or not such supplement or amendment is adverse to any holder of Rights;
provided, however, that from and after the Distribution Date, the Company may,
and the Rights Agent shall, if the Company so directs, supplement or amend the
Shareholders Rights Agreement, without the approval of any holder of Rights,
only to (i) cure ambiguities, defects, or inconsistencies in the Shareholder
Rights Agreement; (ii) supplement or change the provisions thereunder in a
manner which does not materially and adversely affect the holders of the Rights
(other than the Acquiring Person); or (iii) subject to approval by majority of
the Continuing Directors, shorten or lengthen any time periods (except those
regarding redemption) for the purpose of protecting, enhancing or clarifying the
Rights (other than those of the Acquiring Person).
REGISTRATION RIGHTS OF CERTAIN HOLDERS
In connection with the Company's employment agreement with Robert E.
McDonough, Sr., the Company has entered into a registration rights agreement
granting Mr. McDonough and his related trusts annual demand registration rights
and certain "piggyback" registration rights in public offerings of the Company's
securities. The Company is required to pay the expenses (other than underwriting
discounts and commissions) incurred by Mr. McDonough and his related trusts in
connection with any public offering of the Company's securities in which they
are selling shareholders.
In connection with the execution of the Allocation Agreement, the Company
entered into a registration rights agreement with R. Emmett McDonough, his wife
Jadzia McDonough, and their related trusts (the "McDonough Family Shareholders")
granting certain "piggyback" registration rights to the McDonough Family
Shareholders in the Offering and subsequent public offerings of the Company's
securities. If Robert E. McDonough, Sr. is selling at least ten percent of the
shares of Common Stock to be sold in such an offering, the McDonough Family
Shareholders may be limited to selling only one share of Common Stock for every
two shares sold by Mr. Robert McDonough. Under the registration rights
agreement, the Company is required to pay the expenses (other than underwriting
discounts and commissions) incurred by the McDonough Family Shareholders in
connection with any public offering of the Company's securities in which they
are selling shareholders. See "Certain Transactions--Allocation Agreement."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the California General Corporation Law, the Company's
Amended and Restated Articles of Incorporation and its Amended and Restated
Bylaws provide that a director will not be personally liable for monetary
damages to the Company or its shareholders for breach of fiduciary duty as a
director, except for liability for (i) acts or omissions that involve
intentional misconduct or a
54
55
knowing and culpable violation of law, (ii) acts or omissions that a director
believes to be contrary to the best interests of the Company or its shareholders
or that involve the absence of good faith on the part of the director; (iii)
transactions from which the director derived an improper benefit; (iv) acts or
omissions that show a reckless disregard for the director's duty to the Company
or its shareholders in circumstances in which the director was aware, or should
have been aware, in the ordinary course of performing a director's duties, of a
risk of serious injury to the Company or its shareholders; (v) acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Company or its shareholders; (vi)
unlawful distributions, loans or guarantees as set forth in Section 316 of the
California Corporations Code; and (vii) unlawful transactions between the
director and the Company, as provided in Section 310 of the California
Corporations Code. These provisions do not limit or eliminate the rights of the
Company or its shareholders to seek non-monetary relief, such as an injunction
or rescission.
The Company has entered into individual indemnification agreements governed
by California law with each of its directors and certain officers. The
indemnification agreements require the Company to pay, subject to certain
limitations, all amounts attributable to any claims made against such officer or
director arising out of acts by such officer or director in his or her capacity
as, or solely because of his or her position as, an officer and/or director of
the Company, provided that such person acted in good faith and in a manner he or
she reasonably believed to be in the best interests of the Company and its
shareholders, and in the case of a criminal proceeding, had no reasonable cause
to believe that his or her conduct was unlawful. In addition, the indemnity
agreements provide generally that the Company will advance expenses incurred by
directors and executive officers in any action or proceeding as to which they
may be entitled to indemnification subject to certain exceptions. The Company
carries directors and officers indemnity insurance.
The indemnification provisions in the Company's Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws and the
indemnification agreements entered into between the Company and its non-employee
directors may permit indemnification for liabilities arising under the
Securities Act. The Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
The Company's Amended and Restated Articles of Incorporation and Amended
and Restated Bylaws include certain provisions summarized below that may have
anti-takeover effects. These provisions may delay, defer or prevent a tender
offer or takeover attempt that shareholders might consider to be in their best
interests, including attempts that might result in a premium over the market
price for the shares held by the shareholders. These provisions may also make it
more difficult to remove incumbent management.
The Amended and Restated Bylaws provide that when the Company becomes a
"listed corporation" within the meaning of the California Corporations Code
(i.e., has at least 800 holders of its equity securities as of the record date
of its most recent annual meeting of shareholders), cumulative voting rights
will be eliminated and the Company's Board of Directors will be divided into
three classes, initially elected for one, two, and three years, respectively,
and thereafter being elected every three years for three-year terms. In
addition, the Amended and Restated Articles of Incorporation provide that the
Amended and Restated Bylaws may be amended by shareholders only upon the vote of
holders of at least 66 2/3% of the shares entitled to vote.
TRANSFER AGENT AND REGISTRAR
The Company has appointed American Stock Transfer & Trust Company as the
transfer agent and registrar for its Common Stock, as well as rights agent under
the Company's Shareholder Rights Agreement.
55
56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
8,733,333 shares of Common Stock, consisting of 5,365,000 shares of Class A
Common Stock and 3,368,333 shares of Class B Common Stock (8,888,333 shares,
consisting of 5,830,000 shares of Class A Common Stock and 3,058,333 shares of
Class B Common Stock, if the Underwriters' over-allotment option is exercised in
full). Of such shares, the 3,100,000 shares of Class A Common Stock offered
hereby (3,565,000 shares if the Underwriters' over-allotment option is exercised
in full) will be freely tradable without restriction or further registration
under the Securities Act except for shares acquired by "affiliates" of the
Company, which will be subject to the resale limitations imposed under Rule 144.
