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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________________ to___________________
Commission file number 000-23147
OUTSOURCE INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0675628
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
1690 South Congress Ave., Delray Beach, Florida 33445
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(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code: (561) 454-3500
Indicate 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at August 10, 2000
- --------------------------------------- ------------------------------
Common Stock, par value $.001 per share 8,657,913
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OUTSOURCE INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
Item 1 - Financial Statements
Consolidated Balance Sheets as of July 2, 2000 and April 2, 2000............................ 2
Consolidated Statements of Operations for the thirteen weeks
ended July 2, 2000 and three months ended June 30, 1999..................................... 3
Consolidated Statements of Cash Flows for the thirteen weeks
ended July 2, 2000 and three months ended June 30, 1999..................................... 4
Notes to Consolidated Financial Statements.................................................. 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 16
Item 3 - Quantitative and Qualitative Disclosures about Market Risk........................... 31
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................................................... 32
Item 2 - Changes in Securities and Use of Proceeds............................................ 32
Item 3 - Defaults Upon Senior Securities...................................................... 32
Item 4 - Submission of Matters to a Vote of the Security Holders.............................. 33
Item 5 - Other Information.................................................................... 33
Item 6 - Exhibits and Reports on Form 8-K..................................................... 40
Signatures.................................................................................... 42
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
JULY 2, 2000 APRIL 2, 2000
------------ -------------
ASSETS
Current Assets:
Cash $ 1,043 $ 1,546
Trade accounts receivable, net of allowance
for doubtful accounts of $1,498 and $1,574 38,314 42,118
Funding advances to franchises 427 206
Assets held for disposition 426 2,409
Income tax receivable and other current assets 12,502 5,043
--------- ---------
Total current assets 52,712 51,322
Property and equipment, net 7,890 9,154
Goodwill and other intangible assets, net 45,049 45,783
Other assets 2,148 2,310
--------- ---------
Total assets $ 107,799 $ 108,569
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,898 $ 8,887
Accrued expenses:
Payroll 5,297 10,518
Payroll taxes 1,831 4,139
Workers' compensation and insurance 6,386 5,210
Other 5,935 4,499
Accrued restructuring charges 1,693 2,255
Other current liabilities 805 507
Current maturities of long-term debt to related parties 1,197 1,195
Current maturities of long-term debt 6,995 7,635
Revolving credit facility 50,626 50,746
--------- ---------
Total current liabilities 87,663 95,591
Non-Current Liabilities
Current maturities of long-term debt 454 --
Other long-term debt, less current maturities 1,552 1,934
--------- ---------
Total liabilities 89,669 97,525
--------- ---------
Commitments and Contingencies (Notes 5, 6 and 7)
Shareholders' Equity:
Preferred stock, $.001 par value: 10,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $.001 par value: 100,000,000 shares authorized,
8,657,913 shares issued and outstanding 9 9
Additional paid-in-capital 53,546 53,546
Accumulated deficit (35,425) (42,511)
--------- ---------
Total shareholders' equity 18,130 11,044
--------- ---------
Total liabilities and shareholders' equity $ 107,799 $ 108,569
========= =========
See accompanying notes to the consolidated financial statements
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OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED JULY 2, 2000 AND THREE MONTHS ENDED JUNE 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JULY 2, 2000 JUNE 30, 1999
------------ -------------
Net revenues $ 81,618 $ 143,454
Cost of revenues 65,432 123,110
--------- ---------
Gross profit 16,186 20,344
--------- ---------
Selling, general and administrative expenses:
Amortization of intangible assets 734 934
Other selling, general and administrative expenses 13,988 19,913
--------- ---------
Total selling, general and administrative expenses 14,722 20,847
--------- ---------
Restructuring costs 878 --
--------- ---------
Operating income (loss) 586 (503)
--------- ---------
Other expense (income):
Interest expense (net) 1,913 1,702
Disposition of assets and other income (net) (724) (20)
--------- ---------
Total other expense (income): 1,189 1,682
--------- ---------
Loss before benefit for income taxes (603) (2,185)
--------- ---------
Income taxes benefit (7,689) (936)
--------- ---------
Net income (loss) $ 7,086 $ (1,249)
========= =========
Weighted average common shares outstanding:
Basic 8,657,913 8,657,913
========= =========
Diluted 9,857,385 8,657,913
========= =========
Income (loss) per share:
Basic $ 0.82 $ (0.14)
========= =========
Diluted $ 0.72 $ (0.14)
========= =========
See accompanying notes to the consolidated financial statements
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OUTSOURCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED JULY 2, 2000 AND THREE MONTHS ENDED JUNE 30, 1999
(AMOUNTS IN THOUSANDS)
JULY 2, 2000 JUNE 30, 1999
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,086 $ (1,249)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,406 1,889
Loss on sale of assets held for disposition 446 --
Deferred income taxes (7,767) (1,470)
Notes received from franchises -- (796)
Gain on the sale of the Company's PEO operations (684) --
Loss on disposal of assets, net 92 --
--------- ---------
Changes in assets and liabilities (excluding effects of acquisitions
and dispositions): 579 (1,626)
(Increase) decrease in:
Trade accounts receivable 4,387 1,594
Prepaid expenses and other current assets 943 239
Other assets (59) 324
Increase (decrease) in:
Accounts payable (994) 24
Accrued expenses:
Payroll (5,248) 2,201
Payroll taxes (2,309) 1,443
Workers' compensation and insurance 1,120 (993)
Reserve for restructuring charges (562) --
Other 53 101
Other current liabilities (112) 137
--------- ---------
Net cash (used in) provided by operating activities (2,202) 3,444
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from asset sales as part of the Restructuring and related matters 880 --
Proceeds from the sale of the Company's PEO operations 3,314 --
Funding repayments (advances) from franchises, net (220) 300
Purchases of property and equipment (192) (408)
Proceeds from sale of property and equipment -- 1,600
--------- ---------
Net cash provided by investing activities 3,782 1,492
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in excess of outstanding checks over bank balance,
included in accounts payable (1,454) 102
Repayment of lines of credit and revolving credit facilities (120) (2,512)
Proceeds from interest collar termination -- 250
Related party debt repayments -- (142)
Repayment of other long-term debt (509) (1,489)
--------- ---------
Net cash used in financing activities (2,083) (3,791)
--------- ---------
Net (decrease) increase in cash (503) 1,145
Cash, beginning of period 1,546 1,418
--------- ---------
Cash, end of period $ 1,043 $ 2,563
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,699 $ 1,823
========= =========
See accompanying notes to the consolidated financial statements
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OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements and the related
information in these notes as of July 2, 2000 and for the thirteen
weeks ended July 2, 2000 ("Q1 2001") and the three months ended June
30, 1999 ("Q2 1999") have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of
management, reflect all adjustments (including normal accruals)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. The
results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to the presentation of the
financial position and results of operations for Q2 1999 to conform to
current presentation. These reclassifications had no effect on
previously reported results of operations or retained earnings.
The Company filed a Form 8-K during the fourth calendar quarter of 1999
indicating, among other things, its change for financial reporting
purposes, effective January 1, 2000, from a fiscal year ended December
31 to a fiscal year ending the 52 or 53 week period ending the Sunday
closest to March 31. These interim financial statements should be read
in conjunction with the audited financial statements for the year ended
December 31, 1999, included in the Company's Form 10-K filed with the
Securities and Exchange Commission ("SEC") on April 14, 2000 and the
financial statements in the Company's Form 10-Q for the transition
period ended April 2, 2000 ("Q1 2000") filed with the SEC on May 17,
2000.
In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" was
issued. SFAS No. 133 defines derivatives and establishes accounting and
reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts)
be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 also requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset
related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. SFAS
No. 133, as modified by SFAS No. 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, and cannot be
applied retroactively. The Company intends to implement SFAS No. 133 in
its consolidated financial statements as of and for the fiscal quarter
ending July 2, 2001. Although it has not determined the effects, if
any, that implementation will have, management does not believe that
the Company is a party to any transactions involving derivatives as
defined by SFAS No. 133. SFAS No. 133 could increase volatility in
earnings and other comprehensive income if the Company enters into any
such transactions in the future.
NOTE 2: FUTURE LIQUIDITY
As discussed in Note 5 to the Company's Consolidated Financial
Statements, the Company's bank financing expired on August 15, 2000 and
the Company was, until August 15, 2000, in default of certain
acquisition debt subordinated to its bank financing.
Effective August 15, 2000, the Company entered into a three-year
agreement with a syndicate of lenders led by Ableco Finance, LLC, as
agent, which replaced the Company's previous senior credit facility
with a $33.4 million Revolving Credit Facility and two term loans of
$17.6 million and $9.0 million, respectively. In connection with the
repayment of the previous credit facility, the Company issued a
four-year, $5.3 million subordinated term note to the lenders under the
previous credit facility. Simultaneously with the closing of the new
credit facility, the Company amended certain of its outstanding
acquisition notes payable to provide for the payment of interest only
for a period of three years followed by two years of equal monthly
installments of principal and interest. As a result of the
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OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: FUTURE LIQUIDITY (CONTINUED)
amendments to the acquisition notes payable the Company is no longer in
default under those notes (see Note 5).
NOTE 3: RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR
DISPOSITION
On August 6, 1999, the Company announced the following actions to
improve its short-term liquidity, concentrate its operations within one
core segment (Tandem, its flexible industrial staffing division) and
improve its operating performance within that segment:
(i) the sale of Office Ours, the Company's clerical staffing
division, effective August 30, 1999. Revenues of Office Ours, for the
three months ended June 30, 1999, were $2.1 million, and the loss
before taxes for these operations, on a basis consistent with the
segment information presented in Note 9, was approximately $19,000;
(ii) the engagement of an investment banking firm to assist in the
evaluation of strategic options, including the possible sale, of
Synadyne, the Company's PEO division. Effective April 8, 2000, the
Company sold the operations of Synadyne for net proceeds at closing of
$3.1 million. Effective in May 2000, $0.2 million of the closing
proceeds, which was being held in escrow, were released to the Company.
In addition, if the Company meets certain performance criteria for the
one-year period subsequent to the sale, it will receive additional
proceeds of $1.25 million. In connection with the sale of its PEO
operations, the Company recorded a pre-tax non-operating gain of $0.7
million in its results of operations for the quarter ended July 2,
2000. Revenues of Synadyne, prior to the sale effective April 8, 2000,
were approximately $71,000 and $55.1 million for Q1 2001 and Q2 1999,
respectively. On a basis consistent with the segment information
presented in Note 9, the Company reported a net loss before taxes for
the PEO operations of $0.2 million and income before taxes for the PEO
operations of $0.5 million for Q1 2001 and Q2 1999, respectively; and
(iii) a reduction of the Company's flexible industrial staffing and
support operations (the "Restructuring") consisting primarily of: the
sale, franchise, closure or consolidation of 47 of the 117 Tandem
branch offices existing as of June 30, 1999; an immediate reduction of
the Tandem and corporate headquarters employee workforce by 110
employees (approximately 11% of the Company's workforce); and an
additional reduction of 32 employees through Q2 2001. A total of 47
branch offices have been or will be eliminated in connection with the
Restructuring, 41 of which have been sold, franchised, closed, or
consolidated as of August 15, 2000. These offices were not or are not
expected to be adequately profitable in the near future or are
inconsistent with the Company's operating strategy of clustering
offices within specific geographic regions. The restructuring charge
accrual and its utilization are as follows:
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OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR
DISPOSITION (CONTINUED)
UTILIZATION
ORIGINAL BALANCE AT CHARGES TO ---------------- BALANCE AT
(AMOUNTS IN THOUSANDS) CHARGE 4/2/00 OPERATIONS CASH NON-CASH 7/2/00
-------- ---------- ---------- ---- -------- ----------
Employee severance and
other termination benefits $ 4,040 $2,139 $ (89) $483 $ -- $1,567
Professional fees 1,205 34 369 362 -- 41
Lease termination and write-down of
leasehold improvements at closed offices 400 49 (2) 21 -- 26
Other restructuring charges 146 33 154 128 -- 59
------- ------ ----- ---- ---- ------
Accrued restructuring charges 5,791 2,255 432 994 -- 1,693
Write-down to fair value/loss on sale
of assets identified for disposition 5,429 -- 446 -- 446 --
------- ------ ----- ---- ---- ------
Total restructuring and asset
impairment activity $11,220 $2,255 $ 878 $994 $446 $1,693
======= ====== ===== ==== ==== ======
The original $11.2 million restructuring charge includes $4.0 million
for severance and other termination benefits, $1.2 million for
professional fees, and $0.6 million in lease termination and other
charges. Severance and other termination benefits were decreased by
$0.2 million and $0.1 million during Q1 2000 and Q1 2001, respectively,
to reflect a reduction of amounts to be paid in connection with certain
severance packages accrued in 1999 since certain employees of offices
sold and franchised to third parties would continue employment with
such buyers or franchisees. The remaining liability of $1.6 million for
severance and other termination benefits as of July 2, 2000 consists of
$1.4 million for 23 employees who have been or will be terminated
during the period of August 1999 through September 2000, and paid over
a period ranging from one week to 21 months from the balance sheet
date.
Professional fees of $0.5 million and $0.4 million were recorded as
restructuring costs incurred during Q1 2000 and Q1 2001, respectively.
These professional fees were comprised primarily of amounts paid to
Crossroads LLC, formerly Crossroads Capital Partners, LLC
("Crossroads"), for its services related to the Restructuring. The
Company expects to complete these restructuring activities during the
quarter ending October 1, 2000.
The Company utilized $0.1 million and $0.1 million of the restructuring
charge during Q1 2000 and Q1 2001, respectively, for the costs of
terminating leases as well as writing down the carrying value of
leasehold improvements and other assets not usable in other Company
operations.
The restructuring charge includes a $5.4 million write-down of assets,
recorded in the Company's results of operations at such time as these
assets were classified as held for disposition, to their estimated net
realizable value based on management's estimate of the ultimate sales
prices that would be negotiated for these assets. The charge was
increased by $0.1 million in Q1 2000 and $0.4 million during Q1 2001,
and is subject to future adjustments as the Company negotiates the
actual sales prices of the assets that remain to be sold as of July 2,
2000.
