AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OUTSOURCE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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FLORIDA 7363 65-0675628
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
1144 EAST NEWPORT CENTER DRIVE, DEERFIELD BEACH, FL 33442
(954) 418-6200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT A. LEFCORT
1144 EAST NEWPORT CENTER DRIVE, DEERFIELD BEACH, FL 33442
(954) 418-6200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
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COPIES TO:
DONN A. BELOFF, ESQ. HARVEY GOLDMAN, ESQ.
HOLLAND & KNIGHT LLP STEEL HECTOR & DAVIS LLP
ONE EAST BROWARD BOULEVARD, SUITE 1300 200 SOUTH BISCAYNE BOULEVARD, SUITE 4000
FORT LAUDERDALE, FL 33301 MIAMI, FL 33131
(954) 525-1000 (305) 577-7000
TELECOPIER NO. (954) 463-2030 TELECOPIER NO. (305) 577-7001
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE
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Common Stock, $.001 par value... $68,080,000 $20,630.30
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933, as amended.
(2) This Registration Statement also relates to the Rights to purchase shares
of preferred stock of the Registrant which will be attached to all shares
of Common Stock being registered hereunder as of the date the Registrant
adopts a Shareholder Protection Rights Agreement, at a rate of one Right
for each share of the Common Stock. The Registrant intends to enter into
the Shareholder Protection Rights Agreement prior to the effective date of
this Registration Statement. Until the occurrence of certain prescribed
events, the Rights are not exercisable, are evidenced by the certificates
of Common Stock and will be transferred with and only with such stock.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED AUGUST 12, 1997
P R O S P E C T U S
3,700,000 SHARES
[OUTSOURCE LOGO]
Common Stock
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Of the 3,700,000 shares of Common Stock being offered hereby (the
"Offering"), 3,000,000 shares are being offered by OutSource International,
Inc. (the "Company") and 700,000 shares are being offered by certain
shareholders of the Company (the "Selling Shareholders"). The Company will not
receive any proceeds from the sale of shares of Common Stock by the Selling
Shareholders. See "Principal and Selling Shareholders" and "Underwriting."
Prior to this Offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public
offering price will be between $14.00 and $16.00 per share. See "Underwriting"
for information relating to the factors to be considered in determining the
initial public offering price. Application has been made to have the Common
Stock listed on The Nasdaq National Market under the symbol "OSIX."
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SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
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Per Share $ $ $ $
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Total(3) $ $ $ $
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offering estimated at $ ,
$ of which are payable by the Company and $ of which
are payable by the Selling Shareholders.
(3) Certain of the Selling Shareholders have granted to the Underwriters a
30-day option to purchase up to 555,000 additional shares of Common Stock
on the same terms as set forth above solely to cover over-allotments, if
any. See "Underwriting." If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Selling Shareholders will be $ , $ , and $ ,
respectively.
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The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them, and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
September , 1997 at the offices of Smith Barney Inc., 14 Wall Street, New
York, New York 10005.
----------------
Smith Barney Inc.
Robert W. Baird & Co.
Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
, 1997
[GRAPHIC TO BE FILED BY AMENDMENT]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. THE INFORMATION IN THIS PROSPECTUS REFLECTS THE CONSUMMATION ON
FEBRUARY 21, 1997 OF A REORGANIZATION (THE "REORGANIZATION") AMONG NINE
OPERATING CORPORATIONS EXISTING UNDER THE LAWS OF THE STATE OF FLORIDA
(COLLECTIVELY, THE "SUBSIDIARIES") AND THE SHAREHOLDERS OF EACH OF THE
SUBSIDIARIES, WHICH RESULTED IN THE COMPANY BECOMING THE PARENT COMPANY OF THE
SUBSIDIARIES. AS USED IN THIS PROSPECTUS, UNLESS OTHERWISE INDICATED: (I) THE
TERMS "COMPANY" AND "OUTSOURCE" REFER COLLECTIVELY TO THE COMPANY AND THE
SUBSIDIARIES SUBSEQUENT TO THE REORGANIZATION AND TO THE SUBSIDIARIES ON A
CONSOLIDATED BASIS PRIOR TO THE REORGANIZATION; (II) THE TERM "COMMON STOCK"
REFERS TO THE COMPANY'S COMMON STOCK PAR VALUE $.001 PER SHARE, AND THE RIGHTS
TO PURCHASE SHARES OF PREFERRED STOCK ATTACHED THERETO; (III) ALL SHARE AND PER
SHARE DATA HAS BEEN RETROACTIVELY ADJUSTED TO GIVE EFFECT TO A REVERSE STOCK
SPLIT TO BECOME EFFECTIVE IMMEDIATELY PRIOR TO THIS OFFERING. SEE "THE
COMPANY," "DESCRIPTION OF SECURITIES--COMMON STOCK," "DESCRIPTION OF
SECURITIES--REORGANIZATION" AND "DESCRIPTION OF SECURITIES--SHAREHOLDER RIGHTS
PLAN."
THE COMPANY
The Company is a rapidly growing national provider of human resource
services focusing on the flexible industrial staffing market through its Tandem
division and on the professional employer organization ("PEO") market through
its Synadyne division. The Tandem division recruits, trains and deploys
temporary industrial personnel and provides payroll administration, risk
management and benefits administration services to its clients. Tandem's
clients include businesses in the manufacturing, distribution, hospitality and
construction industries. Through its Synadyne division, the Company offers a
comprehensive package of PEO services including payroll administration, risk
management, benefits administration and human resource consultation to
companies in a wide range of industries. The Company's operations began in
Chicago, Illinois in 1974. As of June 30, 1997, the Company and its franchise
associates operated 163 offices, with an estimated 31,000 employees, in 38
states and the District of Columbia.
The Tandem division provides approximately 17,000 flexible industrial
staffing personnel daily to approximately 3,600 client companies through a
nationwide network of 80 Company-owned and 74 franchised offices. Between 1994
and 1996, Company and franchise flexible industrial staffing revenues increased
from $119.8 million to $247.3 million, a compound annual growth rate of
approximately 44%. The Synadyne division, which began in 1994, has
approximately 11,000 employees. Between 1994 and 1996, PEO revenues increased
from $35.6 million to $172.1 million, a compound annual growth rate of
approximately 120%. To implement its expansion strategy, the Company completed
17 acquisitions of industrial staffing companies since January 1, 1995, with 48
offices and approximately $84 million in annual revenue. During this period,
the number of Company-owned flexible staffing and PEO offices increased from
ten to 89, the number of geographic regions served by the Company increased
from one to nine, and the Company implemented advanced information systems,
further developed back office capabilities and invested in other infrastructure
enhancements necessary to support its future growth.
The Company's operation of both a flexible industrial staffing division
and a PEO division provides it with significant competitive advantages. Both
Tandem and Synadyne offer a number of common services including payroll
administration, risk management and benefits administration. The Company
designs and administers these services through common facilities, personnel and
information systems which give the Company the ability to develop and provide a
wider range of services at lower costs than its primary competitors. In
addition, the Company is able to provide a full spectrum of staffing services
to its industrial clients ranging from a temporary employee for one day to
comprehensive outsourcing of human resource functions through the Company's PEO
division. The Company expects Tandem's national network of locations to
facilitate the rapid expansion of the Synadyne division, and, over time,
increase the Company's penetration of local markets.
The staffing industry consists of companies which provide four basic
services to clients: flexible staffing, PEO services, placement and search, and
outplacement. Based on information provided by the National Association of
Temporary and Staffing Services ("NATSS"), the National Association of
Professional Employer Organizations ("NAPEO") and Staffing Industry Analysts,
Inc. ("SIAI"), 1996
3
staffing industry revenues were approximately $74.4 billion. According to
industry sources, approximately 7,000 flexible staffing firms and 2,000 PEO
firms employed approximately 5.2 million people per day, or approximately 4% of
the entire United States workforce, in 1996. Over the last five years, the
staffing industry has experienced significant growth, due largely to the
utilization of temporary help across a broader range of industries as well as
the emergence of the PEO sector.
According to NATSS, flexible industrial staffing currently represents
31.8% of the estimated $43.6 billion in 1996 flexible staffing revenues. The
Company believes that the flexible industrial staffing market is highly
framented and that in excess of 75% of flexible industrial staffing industry
revenues are generated by small local and regional companies. According to
NATSS, the flexible industrial staffing sector grew from $5.6 billion in 1991
to $13.9 billion in 1996, representing a compound annual growth rate of
approximately 20%. The Company's goal is to target opportunities in this
fragmented, rapidly growing, market which has to date been under-served by
large full service staffing companies.
The PEO sector, the fastest growing sector within the staffing industry,
comprised an estimated $17.3 billion, or approximately 23%, of estimated 1996
staffing industry revenues. This sector has grown at an estimated annual rate
of 29% over the last five years as small and medium size businesses (businesses
with less than 500 employees) continued to realize time and cost savings
associated with outsourcing human resource administration to PEOs. According to
industry sources, less than 2% of small and medium size businesses in the
United States utilize PEO services. As a result, the Company believes there are
significant opportunities for continued growth of its PEO business.
The Company's objective is to become the dominant provider of industrial
flexible staffing and PEO services in select geographic areas. To achieve this
objective, the Company intends to: (i) provide a comprehensive package of
single-source human resource services; (ii) continue to focus on under-
served markets which provide high growth opportunities; (iii) geographically
cluster offices to achieve regional market leadership; (iv) increase market
penetration through a multi-faceted growth strategy which includes internal
growth, acquisitions, franchising and strategic alliances; (v) continue to
maximize operating efficiencies through integrated technology and back office
support; and (vi) commit to the permanent employment, over time, of its
flexible industrial staffing and PEO employees, so as to become their "guardian
employer."
THE OFFERING
Common Stock offered by:
The Company .............................. 3,000,000 shares
The Selling Shareholders .................. 700,000 shares
Total .................................... 3,700,000 shares
Common Stock outstanding
after the Offering ........................ 8,993,666 shares(1)
Use of Proceeds .............................. To (i) reduce indebtedness under certain credit
obligations; (ii) repay related party notes and
indebtedness incurred in connection with certain
acquisitions.
Proposed Nasdaq National Market Symbol ...... OSIX
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(1) Excludes an aggregate of 2,069,896 shares of Common Stock issuable upon
exercise of currently outstanding options and warrants. See
"Management--Stock Option Plan", "Management--Warrants" and Notes 5 and 10
to the Company's Consolidated Financial Statements.
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PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE STATEMENTS IN THIS PROSPECTUS THAT
ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD-LOOKING STATEMENTS THAT
ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS, INCLUDING THOSE
IDENTIFIED UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS" AND ELSEWHERE IN
THIS PROSPECTUS.
