U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the transition period ________________________ to _________________________
Commission File No. 1-9629
WINSTON RESOURCES, INC.
(Name of small business issuer in its charter)
Delaware 13-3134278
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
535 Fifth Avenue, New York, New York 10017
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (212) 557-5000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
Common Stock, $.01 par value American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
On March 19, 1999, (i) the aggregate market value of Common Stock held
by non-affiliates of the registrant was approximately $4,387,115 and (ii) there
were 3,228,521 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(i) Part III, Definitive Proxy Statement of the registrant to be filed
with the Commission on or before April 30, 1999.
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PART I
Item 1. Business
Winston Resources, Inc., a Delaware corporation (the "Company"), is
the successor to a personnel recruitment and placement service business founded
in 1967. The Company and its subsidiaries (collectively, the "Company" or the
"Winston Companies") together provide a wide range of personnel supply services
to businesses, institutions and governmental agencies, through their own offices
and through offices operated by independent franchisees under licenses from the
Company. The Company also provides recruitment advertising services to
businesses and other institutions.
Through its own offices, the Company recruits and places employees in
entry-to-high-level permanent salaried positions in the New York City
metropolitan area (consisting of New York City, Nassau, Suffolk and Westchester
Counties, New York and parts of northern New Jersey and southern Connecticut)
and in the Fort Lauderdale area of Florida. Such services are provided on a
contingent fee basis under which the Company collects a fee only if it
successfully places a job candidate with a client. Through its Fisher- Todd
Associates division, the Company also provides services for business and
industry clients across the United States, recruiting upper level executives on
a retainer fee basis and on a contingency fee basis.
The Company also supplies temporary employees with professional,
secretarial, clerical, medical, allied health, nursing, light industrial,
information technology and word processing skills, to business clients and
governmental agencies in the New York City, Long Island and New Jersey areas, as
well as in Florida's Fort Lauderdale area. Temporary employees perform services
at the client's premises under the client's supervision and direction. For each
temporary employee, the client is charged an hourly rate that includes the
employee's direct labor rate, associated labor costs (such as payroll taxes and
insurance) and a mark-up to cover the Company's overhead and profit.
In addition to services furnished through its own offices, the Company
licenses independent franchisees to provide personnel services under the trade
names and service marks owned by the Company. Franchisees of the Company provide
permanent placement and executive search services under the name "Roth Young",
permanent personnel recruitment and placement services under the names "Division
10", "Alpha" and "Winston Personnel" and temporary office support personnel
under the names "Division 10 Temps" and "Alpha Temps" in a total of sixteen
cities and towns across the United States.
The Company does not have any client which accounts for more than ten
percent of its net revenues.
Permanent Recruitment and Placement Services
The Company provides recruitment and placement services for
entry-level to high-level professional and management positions at all salary
levels on a contingent fee basis.
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The Company employs placement counselors who specialize in recruiting
and placing job candidates in particular industries or professions. The Company
provides permanent placement services in all major industries, however, the
Company primarily recruits and places personnel with skills in accounting,
finance, office support, information technology and health care services and
recruits and places executives and professionals with skills in banking,
insurance, publishing, real estate, securities, human resources, marketing and
market research, management services, corporate facilities and architecture, as
well as lawyers and paralegals.
The Company creates and maintains a data-base of qualified job
candidates based on interviewing and screening procedures. Upon receiving a job
order from a client, the Company attempts to match the specifications required
by the client with qualified candidates from its data base and also recruits
additional qualified candidates. It then arranges interviews between the client
and qualified candidates. If the Company successfully places a candidate, it
charges a fee as a percentage of the candidate's estimated annual salary for the
first year of his or her employment. The fees are always paid by the employer.
During the year ended December 31, 1998, the Company placed applicants
in permanent positions with approximately 700 clients. Approximately fifty
percent of the Company's contingent fee permanent placement clients during that
year were repeat customers.
Through its Fisher-Todd Associates (executive search) division, the
Company specializes in recruiting executives to meet specific requirements of
clients on both a contingent and retainer basis. Fisher- Todd Associates
specializes in recruiting candidates for upper level executive positions,
generally at salaries in excess of $65,000 per year. The division employs
recruiting specialists who work closely with each client to define the
requirements of the position and establish candidate specifications. The Company
then contacts appropriate candidates who are identified through extensive
research, networking, data base searches and, where required, advertisements.
Such candidates are screened through interviews and other procedures and those
most qualified are referred to the clients. The Company assists the client in
evaluating each candidate, in determining an appropriate compensation package
and, in some cases, negotiating the final agreement.
Temporary Staffing Services
The Company furnishes to businesses, on a temporary basis, the
services of individuals with accounting, legal and paralegal, banking,
secretarial, clerical, office support, word processing, informational
technology, health care, light industrial and other professional skills.
Temporary staffing assignments usually last from one day to several months, and
often longer. Such assignments are generally made to fill vacancies in a
client's permanent work force or to supplement the client's normal work force to
meet peak work loads, handle special projects or provide special expertise. In
all cases, the work is performed at the client's facilities under the client's
supervision and direction. The client is charged an hourly rate comprised of the
direct labor rate of the personnel provided, associated labor costs (such as
payroll taxes and insurance) and a mark-up to cover the Company's overhead and
profit. All employees on temporary assignment to the Company's clients are on
the Company's payroll only during the periods of their assignments. Clients that
hire a temporary employee on a permanent basis pay a fee to the Company.
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By using the Company's temporary staffing services, clients are able
to shift to the Company the cost and inconvenience associated with the
employment of temporary personnel, including advertising, interviewing,
screening, testing, record keeping, payroll taxes and insurance. The Company is
able to absorb such costs more effectively than its clients because its
employees, once recruited, are generally assigned to a succession of temporary
positions with different clients.
The Company screens its temporary personnel through personal
interviews, testing, certificate and licensing verification and other procedures
and maintains continuously updated records on job performance. These procedures
enable it to classify its temporary personnel by preference for job location,
hours of employment and work environment and by suitability for particular types
of assignments. Persons who do temporary work usually are registered with more
than one temporary help firm at any one time.
During 1998, the Company provided the services of temporary employees
to approximately 1400 clients. The Company believes that a majority of the
clients to whom it supplied temporary staffing during 1998 were repeat
customers.
Franchise Operations
The Company also has eighteen franchised offices which provide
permanent placement and executive search services under the name "Roth Young",
permanent recruitment and placement services under the names "Division 10",
"Alpha" and "Winston Personnel", and temporary office support personnel under
the names "Division 10 Temps" and "Alpha Temps".
At March 19, 1999, there were fourteen Roth Young, one Division 10,
one Division 10 Temps, one Alpha and one Winston franchise in a total of sixteen
cities in the United States.