During Q1 2001, the Company (i) sold one staffing office and closed
another, in the state of Minnesota, effective April 10, 2000, for cash
proceeds of $60,000, (ii) franchised one of its staffing offices in the
state of Ohio, effective April 10, 2000, for cash proceeds of $20,000,
and (iii) sold its operations in the
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OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR
DISPOSITION (CONTINUED)
states of New Jersey and Pennsylvania, comprising six staffing offices
and two "vendor on premises" locations, for $1.3 million (comprised of
cash proceeds of $0.8 million and two promissory notes totaling $0.5
million). In connection with the sale of its staffing offices in New
Jersey and Pennsylvania, the Company recorded a $0.4 million loss on
the sale, in addition to the original $2.1 million write-down of these
assets to their estimated net realizable value upon their
classification as assets held for disposition.
As of July 2, 2000 there were six Tandem offices that remained to be
sold as part of the Restructuring, and the Company had classified the
related assets as assets held for disposition, excluding cash, accounts
receivable and deferred income taxes. Upon classification as assets
held for disposition, the Company discontinued the related depreciation
and amortization for these assets, which reduced operating expenses by
approximately $0.1 million in Q1 2001. The estimated fair market value
of these assets held for disposition was based on management's judgment
and as such, actual results could vary significantly from such
estimates.
The Company's assets held for disposition as of July 2, 2000, stated at
the lower of original cost (net of accumulated depreciation or
amortization) or fair value (net of selling and disposition costs),
were as follows (presented in thousands):
NET ORIGINAL COST
------------------------------------------
PROPERTY GOODWILL AND LOWER OF
AND OTHER COST OR
EQUIPMENT INTANGIBLE ASSETS TOTAL FAIR VALUE
--------- ----------------- ------ ----------
Tandem branch offices $313 $1,005 $1,318 $426
==== ====== ====== ====
The Tandem operations held for disposition, as well as those sold,
franchised or closed (excluding offices consolidated into existing
offices) as part of the Restructuring as of July 2, 2000, had revenues
of $8.8 million and $13.9 million in Q1 2001 and Q2 1999, respectively.
On a basis consistent with the segment information presented in Note 9,
the Company reported a $0.2 million net income and a ($0.7) million net
loss for Q1 2001 and Q2 1999, respectively, for these operations.
NOTE 4. INCOME TAXES
The Company's effective tax rate differed from the statutory federal
rate of 35% as follows (amounts presented in thousands, except for
percentages):
FOR THE QUARTER ENDED
----------------------------------------------------------
JULY 2, 2000 JUNE 30, 1999
AMOUNT RATE AMOUNT RATE
------- -------- ------ -----
Statutory rate applied to income before income taxes
and extraordinary item $ (211) (35.0)% $(765) (35.0)%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit 20 3.3 (80) (3.7)
Employment tax credits (81) (13.4) (165) (7.5)
Nondeductible expenses 29 4.9 -- --
Other (101) (16.7) 74 3.4
------- -------- ----- -----
Total before valuation allowance (344) (56.9) (936) (42.8)
Change in valuation allowance (7,345) (1,218.1) -- --
------- -------- ----- -----
Total $(7,689) (1,275.0)% $(936) (42.8)%
======= ======== ===== =====
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OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. INCOME TAXES (CONTINUED)
During Q1 2001, the Company reduced the deferred tax asset valuation
allowance by $7.7 million, which is expected to be realized through
utilization of the existing net operating loss carryforward, relating
to the extinguishment gain to be recorded in the quarter ending October
1, 2000 (see Note 5), and through taxable income from future
operations. The Company's expectations of future taxable income are
consistent with past operating history and do not incorporate operating
improvements to achieve such income. The Company's provision for income
taxes may be impacted by adjustments to the valuation allowance that
may be required if management's assessment changes regarding the
realizability of the deferred tax assets in future periods. The
valuation allowance was established in 1999 and was increased by the
tax benefits in the quarter ended April 2, 2000 because it was not
clear that the tax benefits resulting from operating losses and other
temporary differences were "more likely than not" to be realized, as
required by SFAS No. 109, "Accounting for Income Taxes". Income tax
receivable and other current assets at July 2, 2000 includes a $15.4
million deferred tax asset offset by a valuation allowance of $7.7
million, representing the amount of the deferred tax assets that may
not be realizable.
The employment tax credit carryforward of $2.5 million as of July 2,
2000 will expire during the years 2012 through 2020. The employment tax
credits recorded by the Company from February 21, 1997 through December
31, 1999 include Federal Empowerment Zone ("FEZ") credits which
represent a net tax benefit of $0.6 million. Although the Company
believes that these FEZ credits have been reasonably determined, the
income tax law addressing how FEZ credits are determined for staffing
companies is evolving and, the Company's position with regard to the
calculation of the FEZ credit has been challenged by the Internal
Revenue Service.
During 1999, the Company received a preliminary report from the IRS
proposing adjustments to the previously reported taxable income and tax
credits for certain of the Company's subsidiaries for the years ended
December 31, 1994, 1995 and 1996. Since that time, and as a result of
analysis and discussions with the Company, the proposed adjustments
have been modified. The Company is currently evaluating the merits of
these proposed adjustments with the original shareholders. Since the
subsidiaries were "S" corporations for the periods under examination,
the proposed adjustments, if ultimately accepted or proven to be
appropriate, would not result in a materially unfavorable effect on the
Company's results of operations, although additional shareholder
distributions could result as discussed in Note 6.
NOTE 5. DEBT
SENIOR DEBT FACILITIES
Effective August 15, 2000, the Company entered into a three-year
agreement with a syndicate of lenders led by Ableco Finance, LLC, as
agent, an affiliate of Cerberus Capital Management, L.P. (the
"Lenders"), which replaced the Company's existing credit facility with
a $33.4 million Revolving Credit Facility, which includes a subfacility
for the issuance of standby letters of credit ("Senior Facility"), and
two term loans, Term Loan A and Term Loan B ("Term Loans"), of $17.6
million and $9.0 million, respectively (the "Refinancing"). Both the
Senior Facility and the Term Loans are secured by all the assets of the
Company and its subsidiaries. The Senior Facility bears interest at
prime or 9.0%, whichever is greater, plus 2%. Term Loan A and Term Loan
B bear interest at prime or 9.0%, whichever is greater, plus 3.5% and
5.0% per annum, respectively. In connection with the Refinancing, the
Company issued warrants to the Lenders to purchase up to a maximum of
200,000 common shares of the Company, exercisable for a term of five
years, at $0.01 per warrant. The warrants are only exercisable if any
letter of credit issued by the Lenders on behalf of the Company is
drawn in proportion to the amount drawn under the letter of credit.
A portion of the new credit facility was used to satisfy the credit
facility (the "Fleet Facility") with Fleet
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OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DEBT (CONTINUED)
National Bank, for itself and as agent for three other banks (the
"Fleet Group"). Prior to the closing of the Refinancing, the
outstanding balance of the Fleet Facility was approximately $52.0
million. The balance was repaid in full with a cash payment of
approximately $32.3 million and the issuance of a four-year, $5.3
million subordinated term note (the "Fleet Term Note"). The Fleet Term
Note is subordinated to the Senior Facility and Term Loans issued by
the Lenders on behalf of the Company and includes interest only for
four years, followed by a balloon payment for the entire principal
amount. In addition, the Company is entitled to a 60% discount on this
note if it is satisfied within 18 months. This obligation bears
interest at Fleet's Alternative Prime Rate ("APR") plus 3.5% per annum.
In connection with the Refinancing and in satisfaction of the Company's
obligation to the Fleet Group, the Company has issued 524,265 warrants
to the Fleet Group to purchase common shares of the Company, which
constitutes 5.0% of the common stock of the Company on a fully diluted
basis. The warrants are exercisable for a term of 10 years at $0.01 per
warrant. In connection with the Refinancing and the termination of the
Fleet Facility, the Company will record an extraordinary gain, net of
tax, of approximately $8.5 million in the quarter ending October 1,
2000.
As of July 2, 2000, the Company's primary sources of funds for working
capital and other needs were (i) a $26.1 million credit line (the
"Revolving Credit Facility"), including existing letters of credit of
$4.8 million and (ii) a $33.0 million credit facility, based on and
secured by the Company's accounts receivable (the "Receivable
Facility"), with the Fleet Group. Effective April 13, 2000, due in part
to the sale of the Company's Synadyne operation, the maximum
availability under the Receivable Facility was reduced from $50.0
million to $33.0 million. Effective May 1, 2000, the maximum
availability under the Revolving Credit Facility was reduced from $25.5
million to $25.3 million (including existing letters of credit of $4.8
million), and effective in June 2000, the maximum availability under
the Revolving Credit Facility was increased to $26.1 million to provide
for the Company's seasonal increase in working capital requirements.
Prior to their expiration, the Receivable Facility, bore interest at
Fleet's prime rate plus 2.0% per annum, which was 11.5% as of July 2,
2000, while the Revolving Credit Facility bore interest at prime plus
5.0% per annum, which was 14.5% as of July 2, 2000. The weighted
average interest rate payable on the outstanding balances during the
period, exclusive of related fees and expenses, was approximately 13.2%
per annum, compared to approximately 6.7% per annum in Q2 1999. As of
July 2, 2000, the Company had outstanding borrowings of $19.4 million
and $31.3 million under the Revolving Credit Facility and the
Receivable Facility, respectively.
In addition to the Revolving Credit Facility indebtedness discussed
above, the Company had bank standby letters of credit outstanding in
the aggregate amount of $4.8 million as of July 2, 2000, of which $4.2
million secured the pre-1999 portion of the workers' compensation
obligations recorded as a current liability on the Company's
Consolidated Balance Sheet. The remaining $0.6 million, which is
supported by a $0.7 million cash escrow balance, is to secure future
payments on a capital lease for furniture that was sold as part of the
Company's corporate headquarters building.
SUBORDINATED DEBT
In order to remain in compliance with certain covenants in the
Revolving Credit Facility, and to reduce the cash impact of scheduled
payments under its subordinated acquisition debt, the Company
negotiated extensions of the payment dates and modified the interest
rates and other terms of certain of its acquisition notes payable in
1999. The Company had not made substantially all of the scheduled
payments due and, as a result, was in default on acquisition notes
payable having a total outstanding principal balance of $6.9 million as
of July 2, 2000. The terms of the acquisition notes payable, which
10
12
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DEBT (CONTINUED)
were subordinated to the Revolving Credit Facility and the Receivable
Facility, allowed the payees to accelerate terms of payment upon
default. Acceleration of this debt required prior written notice to the
Company by the various payees, which was received from three payees as
of July 2, 2000. On August 15, 2000, in connection with the
Refinancing, the acquisition notes payable were amended to provide that
the Company will pay interest only, at a rate of 10.0% per annum, on
the debt for three years following the closing of the Refinancing,
followed by two years of equal monthly payments of interest and
principal, which will retire the debt. In connection with the
amendments to the acquisition notes payable, the Company paid $0.8
million of accrued interest to the relevant noteholders at the closing
of the Refinancing.
NOTE 6. COMMITMENTS AND CONTINGENCIES
SHAREHOLDER DISTRIBUTION: Effective February 21, 1997, the Company
acquired all of the outstanding capital stock of nine companies under
common ownership and management, in exchange for shares of the
Company's common stock and distribution of previously undistributed
taxable earnings of those nine companies (the "Reorganization"). This
distribution, supplemented by an additional distribution made in
September 1998, is subject to adjustment based upon the final
determination of taxable income through February 21, 1997. Although the
Company has completed and filed its Federal and state tax returns for
all periods through February 21, 1997, further cash distributions may
be required in the event the Company's taxable income for any period
through February 21, 1997 is adjusted due to audits or any other
reason. As a result of the IRS audit of the years 1994 through 1996
(see Note 4), the Company expects to make a distribution to the
Company's original shareholders of at least $2.0 million. The final
amount of the distribution has not been determined and could be up to
$5.0 million; however, the Company expects the actual distribution to
be significantly less.
UNEMPLOYMENT TAXES: Federal and state unemployment taxes represent a
significant component of the Company's cost of revenues. State
unemployment taxes are determined as a percentage of covered wages.
Such percentages are determined in accordance with the laws of each
state and usually take into account the unemployment history of the
Company's employees in that state. The Company has realized reductions
in its state unemployment tax expense as a result of changes in its
organizational structure from time to time. Although the Company
believes that these expense reductions were achieved in compliance with
applicable laws, taxing authorities of certain states may elect to
challenge these reductions.
The Company had made arrangements with several states to pay quarterly
unemployment tax payments originally due in July and October 1999 in
monthly installments over one year, bearing interest at rates ranging
from 12.0% to 24.0% per annum. In addition, the Company contacted the
taxing agencies of certain states to arrange payment of payroll taxes
owed, primarily for the quarter ended April 2, 2000, of approximately
$0.5 million. As of July 2, 2000, all of these accumulated tax
obligations had been remitted to the appropriate taxing authorities.
FEDERAL EMPLOYMENT TAX REPORTING PENALTIES: During September 1999, the
Company was notified by the IRS of its intent to assess penalties of
$500,000 related to W-2s filed by the Company for 1997 for employees
with invalid Social Security numbers. The Company has requested an
abatement of the penalty and does not currently expect that the penalty
ultimately charged will exceed $300,000, which amount was included in
selling, general and administrative expenses in 1999, and is reflected
as a current liability on the Company's July 2, 2000 Consolidated
Balance Sheet. However, there can be no assurance that the Company will
not be required to ultimately pay a higher penalty in connection with
this matter.
11
13
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
UNCLAIMED PROPERTY AUDIT: A state in which the Company conducts a
significant portion of its operations has begun and substantially
completed an audit of the Company's compliance with escheat (unclaimed
property) statutes. The applicable state escheat laws cover a wide
range of situations and property types and have a ten-year statute of
limitations. In addition, it is common for states to share information
in this area. At this time, the Company is unable to estimate any
liability that may result from this audit and has made no provisions in
its financial statements related to this matter.
WORKERS' COMPENSATION: During 1997, and through 1999, the Company's
workers' compensation expense for claims was effectively capped at a
contractually-agreed percentage of payroll. In 1997 and 1998, the
Company's expense was limited to the cap even though the estimated
ultimate cost of the actual claims experience was greater than the cap.
In 1999, the estimated ultimate cost of the actual claims experience
was used as the basis of the Company's workers' compensation expense
since it was approximately $1.7 million less than the cap (3.5% of
payroll). The estimated ultimate cost of the 1999 claims experience was
determined based on information from an independent third-party
administrator employed by the Company plus an allowance for claims
incurred but not reported, based on prior experience and other relevant
data. The Company's methodology for determining workers' compensation
expense in the quarter ended July 2, 2000 is consistent with that for
calendar year 1999.