4
SUMMARY CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
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SUPPLEMENTAL
PRO FORMA
1992 1993 1994 1995 1996 1996(2)
------------ ------------ ------------- ------------- ---------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SYSTEM REVENUES(1) ............... $ 76,467 $ 92,496 $ 151,408 $ 242,681 $389,314 $431,726
======== ======== ========= ========= ========= =========
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net revenues ..................... $ 39,737 $ 43,472 $ 80,647 $ 149,825 $280,171 $345,087
======== ======== ========= ========= ========= =========
Gross profit ..................... $ 7,771 $ 9,105 $ 14,834 $ 23,555 $ 38,069 $ 54,355
======== ======== ========= ========= ========= =========
Operating income .................. $ 1,568 $ 1,607 $ 3,581 $ 3,456 $ 5,483 $ 10,276
Net interest expense ............... 328 263 820 1,259 2,175 2,298
Other expense (income)(3) ......... (59) (237) (51) (11) 1,448 1,417
-------- -------- --------- --------- --------- ---------
Income before provision (benefit) for
income taxes ..................... 1,299 1,581 2,812 2,208 1,860 6,561
Pro forma income taxes(4) ......... 486 595 1,059 859 757 2,529
-------- -------- --------- --------- --------- ---------
Pro forma net income(4) ............ $ 813 $ 986 $ 1,753 $ 1,349 $ 1,103 $ 4,032
======== ======== ========= ========= ========= =========
Pro forma weighted average common
shares outstanding(5) ............ 6,821 6,821 6,821 6,821 6,821 10,687
======== ======== ========= ========= ========= =========
Pro forma earnings per share ...... $ .12 $ .14 $ .26 $ .20 $ .16 $ .38
======== ======== ========= ========= ========= =========
OTHER DATA(6):
EBITDA, as adjusted ............... $ 2,792 $ 3,618 $ 5,993 $ 6,276 $ 9,005 $ 14,449
======== ======== ========= ========= ========= =========
Net income, as adjusted ............ $ 1,382 $ 1,715 $ 2,947 $ 2,586 $ 3,220 $ 4,930
======== ======== ========= ========= ========= =========
Pro forma earnings per share,
as adjusted ........................ $ .47 $ .46
========= =========
SYSTEM OPERATING DATA
(AT END OF PERIOD):
Number of employees ............... 3,300 4,300 12,200 16,200 23,000
Number of offices .................. 26 30 62 101 139
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
SUPPLEMENTAL
PRO FORMA
1996 1997 1997(2)
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SYSTEM REVENUES(1) ............... $72,192 $ 110,714 $ 118,150
======== ========= =========
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net revenues ..................... $51,169 $ 85,374 $ 95,768
======== ========= =========
Gross profit ..................... $ 6,690 $ 11,135 $ 13,603
======== ========= =========
Operating income .................. $ 483 $ 575 $ 923
Net interest expense ............... 329 1,327 588
Other expense (income)(3) ......... 35 (1,952) (108)
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Income before provision (benefit) for
income taxes ..................... 119 1,200 443
Pro forma income taxes(4) ......... 48 (33) 174
-------- --------- ---------
Pro forma net income(4) ............ $ 71 $ 1,233 $ 269
======== ========= =========
Pro forma weighted average common
shares outstanding(5) ............ 6,821 7,188 10,687
======== ========= =========
Pro forma earnings per share ...... $ .01 $ .17 $ .03
======== ========= =========
OTHER DATA(6):
EBITDA, as adjusted ............... $ 1,026 $ 1,676 $ 2,257
======== ========= =========
Net income, as adjusted ............ $ 318 $ (271) $ 269
======== ========= =========
Pro forma earnings per share,
as adjusted ........................ $ (.04) $ .03
========= =========
SYSTEM OPERATING DATA
(AT END OF PERIOD):
Number of employees ............... 20,000 24,300
Number of offices .................. 107 162
MARCH 31, 1997
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ACTUAL AS ADJUSTED(7)
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(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital .................................... $ 11,020 $11,672
Total assets ....................................... 81,490 86,652
Total long-term debt, less current maturities ...... 65,333 26,554
Total shareholders' equity (deficit) ............... (5,700) 38,893
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(1) System revenues is the sum of the Company's net revenues (excluding
revenues from franchise royalties and services performed for flexible
staffing franchisees (the "Franchisees")) and the net revenues of the
Franchisees. System revenues provide meaningful information regarding the
Company's penetration of the market for its services, as well as the scope
and size of the Company's operations. The net revenues of Franchisees are
derived from reports that are unaudited. System revenues consist of the
following:
5
YEARS ENDED DECEMBER 31,
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SUPPLEMENTAL
PRO FORMA
1992 1993 1994 1995 1996 1996
------------ ------------ ------------- ------------- ------------- --------------
(IN THOUSANDS)
Company's net revenues ............ $ 39,737 $ 43,472 $ 80,647 $ 149,825 $ 280,171 $ 345,087
Less Company revenues from:
Franchise royalties ............... (1,393) (1,586) (2,712) (4,138) (5,671) (5,671)
Services to Franchisees ............ -- -- (4,698) (7,507) (35,079) (35,079)
Add Franchisees' net revenues ...... 38,123 50,610 78,171 104,501 149,893 127,389
---------- ---------- --------- --------- ----------- -----------
System revenues ..................... $ 76,467 $ 92,496 $ 151,408 $ 242,681 $ 389,314 $ 431,726
========== ========== ========= ========= =========== ===========
THREE MONTHS ENDED MARCH 31,
----------------------------------------
SUPPLEMENTAL
PRO FORMA
1996 1997 1997
------------ ------------- -------------
Company's net revenues ............ $ 51,169 $ 85,374 $ 95,768
Less Company revenues from:
Franchise royalties ............... (1,176) (1,286) (1,286)
Services to Franchisees ............ (5,782) (8,957) (8,957)
Add Franchisees' net revenues ...... 27,981 35,583 32,625
---------- --------- --------
System revenues ..................... $ 72,192 $ 110,714 $118,150
========== ========= ========
(2) The supplemental pro forma financial information reflects the Company's
historical results of operations, adjusted for (a) the 1996 Acquisitions
and the 1997 Acquisitions (as hereinafter defined, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations"); (b) the distributions to shareholders, the purchase of
shares of common stock of the Subsidiaries from certain shareholders and
the contribution to capital by shareholders, each of which occurred in
connection with the Reorganization; (c) the issuance of $25.0 million
senior subordinated promissory notes (the "Senior Notes") and warrants to
purchase 1,496,335 shares of Common Stock (the "Warrants"); and (d) the
sale by the Company of 3,000,000 shares of Common Stock offered hereby at
an assumed offering price of $15.00 per share and the application of the
net proceeds therefrom, as if all had occurred as of the beginning of the
periods presented. The application of net proceeds includes the retirement
of the balance of the Senior Notes in full, which will result in an
extraordinary loss of $13.9 million, net of a $6.9 million income tax
benefit, which is not reflected in the supplemental pro forma financial
information. This loss consists of the unamortized debt discount and the
unamortized debt issuance costs. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operation,"
"Description of Securities--Reorganization," "Management--Warrants" and
Unaudited Pro Forma Consolidated Financial Information.
The adjustments made to arrive at the supplemental pro forma results for the
three months ended March 31, 1997 include the elimination of $1.9 million of
non-operating income arising from a Put Warrants Valuation Adjustment (as
hereinafter defined, see note 3 below) and included in the Company's
historical results for the same period, as discussed in Note 3 below, which
decreased supplemental pro forma earnings per share by $0.10.
(3) Includes $1.4 million of unusual charges, primarily professional fees, in
the year ended December 31, 1996, related to a registration statement
filed by the Company with the Securities and Exchange Commission that was
subsequently withdrawn and an internal investigation into certain Company
transactions. See "Business--Legal Proceedings" and Note 7 to the
Company's Consolidated Financial Statements.
The holders of the Warrants have a Put Right (as hereinafter defined), as a
result of which the Company recorded a liability at the time of the issuance
of the Warrants based on their fair value (the "Put Warrants Liability").
Until the Offering is consummated, the Company will adjust the Put Warrants
Liability to fair value at the end of each accounting period (the "Put
Warrants Valuation Adjustment"). Other expense (income) for the three months
ended March 31, 1997 includes non-operating income of $1.9 million related
to the adjustment of the Put Warrants Liability recorded at the time of the
issuance of the Warrants on February 21, 1997 and based on their fair value
at that time, to the fair value of the Warrants at March 31, 1997. Based on
an assumed offering price of $15.00 per share and the consummation of this
Offering prior to September 30, 1997, the Put Warrants Valuation Adjustment
will result in non-operating expenses in the second and third quarters of
1997 totalling $5.8 million ($5.1 million net of income tax benefit). At the
time of the Offering, the Warrants, with an adjusted carrying value of $22.4
million (based on an assumed offering price of $15.00 per share), will be
reclassified from debt to additional paid-in capital. See Note 5 to the
Company's Consolidated Financial Statements.
(4) Prior to the Reorganization, each of the Subsidiaries elected to be a
subchapter S corporation and, accordingly, were not subject to income
taxes; therefore, there is no provision for income taxes for periods prior
to the Reorganization. Pro forma income taxes and net income have been
computed as if the Company had been fully subject to federal and
applicable state income taxes for such periods. The Company recognized a
one-time tax benefit of $386,000 as a result of the termination, at the
time of the Reorganization, of the Subsidiaries' elections to be treated
as S corporations. This benefit is reflected in the historical results of
operations for the three months ended March 31, 1997, but has been removed
from the pro forma and the supplemental pro forma results presented for
that period. See Unaudited Pro Forma Consolidated Financial Information.
(5) Includes (a) the 5,993,666 shares of Common Stock issued in connection with
the Reorganization and (b) all outstanding options and warrants to
purchase Common Stock calculated using the treasury stock method and an
assumed offering price of $15.00 per share, as if all such shares, options
and warrants had been outstanding for all periods presented; (c) for the
historical data only for the periods prior to the Reorganization, the
equivalent number of shares (370,072) of Common Stock represented by the
shares of common stock of the Subsidiaries purchased from certain
shareholders for cash and notes in the Reorganization; and (d) for the
supplemental pro forma data only, the sale by the Company of 3,000,000
shares of Common Stock offered hereby. See Note 1 to the Company's
Consolidated Financial Statements.
(6) The other data is presented to reflect the Company's historical results of
operations, adjusted to reflect (a) the elimination of the amount of
compensation expense ($0.9 million, $1.2 million, $1.9 million, $2.0
million and $2.0 million for the years ended December 31, 1992, 1993,
1994, 1995 and 1996, respectively, and $405,000 and $261,000 for the three
months ended March 31, 1996 and 1997, respectively) for Messrs. Louis A.
Morelli, Alan E. Schubert and Lawrence H. Schubert, the Company's founding
shareholders (the "Founding Shareholders") and Mr. Paul M. Burrell, the
Company's President, Chief Executive Officer and Chairman of the Board
(who is also a shareholder), which is in excess of the compensation for
such individuals subsequent to the Reorganization; (b) the elimination of
$1.4 million of unusual charges in the year ended December 31, 1996 and
$1.9 million of non-operating income arising from the March 31, 1997 Put
Warrants Valuation Adjustment, both discussed in Note 3 above; and (c)
income taxes computed as if the Company had been subject to federal and
applicable state income taxes for such periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for summary income statement data reflecting these adjustments.
EBITDA is earnings (net income) before the effect of interest income and
expense, income tax benefit and expense, depreciation expense and
amortization expense. 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.
(7) As adjusted to give effect to the sale by the Company of 3,000,000 shares
of Common Stock offered hereby at an assumed offering price of $15.00 per
share and the application of the net proceeds therefrom to retire (a) the
balance of the Senior Notes in full, (b) a portion of the outstanding
indebtedness under the Company's $45.0 million line of credit facility
(the "Revolving Facility"), (c) various promissory notes due to certain
existing shareholders of the Company, their family members and an
executive officer of the Company, and (d) various promissory notes issued
to related parties in connection with certain acquisitions. See "Use of
Proceeds."
6
THE COMPANY
The Company was organized under the laws of the State of Florida on April
19, 1996. The Company's operations began in Chicago, Illinois in 1974. On
February 21, 1997, the Company consummated a Reorganization with the
Subsidiaries and the shareholders of each of the Subsidiaries which resulted in
the Company becoming the parent company of the Subsidiaries. Immediately prior
to the closing of the Offering, the Company will: (i) effectuate a reverse
stock split pursuant to which each then issued and outstanding share of Common
Stock will be converted into approximately 0.715 shares of Common Stock; and
(ii) amend its Amended and Restated Articles of Incorporation (the "Articles")
to provide for a classified board of directors (the "Board") and certain other
provisions. See "Description of Securities--Common Stock," "Description of
Securities--Reorganization" and "Description of Securities--Certain
Anti-Takeover Provisions Included in the Company's Articles of Incorporation
and Bylaws."