All franchisees operate their businesses autonomously, subject to the
requirements of their respective franchise agreements. The agreements provide
for monthly payments of royalties to the Company based on the franchise's cash
collections and generally cover a specified term renewable at the franchisee's
option. Each franchisee pays the Company royalties for the license of the
Company's know-how and tradenames. The Company is not currently actively engaged
in the marketing of new franchises and has no current plans to do so.
Franchisees operating under Roth Young licenses generally provide
permanent placement and executive search services, principally to the food,
drug, hospitality, retail and health care industries, although licensees are
encouraged to expand their services to other industries.
-4-
The Company believes that its relationship with its independent
franchisees generally is satisfactory.
Recruitment Advertising
The Company's recruitment advertising division places recruitment
advertisements in publications on behalf of the Company, the Company's clients
and other third parties. The Company believes that the services offered by this
division enhances its competitive position in the temporary staffing and
permanent placement markets by broadening the scope of the services it offers to
clients. For the year ended December 31, 1998, the Company served approximately
250 clients through this division.
Marketing
The Company's marketing efforts for its temporary staffing services
and for most permanent recruitment and placement services are largely
concentrated within the areas contiguous to its offices. The services of the
Company's executive search division are marketed nationally. The Company relies
primarily on telephone and direct visit solicitation to existing and prospective
clients and, to a lesser extent, on direct mail, and advertising.
Recruiting
The Company recruits qualified applicants for permanent positions and
temporary employees primarily through direct recruitment, referrals from other
applicants and newspaper advertising.
Competition
The staffing industry is highly competitive, with clients generally
using more than one company to satisfy their personnel requirements. In the
permanent recruitment and placement market, the Company and its franchisees
compete with numerous local and regional firms and, to a lesser extent, a small
number of national firms. In the temporary staffing industry there is intense
competition from national temporary staffing service firms as well as from local
and regional firms. All of the national and many of the regional firms have
substantially greater resources than the Company.
The principal competitive factors in the personnel services industry
are the availability and quality of permanent job applicants and temporary
staff, the level and integrity of the service provided by individual offices
and, to varying degrees, the prices of such services. The Company believes that
its ability to offer a fully integrated personnel service, providing temporary
help, permanent recruitment and placement services, executive recruitment and
recruitment advertising, enhances its competitive position in those markets.
-5-
Regulation
The Company's operations are, in some states, subject to state laws
and regulations which may require employment agencies and/or temporary help
services to be licensed. The principal requirements of such laws and regulations
are satisfactory prior experience and good moral character. The Company has
obtained all necessary licenses and registrations in the states where it
conducts business.
Trademarks and Service Marks
The Company owns a number of trademarks, service marks and tradenames,
including the names, "Winston", "Winston Resources", "Winston Personnel" (with
its logo consisting of a sunburst design and stylized letter W), "Win-Temps",
"Roth Young" and "Division 10", which are registered with the U.S. Patent and
Trademark Office.
Employees
At December 31, 1998, the Company employed approximately 123 permanent
employees, including 39 placement counsellors for its permanent placement
services, in its headquarters and branch offices, not including temporary
employees on assignment to clients. The Company is responsible for all workers'
compensation and disability insurance, state and Federal unemployment taxes,
social security taxes, and fringe benefits for its temporary employees. As a
service business, the Company depends to a material degree on its ability to
hire and retain skilled and motivated personnel.
Item 2. Properties
The Company leases a total of approximately 19,000 square feet in an
office building at 535 Fifth Avenue, New York, New York. The lease was entered
into in August 1990 and renegotiated in 1992, 1993 and 1997, and expires in
2003. The Company also leases office space in Rutherford, Edison and Parsippany,
New Jersey, in Westbury, New York and in Fort Lauderdale, Florida, under leases
expiring between 1999 and 2002.
Item 3. Legal Proceedings
NONE
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1998.
-6-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Company is traded principally on the American
Stock Exchange (ticker symbol "WRS"). The following table shows, for each
quarter of the Company's last two fiscal years and through March 19, 1999, the
high and low sales prices of the common stock of the Company as reported on the
American Stock Exchange.
Price Range
High Low
1999
First Quarter $ 3 3/4 $ 2 1/2
1998
First Quarter $ 6 3/8 $ 4 1/2
Second Quarter 6 9/16 5 1/8
Third Quarter 6 1/4 4 1/2
Fourth Quarter 4 3/8 3 1/4
1997
First Quarter $ 4 1/4 $ 3 1/8
Second Quarter 4 3 1/8
Third Quarter 6 3/8 3 3/8
Fourth Quarter 6 3/4 5 1/4
The Company had 108 holders of record of its common stock on March 19,
1999.
The Company has never paid a cash dividend on the Common Stock and
anticipates that for the foreseeable future, earnings will be retained for use
in its business.
-7-
Item 6. Selected Financial Data
Year ended December 31,
1998 1997 1996 1995 1994
Income Statement Data:
(In thousands, except for per share data and number of shares)
Combined sales:
By Company offices $60,466 $48,986 $39,247 $30,657 $23,822
By franchise 3,193 2,586 2,957 4,175 6,403
Total combined sales 63,659 51,572 42,204 34,832 30,225
Net revenue* 60,850 49,199 39,390 30,989 24,297
Income (loss) from operations 3,204 2,547 1,585 (401)(1) 865
Net income (loss) 1,829 1,444 1,138 (432)(1) 636
Basic earnings (loss) per common share .57 .45 .37 (.15) .22
Diluted earnings (loss) per share .52 .41 .34 (.15) .20
Weighted average shares - basic 3,220,473 3,191,825 3,065,719 2,917,662 2,913,886
Weighted average shares - diluted 3,523,266 3,488,180 3,323,679 2,917,662 3,152,530
*Represents sales by Company, income from franchises and other income
(1) Includes one-time write off of restrictive covenant costs and related assets
associated with franchise operations of $1.1 million
Year ended December 31,
1998 1997 1996 1995 1994
Balance Sheet Data:
(In thousands, except for per share data)
Working capital $6,296 $4,696 $3,248 $ 3,028 $2,201
Total assets 12,919 9,451 8,438 7,146 7,123
Long-term debt 17 35 51 606 579
Stockholders' equity 7,287 5,404 3,862 2,654 3,055
Stockholders' equity per share 2.26 1.68 1.22 .91 1.05
-8-
Quarterly Financial Data (Unaudited)
Quarter Quarter Quarter Quarter
ended ended ended ended
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
Revenue $ 14,409,000 $ 15,098,000 $ 14,823,000 $ 16,520,000
Operating expenses 13,765,000 14,290,000 13,992,000 15,599,000
Net income 355,000 445,000 458,000 571,000
Basic earnings per share 0.11 0.14 0.14 0.18
Diluted earnings per share 0.10 0.13 0.13 0.16
Quarter Quarter Quarter Quarter
ended ended ended ended
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
Revenue $ 10,782,000 $ 11,837,000 $ 13,434,000 $ 13,146,000
Operating expenses 10,371,000 11,220,000 12,711,000 12,350,000
Net income 226,000 343,000 408,000 467,000
Basic earnings per share 0.07 0.11 0.13 0.15
Diluted earnings per share 0.07 0.10 0.12 0.13
-9-
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
1998 Compared to 1997
Revenues increased by approximately $11,651,000 or 24% to $60,850,000
as compared to $49,199,000 in 1997. The increase is primarily due to the
increase in temporary staffing revenues of 31% and permanent placement revenues
of 3%, as compared to 1997.
