1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 1997
REGISTRATION NO. 333-37965
================================================================================
SECURITIES AND EXCHANGE COMMISSION
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SNELLING AND SNELLING, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 7363 23-1488679
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
12801 NORTH CENTRAL EXPRESSWAY, SUITE 700
DALLAS, TEXAS 75243
(972) 239-7575
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
J. RUSSELL CREWS
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
12801 NORTH CENTRAL EXPRESSWAY, SUITE 700
DALLAS, TEXAS 75243
(972) 776-1417
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
KATHERINE M. SEABORN GORDON M. BAVA
RANDALL G. RAY NANCY H. WOJTAS
GARDERE & WYNNE, L.L.P. MANATT, PHELPS & PHILLIPS, LLP
1601 ELM STREET, SUITE 3000 11355 WEST OLYMPIC BOULEVARD
DALLAS, TEXAS 75201 LOS ANGELES, CALIFORNIA 90064
(214) 999-4924 (310) 312-4200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED NOVEMBER 21, 1997
PROSPECTUS
3,350,000 SHARES
[SNELLING LOGO]
COMMON STOCK
------------------
Of the 3,350,000 shares of Class A Common Stock, $0.01 par value per share
(the "Common Stock"), offered hereby, 2,933,333 are being sold by Snelling and
Snelling, Inc. ("Snelling" or the "Company"), and 416,667 are being sold by a
shareholder of the Company ("the Selling Shareholder"). See "Principal and
Selling Shareholders." The Company has two classes of common shares. The Common
Stock is entitled to one vote per share, and the Class B Common Stock, $0.01 par
value per share (the "Class B Common Stock"), is entitled to ten votes per share
(the Common Stock and the Class B Common Stock are collectively referred to as
the "Common Shares"). See "Description of Capital Stock."
There has been no active public market for the common stock of the Company
since 1990. See "The Company." It is currently estimated that the initial public
offering price of the Common Stock will be between $11.00 and $13.00 per share.
See "Underwriting" for information relating to the factors considered in
determining the initial public offering price. The Common Stock has been
approved for listing on the Nasdaq National Market under the symbol "SNEL."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
==================================================================================================================
UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2) SHAREHOLDER(3)
- ------------------------------------------------------------------------------------------------------------------
Per Share............... $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(4)................ $ $ $ $
==================================================================================================================
(1) The Company and the Selling Shareholder have agreed to indemnify the
several Underwriters named herein (the "Underwriters") against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company will not receive any of the proceeds from the sale of the
416,667 shares of Common Stock by the Selling Shareholder.
(4) The Company has granted to the Underwriters a 30-day option to purchase
up to 502,500 additional shares of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
the over-allotment option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1997, at the offices of Smith Barney Inc., 333 West 34th Street,
New York, New York 10001.
------------------
SMITH BARNEY INC. RAUSCHER PIERCE REFSNES, INC.
, 1997
3
[Graphics]
Page 2 of the Prospectus consists of a gatefold with graphics. The inside
front cover, seen when first opening the Prospectus, includes a large
Snelling(R) Personnel Services logo on a white background with the stabilization
language set forth below at the bottom of the page. The first page of the inside
of the gatefold, seen on the left when opening the gatefold, includes the
caption "Providing Clients Integrated," in the middle right of the page, three
photographs of Snelling offices (each captioned with the words "Snelling Office"
and the city and state located), and a photograph of the Snelling corporate
headquarters (captioned with the words "Snelling Corporate Headquarters Dallas,
Texas"). The second page of the inside of the gatefold, seen on the right when
opening the gatefold, includes the caption "Full-Service Staffing Solutions." in
the middle left of the page, four photographs representing Snelling flexible
staffing employees (each captioned with the employee's title) and the
Snelling(R) Personnel Services logo in the lower right corner.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus, including "Risk Factors,"
and the consolidated financial statements of the Company, including the notes
thereto (the "Consolidated Financial Statements"). Unless otherwise indicated,
all references in this Prospectus to "Snelling" or the "Company" shall mean
Snelling and Snelling, Inc., and its subsidiaries on a consolidated basis. In
addition, unless otherwise indicated, the information in this Prospectus (i)
gives effect to the reclassification of Snelling's outstanding common stock into
Class B Common Stock, the equivalent of a 5.415067-for-1 split of the
outstanding shares of Class B Common Stock and the creation of a new Class A
Common Stock, all of which will be effected by amendment and restatement of the
Company's Articles of Incorporation upon the effectiveness of the registration
statement of which this Prospectus forms a part, (ii) assumes that 5,126,904
shares of Class B Common Stock will be outstanding immediately before this
offering and (iii) assumes the Underwriters' over-allotment option will not be
exercised.
THE COMPANY
Snelling is a leading national provider of staffing solutions primarily
targeted to small and mid-sized businesses. As of September 30, 1997, the
Company operated as Snelling(R) Personnel Services through a network of 289
franchise locations and 29 Company-owned branch locations in 42 states, the
District of Columbia and Puerto Rico, as well as three foreign countries, and
had executed an agreement for the opening of one additional franchise location.
The majority of the Company's franchise and branch locations offer the Company's
clients integrated, full-service staffing solutions by providing traditional
flexible staffing, single-source management, temp-to-hire, career placement and
other staffing services from each location.
Founded in 1951, the Company currently provides flexible staffing personnel
for office, clerical and light industrial services. The Company also offers
career placement services in a number of fields, including accounting and
finance, engineering, health care, law, manufacturing, management information
systems and office, sales, marketing and technical services. Flexible staffing
services (which include traditional flexible staffing, single-source management
and temp-to-hire) accounted for approximately 90%, and career placement services
accounted for approximately 10%, of the Company's total system-wide sales for
both the year ended December 31, 1996, and the nine months ended September 30,
1997.
The staffing industry has experienced rapid growth over the past decade as
a result of economic trends and changing approaches to staffing and employment.
According to Staffing Industry Report(R), the U.S. staffing industry has grown
from an estimated $31.4 billion in revenues in 1991 to an estimated $74.4
billion in 1996, representing a compound annual growth rate of approximately
19%. Based on this information, 1996 sales generated by flexible staffing
accounted for 66% of the overall staffing market, professional employer
organizations ("PEOs") accounted for 23% and career placement accounted for 11%.
Traditional flexible staffing for office, clerical and industrial services grew
from approximately $12.1 billion in 1991 to approximately $26.4 billion in 1996,
representing a compound annual growth rate of approximately 17%. Estimated sales
from career placement (in approximate numbers) grew from $3.9 billion in 1991 to
$7.2 billion in 1996, representing a compound annual growth rate of 13%.
Snelling's goal is to enhance its leading position in the staffing industry
through the following business strategy: (i) continue to focus on small and
mid-sized businesses; (ii) offer an integrated, full-service approach to
staffing solutions from each location; (iii) maintain a strong operating
infrastructure; (iv) recruit and retain qualified management and personnel,
including flexible staffing personnel; and (v) control costs through a continued
emphasis on technology and risk management, especially workers' compensation
insurance.
Snelling intends to continue to achieve revenue and earnings growth and
increase market share through the following focused growth strategy: (i) expand
market penetration of its existing franchise and branch locations through
intensive training of sales personnel, investments in technology and the
aggressive pursuit of cross-selling opportunities; (ii) pursue acquisitions of
independent staffing companies and select franchise locations; (iii) establish
alternative distribution channels, such as "co-branding" with other services
providers
3
5
or retailers; (iv) develop new services, such as PEO services, internally or
through strategic acquisitions of related staffing businesses that are
complementary to Snelling's business; and (v) continue to franchise in certain
select markets.
ACQUISITIONS
Consistent with its growth strategy, Snelling began an expansion program in
1994 to acquire independent staffing companies and selected franchise locations.
The Company acquired six franchise locations in 1994 with aggregate annual
revenues of approximately $5.9 million; four franchise locations in 1995, with
aggregate annual revenues of approximately $8.0 million; seven independent
staffing locations and nine franchise locations in 1996, with aggregate annual
revenues of approximately $43.6 million; one franchise location in the first
nine months of 1997, with annual revenues of approximately $3.5 million; one
independent staffing location in October 1997, with annual revenues of
approximately $14.4 million; and one franchise location in November 1997, with
annual revenues of approximately $2.6 million. The aggregate consideration paid
with respect to these acquisitions was approximately $29.1 million and was
financed using a combination of cash, seller financing and bank loans. After
giving effect to the consolidation of certain locations of the acquired
companies, the Company's acquisitions have resulted in a net addition of 26
Company-owned branch locations in 13 states. The Company has one pending
acquisition of an independent staff location with annual revenues of
approximately $2.3 million, which is currently scheduled to be completed in
December 1997. On an ongoing basis, the Company evaluates opportunities to
acquire companies that are complementary to its business, including independent
staffing companies and selected franchises. The Company currently has no plans,
arrangements or understandings, and is not participating in negotiations, with
respect to any material acquisitions.
THE OFFERING
Common Stock being offered by:
The Company............................. 2,933,333 shares
The Selling Shareholder................. 416,667 shares
Common Shares to be outstanding after the
offering................................ 8,060,237 shares(1)
Voting rights............................. The Common Stock is entitled to one vote per share, and
the Class B Common Stock is entitled to ten votes per
share. See "Risk Factors -- Control of the Company by
the Snelling Family" and "Description of Capital Stock."
Use of proceeds........................... To repay certain indebtedness, including capital lease
commitments, and for working capital and other general
corporate purposes.
Proposed Nasdaq National Market symbol.... SNEL
- ---------------
(1) Includes 4,710,237 shares of Class B Common Stock currently issued and
outstanding, which are convertible into shares of Common Stock under certain
circumstances. See "Description of Capital Stock -- Common Shares" regarding
the conversion rights and restrictions on transfer of the Class B Common
Stock. Excludes (i) 2,599,238 shares of Class B Common Stock issuable
pursuant to outstanding options under the Company's 1996 Stock Option Plan
at a weighted average exercise price of $3.85 per share and (ii) 357,974
shares of Class B Common Stock issuable pursuant to options to be granted
under the 1996 Stock Option Plan at the initial public offering price upon
completion of this offering. See "Management -- Stock Option Plans."
4
6
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
SEVEN FISCAL NINE MONTHS
FISCAL YEAR MONTHS YEAR ENDED ENDED
ENDED MAY 31, ENDED DEC. 31, SEPTEMBER 30,
------------------------------ DEC. 31, ------------------- -------------------
1992 1993 1994 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- -------- --------
STATEMENT OF EARNINGS DATA:
Revenues.............................. $ 19,023 $ 30,360 $ 70,202 $ 59,309 $122,701 $168,602 $116,864 $165,686
Cost of services...................... 8,260 16,330 47,456 40,221 87,943 122,945 83,957 123,964
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit.................. 10,763 14,030 22,746 19,088 34,758 45,657 32,907 41,722
Selling, general and administrative
expenses............................ 11,878 11,832 14,116 8,859 15,384 19,600 13,624 20,421
Franchises' share of gross
profit(1)........................... -- 2,023 8,648 8,659 14,682 19,587 14,835 15,772
-------- -------- -------- -------- -------- -------- -------- --------
Operating profit (loss)....... (1,115) 175 (18) 1,570 4,692 6,470 4,448 5,529
Interest expense...................... 46 34 66 71 379 1,100 602 1,885
Other income.......................... 523 432 348 63 97 105 54 698
-------- -------- -------- -------- -------- -------- -------- --------
Earnings (loss) before income
taxes............................... (638) 573 264 1,562 4,410 5,475 3,900 4,342
Income tax expense (benefit).......... (137) 263 152 704 1,720 2,161 1,564 1,727
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings (loss)................... $ (501) $ 310 $ 112 $ 858 $ 2,690 $ 3,314 $ 2,336 $ 2,615
======== ======== ======== ======== ======== ======== ======== ========
Net earnings (loss) per Common
Share............................... $ (0.07) $ 0.04 $ 0.02 $ 0.12 $ 0.38 $ 0.48 $ 0.33 $ 0.38
======== ======== ======== ======== ======== ======== ======== ========
Weighted average Common Shares
outstanding......................... 7,121 7,118 7,068 7,012 7,007 6,966 6,982 6,909
======== ======== ======== ======== ======== ======== ======== ========
SELECTED OPERATING DATA:
System-wide sales (in thousands)(2)... $117,693 $175,747 $225,270 $166,340 $318,858 $372,999 $273,282 $324,932
Hours billed (in thousands)(3)........ -- 1,181 5,016 5,058 9,526 13,141 9,300 13,345
Average bill rate(3).................. -- $ 10.20 $ 10.60 $ 10.54 $ 11.29 $ 11.44 $ 11.57 $ 11.90
Gross margin per flexible
employee(3)......................... -- 23.4% 24.6% 23.9% 23.8% 23.2% 23.6% 22.3%
Number of branch locations(4)(5)...... 1 1 2 7 9 29 19 29
Number of franchise locations(4)...... 271 253 248 248 274 277 276 289
SEPTEMBER 30, 1997
----------------------
AS
ACTUAL ADJUSTED(6)
------- -----------
BALANCE SHEET DATA:
Working capital............................................. $13,943 $20,119
Total assets................................................ 55,302 60,385
Total debt.................................................. 27,407 1,004
Shareholders' equity........................................ 14,885 46,371
- ---------------
(1) The Company has two types of franchises for purposes of flexible staffing
services revenue recognition. With the first type, the Company records
franchise royalties, based on a contractual percentage of flexible staffing
services billings, in the period in which the franchise collects for the
services provided. The second type of franchises participate in the
Company's pay/bill processing program. With the second type, the Company has
a direct contractual relationship with the clients for the services, holds
title to the related receivables and is the legal employer of the flexible
staffing employees. Revenues generated by these franchises and the related
direct costs of services are included as part of the Company's revenues and
costs of services in the period in which the services are provided. The net
distribution paid to franchises participating in the pay/bill processing
program is an operating expense recorded by the Company as franchises' share
of gross profit and is based on either a percentage of the flexible staffing
services billings or a percentage of the gross profit generated. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Organization -- Franchises" and
"Business -- Operations -- Pay/Bill Processing Services."
(2) System-wide sales are equal to the aggregate revenues of all franchise
locations and Company-owned branch locations during the period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Includes franchise locations participating in the Company's pay/bill
processing program and Company-owned branch locations. See
"Business -- Operations -- Pay/Bill Processing Services."
(4) In operation at the end of the period presented.
(5) Branches consist of Company-owned branch locations (including a California
subsidiary, the assets of which were sold in January 1997) and exclude
franchise locations.
(6) As adjusted to reflect the sale of 2,933,333 shares of Common Stock offered
by the Company hereby at an assumed initial offering price of $12.00 per
share (the mid-point of the filing range) and the application of the net
proceeds as set forth in "Use of Proceeds."
5
7
RISK FACTORS
An investment in the shares of Common Stock in this offering involves a
high degree of risk. In addition to the other information in this Prospectus,
the following factors should be carefully considered in evaluating Snelling and
its business before purchasing the Common Stock in this offering. When used in
this Prospectus, the words "anticipate," "estimate," "project," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain assumptions, uncertainties and risks. Should
one or more of these uncertainties or risks materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, projected or expected.
ABILITY TO CONTINUE AND MANAGE GROWTH
The Company's plan for growth, both internal and through the acquisition of
other staffing service businesses, is subject to numerous and substantial risks.
The Company's continued growth depends on many factors, including: (i) the
availability of sufficient working capital to support growth; (ii) the Company's
response to existing and emerging competition; (iii) the Company's ability to
maintain its gross margins in the face of competitive pricing pressures and
changing regulatory environments; (iv) the maintenance and expansion of existing
market share; (v) the hiring, integration and retention of qualified managers in
existing markets as well as new markets; (vi) the recruitment of qualified
flexible staffing personnel; (vii) the development of new client relationships;
(viii) the identification of and expansion into new markets; and (ix) the
development of new service offerings. The Company also could experience
unexpected delays or other problems in the opening of new franchise or branch
locations. Any significant delay in the opening of new locations or the failure
of new locations to achieve anticipated performance levels could adversely
affect the Company's operations and growth plans. See "Business -- Business
Strategy" and "Business -- Growth Strategy."
ACQUISITION RISKS
The Company continually evaluates potential opportunities to acquire other
staffing services firms. Over the last few years, the consolidation of companies
in the staffing industry has been rapid and, in many instances, the Company has
competed for acquisitions with other staffing companies that have recently
raised significant capital or otherwise have greater financial resources than
the Company. The Company's acquisition program will require significant
additional capital resources. There can be no assurance that the Company will be
able to successfully identify suitable acquisition candidates, obtain adequate
capital resources at the time required or on terms acceptable to the Company,
complete acquisitions on terms favorable to the Company or at all, integrate
acquired businesses into its operations or expand into new markets. Once
integrated, acquired firms may not perform as expected. Acquisitions involve a
number of special risks, such as diversion of management's attention from
ongoing operations of the Company, difficulties in the integration of acquired
operations and retention of personnel, failure of acquired businesses to
maintain or increase profitability, operating in markets in which the Company
has little or no prior experience, legal liabilities, maintenance of uniform
standards, controls, procedures and policies, impairment of relationships with
clients of the acquired firm and tax and accounting issues. Any of these risks
could have a material adverse effect on the Company's financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,"
"Business -- Growth Strategy" and "Business -- Competition."
EFFECT OF FLUCTUATIONS IN THE GENERAL ECONOMY
Demand for staffing services is significantly affected by the general level
of economic activity in the United States. When economic activity slows, many
companies hire fewer full-time employees and decrease their usage of flexible
staffing before undertaking layoffs of their full-time employees. A significant
economic downturn, either on a national basis or in regions of the country where
the Company's operations are heavily concentrated, could have a material adverse
effect on the Company's business and results of operations. Adverse changes in
the economy, however, generally have a more negative impact on career placement
activity than on flexible staffing services. As economic activity increases,
flexible staffing personnel are often
6
8
added to the workforce prior to the hiring of full-time employees. During these
periods of increased economic activity and generally higher levels of
employment, the competition among staffing firms for qualified flexible and, to
a lesser extent, full-time personnel is intense. Further, the Company may face
increased pricing pressures during these periods. There can be no assurance
that, during these periods, the Company will be able to recruit and retain
candidates necessary to satisfy its clients' flexible staffing needs or that
these pricing pressures will not adversely affect the Company's financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
COMPETITIVE MARKET; LIMITED BARRIERS TO ENTRY
The staffing industry is highly competitive and highly fragmented, and
there are limited barriers to entry. The Company competes with international,
national, regional and local companies providing general and specialized
flexible staffing services, particularly with respect to office, clerical and
light industrial services. Some of these companies have substantially greater
financial and marketing resources than the Company. The Company faces
significant competition in the markets it serves and is likely to face
significant competition in any new markets that it may enter. In particular, the
Company believes the developing practice of large national and regional
companies to make centralized purchasing decisions for flexible staffing
services on a national or regional basis will increase competition in certain
markets. This increasing competition could limit the Company's ability to
maintain or increase its market share or maintain or increase its gross margins,
either of which could have a material adverse effect on the Company's financial
condition and results of operations. There can be no assurance that the Company
will be able to maintain or increase the current prices charged to its clients.
Any decrease in prices could materially adversely affect the Company's financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Competition."
AVAILABILITY OF QUALIFIED FLEXIBLE STAFFING PERSONNEL
The Company depends upon its ability to attract and retain qualified
flexible staffing personnel who possess the skills and experience necessary to
meet the staffing requirements of its clients. The Company must continually
evaluate and upgrade its base of available qualified personnel to keep pace with
changing client needs and emerging technologies. The Company competes with other
flexible staffing companies, as well as its clients and other employers, for
qualified personnel. In addition, a substantial number of the Company's flexible
staffing employees during any given year will terminate their employment with
the Company to accept employment with the Company's clients, competitors or
other businesses. There can be no assurance that qualified personnel will
continue to be available to the Company in sufficient numbers and upon economic
terms that are acceptable to the Company. See "Business -- Business Strategy"
and "Business -- Operations -- Recruiting Flexible Staffing Personnel."
INCREASED EMPLOYEE COSTS
Businesses and other organizations use flexible staffing in part to shift
certain employment costs and risks (e.g., workers' compensation and unemployment
insurance) to flexible staffing services companies. Accordingly, the Company is
required to pay a number of federal, state and local payroll and related costs,
including unemployment taxes, workers' compensation insurance, Federal Insurance
Contributions Act ("FICA") and Medicare taxes, among others, with respect to its
flexible staffing personnel. Unemployment taxes are a significant expense to the
Company. Significant increases in the effective rates of any payroll-related
costs would have a material adverse effect upon the Company. The Company is
liable for the first $250,000 of each workers' compensation claim. In addition,
the Company could incur costs related to workers' compensation claims at a
higher rate in the future because of factors such as higher than expected losses
from known claims or an increase in the number and severity of new claims. The
Company's costs could also increase as a result of health care reforms. Recent
federal and state legislative proposals have included provisions extending
health care and other benefits to personnel who currently do not receive these
benefits. These proposals, if enacted, would require the Company to provide
health care benefits to its flexible staffing employees and pay a major portion
of the costs. There can be no assurance that the Company will be able to
increase the fees charged to
7
9
its clients in a timely manner and in a sufficient amount to cover increased
costs as a result of these proposals or any of the foregoing. In addition,
certain labor unions have recently targeted the reduction or elimination of
part-time employees and third-party staffing solutions by employers. A
substantial increase in labor union activity against third-party staffing
solution providers could have a material adverse effect on the financial
condition and results of operations of the Company. There can also be no
assurance that the Company will be able to adapt to future regulatory changes
made by the Internal Revenue Service, the Department of Labor or other state and
federal regulatory agencies. See "Business -- Regulation."
INTANGIBLE ASSETS
As of September 30, 1997, approximately $21.3 million or 38.5%, of the
Company's total assets were intangible assets. These intangible assets are
primarily goodwill related to acquisitions of businesses. Any impairment in the
value of goodwill could have a material adverse effect on the Company's
financial condition and results of operations.
EMPLOYER LIABILITY RISKS
Providers of staffing services employ and place people in the workplaces of
other businesses. Inherent risks include possible claims of errors and
omissions, misuse of client proprietary information, misappropriation of funds,
discrimination and harassment (including claims relating to actions of the
Company's clients), employment of illegal aliens, theft of client property,
other criminal activity, negligence and other claims. In some instances,
pursuant to written contracts with certain clients, the Company is required to
indemnify the clients against some or all of the foregoing matters. A failure of
any Company employee to observe the Company's policies and guidelines intended
to reduce exposure to these risks, relevant client policies and guidelines, or
applicable federal, state or local laws, rules and regulations, or other
circumstances that cannot be predicted, could result in negative publicity,
injunctive relief, payment of monetary damages or fines or have other material
adverse effects upon the Company. Moreover, the Company could be held
responsible for the actions at a workplace of persons not under the direct
control of the Company. Because of the large number of flexible staffing
employees the Company employs, in addition to its corporate employees, the
Company's exposure to such claims may be significantly greater than
comparably-sized companies in other industries. The Company is also exposed to
potential claims with respect to the career placement process. To reduce its
exposure to the foregoing risks, the Company maintains insurance and fidelity
bonds covering general liability, workers' compensation claims, employee theft,
errors and omissions and employment practices liability. There can be no
assurance that the insurance coverage will be available on an economical basis
and in amounts adequate to cover any liability. In addition, the defense of any
legal proceeding could result in substantial expense to the Company and divert
the attention of management from the Company's operations, which could have a
material adverse effect on the Company's financial condition and results of
operations. There also can be no assurance that the Company will prevail in any
legal proceedings brought against it. See "Business -- Operations -- Risk
Management" and "Business -- Legal and Administrative Proceedings."
CONTROL OF THE COMPANY BY THE SNELLING FAMILY
Upon consummation of the sale of the shares of Common Stock in this
offering, Robert O. Snelling, Sr. (the Company's Chairman of the Board and Chief
Executive Officer), the Company's directors and officers who are members of the
Snelling family or spouses of family members and their respective spouses will
beneficially own approximately 57.3% of the outstanding Common Shares and
control approximately 91.5% of the total voting power of the Company. In
addition, Robert O. Snelling, Sr., will beneficially own approximately 15.4% of
the outstanding Common Shares and control approximately 24.6% of the total
voting power of the Company. Shareholders controlling a majority of the total
voting power can elect all of the directors of the Company and can approve,
delay or prevent certain fundamental corporate transactions, including mergers,
consolidations and the sale of substantially all of the Company's assets. For so
long as these shareholders own a significant percentage of the Common Shares,
including a significant percentage of the Class B Common Stock, they will retain
substantial influence over the affairs of the Company which may
8
10
result in decisions that do not fully represent the interests of all
shareholders of the Company. These factors, along with the factors described in
"Description of Capital Stock -- Common Shares" and "Description of Capital
Stock -- Certain Provisions of the Charter and By-Laws," may also have the
effect of delaying or preventing a change in management or voting control of the
Company. See "Principal and Selling Shareholders."
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business is highly dependent upon the
Company's executive officers and its senior management. The Company is also
dependent on its ability to hire, develop and retain qualified regional and
local managers, as well as on the performance and productivity of its managers.
The Company has entered into noncompetition, nonsolicitation and confidentiality
agreements with its branch managers; however, there can be no assurance that
such agreements will be enforceable in all jurisdictions or for the periods set
forth, or that the Company would not incur significant expense attempting to
enforce these agreements. The loss of key management or the inability of the
Company to attract and retain qualified regional and local management could have
a material adverse effect on the Company's operations and growth. The Company's
continued growth also will depend upon its ability to attract and retain
additional skilled management personnel. See "Management."
FRANCHISING RISKS
During 1996 and for the first nine months of 1997, the Company's ten
largest franchisees (excluding franchise locations that were acquired by the
Company) accounted for 22.5% of the Company's total system-wide sales and 46.5%
and 42.9%, respectively, of the Company's net earnings. In addition, during 1996
and for the first nine months of 1997, the Company's largest franchisee
accounted for 4.7% and 5.0%, respectively, of the Company's total system-wide
sales and 13.8% and 8.5%, respectively, of the Company's net earnings.
Franchisees typically have the option to terminate their agreements upon at
least six months prior written notice to the Company, resulting in the loss of
franchise revenues and corresponding profitability. In most cases, however, the
Company cannot terminate the franchise agreement without good cause. Further,
while the Company's franchise agreements contain noncompetition covenants that
the Company vigorously seeks to enforce, former franchisees may nevertheless
seek to compete with the Company. The Company's offer and sale of franchises is
regulated by the Federal Trade Commission and by state business opportunity and
franchise laws. The Company has disclosed the filing of the registration
statement of which this Prospectus forms a part and will be required to amend
further its franchise registrations with certain state governmental authorities
when this offering is completed. Until the Company has appropriately amended its
uniform franchise offering circular, it will not be able to offer or sell
franchises in the respective states. The Company is also subject to the risk of
franchisee litigation pursuant to state business opportunity or franchise laws
or otherwise. See "Business -- Organization -- Franchises" and
"Business -- Regulation."
RELIANCE ON MANAGEMENT INFORMATION SYSTEMS
The Company's business depends upon its ability to store, retrieve, process
and manage significant databases, and periodically to expand and upgrade its
information processing capabilities. The interruption or loss of the Company's
information processing capabilities through loss of stored data, breakdown or
malfunction of computer equipment and software systems, telecommunications
failure, conversion difficulties or damage to the Company's headquarters and
systems caused by fire, tornado, lightning, electrical power outage or other
disruption could have a material adverse effect on the Company. The Company is
currently in the process of implementing advanced management information
systems, including a disaster recovery site, but full implementation has not yet
been completed. There can be no assurance that implementation will be completed
in accordance with the Company's current schedule, or at all, or that the
different components of the management information systems will be successfully
integrated. See "Business -- Operations -- Management Information Systems."
9
11
LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There has been no active public market for the Company's common stock since
1990. There can be no assurance that, after this offering, an active public
market for the Common Stock will develop or be sustained or that the market
price for the Common Stock after trading commences will equal or exceed the
initial public offering price set forth on the cover page of this Prospectus.
The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including quarterly
variations in operating results, the liquidity of the market for the Common
Stock and general economic and market conditions. The initial public offering
price for the Common Stock in this offering was determined by negotiation
between the Company and the Representatives of the Underwriters and may bear no
relationship to the price at which the Common Stock will trade after completion
of this offering. In addition, the stock market has experienced substantial
price and volume fluctuations in recent years. These fluctuations have had a
significant effect on the market price of the stock of many companies, often
unrelated to the operating performance of those companies. See "The Company" and
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 3,350,000 shares of
Common Stock and 4,710,237 shares of Class B Common Stock outstanding. There
will also be outstanding employee stock options to purchase an aggregate of
2,957,212 shares of Class B Common Stock. All of the shares of Common Stock,
which are being sold in this offering, will be freely tradeable without
restriction or further registration under the Securities Act, except for shares
purchased by affiliates of the Company. The shares of Class B Common Stock will
be eligible for sale in the public market upon expiration of the applicable
holding periods, or sooner if registered under the Securities Act, and
conversion to shares of Common Stock. The Company, its officers and directors
and certain shareholders (who will collectively own 4,656,614 shares of Class B
Common Stock immediately following this offering) have agreed not to sell or
otherwise transfer any Common Shares for a period of 180 days after the date of
this Prospectus without the prior written consent of Smith Barney Inc. ("Smith
Barney"), one of the Representatives of the Underwriters. Sales of substantial
amounts of Common Stock in the public market following this offering could
adversely affect the market price of the Common Stock. See "Description of
Capital Stock -- Common Shares," "Shares Eligible for Future Sale" and
"Underwriting."
DILUTION
Purchasers of Common Stock in this offering will experience immediate and
substantial dilution in the net tangible book value of their investment. Based
on an assumed initial offering price of $12.00 per share (the mid-point of the
filing range), new investors will experience immediate dilution of $8.89 per
share. See "Dilution."
10
12
THE COMPANY
Snelling was organized in 1951 as a Pennsylvania general partnership and
incorporated in Pennsylvania in 1956. The Company initially offered career
placement services and in 1954 began providing flexible staffing services.
In 1969, the Company completed an initial public offering of its common
stock, which was quoted on the predecessor to The Nasdaq Stock Market. In 1990,
the Company completed a plan of reclassification whereby all shareholders with
100 or fewer shares were reclassified and their shares were converted into a
right to receive cash. As a result of the reclassification, the number of
shareholders of the Company fell below 300 and the Company ceased to be a
reporting company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
As of October 31, 1997, the Company's Common Shares were held by 39 holders
of record. There has been no active public market for the Company's Common Stock
since 1990.
The Company's executive offices are located at 12801 North Central
Expressway, Suite 700, Dallas, Texas 75243, and its telephone number is (972)
239-7575.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,933,333 shares of
Common Stock offered by the Company in this offering are estimated to be $31.5
million ($37.1 million if the Underwriters' over-allotment option is fully
exercised), assuming an initial offering price of $12.00 per share and after
deducting underwriting discounts and commissions to be paid by the Company and
the estimated offering expenses, all of which will be paid by the Company. The
Company intends to use the net proceeds to repay certain outstanding
indebtedness, including capital lease commitments. The remainder of the net
proceeds will be used for working capital and other general corporate purposes.