The Company's principal executive offices are located at 1144 East Newport
Center Drive, Deerfield Beach, Florida 33442, and its telephone number is (954)
418-6200.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN
EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
POTENTIAL FOR UNFAVORABLE INTERPRETATION OF GOVERNMENT REGULATIONS
As an employer, the Company is subject to all federal, state and local
statutes and regulations governing its relationships with its employees and
affecting businesses generally, including its employees assigned to work at
client company locations (sometimes referred to as "worksite employees").
Although the Company is not subject to additional regulation by virtue of its
flexible staffing operations, as a result of its PEO operations, the Company is
affected by specifically applicable licensing and other regulatory requirements
and by the uncertainty of the application of numerous federal and state laws
relating to labor, tax and employment matters. Because many such laws were
enacted prior to the development of alternative employment arrangements, such
as those provided by PEOs and other staffing businesses, many of these laws do
not specifically address the obligations and responsibilities of
non-traditional employers. Interpretive issues concerning such relationships
have arisen and remain unsettled. Uncertainties arising under the Internal
Revenue Code of 1986, as amended (the "Code") include, but are not limited to,
the qualified tax status and favorable tax status of certain benefit plans
provided by the Company and other alternative employers. The unfavorable
resolution of these unsettled issues could have a material adverse effect on
the Company's results of operations, financial condition and liquidity. See
"--Potential Legal Liability."
While many states do not explicitly regulate PEOs, approximately one-third
of the states (including Florida) have passed laws that mandate licensing or
registration requirements for PEOs and several additional states are
considering such regulation. Such laws vary from state to state but generally
provide, among other things, for monitoring the fiscal responsibility of PEOs
and specify some of the employer responsibilities assumed by PEOs. The length
of time required to obtain regulatory approval to begin such operations will
vary from state to state, and there can be no assurance that the Company will
be able to satisfy the licensing requirements or other applicable regulations
of any particular state in which it is not currently operating, that it will be
able to provide the full range of services currently offered, or that it will
be able to operate profitably within the regulatory environment of any state in
which it does obtain regulatory approval. The Company is presently licensed in
ten states, has submitted license applications in three other states, and
intends to submit license applications in two other states. The absence of
required licenses in those states where licensing is required would prohibit
the Company from providing PEO services in such states. See "Business--Industry
Regulation."
7
Future growth of the Company's PEO operations will depend, in part, on the
Company's ability to offer its services to prospective clients in other states.
In order to provide PEO services effectively in other states, the Company must
obtain all necessary regulatory approvals, achieve acceptance in the local
market, comply with state regulatory requirements, adapt to local market
conditions, secure favorable rates for non-statutory benefits, and establish
internal controls that enable it to conduct operations in several locations.
Moreover, as the Company expands into additional states, there can be no
assurance that the Company will be able to duplicate in other markets the
revenue growth and operating results experienced in its current markets. In
addition, there can be no assurance that existing laws and regulations which
are not currently applicable to the Company will not be interpreted more
broadly in the future so as to apply to the Company's existing activities or
that new laws and regulations will not be enacted with respect to the Company's
activities, either of which could have a material adverse effect on the
Company's business, financial condition, results of operations and liquidity.
See "Business--Industry Regulation."
INCREASED EMPLOYEE COSTS
The Company is required to pay a number of federal, state and local
payroll taxes and related payroll costs, including unemployment taxes, workers'
compensation insurance premiums and claims, Social Security, and Medicare,
among others, for its employees (including its worksite employees and the
worksite employees of many of its franchise associates). The Company also
provides certain additional benefits to many of its core employees (including
many of its worksite employees) and incurs certain costs related to the
provision of such benefits, such as insurance premiums for health care. Health
insurance premiums, unemployment taxes and workers' compensation insurance
premiums and costs are significant to the Company's operating results, and are
determined, in part, by the Company's claims experience. Accordingly, the
Company employs extensive procedures in an attempt to control such costs. The
Company's costs could increase as the result of proposed health care reforms.
Recent federal and certain state legislative proposals have included provisions
extending health insurance benefits to employees who do not presently receive
such benefits. There can be no assurance that the Company will be able to
increase the fees charged to its clients in a timely manner and sufficient
amount to cover increased costs related to workers' compensation, unemployment
insurance or health insurance benefits that may be extended to worksite
employees.
LIABILITY FOR WORKERS' COMPENSATION CLAIMS
The Company's worker's compensation insurance coverage for calendar 1997
provides for a $250,000 deductible per accident or industrial illness with an
aggregate annual dollar limit on the Company's potential liability for
deductible payments of 2.2% of aggregate annual payroll. For claims related to
periods prior to 1997, there was no aggregate maximum dollar limit on the
Company's potential liability for deductible payments. From May 1, 1995 through
December 31, 1996, in exchange for a lower excess insurance premium rate, the
Company accepted the responsibility for losses exceeding the $250,000 policy
deductible per accident or industrial illness on a dollar-for-dollar basis, but
only to the extent such losses cumulatively exceed 85% of the excess insurance
premium (excluding the profit and administration component), subject to a
maximum additional premium of approximately $750,000 in 1995 and $1.2 million
in 1996. As a result, the Company pays substantially all workers' compensation
claims of its employees. To the extent the Company is not successful in
managing the severity of workers' compensation claims remaining open from
periods prior to 1997, the costs incurred by the Company will increase and
could have a material adverse effect on the Company's financial condition,
results of operations and liquidity. In addition, because the Company's
aggregate liability for deductible payments was not limited for claims related
to periods prior to 1997, the adverse development of any claims involving
significant dollar amounts could also have a material adverse effect on the
Company's financial condition and results of operations.
The Company employs the services of an independent third-party
administrator to assist management in establishing an appropriate accrual for
the uninsured portion of claims. However, such accrual is an estimate of future
payments relating to known claims and claims incurred but not reported,
8
based on prior experience and other relevant data. Although there can be no
assurance that the Company's actual future workers' compensation obligations
for periods prior to 1997 will not exceed the amount of its workers'
compensation reserves, management believes the recorded reserve is adequate.
Moreover, the Company may incur costs related to workers' compensation claims
at a higher rate in future years due to such causes as higher than anticipated
losses from known claims or an increase in the number and severity of new
claims. Workers' compensation insurance premiums and other costs may increase
as a result of changes in the Company's experience rating or applicable laws.
For a discussion of the adequacy of workers' compensation related reserves, see
"Business--Risk Management Program--Workers' Compensation."
The Company secures its obligations to pay the uninsured portion of its
workers' compensation claims through bank standby letters of credit in favor of
the insurer. Any failure by the Company to maintain sufficient letters of
credit or other collateral to secure its workers' compensation obligations, or
any adverse change in the Company's experience rating or applicable laws, may
adversely affect the Company's workers' compensation insurance rates and
ultimately the Company's business, financial condition, results of operations
and liquidity. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
ABILITY TO CONTINUE GROWTH
The Company has experienced significant growth in the past through
acquisitions, internal growth and by granting franchises. There can be no
assurance that, in the future, the Company will be able to expand its market
presence in its current locations or successfully enter other markets. The
ability of the Company to continue its growth will depend on a number of
factors, including the availability of working capital to support such growth,
existing and emerging competition and the Company's ability to maintain
sufficient profit margins in the face of pricing pressures. The Company must
also manage costs in a changing regulatory environment, adapt its
infrastructure and systems to accommodate growth and recruit and train
additional qualified personnel.
The Company plans to expand its business, in part, through acquisitions
primarily of flexible industrial staffing companies and PEOs. There can be no
assurance that the Company will be able to successfully identify suitable
acquisition candidates, complete acquisitions on favorable terms, or at all, or
integrate acquired businesses into its operations. Moreover, there can be no
assurance that future acquisitions will not have a material adverse effect on
the Company's operating results, particularly in the fiscal quarters
immediately following the consummation of such transactions, while the
operations of the acquired business are being integrated into the Company's
operations. Once integrated, acquisitions may not achieve comparable levels of
revenues, profitability or productivity as at existing Company-owned locations
or otherwise perform as expected. The Company is unable to predict whether or
when any prospective acquisition candidate will become available or the
likelihood that any acquisition will be completed. The Company competes for
acquisition and expansion opportunities with entities that have substantially
greater resources. In addition, acquisitions involve a number of special risks,
such as diversion of management's attention, difficulties in the integration of
acquired operations and retention of personnel, unanticipated problems or legal
liabilities, and tax and accounting issues, some or all of which could have a
material adverse effect on the Company's results of operations and financial
condition. See "Business--Company Strategy."
Franchise growth poses the additional risk of the inability of the Company
to control the quality of services provided by its franchise associates.
Moreover, the failure of its franchise associates to pay royalties due to the
Company could have a material adverse effect on the Company's financial
condition and results of operations.
RISKS RELATED TO INTANGIBLE ASSETS
The 1996 Acquisitions and the 1997 Acquisitions (as hereinafter defined,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations") resulted in significant
9
increases in net identifiable intangible assets and goodwill. Net identifiable
intangible assets, which include customer lists, employee lists and covenants
not to compete acquired in the acquisitions were approximately $5.6 million at
March 31, 1997, representing approximately 6.9% of the Company's total assets.
Net identifiable intangible assets are recorded at fair value on the date of
acquisition and are being amortized over periods ranging from one to 15 years,
or a weighted average of 6.1 years. Goodwill, which relates to the excess of
cost over the fair value of net assets of businesses acquired, was
approximately $25.4 million at March 31, 1997 representing approximately 31.1%
of the Company's total assets. The Company amortizes goodwill on a straight
line basis over periods ranging from 15 to 40 years, or a weighted average of
32.7 years. There can be no assurance that the value of intangible assets will
ever be realized by the Company. On an ongoing basis, the Company makes an
evaluation based on undiscounted cash flows, whether events and circumstances
indicate that all or a portion of the carrying value of intangible assets may
no longer be recoverable, in which case an additional charge to earnings may be
necessary. Although at March 31, 1997 the net unamortized balance of intangible
assets is not considered to be impaired, any future determination requiring the
write off of a significant portion of unamortized intangible assets could have
a material adverse effect on the Company's financial condition and results of
operations. See Note 2 to the Company's Consolidated Financial Statements.
RELIANCE ON INFORMATION PROCESSING SYSTEMS AND PROPRIETARY TECHNOLOGY
The Company's business depends, in part, upon its ability to store,
retrieve, process, and manage significant databases, and periodically to expand
and upgrade its information processing capabilities. The Company's computer
equipment and software systems are maintained at its Deerfield Beach, Florida
headquarters. Interruption or loss of the Company's information processing
capabilities through loss of stored data, breakdown or malfunction of computer
equipment and software systems, telecommunications failure, conversion
difficulties, or damage to the Company's headquarters and systems could have a
material adverse effect on the Company.
POTENTIAL LEGAL LIABILITY
Providers of staffing services may be subject to claims relating to the
actions of their employees (including their worksite employees), including
possible claims of discrimination and harassment, theft of client property,
misuse of client proprietary information, other criminal actions or torts and
other claims. Management has adopted and implemented policies and guidelines to
reduce its exposure to these risks. However, the failure of any Company
employee to follow these policies and guidelines may result in negative
publicity, injunctive relief and the payment by the Company of money damages or
fines. Although the Company historically has not had any significant problems
in this area, there can be no assurance that the Company will not experience
such problems in the future.