Operating expenses increased approximately 24% as compared to 1997.
Compensation and other benefits increased approximately 28% mainly due to
increased compensation and compensation related costs associated with the
increase in revenues. Selling, general and administrative expenses increased 6%
due to additions to the sales force, commissions related to increased revenues
and other costs related to maintaining the Company' branch operations.
Interest expense decreased during 1998 as a result of there being no
borrowings under the Company's credit facility when compared to 1997.
The effective tax rate was approximately 44% for the twelve month
period ended December 31, 1998 and December 31, 1997.
Net income for the twelve month period ended December 31, 1998 was
approximately $1,829,000 or $.57 basic earnings per common share and $.52
diluted earnings per common share as compared to a net income of approximately
$1,444,000 or $.45 basic earnings per common share and $.41 diluted earnings per
common share for the prior year. The increase in net income and earnings per
share is primarily due to increased revenues, partially offset by the related
increases in operating expenses.
1997 Compared to 1996
Revenues increased by approximately $9,809,000 or 25% to $49,199,000
as compared to $39,390,000 in 1996. The increase is primarily due to the
increase in temporary staffing revenues of 31% and permanent placement revenues
of 14%, as compared to 1996.
Operating expenses increased approximately 23% as compared to 1996.
Compensation and other benefits increased approximately 28% mainly due to
increased compensation and compensation related costs associated with the
increase in revenues. Selling, general and administrative expenses increased 6%
due to additions to the sales force and commissions related to increased
revenues and advertising, and other costs related to maintaining the Company's
branch operations.
Interest expense decreased during 1997 due mainly to the lower average
balance on borrowings under the Company's credit facility when compared to 1996.
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The effective tax rate was 44% for the twelve month period ended
December 31, 1997 as compared to 22% in 1996. The lower prior year rate was
attributable to an income tax benefit as a result of a reduction in the
valuation allowance for certain deferred tax assets that were determined to be
realizable.
Net income for the twelve month period ended December 31, 1997 was
approximately $1,444,000 or $.45 basic earnings per common share and $.41
diluted earnings per common share as compared to a net income of approximately
$1,138,000 or $.37 basic earnings per common share and $.34 diluted earnings per
common share for the prior year. The increase in net income and earnings per
share is primarily due to increased revenues, partially offset by the related
increases in operating expenses and increase in effective tax rate.
Liquidity and Capital Resources
Cash provided by operating activities was $1,913,000 in 1998. In
addition to net income, cash flow from operating activities was affected by an
increase in accounts receivable due to the significant growth in revenues offset
by increased accounts payable, accrued expenses and income taxes payable. In
1997, cash generated from operating activities was $190,000. Working capital on
December 31, 1998 was approximately $6,296,000 as compared to $4,696,000 on
December 31, 1997. Cash used in investing activities was $316,000 due to the
purchase of property and equipment and financing activities provided cash of
$5,000 (exercise of options offset by the repayment of capital lease
obligations) in 1998. The Company has no material commitments for capital
expenditures during 1999.
The Company has a secured credit facility providing for short-term
advances to a maximum of $6,000,000 based on up to 80% of eligible accounts
receivable, as defined under which no amounts are outstanding.
Management believes that the cash available from the Company's credit
facility and cash from its operations will be sufficient to support current
operations and any currently foreseeable increase in activities.
Inflation
To date, the impact of inflation and changing prices on the Company's
business has been minimal. The Company charges its customers fixed percentages
of the salaries and wages of permanent and temporary employees, which causes its
fee income to increase proportionately as salary and wages increase.
Year 2000 Issues
The Company has assessed its computer information systems and has
taken necessary steps to ensure its systems are Year 2000 compliant. The
Company's computer systems consultants have represented to the Company in
writing that, as presently configured, the Company's systems are Year 2000
compliant. No special costs were incurred in order to make the systems
compliant, and the cost of testing such compliance which was completed at
December 31, 1998, was not material.
The Company also is in the process of determining the extent to which
it may be vulnerable to any failures by its service providers to resolve their
own Year 2000 issues. The Company has initiated formal communications with such
providers and, at this time, has received formal written responses from a number
of such providers indicating that their systems are Year 2000 compliant. The
Company is continuing to collect such responses and will be developing such
contingency plans as it believes are warranted, based on such responses. At this
time, the Company is unable to estimate the extent of any adverse impact from
failure by these service providers with regard to Year 2000 compliance, and the
nature by which their problems might materially affect the Company's business,
financial condition or results of operations.
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The Company is currently implementing a contingency plan involving
creation of a back-up computer capability as a result of which all of its
systems and files will be redundant so that if its principal offices in New York
City become inaccessible, its operations may be conducted from other Company
offices located in New Jersey. Such contingency plan should be implemented
during the first half of 1999.
Failure by the Company to eliminate Year 2000 problems could result in
a possible failure or miscalculations, causing disruption of operations. Under a
worst case scenario, such problems would be addressed by manually processing
data and transactions. However, this would cause delays and additional costs to
the administrative process. Further contingency plans are being developed to
address this issue.
Based upon the current information, the Company does not anticipate
that, in the aggregate, costs associated with the Year 2000 issue will have a
material financial impact. However there can be no assurances that, despite the
steps taken by the Company to insure that it and its customers and vendors are
Year 2000 compliant, there will not be interruptions or other limitations of
systems functionality or that the Company will not incur significant costs to
avoid such interruptions or limitations. The Company's expectations about future
costs associated with the Year 2000 issue are subject to uncertainties that
could cause actual events to have a greater financial impact than currently
anticipated. Factors that could influence the amount and timing of future costs
include unanticipated vendor delays, technical difficulties, the impact of tests
of vendors' and customers' systems and similar events. If, despite the Company's
efforts under its Year 2000 planning, there are Year 2000-related failures that
create substantial disruptions to the Company's business, the adverse impact on
the business could be material.
Market Risk and Risk Management Policies
The Company currently does not have exposure to market risk. The
Company will develop policies and procedures to manage market risk in the future
as deemed necessary.