At September 30, 1997, the Company had approximately $21.1 million in
principal amount of senior indebtedness under its senior secured credit
facilities (the "Senior Credit Facility"). Of this amount, approximately $8.1
million was outstanding under a revolving facility, which matures on January 31,
2001, and is used for working capital financing, and approximately $13.0 million
was outstanding under an acquisition facility, which is being amortized over
five years ending on January 31, 2001, and is used to finance a portion of the
Company's acquisitions. Subsequent to September 30, 1997, the Company acquired
one independent staffing location and one franchise location for an aggregate
purchase price of $6.5 million. The Company used the Senior Credit Facility to
finance $5.0 million of the aggregate purchase price. Indebtedness under the
Senior Credit Facility bears interest at floating rates. As of September 30,
1997, the blended interest rate on the Senior Credit Facility was 8.56%. The
Company intends to repay the outstanding principal balance and accrued and
unpaid interest under the revolving facility and the acquisition facility.
Prepayments of the Senior Credit Facility are not subject to premiums or
prepayment penalties. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Acquisitions."
At September 30, 1997, the Company had outstanding capital lease
commitments under a master lease agreement, which matures in August 2001, of
approximately $1.9 million. The lease commitments bear interest at various rates
ranging from 8.95% to 14.85%. As of September 30, 1997, the weighted average
rate was 12.51%. The Company intends to repay the outstanding commitment balance
and accrued and unpaid interest under the master lease agreement.
At September 30, 1997, the Company also had an aggregate of approximately
$4.4 million in principal amount of seller-financed indebtedness incurred in
connection with certain of the Company's acquisitions. The Company intends to
repay approximately $3.4 million of this principal amount and related accrued
and unpaid interest with the net proceeds. Of the amount to be repaid,
approximately $2.3 million relates to a note issued to the seller in connection
with the Company's acquisition of five franchise locations. This note, which
bears interest at 8.25% per annum, matures on December 31, 2001. Approximately
$0.4 million remains outstanding
11
13
under a seller note issued in connection with the acquisition of three franchise
locations. This note bears interest at 9.25% per annum and matures on March 17,
1999. Approximately $0.3 million remains outstanding under a seller note issued
in connection with the acquisition of four independent staffing locations. This
note bears interest at 8.25% per annum and matures on March 31, 2000.
Approximately $0.2 million remains outstanding under a seller note issued in
connection with the acquisition of three franchise locations. This note bears
interest at 6.00% per annum and matures on August 1, 1999. Finally,
approximately $0.2 million remains outstanding under a seller note issued in
connection with the acquisition of two franchise locations. This note bears
interest at 8.00% per annum and matures on January 31, 2000. Prepayments of
these seller notes are not subject to premiums or prepayment penalties.
The Company will not receive any of the proceeds from the sale of the
416,667 shares of Common Stock by the Selling Shareholder. See "Principal and
Selling Shareholders."
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on its Common
Shares for the foreseeable future and anticipates that future earnings will be
retained to finance future operations and expansion. The payment of cash
dividends in the future will be at the discretion of the board of directors and
will depend upon such factors as earnings levels, capital requirements, the
Company's financial condition and other factors the board of directors deems
relevant. The Company's Senior Credit Facility prohibits the payment of
dividends by the Company on any Common Shares, other than dividends payable
solely in Common Shares. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
12
14
CAPITALIZATION
The following table sets forth the Company's capitalization at September
30, 1997, (i) on a historical basis and (ii) on an as adjusted basis to give
effect to the sale by the Company of 2,933,333 shares of Common Stock in this
offering at an assumed initial offering price of $12.00 per share and the
application of the net proceeds as described in "Use of Proceeds." The data set
forth below should be read in conjunction with the other financial information
presented elsewhere in this Prospectus.
SEPTEMBER 30, 1997
-------------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
Cash and cash equivalents................................... $ 648 $ 5,731
======= =======
Short-term borrowings, including current maturities of
long-term debt............................................ $ 1,867 $ 774
======= =======
Long-term debt, less current maturities..................... $25,540 $ 230
------- -------
Shareholders' equity:
Preferred Stock, $0.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common Stock, $0.01 par value; 100,000,000 shares
authorized; no shares issued and outstanding; 3,350,000
shares issued and outstanding as adjusted(1)........... -- 33
Class B Common Stock, $0.01 par value; 15,000,000 shares
authorized; 5,126,904 shares issued and outstanding;
4,710,237 shares issued and outstanding as
adjusted(2)............................................ 47 47
Capital in excess of par value............................ 197 31,650
Retained earnings......................................... 14,641 14,641
------- -------
Total shareholders' equity........................ 14,885 46,371
------- -------
Total capitalization.............................. $40,425 $46,601
======= =======
- ---------------
(1) Excludes (i) 1,500,000 shares of Common Stock reserved for issuance under
the Company's 1997 Stock Option Plan, (ii) 150,000 shares of Common Stock
reserved for issuance under the Company's Non-Employee Director Stock Option
Plan and (iii) 800,000 shares of Common Stock the Company intends to reserve
for issuance under a planned stock option offer program for franchisees. See
"Management -- Stock Option Plans."
(2) Excludes (i) 2,599,238 shares of Class B Common Stock issuable pursuant to
outstanding options under the Company's 1996 Stock Option Plan at a weighted
average exercise price of $3.85 per share, (ii) 357,974 shares of Class B
Common Stock issuable pursuant to options to be granted under the 1996 Stock
Option Plan at the initial public offering price upon completion of this
offering and (iii) an additional 21,075 shares of Class B Common Stock
reserved for issuance under the 1996 Stock Option Plan. See
"Management -- Stock Option Plans."
13
15
DILUTION
The net tangible book value (deficit) of the Company at September 30, 1997,
was $(6.4) million, or $(1.24) per Common Share. Net tangible book value
(deficit) per share is determined by dividing the Company's tangible net worth
(total tangible assets less total liabilities) by the total number of Common
Shares outstanding. After giving effect to the sale by the Company of the
2,933,333 shares of Common Stock to be sold by the Company in this offering at
an assumed initial offering price of $12.00 per share and the application of the
net proceeds as set forth under "Use of Proceeds," the Company's net tangible
book value at September 30, 1997, would have been $25.1 million, or $3.11 per
share. This represents an immediate increase in net tangible book value of $4.35
per share to existing shareholders and an immediate dilution of $8.89 per share
to new investors purchasing shares of Common Stock in this offering. The
following table illustrates this dilution per share of Common Stock:
Assumed initial public offering price per share of Common
Stock.................................................... $12.00
Net tangible book value (deficit) per Common Share before
this offering............................................ $(1.24)
Increase per Common Share attributable to new investors.... $ 4.35
------
Pro forma net tangible book value per Common Share after
this offering............................................ $ 3.11
------
Dilution in net tangible book value per share of Common
Stock to new investors................................... $ 8.89
======
The following table sets forth, on an as adjusted basis as of September 30,
1997, the difference between the Common Shares purchased from the Company by
officers, directors and affiliated persons or entities in the preceding five
years (or which they have the right to acquire) and by new investors in the
offering, including the number of Common Shares purchased, the total cash
consideration and the average price per share paid by the officers and directors
and affiliates and by the new investors (assuming an initial offering price of
$12.00 per share).
SHARES PURCHASED(1) TOTAL CONSIDERATION(1) AVERAGE
------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------------ -------- ---------
Officers, directors and
affiliates..................... 2,599,238 47.0% $10,016,939 22.2% $ 3.85
New investors.................... 2,933,333 53.0% 35,199,996 77.8% $ 12.00
--------- ------ ----------- ------
5,532,571 100.0% $45,216,935 100.0%
========= ====== =========== ======
- ---------------
(1) Consists solely of 2,599,238 shares of Class B Common Stock issuable
pursuant to outstanding options granted to certain of the officers and
directors under the 1996 Stock Option Plan at a weighted average exercise
price of $3.85 per share and assumes the exercise of these options. Excludes
357,974 shares of Class B Common Stock issuable pursuant to options to be
granted under the 1996 Stock Option Plan at the initial public offering
price upon completion of this offering. See "Management -- Stock Option
Plans."
14
16
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
The selected historical financial data presented below for the years ended
May 31, 1992, 1993 and 1994, the seven months ended December 31, 1994, and the
years ended December 31, 1995 and 1996, is derived from the Consolidated
Financial Statements of the Company, which have been audited by Grant Thornton
LLP, independent certified public accountants. The consolidated financial data
for the nine months ended September 30, 1996 and 1997, is derived from the
unaudited historical consolidated financial statements. In the opinion of the
Company, the unaudited consolidated financial statements reflect all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the financial position and results of operations for the
unaudited periods. The results of operations for the nine months ended September
30, 1996 and 1997, are not necessarily indicative of the results to be expected
for a full year. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements included elsewhere in this
Prospectus.
SEVEN FISCAL NINE MONTHS
FISCAL YEAR MONTHS YEAR ENDED ENDED
ENDED MAY 31, ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ DECEMBER 31, ------------------- -------------------
1992 1993 1994 1994 1995 1996(1) 1996(1) 1997
-------- -------- -------- ------------ -------- -------- -------- --------
STATEMENT OF EARNINGS DATA:
Revenues.............................. $ 19,023 $ 30,360 $ 70,202 $ 59,309 $122,701 $168,602 $116,864 $165,686
Cost of services...................... 8,260 16,330 47,456 40,221 87,943 122,945 83,957 123,964
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit.................. 10,763 14,030 22,746 19,088 34,758 45,657 32,907 41,722
Selling, general and administrative
expenses............................ 11,878 11,832 14,116 8,859 15,384 19,600 13,624 20,421
Franchises' share of gross
profit(2)........................... -- 2,023 8,648 8,659 14,682 19,587 14,835 15,772
-------- -------- -------- -------- -------- -------- -------- --------
Operating profit (loss)....... (1,115) 175 (18) 1,570 4,692 6,470 4,448 5,529
Interest expense...................... 46 34 66 71 379 1,100 602 1,885
Other income.......................... 523 432 348 63 97 105 54 698
-------- -------- -------- -------- -------- -------- -------- --------
Earnings (loss) before income taxes... (638) 573 264 1,562 4,410 5,475 3,900 4,342
Income tax expense (benefit).......... (137) 263 152 704 1,720 2,161 1,564 1,727
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings (loss)................... $ (501) $ 310 $ 112 $ 858 $ 2,690 $ 3,314 $ 2,336 $ 2,615
======== ======== ======== ======== ======== ======== ======== ========
Net earnings (loss) per Common
Share............................... $ (0.07) $ 0.04 $ 0.02 $ 0.12 $ 0.38 $ 0.48 $ 0.33 $ 0.38
======== ======== ======== ======== ======== ======== ======== ========
Weighted average Common Shares
outstanding......................... 7,121 7,118 7,068 7,012 7,007 6,966 6,982 6,909
======== ======== ======== ======== ======== ======== ======== ========
SELECTED OPERATING DATA:
System-wide sales (in thousands)(3)... $117,693 $175,747 $225,270 $166,340 $318,858 $372,999 $273,282 $324,932
Hours billed (in thousands)(4)........ -- 1,181 5,016 5,058 9,526 13,141 9,300 13,345
Average bill rate(4).................. -- $ 10.20 $ 10.60 $ 10.54 $ 11.29 $ 11.44 $ 11.57 $ 11.90
Gross margin per flexible
employee(4)......................... -- 23.4% 24.6% 23.9% 23.8% 23.2% 23.6% 22.3%
Number of branch locations(5)(6)...... 1 1 2 7 9 29 19 29
Number of franchise locations(5)...... 271 253 248 248 274 277 276 289
MAY 31, DECEMBER 31,
--------------------------- --------------------------- SEPTEMBER 30,
1992 1993 1994 1994 1995 1996 1997
------- ------- ------- ------- ------- ------- -------------
BALANCE SHEET DATA:
Working capital....................................... $ 3,155 $ 3,860 $ 4,763 $ 4,925 $ 5,466 $ 8,346 $ 13,943
Total assets.......................................... 10,954 12,638 15,579 16,015 23,079 52,055 55,302
Total debt............................................ 1,000 475 1,250 1,917 4,776 29,301 27,407
Shareholders' equity.................................. 5,508 5,796 5,793 6,649 9,332 12,326 14,885
- ---------------
(1) In 1996, the Company made two significant acquisitions, each of which was
accounted for by the purchase method. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Acquisitions" and the pro forma condensed statement of earnings
appearing elsewhere in this Prospectus.
(2) The Company has two types of franchises for purposes of flexible staffing
services revenue recognition. With the first type, the Company records
franchise royalties, based on a contractual percentage of flexible staffing
services billings, in the period in which the franchise collects for the
services provided. The second type of franchises participate in the
Company's pay/bill processing program. With the second type, the Company has
a direct contractual relationship with the clients for the services, holds
title to the related receivables and is the legal employer of the flexible
staffing employees. Revenues generated by these franchises and the related
direct costs of services are included as part of the Company's revenues and
costs of services in the period in which the services are provided. The net
distribution paid to franchises participating in the pay/bill processing
program is an operating expense recorded by the Company as franchises' share
of gross profit and is based on either a percentage of the flexible staffing
services billings or a percentage of the gross profit generated. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Organization -- Franchises" and
"Business -- Operations -- Pay/Bill Processing Services."
(3) System-wide sales are equal to the aggregate revenues of all franchise
locations and Company-owned branch locations during the period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(4) Includes franchise locations participating in the Company's pay/bill
processing program and Company-owned branch locations. See "Business --
Operations -- Pay/Bill Processing Services."
(5) In operation at the end of the period presented.
(6) Branches consist of Company-owned branch locations (including a California
subsidiary, the assets of which were sold in January 1997) and exclude
franchise locations.
15
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Consolidated Financial and Operating Data and the Company's Consolidated
Financial Statements included elsewhere herein.
GENERAL
Snelling is a leading national provider of staffing solutions primarily
targeted to small and mid-sized businesses. As of September 30, 1997, the
Company operated through a network of 289 franchise locations and 29
Company-owned branch locations in 42 states, the District of Columbia, and
Puerto Rico, as well as three foreign countries, and had executed an agreement
for the opening of one additional franchise location. The Company provides
flexible staffing personnel for office, clerical and light industrial services.
The Company also offers career placement services in a number of fields,
including accounting and finance, engineering, health care, law, manufacturing,
management information systems and office, sales, marketing and technical
services. Flexible staffing services (which include traditional flexible
staffing, single-source management and temp-to-hire) accounted for approximately
90%, and career placement services accounted for approximately 10%, of the
Company's total system-wide sales for both the year ended December 31, 1996, and
the nine months ended September 30, 1997.
The Company receives revenues from (i) flexible staffing and career
placement services provided through Company-owned branch locations, (ii)
flexible staffing services provided through franchise locations participating in
the Company's pay/bill processing program and (iii) franchising activities.
Revenues from flexible staffing and career placement services through branch
locations and revenues from flexible staffing services through franchise
locations participating in the Company's pay/bill processing program are
recognized at the time the services are provided. Revenues from franchising
activities consist of initial franchise fees and royalties. Franchise fee
revenues from the sale of franchises are recognized when the franchise begins
operations and a substantial portion of the initial franchise fees are received.
The Company records royalty revenues based on a contractual percentage of the
franchise's cash receipts with respect to (i) flexible staffing services
provided by franchises that do not participate in the Company's pay/bill
processing program and (ii) career placement services provided by any
franchisee. From 1994 through September 30, 1997, revenues from franchising
activities declined as a percentage of total revenues, and the Company believes
that this trend will continue as the Company increases the number of branch
locations and the number of franchise locations participating in the Company's
pay/bill processing program.
In 1990, the Company expanded its services available to franchises to
include pay/bill processing services related to their offering of flexible
staffing services. As a result, the Company has two types of franchises for
purposes of flexible staffing services revenue recognition. With the first type,
the Company records franchise royalties, based on a contractual percentage of
flexible staffing services billings, in the period in which the franchise
collects for the services provided. The second type of franchises participate in
the Company's pay/bill processing program. With the second type, the Company has
a direct contractual relationship with the clients for the services, holds title
to the related receivables and is the legal employer of the flexible staffing
employees. Revenues generated by these franchises and the related direct costs
of services are included as part of the Company's revenues and costs of services
in the period in which the services are provided. The net distribution paid to
franchises participating in the pay/bill processing program is an operating
expense recorded by the Company as franchises' share of gross profit and is
based on either a percentage of the flexible staffing services billings or a
percentage of the gross profit generated. As of September 30, 1997, 130
franchise locations, representing approximately 45% of all franchise locations,
and all branch locations were participating in the Company's pay/bill processing
program. See "Business -- Organization -- Franchises" and
"Business -- Operations -- Pay/Bill Processing Services."
For branch locations and those franchises that participate in the pay/bill
processing program, personnel placed in flexible staffing positions are
employees of the Company. The Company is responsible for the direct costs of the
flexible staffing revenues, including payroll, workers' compensation insurance,
unemployment taxes, FICA and Medicare taxes, other payroll taxes, other general
payroll expenses and commissions. In most
16
18
circumstances, the Company does not provide health, dental, life or other
insurance benefits to the flexible staffing employees. The Company typically
bills clients for the hourly wages paid to these employees, plus a negotiated
markup. The agreement with the client may also allow for the pass-through of
increases in employee-related expenses, such as workers' compensation insurance
and unemployment taxes. Since the Company generally pays these employees only
for the hours which they actually work, wages and related expenses for flexible
staffing employees are variable costs which fluctuate directly with the related
revenues reported by the Company.
Gross margins for branch locations and for franchise locations
participating in the Company's pay/bill processing program declined in 1995 and
the first nine months of 1997 and remained relatively unchanged from 1995 to
1996. These trends are primarily due to an increase in the proportion of the
Company's revenues attributable to light industrial services, which are
traditionally subject to lower markups and margins. Although an increase or
decrease in the gross margin for these franchise locations affects the Company's
overall gross margin, there is no material impact on the Company's operating
income as a percentage of total revenues. Such changes result in approximately
offsetting increases or decreases in franchises' share of gross profit, an
operating expense.
GROWTH AND EXPANSION
In recent years, the Company has expanded its operations through internal
growth, acquisitions and the sale of new franchises. System-wide sales have
increased from $263.1 million for the twelve months ended December 31, 1994, to
$373.0 million for the year ended December 31, 1996, representing a compound
annual growth rate of approximately 19%.
From January 1, 1994, through September 30, 1997, the Company established a
net total of 29 branch locations through the acquisition of seven locations from
independent staffing companies, the acquisition of 20 locations from existing
franchises, the opening of five new locations, the consolidation of three
locations and the sale of substantially all the assets of its California
subsidiary. Of the 29 branch locations, 10 were acquired or opened in the last
three months of 1996. All acquisitions completed by the Company have been
accounted for under the purchase method of accounting. The Consolidated
Financial Statements include the operating results of the acquired businesses
from the date of acquisition. Subsequent to September 30, 1997, the Company
acquired one location from an independent staffing company and one franchise
location and has a pending acquisition of another independent staffing location
currently scheduled to be completed in December 1997.
The Company has also expanded by continuing to franchise in certain select
markets. During the years ended December 31, 1995 and 1996, and the nine months
ended September 30, 1997, the Company added a net total of 26, three and 12
franchise locations, respectively. As of September 30, 1997, the Company had
executed an agreement for one additional franchise location to be opened by
December 31, 1997.
17
19
RESULTS OF OPERATIONS
The following table sets forth for the indicated periods certain historical
financial data derived from the Consolidated Financial Statements and indicates
the percentage of total revenues represented by each item.
TWELVE MONTHS FISCAL YEAR ENDED DEC. 31, NINE MONTHS ENDED SEPTEMBER 30,
ENDED --------------------------------------- ---------------------------------------
DEC. 31, 1994 1995 1996 1996 1997
----------------- ------------------ ------------------ ------------------ ------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Revenues................. $91,920 100.0% $122,701 100.0% $168,602 100.0% $116,864 100.0% $165,686 100.0%
Cost of services......... 62,702 68.2 87,943 71.7 122,945 72.9 83,957 71.8% 123,964 74.8%
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross profit........... 29,218 31.8 34,758 28.3 45,657 27.1 32,907 28.2% 41,722 25.2%
Selling, general and
administrative
expenses............... 15,290 16.6 15,384 12.5 19,600 11.7 13,624 11.7% 20,421 12.3%
Franchises' share of
gross profit........... 12,831 14.0 14,682 12.0 19,587 11.6 14,835 12.7% 15,772 9.5%
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Operating profit....... 1,097 1.2 4,692 3.8 6,470 3.8 4,448 3.8% 5,529 3.4%
Interest expense......... 102 0.1 379 0.3 1,100 0.6 602 0.5% 1,885 1.2%
Other income............. 197 0.2 97 0.1 105 0.1 54 -- 698 0.4%
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Earnings before income
taxes................ 1,192 1.3 4,410 3.6 5,475 3.3 3,900 3.3% 4,342 2.6%
Income tax expense....... 537 0.6 1,720 1.4 2,161 1.3 1,564 1.3% 1,727 1.0%
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net earnings............. $ 655 0.7% $ 2,690 2.2% $ 3,314 2.0% 2,336 2.0% 2,615 1.6%
======= ===== ======== ===== ======== ===== ======== ===== ======== =====
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues. Total revenues were $165.7 million for the first nine months of
1997 compared to $116.9 million for the same period in 1996, an increase of
41.8%. Revenues from branch locations increased 128.9% to $55.8 million in the
1997 period from $24.4 million in the 1996 period. This substantial increase in
branch revenues was attributable to a combination of internal sales growth and
acquisitions, which resulted in an increase in the number of branches to 29
locations at September 30, 1997, up from nine locations at December 31, 1995.
Flexible staffing revenues from franchise locations participating in the
Company's pay/bill processing program increased 19.7% to $103.6 million in the
first nine months of 1997 from $86.5 million in the 1996 period. Revenues from
franchising activities increased to $6.1 million in the first nine months of
1997 from $5.7 million for the prior period. This increase in revenues from both
branch and franchise locations reflected increased sales and marketing
activities and strong market conditions.
Gross Profit. Gross profit for the first nine months of 1997 was $41.7
million compared to $32.9 million in the first nine months of 1996, an increase
of 26.8%. The gross margin for the first nine months of 1997 was 25.2% compared
with 28.2% for the 1996 period. The decrease in gross margin is primarily
attributable to three factors: (i) the decrease in revenues from franchising
activities, which have only minimal associated costs, as a percentage of total
revenues; (ii) the implementation of a national accounts program on a limited
basis; and (iii) an increase in the proportion of the Company's revenues
attributable to light industrial services. These factors were partially offset
by the Company's continued emphasis on reducing costs, especially the costs of
risk management and unemployment taxes. Favorable risk management trends
resulted in a reduction in cost of services of approximately $1.5 million and
$0.3 million for the first nine months of 1997 and 1996, respectively. The
reduction was principally attributable to improved claims experience on workers'
compensation and other insurance coverages.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the first nine months of 1997 totaled $20.4 million
compared to $13.6 million in the first nine months of 1996, an increase of
49.9%. As a percentage of total revenues, selling, general and administrative
expenses for the first nine months of 1997 were 12.3% compared to 11.7% in the
1996 period. Of the increase in selling, general and administrative expenses in
the 1997 period, approximately $4.3 million was directly attributable to the 18
new branch locations opened or acquired since June 30, 1996. The remainder was
primarily due to continued infrastructure development relating to the
implementation of new information systems and technology.
18
20
Franchises' Share of Gross Profit. Franchises' share of gross profit
increased to $15.8 million for the first nine months of 1997 from $14.8 million
in the 1996 period. This increase was the result of an increase in flexible
staffing revenues from franchise locations participating in the pay/bill
processing program.
Interest Expense. Interest expense increased to $1.9 million for the first
nine months of 1997 from $0.6 million in the 1996 period, an increase of 213.1%.
The increase is primarily due to borrowings related to acquisitions with an
aggregate purchase price of $17.4 million, which were completed between
September and December 1996 and to additional working capital requirements as a
result of the rapid increase in total revenues. Substantially all of the
Company's indebtedness will be repaid with the net proceeds of this offering.
This is expected to result in a substantial reduction in interest expense
beginning in the first quarter of 1998. The Company's management does not expect
the significant percentage increase in interest expense to continue in future
periods.
Other Income. Other income for the first nine months of 1997 included a
gain of approximately $0.7 million resulting from the January 1997 sale of
substantially all of the assets of a subsidiary that provided union personnel
for flexible staffing assignments at chemical and refinery operations in
California (the "California subsidiary").
Income Tax Expense. Income tax expense was $1.7 million (an effective rate
of 39.8%) for the first nine months of 1997 compared with $1.6 million (an
effective rate of 40.1%) for the 1996 period. See Note (9) to the Consolidated
Financial Statements for an explanation of the decrease in the effective income
tax rate.
Net Earnings. Net earnings for the nine months ended September 30, 1997,
were $2.6 million compared with $2.3 million for the same period in 1996, an
increase of 12.0%. Net earnings as a percentage of total revenues decreased to
1.6% in the 1997 period from 2.0% in the 1996 period.
FISCAL YEAR ENDED DECEMBER 31, 1996, COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1995
Revenues. Total revenues were $168.6 million for 1996 compared to $122.7
million for 1995, an increase of 37.4%. Revenues from branch locations increased
73.4% to $39.0 million in 1996 from $22.5 million in 1995. This substantial
increase in branch revenues was attributable to a combination of internal sales
growth and acquisitions, which resulted in an increase in the number of branches
to 29 locations at December 31, 1996, up from nine locations at the end of 1995.
Flexible staffing revenues from franchise locations participating in the
Company's pay/bill processing program increased 31.2% to $121.1 million in 1996
from $92.3 million in 1995. Revenues from franchising activities increased to
$8.2 million in 1996 from $7.8 million for 1995. This increase in revenues from
both branch and franchise locations reflected increased sales and marketing
activities and strong market conditions.
Gross Profit. Gross profit for 1996 was $45.7 million compared to $34.8
million in 1995, an increase of 31.4%. The gross margin for 1996 was 27.1%
compared with 28.3% for 1995. The decrease in gross margin is primarily
attributable to two factors: (i) the decrease in revenues from franchising
activities, which have only minimal associated costs, as a percentage of total
revenues; and (ii) the implementation of a national accounts program on a
limited basis. These factors were partially offset by the Company's emphasis on
reducing costs, especially the costs of risk management and unemployment taxes,
along with improved pricing of services to clients. Favorable risk management
trends resulted in a reduction in cost of services of approximately $0.5 million
for 1996, which was primarily attributable to improved claims experience on
workers' compensation and other insurance coverages. No similar reduction
occurred in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1996 totaled $19.6 million compared to $15.4 million
in 1996, an increase of 27.4%. As a percentage of total revenues, selling,
general and administrative expenses for 1996 were 11.7% compared to 12.5% in
1995. This decrease in selling, general and administrative expenses as a
percentage of total revenues reflected increased operating leverage as a result
of the Company's investments in information systems and technology. Of the
increase in selling, general and administrative expenses in 1996, approximately
$3.0 million was directly attributable to the increase in the number of branch
locations, including the hiring of new personnel. The
19
21
remainder was primarily due to continued infrastructure development relating to
the implementation of new information systems and technology.
Franchises' Share of Gross Profit. Franchises' share of gross profit
increased to $19.6 million for 1996 from $14.7 million in 1995. This increase
was the result of an increase in flexible staffing revenues from franchise
locations participating in the pay/bill processing program.
Interest Expense. Interest expense increased to $1.1 million in 1996 from
$0.4 million in 1995, an increase of 190.4%. The increase was primarily due to
additional borrowings related to acquisitions and working capital requirements
as a result of the rapid increase in total revenues.
Income Tax Expense. Income tax expense was $2.2 million (an effective rate
of 39.5%) for 1996 compared with $1.7 million (an effective rate of 39.0%) for
1995. See Note (9) to the Consolidated Financial Statements for an explanation
of the increase in the effective income tax rate.
Net Earnings. Net earnings for 1996 were $3.3 million compared with $2.7
million in 1995, an increase of 23.2%. Net earnings as a percentage of total
revenues decreased to 2.0% in 1996 from 2.2% in 1995.
FISCAL YEAR ENDED DECEMBER 31, 1995, COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
Revenues. Total revenues were $122.7 million for 1995 compared to $91.9
million for 1994, an increase of 33.5%. Revenues from branch locations increased
72.8% to $22.5 million in 1995 from $13.0 million in 1994. This substantial
increase in branch revenues is attributable to a combination of internal sales
growth and the full-year effect in 1995 of the acquisition of five franchise
locations in late 1994, as well as a net addition of two branch locations during
1995. At December 31, 1995, the Company had nine branch locations compared to
seven branch locations at the end of 1994. Flexible staffing revenues from
franchise locations participating in the Company's pay/bill processing program
increased 28.6% to $92.3 million in 1995 from $71.8 million in 1994. Revenues
from franchising activities increased to $7.8 million in 1995 from $6.6 million
in 1994. This increase in revenues from both branch and franchise locations
reflected increased sales and marketing activities and strong market conditions.
Gross Profit. Gross profit for 1995 was $34.8 million compared to $29.2
million in 1994, an increase of 19.0%. The gross margin for 1995 was 28.3%
compared with 31.8% for 1994. The decrease in gross margin is primarily
attributable to three factors: (i) an increase in the proportion of the
Company's revenues attributable to light industrial services; (ii) declining
performance by the California subsidiary, the assets of which were sold in
January 1997; and (iii) the decrease in revenues from franchising activities,
which have only minimal associated costs, as a percentage of total revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1995 totaled $15.4 million compared to $15.3 million
in 1994. As a percentage of total revenues, selling, general and administrative
expenses for 1995 were 12.5% compared to 16.6% in 1994. This decrease in
selling, general and administrative expenses as a percentage of total revenues
reflected increased operating leverage as a result of the Company's investments
in information systems and technology and an overall effort by the Company with
respect to cost control and reduction. The level of selling, general and
administrative expenses was relatively unchanged in 1995 despite the full-year
effect of 1994 acquisitions and additional acquisitions in 1995.
Franchises' Share of Gross Profit. Franchises' share of gross profit
increased to $14.7 million for 1995 from $12.8 million in 1994. This increase
was the result of an increase in flexible staffing revenues from franchise
locations participating in the pay/bill processing program.
Interest Expense. Interest expense increased to $0.4 million in 1995 from
$0.1 million in 1994, an increase of 271.6%. The increase was primarily due to
additional working capital requirements as a result of the rapid increase in
total revenues, the use of capitalized leases to finance certain capital
expenditures and borrowings related to acquisitions.
Income Tax Expense. Income tax expense was $1.7 million (an effective rate
of 39.0%) for 1995 compared with $0.5 million (an effective rate of 45.1%) for
1994. See Note (9) to the Consolidated Financial Statements for an explanation
of the increase in the effective income tax rate.
20
22
Net Earnings. Net earning for 1995 were $2.7 million compared with $0.7
million in 1994, an increase of 310.9%. Net earnings as a percentage of total
revenues increased to 2.2% in 1995 from 0.7% in 1994.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth selected quarterly unaudited financial
information for 1995, 1996 and the nine months ended September 30, 1997. The
Company believes that such information reflects all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the information set
forth below. The operating results for any quarter are not necessarily
indicative of the results of any future period.