As an employer, the Company may be subject to a wide variety of
employment-related claims such as claims for injuries, wrongful death,
harassment, discrimination, wage and hour violations and other matters. In
addition, a number of legal issues remain unresolved with respect to
co-employment arrangements among PEOs, their clients and worksite employees,
including questions concerning ultimate liability for violations of employment
and discrimination laws. The Company's standard PEO client service agreement
establishes a contractual division of responsibilities between the Company and
each client for various human resource matters, including compliance with and
liability under various governmental regulations. However, as a result of the
Company's status as co-employer, the Company may be subject to liability for
violations of these and other laws despite these contractual provisions and
even if it does not participate in such violations. Although such client
service agreements generally provide that the client is to indemnify the
Company for any liability attributable to the client's failure to comply with
its contractual obligations and the requirements imposed by law, the Company
may not be able to collect on such a contractual obligation claim and thus may
be responsible for satisfying such liabilities. The Company carries liability
insurance, but there can be no assurance that any such insurance will be
sufficient to cover any judgments, settlements or costs relating to any present
or future claims, suits or complaints or that sufficient insurance will be
available to the Company or such providers in the future on satisfactory terms,
if at all. If insurance is not sufficient to cover any
10
judgments, settlements or costs relating to any present or future claims, suits
or complaints, the Company's business, financial condition, results of
operations and liquidity could be materially adversely affected. See
"--Potential for Unfavorable Interpretation of Government Regulations" and
"Business--Industry Regulation."
The Company may be subject to claims asserting that it is vicariously
liable for the damages allegedly caused by its franchisees. Generally,
franchisor liability for the acts or inactions of its franchisees are based on
agency concepts. The Company's franchise agreements state that the parties are
not agents and that the franchisees control the day-to-day operations of their
businesses. Furthermore, the franchise agreements require the franchisees to
undertake certain efforts to inform the public that they are not agents of the
Company and that they are independently owned and operated. Moreover, the
Company has taken certain additional steps to insulate its potential liability
based on claims from the franchisees' conduct, including requiring the
franchisees to indemnify the franchisor for such claims and mandating that the
franchisees carry certain insurance coverage naming the Company as an
additional insured. Despite these efforts to minimize the risk of vicarious
liability, there can be no assurance that a claim will not be made against the
Company, nor that the indemnification requirements and insurance coverage will
be sufficient to cover any judgments, settlements or costs relating to such a
claim.
COMPETITION
The staffing industry is highly competitive, with approximately 7,000
companies providing flexible staffing services through approximately 17,000
locations and approximately 2,000 companies providing PEO services. The Company
competes with larger full-service and specialized flexible staffing and PEO
competitors in national, regional and local markets. In addition, the Company
may encounter substantial competition from new market entrants. Many of the
Company's competitors have significantly greater name recognition and have
greater marketing, financial and other resources than the Company. The Company
expects that there will be significant consolidation in the staffing industry
in the future, resulting in increased competition from larger national and
regional companies. There can be no assurance that the Company will be able to
compete effectively against such competitors in the future. See "Business--The
Staffing Industry" and "Business--Competition."
DEPENDENCE ON CERTAIN CLIENTS
Approximately 16% of the Company's total 1996 revenues and approximately
26% of the 1996 revenues of its PEO operations were derived from services
provided to independent Allstate insurance agents. As of June 30, 1997, such
services were provided to approximately 2,500 such agents. Although each of
these agents has the authority to make its own decisions concerning outside
vendors, they are required to choose service providers from among those that
are approved by the respective agent's regional headquarters office. The
failure of the Company to remain an approved service provider may result in the
loss of some or all of these customers, which could have a material adverse
effect on the Company's business, financial condition, results of operations
and liquidity. In addition, approximately 13% of the Company's total 1996
revenues and 20% of the 1996 revenues of its PEO operations were derived from
services provided to certain of the Company's flexible industrial staffing
franchises.
SEASONAL VARIATIONS IN RESULTS
The Company normally experiences higher revenues in its third and fourth
quarters because of increased demand for temporary industrial personnel during
this time. Demand is higher during these two quarters because most of the
Company's flexible staffing clients are increasing production in preparation
for the end of the year holiday season. The Company's quarterly operating
results also fluctuate as a result of a number of timing factors, including the
effect of employment tax limits. In addition, the Company usually experiences
lower revenues in the first quarter due to unfavorable weather conditions and
lower overall economic activity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality."
11
FINANCIAL CONDITION OF CLIENTS
The Company is obligated to pay the wages and salaries of its worksite
employees regardless of whether the Company's clients pay the Company on a
timely basis or at all. The Company also makes advances to certain flexible
staffing franchise associates to fund payroll for temporary personnel provided
by those franchise associates to their clients. To the extent that a client or
flexible staffing franchise associate experiences financial difficulty, or is
otherwise unable to meet its obligations as they become due, the Company's
financial condition, results of operations and liquidity could be materially
adversely affected.
DURATION OF PEO SERVICES AGREEMENT
The Company's standard PEO services agreements are generally subject to
termination by the Company or the client at any time upon 30 to 45 days' prior
written notice. A significant number of terminations could have a material
adverse effect on the Company's financial condition, results of operations and
liquidity. See "Business--Clients."
RISK OF LOSS OF QUALIFIED STATUS FOR CERTAIN TAX PURPOSES
For purposes of the Company's 413(c) multiple-employer retirement plans
(similar to 401(k) retirement plans and hereafter referred to as the
"Multi-Employer Retirement Plans"), cafeteria plan and federal employment tax
withholding, the Company treats worksite employees as the employees of the
Company. It is possible that in connection with an examination by the Internal
Revenue Service ("IRS") of a client company and/or the Company, the IRS may
determine that the Company is not the employer of the worksite employees. The
IRS is conducting an examination division market segment specialization
program, coordinated through its Houston, Texas district office, to examine
PEO's throughout the United States. If the Company is not the employer of the
worksite employees, the qualified tax status of the Company's Multi-Employer
Retirement Plans and cafeteria plan may be revoked and the Company may lose its
ability to assume a client company's federal employment tax withholding
obligations.
If the loss of qualified tax status for the Company's Multi-Employer
Retirement Plans or cafeteria plan is applied retroactively, employees' vested
account balances may become taxable immediately to the employees, the Company
would lose its tax deduction to the extent the contributions were not vested,
the plan trust would become a taxable trust and penalties could be assessed. In
such a scenario, the Company would face the risk of client dissatisfaction as
well as potential litigation, and its financial condition, results of
operations and liquidity could be materially adversely affected. In addition,
if the Company is required to report and pay employment taxes for the separate
accounts of its clients rather than for its own account as a single employer,
the Company could incur increased administrative burdens. The Company is unable
to predict the timing or nature of the findings of an IRS examination. See
"Business--Industry Regulation."
POSSIBLE ADVERSE EFFECT OF FLUCTUATIONS IN THE GENERAL ECONOMY AND BUSINESS OF
CLIENTS
Historically, the general level of economic activity has significantly
affected the demand for temporary personnel. As economic activity has slowed,
the use of temporary employees often has been curtailed before core employees
have been laid off. There can be no assurance that an economic downturn would
not adversely affect the demand for temporary personnel. During periods of
increased economic activity and generally higher levels of employment, the
competition among flexible staffing firms for qualified temporary personnel is
intense. Traditionally, demand for PEO services has not been directly affected
by the overall state of the economy. There can be no assurance, however, that
the Company's PEO operations will not be adversely affected by decreases in
economic activity. Staffing providers are also affected by fluctuations and
interruptions in the business of their clients. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition."
12
ANTI-TAKEOVER PROVISIONS
Pursuant to the Company's Articles, the Board has the authority to issue
shares of preferred stock and to determine the designations, preferences,
rights and qualifications or restrictions of those shares without any further
vote or action by the shareholders. The rights of the holders of Common Stock
will be subject to, and may be materially adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate actions, could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of the outstanding voting
stock of the Company. Prior to the closing of the Offering, the Company will
amend its Articles (as so amended, the "Amended Articles") to provide for the
classification of the Company's Board into three classes, each class to be as
nearly equal in number of directors as possible, and amend its Bylaws (as so
amended, the "Amended Bylaws"). These and other additional provisions contained
in the Company's Amended Articles, Amended Bylaws and the Florida Business
Corporation Act ("FBCA"), could have the effect of making it more difficult for
a party to acquire, or of discouraging a party from attempting to acquire,
control of the Company without approval of the Company's Board. See
"Description of Securities-Certain Anti-Takeover Provisions Included in the
Company's Articles of Incorporation and Bylaws" and "Description of
Securities--Certain Provisions of Florida Law."
In addition, prior to the closing of the Offering, the Company will enter
into a shareholder protection rights agreement (the "Rights Agreement") and
will declare a dividend of one right (a "Right") for each outstanding share of
Common Stock. The Rights may cause substantial dilution to a person or group
that attempts to acquire the Company in a manner or on terms not approved by
the Board. These provisions and agreements are intended to encourage a person
interested in acquiring the Company to negotiate with, and to obtain the
approval of, the Board in connection with such a transaction. However, certain
of these provisions and agreements may discourage a future acquisition of the
Company, including an acquisition in which shareholders might otherwise receive
a premium for their shares. As a result, shareholders who might desire to
participate in such a transaction may not have the opportunity to do so. See
"Description of Securities--Shareholder Rights Plan."
VOTING TRUST AGREEMENT; SHAREHOLDERS' AGREEMENT
On February 21, 1997, certain shareholders of the Company deposited
5,152,380 shares of Common Stock into a voting trust (the "Voting Trust"), the
trustees of which are Messrs. Paul M. Burrell, the President, Chief Executive
Officer and Chairman of the Board of the Company, and Richard J. Williams, a
director of the Company (the "Trustees"). The term of the Voting Trust is ten
years. Pursuant to the terms of the Voting Trust, the Trustees have sole and
exclusive right to vote the shares of Common Stock deposited in the Voting
Trust. Upon consummation of this Offering, the shares of Common Stock in the
Voting Trust will constitute approximately 49.5% of the issued and outstanding
shares of Common Stock (or 43.3% if the Underwriters' over-allotment option is
exercised in full). Accordingly, the Trustees will retain sufficient voting
power to control the election of the Board or the outcome of any extraordinary
corporate transaction submitted to the shareholders for approval for the
foreseeable future.
Effective February 21, 1997, the shareholders of the Company (the former
shareholders of the Subsidiaries) agreed to elect a Board comprised of seven
persons: three persons designated by the chief executive officer of the Company
(the "Management Directors"), two persons designated by the holders of $25.0
million senior subordinated promissory notes (the "Senior Notes") issued by the
Company (the "Investor Directors") and two additional persons selected by the
Management Directors and the Investor Directors. In the event of a default
under the Senior Notes or the failure of the Company to achieve certain
performance criteria, the holders of the Senior Notes have the right to
designate up to two additional members of the Board. The shareholders further
agreed to ratify any merger, consolidation or sale of the Company, any
acquisitions made by the Company, and any amendments to the Company's Articles
or Bylaws to the extent such actions are approved by the Board. See
"Management--Voting Trust and Shareholders' Agreement" and "Principal and
Selling Shareholders."