The Company routinely adjusts the accruals made in prior years for
workers' compensation claims and expenses, based on updated information
from its insurance carriers, its independent third-party administrator
and its own analysis. These adjustments are included as a component of
cost of sales in the period in which it becomes apparent that an
adjustment is required.
EMPLOYMENT AGREEMENTS: As of July 2, 2000, the Company had certain
obligations under employment agreements it had entered into with its
Chief Executive Officer ("CEO"), its former CEO and thirteen other
officers. Under the terms of those agreements, in the event that the
Company terminates the employment of any of those officers without
cause or the officer resigns for good reason, the terminated officer
will receive, among other things, severance compensation, including a
portion (ranging from three months to two years) of the officer's
annual base salary and bonus prior to termination. In addition, all
incentive stock options held by such employees would become immediately
exercisable. More substantial severance provisions apply if any of
those officers are terminated within two years (three years for the
CEO) after the occurrence of a "change of control", as defined in the
employment agreements.
Between February 1999 and May 2000, ten of the fifteen officers
referred to above separated from the Company, resulting in the
Company's obligation to pay two of those officers' salary for two
years, three of those officers' salaries for one year and five of those
officers' salaries for six months, in exchange for their agreement to,
among other things, not compete with the Company during that period.
The aggregate costs of these severance agreements total $3.0 million,
of which $1.5 million has been paid as of July 2, 2000, and $1.5
million is accrued in the Company's July 2, 2000 Consolidated Balance
Sheet.
On June 1, 2000, pursuant to the terms of one of the severance
agreements described in the preceding paragraph, the Company provided a
$0.2 million advance on severance, which is being deducted by the
Company in bi-monthly installments payable over two years to a former
officer of the Company.
CONSULTING CONTRACT: In May 1999, the Company engaged Crossroads, LLC,
a consulting firm based in Newport Beach, California, to review the
Company's existing business plan and make recommendations for
adjustments to strategy as well as financial and operational
improvements. In July 1999, the engagement was modified to add
additional services, including working with management to develop the
12
14
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Restructuring plan and a revised business plan based on the
restructured company (see Note 3), assisting in extending the existing
Revolving Credit Facility and Securitization Facility, arranging for
new financing, and periodically reporting to the Company's Board of
Directors and lenders' syndicate. In August 1999, a representative of
Crossroads was appointed as the Company's interim chief operating
officer and the interim president of the Tandem division. In connection
with services provided by Crossroads to assist in the Restructuring,
the Company has incurred costs of $1.9 million through July 2, 2000, of
which $0.4 million was for services provided during Q1 2001. These
amounts were included in the restructuring charge recorded by the
Company in its results of operations. The Company anticipates that it
will record restructuring charges of approximately $0.5 million in Q2
2001 for services to be rendered by Crossroads during that period.
In connection with the Refinancing, the Company will pay Crossroads
$0.9 million for their assistance in securing the new credit facility.
This charge, along with other costs relating to the Refinancing, will
be amortized in the Company's results of operations over the three-year
term of the Refinancing agreements.
STOCK OPTIONS AND WARRANTS: During February 2000, the Company granted
options to purchase 400,000 shares of the Company's common stock to the
Company's new CEO at $2.00 per share. In March 2000, the Company
granted options to purchase 473,038 shares of the Company's common
stock to various employees at $2.125 per share, of which 428,736 shares
remain outstanding as of July 2, 2000. Both grants vest over a
four-year period from the grant date. As of July 2, 2000, the Company
had in aggregate, 1,856,277 stock options and 1,208,988 warrants to
purchase shares of the Company's common stock outstanding.
The total number of shares of common stock reserved for issuance under
the stock option plan as of July 2, 2000 was 2,000,000, as agreed to by
the Company's Board of Directors in April 1999 and approved by the
Company's shareholders at their May 1999 annual meeting.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company recognized revenue of $0.3 million in Q2 1999 from all
franchises owned by significant shareholders of the Company, which
included royalties and payments under buyout agreements. Buyouts are
early terminations of franchise agreements entered into by the Company
in order to allow the Company to develop the related territories. At
the time of the buyouts, the Company receives an initial payment from
the former franchisee and continues to receive quarterly payments from
the former franchisee based on the gross revenues of the formerly
franchised locations for two years after the termination date. These
buyout terms are generally consistent with the terms of buyout
agreements between the Company and unrelated third parties.
Effective February 16, 1998, the Company purchased certain staffing
locations and the related franchise rights from certain shareholders
for $6.9 million which included the issuance of a $1.7 million note
bearing interest at 7.25% per annum payable quarterly over three years.
Effective February 1, 1999, the note was renegotiated so that the
remaining principal balance of $1.3 million would bear interest at
8.50% per annum and would be payable in monthly installments totaling
$0.3 million in the first year and $0.6 million in the second year,
with a $0.4 million balloon payment due at the end of the two year
term. As discussed in Note 5, the Company had not made the renegotiated
payments on this subordinated acquisition note, and, as a result, was
in default under this note. Effective August 15, 2000 this note was
amended to provide that the Company will pay interest only, at a rate
of 10.0% per annum, on the debt for three years, followed by two years
at equal monthly installments of principal and interest, which will
retire the debt.
13
15
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EARNINGS (LOSS) PER SHARE
The Company calculates earnings (loss) per share in accordance with the
requirements of SFAS No. 128, "Earnings Per Share". Certain of the
outstanding options and warrants to purchase common stock of the
Company were anti-dilutive for Q2 1999 and accordingly were excluded
from the calculation of diluted weighted average common shares for that
period, solely because the result of operations was a net loss instead
of net income.
NOTE 9. OPERATING SEGMENT INFORMATION
The Company's reportable operating segments are as follows:
TANDEM: This segment derives revenues from recruiting, training and
deploying temporary industrial personnel and from providing payroll
administration, risk management and benefits administration services.
SYNADYNE: This segment derived revenues from providing a comprehensive
package of PEO services to its clients including payroll
administration, risk management, benefits administration and human
resource consultation. See Note 3 relating to the Company's disposition
of these operations.
FRANCHISING: This segment derives revenues under agreements with
industrial staffing franchisees that provide those franchises with,
among other things, exclusive geographic areas of operations,
continuing advisory and support services and access to the Company's
confidential operating manuals. Franchising revenues also include
revenues from early terminations of franchise agreements, called
"buyouts".
Transactions between segments affecting their reported income are
immaterial. Differences between the reportable segments' operating
results and the Company's consolidated financial statements relate
primarily to other operating divisions of the Company and items
excluded from segment operating measurements, such as corporate support
center expenses and interest expense in excess of interest charged to
the segments based on their outstanding receivables. The Company does
not regularly provide information regarding the reportable segments'
net assets to the chief operating decision-maker. Certain
reclassifications have been made between segments to Income (Loss)
Before Taxes in Q2 1999 to be consistent with current period
presentation.
FOR THE QUARTER ENDED
---------------------------------
JULY 2, 2000 JUNE 30, 1999
------------ -------------
(Amounts in thousands)
REVENUES
Tandem $ 80,859 $ 79,855
Synadyne 71 55,079
Franchising 654 2,469
Other Company revenues 34 6,051
-------- ---------
Total Company revenues $ 81,618 $ 143,454
======== =========
INCOME (LOSS) BEFORE TAXES
Tandem $ 4,608 $ 435
Synadyne (198) 523
Franchising 495 2,191
Other Company income (loss), net (1) (5,508) (5,334)
-------- ---------
The Company's loss before taxes $ (603) $ (2,185)
======== =========
(1) During Q1 2001, the Company recognized restructuring charges
of $0.9 million and a $0.7 million net gain on the sale of the
Company's PEO operations.
14
16
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SUBSEQUENT EVENTS
On August 9, 2000, the Company was notified by Nasdaq-Amex that,
because the Company was not in compliance with the minimum $4 million
net tangible assets for continued listing on the Nasdaq National
Market, the Company's common stock would be delisted effective August
10, 2000. Pursuant to the notification received from Nasdaq-Amex, the
Company's common stock was delisted from the Nasdaq National Market and
is now being traded on the OTC Bulletin Board.
As a result of completing the Refinancing, the Company believes it has
taken the steps necessary to cure the net tangible asset deficiency and
intends to appeal the delisting decision.
15
17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in conjunction with
"Forward-looking information: certain cautionary statements".
GENERAL
The Company offers its clients flexible industrial staffing services
through its Tandem division, targeting opportunities in that
fragmented, growing market which the Company believes has to date been
under-served by large full service staffing companies. Significant
benefits of Tandem's services to clients include providing clients with
the ability to outsource their recruiting function and other logistical
aspects of their staffing needs, as well as converting the fixed cost
of employees to the variable cost of outsourced services. Until the
Company sold the operations of Synadyne, effective April 8, 2000, it
also focused on providing professional employer organization ("PEO")
services to small and medium-sized businesses (those with less than 500
employees).
Flexible industrial staffing services include recruiting, training and
deployment of temporary industrial personnel as well as payroll
administration, risk management and benefits administration services.
PEO services included payroll administration, risk management, benefits
administration and human resource consultation. Tandem delivers its
flexible staffing services through a nationwide network of 84
Company-owned and 51 franchised recruiting and dispatch branches.
Company-owned branches are aggregated into 13 geographic districts,
which are combined into three geographic zones: the East, Midwest and
West.
The Company's revenues are based on the salaries and wages of worksite
employees. Revenues, and the associated costs of wages, salaries,
employment taxes and benefits related to worksite employees, are
recognized in the period during which those employees perform the
services. Since the Company is at risk for all of its direct costs,
independent of whether payment is received from its clients, all
amounts billed to clients for gross salaries and wages, related
employment taxes, health benefits and workers' compensation coverage
are recognized as revenue by the Company, net of credits and
allowances, which is consistent with industry practice. The Company's
primary direct costs are (i) the salaries and wages of worksite
employees (trade payroll costs), (ii) employment-related taxes, (iii)
health benefits, (iv) workers' compensation benefits and insurance, and
(v) worksite employee transportation.
The Company's Tandem operations generate significantly higher gross
profit margins than those of its former Synadyne operations. The higher
staffing margins reflect compensation for recruiting, training and
other services not required as part of many PEO relationships, where
the employees have already been recruited by the client and are trained
and in place at the beginning of the relationship.
On August 6, 1999, the Company announced the following actions intended
to improve its short-term liquidity, concentrate its operations within
one core segment (Tandem, its flexible industrial staffing division)
and improve its operating performance within that segment:
(i) the sale of Office Ours, the Company's clerical staffing
division, which was completed on August 30, 1999;
(ii) the engagement of an investment banking firm to assist in the
evaluation of strategic options for Synadyne which ultimately resulted
in the sale of the operations of Synadyne on April 8, 2000; and
(iii) a reduction of the Company's flexible industrial staffing and
support operations (the "Restructuring") consisting primarily of: the
sale, franchise, closure or consolidation of 47 of the 117 Tandem
branch offices existing as of June 30, 1999; an immediate reduction of
the Tandem and corporate headquarters employee workforce by 110
employees (approximately 11% of the Company's workforce); and an
additional reduction of 32 employees through Q2 2001. A total of 47
branch offices have been or will be
16
18
eliminated in connection with the Restructuring, 41 of which have been
sold, franchised, closed, or consolidated as of August 15, 2000. These
offices were not or are not expected to be adequately profitable in the
near future or are inconsistent with the Company's operating strategy
of clustering offices within specific geographic regions. See
"Restructuring."
RESULTS OF OPERATIONS
The following tables set forth the amounts and percentages of net
revenues of certain items in the Company's consolidated statements of
income for the indicated periods. Certain reclassifications have been
made to the presentation of the results of operations for Q2 1999 to
conform to current presentation. The dollar amounts presented are in
thousands:
FOR THE QUARTER ENDED
---------------------------------------------------------------
JULY 2, 2000 JUNE 30, 1999
------------------------- --------------------------
Net revenues:
Tandem $ 80,859 99.1% $ 79,855 55.7%
Synadyne 71 0.1 55,079 38.4
Franchising 654 0.8 2,469 1.7
Other 34 0.0 6,051 4.2
--------- ------ --------- ------
Total net revenues $ 81,618 100.0% $ 143,454 100.0%
========= ====== ========= ======
Gross profit $ 16,186 19.8% $ 20,344 14.2%
Selling, general and administrative expenses(1) 14,722 18.0 20,847 14.5
Restructuring and asset impairment charges 878 1.1 -- --
--------- ------ --------- ------
Operating income (loss)(1) 586 0.7 (503) (0.4)
Net interest and other expense 1,189 1.5 1,682 1.2
--------- ------ --------- ------
Loss before benefit for income taxes(1) (603) (0.7) (2,185) (1.5)
Benefit for income taxes (7,689) (9.4) (936) (0.7)
--------- ------ --------- ------
Net income (loss)(1) $ 7,086 8.7% $ (1,249) (0.9)%
========= ====== ========= ======
SYSTEM OPERATING DATA:
System Revenues(2) $ 103,070 $ 159,350
========= ==========
System employees (number at the end of period) 20,000 35,000
========= ==========
System offices (number at the end of period) 135 172
========= ==========
(1) During the quarterly period ended July 2, 2000, the Company
recorded an increase to its restructuring reserve of $0.9 million, a
non-operating gain of $0.7 million from the sale of the Company's PEO
operations - see Note 3 to the Company's Consolidated Financial
Statements, and a $7.7 million decrease to its deferred tax asset
valuation allowance - see Note 4 to the Company's Consolidated
Financial Statements. The following table sets forth the amounts (in
thousands, except for per share data and percentages) and the
percentage of certain items in the Company's consolidated statements of
income, with 2001 amounts and percentages adjusted for the above items
as follows: (i) operating income (loss) excludes the increase in the
restructuring reserve, and (ii) net loss and loss per share excludes
the restructuring reserve, gain from the sale of the Company's PEO
operations, and the decrease in the deferred tax valuation allowance.