Impact of Recently Issued Accounting Standards
In June 1998 the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which is required to be adopted
in years beginning after June 15, 1999. The Statement permits early adoption as
of the beginning of any fiscal quarter after its issuance. The Company expects
to adopt the new Statement effective January 1, 2000. The Statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not anticipate that the
adoption of this Statement will have a significant effect on its results of
operations or financial position.
Forward-Looking Statements
This report contains forward-looking statements and information that
is based on management's beliefs and assumptions, as well as information
currently available to management. Such beliefs and assumptions are based on,
among other things, the Company's operating and financial performance over
recent years and its expectations about its business for the current fiscal
year. Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Such statements are subject to certain
risks, uncertainties and assumptions, including, but not limited to, the
possibility that (a) prevailing economic
-12-
conditions may significantly deteriorate, thereby reducing the demand for the
Company's services, (b) the Company might experience a significant deterioration
in its collection of accounts receivable and (c) regulatory or legal changes
might affect an employer's decision to utilize the Company's services, although
none of such risks is anticipated at the present time. Should one or more of
these or any other risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or expected.
Item 8. Financial Statements and Supplementary Data
See Item 14 for a list of Winston Resources, Inc. and Subsidiaries
Financial Statements and Schedules filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by
reference to the material under the caption "ELECTION OF DIRECTORS" in the
Company's definitive Proxy Statement to be filed on or before April 30, 1999
(the "1999 Proxy Statement").
Item 11. Executive Compensation
The information required by this term is incorporated herein by
reference to the material under the caption "EXECUTIVE COMPENSATION" in the 1999
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by
reference to the material under the caption "ELECTION OF DIRECTORS" in the 1999
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference to the material under the caption "ELECTION OF DIRECTORS - Certain
Transactions" in the 1999 Proxy Statement.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1,2 The information required by this subsection of this Item is
presented in the index to the Financial Statements on Page
F-1
Form 10-K - Item 14 (a) (1) and (2)
Winston Resources, Inc. and Subsidiaries
List of Financial Statements and
Financial Statement Schedules
The following consolidated financial statements of Winston Resources, Inc. and
Subsidiaries are included in Item 8:
Report of Independent Auditors....................................................................... F-2
Consolidated Balance Sheets - December 31, 1998 and 1997............................................. F-3
Consolidated Statements of Income - Years Ended
December 31, 1998, 1997 and 1996.................................................................. F-4
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1998, 1997 and 1996.................................................................. F-5
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996.................................................................. F-6
Notes to Consolidated Financial Statements........................................................... F-7
The following consolidated financial statement schedule of Winston Resources, Inc.
and Subsidiaries is included in Item 14 (a) (2):
Schedule II - Valuation and Qualifying Accounts....................................................... F-21
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instruction or are inapplicable and therefore have been omitted.
F-1
Report of Independent Auditors
To the Board of Directors and Stockholders of
Winston Resources, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Winston
Resources, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. Our audits also included the financial statement schedule listed in the
index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Winston
Resources, Inc. and Subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
February 26, 1999
F-2
Winston Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
1998 1997
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Assets
Current assets:
Cash and cash equivalents $2,047,000 $445,000
Accounts receivable - trade, less allowances for doubtful
accounts of $200,000 and $100,000 9,036,000 7,341,000
Prepaid expenses and other current assets 118,000 227,000
Securities available-for-sale 455,000 392,000
----------------------------------
Total current assets 11,656,000 8,405,000
Property and equipment, net 649,000 540,000
Deferred income taxes 234,000 185,000
Security deposits and other assets 380,000 321,000
----------------------------------
Total assets $12,919,000 $9,451,000
==================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $5,200,000 $3,668,000
Capital lease obligations 18,000 16,000
Income taxes payable 142,000 25,000
----------------------------------
Total current liabilities 5,360,000 3,709,000
Deferred rent 255,000 303,000
Long-term portion of capital lease obligations 17,000 35,000
----------------------------------
Total liabilities 5,632,000 4,047,000
Commitments and contingencies
Stockholders' equity:
Preferred stock - $100 par value: authorized 2,000,000 shares,
no shares issued
Common stock - $.01 par value: authorized 10,000,000 shares;
issued and outstanding 3,228,121 shares (3,215,120 in 1997) 32,000 32,000
Additional paid-in capital 4,456,000 4,435,000
Retained earnings 2,612,000 783,000
Accumulated other comprehensive income 187,000 154,000
----------------------------------
Total stockholders' equity 7,287,000 5,404,000
----------------------------------
Total liabilities and stockholders' equity $12,919,000 $9,451,000
==================================
See accompanying notes.
F-3
Winston Resources, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31
1998 1997 1996
----------------------------------------------------------
Revenue:
Placement fees and related income $60,850,000 $49,199,000 $39,390,000
----------------------------------------------------------
Operating expenses:
Compensation and other benefits 48,191,000 37,735,000 29,414,000
Selling, general and administrative 9,455,000 8,917,000 8,391,000
----------------------------------------------------------
57,646,000 46,652,000 37,805,000
----------------------------------------------------------
Income from operations 3,204,000 2,547,000 1,585,000
----------------------------------------------------------
Other income (expense):
Interest expense (5,000) (36,000) (187,000)
Interest and other income 49,000 69,000 52,000
----------------------------------------------------------
44,000 33,000 (135,000)
----------------------------------------------------------
Income before provision for income taxes 3,248,000 2,580,000 1,450,000
Provision for income taxes 1,419,000 1,136,000 312,000
----------------------------------------------------------
Net income $1,829,000 $1,444,000 $1,138,000
==========================================================
Basic earnings per share $.57 $.45 $.37
==========================================================
Diluted earnings per share $.52 $.41 $.34
==========================================================
See accompanying notes.
F-4
Winston Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Common Stock
$.01 Par Value Retained Accumulated
--------------------------- Additional Earnings Other
Number Paid-in (Accumulated Comprehensive
of Shares Amount Capital Deficit) Income Total
------------------------------------------------------------------------------------------
Balance - December 31, 1995 2,920,833 $29,000 $4,396,000 $(1,799,000) $28,000 $2,654,000
Exercise of common stock options 273,060 3,000 115,000 - - 118,000
Retirement of treasury stock (16,789) - (98,000) - - (98,000)
Comprehensive income:
Net income - - - 1,138,000 - 1,138,000
Unrealized gain on securities
available-for-sale, net - - - - 50,000 50,000
-----------
Comprehensive income 1,188,000
------------------------------------------------------------------------------------------
Balance - December 31, 1996 3,177,104 32,000 4,413,000 (661,000) 78,000 3,862,000
Exercise of common stock options 38,016 - 22,000 - - 22,000
Comprehensive income:
Net income - - - 1,444,000 - 1,444,000
Unrealized gain on securities
available-for-sale, net - - - - 76,000 76,000
-----------
Comprehensive income 1,520,000
------------------------------------------------------------------------------------------
Balance - December 31, 1997 3,215,120 32,000 4,435,000 783,000 154,000 5,404,000
Exercise of common stock options 13,001 - 21,000 - - 21,000
Comprehensive income:
Net income - - - 1,829,000 - 1,829,000
Unrealized gain on securities
available-for-sale, net - - - - 33,000 33,000
----------
Comprehensive income 1,862,000
-------------------------------------------------------------------------------------------
Balance - December 31, 1998 3,228,121 $32,000 $4,456,000 $2,612,000 $187,000 $7,287,000
===========================================================================================
See accompanying notes.