13
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Although the Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market, there can be no assurance that an
active trading market will develop for the Common Stock or, if one does
develop, that it will be maintained. The initial public offering price of the
Common Stock will be negotiated between the Company and the representatives of
the Underwriters and may not be indicative of the market price of the Common
Stock after the Offering. Additionally, the market price of the Common Stock
could be subject to significant fluctuations in response to operating results
of the Company, announcements of new services or market expansions by the
Company or its competitors, changes in general conditions in the economy, the
financial markets, the employment services industry, or other developments and
activities affecting the Company, its clients or its competitors, some of which
may be unrelated to the Company's performance. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market
following the Offering could have an adverse effect on prevailing market prices
of the Common Stock. After the Offering, the 3,700,000 shares of Common Stock
offered hereby will be freely tradeable without restriction. However, the
shareholders of the Company as of the date of this Prospectus (the "Existing
Shareholders") who, upon the completion of this Offering, will beneficially own
(excluding options and Warrants) an aggregate of approximately 5,293,666 shares
of Common Stock (or 4,738,666 shares, if the Underwriters' over-allotment
option is exercised in full) have agreed with the Underwriters not to sell any
of their shares for a period of 180 days from the date of this Prospectus
without the prior consent of Smith Barney Inc. See "Shares Eligible for Future
Sale."
The Company has reserved 1,144,000 shares of Common Stock for issuance
under the Company's Stock Option Plan, as amended and restated (the "Stock
Option Plan"). As of the date of this Prospectus, options to purchase up to
573,561 shares of Common Stock (net of forfeitures) have been granted under the
Stock Option Plan. The Company intends to file a registration statement on Form
S-8 under the Securities Act to register shares of Common Stock reserved for
issuance under the Stock Option Plan, thereby permitting the resale of such
shares by non-affiliates in the public market without restriction under the
Securities Act. After the consummation of this Offering, the Company has
agreed, upon demand, to register up to 1,496,335 shares of Common Stock
issuable upon the exercise of the Warrants (the "Warrant Shares"), subject to
certain terms and conditions of a registration rights agreement. The Company
has also agreed to include the Warrants Shares and shares of Common Stock owned
by the Existing Shareholders in certain registration statements under the
Securities Act which may be filed by the Company with respect to an offering of
Common Stock for its own account or the account of any of its shareholders. See
"Management--Stock Option Plan," "Management--Warrants" and "Shares Eligible
for Future Sale."
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate
and significant dilution of $12.58 per share in the net tangible book value of
their shares. See "Dilution."
14
USE OF PROCEEDS
The net proceeds to the Company from the sale of 3,000,000 shares of
Common Stock offered by the Company hereby, after deducting estimated expenses
of the Offering payable by the Company and underwriting discounts and
commissions, will be approximately $41.2 million, based upon an assumed initial
public offering price of $15.00 per share. The Company intends to allocate the
net proceeds of the Offering as follows: (i) approximately $35.2 million will
be used to reduce indebtedness under certain credit obligations; and (ii)
approximately $6.0 million will be used to repay shareholder notes and
indebtedness incurred in connection with certain acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Transactions."
The principal amount of the indebtedness to be retired with the proceeds
of the Offering consists of approximately: (i) $25.0 million incurred in
connection with the issuance of the Senior Notes to Triumph-Connecticut Limited
Partnership ("Triumph") and Bachow Investment Partners III, L.P.
("Bachow")(collectively, the "Senior Note Holders"), bearing interest at the
rate of 11% per annum through February 1999 and at the rate of 12.5%
thereafter, with $10.0 million of the principal amount maturing on March 31,
2001 and the balance due and payable on February 20, 2002; (ii) $10.4 million
under the Company's $45.0 million line of credit facility (the "Revolving
Facility") with Bank of Boston Connecticut, Lasalle National Bank and Comerica
Bank (the "Lenders"), bearing interest at Bank of Boston Connecticut's base
rate or Eurodollar rate (at the Company's option), plus a margin based upon the
ratio of the Company's total indebtedness to the Company's earnings (as defined
in the Revolving Facility), resulting in a rate of 8.9% per annum at March 31,
1997; (iii) $2.9 million under various promissory notes due to certain of the
Existing Shareholders, their family members and an executive officer of the
Company, bearing interest at annual rates ranging from 10% to 21%, most of
which are currently payable; and (iv) $2.9 million due to related parties under
various promissory notes issued in connection with recent acquisitions, bearing
interest at annual rates ranging from 4% to 14%, most of which mature during
the next two years. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Description of Securities--Reorganization."
As a result of the reduction of outstanding indebtedness under the
Revolving Facility, an aggregate of $13.0 million will be available under the
Revolving Facility to the Company for general corporate purposes, including
potential acquisitions of PEO and flexible staffing businesses and expansion of
the Company's operations. The Company is currently negotiating an increase in
the Revolving Facility to $85.0 million, primarily to finance additional
acquisitions by the Company over the next several years. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
The foregoing represents the Company's estimate of its allocation of the
net proceeds of the Offering based upon its contemplated operations, the
Company's business plan and certain economic and industry conditions. The use
of proceeds is subject to reapportionment among the categories in response to,
among other things, changes in the Company's plans, industry conditions and
future revenues and expenditures. The Company will not receive any of the
proceeds from the sale of shares of Common Stock being offered by the Selling
Shareholders. See "Principal and Selling Shareholders."
DIVIDEND POLICY
The Company intends to retain future earnings, if any, to finance future
operations and expansion and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. The Revolving Facility restricts the
Company's ability to declare and pay dividends. Any future determination as to
the payment of dividends will be made at the discretion of the Board and will
depend upon the financial condition, capital requirements and earnings of the
Company, as well as upon other factors that the Board may deem relevant.
15
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
March 31, 1997, and at such date as adjusted to give effect to the sale of
3,000,000 shares of Common Stock offered by the Company hereby at an assumed
offering price of $15.00 per share, and the application of net proceeds
therefrom as described under the caption "Use of Proceeds."
MARCH 31, 1997
-----------------------------------
ACTUAL AS ADJUSTED(1)
---------------- ----------------
Short-term debt:
Current maturities of long term debt to related parties ............... $ 651,840 $ --
Current maturities of obligations under capital leases and other ...... 1,988,678 1,988,678
------------- --------------
Total short-term debt ................................................ 2,640,518 1,988,678
------------- --------------
Long-term debt, less current maturities:
Revolving Facility ................................................... 24,649,137 14,306,702
Senior Notes(2) ...................................................... 6,596,482 --
Put Warrants Liability(3) .......................................... 16,658,714 --
Due to related parties ............................................. 5,180,725 --
Other ............................................................... 12,247,600 12,247,600
------------- --------------
Total long-term debt, less current maturities ........................ 65,332,658 26,554,302
------------- --------------
Shareholders' equity (deficit):
Preferred stock, $.001 par value, 10,000,000 shares authorized,
none issued .........................................................
Common stock, actual -- $.001 par value, 100,000,000 shares
authorized, 5,993,666 issued and outstanding; as adjusted --8,993,666
shares issued and outstanding(4) .................................... 5,994 8,994
Additional paid-in capital (deficit)(3) .............................. (7,484,866) 56,117,196
Retained earnings (deficit)(2) ....................................... 1,779,158 (17,233,127)
------------- --------------
Total shareholders' equity (deficit) ................................. (5,699,714) 38,893,064
------------- --------------
Total capitalization ................................................ $ 62,273,462 $ 67,436,044
============= ==============
- ----------------
(1) Reflects the effects of the sale by the Company of 3,000,000 shares of
Common Stock in the Offering at an assumed price of $15.00 per share, and
the application of net proceeds therefrom. See "Use of Proceeds."
(2) The adjusted amounts reflect a $13.9 million extraordinary loss (net of a
$6.9 million income tax benefit) the Company will record as a result of
the intended use of proceeds of this Offering to repay the $25.0 million
balance of the Senior Notes. This loss consists of the unamortized debt
discount and the unamortized debt issuance costs related to the Senior
Notes. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and
"Description of Securities--Reorganization."
(3) The adjusted amounts reflect the termination of the Put Right which will
occur upon consummation of the Offering and which will result in the
reclassification of the Warrants from debt to additional paid-in capital.
This adjustment includes non-operating expenses of $5.8 million ($5.1
million net of income tax benefit) that would have been recognized had the
Offering been consummated on March 31, 1997 at an assumed offering price of
$15.00 per share, due to the Put Warrants Valuation Adjustment. See
"Management--Warrants."
(4) Excludes 573,561 shares of Common Stock issuable pursuant to options
granted under the Stock Option Plan, and 1,496,335 Warrant Shares. See
"Management--Stock Option Plan" and "Management--Warrants."
16
DILUTION
The net tangible book value (deficit) of the Company at March 31, 1997 was
($36,686,775) or ($6.12) per share of Common Stock. Net tangible book value
(deficit) per share is determined by dividing the net tangible book value
(deficit) (total assets less goodwill and identifiable intangible assets
arising from acquisitions and total liabilities) of the Company at March 31,
1997 by the number of shares of Common Stock outstanding at March 31, 1997.
After giving effect to the sale of 3,000,000 shares of Common Stock offered by
the Company hereby (at an assumed offering price of $15.00 per share) and the
termination of the Put Right which will occur upon consummation of the Offering
and result in the reclassification of the Warrants from debt to additional
paid-in capital, the pro forma net tangible book value of the Company at March
31, 1997 would have been $2.42 per share of Common Stock. This represents an
immediate dilution in pro forma net tangible book value of $12.58 per share to
new investors purchasing shares in the Offering and an immediate increase in
pro forma net tangible book value of $8.54 (including $2.88 attributable to the
termination of the Put Right) per share to the Existing Shareholders. The
following table illustrates this per share dilution:
Assumed public offering price per share .......................................... $15.00
Net tangible book value (deficit) per share before the Offering(1) ............... ($ 6.12)
Pro forma increase in net tangible book value per share attributable to:
Termination of the Put Right(2) ................................................ 2.88
New Investors .................................................................. 5.66
----------
Pro forma net tangible book value per share of Common Stock, after the Offering 2.42
---------
Dilution per share to New Investors(1) .......................................... $12.58
=========
The above calculation does not give effect to the outstanding Warrants to
purchase 1,496,335 shares of Common Stock at $.014 per share or the $13.9
million extraordinary loss (net of a $6.9 million income tax benefit) the
Company will record as a result of the intended use of the proceeds of this
Offering to repay the full balance of the Senior Notes. Including the dilutive
effect of the Warrants and the extraordinary loss, the pro forma net tangible
book value would be $0.75 per share of Common Stock. This represents an
adjusted dilution in pro forma net tangible book value of $14.25 per share to
new investors purchasing shares in the Offering and an adjusted increase in pro
forma net tangible book value of $6.87 (including $2.88 attributable to the
termination of the Put Right) per share to the Existing Shareholders.
The following table sets forth, as of March 31, 1997, the number of shares
of Common Stock purchased from the Company, the total consideration paid to the
Company, and the average price paid per share by the Existing Shareholders and
by purchasers of the shares of Common Stock offered hereby:
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ------------------- --------- --------------
Existing Shareholders ...... 5,993,666 66.6% $ -- 0.0%) $ --
New Investors ............... 3,000,000 33.4 45,000,000(4) 100.0 $15.00
--------- ------ --------------- ------
Total(1) .................. 8,993,666 100.0% $ 45,000,000 100.0%
========= ====== =============== ======
- ----------------
(1) Excludes 573,561 shares of Common Stock issuable pursuant to outstanding
options under the Stock Option Plan and 1,496,335 Warrant Shares. See
"Management--Stock Option Plan," "Management--Warrants" and Notes 5 and 10
to the Company's Consolidated Financial Statements.
(2) The increase in the net tangible book value due to the termination of the
Put Right includes (i) the Put Warrants Valuation Adjustment of $5.8
million ($5.1 million net of income tax benefit) that would have been
recognized had the Offering been consummated on March 31, 1997 at an
assumed offering price of $15.00 per share and (ii) the reclassification
of the resulting adjusted Put Warrant Liability of $22.4 million from debt
to additional paid-in capital upon consummation of the Offering.