QUARTER ENDED
---------------------------------------------------------------------------------
1995 1996
--------------------------------------- ---------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues................. $24,161 $26,411 $28,120 $44,009 $33,740 $39,303 $43,821 $51,738
Cost of services......... 16,785 18,514 20,272 32,372 24,209 28,159 31,589 38,988
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 7,376 7,897 7,848 11,637 9,531 11,144 12,232 12,750
Selling, general and
administrative
expenses................ 3,663 3,778 3,879 4,064 4,262 4,615 4,747 5,976
Franchises' share of
gross profit............ 3,106 2,879 2,686 6,011 4,320 4,999 5,516 4,752
------- ------- ------- ------- ------- ------- ------- -------
Operating profit........ 607 1,240 1,283 1,562 949 1,530 1,969 2,022
Interest expense......... 45 104 115 115 149 235 218 498
Other income............. 23 18 28 28 21 23 10 51
------- ------- ------- ------- ------- ------- ------- -------
Earnings before income
taxes................. 585 1,154 1,196 1,475 821 1,318 1,761 1,575
Income tax expense....... 265 479 465 511 327 521 716 597
------- ------- ------- ------- ------- ------- ------- -------
Net earnings............. $ 320 $ 675 $ 731 $ 964 $ 494 $ 797 $ 1,045 $ 978
======= ======= ======= ======= ======= ======= ======= =======
Net earnings per Common
Share................... $ 0.05 $ 0.09 $ 0.11 $ 0.13 $ 0.07 $ 0.11 $ 0.15 $ 0.15
======= ======= ======= ======= ======= ======= ======= =======
QUARTER ENDED
-----------------------------
1997
-----------------------------
MARCH 31 JUNE 30 SEPT. 30
-------- ------- --------
Revenues................. $49,479 $56,901 $59,306
Cost of services......... 37,124 42,316 44,524
------- ------- -------
Gross profit............ 12,355 14,585 14,782
Selling, general and
administrative
expenses................ 6,634 6,960 6,827
Franchises' share of
gross profit............ 4,676 5,400 5,696
------- ------- -------
Operating profit........ 1,045 2,225 2,259
Interest expense......... 629 629 627
Other income............. 684 7 7
------- ------- -------
Earnings before income
taxes................. 1,100 1,603 1,639
Income tax expense....... 434 643 650
------- ------- -------
Net earnings............. $ 666 $ 960 $ 989
======= ======= =======
Net earnings per Common
Share................... $ 0.10 $ 0.14 $ 0.14
======= ======= =======
The volume of career placement services provided by the Company's franchise
and branch locations tends to fluctuate directly with general economic trends,
with volume increasing during periods of economic growth and declining or
growing at a slower pace during recessionary periods. Flexible staffing
services, although affected to some extent, are less subject to fluctuation
based on the overall economy than career placement services. The Company has,
however, historically been subject to quarterly and seasonal fluctuations in
demand for flexible staffing services, especially as a result of summer and
holiday employment trends. Revenues from flexible staffing services and related
net earnings are generally at their lowest levels during the first quarter of
the year and increase throughout the remainder of the year, peaking in the last
two quarters of the year. While the staffing industry is cyclical, the Company
believes that the broad geographic coverage of its operations and the diversity
of services it provides generally mitigate the adverse effects of economic
cycles in a single industry or geographic region.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $13.9 million, $8.3 million and $5.5
million at September 30, 1997, December 31, 1996 and December 31, 1995,
respectively. The Company's cash flow and working capital requirements are
affected primarily by the payment of wages to flexible staffing employees, who
are paid weekly, and by the receipt of payments from clients, which are
generally received 30 to 60 days after billing. Because of seasonal
fluctuations, accounts receivable are historically higher during the fourth
quarter of the fiscal year and are generally at their lowest level during the
first fiscal quarter.
The Company's operating activities used net cash of $1.0 million in the
nine months ended September 30, 1997, and $2.8 million in 1996, and provided net
cash of $0.1 million in 1995. The negative cash flow from operating activities
in 1996 and the first nine months of 1997 relates primarily to the additional
investment in
21
23
working capital (accounts receivable and prepaid expenses) resulting from the
increase in the number of branch locations during 1996 and the additional
working capital required to fund the increased volume of franchises' flexible
staffing services processed through the Company's pay/bill processing program.
The Company has historically met its cash requirements through a combination of
internally generated funds and bank debt.
Investing activities of the Company provided net cash of $0.7 million in
the first nine months of 1997 and used net cash of $11.7 million in 1996 and
$3.5 million in 1995. For 1997, investing activities included approximately $1.9
million received upon the sale of the California subsidiary. During the first
nine months of 1997, in 1996 and in 1995, the Company invested in acquisitions
with an aggregate purchase price (plus related expenses) of $0.9 million, $19.3
million and $1.4 million, respectively. The aggregate purchase price (plus
related expenses) for the 1996 acquisitions included cash payments of $9.8
million, $7.5 million of which was funded under the acquisition facility of the
Company's Senior Credit Facility. The balance was funded from internal cash flow
and the revolving facility of the Senior Credit Facility. Seller-financed debt
was utilized for the remaining $9.5 million of the aggregate purchase price in
1996. The Company also had capital expenditures of $0.3 million, $2.0 million
and $2.5 million during the first nine months of 1997, in 1996 and in 1995,
respectively. These capital expenditures primarily related to the development of
the Company's new integrated management information system and the upgrading of
the hardware required to support the system. The total cost of the project is
currently estimated at $9.0 million, $6.1 million of which had already been
expended as of September 30, 1997. The remaining cost of the project is expected
to be funded through a combination of internally generated cash, operating
leases and borrowings under the Senior Credit Facility throughout 1997 and 1998.
The Company's financing activities provided net cash of $0.4 million for
the first nine months of 1997 and $14.7 million and $3.5 million in 1996 and in
1995, respectively, as a result of advances under its Senior Credit Facility in
the 1997 period and 1996 and advances under a previous revolving credit line in
1995.
During 1996, the Company negotiated its Senior Credit Facility, which
expires in January 2001, with BankBoston, N.A. ("BankBoston"). The Senior Credit
Facility, which was amended in June and July 1997, currently provides for a
maximum revolving facility of $22.5 million (based on the Company's eligible
receivables) and an acquisition facility of $25.0 million. The Company's ability
to request additional advances under the acquisition facility terminates on
January 31, 1998. Mandatory repayment of amounts borrowed under the Senior
Credit Facility is based on excess cash flow (as defined in the Senior Credit
Facility) for the acquisition facility and on the daily available bank clearings
for the revolving facility. Mandatory quarterly repayments based on a five-year
amortization are also required for the acquisition facility. However, all
payments due on the acquisition facility are required to be funded from the
revolving facility. Optional prepayments are allowed, and any remaining unpaid
balance on either facility is due in January 2001. At the Company's option,
interest is calculated based on a combination of the following: (i) BankBoston's
base rate or the London Interbank Offered Rate ("LIBOR") plus (ii) from 0.5% to
3.0% depending on the facility and certain financial ratios of the Company. At
September 30, 1997, the Company had approximately $21.1 million in principal
amount outstanding under the Senior Credit Facility, of which $8.1 million was
outstanding under the revolving facility and $13.0 million was outstanding under
the acquisition facility. Subsequent to September 30, 1997, the Company acquired
one independent staffing location and one franchise location and used the Senior
Credit Facility to finance $5.0 million of the aggregate purchase price. The
average rate at September 30, 1997, was 8.69% on the acquisition facility and
8.37% on the revolving facility. The Senior Credit Facility requires the Company
to pay a commitment fee from 0.375% to 0.500% per annum on the unused amount of
the credit line. As of September 30, 1997, the Company had $20.2 million of
availability on the Senior Credit Facility. The Senior Credit Facility also
includes financial covenants regarding the Company's working capital,
consolidated net worth, earnings coverage to debt, interest and fixed charges
and limitations on annual capital expenditures. Borrowings under the Senior
Credit Facility are collateralized by substantially all of the Company's assets,
along with an agreement that provides for the pledge by certain shareholders of
the Company of at least 50% of the voting power of the outstanding Common
Shares. The Company intends to repay the outstanding principal balance and
accrued and unpaid interest under the revolving facility and the acquisition
facility with net proceeds from the offering. See "Use of Proceeds."
22
24
The Company has received a written commitment from NationsBank of Texas,
N.A., ("NationsBank") for a new $75.0 million senior revolving credit facility
(the "New Credit Facility"), which the Company intends to use to replace the
Senior Credit Facility. The New Credit Facility is expected to have a three-year
term and include a $15.0 million sublimit for the issuance of standby and
commercial letters of credit. The Company anticipates that the New Credit
Facility will be secured by all of the Company's assets and the capital stock of
the Company's subsidiaries. Interest is anticipated to be at a rate equal to (i)
LIBOR plus an applicable margin charge or (ii) an alternative base rate, which
is the higher of NationsBank's prime lending rate and the Federal Funds rate
plus an applicable margin charge. The New Credit Facility will include customary
affirmative, negative and financial covenants, including a prohibition or
restriction on the payment of dividends on any Common Shares. The New Credit
Facility is subject to the execution of definitive agreements and the
satisfaction of customary closing conditions. There can be no assurance that the
Company will be successful in finalizing the definitive agreements and obtaining
the New Credit Facility or that, if obtained, the New Credit Facility will be on
the same terms as set forth in the written commitment.
The Company's acquisition program will continue to require significant
additional capital resources. The Company intends to seek capital as necessary
to fund acquisitions through one or more funding sources that may include bank
financing or the issuance of debt or equity securities or both. Cash flow from
operating activities, to the extent available, may also be used to fund
acquisitions. Although management believes that the Company will be able to
obtain sufficient capital to fund acquisitions, there can be no assurance that
sufficient capital will be available to the Company at the time it is required
or on terms acceptable to the Company. The Company currently has no plans,
arrangements or understandings, and is not participating in any negotiations,
with respect to any material acquisitions.
The Company believes that the net proceeds from this offering, combined
with internally generated cash flow and borrowings under its Senior Credit
Facility, or the New Credit Facility if obtained, will satisfy working capital
and capital expenditure requirements for the foreseeable future.
INFLATION
The Company believes the effects of inflation have not had a significant
impact on the results of operations or financial condition.
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997; earlier application is not permitted.
SFAS No. 128 requires restatement of all prior-period EPS data presented. The
Company does not believe that the adoption of SFAS No. 128 will have a material
effect on the Company's earnings per share.
23
25
BUSINESS
GENERAL
Snelling is a leading national provider of staffing solutions primarily
targeted to small and mid-sized businesses. As of September 30, 1997, the
Company operated as Snelling(R) Personnel Services through a network of 289
franchise locations and 29 Company-owned branch locations in 42 states, the
District of Columbia and Puerto Rico, as well as three foreign countries, and
had executed an agreement for the opening of one additional franchise location.
The majority of the Company's franchise and branch locations offer the Company's
clients integrated, full-service staffing solutions by providing traditional
flexible staffing, single-source management, temp-to-hire, career placement and
other staffing services from each location.
Founded in 1951, the Company currently provides flexible staffing personnel
for office, clerical and light industrial services. The Company also offers
career placement services in a number of fields, including accounting and
finance, engineering, health care, law, manufacturing, management information
systems and office, sales, marketing and technical services. Flexible staffing
services (which include traditional flexible staffing, single-source management
and temp-to-hire) accounted for approximately 90%, and career placement services
accounted for approximately 10%, of the Company's total system-wide sales for
both the year ended December 31, 1996, and for the nine months ended September
30, 1997.
The Company supports its franchises and branches with a number of corporate
programs, including ongoing training programs, management information systems
support and risk management services. The Company also provides its franchises
and branches with pay/bill processing services to support payroll and billing
activities and working capital needs related to their offering of flexible
staffing services.
INDUSTRY
The staffing industry has experienced rapid growth over the past decade as
a result of economic trends and changing approaches to staffing and employment.
According to Staffing Industry Report(R), the U.S. staffing industry has grown
from an estimated $31.4 billion in sales in 1991 to an estimated $74.4 billion
in 1996, representing a compound annual growth rate of approximately 19%. Based
on this information, 1996 sales generated by flexible staffing accounted for 66%
of the overall staffing market, PEOs accounted for 23% and career placement
accounted for 11%. According to Staffing Industry Report(R), estimated sales for
flexible staffing have increased (in approximate numbers) from $21.8 billion in
1991 to $49.0 billion in 1996, representing a compound annual growth rate of
18%. Traditional flexible staffing for office, clerical and industrial services
grew from approximately $12.1 billion in sales in 1991 to approximately $26.4
billion in 1996, representing a compound annual growth rate of 17%.
The use of flexible staffing, the largest staffing category, has become
widely accepted by businesses as a valuable tool for managing personnel costs,
supplementing full-time workforces, meeting specialized or fluctuating
employment requirements and selectively recruiting permanent employees through a
temp-to-hire evaluation process. Vacations, illness, resignations and periodic
fluctuations in work volume have historically created demand for flexible
staffing. More recently, the growing cost and difficulty of hiring, laying off
and terminating full-time workers and the desire by businesses to better control
their employee costs has also encouraged a greater use of flexible staffing by
businesses. In addition, employees have become increasingly receptive to
flexible staffing opportunities, which enable them to develop skills in a
variety of work environments and maintain more flexible schedules to meet
personal demands.
Professional employer organizations ("PEOs"), also known as employee
leasing companies, comprise the second largest sector in the staffing industry.
A PEO establishes a "co-employer" relationship with its clients and
contractually assumes substantial employer responsibilities with respect to
worksite employees, including human resource administration, employment
regulatory compliance, workers' compensation coverage, health care and other
employee benefits. The outsourcing of one or more of these various functions to
a PEO benefits clients by allowing them to focus on their core business and
manage their employee-related risks. Because a PEO enters into agreements with
numerous small and mid-sized clients, it can achieve economies of scale and
perform employment-related functions at a level typically available only to
large corporations that have
24
26
substantial resources devoted to human resource management. According to
Staffing Industry Report(R), estimated sales in the PEO industry have increased
(in approximate numbers) from $5.0 billion in 1991 to $17.3 billion in 1996,
representing a compound annual growth rate of 28%.
The career placement market continues to grow, but at a lower rate than
other sectors of the staffing industry and the industry generally. Estimated
sales from career placement (in approximate numbers) grew from $3.9 billion in
1991 to $7.2 billion in 1996, representing a compound annual growth rate of 13%.
Fundamental changes in the employer-employee relationship continue to occur,
with employers developing increasingly stringent criteria for selecting
permanent employees while moving towards project-oriented flexible staffing and
contract hiring. As a result, career placement has taken on a more specialized
and limited role in the staffing process.
The Company believes that the staffing services industry is highly
fragmented and is currently experiencing a trend towards consolidation as a
result of several factors, including increasing competition and the growing
importance of economies of scale and working capital to support increased demand
for alternative staffing services by small companies and centralized staffing
services by large companies.
BUSINESS STRATEGY
Snelling's goal is to expand its position as a leading national provider of
staffing solutions to small and mid-sized businesses. The Company believes that
its strong reputation and brand name recognition will support the Company in
achieving its business strategy, which is comprised of the following key
elements.
Focus on Small and Mid-Sized Businesses. The Company focuses on providing
office, clerical and light industrial staffing solutions to small and mid-sized
businesses, generally with less than 500 full-time employees. According to the
latest data published by U.S. Bureau of the Census, businesses with less than
500 employees comprised the fastest growing business sector in the United States
in 1993. The Company believes that small and mid-sized businesses typically seek
value-added personnel services offered at fair market prices as opposed to
larger businesses that emphasize price and request volume discounts. The Company
believes that it has developed competitive advantages in servicing small and
mid-sized businesses by tailoring its operations to meet local client needs and
by establishing strong client relationships through local marketing efforts,
quality service and community involvement.
Offer Integrated, Full-Service Approach. The Company uses an integrated,
full-service approach to staffing by generally providing its clients with a wide
range of staffing services from each location. This integrated, full-service
approach is designed for small and mid-sized businesses that have fewer
personnel resources than larger companies. With this approach, branch and
franchise locations design customized service packages to meet the client's need
for flexibility in service delivery. This approach also provides clients with
the opportunity to choose from a menu of services that includes employee
screening, applicant testing, credit checks, personality evaluation, drug
testing, on-site supervision, single-source management and temp-to-hire options,
as well as contingency career search services. The Company emphasizes building
long-term relationships with its clients by assuming an ongoing role in the
overall service needs of its flexible staffing and career placement clients.
Maintain Strong Operating Infrastructure. The Company seeks to enhance the
success of its business by maintaining a strong operating infrastructure to
support its entrepreneurial network of franchise and branch locations. The
Company devotes significant resources to the development, establishment and
continuing review of operating systems and procedures for use in the day-to-day
operations of its franchises and branches to ensure the consistent delivery of
quality services to the Company's clients. Snelling supports local operations
through a number of corporate programs, including training, management
information systems development and support, risk management and marketing and
advertising services. The Company also provides franchises and branches with
pay/bill processing services to support payroll and billing activities and
working capital needs related to their offering of flexible staffing services.
Recruit and Retain Qualified Management and Personnel. A key component of
the Company's success is its ability to attract and retain qualified management
and personnel, including flexible staffing personnel. The
25
27
Company strives to recruit and retain high quality corporate management and
branch personnel and to attract qualified and motivated franchisees. Each
franchise and branch location manager is provided with recruiting materials and
training on how to recruit qualified full-time employees in key positions. The
Company also seeks to recruit, screen and maintain a pool of qualified flexible
staffing personnel for entry-level positions. Each franchise and branch location
is provided with a proprietary recruiting manual that outlines use of recruiting
materials, advertising and activities designed to increase applicant flow and
retention and the benefits of participating in community activities. In addition
to the attraction of its strong reputation and brand name, the Company has
developed a system of promotions, employee testing and evaluation in order to
maintain and expand its pool of qualified personnel needed to satisfy ongoing
client demand.
Control Costs Through Emphasis on Risk Management. Given the nature of
flexible staffing services, employee-related costs incurred by the Company are
significant and workers' compensation insurance is the principal component of
these costs. Recognizing that workers' compensation and other insurance
coverages are controllable costs, the Company created a dedicated risk
management department in 1994. The Company provides risk management support to
branch locations and franchise locations participating in its pay/bill
processing program, which is focused on safety and loss prevention to control
employee-related costs. The Company's risk management department also
administers a master insurance program for participating locations. The Company
believes that its emphasis on controlling these costs enables its branches and
participating franchises to price their services competitively.
GROWTH STRATEGY
Snelling intends to achieve revenue and earnings growth and increase market
share through a focused growth strategy employing the following five key
elements:
Increase Market Penetration and Profitability at Existing Locations. The
Company has experienced significant internal growth and believes that a
substantial opportunity exists to further increase its market penetration and
profitability at its existing franchise locations and branch locations. The
Company intends to achieve continued internal growth in sales and profitability
by capitalizing on increasing economies of scale and through ongoing investment
in information systems and technology, intensive training of sales personnel and
aggressive pursuit of cross-selling opportunities.
Pursue Acquisitions. The Company intends to capitalize on the significant
opportunities available in the staffing industry to increase its sales and
market share through acquisitions in new and existing markets. The primary focus
of the Company will be to expand branch locations through acquisitions, with a
long-term objective of achieving an equal number of franchise locations and
branch locations. Additionally, the Company plans to pursue strategic
acquisitions of staffing services businesses that offer complementary services,
thereby expanding its range of services offered. The Company will also consider
selective acquisitions of existing franchise locations. During 1996 and the
first nine months of 1997, the Company acquired seven independent staffing
locations and ten franchise locations, with aggregate annual revenues of
approximately $47.1 million. Subsequent to September 30, 1997, the Company
acquired one independent staffing location with annual revenues of approximately
$14.4 million and one franchise location with annual revenues of approximately
$2.6 million and has a pending acquisition of another independent staffing
location currently scheduled to be completed in December 1997.
Establish Alternative Distribution Channels. The Company intends to
evaluate and establish, where appropriate, alternative distribution channels for
its services. An example of an alternative distribution channel is
"co-branding," which strategically links the Company with another services
provider or a retailer in order to exploit marketing synergies. In 1996, the
Company developed a co-branding relationship with Wal-Mart, Inc. ("Wal-Mart"),
through which the Company opens both branch and franchise locations in selected
Wal-Mart Supercenters, giving Snelling access to the high volume of potential
flexible staffing employees passing through a Wal-Mart store. As of September
30, 1997, the Company had three branch locations and eight franchise locations
in Wal-Mart Supercenters. The Company intends to develop further its
relationship with Wal-Mart and may pursue other co-branding opportunities as
they arise.
26
28
Develop New Services. The Company seeks to add or further develop new
staffing services to complement its existing service offerings and expand its
existing client relationships. As an example, the Company seeks to develop a PEO
service offering. The Company also intends to expand services, such as
single-source management, which it currently provides on a limited basis.
Single-source management gives the Company the opportunity to establish
long-term relationships with clients and to generate a stable and recurring
source of revenue. Further development of new services may be accomplished
internally or through acquisitions.
Expand Through Selective Franchising. The Company intends to continue to
franchise in certain select markets. Through franchising, the Company is able to
broaden its geographic coverage and leverage its existing business with minimal
capital investment. The Company plans to direct the expansion of its franchise
program primarily toward the penetration of smaller markets. During 1996 and the
first nine months of 1997, the Company franchised a net addition of 16 new
locations. As of September 30, 1997, 15 were open and the remaining location was
scheduled to open by December 31, 1997.
ACQUISITIONS
Consistent with its growth strategy, Snelling began an expansion program in
1994 to acquire independent staffing companies and selected franchise locations.
The Company acquired six franchise locations in 1994 with aggregate annual
revenues of approximately $5.9 million; four franchise locations in 1995, with
aggregate annual revenues of approximately $8.0 million; seven independent
staffing locations and nine franchise locations in 1996, with aggregate annual
revenues of approximately $43.6 million; one franchise location in the first
nine months of 1997, with annual revenues of approximately $3.5 million; one
independent staffing location in October 1997, with annual revenues of
approximately $14.4 million; and one franchise location in November 1997, with
annual revenues of approximately $2.6 million. The aggregate consideration paid
with respect to these acquisitions was approximately $29.1 million and was
financed using a combination of cash, seller financing and bank loans. After
giving effect to the consolidation of certain locations of the acquired
companies, the Company's acquisitions have resulted in a net addition of 26
company-owned branch locations in 13 states. The Company has one pending
acquisition of an independent staffing location with annual revenues of
approximately $2.3 million, which is currently scheduled to be completed in
December 1997. On an ongoing basis, the Company evaluates opportunities to
acquire companies that are complementary to its business, including independent
staffing companies and selected franchises. The Company currently has no plans,
arrangements or understandings, and is not participating in any negotiations,
with respect to any material acquisitions.
27
29
The following table lists each of the Company's acquisitions or pending
acquisitions since January 1, 1996, the acquired company's or franchise's
estimated annual revenues and the geographic markets served by the acquired
locations:
ESTIMATED
RELATIONSHIP REVENUES NUMBER OF GEOGRAPHIC
SELLER DATE ACQUIRED TO COMPANY (IN MILLIONS) LOCATIONS MARKETS SERVED
------ ------------- ------------ ------------- --------- --------------
Phase II Personnel Systems, Inc. Pending Independent $ 2.3 1 Charlotte, NC
Lummus Services, Inc. Nov. 1997 Franchise 2.6 1 Dallas, TX
Cross Temp, Inc.; Cross Personnel Oct. 1997 Independent 14.4 1 New York, NY
Agency, Inc.
JW Personnel, Inc. May 1997 Franchise 3.5 1 West Palm Beach, FL
Help, Inc.; A Help, Inc.; Temp Help, Dec. 1996 Independent 5.6 4 Omaha, NE and Council
Inc. Bluff, IA
B.A.T. Group Holdings, Inc.; KAL Nov. 1996 Franchise 18.3 5 Chicago, IL and
Help Enterprises, Inc.; Par Three Kalamazoo, MI
Help Services, Inc.; Par Four
Services, Inc.; Par Five Services,
Inc.
Fidelity Personnel Services, Inc. Sept. 1996 Independent 6.0 1 Blountville, TN
Personnel Professionals of the Sept. 1996 Independent 4.5 1 Albany, NY
Northeast, Ltd.
Careers Unlimited, Inc. Aug. 1996 Independent 3.5 1 Raleigh-Durham, NC
Richard W. Conley/Timothy J. Crouser Aug. 1996 Franchise 0.9 1 Lancaster, PA
R. C. Management, Inc. Mar. 1996 Franchise 4.8 3 Kansas City, MO and
----- -- Overland Park, KS
Total: $66.4 20
===== ==
SERVICES
Snelling provides staffing services to over 13,000 businesses, professional
and service organizations, and governmental entities in the United States
through the Company's franchise locations and Company-owned branch locations
participating in its pay/bill processing program. The majority of the Company's
franchise and branch locations offer the Company's clients integrated,
full-service staffing solutions by providing traditional flexible staffing,
single-source management, temp-to-hire, career placement and other staffing
services from each location. Flexible staffing services (which include
traditional flexible staffing, single-source management and temp-to-hire)
accounted for approximately 90% of the Company's total system-wide sales during
each of 1995, 1996 and the first nine months of 1997.
Traditional Flexible Staffing. The Company places flexible staffing
personnel who perform office services and light industrial services. Office
services include general office and clerical positions, such as accounting
assistants, bookkeepers, legal secretaries, administrative assistants, data
processors, typists, receptionists, file clerks, mail clerks and messengers, as
well as other specialized functions. Light industrial work consists of skilled
tasks for nearly every industry, including, engineering, construction,
electronics, manufacturing, warehouse, distribution, delivery and retail.
Traditional flexible staffing personnel may be assigned for either a
specified or indefinite period of time as necessary to meet the needs of
clients. Snelling may provide flexible staffing in response to a continuing
client need or for specific project or peak-period requirements. Through the use
of Snelling's flexible staffing personnel, clients are able to avoid much of the
expense and inconvenience related to recruiting employees, including
advertising, interviewing and testing, conducting reference and background
checks and drug testing. The Company's clients are also able to eliminate or
reduce record keeping and decrease expenses associated with full-time employees,
such as fringe benefits, turnover and related employee costs. A client pays only
for actual hours worked by flexible staffing personnel and may terminate the use
of flexible staffing services without the adverse effects of layoffs.
28
30
Single-Source Management. The Company provides single-source management
services to businesses with a high volume of staffing needs, including national
accounts. This program usually requires the regular presence of a dedicated
Snelling manager on-site at the client's facility. Single-source management
encompasses every facet of coordinating, ordering, planning and tracking all
supplemental staffing personnel, including flexible staffing employees placed by
the Company's competitors. Single-source management represents a cost-effective
solution for employers in industries that require a variable workforce and that
spend a significant amount of administrative and personnel department time
managing employees whose jobs are generally routine and are characterized by
high turnover rates. Examples of the types of clients that might utilize a
single-source management program include customer service centers, distribution
centers, manufacturing and assembly facilities and communications call centers.
Temp-to-Hire. Temp-to-hire is an extension of traditional flexible staffing
that is intended to lead to the placement of permanent employees. Temp-to-hire
affords the client the opportunity to work with and evaluate an employee before
making a permanent hiring commitment. Using this staffing service, the client is
also able to limit traditional recruitment and screening costs. At the same
time, the flexible staffing employee is provided with an opportunity to evaluate
the job duties and understand the client's culture and expectations before
committing to a full-time position.
Career Placement Services. Since 1951, Snelling has provided career
placement services for businesses searching for new full-time employees. As a
result of its years of experience, the Company has developed extensive
recruiting and search capabilities, interview and assessment processes and
information verification procedures designed to result in the placement of
quality candidates that fit its client's needs. The Company provides career
placement services in a number of fields, including accounting and finance,
engineering, health care, law, manufacturing, management information systems and
office, sales, marketing and technical services.
SALES AND MARKETING
Snelling believes it is uniquely positioned to differentiate its services
from most of its competitors by offering integrated, full-service staffing
solutions to its clients, which are predominantly small and mid-sized
businesses. The full-service concept allows the Company to meet its client's
total staffing needs, including flexible staffing, single-source management,
temp-to-hire, career placement and other staffing services from each location.
The Company believes that a majority of its competitors focus on career
placement or flexible staffing, but have not integrated the delivery of these
services from each location.
The Company generates new clients through personal sales presentations,
telemarketing, direct mail solicitations, referrals from other clients and
advertising in a variety of local and national media, including the Yellow
Pages(R), newspapers, magazines and trade publications and the Internet. The
Company's advertising supplements local advertising efforts by Snelling's
franchises and branches. The Company also actively sponsors various community
activities (including, for example, co-sponsoring seminars on human resource-
related issues) in order to increase brand name recognition. The Company's
management personnel are encouraged to participate in national trade
associations, local chambers of commerce and other civic organizations and
conduct public relations activities.
In 1996 and the first nine months of 1997, approximately 13,000 and 12,000
clients, respectively, purchased services from the Company through its
Company-owned branch locations and franchise locations participating in the
Company's pay/bill processing program. The Company's clients are not
concentrated in any industry group or any region of the country. During 1995,
1996 and the first nine months of 1997, the Company's top ten clients in the
aggregate accounted for approximately 11%, 17% and 21%, respectively, of the
Company's revenues. In each of the same periods, the largest single client
(which varied from period to period) accounted for approximately 5% of the
Company's revenues in each period.
The Company's franchise and branch locations devote the majority of their
selling efforts to small and mid-sized businesses. Snelling provides sales and
marketing training to both its franchise and branch locations through corporate
franchise and branch support staffs at the Company's headquarters and in the
field. The support staffs assist local managers in developing sales
opportunities and improving marketing skills.
29
31
The Company also has implemented a national accounts unit on a limited
basis to supplement local sales and marketing. The national accounts unit
targets the single-source management market for large national and international
corporations that is not accessible by individual branch and franchise
locations. The national accounts unit is responsible for lead generation and the
preparation and presentation of proposals for franchise locations and branch
locations. Local franchise and branch locations then provide the service and
sales support for large national clients.
The Company has begun to establish alternative distribution channels for
its services. One such distribution channel is "co-branding," which
strategically links the Company with another services provider or a retailer in
order to exploit marketing synergies. In 1996, the Company developed a
co-branding relationship with Wal-Mart to open both branch and franchise
locations through the leasing of space in selected Wal-Mart Supercenters. This
relationship provides Snelling with access to the high volume of potential
flexible staffing employees passing through a Wal-Mart store as a source of
flexible staffing personnel. For Wal-Mart, a Snelling(R) Personnel Services
location provides an additional attraction to draw customers into the
Supercenter. Pursuant to a master lease, Wal-Mart leases space to the Company
for a Snelling location at a Wal-Mart Supercenter, typically for a three-year
term with a renewal option for an additional three years. The Company may
sublease space to franchisees on identical terms. At September 30, 1997, the
Company had three branch locations and eight franchise locations in Wal-Mart
Supercenters. Snelling's master lease arrangement with Wal-Mart is not
exclusive, and Wal-Mart is not obligated to enter into any specific location
leases. Wal-Mart has entered, and may enter in the future, similar co-branding
relationships with one or more of the Company's competitors. The Company is,
however, free to pursue other co-branding opportunities. There can be no
assurances that the Company will be able to continue its co-branding
relationship with Wal-Mart or to lease space in additional Wal-Mart
Supercenters.