The remaining 5,633,333 shares of Common Stock, consisting of 2,265,000 shares
of Class A Common Stock and 3,368,333 shares of Class B Common Stock (5,323,333
shares, consisting of 2,265,000 shares of Class A Common Stock and 3,058,333
shares of Class B Common Stock, if the Underwriters' over-allotment option is
exercised in full) are "restricted" shares within the meaning of Rule 144
promulgated under the Securities Act and may not be resold unless they are
registered under the Securities Act or are sold pursuant to Rule 144 or an
applicable exemption from registration. Such shares are subject to 180-day
lock-up agreements with the Underwriters and, following the expiration of such
180-day lock-up period, all of such shares will be immediately available for
sale as Class A Common Stock in registered offerings or pursuant to Rule 144. In
addition, Robert E. McDonough, Sr. and his related trusts have annual demand
registration rights with respect to approximately 2,700,000 shares of Common
Stock, and Robert E. McDonough, Sr. and R. Emmett McDonough have certain
"piggyback" registration rights with respect to a total of approximately
4,000,000 shares of Common Stock (approximately 3,700,000 shares of Common Stock
if the Underwriters' over-allotment option is exercised in full) in future
registrations by the Company. See "Description of Capital Stock--Registration
Rights of Certain Holders."
In general, under Rule 144 as currently in effect, a shareholder (or
shareholders whose shares are aggregated) who has beneficially owned
"restricted" shares for at least two years, and any affiliate who owns shares
that are not "restricted" shares, may sell publicly without registration within
any three-month period a number of such shares that does not exceed the greater
of (i) one percent of the then outstanding shares of Class A Common Stock and
(ii) the average weekly trading volume of the Class A Common Stock reported
through the Nasdaq National Market during the four calendar weeks preceding such
sale. Sales under Rule 144 are subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. A shareholder who is not deemed to be an affiliate of the Company at
any time during the 90 days preceding a sale and who has beneficially owned his
shares for at least three years is entitled to sell shares under Rule 144
without regard to volume limitations, manner of sale provisions, notice
requirements or the availability of current public information concerning the
Company.
The Company has reserved 900,000 shares of Class A Common Stock for
issuance under its 1996 Stock Incentive Plan and 250,000 shares of Class A
Common Stock for issuance under its 1996 Employee Stock Purchase Plan. Following
the Offering, the Company intends to file registration statements under the
Securities Act to register these shares, and as a result these shares will, when
issued, generally be freely tradable in the open market (subject to the
limitations of Rule 144 applicable to sales by affiliates of the Company).
The Company, the Selling Shareholders, the other Pre-Offering Shareholders,
and all directors and executive officers of the Company have agreed, subject to
certain exceptions, not to offer, sell, contract to sell, transfer or otherwise
encumber, or dispose of any shares of Common Stock, or securities convertible
into or exchangeable for Common Stock, or exercise demand registration rights,
for a period of 180 days from the date of this Prospectus without the prior
written consent of Dillon, Read & Co. Inc. See "Underwriting."
Prior to the date of this Prospectus, there has been no public market for
the Class A Common Stock offered hereby and no predictions can be made of the
effect, if any, that market sales of shares of Class A Common Stock (including,
without limitation, market sales upon conversion of shares of Class B Common
Stock) or the availability of shares for sale will have on the market price
prevailing from time to time. Sales of substantial amounts of Common Stock
(including shares of Class A Common Stock issued upon exercise of stock
options), or the perception that such sales could occur, could adversely affect
the market price of the Class A Common Stock or the ability of the Company to
raise capital through sales of its equity securities.
56
57
UNDERWRITING
The names of the Underwriters of the shares of Class A Common Stock offered
hereby and the aggregate number of shares which each has severally agreed to
purchase from the Company and the Selling Shareholders, subject to the terms and
conditions specified in the Underwriting Agreement, are as follows:
NUMBER OF
UNDERWRITER SHARES
------------------------------ ---------
Dillon, Read & Co. Inc. ................................................. 762,500
The Robinson-Humphrey Company, Inc. ..................................... 762,500
Auerbach Pollak & Richardson Inc. ....................................... 20,000
Robert W. Baird & Co. Incorporated....................................... 30,000
George K. Baum & Company................................................. 20,000
Bear, Stearns & Co. Inc. ................................................ 65,000
William Blair & Company, L.L.C. ......................................... 30,000
Brean Murray, Foster Securities, Inc. ................................... 20,000
Alex. Brown & Sons Incorporated.......................................... 65,000
Cleary Gull Reiland & McDevitt Inc. ..................................... 30,000
Crowell, Weedon & Co. ................................................... 30,000
CS First Boston Corporation.............................................. 65,000
Dean Witter Reynolds Inc. ............................................... 65,000
Donaldson, Lufkin & Jenrette Securities Corporation...................... 65,000
A.G. Edwards & Sons, Inc. ............................................... 65,000
Furman Selz LLC.......................................................... 30,000
Goldman, Sachs & Co. .................................................... 65,000
Janney Montgomery Scott Inc. ............................................ 30,000
Lazard Freres & Co. Inc. ................................................ 65,000
Lehman Brothers Inc. .................................................... 65,000
McDonald & Company Securities, Inc. ..................................... 30,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated....................... 65,000
Morgan Stanley & Co. Incorporated........................................ 65,000
David A. Noyes & Company................................................. 20,000
Oppenheimer & Co., Inc. ................................................. 65,000
PaineWebber Incorporated................................................. 65,000
Pennsylvania Merchant Group Ltd.......................................... 20,000
Prudential Securities Incorporated....................................... 65,000
Rauscher Pierce Refsnes, Inc. ........................................... 30,000
Raymond James & Associates, Inc. ........................................ 30,000
Salomon Brothers Inc..................................................... 65,000
Schroder Wertheim & Co. Incorporated..................................... 65,000
Scott & Stringfellow, Inc. .............................................. 20,000
Smith Barney Inc. ....................................................... 65,000
Stephens Inc. ........................................................... 30,000
Unterberg Harris......................................................... 30,000
Wellington (H.G.) & Co. Inc. ............................................ 20,000
---------
Total............................................................... 3,100,000
=========
The Managing Underwriters are Dillon, Read & Co. Inc. and The
Robinson-Humphrey Company, Inc.