FOR THE QUARTER ENDED
-------------------------------------------
JULY 2, 2000 JUNE 30, 1999
------------ -------------
Operating income (loss), as adjusted $ 1,464 $ (503)
As a percentage of net revenues 1.8% (0.4)%
Net loss, as adjusted $ (487) $ (1,249)
As a percentage of net revenues (0.6)% (0.9)%
Loss per diluted share, as adjusted $ (0.06) $ (0.14)
EBITDA, as adjusted 2,918 1,406
17
19
EBITDA is earnings (net income) before the effect of interest income
and expense, income tax benefit and expense, depreciation expense and
amortization expense. EBITDA as adjusted excludes the restructuring
reserve and the non-operating gain on sale of the Company's PEO
division. EBITDA is presented because it is a widely accepted financial
indicator used by many investors and analysts to analyze and compare
companies on the basis of operating performance. EBITDA is not intended
to represent cash flows for the period, nor has it been presented as an
alternative to operating income or as an indicator of operating
performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
(2) System revenues are the sum of the Company's net revenues
(excluding revenues from franchise royalties and services performed for
the franchisees) and the net revenues of the franchisees. System
revenues provide information regarding the Company's penetration of the
market for its services, as well as the scope and size of the Company's
operations, but are not an alternative to revenues determined in
accordance with generally accepted accounting principles as an
indicator of operating performance. The net revenues of franchisees,
which are not earned by or available to the Company, are derived from
reports that are unaudited. System revenues consist of the following
amounts reported in thousands (except for percentages):
FOR THE QUARTER ENDED
---------------------------------------------------
JULY 2, 2000 JUNE 30, 1999
---------------------- ----------------------
Company's net revenues $ 81,618 79.2% $ 143,454 90.0%
Less Company revenues from:
Franchise royalties (654) (0.6) (2,469) (1.5)
Services to franchises -- -- (3,979) (2.5)
Add: Franchise net revenues 22,106 21.4 22,344 14.0
--------- ------ --------- ------
System revenues $ 103,070 100.0% $ 159,350 100.00%
========= ====== ========= ======
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for reporting information about
operating segments in financial statements. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The Company's
reportable operating segments under SFAS No. 131 include the Tandem
segment and the Synadyne segment. In prior filings of Form 10K and Form
10Q with the Securities and Exchange Commission, the Company reported
Flexible Staffing Revenues and PEO Revenues, Franchising Revenues, and
Other Revenues. PEO revenues, as reported below, included certain
staffing revenues generated by the Tandem division that the Company
believed were operationally consistent with the PEO business and
operational model, but were not includable in the Synadyne segment due
to the way the Company was organized. The Company sold the operations
of Synadyne effective April 8, 2000, and believes changing its
presentation of Company revenues consistent with the above table is
meaningful in terms of understanding operations and trends of the
Company. The following table reconciles Flexible Staffing net revenues
and PEO net revenues, as presented in past filings to the net revenues
shown above, reported by the Company in accordance with the
requirements of SFAS No. 131 - see Note 9 to the Company's Consolidated
Financial Statements. The following amounts are presented in thousands
(except for percentages):
FOR THE QUARTER ENDED
-------------------------------------------------------------
JULY 2, 2000 JUNE 30, 1999
------------------------ -------------------------
Tandem segment revenues $ 80,859 99.1% $ 79,855 55.7%
Less: Industrial staffing client payrolling (5,750) (7.0) (8,229) (5.7)
-------- ----- --------- -----
Flexible staffing revenues $ 75,109 92.0% $ 71,626 49.9%
-------- ----- --------- -----
Synadyne segment revenues 71 0.1% 55,079 38.4%
Add: Industrial staffing client payrolling 5,750 7.0 8,229 5.7
Add: PEO services to Tandem franchises -- -- 3,979 2.8
-------- ----- --------- -----
PEO revenues $ 5,821 7.1% $ 67,287 46.9%
-------- ----- --------- -----
Other revenues 34 0.0 6,051 4.2
Less: PEO services to Tandem franchises -- -- (3,979) (2.8)
-------- ----- --------- -----
Other revenues 34 0.0 2,072 1.4
-------- ----- --------- -----
Franchise revenues 654 0.8 2,469 1.7
-------- ----- --------- -----
Total net revenues $ 81,618 100.0% $ 143,454 100.0%
======== ===== ========= =====
18
20
THIRTEEN WEEKS ENDED JULY 2, 2000 AS COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1999
NET REVENUES. Net revenues decreased $61.9 million, or 43.1%, from
$143.5 million in the three months ended June 30, 1999 ("Q2 1999") to
$81.6 million in the thirteen weeks ended July 2, 2000 ("Q1 2001").
This decrease resulted from (i) the sale of Synadyne, the Company's
former PEO division, which generated revenues of $55.0 million in Q2
1999, compared to $0.1 million in Q1 2001, (ii) the sale of Office
Ours, the Company's former clerical division, which generated revenues
of $2.1 million in Q2 1999, (iii) the disposition of Tandem offices
pursuant to the Restructuring (excluding offices consolidated into
existing offices), which generated revenues of $13.9 million in Q2
1999, as compared to $8.8 million in Q1 2001 - see "Restructuring",
(iv) the termination of PEO services offered to Tandem franchises as of
December 31, 1999, which generated revenues of $4.0 million in Q2 1999,
and (v) a $1.8 million decrease in revenues derived from franchising
activities. Offsetting these was a $6.1 million increase in revenues
derived from Tandem branches not included in the Company's
restructuring activities.
Tandem
Net revenues from the Company's Tandem division, which provides
flexible staffing services, increased $1.0 million, to $80.9 million
for Q1 2001 from $79.9 million for Q2 1999, or an increase of 1.3%,
despite the fact that Tandem had 33 fewer operating locations at the
end of Q1 2001 compared to Q2 1999. The increase in Tandem revenues was
primarily due to new customers and increased revenues from existing
customers in certain geographic markets that recorded double digit
growth, although the Company also experienced lower growth or declining
revenues in other geographic markets due to the loss or cancellation by
the Company of certain large customers. After the sale, franchise,
closure or consolidation of 41 Tandem offices due to the Restructuring,
Tandem's revenue generation has strengthened. The Company contracted
with 34 new large clients subsequent to Q2 1999 that generated revenues
of approximately $9 million in Q1 2001. On a same-store basis, revenue
growth was 9.3%.
Franchising
Franchise royalty revenues ("Royalties") from the Company's franchising
operations decreased from $2.5 million in Q2 1999 to $0.7 million for
Q1 2001, primarily due to a $2.0 million decrease in revenues from
buyout payments received in connection with the early termination of
certain franchises. The Company allowed the early termination of
franchise agreements for 38 locations in 1998 and 1999 to enable the
Company to develop the related territories. When the Company agrees to
terminate a franchise agreement, it receives an initial buyout payment
from the former franchisee. The Company continues to receive payments
from some former franchisees based on a percentage of the gross
revenues of the formerly franchised locations for up to three years
after the termination dates of the franchise agreement. Although those
gross revenues are not included in the Company's net franchisee or
system revenue totals, the initial buyout payment, as well as
subsequent payments from the former franchisees, are reflected in total
Royalties reported by the Company.
Net revenues earned by Tandem franchisees, which are included in the
Company's system revenues, but are not available to the Company,
decreased slightly from $22.3 million in Q2 1999 to $22.1 million in Q1
2001. As of July 2, 2000, the Company had 51 locations, compared to 43
locations as of June 30, 1999, and as part of its growth efforts, the
Company expects to increase franchisee net revenues by continuing to
sell new franchises in secondary U.S. markets, subject to, among other
factors, the success of the Company's marketing efforts in this regard.
The Company also expects to allow few, if any, remaining franchisees to
buy out of their franchise agreements, since nearly all remaining
franchises are in secondary U.S. markets.
GROSS PROFIT. Gross profit (margin) decreased $4.2 million, from $20.3
million in Q2 1999, to $16.2 million in Q1 2001. Gross profit as a
percentage of net revenues increased to 19.8% in Q1 2001 from 14.2% in
Q2 1999. This increase in margin percent was caused primarily by the
sale of Synadyne at the beginning of Q1 2001, partially offset by the
effect of the sale of Office Ours in August 1999 and the
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decrease in Royalties derived from franchise buyout payments. Synadyne,
while generating 38.4% of the Company's revenues in Q2 1999, produced a
gross margin of only 3.6%, or 9.8% of the Company's profit margin.
Tandem
Gross profit increased from $15.3 million in Q2 1999 to $15.5 million
for Q1 2001. Tandem's gross profit margin percent was 19.2% of revenues
in Q1 2001 and Q2 1999. Price increases that have been instituted in
the past two quarters to reflect the value of services provided have
resulted in a reduction of payroll costs as a percentage of net
revenues, but were offset by higher workers' compensation costs due to
increased claim rates in Q1 2001 and greater than anticipated expenses
for claims still open from the calendar year ended December 31, 1999.
In addition, transportation costs increased in Q1 2001, reducing margin
accordingly. Gross profit before transportation costs improved from
20.3% in Q2 1999 to 20.6% in Q1 2001.
The Company's margins are affected by unemployment, competition for
workers, the size of its customers, workers' compensation costs,
transportation costs, and pricing. The Company was able to mitigate the
effect of low unemployment and competition for workers by better
pricing in Q1 2001. Although the average cost per labor hour increased
by $0.18 during Q1 2001, the average price charged per labor hour
increased by $0.35 in the period. Similarly Tandem began to reduce the
impact of large, low-margin customers in Q1 2001. Over the last past
three years, large lower margin customers had comprised an increasing
part of Tandem's customer portfolio. Although Tandem's 100 largest
customers made up 42% of the Company's revenues in Q1 2001 compared to
39% in Q2 1999, this was lower than the 44% that the largest customers
represented in the quarter ended April 2, 2000 ("Q1 2000"). In
addition, the margins on these large customers increased slightly in Q1
2001 compared to Q2 1999.
Workers' compensation costs will continue to be a significant factor
affecting Tandem margins. As such, the Company employs safety
specialists whose sole purpose is to increase safety training and
awareness, approve job-sites and duties, and reduce workers'
compensation costs. The Company is continuing to increase its focus on
all margin-related performance criteria by providing rewards to field
personnel commensurate with their accomplishments. Based on these
initiatives, the Company expects continued improvement in its staffing
margins; however, the Company's actual results during the remaining
portion of fiscal 2001 may vary depending on, among other things,
competition, unemployment, and general business conditions.
Franchising
Royalties generated from franchising operations are received by the
Company from its franchisees and the Company does not incur the expense
for payroll and payroll-related taxes. Accordingly, gross profit equals
Royalties and gross margin trends are consistent with the revenue
trends discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") decreased $6.1 million, or 29.4%, to
$14.7 million in Q1 2001 from $20.8 million in Q2 1999. This decrease
was primarily the result of a $3.7 million decrease in compensation
costs due to reduced employee headcount, and a $0.6 million reduction
in the Company's bad debt provision in Q1 2001 as compared to Q2 1999 -
see "Accounts Receivable". Other SG&A costs, including
telecommunications, recruiting, and licensing costs decreased by an
aggregate $1.3 million, while depreciation and amortization decreased
by $0.5 million, due to the disposition of the assets sold in
connection with the Restructuring, and the $2.5 million impairment of
goodwill during 1999.
As part of the Restructuring plan and other initiatives to improve
profitability, the Company has (i) reduced headcount by over 370
employees due to both voluntary and involuntary terminations, the sale
and franchise of certain staffing offices, and the sale of the
Company's PEO operations, (ii) improved its collection performance of
trade accounts receivable, as discussed in "Accounts Receivable", and
(iii)
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streamlined other support functions, all of which should continue the
trend of decreased SG&A expenses during the remainder of fiscal year
2001.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. During Q1 2001, the Company
recorded restructuring charges of $0.9 million. As part of the
restructuring charges, the Company has (i) adjusted the carrying value
of assets held for disposition by approximately $0.4 to reflect the
estimated fair value of those assets, (ii) decreased accrued severance
costs by approximately $0.1 million and (iii) incurred $0.4 million in
professional fees.
NET INTEREST AND OTHER EXPENSE. Net interest and other expense
decreased from $1.7 million in Q2 1999 to $1.3 million in Q1 2001. This
decrease was due to a $0.7 million gain on the sale of the Company's
PEO operations as discussed in the "Results of Operations" and other
income of $0.1 million for support services provided to the purchaser
of the Company's PEO operations, offset by a $0.3 million increase in
interest expense arising from higher interest rates paid for the
Company's borrowing facilities in Q1 2001 as compared to Q2 1999 (see
"Liquidity and Capital Resources"). See Notes 3 and 5 to the Company's
Consolidated Financial Statements.
INCOME TAXES. During Q1 2001, the Company reduced the deferred tax
asset valuation allowance by $7.7 million, which is expected to be
realized through the utilization of the existing net operating loss
carryforward to offset tax on the extinguishment gain that will be
recorded in the quarter ending October 1, 2000, and tax on income from
future operations - see Notes 2, 4 and 5 to the Company's Consolidated
Financial Statements. The valuation allowance was established during
the year ended December 31, 1999 and was increased by the tax benefits
during the quarter ended April 2, 2000 because it was not clear that
the tax benefits resulting from operating losses and other temporary
differences were "more likely than not" to be realized, as required by
SFAS 109, "Accounting for Income Taxes".
NET INCOME (LOSS). Net income for Q1 2001 was $7.1 million, as compared
to a net loss of $1.2 million in Q2 1999. As discussed above, the
change in the net loss is primarily due to the reduction of the
deferred tax asset valuation allowance, decreased SG&A costs, and the
gain on the sale of the Company's PEO operations, partially offset by
increased interest costs and restructuring charges. Adjusted to remove
restructuring costs, the non-operating gain from the sale of the
Company's PEO operations, and the reduction of the deferred tax
valuation allowance, the Company's net loss in Q1 2001 was $0.5 million
and in Q2 1999 was $1.2 million.
LIQUIDITY AND CAPITAL RESOURCES
SENIOR DEBT
Effective August 15, 2000, the Company entered into a three-year
agreement with a syndicate of lenders led by Ableco Finance, LLC, as
agent, an affiliate of Cerberus Capital Management, L.P. (the
"Lenders"), which replaced the Company's existing credit facility with
a $33.4 million Revolving Credit Facility, which includes a subfacility
for the issuance of standby letters of credit ("Senior Facility"), and
two term loans, Term Loan A and Term Loan B ("Term Loans"), of $17.6
million and $9.0 million, respectively (the "Refinancing"). Both the
Senior Facility and the Term Loans are secured by all the assets of the
Company and its subsidiaries. The Senior Facility bears interest at
prime or 9.0%, whichever is greater, plus 2%. Term Loan A and Term Loan
B bear interest at prime or 9.0%, whichever is greater, plus 3.5% and
5.0% per annum, respectively. In connection with the Refinancing, the
Company issued warrants the Lenders to purchase up to a maximum of
200,000 common shares of the Company, exercisable for a term of five
years, at $0.01 per warrant. The warrants are only exercisable if any
letter of credit issued by the Lenders on behalf of the Company is
drawn in proportion to the amount drawn under the letter of credit.