F-5
Winston Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1998 1997 1996
----------------------------------------------------------
Cash flows from operating activities
Net income $1,829,000 $1,444,000 $1,138,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense 285,000 41,000 125,000
Depreciation and amortization 207,000 172,000 129,000
Deferred rent (48,000) (47,000) (29,000)
Deferred tax (benefit) expense (75,000) 224,000 (349,000)
Changes in assets and liabilities:
Accounts receivable (1,980,000) (1,527,000) (164,000)
Prepaid expenses and other current assets 109,000 11,000 66,000
Other assets (63,000) (80,000) (38,000)
Accounts payable, accrued expenses and
income taxes payable 1,649,000 (428,000) 1,364,000
----------------------------------------------------------
Net cash provided by (used in) operating activities 1,913,000 (190,000) 2,242,000
----------------------------------------------------------
Cash flows from investing activities
Purchases of property and equipment (316,000) (401,000) (87,000)
----------------------------------------------------------
Cash flows from financing activities
Repayment on credit facility debt - - (1,182,000)
Proceeds from exercise of options 21,000 22,000 20,000
Repayment of capital leases (16,000) (54,000) (69,000)
----------------------------------------------------------
Net cash provided by (used in) financing activities 5,000 (32,000) (1,231,000)
----------------------------------------------------------
Net increase (decrease) in cash and cash 1,602,000 (623,000) 924,000
equivalents
Cash and cash equivalents - beginning of year 445,000 1,068,000 144,000
----------------------------------------------------------
Cash and cash equivalents - end of year $2,047,000 $445,000 $1,068,000
==========================================================
Supplemental disclosures of cash flow
information
Cash payments for interest $5,000 $36,000 $176,000
==========================================================
Cash payments for income taxes $1,384,000 $1,405,000 $128,000
==========================================================
Supplemental disclosures of noncash investing
and financing activities
Retirement of treasury stock $- $- $98,000
==========================================================
See accompanying notes.
F-6
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Principal Business Activity and Summary of Significant Accounting Policies
Business Activity
Winston Resources, Inc. and Subsidiaries (the "Company") provide a wide variety
of temporary staffing specialties, permanent placement services, executive
search recruitment, and recruitment advertising to the business community.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Winston Resources, Inc. and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of
credit risk include cash and cash equivalents and accounts receivable arising
from its normal business activities. The Company places its cash and cash
equivalents with high credit quality financial institutions. Approximately 99%
and 91% of cash and cash equivalents at December 31, 1998 and 1997,
respectively, was on deposit at one financial institution.
The Company believes that its credit risk regarding accounts receivable is
limited due to the large number of entities comprising the Company's customer
base. In addition, the Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk of its customers,
establishes an allowance for uncollectible accounts, where appropriate.
F-7
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Securities Available-for-Sale
Investments, which consist of common stocks, are stated at fair value as
determined by quoted market price. The Company has classified its securities as
investments available-for-sale pursuant to Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, any unrealized gain or loss on the investments, net of
deferred taxes thereon, is reported as a component of accumulated other
comprehensive income.
Depreciation and Amortization
Depreciation and amortization of property and equipment are provided on the
straight-line and declining balance methods over the estimated useful lives of
the assets.
Revenue Recognition
Permanent placement revenue is recognized when a candidate is accepted for
employment. Provisions are made for estimated losses in realization (principally
due to applicants not remaining in employment for the guaranteed period).
Temporary placement revenue is recognized when the temporary personnel provide
the services. Nonrefundable retainer revenue is recognized according to the
terms of the search contract.
Advertising Costs
The Company expenses advertising costs upon the first showing of the
advertisements. Advertising expenses for the years ended December 31, 1998, 1997
and 1996 totaled approximately $952,000, $871,000 and $711,000, respectively.
F-8
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's net
income or stockholders' equity. Statement 130 requires unrealized gains or
losses on securities available-for-sale which, prior to adoption, were reported
separately in stockholders' equity, to be included in other comprehensive
income.
Segment Information
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information. Statement 131 superseded FASB Statement No. 14, Financial Reporting
for Segments of a Business Enterprise. Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. Statement 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption of
Statement 131 did not affect results of operations or financial position, but
did affect the disclosure of segment information (see Note 10).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-9
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Property and Equipment
Property and equipment consisted of the following:
December 31 Estimated
1998 1997 Useful Life
-----------------------------------------------------------
Furniture, fixtures and equipment $970,000 $804,000 3 to 7 years
Leasehold improvements 346,000 349,000 Life of lease
---------------------------------------
1,316,000 1,153,000
Less accumulated depreciation 667,000 613,000
---------------------------------------
$649,000 $540,000
=======================================
Included in property and equipment at December 31, 1998 are assets recorded
under capital leases with a cost of approximately $216,000 and accumulated
amortization of approximately $196,000. Amortization of assets recorded under
capital leases is included with depreciation expense.
3. Financing Arrangements
a. Credit Facility
The Company has a secured credit facility providing for short-term advances
to a maximum of $6,000,000, based on up to 80% of eligible accounts
receivable, as defined. The Company pays interest on advances at the bank's
alternate base rate, as defined, or at LIBOR plus 2.5% (7.5% and 8.5% at
December 31, 1998 and 1997, respectively). The credit facility is
collateralized by the accounts receivable of the Company and expires on
October 31, 1999. The Company had no borrowings under this facility for the
year ended December 31, 1998.