(3) On February 21, 1997, the shareholders of the Subsidiaries (the
"Subsidiaries' Shareholders") exchanged all of their shares of common
stock of the Subsidiaries for shares of the Company's Common Stock, as
well as cash and notes. The shares of common stock of the Subsidiaries had
a market value significantly in excess of the effective cash contribution
by the Subsidiaries' Shareholders for the initial issuance of those
shares. However, distributions to the Subsidiaries' Shareholders in
connection with the Reorganization exceeded retained earnings and
additional paid-in capital. See "Description of
Securities--Reorganization."
(4) Before deducting the underwriting discount and offering expenses payable by
the Company.
17
SELECTED CONSOLIDATED FINANCIAL DATA
The historical selected consolidated balance sheet data and consolidated
statement of income data set forth below as of and for each of the five years
in the period ended December 31, 1996 and the three months ended March 31, 1996
and 1997 has been derived from the historical consolidated financial statements
of the Company. The Consolidated Financial Statements of the Company as of
December 31, 1994 and for the year then ended have been audited by McGladrey &
Pullen, LLP, independent auditors, as stated in their report appearing
elsewhere in this Prospectus. The Consolidated Financial Statements of the
Company as of December 31, 1995 and 1996 and for the years then ended have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing elsewhere in this Prospectus. The Consolidated Financial
Statements of the Company as of March 31, 1997 and for the three months ended
March 31, 1996 and 1997 are unaudited, but in the opinion of management include
all adjustments necessary, including normal accruals, to present fairly
financial position and results of operations in conformity with generally
accepted accounting principles. The system revenues data has been derived from
the Company's records. The Pro Forma and Supplemental Pro Forma data has been
derived from Unaudited Pro Forma Consolidated Financial Information included
elsewhere herein. The data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Company's Consolidated Financial Statements and related Notes thereto, and
other financial information included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
SUPPLEMENTAL
PRO FORMA
1992 1993 1994 1995 1996 1996(2)
------------ ------------ ------------- ------------- ---------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SYSTEM REVENUES(1) ........................ $ 76,467 $ 92,496 $ 151,408 $ 242,681 $389,314 $431,726
======== ======== ========= ========= ========= =========
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net revenues .............................. $ 39,737 $ 43,472 $ 80,647 $ 149,825 $280,171 $345,087
Cost of revenues ........................... 31,966 34,367 65,813 126,270 242,102 290,732
-------- -------- --------- --------- --------- ---------
Gross profit .............................. 7,771 9,105 14,834 23,555 38,069 54,355
Shareholders' compensation .................. 898 1,400 2,245 2,370 2,321 370
Amortization of intangible assets ......... -- -- -- 41 424 2,349
Other selling, general and administrative ... 5,305 6,098 9,008 17,688 29,841 41,360
-------- -------- --------- --------- --------- ---------
Operating income ........................... 1,568 1,607 3,581 3,456 5,483 10,276
Net interest expense ..................... 328 263 820 1,259 2,175 2,298
Other expense (income)(3) .................. (59) (237) (51) (11) 1,448 1,417
-------- -------- --------- --------- --------- ---------
Income before provision (benefit)
for income taxes ........................ 1,299 1,581 2,812 2,208 1,860 6,561
Pro forma income taxes(4) .................. 486 595 1,059 859 757 2,529
-------- -------- --------- --------- --------- ---------
Pro forma net income(4) .................. $ 813 $ 986 $ 1,753 $ 1,349 $ 1,103 $ 4,032
======== ======== ========= ========= ========= =========
Pro forma weighted average common
shares outstanding(5) ..................... 6,821 6,821 6,821 6,821 6,821 10,687
======== ======== ========= ========= ========= =========
Pro forma earnings per share ............... $ .12 $ .14 $ .26 $ .20 $ .16 $ .38
======== ======== ========= ========= ========= =========
OTHER DATA(6):
EBITDA, as adjusted ........................ $ 2,792 $ 3,618 $ 5,993 $ 6,276 $ 9,005 $ 14,449
======== ======== ========= ========= ========= =========
Net income, as adjusted .................. $ 1,382 $ 1,715 $ 2,947 $ 2,586 $ 3,220 $ 4,930
======== ======== ========= ========= ========= =========
Pro forma earnings per share,
as adjusted .............................. $ .47 $ .46
========= =========
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
SUPPLEMENTAL
PRO FORMA
1996 1997 1997(2)
--------- ------------- -------------
SYSTEM REVENUES(1) ........................ $72,192 $ 110,714 $ 118,150
======== ========= =========
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net revenues .............................. $51,169 $ 85,374 $ 95,768
Cost of revenues ........................... 44,479 74,239 82,165
-------- --------- ---------
Gross profit .............................. 6,690 11,135 13,603
Shareholders' compensation .................. 482 292 31
Amortization of intangible assets ......... 10 330 596
Other selling, general and administrative ... 5,715 9,938 12,053
-------- --------- ---------
Operating income ........................... 483 575 923
Net interest expense ..................... 329 1,327 588
Other expense (income)(3) .................. 35 (1,952) (108)
-------- --------- ---------
Income before provision (benefit)
for income taxes ........................ 119 1,200 443
Pro forma income taxes(4) .................. 48 (33) 174
-------- --------- ---------
Pro forma net income(4) .................. $ 71 $ 1,233 $ 269
======== ========= =========
Pro forma weighted average common
shares outstanding(5) ..................... 6,821 7,188 10,687
======== ========= =========
Pro forma earnings per share ............... $ .01 $ .17 $ .03
======== ========= =========
OTHER DATA(6):
EBITDA, as adjusted ........................ $ 1,026 $ 1,676 $ 2,257
======== ========= =========
Net income, as adjusted .................. $ 318 $ (271) $ 269
======== ========= =========
Pro forma earnings per share,
as adjusted .............................. $ (.04) $ .03
========= =========
18
AS OF DECEMBER 31, AS OF MARCH 31,
---------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1997
--------- -------- --------- --------- ------------- -----------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) ........................... $( 130) $1,313 $ 1,596 $ 1,540 $ (3,172) $ 11,020
Total assets ....................................... 5,191 5,923 13,791 24,708 55,877 81,490
Revolving Facility and line of credit ............... 1,788 1,523 4,827 6,468 9,889 24,649
Senior Notes ....................................... -- -- -- -- -- 6,596
Put Warrants Liability .............................. -- -- -- -- -- 16,659
Long-term debt to related parties,
less current maturities ........................... -- -- -- -- 2,403 5,181
Other long-term debt, less current maturities ...... 370 60 2,713 2,815 10,874 12,248
Total shareholders' equity (deficit) ............... 262 1,843 2,701 3,603 4,495 (5,700)
- ----------------
(1) System revenues is 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
provides meaningful information regarding the Company's penetration of the
market for its services, as well as the scope and size of the Company's
operations. The net revenues of franchisees are derived from reports that
are unaudited. System revenues consist of the following:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
SUPPLEMENTAL
PRO FORMA
1992 1993 1994 1995 1996 1996
------------ ------------ ------------- ------------- ------------- --------------
(IN THOUSANDS)
Company's net revenues ............ $ 39,737 $ 43,472 $ 80,647 $ 149,825 $ 280,171 $ 345,087
Less Company revenues from:
Franchise royalties ............... (1,393) (1,586) (2,712) (4,138) (5,671) (5,671)
Services to Franchisees ............ -- -- (4,698) (7,507) (35,079) (35,079)
Add Franchisees' net revenues ...... 38,123 50,610 78,171 104,501 149,893 127,389
---------- ---------- --------- --------- ----------- -----------
System revenues ..................... $ 76,467 $ 92,496 $ 151,408 $ 242,681 $ 389,314 $ 431,726
========== ========== ========= ========= =========== ===========
THREE MONTHS ENDED MARCH 31,
----------------------------------------
SUPPLEMENTAL
PRO FORMA
1996 1997 1997
------------ ------------- -------------
Company's net revenues ............ $ 51,169 $ 85,374 $ 95,768
Less Company revenues from:
Franchise royalties ............... (1,176) (1,286) (1,286)
Services to Franchisees ............ (5,782) (8,957) (8,957)
Add Franchisees' net revenues ...... 27,981 35,583 32,625
---------- --------- --------
System revenues ..................... $ 72,192 $ 110,714 $118,150
========== ========= ========
(2) The supplemental pro forma financial information reflects the Company's
historical results of operations, adjusted for (a) the 1996 Acquisitions
and the 1997 Acquisitions; (b) the distributions to shareholders, the
purchase of shares of Common Stock of the Subsidiaries from certain
shareholders and the contribution to capital by shareholders, each of
which occurred in connection with the Reorganization; (c) the issuance of
the Senior Notes and the Warrants; and (d) the sale by the Company of
3,000,000 shares of Common Stock offered hereby at an assumed offering
price of $15.00 per share and the application of the net proceeds
therefrom, as if all had occurred as of the beginning of the periods
presented. The application of net proceeds includes the retirement of the
balance of the Senior Notes in full, which will result in an extraordinary
loss of $13.9 million, net of a $6.9 million income tax benefit, which is
not reflected in the supplemental pro forma financial information. This
loss consists of the unamortized debt discount and the unamortized debt
issuance costs. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Description
of Securities--Reorganization," "Management--Warrants" and Unaudited Pro
Forma Consolidated Financial Information.
The adjustments made to arrive at the supplemental pro forma results for the
three months ended March 31, 1997 include the elimination of $1.9 million of
non-operating income arising from a Put Warrants Valuation Adjustment and
included in the Company's historical results for the same period, as
discussed in Note 3 below, which decreased supplemental pro forma earnings
per share by $0.10.
(3) Includes $1.4 million of unusual charges, primarily professional fees, in
the year ended December 31, 1996, related to a registration statement
filed by the Company with the Securities and Exchange Commission that was
subsequently withdrawn and an internal investigation into certain Company
transactions. See "Business--Legal Proceedings" and Note 7 to the
Company's Consolidated Financial Statements.
The holders of the Warrants have a Put Right, as a result of which the
Company recorded a Put Warrants Liability. Until the Offering is
consummated, the Company will adjust the Put Warrants Liability to fair
value at the end of each future accounting period. Other expense (income)
for the three months ended March 31, 1997 includes non-operating income of
$1.9 million related to the adjustment of the initial liability recorded at
the time of the issuance of the Warrants on February 21, 1997 and based on
their fair value at that time, to the fair value of the Warrants at March
31, 1997. Based on an assumed offering price of $15.00 per share and the
consummation of this Offering prior to September 30, 1997, the Put Warrants
Valuation Adjustment will result in non-operating expenses in the second and
third quarters of 1997 totalling $5.8 million ($5.1 million net of income
tax benefit). At the time of the Offering, the Warrants, with an adjusted
carrying value of $22.4 million (based on an assumed offering price of
$15.00 per share), will be reclassified from debt to additional paid-in
capital. See Note 5 to the Company's Consolidated Financial Statements.
(4) Prior to the Reorganization, each of the Subsidiaries elected to be a
subchapter S corporation and, accordingly, were not subject to income
taxes; therefore, there is no provision for income taxes for periods prior
to the Reorganization. Pro forma income taxes and net income have been
computed as if the Company had been fully subject to federal and
applicable state income taxes for such periods. The Company recognized a
one-time tax benefit of $386,000 as a result of the termination, at the
time of the Reorganization, of the Subsidiaries' elections to be treated
as S corporations. This benefit is reflected in the historical results of
operations for the three months ended March 31, 1997,
19
but has been removed from the pro forma and the supplemental pro forma
results presented for that period. See Unaudited Pro Forma Consolidated
Financial Information.