The Underwriters are committed to purchase all of the shares of Class A
Common Stock, if any are so purchased. The Underwriting Agreement contains
certain provisions whereby, if any Underwriter defaults in its obligation to
purchase such shares, and the aggregate obligations of the Underwriters so
defaulting do not exceed ten percent of the shares offered hereby, some or all
of the remaining Underwriters must assume such obligations.
The Underwriters propose to offer the shares of Class A Common Stock
directly to the public initially at the offering price per share set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $0.54 per share. The Underwriters may allow, and
such dealers may re-allow, concessions not in excess of $0.10 per share to
certain other dealers. The offering of the shares is made for delivery when, as
and if accepted by the Underwriters and subject to prior sale and withdrawal,
cancellation or modification of this offer without notice. The Underwriters
57
58
reserve the right to reject any order for the purchase of the shares. After the
public offering of the Class A Common Stock, the public offering price and the
concessions may be changed by the Managing Underwriters.
The Company and the Selling Shareholders have granted to the Underwriters
an option for 30 days from the date of this Prospectus to purchase up to 155,000
and 310,000 additional shares of Class A Common Stock, respectively, at the
initial public offering price less the underwriting discount set forth on the
cover page of this Prospectus. The Underwriters may exercise such option only to
cover over-allotments of the Class A Common Stock offered hereby. To the extent
the Underwriters exercise this option, each Underwriter will be obligated,
subject to certain conditions, to purchase the number of additional shares of
Class A Common Stock proportionate to such Underwriter's initial commitment.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company, the Selling Shareholders, the other Pre-Offering Shareholders,
and all directors and executive officers of the Company have agreed, subject to
certain exceptions, that they will not offer, sell, contract to sell, transfer
or otherwise encumber, or dispose of any shares of Common Stock, or securities
convertible into or exchangeable for Common Stock, or exercise demand
registration rights, for a period of 180 days from the date of this Prospectus,
without the prior written consent of Dillon, Read & Co. Inc.
At the request of the Company, the Underwriters have reserved up to 155,000
shares of the Class A Common Stock offered hereby for sale, on the same terms
offered to the general public, to certain officers and employees of the Company,
certain of the Company's franchisees and licensees, and certain other parties.
The number of shares available for sale to the general public will be reduced to
the extent such persons purchase such reserved shares. Any reserved shares not
so purchased will be offered by the Underwriters to the general public on the
same terms as the other shares offered hereby.
Prior to the Offering, there has been no public market for the Class A
Common Stock. Consequently, the initial public offering price for the Class A
Common Stock was determined by negotiation among the Company, the Selling
Shareholders and the Managing Underwriters. Factors considered in determining
the initial public offering price were prevailing market conditions, the state
of the Company's development, recent financial results of the Company, the
future prospects of the Company and its industry, market valuations of
securities of companies engaged in activities deemed by the Managing
Underwriters to be similar to those of the Company and other factors deemed
relevant.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company by Gibson, Dunn & Crutcher LLP, Orange County,
California. Certain legal matters relating to the Offering will be passed upon
for the Underwriters by Howard, Darby & Levin, New York, New York.
EXPERTS
The financial statements of the Company as of October 1, 1995 and October
2, 1994 and for each of the three years in the period ended October 1, 1995
included in this Prospectus have been so included herein in reliance upon the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
58
59
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchanges Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Class A Common Stock
offered by this Prospectus. As permitted by the rules and regulations of the
Commission, this Prospectus, which is a part of the Registration Statement,
omits certain information, exhibits and undertakings contained in the
Registration Statement. Statements made in this Prospectus as to the contents of
any contract, agreement or other document are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to such exhibit for a more
complete description of the matter involved, and each such statement is
qualified in its entirety by such reference.
The Registration Statement and the exhibits and schedules thereto may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and should be available at the Commission's Regional Office at 7
World Trade Center, 13th Floor, New York, New York 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can also be obtained at prescribed rates from the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. Upon consummation of the Offering,
the Company will be subject to the informational requirements of the Exchange
Act, and in accordance therewith will be required to file periodic reports and
other information with the Commission.
After the completion of the Offering, the Company intends to furnish to its
shareholders annual reports containing financial statements audited by its
independent public accountants and quarterly reports containing unaudited
financial information for each of the first three quarters of each fiscal year.