The Company collects an advertising fee from most of its franchisees equal
to 0.5% of cash receipts related to franchise flexible staffing service sales
and 1.0% of cash receipts related to franchise career placement sales. The
Company also contributes an advertising fee at the same rates on behalf of each
of its branches. These advertising fees are placed in a national advertising
fund, which the Company administers. The national advertising fund may be used
to advertise in various media and to promote public relations and is intended to
maximize general public recognition and acceptance of the Snelling brand name to
improve the collective success of the Snelling system. Costs paid out of the
national advertising fund include salaries and other costs of the Company's
corporate marketing department related to national advertising efforts. A
marketing committee of the franchisee's National Executive Council has been
established to provide advice to the Company with respect to the use of the
national advertising fund, but the Company has sole discretion as to the use of
the fund. The Company may also terminate the fund at any time after all monies
have been expended. See "-- Organization -- Franchises."
ORGANIZATION
As of September 30, 1997, Snelling offered its staffing services through a
network of 318 locations, 29 of which were branch locations owned and operated
by the Company and 289 of which were franchise locations owned and operated by
franchisees. The Company has a long-term objective of achieving an even mix
between the number of franchise and branch locations.
Branches. The Company is committed to the expansion of its operations
through the acquisition and opening of new Company-owned branch locations. As of
September 30, 1997, Snelling had 29 Company-owned branch locations in 13 states.
During 1996 and the first nine months of 1997, the Company added a net total of
21 new branch locations. For the nine months ended September 30, 1997,
approximately 98% of branch revenues were derived from flexible staffing
services.
A typical branch location covers 800-1,200 square feet and is staffed with
a branch manager, two account managers and two personnel managers. The branch
manager is generally responsible for sales and operations and reports to one of
four area directors, who have responsibility for marketing, sales, training and
recruiting for a specific group of branch locations. The account managers are
responsible for sales, and the personnel managers are in charge of recruiting
flexible and career personnel.
30
32
Franchises. At September 30, 1997, the Company operated through 289
franchise locations in 42 states, the District of Columbia, Puerto Rico, and
three foreign countries. The Company earns revenue from the sale and continuing
operation of franchises. Upon the sale of a franchise, the Company currently
recognizes initial franchise and training fees of $21,000 when the franchise
begins operations and the fees are collected. The Company has added a net total
of 15 new franchise locations since the beginning of 1996 and has executed an
agreement for one additional franchise location scheduled to open by December
31, 1997.
During 1996 and the first nine months of 1997, the Company's ten largest
franchisees (excluding franchise locations that were acquired by the Company)
accounted for 22.5% of the Company's total system-wide sales and 46.5% and
42.9%, respectively, of the Company's net earnings. In addition, during 1996 and
the first nine months of 1997, the Company's largest franchisee accounted for
4.7% and 5.0%, respectively, of the Company's total system-wide sales and 13.8%
and 8.5%, respectively, of the Company's net earnings.
At September 30, 1997, the Company had 196 franchisees, each of whom had
executed one or more franchise agreements with Snelling that set forth their
respective rights and obligations. Although franchise agreements differ
depending on when the franchise was sold, recently executed franchise agreements
generally provide that the clients serviced by the franchisee and the flexible
staffing employees placed by the franchisee are clients and employees,
respectively, of the Company or become such immediately upon termination of the
franchise agreement.
Snelling franchises differ from typical franchises in two significant
respects. First, a franchisee does not receive an exclusive territory for its
operations and, second, the franchise is granted for as long as the franchisee
continues to operate it. The Company has a right of first refusal with respect
to the sale of a franchise and, in certain limited circumstances, such as the
death of a franchisee or a controlling owner or upon termination of certain
franchises, an option to purchase the franchise. A franchise agreement is,
however, subject to termination by the Company or the franchisee in certain
circumstances, including breaches of the franchise agreement by the franchisee.
A franchisee typically may terminate the franchise agreement upon at least six
months prior written notice and the satisfaction of certain other obligations.
Most of the Company's existing franchise agreements prohibit the franchisee from
competing with Snelling within a defined geographic area for a period of two
years after any termination. The Company's current form of franchise agreement
contains a two-year noncompetition covenant pursuant to which a terminated
franchisee will not contact or do business with any existing Snelling client or
operate any personnel services business within a ten-mile radius of the
franchisee's location or any Snelling location where a principal owner of the
franchise had an interest during the three-year period prior to the termination.
The majority of franchise fee revenues are generated by royalties on the
continuing operations of the franchises. The Company receives monthly royalties
that are generally 4.5% of the flexible staffing services sales and 7.0% of the
career placement sales collected by franchisees each month. In order to
encourage franchisees to place flexible staffing employees on Snelling's
national accounts, which typically result in lower gross margins than the other
clients serviced by the franchises, the franchisee will receive a percentage of
the gross margin of the national account billing. For those franchisees who use
the Company's pay/bill processing services, the related royalties are deducted
from their distribution payments on a weekly basis. The remaining royalty
payments from the franchisees are payable monthly and are due within ten days
following the end of each month. The Company also collects an advertising fee
equal to 0.5% of franchise flexible staffing services sales and 1.0% of
franchise career placement sales. See "-- Sales and Marketing" and
"-- Operations -- Pay/ Bill Processing Services."
The Company has a sales incentive program, which encourages franchisees to
earn a reduction of their effective royalty rate based on the total sales
generated by the franchise. This program currently reduces the effective royalty
received by the Company to approximately 4.0% of flexible staffing sales
collected and approximately 6.0% of career placement sales collected. The
Company will discontinue this program as of January 1, 1998. Beginning January
1, 1998, subject to completion of the offering, the Company intends to implement
a stock option offer program for franchisees, pursuant to which nonqualified
stock options to purchase up to 800,000 shares of Common Stock may be granted to
eligible franchisees with respect to a three-year period. The Company expects
that option grants for each calendar year during the program will be
31
33
determined based on a formula set annually by the compensation committee of the
board of directors. See "Management -- Stock Option Plans -- Franchisee Stock
Option Offer Program."
Also beginning January 1, 1998, subject to completion of the offering, the
Company plans to enter into an expansion investment program with its existing
franchisees to open new franchises. The Company will allocate $5.0 million
toward franchise expansion until the earlier of the 100th franchise expansion
implemented under the program or December 31, 2000. For each approved expansion
location, the Company will invest $50,000 in a new corporate franchisee through
the purchase of preferred stock, which will constitute 5% of the total capital
stock. The existing franchisee must invest an additional $50,000 for the
remaining equity interest in the new corporate franchisee in the form of common
stock. The new corporate franchisee will be required to execute the Company's
then current form of franchise agreement. Snelling will have only limited voting
rights and will not have the right to elect directors; however, Snelling will be
entitled to a 5% preference on net assets in the event of a liquidation or a
change of control.
Snelling offers franchises to qualified individuals and entities to operate
one or more full-service Snelling(R) Personnel Services locations. Franchises
may be sold either to open a new location or convert an existing, independent
staffing business. The Company supplies a franchise with a proprietary system of
management and personnel services training, operational procedures and
techniques, advertising and promotional programs and materials and record
keeping and reporting procedures for operating a Snelling(R) Personnel Services
location. The Company also grants to a franchisee a nonexclusive license to use
Snelling's registered service marks in connection with the operation of the
franchise location. The Company has a franchise support department to assist
franchises with training and business consulting.
Since 1957, the Company has maintained a National Executive Council ("NEC")
made up of 16 franchisee members elected by regions and one representative of
the Company in order to facilitate its relationships and communications with
franchisees. The purpose of the NEC, which generally meets twice a year, is to
act as an advisory group to the Company in the promotion and growth of the
Company's services. Each franchisee owner in good standing, regardless of the
owner's percentage ownership, is entitled to one vote per owned franchise
location for each NEC vacancy to be filled from the owner's region. The Company
believes that its relationships with its franchisees are good.
OPERATIONS
Training of Franchise and Branch Personnel. The Company provides initial
and continuing training to franchise and branch personnel through its "Snelling
University" training courses at the Company's headquarters in Dallas, Texas.
Training programs are generally two weeks in length. Initial training courses
cover a wide range of topics, including sales, operations, telemarketing, human
resources (including recruitment and retention of qualified personnel), sales
management, training, motivation and goal setting, financial management, risk
management, computer software and customer service. A new franchisee and the
manager of the new franchise location, if any, must attend and complete this
initial training program to the Company's satisfaction. Ongoing training is also
provided to other franchise and branch location personnel. Continuing education
is not mandatory for all personnel; however, each local manager is requested to
attend additional training at Snelling headquarters every 24 months.
The Company offers continuing education courses at varying times and at
various locations across the country. Training courses are regularly updated to
keep current with industry trends and modifications to the Snelling system.
Supplemental training is also available in the field through print, video and
audio training courses, system manuals and approved forms, which the Company has
developed and copyrighted.
Recruitment of Flexible Staffing Personnel. The Company seeks to recruit,
screen and maintain a pool of qualified flexible staffing personnel for
entry-level positions. Each franchise and branch location is provided with a
proprietary recruiting manual that outlines community centers of influence, use
of recruiting materials, advertising and activities designed to increase
applicant flow and retention. In addition to the attraction of its strong
reputation and brand name, the Company has developed a system of promotions,
employee testing and evaluation in order to maintain and expand its pool of
qualified personnel needed to satisfy ongoing client demand.
32
34
Flexible staffing personnel are recruited through advertising in local
media and, to a lesser extent, national media, the Yellow Pages(R) and the
Company's Internet web site. In addition, a substantial portion of new employees
are obtained through referrals from other employees of the Company, clients and
various organizations and associations. To encourage employee referrals and
retention, the Company has instituted an incentive program. Flexible staffing
personnel who are enrolled in the Xtra Club(TM) program earn points for hours
worked and for referrals hired. These points are redeemable for various
merchandise found in the Company's Xtra Club(TM) catalog.
The Company interviews, tests, checks references and evaluates the skills
of applicants for flexible employment, utilizing systems and procedures
developed by the Company. Flexible staffing employees are employed by the
Company on an as needed basis dependent upon client demand. Flexible staffing
employees are paid for the time they actually work, but may be eligible for
holiday, vacation, bonus compensation and other benefits.
Pay/Bill Processing Services. Through its wholly owned subsidiary, Advance
Processing Systems, Inc. ("Advance"), the Company offers franchises pay/bill
processing services to support payroll and billing activities and working
capital needs related to their offering of flexible staffing services.
First-time franchisees who have purchased franchises since September 27, 1992,
are contractually obligated to use these services. Other franchisees are
encouraged to participate, but are not required to do so. At September 30, 1997,
130 franchise locations were participating in the Company's pay/bill processing
program. All of the Company's branches also utilize the pay/bill services. The
Company does not currently provide franchises with processing for career
placement services. Flexible staffing services sales of non-pay/bill franchise
locations are only reflected in system-wide sales figures. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General."
The Company's pay/bill processing program provides franchisees with working
capital financing based on flexible staffing services billings. On a weekly
basis, Advance pays flexible staffing employees, withholds and remits payroll
taxes to the proper government agencies, bills and receives payments from
customers and processes distribution payments to franchisees after deduction of
the related royalties, advertising fees and pay/bill processing fees. If any
flexible staffing services billings remain unpaid for 60 days, the amount billed
is charged back to the franchisee.
Risk Management. The Company is responsible for all employee-related costs
for the flexible staffing employees placed by its branch locations and franchise
locations participating in the pay/bill processing program. These variable
expenses include workers' compensation, unemployment insurance, FICA and
Medicare taxes, state and local taxes and other general payroll expenses, with
workers' compensation representing the principal component. Recognizing that
workers' compensation and other insurance coverages are controllable costs, the
Company created a dedicated risk management department in 1994. The Company
provides risk management support to branch locations and franchise locations
participating in its pay/bill processing services, which is focused on safety
and loss prevention to control employee-related costs. The Company believes that
its emphasis on controlling these costs enables its branches and participating
franchises to price their services competitively.
The Company's risk management department is currently staffed by five
professionals with extensive experience in risk management. The Company's risk
management department administers a master insurance program for participating
locations. Risk management personnel work directly with branch and participating
franchise locations to reduce each location's employee-related costs. Risk
management personnel also provide employee safety and health programming and
training on loss control issues. As part of its risk management policy, the
Company limits the types of assignments that can be accepted based on a risk
analysis of the type of work to be performed. The risk management department
manages risk costs by analyzing premium and loss data from participating
locations in order to identify loss trends and determine appropriate risk
management responses. The risk management department is also responsible for
allocating premiums to participating locations, which is based largely on each
participating location's ratio of incurred losses to premiums contributed.
33
35
Management Information Systems. The Company is committed to fully automate
all of its franchise and branch locations with integrated, company-wide
information systems. Since 1995, Snelling has invested approximately $6.1
million, and intends to invest approximately $2.9 million of additional funds in
the implementation of advanced management information systems. The Company's
goal is to strengthen its ability to service clients by effectively filling work
assignments, accurately generating payroll and billings, monitoring flexible
staffing employee performance and providing costing or other management
reporting requested by its clients. The Company believes the new management
information systems will be fully functional in 1998.
The Company's new corporate management information system is comprised of a
front-office component and a back-office component. The front-office system uses
EmpACT(TM) software, an office automation system that handles sales and
day-to-day operations of branch and franchise locations. The PeopleSoft(R) back
office system is composed of financial and human resource/payroll applications.
As of September 30, 1997, 38 franchise and 24 branch locations had fully
implemented the EmpACT(TM) front office system, and an additional 27 franchise
and one branch location had executed sublicense agreements and implementation
was pending. The Company currently has implemented the payroll, accounts
receivable, accounts payable, general ledger and asset management applications
of PeopleSoft(R).
The EmpACT(TM) system provides full front office functionality to
electronically manage the Company's day-to-day transactions, scheduling and
reporting requirements. The EmpACT(TM) System captures and matches, on a timely
basis, client order requirements with the experience, skills, education,
availability and desires of employees. This software is year 2000 compliant and
is scaleable from one field installation to multiple networked field locations
operating on a single database. The Company networks certain metropolitan
locations to share client and employee information providing the greatest
benefit to sales and service and takes advantage of reporting and communications
capabilities to conduct remote audits of its local operations. The Company has
had EmpACT(TM) software enhanced to provide full service functionality for the
various staffing services offered at each location. The software may be further
customized by the individual end-user as circumstances require.
The PeopleSoft(R) back office system is designed to provide the data needed
to meet the Company's external reporting requirements to, among others,
shareholders, creditors and government agencies and is year 2000 compliant. The
completed back office system will process payroll, billing, accounts receivable,
accounts payable and general ledger, along with other financial applications. It
will provide a full range of reports needed to manage franchise and branch
locations on a daily basis, including payroll cost reports, billing reports,
gross margin analyses, client/personnel profitability and receivable agings.
The Company also established an Internet web site in January 1997 listing
all franchise and branch locations and simultaneously began licensing individual
Internet web sites, hot linked to the Company's main site, to its franchises.
Each individual web site has the ability to post both jobs and active job
seekers and receive and direct job applicants and client inquiries to the
appropriate franchise or branch location. In addition, the Company has begun the
implementation of a corporate intranet web site for the paperless dissemination
of information within Snelling's corporate office and among its franchise and
branch locations.
The Company operates a disaster recovery site for its management
information systems, which is near the Snelling headquarters but is serviced by
a separate electric power utility grid. The Company has implemented a
third-party disaster recovery software to create and assist with the ongoing
maintenance of the disaster recovery plan. The plan will enable the Company to
continue to operate in the event of a natural disaster or other problem
affecting the Snelling headquarters. An Oracle(R) database at the disaster
recovery site is updated hourly from the Company's database at Snelling
headquarters. All other computer information is backed up on a daily basis, and
the ultimate goal is to provide real-time backup. The disaster recovery site has
the necessary computer hardware and software and is physically configured so
that the pay/bill processing services provided by the Company can be run at the
disaster recovery site in the event of a problem with the headquarters system.
In the event of a problem, all remote information from franchise and branch
locations can be rerouted to the disaster recovery site within 30 minutes. The
disaster recovery site has not been fully implemented, but the Company
anticipates final completion and testing during the fourth quarter of 1997.
34
36
Once fully implemented, Snelling believes it will have the ability to fully
recover its core financial and pay/bill processing functions within 48 hours of
a total disaster at its corporate headquarters.
COMPETITION
The U.S. staffing industry is highly competitive and highly fragmented. The
Company believes that there are more than 20,000 staffing offices competing in
the industry. Approximately 1,600 staffing companies are members of the National
Association of Temporary and Staffing Services, the staffing industry's
principal trade association, and over 50 staffing companies are publicly traded.
There are limited barriers to entry, and new competitors frequently enter the
market. Snelling believes that no one firm has more than 5% of the U.S. market
based on system-wide sales. The staffing industry has, however, been undergoing
significant consolidation.
The staffing services provided by the Company are also provided by a number
of companies with national and international operations that have substantially
greater resources than the Company. The Company and other national firms
primarily benefit from having nationally recognized brand names. The Company
believes that other competitive factors include the availability of personnel,
quality of personnel and services, proximity to the client and price.
Since many clients of both the Company's flexible staffing services and
career placement services contract for their staffing services locally,
competition varies from market to market. In most major markets, competitors
generally include many of the large publicly traded companies and, in addition,
numerous regional and local full-service and specialized flexible staffing
service agencies, some of which may operate only in a single market. In most
areas, no single company has a dominant share of the market. Many clients use
more than one staffing services company, and it is common for major corporate
clients to use several staffing services companies at the same time. However, in
recent years, there has been a significant increase in the number of large
clients consolidating their flexible staffing purchases with a single supplier
or with a small number of firms. The trend to consolidate flexible staffing
purchases has in some cases made it more difficult for the Company to gain
business from potential clients who have already contracted to fill their
staffing needs with competitors of the Company. In other cases, the Company has
been able to increase the volume of business with certain clients who choose to
purchase flexible staffing primarily from the Company.
REGULATION
Snelling has a legal compliance program to ensure its operations conform
with applicable laws and regulations. The Company also regularly reviews new and
amended laws and regulations at the federal, state, and local levels to
determine their applicability to the services then offered by the Company.
Staffing firms are generally subject to various types of government laws
and regulations, including (i) regulation of the employer/employee relationship
between a firm and its flexible staff and (ii) registration, licensing, record
keeping and reporting requirements. Staffing firms are the legal employers of
their flexible staffing employees. Therefore, staffing firms are also governed
by laws regulating the employer/employee relationship such as tax withholding or
reporting, social security or retirement, anti-discrimination and workers'
compensation.
In certain states, companies which engage in career placement are subject
to regulations. The Company analyzes the applicability of these state
regulations to its career placement activities and complies with these
requirements, if applicable.
The Company's sale of franchises and licenses is regulated by the Federal
Trade Commission and by authorities in approximately 16 states. The Company must
deliver a franchise offering circular (similar to a prospectus) to prospective
franchisees. The Company has filed either the appropriate registration or
obtained an exemption from registration in states that require franchisors to
register in order to sell franchises. The Company believes these requirements
are expensive and time-consuming and impact the Company's ability to sell
franchises, but to no greater extent than other staffing companies that engage
in franchising.
35
37
As a result of the implementation of its new management information
systems, the Company does not believe it will be using any software after 1998
that is not year 2000 compliant. In addition, the Company believes that any use
of software during the interim implementation period that has not been modified
to be year 2000 compliant will not materially adversely affect the Company's
business or results of operations.
PROPERTIES
Snelling's executive offices are located in approximately 43,000
square-feet of leased space in an office building in Dallas, Texas, pursuant to
two leases. The office leases expire in 2001 and 2002, respectively. The Company
also leases 2,300 square feet of space in Richardson, Texas, for the disaster
recovery site for its management information systems. The disaster recovery site
lease expires in March 2002. The Company's branch locations are located in
leased premises, and the majority are pursuant to leases with fixed monthly
rentals and three- to five-year terms.
INTELLECTUAL PROPERTY
The Company currently has 13 service marks and trademarks registered with
the United States Patent and Trademark Office, including Snelling(R), Snelling
and Snelling(R) and Snelling Temporaries(R). These marks are used by the Company
and its franchisees. Most Snelling locations operate under the name Snelling(R)
Personnel Services. The Company does not believe that the loss of any of the
trademarks or service marks, other than Snelling(R) and Snelling and Snelling(R)
would have a material adverse effect on the Company's financial condition and
results of operations.
The Company has no patents, but has copyrighted its original materials. The
Company has obtained registered copyrights for certain of its training and
operations manuals and claims statutory copyright protection for other original
materials. These original materials include the Company's proprietary Remote
Data Entry software.
The Company believes that the protection of its marks and copyrights is
important because of client recognition of the Snelling brand name and the
unique nature of the Snelling system. Franchise agreements include appropriate
provisions granting nonexclusive licenses to franchisees to use the Company's
trademarks and copyrights. Such use inures to the benefit of the Company. The
Company intends to vigorously defend its marks and copyrights.
EMPLOYEES
At September 30, 1997, Snelling had approximately 300 full-time employees.
None of the Company's employees are covered by collective bargaining agreements.
The Company believes that its relationships with its employees are good.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
Snelling, in the ordinary course of its business, may be threatened with or
named as a defendant in legal or administrative proceedings. In addition, the
Company periodically is subject to government audits and inspections. The
Company is not currently a party to any litigation or administrative proceedings
that could have, individually or in the aggregate, a material adverse effect on
the Company's business, financial condition or results of operations.
The Company maintains insurance in such amount and with such coverages,
deductibles and policy limits as management believes are reasonable and prudent.
The principal risks that the Company insures against are general liability,
workers' compensation, employee theft and fidelity losses, errors and omissions
and employee practices liability. The Company believes that its insurance
coverages are adequate for the purposes of its business.
36
38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows.
NAME AGE POSITION
---- --- --------
Robert O. Snelling, Sr............... 65 Director, Chairman of the Board and
Chief Executive Officer
Timothy J. Loncharich................ 53 Director, President and Chief
Operating Officer
Robert O. Snelling, Jr............... 41 Director and Vice Chairman of the
Board and Senior Vice President
J. Russell Crews..................... 41 Director, Senior Vice President,
Chief Financial Officer and Treasurer
R. Allen Riggs....................... 57 Executive Vice
President -- Operations
Barbara A. McAninch.................. 50 Vice President, Legal, General
Counsel and Secretary
Robert O. Snelling, Sr., was elected Chairman of the Board in 1968 and a
director in 1956. He was elected Chief Executive Officer in October 1997. Mr.
Snelling joined the Company in 1952 and served as Chief Executive Officer from
1956 to 1994 and President and Chief Operating Officer from 1956 to 1970, 1973
to 1988 and 1993 to 1994. Mr. Snelling has been a pioneer in the flexible
staffing industry since its inception. He has received many honors and awards in
recognition of his contributions to the staffing industry. President Bush
appointed him to the National Employment Commission in 1992.
Timothy J. Loncharich was elected President July 1994, a director in August
1994 and Chief Operating Officer in October 1997. Mr. Loncharich also served as
Chief Executive Officer from July 1994 through September 1997. From 1990 to
April 1994, Mr. Loncharich was President and Chief Executive Officer of
Nursefinders, Inc., a healthcare staffing company and a subsidiary of Adia SA, a
publicly traded staffing company now known as Adecco SA. From 1985 to 1990, he
served as Executive Vice President, Chief Operating Officer, Chief Financial
Officer and a director of Interim Services Inc., a publicly traded staffing
company. Mr. Loncharich has over ten years of experience in the staffing
industry and 15 years of service industry experience.
Robert O. Snelling, Jr., was elected Vice Chairman of the Board and Senior
Vice President in December 1996 and a director in September 1993. Mr. Snelling
joined the Company in 1990 and has served in various management positions with
the Company, including Senior Vice President -- Information Systems from
September 1994 to December 1996, Senior Vice President, Quality Control from
April to September 1994 and Senior Vice President from September 1993 to April
1994. From March 1988 to August 1990, he was a managing member of the executive
committee of General Fasteners Company, a wholesale distribution company. From
January 1983 to February 1988, Mr. Snelling held various management positions
with and became the corporate secretary of Lufasco, Inc., a wholesale
distribution company. Mr. Snelling has more than 14 years of service industry
experience.
J. Russell Crews was elected Senior Vice President, Chief Financial Officer
and Treasurer in January 1989 and a director in June 1993. From 1981 to 1988, he
was a manager with the public accounting firm of Grant Thornton. Mr. Crews, a
certified public accountant, has more than 19 years of service industry
experience.
R. Allen Riggs was elected Executive Vice President -- Operations in August
1997. From June 1997 to August 1997, Mr. Riggs served as President, Franchise
Division, of Holigan Investments, Inc., a home builder. From 1994 to January
1997, he served as Senior Vice President, Franchising, of Pearle Vision, Inc., a
retailer of optical products and services, and, from 1988 to 1994, he was the
Senior Vice President -- U.S. Operations
37
39
for Nursefinders, Inc. Prior to 1984, Mr. Riggs served in senior operations
positions with Curtis Mathes Corporation and Goodyear Tire and Rubber Company.
Barbara A. McAninch was elected Vice President, General Counsel and
Secretary in August 1997. Prior to joining the Company, Ms. McAninch was
employed by Pearle Vision, Inc., a retail and wholesale optical company. She
served as Senior Vice President, Legal and General Counsel from November 1996 to
May 1997, Director, Senior Vice President, Legal, General Counsel and Secretary
from September 1994 to November 1996, Vice President from August 1993 to
September 1994 and Managing Attorney from June 1992 to August 1993.
Robert O. Snelling, Sr., is the father of Robert O. Snelling, Jr. Mr. Crews
is married to a daughter of Anne M. Snelling, the wife of Robert Snelling, Sr.
The Company's board of directors is currently composed of four directors,
all of whom are employees of or otherwise affiliated with the Company. Each of
the current directors serves until the next annual shareholders' meeting or
until his or her successor has been duly elected and qualified. The Company
intends to expand the board of directors within 90 days following the closing of
this offering by adding three independent directors who are not employees of or
otherwise affiliated with the Company (each an "independent director").
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established an executive committee, which is
composed of the current directors, with Mr. Loncharich serving as Chairman. The
executive committee has the authority, between meetings of the board of
directors, to take all actions with respect to the management of the Company's
business that require action by the board of directors, except with respect to
certain specified matters that by law must be approved by the entire board of
directors.
Following the closing of this offering, the board of directors intends to
create an audit committee and a compensation committee. The audit committee will
be composed of three independent directors. The audit committee will be
responsible for (i) reviewing the scope of, and the fees for, the annual audit,
(ii) reviewing with the independent auditors the corporate accounting practices
and policies and recommending to whom reports should be submitted within the
Company, (iii) reviewing with the independent auditors their final report each
year, (iv) reviewing with internal and independent auditors overall accounting
and financial controls and (v) being available to the independent auditors
during the year for consultation purposes.
The compensation committee will be composed of three independent directors.
The Compensation Committee will determine the nature and amount of the
compensation of the executive officers of the Company and will administer the
Company's 1997 Stock Option Plan and the planned stock option offer program for
franchisees.
DIRECTOR COMPENSATION
Each independent director, who is not an employee or officer of the
Company, will receive a fee of $36,000 annually and $1,500 per board or
committee meeting. Pursuant to the Company's 1997 Non-Employee Directors Stock
Option Plan, each independent director will also receive a grant of options to
purchase 5,000 shares of Common Stock upon his or her election or appointment to
the board of directors and upon his or her reelection to the board of directors
at each annual shareholders' meeting. See "-- Stock Option Plans -- 1997
Non-Employee Directors Stock Option Plan." All directors will be reimbursed for
expenses incurred in connection with attendance at board of director and
committee meetings.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the Company's chief
executive officer and the Company's four other most highly compensated executive
officers for services rendered during 1996 (collectively each a "named executive
officer").
38
40
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) COMPENSATION($)(2) OPTIONS(#)(3) COMPENSATION($)(4)
- --------------------------- --------- ----------- ------------------ ------------- ------------------
Robert O. Snelling, Sr..... $475,736 $ 53,750 -- -- $19,528(5)
Chairman of the Board and
Chief Executive
Officer
Timothy J. Loncharich...... 276,979 273,750 -- 433,206 --
President and Chief
Operating Officer
Robert O. Snelling, Jr..... 157,314 140,750 -- 541,508 --
Vice Chairman of the
Board and Senior Vice
President
J. Russell Crews........... 161,481 140,750 -- 541,508 --
Senior Vice President,
Chief Financial
Officer and Treasurer
- ---------------
(1) Bonuses paid in 1997 for performance in 1996.
(2) Certain of the Company's executive officers receive personal benefits in
addition to salary and cash bonuses. The aggregate amount of the personal
benefits, however, does not exceed the lesser of $50,000 or 10% of the total
of the annual salary and bonus reported for the named executive officer.
(3) Class B Common Stock.
(4) No restricted stock has been awarded to the named executive officers.
(5) Life insurance premiums paid by the Company.
The following table represents the options granted to the named executive
officers during 1996 and the value of the options.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN OR BASE EXPIRATION ---------------------------
NAME GRANTED(#)(1) FISCAL YEAR PRICE($/SH) DATE 5%($) 10%($)
---- ------------- ------------ ----------- ---------- ------------ ------------
Robert O. Snelling,
Sr................... -- -- -- -- -- --
Timothy J.
Loncharich........... 433,206 16.7% $3.85 11/01/06 $1,048,890 $2,658,108
Robert O. Snelling,
Jr................... 25,982 1.0% 4.23 11/30/01 17,763 51,197
Robert O. Snelling,
Jr................... 515,526 19.8% 3.85 11/30/06 1,248,205 3,165,215
J. Russell Crews....... 541,508 20.8% 3.85 11/30/06 1,311,114 3,322,638
- ---------------
(1) Class B Common Stock.
(2) Calculated based on the fair market value of the Company's common stock as
of December 2, 1996, as determined by the board of directors pursuant to,
among other things, an independent valuation and sales of the Company's
common stock. The amounts represent only certain assumed rates of
appreciation mandated by the rules of the Commission. Actual gains, if any,
on stock option exercises and sale of Common Shares cannot be predicted, and
there can be no assurance that the gains set forth in the table will be
achieved.
39
41
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1996, the board of directors did not have a compensation committee or
other committee performing similar functions. Decisions concerning compensation
of executive officers were made by the board of directors, which included each
of the current directors, Robert R. Paulk (Senior Vice President -- Operations),
Richard H. Spragins (Senior Vice President -- Operations), Melinda S. Paulk
(Vice President -- National Accounts Division) and Anne M. Snelling (Vice
President). Following the election of independent directors to the board of
directors, the board of directors will create a compensation committee that will
be composed of three independent directors.
EMPLOYMENT AGREEMENTS
Chairman of the Board and Chief Executive Officer. The Company entered into
an employment agreement with Robert O. Snelling, Sr., in October 1997, pursuant
to which Mr. Snelling serves as Chief Executive Officer and, at such times as
Mr. Snelling serves on the board of directors, Chairman of the Board. The
employment agreement has a term of 15 years. The employment agreement provides
for a base salary of $475,000 per year, which will increase annually by an
amount determined by the board of directors, but in any event not less than two
times any change in the Consumer Price Index for the previous year. Mr. Snelling
is also entitled to various other benefits, including (i) one demand and two
piggyback registration rights with respect to Common Shares he holds and (ii)
sabbaticals from time to time as he and the Company deem appropriate, including
a planned one-year sabbatical at a time of his choosing.