A portion of the new credit facility was used to satisfy the credit
facility (the "Fleet Facility") with Fleet National Bank, for itself
and as agent for three other banks (the "Fleet Group"). Prior to the
closing of the Refinancing, the outstanding balance of the Fleet
Facility was approximately $52.0 million. The balance
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was repaid in full with a cash payment of approximately $32.3 million
and the issuance of a four-year, $5.3 million subordinated term note
(the "Fleet Term Note"). The Fleet Term Note is subordinated to the
Senior Facility and Term Loans issued by the Lenders on behalf of the
Company and includes interest only for four years, followed by a
balloon payment for the entire principal amount. In addition, the
Company is entitled to a 60% discount on this note if it is satisfied
within 18 months. This obligation bears interest at Fleet's Alternative
Prime Rate ("APR") plus 3.5% per annum. In connection with the
Refinancing and in satisfaction of the Company's obligation to the
Fleet Group, the Company has issued 524,265 warrants to the Fleet Group
to purchase common shares of the Company, which constitutes 5.0% of the
common stock of the Company on a fully diluted basis. The warrants are
exercisable for a term of 10 years at $0.01 per warrant. The Company
agreed to register with the Securities and Exchange Commission the
shares of common stock of the Company issuable upon the exercise of the
warrants issued to the Lenders and the Fleet Group in connection with
the Refinancing. In connection with the Refinancing and the termination
of the Fleet Facility, the Company will record an extraordinary gain,
net of tax, of approximately $8.5 million in the quarter ending October
1, 2000.
As of July 2, 2000, the Company's primary sources of funds for working
capital and other needs were (i) a $26.1 million credit line (the
"Revolving Credit Facility"), including existing letters of credit of
$4.8 million and (ii) a $33.0 million credit facility, based on and
secured by the Company's accounts receivable (the "Receivable
Facility"), with the Fleet Group. Effective April 13, 2000, due in part
to the sale of the Company's Synadyne operation, the maximum
availability under the Receivable Facility was reduced from $50.0
million to $33.0 million. Effective May 1, 2000, the maximum
availability under the Revolving Credit Facility was reduced from $25.5
million to $25.3 million (including existing letters of credit of $4.8
million), and effective in June 2000, the maximum availability under
the Revolving Credit Facility was increased to $26.1 million to provide
for the Company's seasonal increase in working capital requirements.
Prior to their expiration, the Receivable Facility, bore interest at
Fleet's prime rate plus 2.0% per annum, which was 11.5% as of July 2,
2000, while the Revolving Credit Facility bore interest at prime plus
5.0% per annum, which was 14.5% as of July 2, 2000. The weighted
average interest rate payable on the outstanding balances during the
period, exclusive of related fees and expenses, was approximately 13.2%
per annum, compared to approximately 6.7% per annum in Q2 1999. As of
July 2, 2000, the Company had outstanding borrowings of $19.4 million
and $31.3 million under the Revolving Credit Facility and the
Receivable Facility, respectively.
In addition to the Revolving Credit Facility indebtedness discussed
above, the Company had bank standby letters of credit outstanding in
the aggregate amount of $4.8 million as of July 2, 2000, of which $4.2
million secured the pre-1999 portion of the workers' compensation
obligations recorded as a current liability on the Company's
Consolidated Balance Sheet. The remaining $0.6 million, which is
supported by a $0.7 million cash escrow balance, is to secure future
payments on a capital lease for furniture that was sold as part of the
Company's corporate headquarters building.
OTHER DEBT
In order to remain in compliance with certain covenants in the
Revolving Credit Facility, and to reduce the cash impact of scheduled
payments under its subordinated acquisition debt, the Company
negotiated extensions of the payment dates and modified the interest
rates and other terms of certain of its acquisition notes payable in
1999. The Company had not made substantially all of the scheduled
payments due and, as a result, was in default on acquisition notes
payable having a total outstanding principal balance of $6.9 million as
of July 2, 2000. The terms of the acquisition notes payable, which were
subordinated to the Revolving Credit Facility and the Receivable
Facility, allowed the payees to accelerate terms of payment upon
default. Acceleration of this debt required prior written notice to the
Company by the various payees, which was received from three payees as
of July 2, 2000. On August 15, 2000, in connection with the
Refinancing, the acquisition notes payable were amended to provide that
the Company will pay interest only, at a rate of 10.0% per annum, on
the debt for three years following the
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closing of the Refinancing, followed by two years of equal monthly
payments of interest and principal, which will retire the debt. In
connection with the amendments to the acquisition notes payable, the
Company paid $0.8 million of accrued interest to the relevant
noteholders at the closing of the Refinancing.
In addition to the debt previously discussed, the Company had, as of
July 2, 2000, (i) obligations under capital leases for property and
equipment in the aggregate of $2.4 million; (ii) obligations under
mortgages totaling $0.6 million and (iii) obligations for annual
insurance premiums and other matters totaling $0.3 million, of which a
portion represents prepayment for future benefits and would be
refundable to the Company should the policy be cancelled.
SUMMARY OF CASH FLOWS
The Company's principal uses of cash are for wages and related payments
to job-site employees, operating costs, capital expenditures and
repayment of debt and interest thereon. In Q1 2001 cash used in
operating activities was $2.2 million, as compared with $3.4 million
provided by operating activities in Q2 1999. Cash provided by (i) a
decrease in accounts receivable related to the sale of the Company's
PEO operations and Tandem offices in connection with the Restructuring,
(ii) improved collections of the Company's accounts receivable in Q1
2001 - see "Accounts Receivable", and (iii) an increase in the
Company's workers' compensation reserve - see "Workers' Compensation",
was more than offset by the decrease in current liabilities due to the
sale of the Company's PEO operations. Adjusted to remove the effects of
the Securitization, cash used in operating activities was $2.8 million
in Q2 1999 compared to $2.2 million in Q1 2001.
The Company anticipates that accounts receivable will decrease by an
additional $2.3 million in Q2 2001 as the outstanding accounts
receivable from the Tandem offices sold in Pennsylvania and New Jersey
on June 25, 2000 are collected, offset partially by the increase in
accounts receivable from the seasonal increase in sales volume
experienced by staffing companies that support the manufacturing
sector.
The tables below set forth the Company's cash flows, (i) as presented
in the Company's Consolidated Financial Statements for Q1 2001 and Q2
1999 and (ii) as adjusted to remove the effect of the sale of the
Company's uncollected accounts receivable under the Company's previous
$50.0 million securitization facility (the "Securitization Facility")
during Q2 1999, in thousands:
FOR THE QUARTER ENDED
------------------------------
JULY 2, 2000 JUNE 30, 1999
------------ -------------
Cash flows provided by (used in):
Historical cash flow
Operating activities $(2,202) $ 3,444
Investing activities 3,782 1,492
Financing activities (2,083) (3,791)
------- -------
Net increase (decrease) in cash $ (503) $ 1,145
======= =======
Cash flow - without Securitization Facility (1)
Operating activities $(2,202) $(2,836)
Investing activities 3,782 1,492
Financing activities (2,083) 2,489
------- -------
Net increase (decrease) in cash $ (503) $ 1,145
======= =======
(1) As part of the Company's borrowing facilities, in Q2 1999, the
Company sold certain trade accounts receivable to obtain working
capital for the Company's operations. Under this agreement the Company
had sold $42.4 million of trade accounts receivable as of June 30,
1999, which was excluded from the uncollected accounts receivable
balance presented in the Company's Consolidated Financial Statements.
This agreement was subsequently terminated as of October 1, 1999 and
replaced by the Receivable Facility, under which the Company currently
obtains working capital. See Note 5 to the Company's Consolidated
Statements.
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Cash provided by investing activities during Q1 2001 was $3.8 million,
consisting of $4.2 million from the sale of the Company's PEO
operations and certain Tandem branches, offset by cash outlays of $0.4
million for capital expenditures and funding advances to franchises.
Cash provided by investing activities during Q2 1999 was $1.5 million,
consisting primarily of $1.6 million received in conjunction with a
sale-leaseback transaction and funding repayments of $0.3 million,
offset by capital expenditures of $0.4 million.
Cash used in financing activities during Q1 2001 was $2.1 million, as
compared to $3.8 million used in financing activities in Q2 1999.
Adjusted to remove the effects of the Securitization Facility in Q2
1999, cash provided by financing activities was $2.5 million, which was
due to increased borrowings in 1999 to fund increased payroll costs
arising from cyclical seasonal increases of provided services - see
"Seasonality". In Q1 2001, the seasonal increase in provided services
historically experienced by the Company was offset by a decrease in the
Company's outstanding payroll obligation at the end of the quarter due
the sale of the Company's PEO operations and sale, franchise, closure,
and consolidation of the aforementioned Tandem offices in connection
with the Restructuring.
WORKERS' COMPENSATION COLLATERAL
Prior to 1999, the Company secured its workers' compensation
obligations by the issuance of bank standby letters of credit to its
insurance carriers, minimizing the required current cash outflow for
such items. In 1999, the Company selected a pre-funded deductible
program whereby expected claims expenses are funded in advance in
exchange for reductions in administrative costs. The required advance
funding is provided through either cash flows from operations or
additional borrowings under the Revolving Credit Facility.
In January 2000, the Company renewed its pre-funded deductible program
for one year. Under the new agreement, the Company will fund $10.1
million in 12 installments for projected calendar year 2000 claims
expenses. This claim fund requirement will be adjusted upward or
downward each quarter based on the projected cost of the actual claims
incurred during calendar year 2000, up to a maximum liability of $19.0
million. In addition, the Company has agreed to establish a $3.0
million trust account naming Hartford Insurance Company ("Hartford") as
beneficiary to secure any liability for claim funding for 1999 and/or
2000 that might exceed the pre-funded amounts up to the aggregate
maximum cap for each year of $13.6 million and $19.0 million,
respectively. This trust account is being funded in 11 installments
through December 2000 and as of July 2, 2000, the Company had funded
$1.7 million into the trust account.
ACCOUNTS RECEIVABLE
The Company is a service business and therefore a majority of its
tangible assets are customer accounts receivable. Flexible staffing
employees are paid by the Company on a daily or weekly basis. The
Company, however, receives payment from customers for these services,
on average, 30 to 60 days from the date of the invoice. Beginning in
the fourth quarter of 1998, the Company experienced an increase in the
percentage of its staffing accounts receivable that were past due.
During calendar 1999 and the first two quarters of calendar 2000, the
Company increased its focus on its accounts receivable collection
process. As a result, the average number of days to collect staffing
accounts receivable from invoice presentation has decreased from 53
days at December 31, 1998 to 42 days at July 2, 2000. Since the Company
announced its restructuring plan in August 1999, accounts receivable
decreased by approximately $3 million due to the sale of staffing
offices and the clerical division to third parties; although the
working capital benefit was substantially less due to the corresponding
reduction in liabilities such as accrued payroll, payroll taxes and
workers' compensation. The Company anticipates that its accounts
receivable will decrease by an additional $2 million as the outstanding
receivables for the branches sold in the states of New Jersey and
Pennsylvania on June 25, 2000 are collected, and by approximately $1
million when the assets held for disposition as of July 2, 2000 are
disposed.
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As part of the sale of the Company's PEO operations, its accounts
receivable decreased by approximately $6 million, although the working
capital benefit was substantially offset by the corresponding reduction
in liabilities such as accrued payroll, payroll taxes and workers'
compensation. In addition, during the fourth quarter of 1999, the
Company sold certain trade accounts receivable, with a face value of
approximately $4.3 million, most of which was more than 180 days past
due, to unrelated third parties for approximately $220,000.
CAPITAL EXPENDITURES
The Company anticipates spending up to $2 million during the next
twelve months to improve its management information and operating
systems, upgrade existing locations and other capital expenditures
including, but not limited to, opening new staffing locations.
FUTURE LIQUIDITY
As shown in the Company's Consolidated Financial Statements, for the
year ended December 31, 1999, the Company incurred a net loss of $30.9
million, the Company's current liabilities exceeded its current assets
by $42.0 million, and the Company was in default in repayment of
certain acquisition debt subordinated to its bank financing. The
Company's bank facilities and financial covenants were modified
effective October 1, 1999, accelerating the date of maturity, which was
subsequently extended by the syndicate of lenders on a monthly basis
through August 15, 2000.
Effective August 15, 2000, as previously discussed, the Company entered
into a three year agreement with a syndicate of lenders led by Ableco
Finance LLC whereby the Company's existing credit facility was replaced
by a $33.4 million Senior Facility and a $17.6 million Term Loan A and
a $9.0 Term Loan B. The Company believes that funds provided by
operations and borrowings under the new credit facilities will be
sufficient to meet its needs for working capital, capital expenditures,
and debt service for the foreseeable future.
RESTRUCTURING
On August 6, 1999, the Company announced actions to improve its
short-term liquidity, concentrate its operations within its core
segment, Tandem, and improve its operating performance. In connection
with these actions, the Company sold its PEO and clerical staffing
divisions. In addition, the Company announced a specific plan (the
"Restructuring") to sell, franchise, close, or consolidate 47 offices
and reduce headcount at its other 70 locations and corporate
headquarters. See "General" and Note 3 to the Company's Consolidated
Financial Statements. The restructuring charge accrual and its
utilization are as follows:
UTILIZATION
ORIGINAL BALANCE AT CHARGES TO ---------------- BALANCE AT
(AMOUNTS IN THOUSANDS) CHARGE 4/2/00 OPERATIONS CASH NON-CASH 7/2/00
-------- ---------- ---------- ---- -------- ----------
Employee severance and
other termination benefits $ 4,040 $2,139 $ (89) $483 $ -- $1,567
Professional fees 1,205 34 369 362 -- 41
Lease termination and write-down of
leasehold improvements at closed offices 400 49 (2) 21 -- 26
Other restructuring charges 146 33 154 128 -- 59
------- ------ ----- ---- ---- ------
Accrued restructuring charges 5,791 2,255 432 994 -- 1,693
Write-down to fair value/loss on sale
of assets identified for disposition 5,429 -- 446 -- 446 --
------- ------ ----- ---- ---- ------
Total restructuring and asset
impairment activity $11,220 $2,255 $ 878 $994 $446 $1,693
======= ====== ===== ==== ==== ======
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The original $11.2 million restructuring charge includes $4.0 million
for severance and other termination benefits, $1.2 million for
professional fees, and $0.6 million in lease termination and other
charges. Severance and other termination benefits were decreased by
$0.2 million and $0.1 million during Q1 2000 and Q1 2001, respectively,
to reflect a reduction of amounts to be paid in connection with certain
severance packages accrued in 1999 as it became apparent that certain
employees of offices sold and franchised to third parties would not
receive severance packages, but would continue employment with the
respective buyers or franchisees. The remaining liability of $1.6
million for severance and other termination benefits as of July 2, 2000
consists of $1.4 million for 23 employees who have been or will be
terminated during the period of August 1999 through September 2000,
which will be paid over a period ranging from one week to 21 months
from the balance sheet date.