(5) Includes (a) the 5,993,666 shares of Common Stock issued in connection with
the Reorganization and (b) all outstanding options to purchase Common
Stock and Warrants calculated using the treasury stock method and an
assumed offering price of $15.00 per share, as if all such shares, options
and warrants had been outstanding for all periods presented; (c) for the
historical data only for for the periods prior to the Reorganization, the
equivalent number of shares (370,072) of Common Stock represented by the
shares of common stock of the Subsidiaries purchased from certain
shareholders for cash and notes in the Reorganization; and (d) for the
supplemental pro forma data only, the sale by the Company of 3,000,000
shares of Common Stock offered hereby. See Note 1 to the Company's
Consolidated Financial Statements.
(6) The other data is presented to reflect the Company's historical results of
operations, adjusted to reflect (a) the elimination of the amount of
compensation expense ($0.9 million, $1.2 million, $1.9 million, $2.0
million and $2.0 million for the years ended December 31, 1992, 1993,
1994, 1995 and 1996, respectively, and $405,000 and $261,000 for the three
months ended March 31, 1996 and 1997, respectively,) for the Founding
Shareholders and Mr. Burrell which is in excess of the compensation for
such individuals subsequent to the Reorganization; (b) the elimination of
$1.4 million of unusual charges in the year ended December 31, 1996 and
$1.9 million of non-operating income arising from the March 31, 1997 Put
Warrants Valuation Adjustment, both discussed in Note 3 above; and (c)
income taxes computed as if the Company had been subject to federal and
applicable state income taxes for such periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for summary income statement data reflecting these adjustments.
EBITDA is earnings (net income) before the effect of interest income and
expense, income tax benefit and expense, depreciation expense and
amortization expense. 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.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a rapidly growing national provider of human resource
services focusing on the flexible industrial staffing market through its Tandem
division and on the PEO market through its Synadyne division. The Company's
revenues are based upon the salaries and wages of worksite employees. The
Company's fee structure is based on the gross payroll of each employee, the
estimated costs of employment related taxes, health benefits, workers'
compensation benefits, insurance and other services offered by the Company plus
a negotiated mark-up. The Company's revenues are dependent on the number of
clients enrolled, the resulting number of employees paid each period and the
gross payroll of such employees.
The Company's primary direct costs are (i) the salaries and wages of
worksite employees (payroll cost), (ii) employment related taxes, (iii) health
benefits and (iv) workers' compensation benefits and insurance. See
"Business--Risk Management Program--Workers' Compensation." Employment related
taxes consist of the employer's portion of payroll taxes required under the
Federal Income Contribution Act ("FICA"), which includes Social Security and
Medicare, and federal and state unemployment taxes. The federal tax rates are
defined by the appropriate federal regulations. State unemployment tax rates
vary from state to state and are affected by claims experience. Health benefits
are comprised primarily of medical insurance costs but also include costs of
other employee benefits such as prescription coverage, vision care, disability
insurance and employee assistance plans.
The Company's gross profit margin is determined in part by its ability to
accurately estimate and control direct costs and its ability to incorporate
such costs in the service fees charged to clients. The Company attempts to
reflect changes in the primary direct costs through adjustments in service fees
charged to clients, subject to contractual arrangements.
RECENT ACQUISITIONS
During 1995, the Company expanded its business into six additional
geographic regions by establishing offices in Arizona, California, Georgia,
Maryland/Pennsylvania/Virginia, Massachusetts/ New Hampshire and Michigan.
During 1995, the Company acquired four flexible industrial staffing
franchises (the "1995 Acquisitions"), with five offices and approximately $7.0
million in annual revenue.
During 1996, the Company made five flexible industrial staffing
acquisitions (the "1996 Acquisitions"): franchises in Illinois and Wisconsin,
with eight offices and approximately $7.0 million in annual revenue; a
competitor in Massachusetts, with one office and approximately $5.0 million in
annual revenue; a franchise in Tennessee, with two offices and approximately
$2.0 million in annual revenue; a franchise in Indiana, with one office and
approximately $1.0 million in annual revenue; and a franchise in California,
with one office and approximately $1.0 million in annual revenue.
From January 1 to March 31, 1997, the Company made seven flexible
industrial staffing acquisitions (the "1997 Acquisitions"): a competitor in New
Jersey with six offices and approximately $17.0 million in annual revenue; a
franchise in Florida with ten offices and approximately $14.0 million in annual
revenue; two competitors in Colorado, with ten offices and approximately $20.0
million in annual revenue; a franchise in Georgia, with two offices and
approximately $3.0 million in annual revenue; a competitor in Massachusetts,
with one office and approximately $4.0 million in annual revenue; and a
competitor in Wisconsin with approximately $1.0 million in annual revenue.
On June 30, 1997, the Company acquired its flexible industrial staffing
franchise in Minnesota, with one office and approximately $2.0 million in
annual revenue.
21
The 1996 Acquisitions and 1997 Acquisitions have resulted in a significant
increase in net identifiable intangible assets. At March 31, 1997, the
unamortized portion of net intangible assets was $31.0 million, including $5.6
million of net identifiable intangible assets and $25.4 million of goodwill,
principally due to the 1996 Acquisitions and 1997 Acquisitions. Substantially
all of the aggregate purchase price of the 1996 Acquisitions and 1997
Acquisitions (approximately $32.0 million) was recorded as either net
identifiable intangible assets or goodwill. See Note 2 to the Company's
Consolidated Financial Statements. Net identifiable intangible assets include
customer lists, employee lists, and covenants not to compete acquired in
connection with the acquisitions and are being amortized on a straight line
basis over periods ranging from one to 15 years. Goodwill represents the excess
of cost over the fair value of the net assets of the acquisitions and is being
amortized on a straight line basis over periods ranging from 15 to 40 years.
For the year ended December 31, 1996, amortization of net indentifiable
intangible assets and goodwill on a pro forma basis including the 1996
Acquisitions and 1997 Acquisitions was $2.3 million. The Company will evaluate
the carrying values attributed to intangible assets on an on-going basis. See
"Risk Factors--Risks Related to Intangible Assets."
The effect of the 1996 Acquisitions and the 1997 Acquisitions on the
Company's results of operations is more fully discussed in Note 2 to the
Company's Consolidated Financial Statements and the Unaudited Pro Forma
Consolidated Financial Information.
RESULTS OF OPERATIONS
Effective February 21, 1997, the Company consummated a Reorganization
whereby it acquired all of the outstanding capital stock of its Subsidiaries.
See "Description of Securities--Reorganization." The historical operating
results of the Company contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" also include the historical
operating results of the Subsidiaries for the periods noted.
For the years ended December 31, 1994, 1995 and 1996, and for the eight
week period ended February 21, 1997, the Company elected to be treated as a
subchapter S corporation and, accordingly, the Company's income was taxed at
the shareholder level. In addition, during those periods, the Company paid
compensation to the Founding Shareholders and Mr. Burrell, who is also a
shareholder of the Company ("Shareholder Compensation"). All of the
compensation for the Founding Shareholders and a portion of the compensation
for Mr. Burrell was discontinued after the Reorganization. In 1996, the Company
incurred unusual expenses of approximately $1.4 million in relation to a
registration statement filed by the Company with the Securities and Exchange
Commission that was subsequently withdrawn and an internal investigation into
certain Company transactions (See Note 7 to the Company's Consolidated
Financial Statements.) During the three months ended March 31, 1997, the
Company recorded non-operating income of approximately $1.9 million related to
the Put Warrants Valuation Adjustment (See Note 5 to the Company's Consolidated
Financial Statements). For purposes of the discussion of the comparison of the
results of operations for the three months ended March 31, 1997 to the three
months ended March 31, 1996, for the year ended December 31, 1996 to the year
ended December 31, 1995, and for the year ended December 31, 1995 to the year
ended December 31, 1994: (i) selling, general and administrative expenses are
presented on an adjusted basis which excludes discontinued Shareholder
Compensation; (ii) interest and other expense is presented on an adjusted basis
which excludes the unusual expenses in 1996 and the March 31, 1997 Put Warrants
Valuation Adjustment, both discussed above; and (iii) net income (loss) is also
presented on an adjusted basis which excludes discontinued Shareholder
Compensation, the unusual expenses in 1996, and the March 31, 1997 Put Warrants
Valuation Adjustment and assumes the Company had been subject to federal and
state income taxes and taxed as a C corporation during each of these periods.
22
The following tables set forth, on an adjusted basis as discussed above,
the amounts and percentage of net revenues of certain items in the Company's
consolidated statements of income for the indicated periods.
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ -------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- --------- -------------
(IN THOUSANDS)
System Revenues(1) ........................... $151,408 $242,681 $389,314 $72,192 $ 110,714
========= ========= ========= ======== =========
Net revenues:
Flexible industrial staffing ............... $ 41,622 $ 57,791 $ 97,397 $15,432 $ 32,463
PEO ....................................... 35,609 85,557 172,069 33,695 49,991
Franchise royalties ........................ 2,712 4,138 5,671 1,176 1,286
Other ....................................... 704 2,339 5,034 866 1,634
--------- --------- --------- -------- ---------
Total net revenues ........................ $ 80,647 $149,825 $280,171 $51,169 $ 85,374
========= ========= ========= ======== =========
Gross profit ................................. $ 14,834 $ 23,555 $ 38,069 $ 6,690 $ 11,135
Selling, general and administrative expenses(2) 9,337 18,074 30,635 5,803 10,298
--------- --------- --------- -------- ---------
Operating income ........................... 5,497 5,481 7,434 887 837
Net interest expense(3)(4) .................. 769 1,248 2,175 366 1,258
--------- --------- --------- -------- ---------
Income (loss) before provision (benefit) for
income taxes .............................. $ 4,728 $ 4,233 $ 5,259 $ 521 $ (421)
========= ========= ========= ======== =========
Net income (loss), as adjusted ............... $ 2,947 $ 2,586 $ 3,220 $ 318 $ (271)
========= ========= ========= ======== =========
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ --------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- -------------
Net revenues:
Flexible industrial staffing ............... 51.6% 38.6% 34.8% 30.2% 38.0%
PEO ....................................... 44.2 57.1 61.4 65.8 58.6
Franchise royalties ........................ 3.4 2.8 2.0 2.3 1.5
Other ....................................... 0.8 1.5 1.8 1.7 1.9
------ -------- -------- ------ ----------
Total net revenues ........................ 100.0% 100.0% 100.0% 100.0% 100.0%
====== ======== ======== ====== ==========
Gross profit ................................. 18.4% 15.7% 13.6% 13.1% 13.0%
Selling, general and administrative expenses(2) 11.6 12.1 10.9 11.4 12.0
------ -------- -------- ------ ----------
Operating income ........................... 6.8 3.6 2.7 1.7 1.0
Net interest expense(3)(4) .................. .9 .8 .8 .7 1.5
------ -------- -------- ------ ----------
Income (loss) before provision (benefit) for
income taxes .............................. 5.9% 2.8% 1.9% 1.0% (.5)%
====== ======== ======== ====== ==========
Net income (loss), as adjusted ............... 3.7% 1.7% 1.1% .6% (.3)%
====== ======== ======== ====== ==========
- ----------------
(1) See note 1 to "Selected Consolidated Financial Data."
(2) Excludes aggregate discontinued Shareholder Compensation of $1.9 million
(2.4% of revenue) paid in 1994, $2.0 million (1.4% of revenue) paid in
1995, $2.0 million paid in 1996 (0.7% of revenue), $405,000 (0.8% of
revenue) paid for the three months ended March 31, 1996 and $261,000 (0.3%
of revenue) paid for the three months ended March 31, 1997 that was
discontinued after the Reorganization. See "Certain Transactions" and
"Description of Securities--Reorganization."