Mr. Snelling's employment may be terminated prior to the end of the term by
the Company upon his death or disability, by mutual written consent of the
parties, by Mr. Snelling on 30-days' written notice or by the Company for good
cause (as defined in the employment agreement). If his employment is terminated
by the Company for any reason other than good cause, Mr. Snelling is entitled to
receive a severance benefit in an amount equal to two times his base salary paid
during the immediately preceding 12-month period. In addition, if Mr. Snelling's
employment is terminated for any reason or the number of hours he regularly
devotes to the business of the Company is reduced to substantially less than
full time, then he is entitled to receive, for the balance remaining of the
15-year term and for five years thereafter, annual deferred compensation in an
amount equal to 75% of his then base salary. The deferred compensation will be
payable monthly and be subject to minimum annual increases at the discretion of
the board of directors. If Mr. Snelling dies while an employee or while
receiving such deferred compensation, the Company will pay his surviving spouse
an annual death benefit equal to two-thirds of the amount of deferred
compensation Mr. Snelling would otherwise have been entitled to receive and for
the same period Mr. Snelling would have been paid deferred compensation. In
addition, if a change in control (as defined in the employment agreement)
occurs, Mr. Snelling may elect, within 12 months following the change of
control, to (i) have his compensation, including any deferred compensation,
increased by 10% or (ii) require the Company to pay him a lump sum equal to the
then present value of the economic benefits pursuant to the employment agreement
(plus, in either case, an additional gross-up amount in the event of imposition
of any federal excise or similar tax on the payment). If a change of control had
occurred on October 31, 1997, the present value amount payable to Mr. Snelling,
at his election, would have been approximately $6.6 million (plus the additional
gross-up amount, if applicable). The employment agreement also contains a
noncompetition provision, which applies during Mr. Snelling's employment, and a
noninterference provision, which applies during Mr. Snelling's employment and
for 36 months thereafter if Mr. Snelling's employment is terminated for any
reason.
President and Chief Operating Officer. The Company entered into an
employment agreement with Mr. Loncharich in July 1994. As amended, the
employment agreement provides for Mr. Loncharich to serve as President and Chief
Operating Officer of the Company. The employment agreement has an initial term
through December 31, 2001. The employment agreement provides for a base salary
to be determined by the board of directors, with a minimum of $230,000 per year,
as well as an annual performance bonus ranging from 25% to 100% of Mr.
Loncharich's annual base salary based on the percentage of achievement of the
Company's budgeted earnings before income taxes. No performance bonus is payable
unless the Company's earnings before income taxes are at least 80% of budgeted
earnings before income taxes. The employment
40
42
agreement also originally provided for a long-term incentive bonus plan. An
amendment to the employment agreement in November 1996 replaced an original
long-term incentive bonus plan with a grant of options to purchase 433,206
shares of Class B Common Stock under the Company's 1996 Stock Option Plan.
Mr. Loncharich's employment may be terminated prior to the end of the term
by the Company upon his death or disability, by Mr. Loncharich on 30-days'
written notice or by the Company for good cause (as defined in the employment
agreement) or upon 30-days' written notice. If his employment is terminated by
the Company for reasons other than good cause and upon 30-days' notice, Mr.
Loncharich is entitled to receive his base salary for an additional six months
and a pro rata portion of his performance bonus for that year. The employment
agreement also contains noncompetition and noninterference provisions, which
apply during Mr. Loncharich's employment and for 24 months and 36 months,
respectively, thereafter if Mr. Loncharich's employment is terminated for any
reason.
Senior Vice Presidents. In December 1996, the Company entered into
employment agreements with each of Robert O. Snelling, Jr., and Messrs. Crews,
Paulk and Spragins, pursuant to which each officer serves as a senior vice
president of the Company. In addition, Mr. Snelling, Jr., serves as Vice
Chairman of the Board. Each of the employment agreements has an initial term of
ten years. The employment agreements each provide for a base salary to be
determined by the board of directors, with a minimum of $175,000 per year. The
employment agreements also each provide for an annual performance bonus
generally ranging from 25% to 100% of the officer's annual base salary based on
the percentage of achievement of the Company's budgeted earnings before income
taxes. No performance bonus is payable unless the Company's earnings before
income taxes are at least 80% of budgeted earnings before income taxes. If the
Company's earnings before income taxes exceed 120% of projected earnings before
income taxes, the bonus will be greater than 100% of the officer's annual base
salary based upon a formula set forth in the employment agreements. For purposes
of this bonus calculation, the budgeted earnings before income taxes for any
year must not be less than the previous year's budgeted amount.
Each officer's employment may be terminated prior to the end of the term by
the Company upon the officer's death or disability, by the officer on 30-days'
written notice or by the Company for good cause (as defined in the employment
agreement). If the officer's employment is terminated by the Company for reasons
other than good cause, each officer is entitled to receive a severance benefit
equal to three times the officer's base salary and annual performance bonus
during the immediately preceding 12-month period. In addition, if a change in
control (as defined in the employment agreement) occurs and the officer's
employment is terminated upon the change in control or at any time during the
two-year period immediately following the change in control either by the
Company (except for death, disability, good cause or expiration of the term of
the employment agreement) or by the officer because of a significant reduction
in responsibilities, a reduction of the officer's annual base salary in effect
prior to the change in control, or a job relocation of more than 25 miles, then
the officer is entitled to receive an amount equal to three times the officer's
base salary and three times a pro rata portion of the officer's annual
performance bonus determined through the date of termination (along with an
additional gross-up amount in the event of imposition of any federal excise tax
on the payment). If a change of control had occurred on October 31, 1997, the
amount payable to each of the officers (assuming no annual performance bonus for
1997) would have been approximately $0.5 million. Each officer's employment
agreement also contains a noncompetition provision, which applies during the
officer's employment, and a noninterference provision, which applies during the
officer's employment and for 36 months thereafter if the officer's employment is
terminated for any reason.
Vice Presidents. In December 1996, the Company entered into an employment
agreement with Mrs. Paulk, pursuant to which Mrs. Paulk serves as a vice
president of the Company. The material terms of Mrs. Paulk's employment
agreement are the same as the terms of the employment agreements entered into
with Robert O. Snelling, Jr., and Messrs. Crews, Paulk and Spragins, except that
Mrs. Paulk's employment agreement (i) provides for a base salary of $135,000 per
year and (ii) does not provide for an annual performance bonus.
The Company entered into an employment agreement with Anne M. Snelling in
October 1997, pursuant to which Mrs. Snelling serves as a vice president of the
Company. The material terms of Mrs. Snelling's
41
43
employment agreement are the same as the terms of Mr. Snelling's employment
agreement, except that Mrs. Snelling's employment agreement (i) provides for a
base salary of $25,000 per year and (ii) does not include any grant of
registration rights. Mrs. Snelling is a part-time employee of the Company.
STOCK OPTION PLANS
1997 Stock Option Plan. Pursuant to the Company's 1997 Stock Option Plan
(the "1997 Stock Option Plan"), options may be granted to eligible employees for
the purchase of an aggregate of 1,500,000 shares of Common Stock. Any shares
that are no longer subject to purchase pursuant to an option by reason of the
expiration of the option or otherwise may be re-offered under the 1997 Stock
Option Plan. Employees eligible under the 1997 Stock Option Plan are those whose
performance and responsibilities are determined to be instrumental to the
Company's success. The 1997 Stock Option Plan is administered by the
compensation committee of the board of directors which determines, in its
discretion, who will receive stock options, the number of shares subject to each
option granted and the related purchase price, and option period. Both
nonqualified stock options and incentive stock options, as defined by the
Internal Revenue Code, may be granted under the 1997 Stock Option Plan.
The 1997 Stock Option Plan requires that the exercise price for each stock
option must be not less than the fair market value of the Common Stock at the
time the option is granted, as determined by the compensation committee, and
that the option period may not be more than ten years from the date the option
is granted. No incentive stock option, however, may be granted to an employee
who owns more than 10% of the total combined voting power of all classes of
outstanding stock of the Company on the date of grant unless the option price is
at least 110% of the fair market value of the Common Stock on the date of grant
and the option period does not exceed five years. The fair market value of
incentive stock options that may be granted to an employee in any calendar year
is not limited, but no options granted under the 1997 Stock Option Plan to an
employee may be treated as incentive stock options to the extent that the
aggregate fair market value (determined as of the date of grant of such options)
of the options that first become exercisable during a calendar year to purchase
Common Stock exceeds $100,000. An incentive stock option (or an installment
thereof) counts against the annual limitation only in the year it first becomes
exercisable.
Options may be exercised in annual installments as specified by the
compensation committee, and all installments that become exercisable are
cumulative and may be exercised at any time after they become exercisable until
the option expires. Options are not assignable except by will or the laws of
descent and distribution. Full payment for shares purchased upon exercise of an
option must be made at the time of exercise, and no shares may be issued until
full payment is made. The 1997 Stock Option Plan provides that an option
agreement may permit an optionee to tender previously owned Common Shares in
partial or full payment for shares to be purchased on exercise of an option.
Unless sooner terminated by action of the board of directors, the 1997
Stock Option Plan will terminate in 2007. The 1997 Stock Option Plan may be
amended, altered or discontinued in certain respects by the board of directors
without shareholder approval. However, the 1997 Stock Option Plan may not be
amended without the approval of the shareholders (i) to materially increase the
number of securities that may be issued thereunder or (ii) to materially modify
the requirements of eligibility for participation in the 1997 Stock Option Plan.
No options have been granted under the 1997 Stock Option Plan as of the
date of this Prospectus.
1996 Stock Option Plan. Pursuant to the Company's 1996 Stock Option Plan
(the "1996 Stock Option Plan"), options may be granted to eligible employees for
the purchase of an aggregate of 2,978,287 shares of Class B Common Stock. Any
shares that are no longer subject to purchase pursuant to an option by reason of
the expiration of the option or otherwise may be re-offered under the 1996 Stock
Option Plan. Employees eligible under the 1996 Stock Option Plan are those whose
performance and responsibilities are determined to be instrumental to the
Company's success. The 1996 Stock Option Plan is administered by the board of
directors which determines, in its discretion, who will receive stock options,
the number of shares subject to each option granted and the related purchase
price, and option period. Both nonqualified stock options and incentive stock
options may be granted under the 1996 Stock Option Plan.
42
44
The 1996 Stock Option Plan requires that the exercise price for each stock
option must be not less than the fair market value of the Class B Common Stock
at the time the option is granted, as determined by the board of directors, and
that the option period may not be more than ten years from the date the option
is granted. No incentive stock option, however, may be granted to an employee
who owns more than 10% of the total combined voting power of all classes of
outstanding stock of the Company on the date of grant unless the option price is
at least 110% of the fair market value of the Class B Common Stock on the date
of grant and the option period does not exceed five years. The fair market value
of incentive stock options that may be granted to an employee in any calendar
year is not limited, but no options granted under the 1996 Stock Option Plan to
an employee may be treated as incentive stock options to the extent that the
aggregate fair market value (determined as of the date of grant of such options)
of the options that first become exercisable during a calendar year to purchase
Class B Common Stock exceeds $100,000. An incentive stock option (or an
installment thereof) counts against the annual limitation only in the year it
first becomes exercisable.
Options may be exercised in annual installments as specified by the board
of directors, and all installments that become exercisable are cumulative and
may be exercised at any time after they become exercisable until the option
expires. Options are not assignable except by will or the laws of descent and
distribution. Full payment for shares purchased upon exercise of an option must
be made at the time of exercise, and no shares may be issued until full payment
is made. The 1996 Stock Option Plan provides that an option agreement may permit
an optionee to tender previously owned shares of Class B Common Stock in partial
or full payment for shares to be purchased on exercise of an option.
Unless sooner terminated by action of the board or directors, the 1996
Stock Option Plan will terminate in 2006. The 1996 Stock Option Plan may be
amended, altered or discontinued in certain respects by the board of directors
without stockholder approval. However, the 1996 Stock Option Plan may not be
amended without the approval of the stockholders (i) to materially increase the
number of securities that may be issued thereunder or (ii) to materially modify
the requirements of eligibility for participation in the 1996 Stock Option Plan.
During 1996, options to purchase a total of 2,599,238 shares of Class B
Common Stock at a weighted exercise price of $3.85 per share were granted under
the 1996 Stock Option Plan to certain key employees of the Company. The Company
has granted options to purchase an additional 357,974 shares of Class B Common
Stock to other key employees at the initial public offering price upon
completion of this offering, provided the offering is completed before December
31, 1997.
1997 Non-Employee Directors Stock Option Plan. Pursuant to the Company's
1997 Non-Employee Directors Stock Option Plan (the "Directors Stock Option
Plan"), nonqualified stock options are granted to non-employee directors,
assuming there is an adequate number of shares available for grant under the
Directors Stock Option Plan at a specified grant date, under a formula whereby
(i) each non-employee director elected to the board of directors after the
effective date of this offering, at an annual shareholders' meeting who has not
previously served as a director of the Company will be granted an option to
purchase 5,000 shares of Common Stock of the Company, (ii) each non-employee
director appointed after such date to fill a vacancy in the board of directors
who has not previously served as a director of the Company will be granted an
option to purchase 5,000 shares of Common Stock of the Company and (iii) each
other non-employee director of the Company elected at, or continuing to serve
following, each annual shareholders' meeting commencing with the 1998 annual
shareholders' meeting will be granted an option to purchase 5,000 shares of
Common Stock of the Company. The aggregate number of shares of Common Stock that
may be granted during the ten-year term of the Directors Stock Option Plan is
150,000 shares. Unless sooner terminated by action of the board of directors,
the Directors Stock Option Plan will terminate in 2007, and no options may
thereafter be granted under the Directors Stock Option Plan.
The Directors Stock Option Plan requires that the exercise price of each
option must not be less than 100% of the fair market value of the Common Stock
at the time of the grant of the option. The period during which each option is
exercisable will commence six months after the date the option is granted and
will expire five years from the grant date or, if earlier, three months
following the non-employee director's death or
43
45
disability or 30 days following the date a non-employee director ceases to be a
director of the Company. Options are not assignable other than by will or by the
laws of descent and distribution.
No options have been granted under the Directors Stock Option Plan as of
the date of this Prospectus.
Franchisee Stock Option Offer Program. Beginning January 1, 1998, subject
to completion of the offering, the Company intends to implement a stock option
offer program for franchisees, pursuant to which nonqualified stock options to
purchase up to 800,000 shares of Common Stock may be granted to eligible
franchisees with respect to a three-year period. In order to participate in the
program, a franchise will be required to execute a franchisee stock option
program participation agreement. The Company expects that options granted for
each calendar year during the program will be determined based on a formula set
annually by the compensation committee of the board of directors. In general,
options granted to participating franchisees pursuant to this program will have
an exercise price equal to the average of the closing sales price of the Common
Stock for the three trading days prior to the date of the option grant, may be
exercised in annual installments over a five-year period and will have an option
period of not more than 10 years from the date the option is granted. Options
will be granted only to participating franchisees who or which are in
compliance, on the date of grant, with their respective franchise agreement or
agreements and with the option program participation agreement. Options may be
granted for no more than 266,667 shares of Common Stock with respect to each of
1998 and 1999 and no more than 266,666 shares of Common Stock for 2000. Options
may be granted on or before May 1, 2001.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the named
executive officers concerning exercise of stock options during 1996 and
unexercised options held as of the end of 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END(#)(1) FISCAL YEAR-END($)(2)
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- -------------
Robert O. Snelling, Sr.................... -- -- -- --
Timothy J. Loncharich..................... 173,282 259,924 -- --
Robert O. Snelling, Jr.................... 541,508 -- -- --
J. Russell Crews.......................... 541,508 -- -- --
- ---------------
(1) Class B Common Stock.
(2) Calculated based on the fair market value of the Company's common stock as
of December 31, 1996, as determined by the board of directors pursuant to,
among other things, an independent valuation and sales of the Company's
common stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Although the Company has no present intention to do so, it may in the
future enter into other transactions and agreements incident to its business
with its directors, officers, principal shareholders and other affiliates.
Company intends for all such transactions and agreements to be on terms no less
favorable to the Company than those obtainable from unaffiliated third-parties
on an arms-length basis. In addition, all such transactions will be approved by
a majority of the Company's disinterested directors.
44
46
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Shares of the Company, as of October 31, 1997
(the "Ownership Date"), before and after giving effect to the sale of shares of
Common Stock in this offering, by (i) each director, (ii) each named executive
officer, (iii) all directors and executive officers as a group, (iv) each person
known by the Company to own beneficially more than 5% of the outstanding shares
of any class of Common Shares and (v) the Selling Shareholder.
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENTAGE PRIOR PERCENTAGE AFTER
PRIOR TO OFFERING(1) TO OFFERING OFFERING
--------------------- ----------------- NUMBER -----------------
SHARES OF OF SHARES
SHARES OF CLASS B TOTAL TOTAL BEING TOTAL TOTAL
COMMON COMMON COMMON VOTING SOLD IN COMMON VOTING
NAME STOCK STOCK SHARES POWER OFFERING SHARES POWER
---- --------- --------- ------- ------- --------- ------- -------
Robert O. Snelling, Sr.(2)......... -- 3,825,136 52.4% 52.4% 416,667 33.3% 47.3%
Timothy J. Loncharich(3)........... -- 259,923 4.8% 4.8% -- 3.1% 4.9%
Robert O. Snelling, Jr.(4)......... -- 3,730,958 65.8% 65.8% -- 43.4% 66.8%
J. Russell Crews(5)................ -- 3,072,129 54.2% 54.2% -- 35.7% 55.0%
Krista C. Coppock(6)............... -- 2,488,199 48.5% 48.5% -- 30.9% 49.3%
Lee Alan Coppock, Jr.(7)........... -- 2,450,293 47.8% 47.8% -- 30.4% 48.6%
Leigh S. Crews(8).................. -- 2,485,491 48.5% 48.5% -- 30.8% 49.3%
Charles B. Fulton, Jr.(9).......... -- 487,901 9.5% 9.5% -- 6.1% 9.7%
Melinda S. Paulk(10)............... -- 2,485,491 48.5% 48.5% -- 30.8% 49.3%
Robert R. Paulk(11)................ -- 3,072,123 54.2% 54.2% -- 35.7% 55.0%
Carol A. Snelling(12).............. -- 2,485,491 48.5% 48.5% -- 30.8% 49.3%
Richard H. Spragins(13)............ -- 3,072,123 54.2% 54.2% -- 35.7% 55.0%
Sherri S. Spragins(14)............. -- 2,485,491 48.5% 48.5% -- 30.8% 49.3%
Arimathea Associates, Ltd.(15)..... -- 2,450,293 47.8% 47.8% -- 30.4% 48.6%
All directors and executive
officers as a group (6
persons)(16)..................... -- 7,309,707 96.8% 96.8% 416,667 65.7% 92.2%
- ---------------
(1) A person is deemed to be the beneficial owner of a security if the person,
directly or indirectly, has or shares the power to vote or direct the
voting of the security or the power to dispose or direct the disposition of
the security. A person is also deemed to be a beneficial owner of any
securities if that person has the right to acquire beneficial ownership
within 60 days of the Ownership Date. Accordingly, more than one person may
be deemed to be a beneficial owner of the same securities. Unless otherwise
indicated by footnote, the named individuals have sole voting and
investment power with respect to the Common Shares beneficially owned.
Unless otherwise indicated, the address of any listed principal shareholder
is 12801 North Central Expressway, Suite 700, Dallas, Texas 75243.
(2) Includes (i) 1,035,825 shares of Class B Common Stock over which Mr.
Snelling, Sr., has sole voting and investment power; (ii) 487,901 shares
Class B Common Stock over which Mr. Snelling, Sr., has shared voting and
investment power as a co-trustee along with Charles B. Fulton, Jr.; (iii)
an aggregate of 135,378 shares of Class B Common Stock held by Messrs.
Crews, Paulk, and Spragins over which Mr. Snelling, Sr., has sole voting
power pursuant to an irrevocable, ten-year proxy (the "Snelling Proxy")
granted by such owners on January 15, 1997; and (iv) an aggregate of
2,166,032 shares of Class B Common Stock issuable upon the exercise of
options granted to Robert O. Snelling, Jr., and Messrs. Crews, Paulk and
Spragins under the 1996 Stock Option Plan over which Mr. Snelling, Sr.,
will have sole voting power upon issuance pursuant to the Snelling Proxy.
Mr. Snelling, Sr., disclaims beneficial ownership of the shares of Class B
Common Stock described in clauses (ii), (iii) and (iv) above.
Contemporaneously with the closing of this offering, Mr. Snelling, Sr.,
will convert 416,667 shares of Class B Common Stock into the same number of
shares of Common Stock, which will be sold in the offering. See
"Description of Capital Stock -- Common Stock" regarding the conversion
rights and restrictions on transfer of the Class B Common Stock.
45
47
(3) Includes 259,923 shares of Class B Common Stock issuable upon the exercise
of options granted under the 1996 Stock Option Plan that are currently
exercisable.
(4) Includes (i) 739,157 shares of Class B Common Stock, of which 35,198 shares
are held by Mr. Snelling, Jr., with his wife, Carol A. Snelling, as tenants
in common; (ii) 2,450,293 shares of Class B Common Stock held by Arimathea
Associates, Ltd., a Texas limited partnership ("Arimathea"), over which Mr.
Snelling, Jr., has shared voting and investment power as a 10.8% limited
partner and a 10% shareholder and director of Arimathea's corporate general
partner, Nehemiah, Inc., a Texas corporation ("Nehemiah"); and (iii)
541,508 shares of Class B Common Stock issuable upon the exercise of
options granted under the 1996 Stock Option Plan that are currently
exercisable, but over which Mr. Snelling, Sr., will have sole voting power
upon issuance pursuant to the Snelling Proxy. Mr. Snelling, Jr., disclaims
beneficial ownership of the shares of Class B Common Stock held by
Arimathea, except to the extent such shares are attributable to his limited
partner interest and indirect general partner interest.
(5) Includes (i) 45,130 shares of Class B Common Stock, the voting power of all
of which has been granted to Mr. Snelling, Sr., pursuant to the Snelling
Proxy; (ii) 35,198 shares of Class B Common Stock held by Mr. Crews and his
wife, Leigh S. Crews, as tenants in common; (iii) 2,450,293 shares of Class
B Common Stock held by Arimathea over which Mr. Crews has shared voting and
investment power as a 7.4% limited partner and a 10% shareholder and
director of Nehemiah; and (iv) 541,508 shares of Class B Common Stock
issuable upon the exercise of options granted under the 1996 Stock Option
Plan that are currently exercisable, but over which Mr. Snelling, Sr., will
have sole voting power upon issuance pursuant to the Snelling Proxy. Mr.
Crews disclaims beneficial ownership of the shares of Class B Common Stock
held by Arimathea, except to the extent such shares are attributable to his
limited partner interest and indirect general partner interest.
(6) Includes (i) 37,906 shares of Class B Common Stock; and (ii) 2,450,293
shares of Class B Common Stock held by Arimathea over which Mrs. Coppock
has shared voting and investment power as a 10.8% limited partner and a 10%
shareholder of Nehemiah. Mrs. Coppock disclaims beneficial ownership of the
shares of Class B Common Stock held by Arimathea, except to the extent such
shares are attributable to her limited partner interest and indirect
general partner interest. Mrs. Coppock's father is Mr. Snelling, Sr. Mrs.
Coppock's address is 3327 S. Manor Way, Osseo, Michigan 49266.
(7) Includes 2,450,293 shares of Class B Common Stock held by Arimathea over
which Mr. Coppock has shared voting and investment power as a 7.4% limited
partner and a 10% shareholder of Nehemiah. Mr. Coppock disclaims beneficial
ownership of the shares of Class B Common Stock held by Arimathea, except
to the extent such shares are attributable to his limited partner interest
and indirect general partner interest. Mr. Coppock's address is 3327 S.
Manor Way, Osseo, Michigan 49266.
(8) Includes (i) 35,198 shares of Class B Common Stock held by Mr. and Mrs.
Crews as tenants in common; and (ii) 2,450,293 shares of Class B Common
Stock held by Arimathea over which Mrs. Crews has shared voting and
investment power as a 10.8% limited partner and a 10% shareholder of
Nehemiah. Mrs. Crews disclaims beneficial ownership of the shares of Class
B Common Stock held by Arimathea, except to the extent such shares are
attributable to her limited partner interest and indirect general partner
interest. Mrs. Crews' mother is Mrs. Snelling, Sr.
(9) Includes 487,901 shares of Class B Common Stock held by the Joan E.
Snelling Trust over which Mr. Fulton has shared voting and investment power
as a co-trustee along with Mr. Snelling, Sr. Mr. Fulton disclaims
beneficial ownership of such shares. Mr. Fulton's address is 1580 Murdock
Road, Marietta, Georgia 30060.
(10) Includes (i) 35,198 shares of Class B Common Stock held by Mrs. Paulk and
her husband, Robert R. Paulk, as tenants in common; and (ii) 2,450,293
shares of Class B Common Stock held by Arimathea over which Mrs. Paulk has
shared voting and investment power as a 10.8% limited partner and a 10%
shareholder and director of Nehemiah. Mrs. Paulk disclaims beneficial
ownership of the shares of Class B Common Stock held by Arimathea, except
to the extent such shares are attributable to her limited partner interest
and indirect general partner interest. Mrs. Paulk's mother is Mrs.
Snelling, Sr.
46
48
(11) Includes (i) 45,124 shares of Class B Common Stock, the voting power of all
of which has been granted to Mr. Snelling, Sr., pursuant to the Snelling
Proxy; (ii) 35,198 shares of Class B Common Stock held by Mr. and Mrs.
Paulk as tenants in common; (iii) 2,450,293 shares of Class B Common Stock
held by Arimathea over which Mr. Paulk has shared voting and investment
power as a 7.4% limited partner and a 10% shareholder of Nehemiah; and (iv)
541,508 shares of Class B Common Stock issuable upon the exercise of
options granted under the 1996 Stock Option Plan that are currently
exercisable, but over which Mr. Snelling, Sr., will have sole voting power
upon issuance pursuant to the Snelling Proxy. Mr. Paulk disclaims
beneficial ownership of the shares of Class B Common Stock held by
Arimathea, except to the extent such shares are attributable to his limited
partner interest and indirect general partner interest.
(12) Includes (i) 35,198 shares of Class B Common Stock that are held by Mrs.
Snelling and her husband, Robert O. Snelling, Jr., as tenants in common;
and (ii) 2,450,293 shares of Class B Common Stock held by Arimathea over
which Mrs. Snelling has shared investment power as a 7.4% limited partner
and a 10% shareholder of Nehemiah. Mrs. Snelling disclaims beneficial
ownership of the shares of Class B Common Stock held by Arimathea, except
to the extent such shares are attributable to her limited partner interest
and indirect general partner interest.
(13) Includes (i) 45,124 shares of Class B Common Stock, the voting power of all
of which has been granted to Mr. Snelling, Sr., pursuant to the Snelling
Proxy; (ii) 35,198 shares of Class B Common Stock held by Mr. Spragins and
his wife, Sherri S. Spragins, as tenants in common; (iii) 2,450,293 shares
of Class B Common Stock held by Arimathea over which Mr. Spragins has
shared investment power as a 10.8% limited partner and a 10% shareholder
and director of Nehemiah; and (iv) 541,508 shares of Class B Common Stock
issuable upon the exercise of options granted under the 1996 Stock Option
Plan that are currently exercisable, but over which Mr. Snelling, Sr., will
have sole voting power upon issuance pursuant to the Snelling Proxy. Mr.
Spragins disclaims beneficial ownership of the shares of Class B Common
Stock held by Arimathea, except to the extent such shares are attributable
to his limited partner interest and indirect general partner interest. Mr.
Spragins' mother is Mrs. Snelling, Sr.
(14) Includes (i) 35,198 shares of Class B Common Stock held by Mr. and Mrs.
Spragins as tenants in common; and (ii) 2,450,293 shares of Class B Common
Stock held by Arimathea over which Mrs. Spragins has shared voting and
investment power as a 7.4% limited partner and a 10% shareholder of
Nehemiah. Mrs. Spragins disclaims beneficial ownership of the shares of
Class B Common Stock held by Arimathea, except to the extent such shares
are attributable to her limited partner interest and indirect general
partner interest.
(15) Includes 2,450,293 shares of Class B Common Stock over which Nehemiah, as
Arimathea's corporate general partner, has voting and investment power.
(16) Includes options to purchase 2,425,955 shares of Class B Common Stock
issuable upon the exercise of options granted under the 1996 Stock Option
Plan that are currently exercisable. Mr. Snelling, Sr., will have sole
voting power over an aggregate of 2,166,032 of such shares upon issuance
pursuant to the Snelling Proxy.
47
49
DESCRIPTION OF CAPITAL STOCK
Prior to the effectiveness of the registration statement of which this
Prospectus forms a part, the Company will (i) file its Second Amended and
Restated Articles of Incorporation (the "Charter") with the Commonwealth of
Pennsylvania, which will, among other things, reclassify the 946,778 outstanding
shares of its common stock, par value $0.05 per share ("Old Common Stock") into
5,126,904 shares of Class B Common Stock, with any resulting fractional shares
rounded up to the next whole share, and (ii) adopt amended and restated Bylaws
(the "Bylaws"). The actual number of outstanding shares of Class B Common Stock,
which may differ based upon rounding, will not be determined until the effective
date, but is not expected to differ materially. Both the Charter and the Bylaws
will become effective upon the effective date of the registration statement of
which this Prospectus forms a part. The following summary of certain provisions
of the Company's capital stock gives effect to the Charter, including the
reclassification, and the Bylaws. The following summary does not purport to be
complete and is subject to, and qualified in its entirety by, the Charter and
the Bylaws, the forms of which are included as exhibits to the registration
statement of which this Prospectus forms a part, and by provisions of applicable
law.
The Company is authorized to issue up to 100,000,000 shares of Common
Stock, par value $0.01 per share, up to 15,000,000 shares of Class B Common
Stock, par value $0.01 per share, and up to 10,000,000 shares of Preferred
Stock, par value $0.01 per share. Prior to this offering, the Company had issued
and outstanding 946,778 shares of Old Common Stock (5,126,904 shares of Class B
Common Stock after giving effect to the reclassification), which were held, as
of October 31, 1997, by 39 holders of record, and no Common Shares or Preferred
Stock were outstanding. Upon consummation of this offering, 3,350,000 shares of
Common Stock will be outstanding.
PREFERRED STOCK
The board of directors of the Company is authorized (without any further
action by the shareholders) to issue Preferred Stock in one or more series and
to fix voting rights, liquidation preferences, dividend rates, conversion
rights, redemption rights and terms, including sinking fund provisions, and
certain other rights and preferences. The board of directors may issue Preferred
Stock for the consideration and on the terms it deems desirable. Satisfaction of
any dividend preferences of outstanding Preferred Stock would reduce the amount
of funds available for the payment of dividends on Common Shares. Also, holders
of Preferred Stock would normally be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the Company before
any payment is made to the holders of Common Shares. In addition, under certain
circumstances, the issuance of Preferred Stock may render more difficult or tend
to discourage a merger, tender offer or proxy contest, the assumption of control
by a holder of a large block of the Company's securities or the removal of
incumbent management. The board of directors of the Company, without shareholder
approval, may issue Preferred Stock with voting and conversion rights which
could adversely affect the holders of Common Shares. The Company has no present
intention to issue any shares of Preferred Stock.
COMMON SHARES
Voting Rights. Each share of Common Stock is entitled to one vote and each
share of Class B Common Stock is entitled to ten votes on all matters submitted
to a vote of the shareholders. Except as otherwise provided by law, in any
resolution or resolutions of the board of directors of the Company providing for
the issuance of Preferred Stock, or on a vote to alter or change the rights,
privileges, restrictions or powers of the holders of the Common Shares, the
Common Stock and the Class B Common Stock vote together as a single class on all
matters presented for a vote of the shareholders. Any change in the rights,
privileges, restrictions or powers of the holders of the Common Shares requires
a vote of not less than 80% of all votes entitled to be voted by the holders of
each class to be adversely affected, voting as a separate class. The Company's
Common Shares do not have cumulative voting rights.