Professional fees of $0.5 million and $0.4 million were recorded as
restructuring costs incurred during Q1 2000 and Q1 2001, respectively.
These professional fees were comprised primarily of amounts paid to
Crossroads LLC, formerly Crossroads Capital Partners, LLC
("Crossroads"), for its services related to the Restructuring. The
Company expects to complete these restructuring activities during the
quarter ended October 1, 2000.
The Company utilized $0.1 million of the restructuring charge during Q1
2000 and $0.1 million of the restructuring charge during Q1 2001 for
the costs of terminating leases as well as writing down the carrying
value of leasehold improvements and other assets not usable in other
Company operations.
The restructuring charge includes a $5.4 million write-down of assets,
recorded in the Company's results of operations at such time as these
assets were classified as held for disposition, to their estimated net
realizable value based on management's estimate of the ultimate sales
prices that would be negotiated for these assets. The charge was
increased by $0.1 million in Q1 2000 and $0.4 million during Q1 2001,
and is subject to future adjustments as the Company negotiates the
actual sales prices of the assets that remain to be sold as of July 2,
2000.
During Q1 2001 the Company (i) sold one staffing office and closed
another, in the state of Minnesota, effective April 10, 2000, for cash
proceeds of $60,000, (ii) franchised one of its staffing offices in the
state of Ohio, effective April 10, 2000, for cash proceeds of $20,000,
and (iii) sold its operations in the states of New Jersey and
Pennsylvania, comprising six staffing offices and two "vendor on
premises" locations, for $1.3 million (comprised of cash proceeds of
$0.8 million and two promissory notes totaling $0.5 million). In
connection with the sale of its staffing offices in New Jersey and
Pennsylvania, the Company recorded a $0.4 million loss on the sale, in
addition to the original $2.1 million write-down of these assets to
their estimated net realizable value upon their classification as
assets held for disposition.
As of July 2, 2000 there were six Tandem offices that remained to be
sold as part of the Restructuring, and the Company had classified the
related tangible and intangible assets as assets held for disposition,
excluding cash, accounts receivable and deferred income taxes. Upon
classification as assets held for disposition, the Company discontinued
the related depreciation and amortization for these assets, which
reduced operating expenses by approximately $0.1 million in Q1 2001.
The estimated fair market value of these assets held for disposition
was based on management's judgment and as such, actual results could
vary significantly from such estimates.
The Company's assets held for disposition as of July 2, 2000, stated at
the lower of original cost (net of accumulated depreciation or
amortization) or fair value (net of selling and disposition costs), are
as follows (presented in thousands):
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NET ORIGINAL COST
------------------------------------------
PROPERTY GOODWILL AND LOWER OF
AND OTHER COST OR
EQUIPMENT INTANGIBLE ASSETS TOTAL FAIR VALUE
--------- ----------------- ------ ----------
Tandem branch offices $313 $1,005 $1,318 $426
==== ====== ====== ====
The following table reflects the Company's net revenues and gross
profit margin segregating ongoing operations and operations from assets
held for disposition or sold as part of the Company's restructuring
efforts and other disposed operations. Those operations include: (i)
the Synadyne division, sold as of April 8, 2000, (ii) Office Ours, the
Company's clerical division, sold during the third quarter of calendar
1999, (iii) franchise PEO operations, which ceased operations after
December 31, 1999, and (iv) Tandem branch offices disposed or held for
sale as of July 2, 2000. Ongoing operations include (i) the Tandem
division, which provides flexible industrial staffing and (ii)
franchising. Dollar amounts are in thousands, except for percentages:
FOR THE QUARTER ENDED
--------------------------------
JULY 2, 2000 JUNE 30, 1999
------------ -------------
Net revenues:
Total Company $ 81,618 $ 143,454
Less revenues from assets held for sale and disposed/ceased operations
Synadyne (71) (55,079)
Clerical, franchise PEO and other (8,755) (19,932)
-------- ---------
Subtotal - revenues from assets held for sale and disposed/ceased operations (8,826) (75,011)
-------- ---------
Net revenues from ongoing operations $ 72,792 $ 68,443
======== =========
Gross profit margin:
Total Company $ 16,186 $ 20,344
Less gross profit from assets held for sale and disposed/ceased operations
Synadyne 12 (1,993)
Clerical, franchise PEO and other (1,334) (2,965)
-------- ---------
Subtotal - gross profit from assets held for sale and disposed/ceased operations (1,322) (4,958)
-------- ---------
Net revenues from ongoing operations $ 14,864 $ 15,386
======== =========
Gross profit margin as a percentage of net revenues:
Ongoing operations - Tandem 19.7 % 19.6%
Ongoing operations - franchising and other 100.0 % 100.0%
Operations from assets held for sale and disposed/ceased operations 15.0 % 6.6%
Tandem branches sold, franchised or held for sale as of July 2, 2000
generated revenues of $8.8 million, and $13.9 million during Q1 2001
and Q2 1999, respectively, and earned gross profit of $1.3 million and
$2.4 million for those periods. Those same branches incurred SG&A
expenses of $1.0 million and $2.7 million, excluding depreciation and
amortization costs, during Q1 2001 and Q2 1999, respectively.
Office Ours, the Company's former clerical division which was sold on
August 30, 1999, generated revenues of $2.1 million, earned gross
profit of $0.6 million, and incurred $0.5 million in SG&A expense,
excluding depreciation and amortization, during Q2 1999. SG&A for the
Synadyne division, excluding depreciation and amortization, was $0.2
million and $1.3 during Q1 2001 and Q2 1999, respectively. Results of
flexible industrial staffing offices that were consolidated into
existing offices, as part of the Company's Restructuring efforts, are
included in ongoing operations.
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29
SEASONALITY
The Company's quarterly results of operations reflect the seasonality
of higher customer demand for industrial staffing services in the last
two calendar quarters of the year, as compared to the first two
quarters. Even though there is a seasonal reduction of industrial
staffing revenues in the first calendar quarter of a year as compared
to the fourth calendar quarter of the prior year, the Company does not
reduce the related core personnel and other operating expenses
proportionally because most of that infrastructure is needed to support
anticipated increased revenues in subsequent quarters. As a result of
these factors, the Company anticipates that it will earn a significant
portion of its annual operating income in the third and fourth calendar
quarter (fiscal quarters Q2 2001 and Q3 2001), which historically
exceeds the operating income earned during the first two calendar
quarters of the year (fiscal quarters Q1 2000 and Q1 2001).
INFLATION
The effects of inflation on the Company's operations were not
significant during the periods presented in the Company's Consolidated
Financial Statements. Generally, throughout the periods discussed
above, the increases in revenues and expenses have resulted from a
combination of volume increases, price increases, and changes in the
customer mix.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" was
issued. SFAS No. 133 defines derivatives and establishes accounting and
reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts)
be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 also requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset
related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. SFAS
No. 133, as modified by SFAS No. 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, and cannot be
applied retroactively. The Company intends to implement SFAS No. 133 in
its consolidated financial statements as of and for the thirteen weeks
ending July 2, 2001. Although it has not determined the effects, if
any, that implementation will have, management believes that the
Company is not currently a party to any transactions involving
derivatives. SFAS No. 133 could increase volatility in earnings and
other comprehensive income if the Company enters into any such
transactions in the future.
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30
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-Q are forward-looking statements, including
but not limited to, statements regarding the Company's expectations or
beliefs concerning the Company's strategy and objectives, expected
sales and other operating results, the effect of changes in the
Company's gross margin, the Company's liquidity, anticipated capital
spending, the availability of financing, equity and working capital to
meet the Company's future needs, economic conditions in the Company's
market areas, costs and the tax-qualified status of the Company's
401(k) and 413(c) plans. The words "aim," "believe," "expect,"
"anticipate," "intend," "estimate," "will," "should," "could" and other
expressions which indicate future events and trends identify
forward-looking statements. Such forward-looking statements involve
known and unknown risks and are also based upon assumptions of future
events, which may not prove to be accurate. Therefore, actual results
may differ materially from any future results expressed or implied in
the forward-looking statements. These known and unknown risks and
uncertainties include, but are not limited to, changes in U.S. economic
conditions, particularly in the manufacturing sector; its future cash
flows, sales, gross margins and operating costs, including the
Company's ability to implement and maintain cost reductions in
connection with the Restructuring; the Company's ability to sell or
otherwise dispose of non-strategic assets under satisfactory terms and
timing; the effect of changing market and other conditions in the
staffing industry; the ability of the Company to continue to grow;
legal proceedings, including those related to the actions of the
Company's temporary employees; the availability and cost of financing;
the ability to maintain existing banking relationships and to establish
new ones; the recoverability of the recorded value of goodwill and
other intangible assets arising from past acquisitions; the general
level of economic activity and unemployment in the Company's markets,
specifically within the construction, manufacturing, distribution and
other light industrial trades; increased price competition; changes in
and the Company's ability to comply with government regulations or
interpretations thereof, particularly those related to employment; the
continued availability of qualified temporary personnel; the financial
condition of the Company's clients and their demand for the Company's
services (which in turn may be affected by the effects of, and changes
in, U.S. and worldwide economic conditions); collection of accounts
receivable; the Company's ability to retain large clients; the
Company's ability to recruit, motivate and retain key management
personnel; the costs of complying with government regulations
(including occupational safety and health provisions, wage and hour and
minimum wage laws and workers' compensation and unemployment insurance
laws) and the ability of the Company to increase fees charged to its
clients to offset increased costs relating to these laws and
regulations; volatility in the workers' compensation, liability and
other insurance markets; inclement weather; interruption, impairment or
loss of data integrity or malfunction of information processing
systems; changes in government regulations or interpretations thereof,
and other risks detailed from time to time by the Company or in its
press releases or in its filings with the Securities and Exchange
Commission.
In addition, the market price of the Company's stock may from time to
time be volatile as a result of, among other things, the Company's
operating results, the operating results of other temporary staffing
companies, economic conditions, the proportion of the Company's stock
available for active trading and the performance of the stock market in
general.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update
any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from
time to time, and it is not possible for management to predict all of
such factors. Further, management cannot assess the impact of each such
factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
Subsequent written and oral forward-looking statements attributable to
the Company or persons acting on
29
31
its behalf are expressly qualified in their entirety by cautionary
statements in this paragraph and elsewhere in this Form 10-Q, and in
other reports filed by the Company with the Securities and Exchange
Commission, including, but not limited to the Company's Form 10-K for
the year ended December 31, 1999 and Form 10-Q for the transition
period ended April 2, 2000.
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32
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's assessment of its
sensitivity to market risk as of July 2, 2000 as compared to the
information included in Part II, Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk", of the Company's Form 10-K for the year
ended December 31, 1999, as filed with the Securities and Exchange
Commission on April 14, 2000.
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33
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None to report.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
None to report.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
In order to remain in compliance with certain covenants in the
Revolving Credit Facility, and to reduce the cash impact of scheduled
payments under its subordinated acquisition debt, the Company had
negotiated extensions of the payment dates and modified the interest
rates and other terms of certain of its acquisition notes payable in
1999. The Company had not made substantially all of the scheduled
payments due and, as a result, was in default on these debts having
total principal outstanding of $6.9 million as of July 2, 2000. The
terms of these acquisition notes payable, which are subordinated to the
Revolving Credit Facility and the Receivable Facility, allowed the
payees to accelerate terms of payment upon default. Acceleration of
this debt required prior written notice to the Company by the various
payees, which was received from three payees as of July 2, 2000. On
August 15, 2000, in connection with the Refinancing, the acquisition
notes payable were amended to provide that the Company will pay
interest only, at a rate of 10.0% per annum, on the debt for three
years following the closing of the Refinancing, followed by two years
of equal monthly payments of interest and principal, which will retire
the debt. In connection with the amendments to the acquisition notes
payable, the Company paid $0.8 million of accrued interest to the
relevant noteholders at closing.
32
34
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the Company (the "Meeting")
was held on May 18, 2000. The Company solicited proxies for the Meeting
and there was no solicitation in opposition to management's nominees
for directors. At the Meeting, the shareholders voted:
(1a) To elect director Garry E. Meier for a three-year term:
Votes For 6,968,833
Votes Withheld 22,965
(1b) To elect director Lawrence Chimerine for a three-year term:
Votes For 6,987,833
Votes Withheld 3,965
There were no votes against, abstentions, or broker non-votes with
respect to the election of the Directors. The names of other directors
whose term of office continued after the Meeting are Scott R. Francis,
Michael S. Fawcett, David S. Hershberg and Jay D. Seid.
(2) To ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending
April 1, 2001:
Votes For 6,991,298
Votes Against 500
Votes Abstained None
ITEM 5 - OTHER INFORMATION
Effective April 8, 2000, the Company sold certain of the assets of its
Synadyne division to Teamstaff V, Inc., a Florida corporation
("Teamstaff V") and an affiliate of Teamstaff, Inc., a New Jersey
corporation for $3.5 million cash, with up to an additional $1.25
million to be paid to the Company by Teamstaff on April 30, 2001 based
on the total number of employees, at each of the customer accounts sold
to Teamstaff V, who are still employed by Teamstaff V on September 30,
2000 and April 30, 2001. The assets included all of the customer
accounts relating to the Company's PEO business, the trade name
"Synadyne," certain desktop computers and marketing materials relating
to the Company's PEO business.
In connection with the sale of the Synadyne division, the Company is
obligated to provide certain support services to TeamStaff V through
July 31, 2000, including accounting and information systems services.
The Company is currently providing such services and it is negotiating
with TeamStaff V to extend the support services agreement. The Company
has also contracted with TeamStaff V to provide PEO services to the
Company and its employees for an initial term expiring on December 31,
2001.