59
60
REMEDYTEMP, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants..................................................... F-2
Balance Sheets as of October 2, 1994, October 1, 1995 and March 31, 1996
(unaudited)......................................................................... F-3
Statement of Income for the fiscal years ended October 3, 1993, October 2, 1994 and
October 1, 1995 and the six months ended April 2, 1995 (unaudited) and March 31,
1996 (unaudited).................................................................... F-4
Statement of Shareholders' Equity for the fiscal years ended October 3, 1993, October
2, 1994 and October 1, 1995 and the six months ended March 31, 1996 (unaudited)..... F-5
Statement of Cash Flows for the fiscal years ended October 3, 1993, October 2, 1994
and October 1, 1995 and the six months ended April 2, 1995 (unaudited) and March 31,
1996 (unaudited).................................................................... F-6
Notes to the Financial Statements..................................................... F-7
F-1
61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of RemedyTemp, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, of cash flows and of changes in shareholders' equity present fairly, in
all material respects, the financial position of RemedyTemp, Inc. at October 1,
1995 and October 2, 1994, and the results of its operations and its cash flows
for each of the three years in the period ended October 1, 1995, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
November 7, 1995, except as to
Note 10 which is as of July 8, 1996
F-2
62
REMEDYTEMP, INC.
BALANCE SHEET
(AMOUNTS IN THOUSANDS)
ASSETS
MARCH 31,
1996
OCTOBER 2, OCTOBER 1, MARCH 31, PRO FORMA
1994 1995 1996 (NOTE 9)
----------- ----------- ---------- ---------
(UNAUDITED)
Current assets:
Cash and cash equivalents......................... $ 1,330 $ 2,204 $ -- $ --
Accounts receivable, net of allowance for doubtful
accounts of $1,492 and $1,950 at October 2,
1994 and October 1, 1995, respectively......... 23,023 33,068 32,859 32,859
Prepaid expenses and other current assets......... 1,915 2,248 2,313 2,313
Current portion of net investment in direct
financing leases............................... 152 175 166 166
Deferred income taxes (Note 9).................... 1,091
------- ------- ------- -------
Total current assets...................... 26,420 37,695 35,338 36,429
Fixed assets, net (Note 2).......................... 2,860 4,340 5,090 5,090
Other assets (Note 5)............................... 530 843 885 885
Net investment in direct financing leases........... 680 618 618 618
------- ------- ------- -------
$30,490 $43,496 $ 41,931 $43,022
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 96 $ 519 $ 824 $ 824
Distributions payable to shareholders............. 7,461
Accrued workers' compensation..................... 6,969 6,733 6,597 6,597
Accrued expenses, principally payroll and related
costs and benefits............................. 5,262 8,544 9,128 9,128
Debt (Note 3)..................................... 3,121 6,700
Current portion of capitalized lease obligation
(Note 6)....................................... 230 383 378 378
Deferred income taxes (Note 4).................... 132 167 191 --
------- ------- ------- -------
Total current liabilities................. 15,810 23,046 17,118 24,388
Deferred income taxes (Note 9)...................... 7,783
Capitalized lease obligation (Note 6)............... 851 1,142 946 946
------- ------- ------- -------
16,661 24,188 18,064 33,117
------- ------- ------- -------
Commitments and contingent liabilities (Note 6)
Shareholders' equity (Note 10):
Preferred stock, par value $.01; authorized 5,000
shares; none outstanding
Class A common stock, $.01 par value; authorized
50,000 shares; 2,265 issued and outstanding.... 23 23 23 23
Class B non-voting common stock, $.01 par value;
4,530 authorized, issued and outstanding....... 45 45 45 45
Additional paid-in capital........................ 84 84 84 6,278
Retained earnings................................. 13,677 19,156 23,715 3,559
------- ------- ------- -------
Total shareholders' equity................ 13,829 19,308 23,867 9,905
------- ------- ------- -------
$30,490 $43,496 $ 41,931 $43,022
======= ======= ======= =======
See accompanying notes to financial statements.
F-3
63
REMEDYTEMP, INC.
STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SIX MONTHS ENDED
---------------------------------- --------------------
OCTOBER OCTOBER OCTOBER APRIL MARCH
3, 2, 1, 2, 31,
1993 1994 1995 1995 1996
-------- -------- -------- ------- --------
(UNAUDITED)
Direct sales......................... $103,219 $119,042 $144,646 $67,520 $ 83,202
Licensed sales....................... 16,036 31,201 61,377 25,387 45,525
Franchise royalties.................. 1,938 2,462 2,751 1,422 1,347
Initial franchise fees............... 101 300 229 102 39
-------- -------- -------- ------- --------
Total revenues............. 121,294 153,005 209,003 94,431 130,113
Cost of direct sales................. 80,195 92,022 110,159 51,467 63,620
Cost of licensed sales............... 12,281 24,018 46,017 19,134 34,229
Licensees' share of gross profit..... 2,450 4,857 10,328 4,174 7,554
Selling and administrative
expenses........................... 24,245 27,581 35,667 17,218 18,839
Depreciation and amortization........ 848 1,436 1,453 627 939
-------- -------- -------- ------- --------
Income from operations..... 1,275 3,091 5,379 1,811 4,932
Other income:
Interest income (expense), net..... 93 (1) (23) (24) (36)
Other, net......................... 489 712 1,141 438 444
-------- -------- -------- ------- --------
Income before provision for income
taxes........................... 1,857 3,802 6,497 2,225 5,340
Provision for income taxes........... 46 57 97 33 80
-------- -------- -------- ------- --------
Net income........................... $ 1,811 $ 3,745 $ 6,400 $ 2,192 $ 5,260
======== ======== ======== ======= ========
Unaudited pro forma data
(Notes 1 and 9)
Income before income taxes........... $ 1,857 $ 3,802 $ 6,497 $ 2,225 $ 5,340
Provision for income taxes........... 743 1,521 2,599 890 2,136
-------- -------- -------- ------- --------
Pro forma net income................. $ 1,114 $ 2,281 $ 3,898 $ 1,335 $ 3,204
======== ======== ======== ======= ========
Pro forma net income per share....... $ .52 $ .43
======== ========
Weighted average number of shares.... 7,435 7,435
======== ========
See accompanying notes to financial statements.