F-10
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Financing Arrangements (continued)
b. Capital Lease Obligations
The Company has leased telephone equipment, software and computer equipment
under capital leases which are included in property and equipment (see Note
2). The following is a schedule of the future minimum lease payments,
together with the present value of the minimum lease payments as of
December 31, 1998:
Year ending December 31:
1999 $21,000
2000 17,000
----------------------
Total 38,000
Less amount representing interest (effective rate 11%) 3,000
----------------------
Present value of the minimum lease payments 35,000
Less current portion of capital lease obligations 18,000
----------------------
$17,000
======================
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
December 31
1998 1997
-----------------------------------------------
Accounts payable - trade $739,000 $686,000
Accrued compensation and payroll taxes 3,003,000 1,750,000
Accrued commissions 1,143,000 904,000
Other accrued expenses 315,000 328,000
-----------------------------------------------
Total $5,200,000 $3,668,000
===============================================
F-11
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Taxes
The provision for income taxes consists of:
Year ended December 31
1998 1997 1996
--------------------------------------------------------------
Current:
Federal $952,000 $720,000 $535,000
State and local 542,000 192,000 126,000
Deferred (75,000) 224,000 (349,000)
--------------------------------------------------------------
$1,419,000 $1,136,000 $312,000
==============================================================
A reconciliation of the federal statutory tax rate to the actual effective rate is as follows:
Year ended December 31
1998 1997 1996
------------------------------------------------------------
Statutory rate 34.0% 34.0% 34.0%
State and local income taxes, net of
federal benefit 10.7 4.3 4.8
Change in valuation allowance (1.0) 1.8 (17.1)
Permanent differences 1.6 2.4 1.8
Other (1.6) 1.5 (2.0)
------------------------------------------------------------
43.7% 44.0% 21.5%
============================================================
F-12
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
The deferred income taxes are comprised of the following:
December 31
1998 1997
------------------------------------------
Assets
Provision for doubtful accounts $80,000 $40,000
Intangible assets written off 230,000 224,000
Accrued rent 102,000 121,000
Net operating losses for state and local tax purposes 91,000 127,000
------------------------------------------
Deferred tax asset 503,000 512,000
------------------------------------------
Liabilities
Unrealized gain on securities (182,000) (156,000)
Other (30,000) (44,000)
------------------------------------------
Deferred tax liability (212,000) (200,000)
------------------------------------------
291,000 312,000
Valuation allowance (57,000) (127,000)
------------------------------------------
$234,000 $185,000
==========================================
The valuation allowance (decreased) increased by ($70,000), $52,000 and
$(333,000), respectively, during the years ended December 31, 1998, 1997 and
1996.
6. Commitments and Contingencies
Operating Leases
The Company leases office space under noncancelable operating leases which
expire at various dates through 2003. These leases are subject to escalations
for increases in real estate taxes and other expenses.
F-13
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Commitments and Contingencies (continued)
The aggregate future minimum lease payments required under these leases are as
follows:
Year ending December 31:
1999 $783,000
2000 791,000
2001 743,000
2002 699,000
2003 398,000
----------------------
Total $3,414,000
======================
Rental expense under operating leases, including escalation charges for the
years ended December 31, 1998, 1997 and 1996, approximated $839,000, $726,000
and $700,000, respectively.
Pursuant to one of the Company's leases, rent expense charged to operations
differs from rent paid because of the effect of free rent periods and scheduled
rent increases. Accordingly, the Company has recorded deferred rent payable of
$255,000 and $303,000 at December 31, 1998 and 1997, respectively. Rent expense
is calculated by allocating total rental payments, including those attributable
to scheduled rent increases, on a straight-line basis, over the lease term.
The Company has been released from a portion of its rent obligation on certain
premises which it had been subleasing through 2003; however, in the event of
default by the sublessee, it would remain liable for the balance of the rent
obligation which, at December 31, 1998, aggregated $464,000.
Executive Employment Agreement
An employment agreement with the chief executive officer expiring in August 2002
provides for an annual salary of approximately $446,000, plus incentive bonuses
based on pre-tax income. In addition, the officer is entitled, under certain
circumstances, to termination benefits.
F-14
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Retirement Plan
The Company has a defined contribution plan under Section 401(k) of the Internal
Revenue Code ("IRC") which provides that eligible employees may make
contributions, subject to IRC limitations. The Company may choose to make
contributions to the Plan in an amount determined by the Company at its
discretion. No contributions were made for the years ended December 31, 1998 and
1997. The Company made a contribution to the Plan of $25,000 for the year ended
December 31, 1996.
8. Stock Option Plans
Under the Company's 1996 Stock Plan (the "Plan") a committee of the Board of
Directors is authorized to issue to officers, directors, key employees and
consultants stock options (both incentive stock options ("ISOs") and
nonqualified options), restricted stock and directors' options. In 1998, the
number of options issuable under the Plan was increased from 400,000 to 800,000.
The Company also has an Incentive Program (the "Program") under which it may
issue to officers, directors, key employees, and certain consultants stock
options (both ISOs and nonqualified options), stock appreciation rights ("SARs")
(in tandem with stock options or free-standing), restricted stock and directors'
options issuable pursuant to a formula. Up to 575,000 shares are issuable under
the Program either as outright grants or upon exercise of options or SARs
awarded thereunder.
Directors of the Company who are not employees are eligible to participate
solely in the nondiscretionary directors' option portion of the Program. All
administrative powers of the Option Committee of the Broad of Directors (the
"Committee") with respect to directors' options may be exercised, at the
discretion of the Board of Directors, by an Alternate Committee comprised of
persons not eligible to receive directors' options, one of whom must be a
director. Moreover, in no event, may the number of shares subject to directors'
options issuable to any qualified director in any year exceed 25,000.
F-15
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plans (continued)
The selection of participants from among employees and officers and the
determination of the type and amount of awards (except as to the directors'
options) is entirely within the discretion of the Committee. There is no limit
on the number or amount of awards which may be granted to any one person under
the Program, except that the fair market value (determined as of the date of
grant) of shares with respect to which ISOs are first exercisable in any one
year as to any participant may not exceed $100,000.
All options granted have five or ten year terms and vest and become fully
exercisable at the end of three years of continued employment.
Restricted stock may be awarded under the Program either at no cost to the
recipient or for such cost as specified by the grant. Unless waived in whole or
in part by the Committee, once a holder of record of restricted stock ceases to
be an employee, officer or director of the Company, all shares of restricted
stock then held and still subject to restriction will be forfeited by such
holder and reacquired by the Company.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its employee stock options. Under APB
25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its stock options under the fair
value method estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1997 and 1996 (no
options were granted in 1998), risk-free interest rates of 5.6% in 1997 and 5.9%
to 6.0% in 1996; volatility factors of the expected market price of the
Company's common stock of .72 and .75. The weighted-average expected life of the
options is three years. Dividends are not expected in the future.