During the first week of May 2000, the Company moved its corporate
headquarters to 1690 South Congress Avenue, Suite 210, Delray Beach,
Florida 33445.
Separation Agreement and Release
The Company entered into a Separation Agreement and Release with Paul
Burrell, its former Chief Executive Officer on February 21, 2000, with
Robert Lefcort, the former President of its Synadyne division on April
6, 2000 and with Brian Nugent, former Vice President, Secretary and
General Counsel of the Company on April 21, 2000.
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35
Pursuant to the terms of the agreement with Mr. Burrell, Mr. Burrell
resigned as President, Chief Executive Officer and Chairman of the
Board of Directors of the Company and as an officer, director and/or
manager of any affiliates of the Company effective February 14, 2000.
The Company agreed to pay Mr. Burrell total severance compensation of
$750,000, payable in equal bi-weekly installments of $14,423.07. Mr.
Burrell was granted the right to exercise any stock option previously
granted to him through February 13, 2003; however, certain restrictions
were placed on the amount of profit Mr. Burrell can realize on the sale
of the underlying stock.
Pursuant to the terms of the agreement with Mr. Lefcort, Mr. Lefcort
resigned as President of the Company's Synadyne division effective
April 6, 2000. The Company agreed to pay Mr. Lefcort total severance
compensation of $395,286, payable in equal bi-weekly installments of
$7,601.64 and a retention bonus in the amount of $80,000, which was
paid on April 15, 2000. In connection with Mr. Lefcort's severance
agreement, the Company agreed to provide an advance on severance to Mr.
Lefcort in the amount of $200,000 on June 1, 2000. Mr. Lefcort was
granted the right to exercise any stock option previously granted to
him through April 5, 2003.
Pursuant to the terms of the agreement with Mr. Nugent, Mr. Nugent
resigned as Vice President, Secretary and General Counsel of the
Company and any affiliates of the Company effective April 21, 2000. The
Company agreed to pay Mr. Nugent total severance compensation of
$229,500, payable in equal bi-weekly installments of $12,736.11. Mr.
Nugent was granted the right to exercise any stock option previously
granted to him through April 20, 2002; however, certain restrictions
were placed on the amount of profit Mr. Nugent can realize on the sale
of the underlying stock.
Pro Forma Financial Information
Effective August 15, 2000, the Company entered into a three-year
agreement with a syndicate of lenders led by Ableco Finance, LLC, as
agent, an affiliate of Cerberus Capital Management, L.P. (the
"Lenders") which replaced the Company's previous credit facilities with
a $33.4 million Revolving Credit Facility and two term loans of $17.6
million and $9.0 million, respectively, plus a four-year, $5.3 million
term loan, provided by the Company's former syndicate of lenders, led
by Fleet National Bank subordinated to the borrowing facilities
provided by the Lenders (the "Refinancing"). Simultaneously with the
new arrangements, the Company renegotiated the payment schedules of its
acquisition debt so that the defaults under those loans were cured.
The following unaudited pro forma consolidated statements of operations
for the year ended December 31, 1999 and the quarter ended July 2, 2000
include the Company's historical results of operations adjusted to
reflect (a) the Refinancing as if it had been consummated at the
beginning of the periods presented and (b) the elimination of the
revenues, costs of revenues, SG&A expenses and other items in
connection with (i) the sale of the Company's Synadyne division
effective April 8, 2000, (ii) the sale of the Company's clerical
division, Office Ours, effective August 30, 1999, (iii) the
discontinuance by the Company of PEO services offered to Tandem
franchises as of December 31, 1999, (iv) the sale or pending sale of
the assets of offices and (v) the corporate headquarters in connection
with the Company's restructuring efforts (the "Disposed Operations").
The unaudited pro forma results are not necessarily indicative of
operating results that would have occurred had the aforementioned
transactions been consummated as of the beginning of the periods
presented. The unaudited pro forma balance sheet is presented as if the
Company's Refinancing had been consummated on the balance sheet date of
July 2, 2000. All amounts presented are in thousands:
34
36
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JULY 2, 2000
Pro forma
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- ---------
ASSETS
Current Assets
Cash and cash equivalents $ 1,043 $ 69 $ 1,112
Accounts receivable, net 38,314 -- 38,314
Assets held for disposition 426 -- 426
Income tax receivable and other current assets 12,929 2,302 15,231
--------- -------- ---------
Total current assets 52,712 2,371 55,083
Property and equipment, net 7,890 -- 7,890
Goodwill and other intangible assets, net 45,049 -- 45,049
Other assets 2,148 -- 2,148
--------- -------- ---------
Total assets $ 107,799 $ 2,371 $ 110,170
========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 6,898 $ -- $ 6,898
Accrued expenses
Payroll and related costs 13,514 -- 13,514
Other 5,935 (761) 5,174
Accrued restructuring charges 1,693 -- 1,693
Other current liabilities 805 -- 805
Current maturities of long-term debt 8,192 -- 8,192
CIT Revolving Loan 19,364 (2,949) 16,415
Fleet receivable facility (old) 31,262 (31,262) --
--------- -------- ---------
Total current liabilities 87,663 (34,972) 52,691
Non-Current Liabilities
Deferred tax liability - Fleet facility -- 5,304 5,304
Ableco term loans -- 26,600 26,600
Ableco term loan discount -- (9,000) (9,000)
Fleet term loan (new) -- 5,343 5,343
Other long-term debt, less current maturities 2,006 -- 2,006
--------- -------- ---------
Total liabilities 89,669 (6,725) 82,944
--------- -------- ---------
Shareholders' Equity
Common stock, $.001 par value: 10,000,000 shares authorized 9 -- 9
8,657,913 shares issued and outstanding --
Additional paid-in-capital 53,546 624 54,170
Accumulated deficit (35,425) 8,472 (26,953)
--------- -------- ---------
Total shareholders' equity 18,130 9,096 27,226
--------- -------- ---------
Total liabilities and shareholders' equity $ 107,799 $ 2,371 $ 110,170
========= ======== =========
Total shareholders' equity $ 18,130 $ 9,096 $ 27,226
Less: Net goodwill as of July 2, 2000 (21,614) -- (21,614)
--------- -------- ---------
Net Tangible Assets (2) $ (3,484) $ 9,096 $ 5,612
========= ======== =========
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OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
DISPOSED
OPERATIONS REFINANCING PRO FORMA
HISTORICAL ADJUSTMENTS (3) PRO FORMA ADJUSTMENTS(4) AS ADJUSTED
----------- --------------- ----------- -------------- -----------
Net revenues $ 594,047 $ (306,718) $ 287,329 $ -- $ 287,329
Cost of revenues 512,136 (288,153) 223,983 -- 223,983
----------- ----------- ----------- -------- -----------
Gross profit 81,911 (18,565) 63,346 -- 63,346
Selling, general and administrative expenses 86,719 (18,711) 68,008 -- 68,008
Restructuring and asset impairment charges 13,823 -- 13,823 -- 13,823
----------- ----------- ----------- -------- ----------
Operating (loss) income (18,631) 146 (18,485) -- (18,485)
Interest expense, net 8,604 (1,568) 7,036 3,775 10,811
Other (income) expense (479) -- (479) -- (479)
----------- ----------- ----------- -------- ----------
Loss before benefit for income taxes (26,756) 1,714 (25,042) (3,775) (28,817)
Provision (benefit) for income taxes 4,123 643 4,766 (1,416) 3,350
----------- ----------- ----------- -------- ----------
Net loss from continuing operations $ (30,879) $ 1,071 $ (29,808) $ (2,359) $ (32,167)
=========== =========== =========== ======== ==========
Loss per share:
Basic and diluted
Loss from continuing operations $ (3.57) $ (3.44) $ (3.72)
Weighted average common shares
Basic 8,657,913 8,657,913 8,657,913
Diluted 8,657,913 8,657,913 8,657,913
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38
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED JULY 2, 2000
DISPOSED
OPERATIONS REFINANCING PRO FORMA
HISTORICAL ADJUSTMENTS (3) PRO FORMA ADJUSTMENTS(4) AS ADJUSTED
---------- --------------- ---------- -------------- -----------
Net revenues $ 81,618 $(8,826) $ 72,792 $ -- $72,792
Cost of revenues 65,432 (7,504) 57,928 -- 57,928
---------- ------- ---------- ------- ----------
Gross profit 16,186 (1,322) 14,864 -- 14,864
Selling, general and administrative expenses 14,722 (1,201) 13,521 -- 13,521
Restructuring and asset impairment charges 878 -- 878 -- 878
---------- ------- ---------- ------- ----------
Operating (loss) income 586 (121) 465 -- 465
Interest expense, net 1,913 (120) 1,793 890 2,683
Other (income) expense (724) -- (724) -- (724)
---------- ------- ---------- ------- ----------
Loss before benefit for income taxes (603) (1) (604) (890) (1,494)
Benefit for income taxes (7,689) -- (7,689) (334) (8,023)
---------- ------- ---------- ------- ----------
Income from continuing operations $ 7,086 $ (1) $ 7,085 $ (556) $ 6,529
========== ======= ========== ======= ==========
Earnings per share:
Basic
Income from continuing operations $ 0.82 $ 0.82 $ 0.75
Diluted
Income from continuing operations $ 0.72 $ 0.72 $ 0.66
Weighted average common shares
Basic 8,657,913 8,657,913 8,657,913
Diluted (5) 9,857,385 9,857,385 9,857,385
NOTE 1
The adjustments reflect issuance of two term loans by a syndicate of
lenders led by Ableco Finance, LLC, as agent (the "Lenders") of $17.6
million and $9.0 million, and a $33.4 million Revolving Credit
Facility, of which $16.4 million would have been outstanding as of July
2, 2000, and the discontinuance of the Revolving Credit and Receivable
Facilities with a syndicate of lenders led by Fleet National Bank, as
agent (the "Fleet Group"). The Fleet Group forgave $14.4 million of
debt, of which $9.0 will be paid to Ableco, which is recorded as a
discount on debt and will be amortized as interest expense in the
Company's results of operations over a period of three years.
In addition to the loans from the Lenders, a $5.3 million term loan,
payable over four years, was issued to the Fleet Group (the
"Subordinated Term Note"). In connection with the Subordinated Term
Note, the Company issued 524,265 warrants to the Fleet Group,
exercisable at $0.01 per share for a term of ten years, to purchase
outstanding shares of the Company's common stock with a fair value of
$0.6 million as of August 15, 2000. As a result of the above
transactions, the Company recorded an extraordinary gain on
extinguishment of debt, net of tax of $8.5 million ($13.8 million, less
$5.3 million of income tax).
As part of the Refinancing, the Company renegotiated its subordinated
debt and paid accrued interest of $0.8 million at closing, which is
included in Other Accrued Expenses.
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39
NOTE 2
The Company's net tangible assets calculated in accordance with the
Nasdaq National Market's listing requirements.
NOTE 3
Elimination of revenues, costs of revenues, SG&A expenses and other
costs of the following disposed operations: (i) the Company's PEO
division, Synadyne, which was sold effective April 8, 2000, (ii) the
Company's clerical division, Office Ours, which was sold effective
August 30, 1999, (iii) the discontinuance of PEO services offered to
Tandem franchises after December 31, 1999, (iv) offices sold,
franchised, closed, or held for sale as of July 2, 2000, and (v) the
sale of the corporate headquarters building in connection with the
Company's restructuring efforts.
The following table summarizes the results of operations before income
taxes of the Company's Disposed Operations that are reflected in the
Company's pro forma results of operations.
Amounts are in thousands:
FOR THE YEAR ENDED DECEMBER 31, 1999:
RESTRUCTURING DISPOSED
OFFICE OURS SYNADYNE & OTHER OPERATIONS
----------- ---------- ------------- ----------
Revenues $ 5,244 $ 22,450 $ 279,024 $ 306,718
Cost of revenues 3,854 15,527 268,772 288,153
--------- ---------- --------- ----------
Gross margin 1,390 6,923 10,252 18,565
Selling, general and administrative 1,481 5,191 12,039 18,711
Other expense (income), net 57 338 1,173 1,568
--------- ---------- --------- ----------
(Loss) income before taxes $ (148) $ 1,394 $ (2,960) $ (1,714)
========= ========== ========= ==========
FOR THE QUARTER ENDED JULY 2, 2000:
RESTRUCTURING DISPOSED
OFFICE OURS SYNADYNE & OTHER OPERATIONS
----------- ---------- ------------- ----------
Revenues $ -- $ 71 $ 8,755 $ 8,826
Cost of revenues -- 83 7,421 7,504
--------- ---------- --------- ----------
Gross margin -- (12) 1,334 1,322
Selling, general and administrative -- 172 1,029 1,201
Other expense (income), net -- 14 106 120
--------- ---------- --------- ----------
(Loss) income before taxes $ -- $ (198) $ 199 $ 1
========= ========== ========= ==========
NOTE 4
Adjustments to reflect interest expense relating to (a) the
Refinancing, and (b) debt extinguished as a result of the disposed
operations, and (c) the sale of the Company's former corporate
headquarters building during the fourth quarter of 1999.
Interest expense was adjusted as follows, amounts are in thousands:
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40
YEAR ENDED QUARTER ENDED
DECEMBER 31, 1999 JULY 2, 2000
----------------- ------------
Add:
Fleet Term Loan (at an effective rate of 11.5%) $ 613 $ 169
Ableco Revolving Facility and Term Loans
(at an effective rate of 12.2%) 5,301 1,329
Amortization of debt discount 3,000 750
Amortization of loan fees 767 192
------- -------
Subtotal 9,681 2,440
------- -------
Less:
Fleet Revolver and Securitization Facilities (5,192) (1,646)
Amortization of loan fees (1,887) (24)
OSI corporate headquarters mortgage (286) --
Acquisition notes forgiven in connection with
the sale of certain restructured offices (109) --
------- -------
Subtotal (7,474) (1,670)
------- -------
Net change interest expense 2,207 770
Addback: interest charged to disposed operations 1,568 120
------- -------
Net interest expense change due to the refinancing $ 3,775 $ 890
======= =======
NOTE 5
Includes 8,657,913 outstanding common shares of the Company as of
August 15, 2000, and the options and warrants to purchase common shares
of the Company that would remain outstanding, and therefore be dilutive
to the Company's earnings per share, after assumed repurchase using
proceeds from the exercise of those options and warrants.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation of the Company (1)
3.2 Amended and Restated Bylaws of the Company (2)
10.68 Ninth Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc., Outsource International of America, Inc., Mass Staff,
Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
East, LLC, Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A., as agent for the banks, dated as
of May 19, 2000.