F-4
64
REMEDYTEMP, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL
---------------- ---------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------ ------ ---------- -------- --------
Balance at September 27, 1992...... 2,265 $ 23 4,530 $ 45 $ 84 $ 8,901 $ 9,053
Net income....................... 1,811 1,811
Distributions to shareholders.... (780 ) (780)
----- --- ----- --- --- ------- -------
Balance at October 3, 1993......... 2,265 23 4,530 45 84 9,932 10,084
Net income....................... 3,745 3,745
Distributions to shareholders.... -- --
----- --- ----- --- --- ------- -------
Balance at October 2, 1994......... 2,265 23 4,530 45 84 13,677 13,829
Net income....................... 6,400 6,400
Distributions to shareholders.... (921 ) (921)
----- --- ----- --- --- ------- -------
Balance at October 1, 1995......... 2,265 23 4,530 45 84 19,156 19,308
Unaudited Information:
Net income....................... 5,260 5,260
Distributions to shareholders.... (701 ) (701)
----- --- ----- --- --- ------- -------
Balance at March 31, 1996.......... 2,265 $ 23 4,530 $ 45 $ 84 $23,715 $ 23,867
===== === ===== === === ======= =======
See accompanying notes to financial statements.
F-5
65
REMEDYTEMP, INC.
STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED
---------------------------------------- ----------------------
OCTOBER 3, OCTOBER 2, OCTOBER 1, APRIL 2, MARCH 31,
1993 1994 1995 1995 1996
----------- ----------- ---------- -------- ----------
(UNAUDITED)
Cash flows provided by (used in) operating
activities:
Net income.................................... $ 1,811 $ 3,745 $ 6,400 $ 2,192 $ 5,260
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 848 1,436 1,453 627 939
Provision for losses on accounts
receivable............................ 724 890 1,221 546 425
Changes in assets and liabilities:
Accounts receivable................... (3,301) (7,820) (11,266) (2,867) (216)
Prepaid expenses and other current
assets.............................. (250) (620) (333) (1,232) (65)
Net investment in direct financing
leases.............................. (832) 39 14 9
Other assets.......................... (36) 335 (313) (39) (42)
Accounts payable...................... (170) 56 423 69 (396)
Accrued workers' compensation......... 596 1,479 (236) 43 (136)
Accrued expenses...................... 639 1,225 3,282 3,786 584
Deferred taxes........................ 32 (14) 35 16 24
------- ------- -------- ------- -------
Net cash provided by (used in) operating
activities............................... 893 (120) 705 3,155 6,386
------- ------- -------- ------- -------
Cash flows used in investing activities:
Purchase of fixed assets................... (2,217) (1,421) (2,933) (1,266) (1,689)
------- ------- -------- ------- -------
Net cash used in investing activities...... (2,217) (1,421) (2,933) (1,266) (1,689)
------- ------- -------- ------- -------
Cash flows provided by financing activities:
Borrowings under line of credit
agreement................................ 2,000 3,602 8,029 488 4,148
Repayments under line of credit
agreement................................ (2,500) (4,450) (3,100) (10,848)
Repayments under capital lease
obligation............................... (187) (338) (151) (201)
Proceeds from sale/leaseback agreement..... 1,268 782 782
Distributions to shareholders.............. (780) (921)
------- ------- -------- ------- -------
Net cash provided by (used in) financing
activities............................... 1,220 2,183 3,102 (1,981) (6,901)
------- ------- -------- ------- -------
Net (decrease) increase in cash and cash
equivalents................................... (104) 642 874 (92) (2,204)
Cash and cash equivalents at beginning of
period........................................ 792 688 1,330 1,330 2,204
------- ------- -------- ------- -------
Cash and cash equivalents at end of period...... $ 688 $ 1,330 $ 2,204 $ 1,238 $ 0
======= ======= ======== ======= =======
Supplemental Disclosure of Non Cash Investing and Financing Activities
At March 31, 1996, The Company had declared and accrued dividends of $701.
Other cash flow information
Cash paid during the period for interest...... $ 5 $ 89 $ 164 $ 64 $ 92
Cash paid during the period for income
taxes...................................... 1 1 7
See accompanying notes to financial statements.
F-6
66
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
The Company's principal business is providing temporary personnel to
businesses and industry.
The Company has two classes of common stock outstanding: Class A Common
Stock, which has all voting and other rights normally associated with common
stock, and Class B Common Stock, which is identical to the Class A Common Stock
in all respects except that the Class B Common Stock has no voting rights except
with respect to certain amendments of the Company's Articles of Incorporation,
certain mergers and as otherwise required by law. The Class B Common Stock will
automatically convert into Class A Common Stock on a share-for-share basis upon
the earlier of (i) certain transfers to non-affiliates (ii) the death or legal
incapacity of the Chairman of the Company, or (iii) the tenth anniversary of the
completion of the Offering described below.
In March 1996, the Company entered into an agreement in principle with two
underwriters (the "Underwriters"), whereby the Underwriters have agreed in
principle to act as underwriters in an initial public offering (the "Offering")
of up to 3,565 shares of the Company's Class A Common Stock (3,100 shares
intended to be offered to the public and 465 shares which the Underwriters have
the option to purchase to cover over-allotments, if any). Included in the 3,100
and 465 shares above are approximately 1,162 and 310 shares, respectively, of
Class B Common Stock that are being sold by the existing shareholders and will
automatically convert into Class A Common Stock in connection with the Offering.