F-16
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plans (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1998 1997 1996
------------------------------------------------------------
Pro forma net income $1,712,000 $1,363,000 $979,000
Pro forma basic income per share $.53 $.43 $.32
Pro forma diluted income per share $.50 $.40 $.30
Stock option activity is summarized as follows:
Weighted-
Average
Shares Exercise Price
---------------------------------------------
Balance at January 1, 1996 518,317 $.97
Granted 304,500 $2.14
Exercised (273,060) $.43
Cancelled (5,107) $.43
---------------------------------------------
Balance at December 31, 1996 (137,759
exercisable at option prices $.4875 to $2.20) 544,650 $1.90
Granted 113,500 $5.34
Exercised (38,016) $.58
Cancelled (2,124) $.85
---------------------------------------------
Balance at December 31, 1997 (272,938 exercisable
at option prices $.4375 to $5.775) 618,010 $2.62
Exercised (13,001) $1.63
Cancelled (333) $1.50
---------------------------------------------
Balance at December 31, 1998 (428,396 exercisable
at option prices $.4375 to $5.775) 604,676 $2.64
=============================================
F-17
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plans (continued)
The weighted average fair value of options granted during 1997 and 1996 was
$2.03 and $1.07, respectively. The exercise prices for options outstanding as of
December 31, 1998 ranged from $.4375 to $5.775. The weighted average remaining
contractual life of those options is 6.63 years.
At December 31, 1998, 432,850 options are available for grant.
9. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
1998 1997 1996
----------------------------------------------------------------
Numerator:
Net income $1,829,000 $1,444,000 $1,138,000
----------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share-weighted-average shares 3,220,473 3,191,825 3,065,719
Effect of dilutive securities:
Stock options 302,793 296,355 257,960
----------------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed 3,523,266 3,488,180 3,323,679
conversions
----------------------------------------------------------------
Basic earnings per share $.57 $.45 $.37
================================================================
Diluted earnings per share $.52 $.41 $.34
================================================================
F-18
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Segment Information
The Company derives all of its revenues from businesses located in the United
States and classifies its business into two fundamental areas: placement
services and recruitment advertising. Placement services consist of the
placement of temporary and permanent employees. Recruitment advertising consists
of the placement of recruitment advertising on behalf of the Company, clients
and other third parties.
The Company evaluates performance based on the segments' profit or loss. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies (see Note 2). Inter-segment
sales and transfers are recorded at the Company's cost; there is no intercompany
profit or loss on inter- segment sales or transfers.
Year ended December 31, 1998
-------------------------------------------------------
Placement Recruitment
Services Advertising Total
-----------------------------------------------------------
Placement fees and related income $55,259,000 $6,423,000 $61,682,000
Inter-segment placement fees and related 71,000 761,000 832,000
income
Interest expense 5,000 - 5,000
Depreciation and amortization 195,000 12,000 207,000
Income tax expense 1,407,000 12,000 1,419,000
Segment profit 1,814,000 15,000 1,829,000
Segment assets 12,330,000 589,000 12,919,000
Expenditures for long-lived assets 299,000 17,000 316,000
Year ended December 31, 1997
-------------------------------------------------------
Placement Recruitment
Services Advertising Total
-----------------------------------------------------------
Placement fees and related income $43,684,000 $6,239,000 $49,923,000
Inter-segment placement fees and related 27,000 697,000 724,000
income
Interest expense - 36,000 36,000
Depreciation and amortization 163,000 9,000 172,000
Income tax expense 1,081,000 55,000 1,136,000
Segment profit 1,376,000 68,000 1,444,000
Segment assets 8,959,000 492,000 9,451,000
Expenditures for long-lived assets 392,000 9,000 401,000
F-19
Winston Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Segment Information (continued)
Year ended December 31, 1996
Placement Recruitment
Services Advertising Total
-----------------------------------------------------------
Placement fees and related income $34,230,000 $5,768,000 $39,998,000
Inter-segment placement fees and related 40,000 568,000 608,000
income
Interest expense 172,000 15,000 187,000
Depreciation and amortization 122,000 7,000 129,000
Income tax expense (benefit) 336,000 (24,000) 312,000
Segment profit (loss) 1,226,000 (88,000) 1,138,000
Segment assets 7,858,000 580,000 8,438,000
Expenditures for long-lived assets 82,000 5,000 87,000
F-20
Winston Resources, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Balance at
the Beginning Costs and End
of the Period Expenses Deductions of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $100,000 $285,000 $185,000 (1) $200,000
Year ended December 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $109,000 $41,000 $50,000 (1) $100,000
Year ended December 31, 1996
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $82,000 $125,000 $98,000 (1) $109,000
Uncollectible accounts written off, net of recoveries.
F-21
(a)3 Exhibits
Exhibit No. Description
* 3.1.1 Restated Certificate of Incorporation of the Company, as
filed with the Secretary of State of Delaware on April 6,
1987 [Registration Statement No. 33-14913, Exhibit 3.1]
* 3.1.2 Agreement and Plan of Merger dated as of April 15, 1987,
between Winston Resources, Inc. (New York) and the Company,
as filed with the Secretary of State of Delaware on April
20, 1987 [Registration Statement No. 33-14813, Exhibit 3.2]
* 3.1.3 Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of Delaware on June 11, 1993 [Form 10-KSB (1993)]
* 3.1.4 Composite Copy of Restated Certificate of Incorporation of
the Company, as amended [Form 10-K (1987), Exhibit 3.3]
* 3.2 By-laws of the Company, as amended June 11, 1993 [Form
10-KSB (1993)]
* 9 Stockholders' Voting Agreement, dated June 8, 1987, among
Seymour Kugler, Alec Peters and Melvin Winograd
[Registration Statement No. 33-14913, Exhibit 9]
10.1 Amended and Restated Employment Agreement, dated January 1,
1997, between the Company and Seymour Kugler
* 10.2 Supplemental Excess Profit Sharing Plan, dated December 12,
1984 [Registration Statement No. 33-14913, Exhibit 10.3]
* 10.3 Incentive Program of the Company [Registration Statement on
Form S-8 No. 33- 37476, Exhibit 4]
____________________
* Incorporated by reference and not filed herewith.
-15-
Exhibit No. Description
* 10.4 Winston Resources, Inc. 1996 Stock Plan [1996 Proxy
Statement, Exhibit A]
* 10.5 Agreement of Lease, dated as of August 8, 1990 (the
"Lease"), between Nineteen New York Properties Limited
Partnership, and the Company, as tenant [Form 10- K (1990),
Exhibit 10.11]
* 10.6 First Amendment of Lease dated as of March 1, 1992, between
Nineteen New York Properties Limited Partnership and the
Company [Form 10-KSB (1992), Exhibit 10.6]
* 10.7 Second Amendment of Lease dated as of January 29, 1993,
between Nineteen New York Properties Limited Partnership and
the Company [Form 10-KSB (1992), Exhibit 10.7]
* 10.8 Third Amendment of Lease dated as of February 19, 1993,
between Nineteen New York Properties Limited Partnership and
the Company [Form 10-KSB (1992), Exhibit 10.8]
10.9 Fifth Amendment of Lease dated as of March 14, 1997 between
535 Fifth Avenue LLC (the successor in interest to Nineteen
New York Properties Limited Partnership) and the Company, as
tenant
10.10 Secured Line of Credit Agreement dated November 4, 1996
between Winston Resources, Inc. and The Bank of New York
10.11 Promissory Note dated November 26, 1996 made by Winston
Resources, Inc. in favor of The Bank of New York
10.12 Security Agreement dated as of November 26, 1996 by and
among Winston Resources, Inc., WIN-PAY, Inc., Winston
Professional Staffing, Inc., Winston Cosmopolitan, Inc.,
Roth Young Personnel Services, Inc., Winston Personnel of
Boca Raton, Inc., Winston Personnel Inc. of New Jersey,
Winston Staffing Services, Inc. and The Bank of New York
10.13 Extension by The Bank of New York of term of Line of Credit
through October 31, 1999
____________________
* Incorporated by reference and not filed herewith.