Dividends, Liquidation Rights and Pre-emptive Rights. The Common Shares
share equally in any dividends when, as and if declared. In the event of any
dissolution, liquidation or winding up of the affairs of
48
50
the Company, after payment or provision for payment of the debts or other
liabilities of the Company, the remaining assets and funds of the Company will
be divided equally among the record holders of the Common Shares. The Common
Shares do not have pre-emptive rights.
Conversion Rights. The Common Stock has no conversion rights. Each share of
Class B Common Stock will be convertible at any time, at the option of and
without cost to the shareholder, into one fully paid and nonassessable share of
Common Stock upon surrender to the Company's transfer agent of the certificate
or certificates evidencing the Class B Common Stock to be converted, together
with a written notice of the election of such shareholder to convert such shares
into Common Stock. Each conversion of shares of Class B Common Stock shall be
deemed to have been effected on the date on which the certificate or
certificates representing such shares shall have been surrendered and such
notice and any required instruments of transfer shall have been received. Upon
any conversion of shares of Class B Common Stock into shares of Common Stock, no
adjustment with respect to dividends shall be made. Shares of Class B Common
Stock converted into Common Stock shall be retired and shall resume the status
of authorized but unissued shares of Class B Common Stock.
Restrictions on Transfer of Class B Common Stock. Shares of Class B Common
Stock are freely transferable among Permitted Transferees (as hereinafter
defined), but any other transfer of Class B Common Stock will result in its
automatic conversion into Common Stock. In the case of a person or entity
holding record ownership of shares of Class B Common Stock (a "Class B Holder")
who is a natural person and the beneficial owner of the shares of Class B Common
Stock to be transferred, a Permitted Transferee consists of the following: (i)
the Class B Holder's spouse (provided, however, that upon divorce any Class B
Common Stock held by the spouse shall automatically be converted into Common
Stock); (ii) any family member of the Class B Holder, which includes any lineal
descendant of a parent of the Class B Holder, any spouse of such lineal
descendant and a lineal descendant of a parent of the spouse of the Class B
Holder, including in each case any adopted children; (iii) the trustee of a
trust for the sole benefit of the Class B Holder or any of the Class B Holder's
family members; (iv) any organization established by the Class B Holder or any
of the Class B Holder's family members, contributions to which are deductible
for federal income, estate or gift tax purposes and a majority of whose
governing board at all times consists of such Class B Holder and/or one or more
Permitted Transferees; (v) the estate of the Class B Holder; (vi) a corporation
wholly owned by, or a partnership in which all of the partners are, and all of
the partnership interests are owned by, such Class B Holder and/or one or more
of the Class B Holder's family members and/or Permitted Transferees (provided,
however, that if there is any change in the shareholders of the corporation or
the partners of the partnership that would cause the corporation or partnership
no longer to be a Permitted Transferee, any Class B Common Stock held by the
corporation or partnership shall automatically be converted into Common Stock);
and (vii) any other Class B Holder who or which is the beneficial owner of
shares of Class B Common Stock.
In the case of a Class B Holder that is a partnership or corporation and
the beneficial owner of the shares of Class B Common Stock, a Permitted
Transferee consists of: (i) the partnership's partners or the corporation's
shareholders, as the case may be; (ii) any transferor to the partnership or
corporation of shares of Class B Common Stock after October 21, 1997 (the
"Record Date"); (iii) any shareholder of such corporation on the Record Date and
who receives shares of Class B Common Stock pro rata to the shareholder's stock
ownership in such corporation through a dividend or through a distribution made
upon liquidation of such corporation; (iv) any Permitted Transferee of any such
person, partner or shareholder referred to in clauses (i), (ii) or (iii); and
(v) the survivor of a merger or consolidation of such corporation if those
persons who beneficially owned sufficient shares entitled to elect at least a
majority of the entire board of directors of such corporation immediately prior
to the merger or consolidation beneficially own sufficient shares entitled to
elect at least a majority of the entire board of directors of the survivor. In
the case of a Class B Holder that is an irrevocable trust on the Record Date, a
Permitted Transferee consists of: (i) any successor trustee of such trust who
meets the requirements set forth in clause (ii) or (iii) below; (ii) any person
to whom or for whose benefit principal may be distributed under the terms of
such trust or any person to whom such trust may be obligated to make future
transfers; and (iii) any lineal descendant of a parent of the creator of such
trust including adopted children and any such descendant's spouse. In the case
of a Class B Holder that is any trust other than an irrevocable trust on the
Record Date, a Permitted Transferee consists of:
49
51
(i) any successor trustee who meets the requirements set forth in clause (ii)
below; and (ii) the person who established such trust and any Permitted
Transferee of such person. In the case of a Class B Holder that is the estate of
a deceased Class B Holder, or that is the estate of a bankrupt or insolvent
Class B Holder, and provided such deceased, bankrupt or insolvent Class B Holder
held record and beneficial ownership of the shares of Class B Common Stock in
question, a Permitted Transferee means a Permitted Transferee of such deceased,
bankrupt or insolvent Class B Holder. In the case of a record, but not
beneficial, owner of Class B Common Stock as nominee for the person who is the
beneficial owner thereof on the Record Date, a Permitted Transferee consists
only of such beneficial owner of the Class B Common Stock and any Permitted
Transferee of such beneficial owner.
The restriction on transfers of shares of Class B Common Stock to other
than a Permitted Transferee may preclude or delay a change in control of the
Company.
CERTAIN PROVISIONS OF THE CHARTER AND BYLAWS
Antitakeover Provisions. The Charter and Bylaws contain certain provisions,
as described below, that, in addition to the voting power of the Class B Common
Stock and the authorization of the Preferred Stock, may reduce the likelihood of
a change in management or voting control of the Company without the consent of
the Company's board of directors. These provisions could have the effect of
delaying, deterring or preventing tender offers or takeover attempts that some
or a majority of the Company's shareholders might consider to be in the
shareholders' best interest, including offers or attempts that might result in a
premium over the market price for the Common Stock.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. The Company's Bylaws establish advance notice procedures with
regard to shareholder proposals and the nomination, other than by or at the
direction of the board of directors or a committee thereof, of candidates for
election as directors. These procedures provide that the notice of shareholder
proposals and shareholder nominations for the election of directors at an annual
meeting must be in writing and delivered to or mailed and received at the
principal executive offices of the Company not later than the date that
corresponds to 120 days prior to the date the Company's proxy statement was
released to shareholders in connection with the previous year's annual meeting
of shareholders; provided, however, that in the event that the date of the
annual meeting is changed by more than 30 days from such anniversary date,
notice by the shareholder to be timely must be so received not later than the
close of business on the tenth day following the earlier of the day on which
notice of the date of the meeting was mailed or public disclosure of the meeting
date was made. Shareholder proposals and nominations for the election of
directors at a special meeting must be in writing and received by the Secretary
of the Company no later than the close of business on the tenth day following
the day on which notice of the meeting was mailed or public disclosure of the
date of the meeting was made. The notice of director nominations and the notice
of shareholder proposals must set forth certain information as detailed in the
Company's Bylaws.
Certain Effects of Authorized But Unissued Stock. Unissued and unreserved
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital and for facilitating corporate
acquisitions. Except pursuant to certain employee benefit plans described in
this Prospectus, the Company does not currently have any plans to issue
additional shares of Common Stock, Class B Common Stock or Preferred Stock. One
of the effects of unissued and unreserved shares of capital stock may be to
enable the board of directors to render more difficult or discourage an attempt
to obtain control of the Company by means of a merger, tender offer, proxy
contest or otherwise, and thereby to protect the continuity of the Company's
management. If, in the due exercise of its fiduciary obligations, for example,
the board of directors determines that a takeover proposal was not in the
Company's best interests, such shares could be issued by the board of directors
without shareholder approval in one or more private transactions or other
transactions that might prevent or render more difficult or costly the
completion of the takeover transaction by diluting the voting or other rights of
the proposed acquiror or insurgent shareholder group, by creating a substantial
voting block in institutional or other hands that might undertake to support the
position of the incumbent board of directors, by effecting an acquisition that
might complicate or preclude the takeover or otherwise.
50
52
Removal of Directors. The Charter provides that directors may only be
removed from the board of directors for cause and by the affirmative vote of the
holders of 80% or more of the voting interest of the shareholders of record of
the Company entitled to vote at an annual or special meeting called for that
purpose.
Anti-Greenmail. The Charter contains a so-called "anti-greenmail"
provision, which is intended to discourage speculators who accumulate beneficial
ownership of a significant block of voting shares of the Company and then, under
the threat of making a tender offer or proxy contest or instigating some other
corporate disruption, succeed in extracting from the Company a premium price to
repurchase the shares acquired by the speculator. This tactic has become known
as "greenmail." The anti-greenmail provision entitles the Company to recover any
profit (as defined in the Charter) by a controlling person or group from the
disposition of any shares, or any securities exercisable for or convertible into
shares, of the Company, to any person, including the Company or another member
of the controlling person or group, whether or not the profit is actually
realized by the controlling person or group. This recovery right applies if the
shares or other securities were acquired within 24 months before and 18 months
after the person or group attains the status of a controlling person or group
and the disposition is within 18 months after the person or group attains such
status. The term "controlling person" or group" is defined as follows: (i) a
person or group who has acquired, offered to acquire or, directly or indirectly,
publicly disclosed the intention of acquiring voting power over voting shares of
the Company that would entitle the holder thereof to cast at least 10% of the
votes that all shareholders would be entitled to cast in an election of
directors of the Company; or (ii) a person or group who has otherwise, directly
or indirectly, publicly disclosed or caused to be disclosed that it may seek to
acquire control of the Company through any means. A person or group shall not be
deemed a controlling person or group (absent significant other activities
indicating that the person or group should be deemed a controlling person or
group) if the person or group is one who or which: (A)(i) did not acquire the
voting shares for the purpose, directly or indirectly, of changing or
influencing control of the Company; (ii) if control were acquired, would not be
a person or group or a participant in a group that has control over the Company
and will not receive any disproportionate consideration from such a person or
group; and (iii) if a proxy or consent is given, executes a revocable proxy or
consent given without consideration in response to a proxy or consent
solicitation made in accordance with the rules and regulations under the
Exchange Act; or (B)(i) holds voting power in good faith, and not for the
purpose of circumventing the Company, as an agent or nominee; or (ii) holds
voting power in connection with the solicitation of proxies or consents by or on
behalf of the Company. This anti-greenmail provision does not apply to certain
transactions, including a transfer of equity securities of the Company
consummated before July 31, 1997, and a transfer of equity securities by or to a
person or group that as of July 31, 1997, beneficially owned shares entitling
the person or group to cast at least 10% of the Company's voting shares.
The Charter provides that the affirmative vote of the holders of 80% or
more of the outstanding shares entitled to vote, voting together as a single
class, is required to amend or repeal or adopt any provision inconsistent with
the Company's anti-greenmail provisions.
Limitations on Liability of Directors and Executive Officers. The Charter
limits the liability of directors and executive officers. Specifically,
directors and executive officers will not be held personally liable to the
Company or its shareholders for monetary damages for any action taken, or any
failure to take any action, in their capacity as a director or executive
officer, unless (i) the director or executive officer has breached or failed to
perform the duties of his or her office under the Charter, the Bylaws or
applicable provisions of law and (ii) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. The limitations on
liability do not apply to the responsibility or liability of a director or an
executive officer pursuant to any criminal statute or for the payment of taxes
pursuant to federal, state or local law.
The principal effect of the limitation of liability provision is that a
shareholder is unable to prosecute an action for monetary damages against a
director or an executive officer of the Company unless the shareholder can
demonstrate one of the specified bases for liability. This provision does not
eliminate the directors' or the executive officers' duty of care, but it may
discourage or deter shareholders or management from bringing a lawsuit against
directors or executive officers for a breach of fiduciary duties, even though
such an action, if successful, might otherwise benefit the Company and its
shareholders. This provision does not eliminate or limit director or executive
officer liability arising in connection with causes of action brought under the
federal
51
53
securities laws. In addition, this provision should not affect the availability
of equitable remedies such as injunction or rescission based upon a director's
breach of the duty of care.
Indemnification. The Bylaws provide that the Company is generally required
to indemnify its directors and officers, and any other person designated as an
indemnified representative by the board of directors, for all judgments, fines,
settlements, legal fees and other expenses incurred in connection with pending
or threatened legal proceedings because of the director's or officer's position
with the Company or another entity that the director, officer or representative
serves at the Company's request, subject to certain conditions, and to advance
funds to its directors, officers and representatives to enable them to defend
against such proceedings upon receipt of any undertaking by or on behalf of the
director, officer or representative to repay the amount if it is ultimately
determined that he is not entitled to be indemnified by the Company as
authorized by the Pennsylvania Business Corporation Law or otherwise. Conditions
that bar indemnification against liabilities arising from conduct include (i)
where the conduct of the indemnified director, officer or representative has
been determined to constitute willful misconduct or recklessness under the
Pennsylvania Business Corporation Law or any superseding provision of law and
(ii) self-dealing, which means the receipt of personal benefit from the
corporation to which the authorized director, officer or representative is not
legally entitled. To receive indemnification, the director, officer or
representative must have been successful in the legal proceeding or acted in
good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the Company's best interests.
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock is Chase
Mellon Shareholder Services LLC.
LISTING
The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "SNEL."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 3,350,000 shares of
Common Stock and 4,710,237 shares of Class B Common Stock outstanding. There
will also be outstanding employee stock options to purchase an aggregate of
2,957,212 shares of Class B Common Stock. All of the shares of Common Stock,
which are being sold in this offering, will be freely transferable without
restriction or further registration under the Securities Act, except that shares
purchased by "affiliates" of the Company may generally be sold only in
compliance with applicable provisions of Rule 144 under the Securities Act. The
shares of Class B Common Stock are, and any shares issued upon the exercise of
stock options will be, "restricted securities" within the meaning of Rule 144
and may not be sold without registration under the Securities Act or an
applicable exemption under the Securities Act, including an exemption pursuant
to Rule 144. Except for private sales involving a limited number of permitted
transferees, any sale of shares of Class B Common Stock will result in the
simultaneous conversion of the shares to shares of Common Stock. See
"Description of Capital Stock -- Common Shares."
Rule 144 as currently in effect provides that an affiliate of the Company
or a person (or persons whose shares are aggregated) who has beneficially owned
restricted securities for at least one year is entitled to sell, commencing 90
days after the date of this Prospectus, within any three-month period, a number
of shares that does not exceed the greater of 1% of the then outstanding shares
of the Common Stock (80,602 shares immediately after this offering) and the
average weekly reported trading volume in the Common Stock during the four
calendar weeks preceding the sale. Sales under Rule 144 also are subject to
certain notice and manner-of-sale requirements and the availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not an affiliate of the Company (in general, a person who is
not a director, officer or principal shareholder of the Company) during the
three months prior to resale and who has beneficially owned the restricted
securities for at least two years is entitled to sell the restricted securities
under Rule 144 without regard to the requirements discussed above.
52
54
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 under the Securities Act may be
relied upon with respect to the resale of shares of Class B Common Stock
originally purchased from the Company by its employees, directors or officers
prior to the date the Company becomes subject to the reporting requirements of
the Exchange Act pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. Shares of Class B Common
Stock issued in reliance on Rule 701 are restricted securities and, commencing
90 days after the date of this Prospectus, may be sold by persons other than
affiliates under Rule 144, subject to the provisions regarding manner of sale
under Rule 144, and by affiliates under Rule 144 without compliance with its
holding period requirements.
The Company, its officers and directors and certain shareholders, who will
collectively own 4,656,614 shares of Class B Common Stock immediately following
this offering, have agreed that for a period of 180 days after the date of this
Prospectus they will not offer, sell, agree to sell, grant any option to
purchase or make any other disposition (excluding certain pledges) of any Common
Shares or any securities convertible into or exchangeable for Common Shares
(except for options granted pursuant to the Company's stock option plans
disclosed in this Prospectus) without the prior written consent of Smith Barney.
There has been no active public market for the Company's common stock since
1990, and no prediction can be made as to the effect, if any, that sales of
shares of Common Stock or the availability of the shares for future sale will
have on the market price of the Common Stock prevailing from time to time. Sales
of substantial amounts of Common Stock in the public market following this
offering could adversely affect the market price of the Common Stock.
53
55
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting
Agreement, each of the Underwriters named below has severally agreed to
purchase, and the Company has agreed to sell to the Underwriters, the respective
number of shares of Common Stock set forth opposite the name of each
Underwriter:
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
Smith Barney Inc............................................
Rauscher Pierce Refsnes, Inc................................
Total............................................. 3,350,000
=========
The Underwriting Agreement provides that the obligations of the several
Underwriters to accept delivery of the shares of Common Stock offered hereby are
subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all shares
of Common Stock offered hereby (other than shares covered by the over-allotment
option described below) if any shares are purchased.
The Underwriters, for whom Smith Barney and Rauscher Pierce Refsnes, Inc.,
are acting as Representatives, propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page of this Prospectus and part of the shares to certain dealers at a price
that represents a concession not in excess of $ per share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
initial public offering, the offering price and other selling terms may be
changed by the Representatives. The Representatives have advised the Company
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 502,500
additional shares of Common Stock at the public offering price set forth on the
cover page of this Prospectus minus the underwriting discounts and commissions.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with the sale of the shares offered
hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
such Underwriter's name in the preceding table bears to the total number of
shares in such table.
The Company, its officers and directors and certain shareholders, who will
collectively own 4,656,614 shares of Class B Common Stock immediately following
this offering, have agreed that for a period of 180 days after the date of this
Prospectus they will not offer, sell, agree to sell, grant any option to
purchase or make any other disposition (excluding certain pledges) of any Common
Shares or any securities convertible into or exchangeable for Common Shares
(except for options granted pursuant to the Company's stock option plans
disclosed in this Prospectus) without the prior written consent of Smith Barney.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Underwriters may engage in over-allotment, stabilizing transactions,
covering transactions and penalty bids in accordance with Regulation M under the
Exchange Act. Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position. Stabilizing transactions permit
bids for and purchases of the Common Stock so long as the stabilizing bids do
not exceed a specified maximum. Syndicate covering transactions involve
purchases of the Common Stock in the open market in
54
56
order to cover syndicate short positions. Penalty bids permit the Underwriters
to reclaim a selling concession from a syndicate member when the shares of
Common Stock originally sold by such syndicate member are purchased in a
stabilizing transaction or syndicate covering transaction to cover syndicate
short positions. Such stabilizing transactions, syndicate covering transactions
and penalty bids may cause the price of the Common Stock to be higher than it
would otherwise be in the absence of such transactions. These transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
There has not been any public market for the Company's common stock since
1990. Consequently, the initial public offering price for the shares of Common
Stock included in this offering was determined by negotiations between the
Company and the Representatives. Among the factors considered in determining the
price were the history of and prospects for the Company's business and the
industry in which it competes, an assessment of the Company's management and the
present state of the Company's development, the past and present revenues and
earnings of the Company, the prospects for growth of the Company's revenues and
earnings, the current state of the economy in the United States, the current
level of economic activity in the industry in which the Company competes and in
related or comparable industries and current prevailing conditions in the
securities markets, including current market valuations of publicly traded
companies that are comparable to the Company.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "SNEL".
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock covered by this
Prospectus will be passed upon for the Company by Gardere & Wynne, L.L.P.,
Dallas, Texas. Certain legal matters pertaining to the Common Stock will be
passed upon for the Underwriters by Manatt, Phelps & Phillips, LLP, Los Angeles,
California.
EXPERTS
The Consolidated Financial Statements and related schedules of the Company
as of December 31, 1995 and 1996, and for each of the two fiscal years then
ended, for the seven months ended December 31, 1994, and for the fiscal year
ended May 31, 1994, and the combined financial statements of the B.A.T. Group as
of December 31, 1994 and 1995, and for each of the two years then ended,
appearing in this Prospectus and the registration statement have been audited by
Grant Thornton LLP, independent certified public accountants, as set forth in
their reports thereon appearing elsewhere in this Prospectus, and are included
upon the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which is a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits filed therewith. For further information concerning the Company and the
Common Stock, reference is made to the registration statement and to the
exhibits and schedules filed therewith. Statements contained in this Prospectus
as to the contents of any contract, agreement or other document are not
necessarily complete, and, in each instance, reference is made to the copy of
the document filed as an exhibit to the registration statement. Copies of the
registration statement and the exhibits may be inspected without charge at the
public reference section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such documents may be obtained from the public reference section of the
Commission upon payment of the prescribed fees or on the Internet at
http://www.sec.gov.
55
57
The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
56
58
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Financial Statements -- Snelling and Snelling, Inc.
Report of Independent Certified Public Accountants........ F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Earnings....................... F-4
Consolidated Statement of Changes in Shareholders'
Equity................................................. F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
Financial Statements -- B.A.T. Group
Report of Independent Certified Public Accountants........ F-18
Combined Balance Sheets................................... F-19
Combined Statements of Earnings........................... F-20
Combined Statement of Changes in Stockholders' Equity..... F-21
Combined Statements of Cash Flows......................... F-22
Notes to Combined Financial Statements.................... F-23
Pro Forma Condensed Financial Statement
Pro Forma Condensed Statement of Earnings................. F-29
Notes to Pro Forma Condensed Statement of Earnings........ F-30
F-1
59
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Snelling and Snelling, Inc.
We have audited the consolidated balance sheets of Snelling and Snelling,
Inc. as of December 31, 1995 and 1996, and the related consolidated statements
of earnings, changes in shareholders' equity and cash flows for the year ended
May 31, 1994, the seven months ended December 31, 1994, and the years ended
December 31, 1995 and 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Snelling and Snelling, Inc. as of December 31, 1995 and 1996, and the
consolidated results of its operations and its consolidated cash flows for the
year ended May 31, 1994, the seven months ended December 31, 1994, and the years
ended December 31, 1995 and 1996 in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Dallas, Texas
April 25, 1997 (except for Note 11 as to
which the date is October 2, 1997
and Note 16 as to which the date is
December , 1997)
The foregoing report is in the form which will be signed upon consummation
of the transaction described in Note 16 to the financial statements.
/s/ GRANT THORNTON LLP
Dallas, Texas
November 21, 1997
F-2
60
SNELLING AND SNELLING, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
Current assets
Cash and cash equivalents................................. $ 369 $ 549 $ 648
Receivables, less allowance for doubtful accounts of $201,
$349 and $681.......................................... 14,321 21,369 24,448
Prepaid expenses and other current assets................. 1,009 2,392 2,008
Refundable and deferred income taxes...................... 540 394 756
------- ------- -------
Total current assets.............................. 16,239 24,704 27,860
Fixed assets, net........................................... 3,736 5,054 4,493
Intangible assets, net...................................... 2,380 20,968 21,267
Other assets................................................ 724 1,329 1,682
------- ------- -------
$23,079 $52,055 $55,302
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt...................... $ 447 $ 4,014 $ 1,863
Short-term borrowings..................................... 2,504 2,876 4
Accounts payable-trade.................................... 846 1,024 1,190
Other current liabilities................................. 6,976 8,444 10,860
------- ------- -------
Total current liabilities......................... 10,773 16,358 13,917
Long-term debt, less current maturities..................... 1,825 22,411 25,540
Other noncurrent liabilities
Deferred rent payable..................................... 899 739 641
Other..................................................... 250 221 319
------- ------- -------
1,149 960 960
------- ------- -------
Total liabilities................................. 13,747 39,729 40,417
Commitments and contingencies............................... -- -- --
Shareholders' equity
Preferred stock, $.01 par value; authorized, 10,000,000
shares; none issued.................................... -- -- --
Class A common stock, $.01 par value; authorized,
100,000,000 shares; none issued........................ -- -- --
Class B common stock, $.01 par value; authorized,
15,000,000 shares; issued, 6,408,840 shares in 1995,
6,324,094 shares in 1996 and 5,126,904 shares in
1997................................................... 59 58 47
Capital in excess of par value............................ 246 243 197
Retained earnings......................................... 11,559 14,696 14,641
------- ------- -------
11,864 14,997 14,885
Less treasury stock, at cost (1,171,853 of Class B common
shares in 1995 and 1,171,474 of Class B common shares
in 1996)............................................... 2,532 2,671 --
------- ------- -------
Total shareholders' equity........................ 9,332 12,326 14,885
------- ------- -------
$23,079 $52,055 $55,302
======= ======= =======
The accompanying notes are an integral part of these statements.
F-3
61
SNELLING AND SNELLING, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEVEN
MONTHS YEARS ENDED NINE MONTHS ENDED
ENDED DECEMBER 31, SEPTEMBER 30,
YEAR ENDED DECEMBER 31, --------------------- -------------------------
MAY 31, 1994 1994 1995 1996 1996 1997
------------ ------------ --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues..................... $ 70,202 $ 59,309 $ 122,701 $ 168,602 $ 116,864 $ 165,686
Cost of services............. 47,456 40,221 87,943 122,945 83,957 123,964
---------- --------- --------- --------- --------- ---------
Gross profit....... 22,746 19,088 34,758 45,657 32,907 41,722
Selling, general and
administrative expenses.... 14,116 8,859 15,384 19,600 13,624 20,421
Franchises' share of gross
profit..................... 8,648 8,659 14,682 19,587 14,835 15,772
---------- --------- --------- --------- --------- ---------
Operating profit
(loss)........... (18) 1,570 4,692 6,470 4,448 5,529
Other income (expense)
Interest expense........... (66) (71) (379) (1,100) (602) (1,885)
Gain on sale of assets of
subsidiary.............. -- -- -- -- -- 678
Other...................... 348 63 97 105 54 20
---------- --------- --------- --------- --------- ---------
282 (8) (282) (995) (548) (1,187)
---------- --------- --------- --------- --------- ---------
Earnings before
income taxes..... 264 1,562 4,410 5,475 3,900 4,342
Income tax expense........... 152 704 1,720 2,161 1,564 1,727
---------- --------- --------- --------- --------- ---------
NET EARNINGS....... $ 112 $ 858 $ 2,690 $ 3,314 $ 2,336 $ 2,615
========== ========= ========= ========= ========= =========
Earnings per share........... $ 0.02 $ 0.12 $ 0.38 $ 0.48 $ 0.33 $ 0.38
========== ========= ========= ========= ========= =========
Weighted average common and
common equivalent shares... 7,067,662 7,011,698 7,007,062 6,965,843 6,982,234 6,908,741
========== ========= ========= ========= ========= =========
The accompanying notes are an integral part of these statements.
F-4
62
SNELLING AND SNELLING, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CAPITAL
COMMON SHARES IN EXCESS TREASURY STOCK
------------------- OF PAR RETAINED --------------------
SHARES AMOUNT VALUE EARNINGS SHARES AMOUNT
---------- ------ --------- -------- ---------- -------
BALANCE AT JUNE 1, 1993........... 6,475,321 $ 60 $249 $ 8,040 1,138,864 $ 2,553
Net earnings.................... -- -- -- 112 -- --
Purchase of treasury stock...... -- -- -- -- 88,672 115
---------- ---- ---- ------- ---------- -------
BALANCE AT MAY 31, 1994........... 6,475,321 60 249 8,152 1,227,536 2,668
Net earnings.................... -- -- -- 858 -- --
Purchase of treasury stock...... -- -- -- -- 1,083 2
Retirement of treasury stock.... (66,481) (1) (3) (141) (66,481) (145)
---------- ---- ---- ------- ---------- -------
BALANCE AT DECEMBER 31, 1994...... 6,408,840 59 246 8,869 1,162,138 2,525
Net earnings.................... -- -- -- 2,690 -- --
Purchase of treasury stock...... -- -- -- -- 9,715 7
---------- ---- ---- ------- ---------- -------
BALANCE AT DECEMBER 31, 1995...... 6,408,840 59 246 11,559 1,171,853 2,532
Net earnings.................... -- -- -- 3,314 -- --
Purchase of treasury stock...... -- -- -- -- 83,186 320
Retirement of treasury stock.... (84,746) (1) (3) (177) (83,565) (181)
---------- ---- ---- ------- ---------- -------
BALANCE AT DECEMBER 31, 1996...... 6,324,094 58 243 14,696 1,171,474 2,671
Net earnings.................... -- -- -- 2,615 -- --
Purchase and retirement of
stock........................ (20,339) (1) (1) (33) -- --
Purchase of treasury stock...... -- -- -- -- 5,415 21
Retirement of treasury stock.... (1,176,889) (10) (45) (2,637) (1,176,889) (2,692)
---------- ---- ---- ------- ---------- -------
BALANCE AT SEPTEMBER 30, 1997
(unaudited)..................... 5,126,866 $ 47 $197 $14,641 -- $ --
========== ==== ==== ======= ========== =======
The accompanying notes are an integral part of this statement.
F-5
63
SNELLING AND SNELLING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
SEVEN MONTHS YEARS ENDED ENDED
ENDED DECEMBER 31, SEPTEMBER 30,
YEAR ENDED DECEMBER 31, ------------------ -------------------------
MAY 31, 1994 1994 1995 1996 1996 1997
------------ ------------ ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Cash Flows From Operating Activities
Net earnings........................... $ 112 $ 858 $ 2,690 $ 3,314 $ 2,336 $ 2,615
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation and amortization....... 861 403 798 1,449 878 1,504
Provision for losses on
receivables....................... 375 68 74 226 90 539
Provision for loss on investments... 55 120 -- -- -- --
Gain on sale of assets of
subsidiary........................ -- -- -- -- -- (678)
Changes in operating assets and
liabilities
Receivables....................... (3,723) (1,844) (3,461) (7,275) (2,459) (4,747)
Prepaid expenses and other current
assets......................... 213 216 277 (648) (436) 381
Other assets...................... 250 320 (24) (891) (792) (484)
Accounts payable and other current
liabilities.................... 2,229 1,064 (142) 912 (398) 385
Refundable and deferred income
taxes.......................... (325) (271) (9) 308 (15) (421)
Other noncurrent liabilities...... 63 (96) (142) (189) (161) (94)
------- ------- ------- -------- ------- -------
Net cash provided by (used in)
operating activities......... 110 838 61 (2,794) (957) 1,000
Cash Flows From Investing Activities
Proceeds from sale of assets........... 9 3 32 60 3 1,940
Capital expenditures................... (380) (286) (2,527) (2,014) (1,747) (266)
Acquisition of businesses.............. -- (915) (1,002) (9,764) (4,965) (949)
------- ------- ------- -------- ------- -------
Net cash provided by (used in)
investing activities......... (371) (1,198) (3,497) (11,718) (6,709) 725
------- ------- ------- -------- ------- -------
Cash Flows From Financing Activities
Proceeds from bank overdrafts.......... -- -- 1,806 710 1,043 2,324
Proceeds from debt..................... 836 -- 3,033 17,518 8,090 4,587
Repayments of debt..................... (60) (255) (1,288) (3,216) (974) (6,481)
Purchase of stock...................... (115) (2) (7) (320) (320) (56)
------- ------- ------- -------- ------- -------
Net cash provided by (used in)
financing activities......... 661 (257) 3,544 14,692 7,839 374
------- ------- ------- -------- ------- -------
Net Increase (Decrease) In Cash And Cash
Equivalents............................ 400 (617) 108 180 173 99
Cash And Cash Equivalents:
At Beginning Of Period................. 478 878 261 369 369 549
------- ------- ------- -------- ------- -------
At End Of Period....................... $ 878 $ 261 $ 369 $ 549 $ 542 $ 648
======= ======= ======= ======== ======= =======
See Note 14 for supplemental disclosure of cash flows and noncash investing and
financing transactions.