The Company will not receive any of the proceeds from the sale of shares by
existing shareholders.
Summary of significant accounting policies
Fiscal year
The Company's fiscal year includes 52 or 53 weeks, ending on the Sunday
closest to September 30. Fiscal year 1993 consisted of 53 weeks, fiscal years
1995 and 1994 consisted of 52 weeks. The six month periods ended April 2, 1995
and March 31, 1996 each consisted of 26 weeks.
Revenue recognition
Revenue from the sale of services is recognized at the time the service is
performed. A portion of the Company's revenue is derived from affiliate
operations which consist of franchises and licensed operations.
Under the Company's franchised operations, the franchisee has the direct
contractual relationship with the customers, holds title to the related customer
receivables and is the legal employer of the temporary employees. Accordingly,
sales and cost of sales generated by the franchised operations are not included
in the Company's financial statements. Fees are paid to the Company based upon a
percentage of the gross sales generated by the franchisee and such fees are
recorded by the company as "Franchise royalties."
Revenues generated by licensed operations and the related costs of services
are included in the Company's financial statements and are reported as Licensed
sales, and Cost of licensed sales, respectively since the Company has the direct
contractual relationship with the customer, holds title to the related customer
receivables and is the legal employer of the temporary employees. The risks
associated with the licensed operations remain with the Company. "Licensee"
refers to the Company's affiliates in their role as independent contractors and
limited agents of the Company in recruiting job applicants, soliciting job
orders, filling those orders and handling collection matters upon request. The
F-7
67
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Licensee acts as a limited agent for the Company to market the Company's
services within the Licensee's territory. The net distribution paid to the
Licensee for the services rendered is based on a percentage of the gross profit
generated by the Licensee's operation and is reflected as "Licensees' share of
gross profit."
Both Franchisees and Licensees pay an initial fee for their affiliation
with the Company. This fee is recognized as revenue when substantially all of
the initial services required by the Company have been performed, and is
recorded by the Company as "Initial franchise fees."
Concentrations of credit risk
The Company's financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. However,
concentrations of credit risk are limited due to the large number of customers
comprising the Company's customer base and their dispersion across different
business and geographic areas. Furthermore, the Company routinely assesses the
financial strength of its customers.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and cash equivalents
For purposes of financial reporting, cash equivalents represent highly
liquid short-term investments with original maturities of less than 90 days.
Fixed assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which are three to five years for furniture and fixtures and computer equipment.
Major improvements to leased office space are capitalized and amortized over the
shorter of their useful lives or the terms of the leases.
Net investment in direct financing leases
During fiscal year 1994, the Company began leasing computer and related
equipment to various franchisees. The leases are accounted for as
direct-financing leases as there is no profit recognized and title to the leased
equipment transfers to the franchisee upon conclusion of the lease. The net
investment in direct financing leases represents the future minimum lease
payments less the portion of the future payments relating to unearned interest
income.
Accrued workers' compensation
The Company became self-insured for its workers' compensation liability in
1986. The estimated costs of existing and incurred but not yet reported claims
are accrued based on historical loss development trends and may be subsequently
revised based on developments relating to such claims.
F-8
68
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Other income
Other income consists primarily of fees collected from customers on past
due accounts receivable balances in the amounts of $480,000, $580,000, $883,000
for the years ended October 3, 1993, October 2, 1994 and October 1, 1995,
respectively.
Income taxes
The Company records income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for
Income Taxes." SFAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, SFAS 109
generally considers all expected future events other than enactments of changes
in the tax law or rates.
Beginning with fiscal 1987, the Company elected to be taxed as an S
corporation for federal and state income tax purposes. Pursuant to this
election, earnings or losses are subject to tax at the shareholder level rather
than the corporate level. Therefore, no provision is made for federal income tax
on earnings or losses of the Company. Tax laws relative to S corporations vary
by state. In California, the principal state of operation for the Company,
earnings of S corporations are taxed at 1.5 percent and the Company provides
state taxes accordingly.
Should the S corporation status be terminated, deferred taxes will be
reinstated as a charge to tax expense in the period of termination to provide
for a difference between the tax and financial reporting bases of the assets and
liabilities (Note 9).
Unaudited interim information
The accompanying balance sheet at March 31, 1996 , and the statements of
income and of cash flows for the six month periods ended April 2, 1995 and March
31, 1996, and the statement of shareholders' equity for the six month period
ended March 31, 1996 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results of the interim
periods. The data disclosed in these notes to financial statements for those
periods are also unaudited.
Unaudited pro forma net income and net income per share
Pro forma net income represents pro forma net income after a pro forma
provision, using a tax rate of 40%, to reflect the estimated income tax expense
of the Company as if it had been subject to normal federal and state income
taxes for the period.
Pro forma net income per share (unaudited) is computed by using the
weighted average number of common and common equivalent shares outstanding
during the period, adjusted to include the estimated number of shares required
to be sold by the Company to prepay the $7,461 pro forma distributions payable
to the Pre-Offering Shareholders at March 31, 1996 (640 shares as calculated
based on the estimated net proceeds of the initial public offering). The pro
forma net income per share does not give effect to distributions that may be
paid from earnings generated subsequent to March 31, 1996. The computation of
pro forma weighted average shares outstanding gives effect to the stock split
being effected in connection with the Offering (Note 10). Historical net income
per share has not been presented in view of prior period S corporation status.
F-9
69
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Reclassifications
Certain reclassifications, which have no effect on retained earnings, have
been made to conform the 1993 and 1994 information to the 1995 presentation.