-16-
Exhibit No. Description
22 Subsidiaries of the Company:
Delta 10, Inc. (a New Jersey corporation)
Winston Personnel of Boca Raton, Inc. (a Florida
corporation)
Winston Personnel, Inc. of New Jersey (a New Jersey
corporation)
Winston Professional Staffing, Inc. (a New Jersey
corporation)
Winston Staffing Services, Inc. (a New York
corporation)
WIN-PAY, Inc. (a New York corporation)
23.1 Consent of Ernst & Young LLP, independent auditors
27 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K have been
filed during the quarter ended December 31, 1998.
-17-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 25, 1999
WINSTON RESOURCES, INC.
By: /s/ Seymour Kugler
Seymour Kugler, Chairman of
the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature
/s/ Seymour Kugler Chairman of the Board and March 25, 1999
Seymour Kugler President; Principal Executive
Officer; Director
/s/ Jesse Ulezalka Chief Financial Officer March 25, 1999
Jesse Ulezalka
/s/Gregg Kugler Director March 25, 1999
Gregg Kugler
/s/Todd Kugler Director March 25, 1999
Todd Kugler
/s/ Martin Fischer Director March 25, 1999
Martin Fischer
/s/ Alan E. Wolf Director March 25, 1999
Alan E. Wolf
/s/ Martin Wolfson Director March 25, 1999
Martin Wolfson
/s/ Norton Sperling Director March 25, 1999
Norton Sperling
/s/ Martin J. Simon Director March 25, 1999
Martin J. Simon
-18-
EXHIBIT 10.13
THE BANK OF NEW YORK
NEW YORK'S FIRST BANK - FOUNDED IN 784 BY ALEXANDER HAMILTON
1290 Avenue of the Americas, New York, N.Y 10104
Mr. Sy Kaye, Chairman,
Winston Resources, Inc.
535 Fifth Avenue,
New York, N.Y. 10017
10/30/98
Dear Sir,
This is to confirm that the advised Line of Credit available for Winston
Resources, Inc. is extended to October 31, 1999. All the terms and conditions
remain the same.
Sincerely,
Sanjay S Shirali
Vice President.
EXHIBIT
THE BANK OF NEW YORK
NEW YORK'S FIRST BANK - FOUNDED IN 784 BY ALEXANDER HAMILTON
1290 Avenue of the Americas, New York, N.Y 10104
October 13, 1998
Winston Resources, Inc.
535 Fifth Avenue
New York, New York 10017
Attention: Sy Kaye
Chief Executive Officer
Gentlemen/Ladies:
The Bank of New York (the "Bank") is pleased to confirm that it has
extended the period of availability of the $6,000,000 secured line of credit
that the Bank holds available to Winston Resources, Inc.
Notwithstanding the foregoing, the aggregate outstanding principal
amount of all advances under this line of credit shall not exceed the lesser of
$6,000,000 or an amount equal to the sum of the following:
1. 80% of each account receivable of the Company (including the
Company's Winston Advertising Agency division) or any of Winston Personnel of
Boca Raton, Inc., WIN- PAY, Inc., Winston Personnel Inc. of New Jersey, Winston
Professional Staffing, Inc., Winston Staffing Services, Inc., Winston
Cosmopolitan, Inc., Winston Franchise Corp. and Roth Young Personnel Services,
Inc. (collectively, the "Subsidiaries") (i) which was generated in connection
with the placement of temporary employees or in connection with advertising,
(ii) in respect of which the Bank has a perfected first priority security
interest and (iii) in respect of which no amount is unpaid for more than 90 days
(or in the case of an account receivable, the relevant account debtor on which
is a hospital, 120 days) past the date of the related invoice; plus
2. 50% of each account receivable of the Company or any of the
Subsidiaries (i) which was generated in connection with the placement of
permanent employees, (ii) in respect of which the Bank has a perfected first
priority security interest and (iii) in respect of which no amount is unpaid for
more than 90 days past the date of the related invoice.
Advances under this line of credit shall be evidenced by, shall be
payable as provided in, and shall bear interest at the rate specified in, the
Promissory Note dated November 26, 1996 made by the Company to the order of the
Bank in the principal amount of $6,000,000.
2
All obligations of the Company to the Bank with respect to this line
of credit shall be jointly and severally guaranteed by the Subsidiaries pursuant
to the Guaranty Agreement dated November 26, 1996 between the Subsidiaries and
the Bank. In addition, all obligations of the Company and the Subsidiaries to
the Bank with respect to this line of credit shall be secured pursuant to the
Security Agreement dated November 26, 1996 among the Company, the Subsidiaries
and the Bank which grants the Bank a first and prior security interest in all
accounts receivable of the Company and the Subsidiaries.
For so long as this line of credit is held available or the Company
has any obligations outstanding under this line of credit, there shall be
delivered to the Bank the following, each in form and content satisfactory to
the Bank:
a. Within 5 business days after the filing thereof, copies of all
documents, including financial statements, filed by the Company or any of the
Subsidiaries with the Securities and Exchange Commission;
b. Within 15 days after the end of each month, a borrowing base
certificate and an aging schedule of the accounts receivable of the Company and
the Subsidiaries, in each case as of the end of such month; and
c. Promptly upon the Bank's request therefor, such other information
as the Bank may reasonably request from time to time.
As you know lines of credit are cancellable at any time by either
party and, in addition, any advance under this line of credit is subject to the
Bank's satisfaction, at the time of such advance, with the condition (financial
and otherwise), business, prospects, properties, assets, ownership, management
and operations of each of the Company and each of the Subsidiaries and with the
collateral for this line of credit. Unless cancelled earlier as provided in the
first sentence of this paragraph, this line of credit shall be held available
until October 9, 1999.
Very truly yours,
THE BANK OF NEW YORK
By _________________
Sanjay S Shirali
Vice President