The accompanying notes are an integral part of these statements.
F-6
64
SNELLING AND SNELLING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Snelling and Snelling, Inc. (Snelling) and all of its
subsidiaries (collectively, the Company). All significant intercompany accounts
and transactions have been eliminated.
BUSINESS AND REVENUE RECOGNITION -- The Company provides career and
flexible staffing services through Company owned and franchised offices located
primarily throughout the United States. The Company services a wide variety of
customers, none with any significant geographic or revenue concentration.
Revenue from services is recognized at the time the services are provided.
Revenue from the sale of franchises is recognized when the franchised office
begins operations and a substantial portion of the sales price is received. The
Company also receives revenues from sales of employment services and from fees
earned on sales of employment services (career placement and flexible staffing)
by its franchise operations.
The Company has two types of franchises for purposes of flexible staffing
services revenue recognition. With the first type, the Company records franchise
royalties, based on a contractual percentage of flexible staffing services
billings, in the period in which the franchise collects for the services
provided. The second type of franchises participate in the Company's pay/bill
processing program. With the second type, the Company has a direct contractual
relationship with the clients for the services, holds title to the related
receivables and is the legal employer of the flexible staffing employees.
Revenues generated by these franchises and the related direct costs of services
are included as part of the Company's revenues and costs of services in the
period in which the services are provided. The net distribution paid to
franchises participating in the pay/bill processing program is an operating
expense recorded by the Company as franchises' share of gross profit and is
based on either a percentage of the flexible staffing services billings or a
percentage of the gross profit generated.
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts for cash,
receivables and accounts payable approximate fair value because of the
short-term nature of these items. The fair value for long-term debt approximates
its carrying value because interest rates are tied to market.
FIXED ASSETS -- Fixed assets are stated at cost. Depreciation is provided
using the straight-line method, principally over the following useful lives:
equipment, five to ten years; computer hardware and software, five years.
Amortization of leasehold improvements is provided using the straight-line
method over the life of the lease or the asset, whichever is shorter.
INTANGIBLES -- Intangible assets primarily consist of goodwill related to
acquisitions of businesses. The cost in excess of the fair value of net assets
acquired (goodwill) is amortized by the straight-line method over 40 years.
Other intangible assets consist of covenants not to compete that are amortized
over the term of the agreements.
The Company evaluates the recoverability of its goodwill and other
intangibles in relation to the anticipated cash flows on an undiscounted basis.
Based on this evaluation, the Company believes that no material impairment of
intangible assets exists at December 31, 1996.
F-7
65
SNELLING AND SNELLING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
WORKERS' COMPENSATION -- The Company is self-insured up to specified limits
for certain risks related to workers' compensation liability. Workers'
compensation costs are accrued based upon the aggregate of the liability for
reported claims and loss adjustment expenses and an actuarially-determined
estimated liability for claims incurred but not reported. The estimated costs of
reported claims are accrued based upon loss development trends and may be
revised in the future based on changes in the value of those claims.
INCOME TAXES -- Deferred tax assets and liabilities are determined based on
the differences between financial statement and income tax bases of assets and
liabilities using the enacted tax rates in effect.
DEFERRED RENT -- The cost of the Company's lease for office space is
accounted for by the straight-line method. The difference between the net cash
requirements of the lease and the straight-line method is reflected on the
balance sheet as deferred rent payable.
STATEMENTS OF CASH FLOWS -- For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid investments with a maturity
of three months or less at the time of purchase to be cash equivalents.
STOCK OPTIONS -- The Company accounts for stock-based employee compensation
as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and the related interpretations. The pro forma
information required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" is disclosed in Note 12.
ADVERTISING EXPENSE -- Advertising costs are expensed as incurred.
Advertising expense was $153,000 for the year ended May 31, 1994, $57,000 for
the seven months ended December 31, 1994 and $204,000 and $376,000 for the years
ended December 31, 1995 and 1996, respectively, and $225,000 and $574,000 for
the nine months ended September 30, 1996 and 1997, respectively.
CONCENTRATION OF RISK -- The Company provides staffing services on a
national basis. Credit risks are minimized due to the nature of the staffing
business, large number of customers and diversity of industries serviced. The
Company continually analyzes the creditworthiness of its customers.
A single franchisee operates twelve franchise locations from which the
Company currently derives approximately 13.8% of its net earnings. Loss of this
franchisee would have a material adverse effect on results of operations.
EARNINGS PER SHARE -- Earnings per share were computed by dividing net
earnings applicable to common stock by the weighted average number of shares of
common stock and common stock equivalents outstanding during the period after
giving retroactive effect to the common stock reclassification in December 1997
(Note 16). Stock options granted during the twelve months prior to the filing of
the Company's Registration Statement on Form S-1 have been included in the
calculation of common equivalent shares using the treasury stock method as if
they were outstanding for all periods presented. In computing the number of
shares that could have been purchased with the proceeds from exercise, the
estimated initial public offering price was used.
INTERIM STATEMENTS -- In the opinion of management, the unaudited interim
financial statements as of September 30, 1997 and for the nine months ended
September 30, 1996 and 1997 include all adjustments, consisting only of those of
a normal recurring nature, necessary to present fairly the Company's financial
position as of September 30, 1997 and the results of its operations and cash
flows for the nine-month periods ended September 30, 1996 and 1997. The results
of operations for the nine months ended September 30, 1997 are not necessarily
indicative of the results to be expected for the full year.
F-8
66
SNELLING AND SNELLING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 2 -- ACQUISITIONS
From June 1, 1994, through September 30, 1997, the Company acquired 19
franchise locations and seven independent staffing locations.
The acquisitions were accounted for under the purchase method of accounting
and are included in the consolidated financial statements from the dates of
acquisition.
The following table summarizes the Company's acquisition activity since
June 1, 1994. Included in the amounts paid are expenses of the acquisitions:
SEVEN MONTHS YEARS ENDED NINE MONTHS
ENDED DECEMBER 31, ENDED
DECEMBER 31, ---------------- SEPTEMBER 30,
1994 1995 1996 1997
------------ ------ ------- -------------
(IN THOUSANDS)
Cash paid.................................. $ 915 $1,002 $ 9,764 $949
Amounts due sellers of business............ 433 400 9,489 --
------ ------ ------- ----
Total............................ $1,348 $1,402 $19,253 $949
====== ====== ======= ====
Five of the 19 franchise locations acquired are located in the Chicago
area. The locations were purchased from a group of corporations (the B.A.T.
Group Acquisition), which were affiliated, in simultaneous transactions in
November 1996.
Three of the 19 franchise locations acquired, which are located in the
Kansas City area, were purchased from a single corporation in March 1996 (the
Kansas City Acquisition).
The following unaudited pro forma information has been prepared assuming
that the B.A.T. Group and Kansas City Acquisitions had occurred at the beginning
of the periods presented, after including the impact of certain adjustments.
These adjustments include amortization of intangibles, interest expense on
acquisition debt, reflection of changes to the Company's workers' compensation
liability rates and state unemployment tax rates in effect at the time of
acquisition, reduction of executive compensation for sellers who were no longer
employed by the Company subsequent to acquisition, eliminations of intercompany
transactions, and the related effects on income taxes. Pro forma adjustments
reflecting anticipated "efficiencies" in operations are not permitted under
generally accepted accounting principles. As a result of the limitations imposed
with regard to the types of permitted pro forma adjustments, the Company
believes that this unaudited pro forma information is not indicative of future
results of operations, nor the results of historical operations had the B.A.T.
Group and Kansas City Acquisitions been consummated as of the assumed dates.
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------ SEPTEMBER 30,
1995 1996 1996
---------- ---------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues......................................... $144,657 $185,396 $131,331
Net earnings..................................... $ 2,991 $ 3,623 $ 2,623
Earnings per share............................... $ .43 $ .52 $ 0.38
All other acquisitions of franchise locations and independent personnel
service locations were insignificant to the overall financial results of the
periods presented and, therefore are not included in the pro forma information.
F-9
67
SNELLING AND SNELLING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 3 -- FIXED ASSETS
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(IN THOUSANDS)
Computer hardware and software........................... $4,912 $6,855 $6,832
Equipment................................................ 553 654 534
Leasehold improvements................................... 691 710 749
Other.................................................... 321 414 250
------ ------ ------
6,477 8,633 8,365
Less accumulated depreciation and amortization........... 2,741 3,579 3,872
------ ------ ------
$3,736 $5,054 $4,493
====== ====== ======
Capitalized leases included above were approximately $1,848,000, $2,272,000
and $1,895,000 at December 31, 1995 and 1996 and September 30, 1997,
respectively. These consisted primarily of leases for computer hardware and
software related to systems conversions in the offices of both the Company and
its franchisees.
NOTE 4 -- INTANGIBLES
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------- -------------
(IN THOUSANDS)
Goodwill................................................ $2,310 $21,228 $21,905
Covenants not to compete................................ 450 575 590
------ ------- -------
2,760 21,803 22,495
Less accumulated amortization........................... 380 835 1,228
------ ------- -------
$2,380 $20,968 $21,267
====== ======= =======
NOTE 5 -- OTHER ASSETS
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
---- ------ -------------
(IN THOUSANDS)
Loan origination fees (net of accumulated amortization of
$147,000 and $275,000 in 1996 and 1997)................. $ -- $ 659 $ 560
Deferred financing costs.................................. -- -- 420
Long-term investments, at cost (net of allowance of
approximately $325,000 in 1995, 1996 and 1997).......... 9 39 56
Cash surrender value of officer life insurance............ 569 624 642
Deferred income taxes..................................... 146 7 2
---- ------ ------
$724 $1,329 $1,680
==== ====== ======
F-10
68
SNELLING AND SNELLING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 6 -- SHORT-TERM BORROWINGS
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------- -------------
(IN THOUSANDS)
Bank line of credit................................... $1,985 $ -- $ --
Short-term notes financing acquisitions, at interest
rates from 8.25% to 9.25%........................... -- 2,306 --
Other debt, at interest rates from 7.0% to 9.7%....... 519 570 4
------ ------- ------
$2,504 $ 2,876 $ 4
====== ======= ======
Weighted average interest rate........................ 8.38% 8.08% 7.48%
====== ======= ======
NOTE 7 -- LONG-TERM DEBT
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------- -------------
(IN THOUSANDS)
Revolving credit facility............................. $ -- $ 9,013 $ 8,115
Acquisition credit facility........................... -- 7,478 12,963
Acquisition note payable in quarterly installments
through 2001, at 8.25% interest..................... -- 6,058 3,273
Other acquisition notes payable in installments
through 2000, with interest ranging from 6% to
9.25%............................................... 628 1,604 1,157
Capitalized lease obligations, payable in varying
monthly installments through 2001, collateralized by
the related equipment............................... 2,203 2,919 2,311
------ ------- -------
2,831 27,072 27,819
Less amount representing interest on capital lease
obligations, imputed at rates ranging from 8.95% to
17.18%.............................................. 559 647 416
------ ------- -------
2,272 26,425 27,403
Less current maturities............................... 447 4,014 1,863
------ ------- -------
$1,825 $22,411 $25,540
====== ======= =======
Aggregate maturities of long-term debt for the five years following
December 31, 1996 are as follows:
(IN THOUSANDS)
1997........................................... $ 4,014
1998........................................... 1,884
1999........................................... 1,942
2000........................................... 1,225
2001........................................... 17,360
-------
$26,425
=======
During 1996, the Company negotiated a new Senior Credit Facility, which
expires in January 2001, with BankBoston, N.A. ("BankBoston") and a syndicate of
other banks. At December 31, 1996, the Senior Credit Facility provided for a
maximum revolving facility of $15.0 million (based on the Company's eligible
F-11
69
SNELLING AND SNELLING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
receivables) and a $25.0 million acquisition facility. The Company's ability to
request additional advances under the acquisition facility terminates on January
31, 1998. Optional prepayments are allowed on both facilities, and any remaining
unpaid balance on either facility is due in January 2001. Mandatory repayment of
amounts borrowed under the revolving facility is based on daily bank clearings
of deposits. For the acquisition facility, mandatory repayments included: (1)
quarterly payments based on a five year amortization; and (2) annual payments
based on the Company's excess cash flow (as defined in the Senior Credit
Facility). However, all payments due on the acquisition facility are required to
be funded from the revolving facility. As a result, no portion of either
facility is included in current maturities of debt at December 31, 1996 or
September 30, 1997, since the revolving facility has no current maturity at
either date and there was sufficient availability under the revolving facility
at both dates to fund the mandatory repayments on the acquisition facility
during the following year.
At the Company's option, interest is calculated based on a combination of
the following: (i) BankBoston's base rate or the London Interbank Offered Rate
("LIBOR") plus (ii) from 0.5% to 3.0% depending on the facility and certain
financial ratios of the Company. The average rate at December 31, 1996 was 8.20%
on the acquisition facility and 8.09% on the revolving facility. The Senior
Credit Facility requires the Company to pay a commitment fee ranging from .375%
to .500% per annum depending on certain financial ratios on the unused amount of
the credit line (approximately $23.5 million at December 31, 1996). The Senior
Credit Facility also includes financial covenants regarding the Company's
working capital, consolidated net worth, earnings coverage to debt, interest and
fixed charges and limitations on annual capital expenditures. Borrowings under
the Senior Credit Facility are collateralized by substantially all of the
Company's assets, along with an agreement that provides for the pledge by
certain shareholders of the Company of at least 50% of the voting power of the
outstanding common shares of the Company.
In June and July, 1997, the Senior Credit Facility was amended to increase
the revolving facility to a maximum of $22.5 million and to modify certain of
its financial covenants.
Availability under the Senior Credit Facility at September 30, 1997 was
$20.2 million.
The Company had outstanding irrevocable standby letters of credit as of
December 31, 1995 and 1996, and September 30, 1997 in the total principal
amounts of $4,176,000, $3,163,000 and $4,163,000, respectively, primarily in
connection with the Company's workers' compensation insurance program.
NOTE 8 -- OTHER CURRENT LIABILITIES
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(IN THOUSANDS)
Accrued expenses
Compensation...................................... $2,388 $1,877 $ 934
Taxes, other than income taxes.................... 1,172 1,201 2,150
Insurance......................................... 669 2,148 2,198
Rebates to franchisees............................ 209 250 136
Other expenses.................................... 732 452 602
Cash overdraft.................................... 1,806 2,516 4,840
------ ------ -------
$6,976 $8,444 $10,860
====== ====== =======
F-12
70
SNELLING AND SNELLING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 9 -- INCOME TAXES
The provision for income taxes in the consolidated statements of earnings
is comprised of the following:
SEVEN MONTHS YEARS ENDED NINE MONTHS ENDED
YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30,
MAY 31, DECEMBER 31, --------------- ------------------
1994 1994 1995 1996 1996 1997
---------- ------------ ------ ------ ------- -------
(IN THOUSANDS)
Current expense.............. $ 329 $ 922 $1,258 $1,759 $1,267 $1,401
Federal.................... 108 144 199 389 282 323
----- ------ ------ ------ ------ ------
State...................... 437 1,066 1,457 2,148 1,549 1,724
----- ------ ------ ------ ------ ------
Deferred expense (benefit)
Federal.................... (228) (308) 154 10 11 3
State...................... (57) (54) 109 3 4 --
----- ------ ------ ------ ------ ------
(285) (362) 263 13 15 3
----- ------ ------ ------ ------ ------
$ 152 $ 704 $1,720 $2,161 $1,564 $1,727
===== ====== ====== ====== ====== ======
The income tax provision, reconciled to the tax computed at the statutory
Federal rate, is as follows:
SEVEN MONTHS YEARS ENDED NINE MONTHS ENDED
YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30,
MAY 31, DECEMBER 31, ---------------- ------------------
1994 1994 1995 1996 1996 1997
----------- ------------ ------ ------ ------- -------
(IN THOUSANDS)
Tax at statutory rate....... $ 90 $531 $1,499 $1,861 $1,326 $1,476
State income taxes, net of
Federal benefit........... 12 97 202 258 195 213
Other....................... 50 76 19 42 43 38
---- ---- ------ ------ ------ ------
Total............. $152 $704 $1,720 $2,161 $1,564 $1,727
==== ==== ====== ====== ====== ======
F-13
71
SNELLING AND SNELLING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
The components of the net deferred tax asset were as follows:
DECEMBER 31,
------------ SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
(IN THOUSANDS)
Deferred tax assets
Allowance for doubtful accounts....................... $ 78 $135 $ 285
Accrued expenses...................................... 306 346 362
Fixed assets.......................................... 28 -- --
Intangible assets..................................... 42 5 --
---- ---- -----
454 486 647
---- ---- -----
Deferred tax liabilities
Deferred rent......................................... 26 50 72
Fixed assets.......................................... -- 11 70
Intangible assets..................................... -- -- 79
Other................................................. 14 24 28
---- ---- -----
40 85 249
---- ---- -----
Net deferred tax asset.................................. $414 $401 $ 398
==== ==== =====
Balance sheet classifications:
Current deferred tax asset............................ $268 $394 $ 567
Noncurrent deferred tax asset (liability)............. 146 7 (169)
---- ---- -----
$414 $401 $ 398
==== ==== =====
NOTE 10 -- EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan (the Plan) for employees, under which
employee contributions qualify as salary reductions. The Company is required to
match 25% of the employee's salary reduction contributions and, at its option,
may make discretionary contributions. Substantially all of the full-time
employees of the Company who are not members of a collective bargaining unit, as
well as flexible staffing employees who meet certain requirements regarding
hours worked, are eligible for the Plan after one year of service. Company
contributions become fully vested to participants after five years. Effective
June 1, 1994, the Company suspended all contributions to the Plan. Subsequent to
December 31, 1994, the Plan was amended and both employee and Company
contributions were permitted. Company contributions to the Plan were
approximately $230,000, $25,000, $34,000, $27,000 and $40,000 for the years
ended May 31, 1994, December 31, 1995 and 1996, and the nine months ended
September 30, 1996 and 1997, respectively. There were no contributions for the
seven months ended December 31, 1994.
One of the Company's subsidiaries had a non-contributory, defined
contribution pension plan for employees who work 1,000 hours or more per year.
Pension expense for this plan is computed based upon the number of hours worked
at $.35 per hour for the year ended December 31, 1996 and $.30 per hour for the
year ended December 31, 1995 and for the seven months ended December 31, 1994.
Contributions were approximately $40,000 and $63,000 for the years ended
December 31, 1996 and 1995, $11,000 for the seven months ended December 31,
1994, and $40,000 for the nine months ended September 30, 1996. The operations
and substantially all of the assets of the subsidiary were sold in January 1997.
F-14
72
SNELLING AND SNELLING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated under various noncancellable operating leases for
computer hardware and software, office space and furnishings through 2005. Total
rental expense was approximately $899,000 for the year ended May 31, 1994,
$544,000 for the seven months ended December 31, 1994, and $956,000 and
$1,099,000 for the years ended December 31, 1995 and 1996, respectively, and
$721,000 and $1,570,000 for the nine months ended September 30, 1996 and 1997,
respectively, including short-term automobile and equipment rentals. The future
minimum lease payments under all long-term noncancellable operating leases at
December 31, 1996 are approximately as follows:
(IN THOUSANDS)
1997........................................... $1,670
1998........................................... 1,679
1999........................................... 1,443
2000........................................... 1,198
2001........................................... 744
Future years................................... 272
------
$7,006
======
Legal
Several legal actions arising in the ordinary course of business are
pending or in process against the Company. In the opinion of management, the
eventual disposition of these actions will have no material adverse effect on
the financial position, results of operations or liquidity of the Company.
Employment Agreements
The Company has agreements, expiring between 2001 and 2006, with several
executive officers providing for cash compensation and other benefits in the
event of termination without cause or a change in control of the Company.
In October 1997, the Company entered into a 15-year employment agreement
with its chief executive officer, Robert O. Snelling, Sr. The agreement provides
for annual compensation of $475,000, adjusted for Consumer Price Index changes.
In the event of termination of employment, Mr. Snelling is entitled to receive
annual compensation equal to 75% of his then base salary for the remaining term
plus five years. In the event of death, the spouse of Mr. Snelling is entitled
to receive two-thirds of the amount he would otherwise receive. If there is a
change in control of the Company, Mr. Snelling may elect either to receive a
lump-sum payment equal to the then present value of the economic benefits under
the agreement or to have his compensation, including any deferred compensation,
increased by 10% (plus, in either case, an additional gross-up amount in the
event of imposition of any federal excise or similar tax on payment).
NOTE 12 -- STOCK OPTIONS
The 1996 Stock Option Plan provides for the granting of incentive and
non-qualified stock options. A total of 2,978,286 shares of Class B common stock
is authorized for issuance to certain employees of the Company. The options
granted have ten year terms and have either immediate vesting or graded vesting
over five years. The exercise price may not be less than the fair market value
on the measurement date.
F-15
73
SNELLING AND SNELLING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
The following table reflects activity under the stock option plan and the
weighted average exercise price per share:
WEIGHTED
AVERAGE
EXERCISE PRICE
STOCK OPTIONS PER SHARE
------------- --------------
Outstanding -- January 1, 1996............................ --
Granted................................................... 2,599,238 $3.85
---------
Outstanding -- December 31, 1996 and September 30, 1997... 2,599,238 $3.85
=========
Options exercisable at December 31, 1996.................. 2,339,314 $3.85
=========
Options exercisable at September 30, 1997................. 2,425,955 $3.85
=========
The Company accounts for these plans under Accounting Principles Board
Opinion No. 25. Accordingly, no compensation cost has been recognized for the
stock option plan. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123) requires pro forma
disclosures of net earnings and earnings per share based upon the fair value of
options granted. The fair value of each option has been estimated as of the
measurement date, using present value calculations with the following
assumptions:
Risk-free interest rate.................................... 6%
Dividend yield............................................. 0%
Expected life.............................................. 5 years
Volatility................................................. 36%
The weighted average fair value of options granted in 1996 was $1.58 per
share. Had compensation for stock options been accounted for under Financial
Accounting Standards No. 123, the effect on the Company's net earnings and
earnings per share for the year ended December 31, 1996 would have been as
follows:
AS REPORTED PRO FORMA
----------- ---------
Net earnings (in thousands)................................. $3,314 $1,042
====== ======
Earnings per share.......................................... $ .48 $ .15
====== ======
NOTE 13 -- REVENUES
Total system-wide placement sales for Company-owned branch locations and
franchise locations were approximately $225.3 million for the year ended May 31,
1994, $166.3 million for the seven months ended December 31, 1994, $318.9
million and $373.0 million for the years ended December 31, 1995 and 1996,
respectively, and $325.0 million for the nine months ended September 30, 1997.
F-16
74
SNELLING AND SNELLING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 14 -- CASH FLOW INFORMATION
Supplemental information on cash flows and noncash investing and financing
transactions is as follows:
NINE MONTHS
SEVEN MONTHS YEAR ENDED ENDED
ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------- ---------------
1994 1995 1996 1996 1997
------------ ------ ------- ------ ------
(IN THOUSANDS)
Supplemental cash flow information
Interest paid.......................... $ 71 $ 351 $ 843 $ 566 $1,848
===== ====== ======= ====== ======
Income taxes paid...................... $ 561 $2,203 $ 1,853 $1,557 $1,861
===== ====== ======= ====== ======
Supplemental data on noncash investing
and financing activities
Note issued for purchase of insurance
policies............................ $ 488 $ 714 $ 736 $ 269 $ --
===== ====== ======= ====== ======
Purchase of businesses
Fair value of tangible assets
acquired.......................... $ 109 $ 112 $ 210 $ 75 $ 25
Goodwill............................ 1,189 890 18,918 1,450 909
Covenants not to compete............ 50 400 125 25 15
Debt issued......................... (433) (400) (9,489) (675) --
----- ------ ------- ------ ------
Cash paid........................... $ 915 $1,002 $ 9,764 $ 875 $ 949
===== ====== ======= ====== ======
NOTE 15 -- SALE OF SUBSIDIARY
During January 1997, the Company sold substantially all the assets of a
subsidiary company, realizing a net gain on sale of $678,000.
NOTE 16 -- RECAPITALIZATION
In December 1997, the Company amended its articles of incorporation to
provide for the issuance of 100,000,000 shares of Class A common stock,
15,000,000 shares of Class B common stock and 10,000,000 shares of preferred
stock. This recapitalization had the effect of a 5.415067 for 1 split of its
Class B common shares at that time. No shares of Class A common stock or
preferred stock have been issued. Each share of Class B common stock is entitled
to ten votes, and each share of Class A is entitled to one vote.
The consolidated financial statements, including all references to number
of shares and per share data, have been adjusted to reflect the stock split.
NOTE 17 -- SUBSEQUENT EVENTS (UNAUDITED)
In October 1997, the Company acquired an independent staffing location in
New York City for $6.0 million in total consideration. In November 1997, the
Company acquired a franchise location in Dallas for $0.5 million in total
consideration.
F-17
75
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
B.A.T. Group Holdings, Inc.,
KAL Help Enterprises, Inc.,
Par Three Help Services, Inc., and
Par Four Services, Inc.
We have audited the combined balance sheets of B.A.T. Group Holdings, Inc.,
KAL Help Enterprises, Inc., Par Three Help Services, Inc. and Par Four Services,
Inc. (collectively, B.A.T. Group) as of December 31, 1994 and 1995, and the
related combined statements of earnings, changes in stockholders' equity and
cash flows for the years then ended. These combined financial statements are the
responsibility of the management of B.A.T. Group. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of B.A.T.
Group as of December 31, 1994 and 1995, and the combined results of its
operations and its combined cash flows for the years then ended, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
August 15, 1997
F-18
76
B.A.T. GROUP
COMBINED BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
Current assets
Cash and cash equivalents........................... $ 1,000 $ 181,848 $ --
Marketable securities available for sale, at market
value (cost -- $410,922 in 1995 and $539,862 in
1996)............................................ -- 420,875 601,175
Receivables -- trade, less allowance for doubtful
accounts of $44,000, $150,000 and $69,000 in
1994, 1995 and 1996.............................. 2,287,025 2,970,338 3,238,461
Prepaid expenses and other current assets........... 23,419 182,498 386,677
---------- ---------- ----------
Total current assets........................ 2,311,444 3,755,559 4,226,313
Equipment and leasehold improvements, net............. 186,028 273,354 281,223
Intangible assets, net................................ 223,097 208,504 286,547
---------- ---------- ----------
Total assets................................ $2,720,569 $4,237,417 $4,794,083
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Cash overdraft...................................... $ 81,713 $ -- $ 210,437
Current maturities of long-term debt................ 128,444 49,604 91,164
Short-term borrowings............................... 780,000 1,302,374 913,991
Payable to franchisor............................... 171,929 211,978 211,694
Workers' compensation insurance accrual............. 110,506 34,250 59,600
Payroll taxes payable............................... 96,800 151,304 --
Accounts payable and other accrued expenses......... 13,208 41,544 94,622
---------- ---------- ----------
Total current liabilities................... 1,382,600 1,791,054 1,581,508
Long-term debt, less current maturities............... 40,268 46,822 86,604
---------- ---------- ----------
Total liabilities........................... 1,422,868 1,837,876 1,668,112
Commitments and contingencies......................... -- -- --
Stockholders' equity
Common stock........................................ 3,000 108,000 108,000
Unrealized gain on securities available for sale.... -- 9,953 61,313
Retained earnings................................... 1,294,701 2,281,588 2,956,658
---------- ---------- ----------
Total stockholders' equity.................. 1,297,701 2,399,541 3,125,971
---------- ---------- ----------
$2,720,569 $4,237,417 $4,794,083
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-19
77
B.A.T. GROUP
COMBINED STATEMENTS OF EARNINGS
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
(UNAUDITED)
Revenues............................................ $13,827,972 $17,683,665 $13,953,776
Cost of services.................................... 11,225,069 13,846,908 10,786,716
----------- ----------- -----------
Gross profit.............................. 2,602,903 3,836,757 3,167,060
Selling, general and administrative expenses........ 1,653,288 2,192,953 1,912,294
Depreciation and amortization....................... 46,186 88,685 82,653
Management fee paid to affiliate.................... -- 136,000 --
----------- ----------- -----------
Operating profit.......................... 903,429 1,419,119 1,172,113
Other expense
Interest.......................................... 64,796 78,638 51,449
Other............................................. -- 7,382 --
----------- ----------- -----------
64,796 86,020 51,449
----------- ----------- -----------
NET EARNINGS.............................. $ 838,633 $ 1,333,099 $ 1,120,664
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-20
78
B.A.T. GROUP
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995
UNREALIZED
GAIN ON
SECURITIES
COMMON AVAILABLE RETAINED
STOCK FOR SALE EARNINGS TOTAL
-------- ---------- ---------- ----------
Balance at January 1, 1994.................. $ 1,000 $ -- $ 678,710 $ 679,710
Incorporation of KAL Help Enterprises,
Inc....................................... 1,000 -- -- 1,000
Incorporation of Par Three Help Services,
Inc....................................... 1,000 -- -- 1,000
Distributions to stockholders............... -- -- (222,642) (222,642)
Net earnings................................ -- -- 838,633 838,633
-------- ------- ---------- ----------
Balance at December 31, 1994................ 3,000 -- 1,294,701 1,297,701
Incorporation of Par Four Services, Inc..... 105,000 -- -- 105,000
Unrealized gains on securities.............. -- 9,953 -- 9,953
Distributions to stockholders............... -- -- (346,212) (346,212)
Net earnings................................ -- -- 1,333,099 1,333,099
-------- ------- ---------- ----------
Balance at December 31, 1995................ 108,000 9,953 2,281,588 2,399,541
Unrealized gains on securities.............. -- 51,360 -- 51,360
Distributions to stockholders............... -- -- (445,594) (445,594)
Net earnings................................ -- -- 1,120,664 1,120,664
-------- ------- ---------- ----------
Balance at September 30, 1996............... $108,000 $61,313 $2,956,658 $3,125,971
======== ======= ========== ==========
The accompanying notes are an integral part of this statement.
F-21
79
B.A.T. GROUP
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ---------- -------------
(UNAUDITED)
Cash flows from operating activities
Net earnings....................................... $ 838,633 $1,333,099 $1,120,664
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization................... 46,186 88,685 82,653
Loss on sale of assets.......................... -- 7,382 --
Changes in operating assets and liabilities
Receivables -- trade.......................... (1,029,464) (683,313) (268,123)
Prepaid expenses and other current assets..... (113,308) (144,476) (204,179)
Accounts payable and accrued expenses......... 322,705 46,633 (73,160)
----------- ---------- ----------
Net cash provided by operating
activities............................... 64,752 648,010 657,855
Cash flows from investing activities
Purchase of marketable securities.................. -- (207,548) (317,871)
Capital expenditures............................... (143,947) (183,403) (168,565)
Acquisition of businesses.......................... (217,791) -- --
----------- ---------- ----------
Net cash used in investing activities...... (361,738) (390,951) (486,436)
Cash flows from financing activities
Net change in short-term borrowings................ 305,000 319,000 (199,452)
Proceeds from bank overdraft....................... 17,146 (81,713) 210,437
Proceeds from long-term borrowings................. 175,507 73,362 81,342
Repayments of long-term borrowings................. (18,468) (145,648) --
Issuance of common stock........................... 2,000 105,000 --
Distributions to stockholders...................... (222,642) (346,212) (445,594)
----------- ---------- ----------
Net cash provided by (used in) financing
activities............................... 258,543 (76,211) (353,267)
----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents........................................ (38,443) 180,848 (181,848)
Cash and cash equivalents at beginning of period..... 39,443 1,000 181,848
----------- ---------- ----------
Cash and cash equivalents at end of period........... $ 1,000 $ 181,848 $ --
=========== ========== ==========
See Note H for supplemental disclosures of cash flow information.