2. FIXED ASSETS
MARCH 31,
1996
OCTOBER 2, OCTOBER 1, -----------
1994 1995
---------- ---------- (UNAUDITED)
Computer equipment........................ $3,343 $ 5,173 $ 6,281
Furniture and fixtures.................... 3,074 3,587 4,012
Leasehold improvements.................... 1,540 1,881 1,970
------ ------- -------
7,957 10,641 12,263
Less accumulated depreciation............. (5,097) (6,301) (7,173)
------ ------- -------
$2,860 $ 4,340 $ 5,090
====== ======= =======
Included in the above computer equipment are capitalized leases and related
accumulated depreciation of $1,268 and $191, respectively, at October 2, 1994
and $2,050 and $588, respectively, at October 1, 1995.
3. DEBT
The Company has a revolving line of credit agreement with two banks, which
provides for aggregate borrowings of $15,000 (see Note 8). Interest on
outstanding borrowings is payable monthly at the designated bank's reference
rate (8.75% at October 1, 1995) or, at the Company's election, at a fixed rate
equal to LIBOR plus 1.95 percent for a predetermined period. The line of credit
agreement expires on February 28, 1997.
At October 2, 1994 and October 1, 1995 the Company had $3,100 and $6,700,
respectively, outstanding under its line of credit agreements. The Company had
outstanding undrawn letters of credit of $4,679 and $4,767 at October 2, 1994
and October 1, 1995, respectively.
Under the provisions of the line of credit agreement, the Company must
maintain certain financial ratios and must comply with certain restrictive
covenants. At October 1, 1995, the Company was in compliance with these
requirements.
4. INCOME TAXES
The provision for state income taxes for the years ended October 3, 1993,
October 2, 1994 and October 1, 1995 was $46, $57, and $97, respectively. The
deferred income tax balance was $132 and $167 at October 2, 1994 and October 1,
1995, respectively. Deferred state income taxes are provided for items reported
in different periods for financial and tax reporting purposes. Such differences
result primarily from adjustments arising from using the accrual basis of
accounting for financial statement purposes and the cash basis of accounting for
income tax purposes. Effective October 1, 1987, the Company elected S
Corporation filing status for income tax reporting purposes. During 1987, the
California tax law was conformed to the federal S Corporation provisions.
Currently, the California S corporation provisions require the payment of taxes
at a rate of 1.5% on taxable income.
F-10
70
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. RELATED PARTY TRANSACTIONS
The Company leases its corporate facility from the principal shareholder of
the Company. The lease expires in August 1996, with rent adjustments based on
cost of living increases. The lease gives the Company a five year option to
renew upon expiration. The lease provides for the payment of property taxes,
insurance and certain other operating expenses applicable to the leased property
by the lessee. Rent expense paid to the principal shareholder totaled $301 for
the each of the three years ended October 1, 1995.
Included in other assets at October 2, 1994 and October 1, 1995 are
advances and notes receivable due from shareholders and officers of the Company
in the amount of $60 and $313, respectively.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its corporate facility, branch offices and certain
equipment under operating leases. The leases typically require the Company to
pay taxes, insurance and certain other operating expenses applicable to the
leased property. Total rent expense was approximately $2,044, $2,086, and
$2,209, for the years ended October 3, 1993, October 2, 1994 and October 1,
1995, respectively.
In 1994, the Company entered into a financing agreement for the purchase of
computer and related equipment. Fixed assets totaling $1,268 and $782 for the
years ended October 2, 1994 and October 1, 1995, respectively, were sold to and
leased back from the bank under this agreement. Based upon the terms of the
agreement, the lease was accounted for as a capital lease.
Future minimum lease commitments under all noncancellable capital and
operating leases as of October 1, 1995 are as follows:
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
------------------------------------------------ ------- ---------
1996............................................ $ 383 $ 1,687
1997............................................ 416 800
1998............................................ 453 376
1999............................................ 232 173
2000............................................ 41 81
------ ------
Total................................. $ 1,525 $ 3,117
====== ======
The Company is involved in various claims and legal actions arising in the
ordinary course of business. It is the opinion of management, upon the advice of
legal counsel, that the ultimate disposition of these matters will not
materially affect the Company's financial position, results of operations or
cash flows.
7. 401(K) PLANS
In June 1991, the Company established two 401(k) plans. The first is for
all full-time eligible employees and the second is for qualified temporary
employees. The annual amount of employer contributions to the plans is
determined at the discretion of the board of directors, subject to certain
limitations. Eligible participants may make voluntary contributions to the plan
and become fully vested in the Company's contributions over a five-year period.
The Company has made no contributions during the three years ended October 1,
1995.
F-11
71
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. SUBSEQUENT EVENTS (UNAUDITED)
(1) In connection with the consummation of the Offering, the Company will
implement its 1996 Stock Incentive Plan for officers, directors, key employees
and consultants of the Company (the "Plan"). A total of 900 shares will be
reserved for issuance under the Plan. Concurrent with the Offering, the Company
intends to grant options to a number of employees and non-employee directors for
the purchase of approximately 450 shares at the initial public offering price.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123 "Accounting for Stock-based
Compensation (SFAS 123) which establishes financial accounting and reporting
standards for stock-based employee compensation. Under SFAS 123, companies are
encouraged, but not required, to adopt a method of accounting for stock
compensation awards based upon the estimated fair value at the date the
options/awards are granted as determined through the use of a pricing model (the
"Fair Value Method"). Companies continuing to account for such awards in
accordance with the existing guidance of Accounting Principles Board Opinion 25
"Accounting for Stock Issued to Employees" (APB 25) will have to disclose, in
the Notes to Financial Statements, the pro forma impact on net income and net
income per share had the Company utilized the Fair Value Method. The Company
anticipates accounting for future stock compensation awards in accordance with
APB 25 with the appropriate footnote disclosure required under SFAS 123.