10.69 Sixth Amendment to Revolving Credit Agreement among Outsource Funding
Corporation, the banks from time to time parties thereto, and
BankBoston, N.A., as agent for the banks, dated May 19, 2000.
10.70 Tenth Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc., Outsource International of America, Inc., Mass Staff,
Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
East, LLC, Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A., as agent for the banks, dated as
of May 31, 2000.
10.71 Seventh Amendment to Revolving Credit Agreement among Outsource Funding
Corporation, the banks from time to time parties thereto, and
BankBoston, N.A., as agent for the banks, dated May 31, 2000.
10.72 Eleventh Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc., Outsource International of America, Inc., Mass Staff,
Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
East, LLC, Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A., as agent for the banks, dated as
of June 26, 2000.
10.73 Eighth Amendment to Revolving Credit Agreement among Outsource Funding
Corporation, the banks from time to time parties thereto, and
BankBoston, N.A., as agent for the banks, dated June 26, 2000.
10.74 Twelfth Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc., Outsource International of America, Inc., Mass Staff,
Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
East, LLC, Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A., as agent for the banks, dated as
of July 14, 2000.
10.75 Ninth Amendment to Revolving Credit Agreement among Outsource Funding
Corporation, the banks from time to time parties thereto, and
BankBoston, N.A., as agent for the banks, dated July 14, 2000.
10.76 Thirteenth Amendment to Third Amended and Restated Credit Agreement
among Outsource International, Inc., Capital Staffing Fund, Inc.,
Outsource Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc.,
Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees
Insurance Services, Inc., Outsource International of America, Inc.,
Mass Staff, Inc., Staff All, Inc., Outsource of Nevada, Inc.,
Employment Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc.,
Guardian Employer East, LLC, Guardian Employer West, LLC, each of the
banks party to the Credit Agreement and BankBoston, N.A., as agent for
the banks, dated as of July 31, 2000.
10.77 Tenth Amendment to Revolving Credit Agreement among Outsource Funding
Corporation, the banks from time to time parties thereto, and
BankBoston, N.A., as agent for the banks, dated July 31, 2000.
10.78 Fourteenth Amendment to Third Amended and Restated Credit Agreement
among Outsource International, Inc., Capital Staffing Fund, Inc.,
Outsource Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc.,
Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees
Insurance Services, Inc., Outsource International of America, Inc.,
Mass Staff, Inc., Staff All, Inc., Outsource of Nevada, Inc.,
Employment Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc.,
Guardian Employer East, LLC, Guardian Employer West, LLC, each of the
banks party to the Credit Agreement and BankBoston, N.A., as agent for
the banks, dated as of August 2, 2000.
10.92(a) Financing Agreement, dated as of August 15, 2000, among Outsource
International, Inc., Outsource International of America, Inc.,
Outsource Franchising, Inc., Guardian Employer East, LLC and Guardian
Employer West, LLC, as Borrowers, the other subsidiaries of Outsource
International, Inc., as Guarantors, Ableco Finance, LLC, as agent for
certain Lenders, and The CIT Group/Business Credit, Inc.
10.92(b) Term A Note, dated August 15, 2000, in the amount of $8,800,000, made
by Outsource International, Inc., Outsource International of America,
Inc., Outsource Franchising, Inc., Guardian Employer East, LLC and
Guardian Employer West, LLC, as Borrowers, to the order of Ableco
Finance, LLC.
10.92(c) Term A Note, dated August 15, 2000, in the amount of $8,800,000, made
by Outsource International, Inc., Outsource International of America,
Inc., Outsource Franchising, Inc., Guardian Employer East, LLC and
Guardian Employer West, LLC, as Borrowers, to the order of A2 Funding
LP.
10.92(d) Term B Note, dated August 15, 2000, in the amount of $9,000,000, made
by Outsource International, Inc., Outsource International of America,
Inc., Outsource Franchising, Inc., Guardian Employer East, LLC and
Guardian Employer West, LLC, as Borrowers, to the order of Ableco
Holding LLC.
10.92(e) Revolving Credit Note, dated August 15, 2000, in the amount of
$33,400,000, made by Outsource International, Inc., Outsource
International of America, Inc., Outsource Franchising, Inc., Guardian
Employer East, LLC and Guardian Employer West, LLC, as Borrowers, to
the order of The CIT Group/Business Credit, Inc.
10.92(f) Warrant, dated August 15, 2000, issued to Ableco Holding LLC.
10.92(g) Registration Rights Agreement, dated as of August 15, 2000, between
Outsource International, Inc. and Ableco Holding LLC.
10.93(a) Restructuring Agreement, dated as of August 15, 2000, among Outsource
International, Inc., Fleet National Bank, as agent, and each of the
banks party thereto.
10.93(b) Notes, each dated August 15, 2000, totaling $5,343,262, made by
Outsource International, Inc., as Borrower, to the order of Fleet
National Bank ($2,200,168.28); LaSalle Bank National Association
($1,257,237.49); Comerica Bank ($1,257,237.49), and SunTrust Bank
($628,618.74).
10.93(c) Warrant Purchase Agreement, dated as of August 15, 2000, among
Outsource International, Inc., Fleet National Bank, Comerica Bank,
LaSalle Bank National Association and SunTrust Bank.
10.93(d) Form of Warrant, dated August 15, 2000, issued to Fleet National Bank
(215,874 shares), Comerica Bank (123,356), LaSalle Bank National
Association (123,356) and SunTrust Bank (61,679).
27 Financial Data Schedule
- -----------------------------------------------------------------
(1) Incorporated by reference to the Exhibits to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration Statement No.
333-33443) as filed with the Securities and Exchange Commission on October
21, 1997.
(2) Incorporated by reference to the Exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Registration Statement No.
333-33443) as filed with the Securities and Exchange Commission on
September 23, 1997.
- ------------------------------------------------------------------
(b) REPORTS ON FORM 8 - K:
No reports were filed on Form 8-K during the fiscal quarter ended July 2, 2000.
40
42
SIGNATURES
Pursuant to the requirements 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.
OUTSOURCE INTERNATIONAL, INC.
Date: August 21, 2000 By: /s/ Garry E. Meier
-----------------------------------------
Garry E. Meier
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: August 21, 2000 By: /s/ Scott R. Francis
-----------------------------------------
Scott R. Francis
Vice President and Chief Financial Officer
(Principal Financial Officer)
41
43
EXHIBIT INDEX
Exhibit No. Description
10.68 Ninth Amendment to Third Amended and Restated Credit Agreement
among Outsource International, Inc., Capital Staffing Fund,
Inc., Outsource Franchising, Inc., Synadyne I, Inc., Synadyne
II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V,
Inc., Employees Insurance Services, Inc., Outsource
International of America, Inc., Mass Staff, Inc., Staff All,
Inc., Outsource of Nevada, Inc., Employment Consultants, Inc.,
X-tra Help, Inc., Co-Staff, Inc., Guardian Employer East, LLC,
Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A., as agent for the banks,
dated as of May 19, 2000.
10.69 Sixth Amendment to Revolving Credit Agreement among Outsource
Funding Corporation, the banks from time to time parties
thereto, and BankBoston, N.A., as agent for the banks, dated
May 19, 2000.
10.70 Tenth Amendment to Third Amended and Restated Credit Agreement
among Outsource International, Inc., Capital Staffing Fund,
Inc., Outsource Franchising, Inc., Synadyne I, Inc., Synadyne
II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V,
Inc., Employees Insurance Services, Inc., Outsource
International of America, Inc., Mass Staff, Inc., Staff All,
Inc., Outsource of Nevada, Inc., Employment Consultants, Inc.,
X-tra Help, Inc., Co-Staff, Inc., Guardian Employer East, LLC,
Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A., as agent for the banks,
dated as of May 31, 2000.
10.71 Seventh Amendment to Revolving Credit Agreement among
Outsource Funding Corporation, the banks from time to time
parties thereto, and BankBoston, N.A., as agent for the banks,
dated May 31, 2000.
10.72 Eleventh Amendment to Third Amended and Restated Credit
Agreement among Outsource International, Inc., Capital
Staffing Fund, Inc., Outsource Franchising, Inc., Synadyne I,
Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV,
Inc., Synadyne V, Inc., Employees Insurance Services, Inc.,
Outsource International of America, Inc., Mass Staff, Inc.,
Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian
Employer East, LLC, Guardian Employer West, LLC, each of the
banks party to the Credit Agreement and BankBoston, N.A., as
agent for the banks, dated as of June 26, 2000.
10.73 Eighth Amendment to Revolving Credit Agreement among Outsource
Funding Corporation, the banks from time to time parties
thereto, and BankBoston, N.A., as agent for the banks, dated
June 26, 2000.
10.74 Twelfth Amendment to Third Amended and Restated Credit
Agreement among Outsource International, Inc., Capital
Staffing Fund, Inc., Outsource Franchising, Inc., Synadyne I,
Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV,
Inc., Synadyne V, Inc., Employees Insurance Services, Inc.,
Outsource International of America, Inc., Mass Staff, Inc.,
Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian
Employer East, LLC, Guardian Employer West, LLC, each of the
banks party to the Credit Agreement and BankBoston, N.A., as
agent for the banks, dated as of July 14, 2000.
10.75 Ninth Amendment to Revolving Credit Agreement among Outsource
Funding Corporation, the banks from time to time parties
thereto, and BankBoston, N.A., as agent for the banks, dated
July 14, 2000.
10.76 Thirteenth Amendment to Third Amended and Restated Credit
Agreement among Outsource International, Inc., Capital
Staffing Fund, Inc., Outsource Franchising, Inc., Synadyne I,
Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV,
Inc., Synadyne V, Inc., Employees Insurance Services, Inc.,
Outsource International of America, Inc., Mass Staff, Inc.,
Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian
Employer East, LLC, Guardian Employer West, LLC, each of the
banks party to the Credit Agreement and BankBoston, N.A., as
agent for the banks, dated as of July 31, 2000.
10.77 Tenth Amendment to Revolving Credit Agreement among Outsource
Funding Corporation, the banks from time to time parties
thereto, and BankBoston, N.A., as agent for the banks, dated
July 31, 2000.
10.78 Fourteenth Amendment to Third Amended and Restated Credit
Agreement among Outsource International, Inc., Capital
Staffing Fund, Inc., Outsource Franchising, Inc., Synadyne I,
Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV,
Inc., Synadyne V, Inc., Employees Insurance Services, Inc.,
Outsource International of America, Inc., Mass Staff, Inc.,
Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian
Employer East, LLC, Guardian Employer West, LLC, each of the
banks party to the Credit Agreement and BankBoston, N.A., as
agent for the banks, dated as of August 2, 2000. 10.92(a)
Financing Agreement, dated as of August 15, 2000, among
Outsource International, Inc., Outsource International of
America, Inc., Outsource Franchising, Inc., Guardian Employer
East, LLC and Guardian Employer West, LLC, as Borrowers, the
other subsidiaries of Outsource International, Inc., as
Guarantors, Ableco Finance, LLC, as agent for certain Lenders,
and The CIT Group/Business Credit, Inc. 10.92(a) Financing
Agreement, dated as of August 15, 2000, among Outsource
International, Inc., Outsource International of America, Inc.,
Outsource Franchising, Inc., Guardian Employer East, LLC and
Guardian Employer West, LLC, as Borrowers, the other
subsidiaries of Outsource International, Inc., as Guarantors,
Ableco Finance, LLC, as agent for certain Lenders, and The CIT
Group/Business Credit, Inc.
10.92(a) Financing Agreement, dated as of August 15, 2000, among
Outsource International, Inc., Outsource International of
America, Inc., Outsource Franchising, Inc., Guardian Employer
East, LLC and Guardian Employer West, LLC, as Borrowers, the
other subsidiaries of Outsource International, Inc., as
Guarantors, Ableco Finance, LLC, as agent for certain Lenders,
and The CIT Group/Business Credit, Inc.
10.92(b) Term A Note, dated August 15, 2000, in the amount of
$8,800,000, made by Outsource International, Inc., Outsource
International of America, Inc., Outsource Franchising, Inc.,
Guardian Employer East, LLC and Guardian Employer West, LLC,
as Borrowers, to the order of Ableco Finance, LLC.
10.92(c) Term A Note, dated August 15, 2000, in the amount of
$8,800,000, made by Outsource International, Inc., Outsource
International of America, Inc., Outsource Franchising, Inc.,
Guardian Employer East, LLC and Guardian Employer West, LLC,
as Borrowers, to the order of A2 Funding LP.
10.92(d) Term B Note, dated August 15, 2000, in the amount of
$9,000,000, made by Outsource International, Inc., Outsource
International of America, Inc., Outsource Franchising, Inc.,
Guardian Employer East, LLC and Guardian Employer West, LLC,
as Borrowers, to the order of Ableco Holding LLC.
10.92(e) Revolving Credit Note, dated August 15, 2000, in the amount of
$33,400,000, made by Outsource International, Inc., Outsource
International of America, Inc., Outsource Franchising, Inc.,
Guardian Employer East, LLC and Guardian Employer West, LLC,
as Borrowers, to the order of The CIT Group/Business Credit,
Inc.
10.92(f) Warrant, dated August 15, 2000, issued to Ableco Holding LLC.
10.92(g) Registration Rights Agreement, dated as of August 15, 2000,
between Outsource International, Inc. and Ableco Holding LLC.
10.93(a) Restructuring Agreement, dated as of August 15, 2000, among
Outsource International, Inc., Fleet National Bank, as agent,
and each of the banks party thereto.
10.93(b) Notes, each dated August 15, 2000, totaling $5,343,262, made
by Outsource International, Inc., as Borrower, to the order of
Fleet National Bank ($2,200,168.28); LaSalle Bank National
Association ($1,257,237.49); Comerica Bank ($1,257,237.49),
and SunTrust Bank ($628,618.74).
10.93(c) Warrant Purchase Agreement, dated as of August 15, 2000, among
Outsource International, Inc., Fleet National Bank, Comerica
Bank, LaSalle Bank National Association and SunTrust Bank.
10.93(d) Form of Warrant, dated August 15, 2000, issued to Fleet
National Bank (215,874 shares), Comerica Bank (123,356),
LaSalle Bank National Association (123,356) and SunTrust Bank
(61,679).
27 Financial Data Schedule