The accompanying notes are an integral part of these statements.
F-22
80
B.A.T. GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1996 AND THE NINE MONTHS THEN ENDED
IS UNAUDITED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Presentation
The accompanying financial statements include the accounts of B.A.T. Group
Holdings, Inc., KAL Help Enterprises, Inc., Par Three Help Services, Inc. and
Par Four Services, Inc. (collectively, B.A.T. Group or the Company). All
significant intercompany accounts and transactions have been eliminated.
Combined financial statements are presented because the companies are under
common control and common management.
Business and Revenue Recognition
The Company provides temporary staffing services to customers in a wide
variety of industries. It operates four locations in Illinois and Michigan under
a franchise arrangement with Snelling and Snelling, Inc.
Revenue from services is recognized at the time the services are provided.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts for cash, receivables and accounts payable approximate
fair value because of the short-term nature of these items. Marketable
securities are carried at market value. Long-term debt bears interest at
floating rates and, therefore, fair value approximates its carrying value.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation is
computed over the estimated useful lives of the assets, principally five to
seven years, using the straight-line method. Amortization of leasehold
improvements is provided using the straight-line method over the life of the
lease or the asset, whichever is shorter.
Intangibles
Intangible assets consist of goodwill and covenants not to compete related
to the acquisition of businesses. The cost in excess of the fair value of net
assets acquired (goodwill) is amortized by the straight-line method over 15
years. Covenants not to compete are amortized over the term of the agreements.
The Company evaluates the recoverability of its goodwill and other
intangibles on an annual basis. Based on these evaluations, the Company believes
that no material impairment of intangible assets exists at December 31, 1995 or
December 31, 1994.
Workers' Compensation
The Company is self-insured up to specified limits for certain risks
related to workers' compensation liability. Workers' compensation costs are
accrued based upon data provided by the insurance companies of the estimated
liability for reported claims and for claims incurred but not reported. The
estimated costs of
F-23
81
B.A.T. GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1996 AND THE NINE MONTHS THEN ENDED
IS UNAUDITED)
reported claims are accrued based upon loss development trends and may be
revised in the future based on changes in the expected losses of those claims.
Income Taxes
The income taxes on the net earnings are payable personally by the
stockholders pursuant to elections as S Corporations under the Internal Revenue
Code not to have the Companies taxed as corporations.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense was
$126,077 and $78,475 for the years ended December 31, 1995 and 1994,
respectively.
Statements of Cash Flows
For purposes of the combined statements of cash flows, the Company
considers all highly liquid investments with a maturity of three months or less
at the time of purchase to be cash equivalents.
NOTE B -- ACQUISITIONS
During 1994 and 1996, the Company acquired franchise operating rights and
certain assets of two and one temporary staffing service businesses,
respectively (See Note H). Each acquisition has been accounted for under the
purchase method of accounting and is included in the combined financial
statements from the date of acquisition.
NOTE C -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
Computer hardware and software................. $ 90,766 $ 144,878 $ 152,365
Automobiles.................................... 34,608 88,328 92,893
Leasehold improvements......................... 58,759 84,539 88,908
Furniture and fixtures......................... 111,207 138,128 192,772
--------- --------- ---------
295,340 455,873 526,938
Less accumulated depreciation and
amortization....................... (109,312) (182,519) (245,715)
--------- --------- ---------
$ 186,028 $ 273,354 $ 281,223
========= ========= =========
NOTE D -- INTANGIBLE ASSETS
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
Goodwill......................................... $212,500 $213,385 $270,885
Covenants not to compete......................... 20,000 20,000 60,000
-------- -------- --------
232,500 233,385 330,885
Less accumulated amortization.......... (9,403) (24,881) (44,338)
-------- -------- --------
$223,097 $208,504 $286,547
======== ======== ========
F-24
82
B.A.T. GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1996 AND THE NINE MONTHS THEN ENDED
IS UNAUDITED)
NOTE E -- SHORT-TERM BORROWINGS
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
-------- ---------- -------------
Bank lines of credit........................... $780,000 $1,099,000 $692,000
Broker loan, collateralized by marketable
securities, with interest at 8.25%........... -- 203,374 221,991
-------- ---------- --------
$780,000 $1,302,374 $913,991
======== ========== ========
The Company has unused lines of credit aggregating $601,000 at December 31,
1995. Interest is charged on these lines at prime (8.5% at December 31, 1995).
Utilization of the lines of credit is limited to the amount of eligible accounts
receivable, as defined in the loan agreement.
The lines of credit are collateralized by the assets of the Company and by
personal guarantees of the stockholders.
NOTE F -- LONG-TERM DEBT
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- ------- -------------
Notes payable to banks, payable in installments
through 1998, bearing interest at prime rate.... $ 68,205 $96,426 $ 55,422
Acquisition notes................................. 55,834 -- 122,346
Other............................................. 44,673 -- --
-------- ------- --------
168,712 96,426 177,768
Less current maturities................. 128,444 49,604 91,164
-------- ------- --------
$ 40,268 $46,822 $ 86,604
======== ======= ========
Aggregate maturities of long-term debt for the years following December 31,
1995 are as follows:
YEAR ENDED
DECEMBER 31,
- ------------
1996........................................................ $49,604
1997........................................................ 46,297
1998........................................................ 525
-------
$96,426
=======
F-25
83
B.A.T. GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1996 AND THE NINE MONTHS THEN ENDED
IS UNAUDITED)
NOTE G -- COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under noncancellable operating lease
agreements expiring at various dates through 1998. Total rental expense was
approximately $89,000 and $50,000 for the years ended December 31, 1995 and
1994, respectively. The future minimum lease payments under these leases at
December 31, 1995 are as follows:
YEAR ENDED
DECEMBER 31,
- ------------
1996....................................................... $ 92,168
1997....................................................... 50,915
1998....................................................... 25,326
--------
$168,409
========
NOTE H -- CASH FLOW INFORMATION
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------ SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
Interest paid.................................... $ 64,796 $ 70,138 $ 51,449
======== ======== =========
Purchase of businesses
Fair value of tangible assets acquired......... $ 72,791 $ -- $ 40,000
Goodwill....................................... 212,500 -- 57,500
Covenants not to compete....................... 20,000 -- 40,000
-------- -------- ---------
Total consideration.............................. 305,291 -- 137,500
Less note payable................................ (87,500) -- (137,500)
-------- -------- ---------
Cash paid........................................ $217,791 $ -- $ --
======== ======== =========
Purchase of marketable securities with broker
loan........................................... $ -- $203,374 $ 18,617
======== ======== =========
NOTE I -- RELATED PARTY TRANSACTIONS
The Company paid a management fee of $136,000 in 1995 to a related party,
B.A.T. Real Estate, Inc.
NOTE J -- COMMON STOCK
Information on common stock, none of which has a par or stated value, is as
follows:
SHARES SHARES ISSUED
AUTHORIZED AND OUTSTANDING AMOUNT
---------- --------------- --------
B.A.T. Group Holdings, Inc..................... 1,000 1,000 $ 1,000
KAL Help Enterprises, Inc...................... 1,000 1,000 1,000
Par Three Help Services, Inc................... 1,000 100 1,000
Par Four Services, Inc......................... 1,000,000 1,000 105,000
--------
$108,000
========
F-26
84
B.A.T. GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1996 AND THE NINE MONTHS THEN ENDED
IS UNAUDITED)
NOTE K -- SUBSEQUENT EVENT
In November 1996, the Company sold its franchise operating rights and
certain tangible assets to the franchisor, Snelling and Snelling, Inc.
F-27
85
SNELLING AND SNELLING, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENT
(UNAUDITED)
The following unaudited pro forma condensed statement of earnings for the
year ended December 31, 1996 is presented for illustrative purposes only and
gives effect to (i) the acquisition on November 4, 1996 of five franchise
locations in the Chicago area (B.A.T. Group Acquisition) for $11.0 million, (ii)
the acquisition on March 17, 1996 of three franchise locations in the Kansas
city area (Kansas City Acquisition) for $1.5 million as though they had been
made on January 1, 1996 and (iii) the pro forma effect of the use of proceeds
from the sale of shares being offered herein to retire debt.
All of the acquisitions have been accounted for using the purchase method
of accounting. The unaudited pro forma condensed statement of earnings combines
the Company's results of operations for the year ended December 31, 1996 with
the operating results of B.A.T. Group Acquisition for the period from January 1,
1996 through November 3, 1996, and the Kansas City Acquisition for the period
from January 1, 1996 through March 16, 1996. The pro forma statement reflects
pro forma adjustments based upon available information and certain assumptions
the Company believes are reasonable. Because of limitations imposed with regard
to the types of permitted pro forma adjustments, no effect has been given to
anticipated efficiencies in operations which may result. Therefore, the Company
believes that this pro forma condensed statement of earnings is not indicative
of future results of operations nor the historical results of operations had the
acquisitions been consummated on January 1, 1996. These pro forma financial
statements should be read in conjunction with the historical financial
statements and related notes of the Company and B.A.T. Group. Certain businesses
acquired have not been included as they are immaterial to results of operations.
F-28
86
SNELLING AND SNELLING, INC.
PRO FORMA CONDENSED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
B.A.T. KANSAS PRO FORMA PRO FORMA
GROUP CITY PRO FORMA FOR ADJUSTMENTS
COMPANY ACQUISITION ACQUISITION TOTAL ADJUSTMENTS ACQUISITIONS FOR OFFERING
---------- ----------- ----------- -------- ----------- ------------ ------------
Revenues.......................... $ 168,602 $16,341 $884 $185,827 $(431)(1) $ 185,396 $ --
Cost of services.................. 122,945 12,635 650 136,230 (447)(2) 135,783 --
---------- ------- ---- -------- ----- ---------- --------
Gross profit.............. 45,657 3,706 234 49,597 16 49,613 --
Selling, general and
administrative expenses......... 19,600 2,509 115 22,224 (7)(3) 22,217 --
Franchises' share of gross
profit.......................... 19,587 -- -- 19,587 -- 19,587 --
---------- ------- ---- -------- ----- ---------- --------
Operating profit.......... 6,470 1,197 119 7,786 23 7,809 --
Other income (expense)
Interest expense................ (1,100) (58) -- (1,158) (770)(4) (1,928) 1,350(5)
Other........................... 105 -- -- 105 -- 105 --
---------- ------- ---- -------- ----- ---------- --------
(995) (58) -- (1,053) (770) (1,823) 1,350
---------- ------- ---- -------- ----- ---------- --------
Earnings before income
taxes................... 5,475 1,139 119 6,733 (747) 5,986 1,350
Income tax expense................ 2,161 -- -- 2,161 (202)(6) 2,363 533(6)
---------- ------- ---- -------- ----- ---------- --------
NET EARNINGS.............. $ 3,314 $ 1,139 $119 $ 4,572 $(949) $ 3,623 $ 817
========== ======= ==== ======== ===== ========== ========
Earnings per share................ $ .48 $ .52
========== ==========
Weight average common and common
equivalent shares............... 6,965,843 6,965,843 618,280(5)
========== ========== ========
PRO FORMA
----------
Revenues.......................... $ 185,396
Cost of services.................. 135,783
----------
Gross profit.............. 49,613
Selling, general and
administrative expenses......... 22,217
Franchises' share of gross
profit.......................... 19,587
----------
Operating profit.......... 7,809
Other income (expense)
Interest expense................ (578)
Other........................... 105
----------
(473)
----------
Earnings before income
taxes................... 7,336
Income tax expense................ 2,896
----------
NET EARNINGS.............. $ 4,440
==========
Earnings per share................ $ .59
==========
Weight average common and common
equivalent shares............... 7,584,123
==========
F-29
87
SNELLING AND SNELLING, INC.
NOTES TO PRO FORMA CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
The pro forma adjustments to the accompanying pro forma statement of
earnings are described below:
(1) Eliminations of royalty revenues received from acquired franchise
locations.
(2) Elimination of the acquired franchise locations' cost of services for
royalties paid to the Company and adjustments to reflect the Company's
workers' compensation rates and state unemployment tax rates in effect
at the time of acquisition, as follows (in thousands):
Royalties paid to the Company............................... $431
Reduction in workers' compensation insurance rates.......... 6
Reduction in state unemployment tax rates................... 10
----
$447
====
(3) Adjustment to compensation expense associated with sellers who were
executive officers of the franchise locations acquired who were not
employed by the Company after acquisition and amortization of the
assets acquired in the B.A.T. Group and Kansas City Acquisitions as
follows (in thousands):
Compensation expense........................................ $(174)
Amortization -- B.A.T. Group Acquisition.................... 155
Amortization -- Kansas City Acquisition..................... 12
-----
$ (7)
=====
(4) Adjustment for interest expense on borrowings of $11.0 million and $1.5
million incurred in connection with the B.A.T. Group and Kansas City
Acquisitions, respectively, and to eliminate interest expense of the
B.A.T. Group Acquisition.
(5) Adjustment to reflect shares being offered to retire debt with an
average balance of $7,900,000 during the year ended December 31, 1996,
and the elimination of the related interest expense along with the pro
forma interest expense of $770,000 of acquisition debt, net of tax, as
though the debt were retired at the beginning of the year.
(6) Tax effects of pro forma adjustments and provision for income taxes,
using the Company's effective tax rate, on the earnings of B.A.T. Group
and the Kansas City Acquisitions, which had S Corporation status for
federal income tax purposes.
F-30
88
[GRAPHICS]
The inside back cover of the Prospectus includes the caption "Over 300
Locations Serving the United States." in the upper right corner, a photograph of
the Snelling office in Quincy, Illinois (with a caption to that effect) in the
upper left corner of the page, a map of the United States with dots placed to
represent Snelling locations in the lower half of the page (along with the
caption to the right of the map of "318 Snelling Locations* as of September 30,
1997" on two lines and, in a smaller point size below, "* includes eight
locations outside the U.S."), a photograph of a Snelling office in Dallas, Texas
(with a caption to that effect) in the lower left corner and the Snelling(R)
Personnel Services logo in the lower right corner.
89
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Risk Factors.......................... 6
The Company........................... 11
Use of Proceeds....................... 11
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Consolidated Financial and
Operating Data...................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 24
Management............................ 37
Certain Relationships and Related
Transactions........................ 44
Principal and Selling Shareholders.... 45
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 52
Underwriting.......................... 53
Legal Matters......................... 54
Experts............................... 54
Additional Information................ 54
Index to Financial Statements......... F-1
---------------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT 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.
======================================================
======================================================
3,350,000 SHARES
[SNELLING LOGO]
COMMON STOCK
---------------------
PROSPECTUS
, 1997
---------------------
SMITH BARNEY INC.
RAUSCHER PIERCE REFSNES, INC.
======================================================
90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Company in connection with this
offering are as follows:
SEC registration fee........................................ $ 22,652
NASD fee.................................................... 7,475
Nasdaq National Market listing fee.......................... 31,875
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Printing expenses........................................... *
Blue Sky fees and expenses (including legal fees)........... *
Transfer agent's and registrar's fees....................... *
Miscellaneous other expenses................................ *
----------
Total............................................. $1,250,000
==========
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 1741, 1742 and 1743 of the Pennsylvania Business Corporation Law
provide that a Pennsylvania corporation may indemnify any person against
expenses (including attorneys fees), judgments, fines and settlements actually
and reasonably incurred by any such person in connection with a threatened,
pending or completed action, suit or proceeding in which he is involved by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, provided that (i) he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and (ii) with respect to any criminal action or proceeding, he had
no reasonable cause to believe his conduct was unlawful. If the action or suit
is by or in the name of the corporation, the corporation may indemnify any such
person against expenses actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interest of the corporation, except that no indemnification may be made in
respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation, unless and only to the extent that the
district court of common pleas or the court in which the action or suit is
brought determines upon application that, despite the adjudication of liability
but in light of the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the court deems proper. To
the extent that such a person has been successful on the merits or otherwise in
defense of any such action or proceeding, the person shall be indemnified
against expenses actually and reasonably incurred in connection therewith.
The Bylaws provide that the Company is generally required to indemnify its
directors and officers for all judgments, fines, settlements, legal fees and
other expenses incurred in connection with pending or threatened legal
proceedings because of the director's or officer's position with the Company or
another entity that the director or officer serves at the Company's request,
subject to certain conditions, and to advance funds to its directors and
officers to enable them to defend against such proceedings upon receipt of any
undertaking by or on behalf of the director or officer to repay the amount if it
is ultimately determined that he is not entitled to be indemnified by the
Company as authorized by the Pennsylvania Business Corporation Law or otherwise.
Conditions that bar indemnification against liabilities arising from conduct
include (i) where the conduct of the indemnified director or officer has been
determined to constitute willful misconduct or recklessness under the
Pennsylvania Business Corporation Law or any superseding provision of law and
(ii) self-dealing, which means the receipt of personal benefit from the
corporation to which the authorized director or officer is not legally entitled.
To receive indemnification, the director or officer must have been successful in
the legal
II-1
91
proceeding or acted in good faith and in what was reasonably believed to be a
lawful manner and in the Company's best interest. See "Description of Capital
Stock -- Certain Provisions of the Charter and Bylaws."
In addition, the Charter limits the liability of directors to the extent
allowed by the Pennsylvania Business Corporation Law. Specifically, directors
will not be held personally liable to the Company or its shareholders for
monetary damages for any action taken, or any failure to take any action, in
their capacity as a director, unless (i) the director has breached or failed to
perform the duties of the director's office under the Charter, By-Laws or
applicable provisions of law and (ii) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. The limitations on
liability do not apply to the responsibility or liability of a director pursuant
to any criminal statute or for the payment of taxes pursuant to federal, state
or local law. See "Description of Capital Stock -- Certain Provisions of the
Charter and Bylaws."
Section 1747 of the Pennsylvania Business Corporation Law allows the
Company to purchase and maintain insurance on behalf of its directors and
officers against liabilities that may be asserted against, or incurred by, the
directors and officers in any such capacity, whether the Company would have the
authority to indemnify the directors and officers against liability under the
provisions of Sections 1741, 1742 and 1743. The Company maintains a directors'
and officers' liability policy for this purpose.
The Underwriting Agreement filed as Exhibit 1.1 hereto contains reciprocal
agreements of indemnity between the registrant and the Underwriters as to
certain liabilities, including liabilities under the Securities Act and in
certain circumstances provides for indemnification of the registrant's directors
and officers.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling the Company as described
above, the Company has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
therefore is unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On December 2, 1996, the Company granted options to purchase an aggregate
of 2,599,238 shares of Class B Common Stock to certain of its executive officers
pursuant to the 1996 Stock Option Plan. See "Management -- Stock Option Plans.
The options were granted pursuant to private transactions, and the grants were
exempt from the registration provisions of the Securities Act pursuant to
Section 4(2) for transactions not involving any public offering and Rule 701 for
offers and sales to employees, directors or officers pursuant to written
compensatory benefit plans or written contracts relating to the compensation of
such persons.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*1.1 -- Form of Underwriting Agreement
*3.1 -- Form of Second Amended and Restated Articles of
Incorporation
*3.2 -- Form of amended and restated Bylaws
**4.1 -- Form of certificate representing shares of Common Stock
**5.1 -- Legal Opinion of Gardere & Wynne, L.L.P., regarding
legality of securities being registered
10.1 -- Employment Agreement, effective as of October 2, 1997, by
and between the Company and Robert O. Snelling, Sr.
10.2 -- Employment Agreement, effective as of July 26, 1994, by
and between the Company and Timothy J. Loncharich
II-2
92
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.3 -- Snelling and Snelling, Inc. Long Term Incentive
Performance Bonus Plan for Timothy J. Loncharich,
effective as of July 26, 1994
10.4 -- Amendment Number One to the Employment Agreement between
the Company and Timothy J. Loncharich, effective as of
August 1, 1994
10.5 -- Amendment Number Two to the Employment Agreement between
the Company and Timothy J. Loncharich, effective as of
November 1, 1996
10.6 -- Termination Agreement, effective as of November 1, 1996,
by and between the Company and Timothy J. Loncharich
(relating to Long Term Incentive Performance Bonus Plan)
10.7 -- Amendment Number Three to the Employment Agreement
between the Company and Timothy J. Loncharich, effective
as of October 2, 1997.
*10.8 -- Employment Agreement, effective as of December 1, 1996,
by and between the Company and Robert O. Snelling, Jr.
10.9 -- Employment Agreement, effective as of December 1, 1996,
by and between the Company and J. Russell Crews
*10.10 -- Snelling and Snelling, Inc. 1997 Stock Option Plan,
including form of Incentive Stock Option Agreement and
Nonqualified Stock Option Agreement
*10.11 -- Snelling and Snelling, Inc. 1996 Stock Option Plan,
including form of Incentive Stock Option Agreement and
Nonqualified Stock Option Agreement
*10.12 -- Snelling and Snelling, Inc. Non-Employee Director Stock
Option Plan, including form of Nonqualified Stock Option
Agreement
10.13 -- Credit Agreement, dated as of January 31, 1996, among the
Company, as Borrower, and The First National Bank of
Boston, individually and as Agent, and the lenders named
therein
10.14 -- Security Agreement, dated as of January 31, 1996, by and
between the Company and The First National Bank of
Boston, as agent
10.15 -- Copyright Security Agreement dated as of January 31,
1996, by and between the Company and The First National
Bank of Boston, as agent
10.16 -- Trademark Security Agreement dated as of January 31,
1996, by and between the Company and The First National
Bank of Boston, as agent
10.17 -- Borrower Pledge Agreement dated as of January 31, 1996,
by and between the Company and The First National Bank of
Boston, as agent
10.18 -- Amendment to Credit Agreement, dated as of August 22,
1996, by and between the Company, Advance, Plant
Maintenance, Inc., Robert O. Snelling, Sr., and Anne M.
Snelling and The First National Bank of Boston,
individually and as agent, and the lenders named therein
10.19 -- Second Amendment to Credit Agreement, dated as of July
25, 1997, by and between the Company, Advance, Robert O.
Snelling, Sr., Anne M. Snelling and Arimathea and
BankBoston, N.A., individually and as agent, and the
lenders named therein
II-3
93
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.20 -- Form of Franchise Agreement
*10.21 -- Asset Purchase Agreement dated as of October 16, 1996,
between B.A.T. Holdings, Inc., and Brett S. Hardt and
Jeff Albrecht and the Company
10.22 -- Asset Purchase Agreement dated as of October 16, 1996,
between KAL Help Enterprises, Inc., and Brett S. Hardt
and Jeff Albrecht and the Company
10.23 -- Asset Purchase Agreement dated as of October 16, 1996,
between Par Three Help Services, Inc., and Brett S. Hardt
and Jeff Albrecht and the Company
10.24 -- Asset Purchase Agreement dated as of October 16, 1996,
between Par Four Services, Inc., and Brett Hardt, Jeff
Albrecht and Scott Wells and the Company
10.25 -- Asset Purchase Agreement dated as of October 16, 1996,
between Par Five Services, Inc., and Brett S. Hardt, Jeff
Albrecht and Lila Petrovich and the Company
10.26 -- Asset Purchase Agreement dated as of September , 1997,
Cross Temps, Inc. and Cross Personnel Agency, Inc. and
James A. Zamparelli, Maria Zamparelli, Michael Monda and
John Costa and the Company
11.1 -- Statement regarding computation of per share data
*21.1 -- List of subsidiaries
*23.1 -- Consent of Grant Thornton LLP
**23.2 -- Consent of Gardere & Wynne, L.L.P. (included in Exhibit
5.1)
24.1 -- Power of Attorney (set forth on page II-6 of initial
filing)
*27.1 -- Financial Data Schedule
- ---------------
* Filed herewith
** To be filed by amendment
(b) Financial Statement Schedules
The following financial statement schedules are included in Part II of the
registration statement:
Schedule II -- Valuation and Qualifying Accounts for the year ended May 31,
1994, the seven months ended December 31, 1994, and the
years ended December 31, 1995 and 1996.
All other schedules are omitted because they are inapplicable or the
requested information is shown in the financial statements or noted therein.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
94
(b) The undersigned registrant hereby undertakes to provide to the
representatives of the underwriters at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in such names as
required by the representatives of the underwriters to permit prompt delivery to
each purchaser.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas and
State of Texas on the 21st day of November, 1997.
SNELLING AND SNELLING, INC.
By: /s/ J. RUSSELL CREWS
----------------------------------
J. Russell Crews
Senior Vice President, Chief
Financial Officer and Treasurer
Pursuant to the requirements of the Securities Act, this amendment to
registration statement has been signed below by the following persons and in the
capacities indicated on the 21st day of November, 1997.
NAME TITLE
---- -----
* Director, Chairman of the Board and Chief
- ----------------------------------------------------- Executive Officer (principal executive
Robert O. Snelling, Sr. officer)
* Director, President and Chief Operating
- ----------------------------------------------------- Officer
Timothy J. Loncharich
* Director, Senior Vice President, Chief
- ----------------------------------------------------- Financial Officer and Treasurer (principal
J. Russell Crews financial and accounting officer)
* Director, Vice Chairman of the Board and
- ----------------------------------------------------- Senior Vice President
Robert O. Snelling, Jr.
*By: /s/ J. RUSSELL CREWS
------------------------------------------------
J. Russell Crews
Attorney-in-Fact
II-6
96
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Snelling and Snelling, Inc.
In connection with our audit of the consolidated financial statements of
Snelling and Snelling, Inc. referred to in our report dated April 25, 1997,
which is included in the Prospectus constituting Part I of this Registration
Statement, we have also audited Schedule II for the periods set forth in Item
16. In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Dallas, Texas
April 25, 1997
S-1
97
SNELLING AND SNELLING, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A COLUMN B - COLUMN C - COLUMN D - COLUMN E -
-------- ------------ ---------- ---------- ----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF BAD DEBT END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS PERIOD EXPENSE DEDUCTIONS(1) PERIOD
------------------------------- ------------ ---------- ------------- ----------
Year ended May 31, 1994...................... $532 $375 $160 $747
Seven months ended December 31, 1994......... 747 68 637 178
Year ended December 31, 1995................. 178 74 51 201
Year ended December 31, 1996................. 201 226 78 349
- ---------------
(1) Accounts charged off, net of recoveries.
S-2
98
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*1.1 -- Form of Underwriting Agreement
*3.1 -- Form of Second Amended and Restated Articles of
Incorporation
*3.2 -- Form of amended and restated Bylaws
**4.1 -- Form of certificate representing shares of Common Stock
**5.1 -- Legal Opinion of Gardere & Wynne, L.L.P., regarding
legality of securities being registered
10.1 -- Employment Agreement, effective as of October 2, 1997, by
and between the Company and Robert O. Snelling, Sr.
10.2 -- Employment Agreement, effective as of July 26, 1994, by
and between the Company and Timothy J. Loncharich
10.3 -- Snelling and Snelling, Inc. Long Term Incentive
Performance Bonus Plan for Timothy J. Loncharich,
effective as of July 26, 1994
10.4 -- Amendment Number One to the Employment Agreement between
the Company and Timothy J. Loncharich, effective as of
August 1, 1994
10.5 -- Amendment Number Two to the Employment Agreement between
the Company and Timothy J. Loncharich, effective as of
November 1, 1996
10.6 -- Termination Agreement, effective as of November 1, 1996,
by and between the Company and Timothy J. Loncharich
(relating to Long Term Incentive Performance Bonus Plan)
10.7 -- Amendment Number Three to the Employment Agreement
between the Company and Timothy J. Loncharich, effective
as of October 2, 1997.
*10.8 -- Employment Agreement, effective as of December 1, 1996,
by and between the Company and Robert O. Snelling, Jr.
10.9 -- Employment Agreement, effective as of December 1, 1996,
by and between the Company and J. Russell Crews
*10.10 -- Snelling and Snelling, Inc. 1997 Stock Option Plan,
including form of Incentive Stock Option Agreement and
Nonqualified Stock Option Agreement
*10.11 -- Snelling and Snelling, Inc. 1996 Stock Option Plan,
including form of Incentive Stock Option Agreement and
Nonqualified Stock Option Agreement
*10.12 -- Snelling and Snelling, Inc. Non-Employee Director Stock
Option Plan, including form of Nonqualified Stock Option
Agreement
10.13 -- Credit Agreement, dated as of January 31, 1996, among the
Company, as Borrower, and The First National Bank of
Boston, individually and as Agent, and the lenders named
therein
10.14 -- Security Agreement, dated as of January 31, 1996, by and
between the Company and The First National Bank of
Boston, as agent
10.15 -- Copyright Security Agreement dated as of January 31,
1996, by and between the Company and The First National
Bank of Boston, as agent
10.16 -- Trademark Security Agreement dated as of January 31,
1996, by and between the Company and The First National
Bank of Boston, as agent
10.17 -- Borrower Pledge Agreement dated as of January 31, 1996,
by and between the Company and The First National Bank of
Boston, as agent
99
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.18 -- Amendment to Credit Agreement, dated as of August 22,
1996, by and between the Company, Advance, Plant
Maintenance, Inc., Robert O. Snelling, Sr., and Anne M.
Snelling and The First National Bank of Boston,
individually and as agent, and the lenders named therein
10.19 -- Second Amendment to Credit Agreement, dated as of July
25, 1997, by and between the Company, Advance, Robert O.
Snelling, Sr., Anne M. Snelling and Arimathea and
BankBoston, N.A., individually and as agent, and the
lenders named therein
10.20 -- Form of Franchise Agreement
*10.21 -- Asset Purchase Agreement dated as of October 16, 1996,
between B.A.T. Holdings, Inc., and Brett S. Hardt and
Jeff Albrecht and the Company
10.22 -- Asset Purchase Agreement dated as of October 16, 1996,
between KAL Help Enterprises, Inc., and Brett S. Hardt
and Jeff Albrecht and the Company
10.23 -- Asset Purchase Agreement dated as of October 16, 1996,
between Par Three Help Services, Inc., and Brett S. Hardt
and Jeff Albrecht and the Company
10.24 -- Asset Purchase Agreement dated as of October 16, 1996,
between Par Four Services, Inc., and Brett Hardt, Jeff
Albrecht and Scott Wells and the Company
10.25 -- Asset Purchase Agreement dated as of October 16, 1996,
between Par Five Services, Inc., and Brett S. Hardt, Jeff
Albrecht and Lila Petrovich and the Company
10.26 -- Asset Purchase Agreement dated as of September , 1997,
Cross Temps, Inc. and Cross Personnel Agency, Inc. and
James A. Zamparelli, Maria Zamparelli, Michael Monda and
John Costa and the Company
11.1 -- Statement regarding computation of per share data
*21.1 -- List of subsidiaries
*23.1 -- Consent of Grant Thornton LLP
**23.2 -- Consent of Gardere & Wynne, L.L.P. (included in Exhibit
5.1)
24.1 -- Power of Attorney (set forth on page II-6 of initial
filing)
*27.1 -- Financial Data Schedule
- ---------------
* Filed herewith
** To be filed by amendment