(2) The Company will also implement its 1996 Employee Stock Purchase Plan
(the "Purchase Plan") in connection with the consummation of the Offering. A
total of 250 shares will be reserved for issuance under the Purchase Plan.
(3) In March 1996, the Company amended its revolving line of credit
agreement to provide for aggregate borrowings of $25,000. Certain covenants were
modified to provide for the transactions resulting from the termination of the
Company's S corporation status in connection with the Offering. All other terms
and conditions of the agreement remain unchanged.
(4) In March 1996, the Company declared a distribution of $701 to the
Pre-Offering Shareholders representing their income tax obligations associated
with fiscal 1995 S corporation earnings. The distribution was paid in April
1996.
(5) In May 1996, the Company paid a $5,000 distribution to the Pre-Offering
Shareholders. The distribution was financed through borrowings under the
Company's line of credit agreement. The Company intends to repay the borrowings
from the proceeds of the Offering.
9. UNAUDITED PRO-FORMA INFORMATION
In connection with the consummation of the initial public offering of the
Company's Common Stock, the Company will elect to terminate its S corporation
status for tax purposes. Accordingly, the Company's unaudited pro forma
consolidated balance sheet at March 31, 1996 includes adjustments which increase
deferred tax assets in aggregate by $1,091, and deferred tax liabilities by
$7,783 assuming the Company ceased to be treated as an S corporation on March
31, 1996. With the termination of the S corporation status, the Company will
record a net charge to earnings for the tax effect associated with the change.
Had the Company elected to terminate its S corporation status at March 31, 1996,
the charge to earnings would have been $6,501. The effect of the change may vary
based upon the actual date the Company ceases to be treated as an S corporation.
The actual net charge to earnings could be greater, depending upon the Company's
results of operations and financial information as of the date of termination of
the Company's S corporation status. The Company has calculated the pro forma
deferred tax assets and liabilities and provision for income taxes using the
asset and liability approach in accordance with SFAS 109.
F-12
72
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following presents the pro forma deferred tax assets and liabilities
assuming the Company ceased to be treated as an S corporation on March 31, 1996.
Workers' compensation.................................... $ 2,514
Other liabilities and accruals........................... 784
Depreciation............................................. 412
Bad debts................................................ 526
--------
Gross deferred tax assets...................... 4,236
Valuation allowance...................................... 0
--------
4,236
S corporation cash basis accounting adjustment........... (10,928)
--------
Gross deferred tax liabilities................. (10,928)
--------
Net deferred tax liability............................... $ (6,692)
========
Additionally, the unaudited pro forma balance sheet includes an adjustment
to reflect a $5,000 distribution paid to the Company's pre-Offering shareholders
in May 1996 (see Note 8), and an estimated $2,461 distribution to be paid to the
Company's pre-Offering representing the estimated income tax obligations of the
Company's pre-Offering shareholders on undistributed S corporation earnings from
October 2, 1995 through March 31, 1996 (the "Assumed Distribution"). The actual
amount of the Assumed Distribution may be significantly higher depending and
will be based upon the Company's S corporation earnings through the date the S
corporation status is terminated. The pro forma balance sheet does not give
effect to distributions that may be paid from S corporation earnings generated
subsequent to March 31, 1996.
The unaudited pro forma balance sheet includes the reclassification of
remaining S corporation retained earnings to additional paid-in capital. The
amount of retained earnings which is not reclassified represents the Company's C
corporation retained earnings prior to October 1, 1987, the effective date of
the Company's initial S corporation election.
The following provides a summary reconciliation of the effects of the
unaudited pro forma adjustments to the Company's retained earnings as of March
31, 1996:
Unaudited balance as of March 31, 1996..................... $ 23,715
Declared distribution to shareholders...................... (7,461)
Pro forma income tax charge -- net......................... (6,501)
Reclassification of remaining S corporation retained
earnings................................................. (6,194)
-------
$ 3,559
=======
10. RECAPITALIZATION
The Company's Board of Directors authorized in connection with the closing
of the Offering (i) a 1.812-for-1 stock split of its outstanding voting and
non-voting common stock, and (ii) an amendment to the Company's Articles of
Incorporation to provide for the issuance of up to 5,000 shares of preferred
stock, par value $.01, an increase in the number of voting common shares
authorized from 10,000 to 50,000, a reclassification of the voting and
non-voting common stock, and a decrease in the number of authorized non-voting
common shares from 7,500 to 4,530. Share and per share amounts for all periods
presented have been adjusted to give retroactive effect to the above.
F-13
73
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SHARES OF COMMON STOCK IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................... 3
Risk Factors................................ 8
Prior S Corporation Status and
Distributions............................. 13
Use of Proceeds............................. 14
Dividend Policy............................. 15
Capitalization.............................. 16
Dilution.................................... 17
Selected Financial Data..................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 20
Business.................................... 27
Management.................................. 40
Certain Transactions........................ 47
Principal and Selling Shareholders.......... 49
Description of Capital Stock................ 50
Shares Eligible for Future Sale............. 56
Underwriting................................ 57
Legal Matters............................... 58
Experts..................................... 58
Additional Information...................... 59
Index to Financial Statements............... F-1
------------------------
UNTIL AUGUST 4, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
LOGO
LOGO
------------------------
3,100,000 SHARES
CLASS A COMMON STOCK
PROSPECTUS
JULY 10, 1996
------------------------
DILLON, READ & CO. INC.
THE ROBINSON-HUMPHREY
COMPANY, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------