(3) Excludes $1.4 million of unusual charges, primarily professional fees, in
the year ended December 31, 1996 related to a registration statement filed
by the Company with the Securities and Exchange Commission that was
subsequently withdrawn and an internal investigation into certain Company
transactions. See Note 7 to the Company's Consolidated Financial
Statements.
(4) Excludes $1.9 million of non-operating income for the three months ended
March 31, 1997 related to a Put Warrants Valuation Adjustment. See Note 5
to the Company's Consolidated Financial Statements.
23
The following table sets forth the gross profit margins for the Company's
two primary areas of operations for the indicated periods.
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- ------
Flexible industrial staffing ...... 25.0% 25.2% 24.5% 25.8% 23.3%
PEO .............................. 3.9 3.9 3.7 3.4 3.3
The Company's flexible industrial staffing division generates
significantly higher gross profit margins than its PEO division. The higher
flexible industrial staffing division margin reflects 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.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
SYSTEM REVENUES. System revenues increased $38.5 million, or 53.4%, from
$72.2 million in the first quarter of 1996 to $110.7 million in the first
quarter of 1997. The increase in system revenues was attributable to the $34.2
million increase in the Company's net revenues discussed below, of which $3.3
million related to services provided to franchises, and a $7.6 million increase
in franchise industrial staffing revenues.
NET REVENUES. Net revenues increased $34.2 million, or 66.8%, from $51.2
million in the first quarter of 1996 to $85.4 million in the first quarter of
1997. This increase resulted from growth in PEO revenues from the first quarter
of 1996 to the first quarter of 1997 of $16.3 million, or 48.4%, and flexible
industrial staffing revenues of $17.0 million, or 110.4%. The increase in PEO
revenues was primarily due to a broadening of the Company's targeted PEO client
base. Flexible industrial staffing revenues increased due to: (i) the 1996
Acquisitions (which were consummated after the first quarter of 1996) and the
1997 Acquisitions, which resulted in an increase of $7.9 million in revenues;
and (ii) internal growth, which resulted in an increase of $9.1 million due to
development of existing Company-owned locations and an increase in the number
of Company-owned offices. The Company-owned flexible industrial staffing
offices increased from 22 locations as of March 31, 1996 to 72 locations as of
March 31, 1997, with 41 of the 50 additional locations arising from the 1996
Acquisitions and 1997 Acquisitions.
GROSS PROFIT. Gross profit increased $4.4 million, or 66.4%, from $6.7
million in the first quarter of 1996 to $11.1 million in the first quarter of
1997. Gross profit as a percentage of net revenues decreased from 13.1% in the
first quarter of 1996 to 13.0% in the first quarter of 1997. This decrease was
primarily due to the low growth rate in franchise royalties arising from fewer
new franchises being granted. In addition, the Company experienced lower gross
profit margins from flexible industrial staffing, primarily due to higher labor
costs arising from the October 1996 minimum wage increase. However, the impact
on the Company's gross profit margin percentage was offset by the effect of the
significantly higher growth rate for flexible industrial staffing revenues as
compared to the growth rate for PEO revenues, which generate lower gross profit
margins. In the first quarter of 1997, PEO net revenues generated gross profit
margins of 3.3% as compared to gross profit margins of 23.3% generated by
flexible industrial staffing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, on an adjusted basis, increased $4.5 million, or
77.5%, from $5.8 million in the first quarter of 1996 to $10.3 million in the
first quarter of 1997. This increase was primarily a result of operating costs
associated with increased flexible industrial staffing volume at existing
locations, the 1996 Acquisitions, the 1997 Acquisitions, and pre-opening
expenses associated with 15 new office locations in existing flexible
industrial staffing regions. As a percentage of net revenues, selling, general
and administrative expenses increased from 11.4% in the first quarter of 1996
to 12.0% in the first quarter of 1997.
24
NET INTEREST EXPENSE. Net interest expense, on an adjusted basis,
increased by $0.9 million, or 243.7% from $0.4 million in the first quarter of
1996 to $1.3 million in the first quarter of 1997. The increase in net interest
expense was primarily due to interest, and other expense, including
amortization of debt discount and issuance costs, associated with the Senior
Notes which were issued in the first quarter of 1997, as well as interest
expense associated with net additional borrowings of $14.8 million in the first
quarter of 1997 under the Revolving Facility to finance working capital
requirements and the 1997 Acquisitions. See Note 5 to the Company's
Consolidated Financial Statements.
NET INCOME (LOSS). Net income (loss), on an adjusted basis, decreased by
$0.6 million from $0.3 million in net income in the first quarter of 1996 to a
$0.3 million net loss in the first quarter of 1997. This decrease was primarily
due to the increases in selling, general and administrative expenses and net
interest expense, as discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
SYSTEM REVENUES. System revenues increased $146.6 million, or 60.4% from
$242.7 million in 1995 to $389.3 million in 1996. The increase in system
revenues was attributable to the $130.3 million increase in the Company's net
revenues discussed below, of which $29.2 million related to services provided
to franchises, and a $45.4 million increase in franchise industrial staffing
revenues.
NET REVENUES. Net revenues increased $130.3 million, or 87.0%, from $149.8
million in 1995 to $280.2 million in 1996. This increase resulted primarily
from the increase in PEO revenues from 1995 to 1996 of $86.5 million, or
101.1%. The increase in PEO revenues was primarily due to a broadening of the
Company's targeted PEO client base. Flexible industrial staffing revenues grew
by $39.6 million, 68.5%, with $12.4 million of the increase resulting from the
1996 Acquisitions and the remainder due to development of existing
Company-owned locations and an increase in the number of Company-owned offices.
Company-owned flexible industrial staffing offices increased from 19 locations
as of December 31, 1995 to 43 locations as of December 31, 1996.
GROSS PROFIT. Gross profit increased $14.5 million, or 61.6%, from $23.6
million in 1995 to $38.1 million in 1996. Gross profit as a percentage of net
revenues decreased from 15.7% in 1995 to 13.6% in 1996. The Company's gross
profit as a percentage of net revenues decreased from 1995 to 1996 since PEO
revenues, which generate lower gross profit margins than flexible industrial
staffing revenues, increased at a higher rate than the flexible industrial
staffing revenues. In 1996, PEO net revenues generated gross profit margins of
3.7% as compared to gross profit margins of 24.5% generated by flexible
industrial staffing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, on an adjusted basis, increased $12.6 million, or
69.5%, from $18.1 million in 1995 to $30.6 million in 1996. The increase in
selling, general and administrative expenses in 1996 was primarily a result of
$5.6 million for salaries and other operating costs incurred in continuing the
establishment of flexible industrial staffing offices in six new geographic
regions. The remainder of the increase was primarily due to marketing and
support costs related to the broadening of the PEO client base, operating costs
associated with increased flexible industrial staffing volume at existing
locations and buildup of corporate infrastructure in contemplation of the 1997
Acquisitions. As a percentage of net revenues, selling, general and
administrative expenses decreased from 12.1% in 1995 to 10.9% in 1996,
primarily due to the significant increase in 1996 of the PEO operations in
proportion to total Company revenues. The PEO operations have lower associated
selling, general and administrative expenses (as a percentage of revenues) than
flexible industrial staffing revenues.
NET INTEREST EXPENSE. Net interest expense, on an adjusted basis,
increased by $1.0 million, or 74.3%, from $1.2 million in 1995 to $2.2 million
in 1996. The increase in net interest expense was principally due to interest
associated with net additional borrowings of $3.6 million in 1996 under the
Company's line of credit to finance working capital requirements as well as
interest arising from $4.4 million of indebtedness incurred in connection with
the 1996 Acquisitions.
25
NET INCOME (LOSS). Net income, on an adjusted basis, increased by $0.6
million, or 24.5%, from $2.6 million in 1995 to $3.2 million in 1996. This
increase was primarily due to increases in net revenues and gross profit, as
discussed above, offset by $2.7 million of operating losses incurred in
continuing the establishment of flexible industrial staffing offices in six new
geographic regions.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
SYSTEM REVENUES. System revenues increased $91.3 million, or 60.3%, from
$151.4 million in 1994 to $242.7 million in 1995. The increase in system
revenues was attributable to the $69.2 million increase in the Company's net
revenues discussed below, of which $4.2 million related to services provided to
franchises, and a $26.3 million increase in franchise industrial staffing
revenues.
NET REVENUES. Net revenues increased $69.2 million, or 85.8%, from $80.6
million in 1994 to $149.8 million in 1995. This increase resulted primarily
from increases in PEO revenues from 1994 to 1995 of $49.9 million, or 140.3%.
The increase in PEO revenues was primarily due to a broadening of the Company's
targeted PEO client base. Flexible industrial staffing revenues grew by $16.2
million, or 38.8%, with $6.9 million of the increase as a result of the 1995
Acquisitions and the remainder due to development of existing Company-owned
locations and an increase in the number of Company-owned offices. Company-owned
flexible industrial staffing offices increased from eight locations as of
December 31, 1994 to 19 locations as of December 31, 1995.
GROSS PROFIT. Gross profit increased $8.7 million, or 58.8%, from $14.8
million in 1994 to $23.6 million in 1995. Gross profit as a percentage of net
revenues decreased from 18.4% in 1994 to 15.7% in 1995. The Company's gross
profit, as a percentage of net revenues, decreased since PEO revenues, which
generate lower gross profit margins than flexible industrial staffing,
increased at a higher rate than the flexible industrial staffing revenues. In
1995, PEO net revenues generated gross profit margins of 3.9% as compared to
gross profit margins of 25.2% generated by flexible industrial staffing
operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, on an adjusted basis, increased $8.7 million, or
93.6%, from $9.3 million in 1994 to $18.1 million in 1995. The increase in
selling, general and administrative expenses in 1995 was primarily a result of
$5.4 million for salaries and other operating costs incurred in establishing
flexible industrial staffing offices in six new geographic regions. The
remainder of the increase was primarily due to marketing and support costs
related to broadening the PEO client base and operating expenses from higher
flexible industrial staffing sales volume at existing locations. As a
percentage of net revenues, selling, general and administrative expenses
increased from 11.6% in 1994 to 12.1% in 1995.
NET INTEREST EXPENSE. Net interest expense, on an adjusted basis,
increased $0.4 million, or 62.3%, from $0.8 million in 1994 to $1.2 million in
1995. The increase in net interest expense was primarily due to interest
associated with net additional borrowings in 1995 of $1.6 million under the
Company's line of credit to finance working capital requirements, as well as
similar borrowings made late in 1994 but not fully reflected in the Company's
interest expense until 1995.
NET INCOME (LOSS). Net income, on an adjusted basis, decreased by $0.3
million, or 12.2%, from $2.9 million in 1994 to $2.6 million in 1995. This
increase was primarily due to increases in net revenues and gross profit, as
discussed above, offset by $2.2 million of operating losses incurred in
connection with the establishment of flexible industrial staffing offices in
six new geographic regions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds for working capital and other needs
have been a $45.0 million Revolving Facility with the Lenders, the Senior
Notes, borrowings from related parties and cash flow from operations.
The Revolving Facility is for a term of four years and expires in February
2001. Outstanding amounts under the Revolving Facility are secured by
substantially all of the Company's assets and the
26
pledge of all of the outstanding shares of common stock of each of the
Subsidiaries. Amounts borrowed under the Revolving Facility bear interest at
Bank of Boston Connecticut's base rate or Eurodollar rate (at the Company's
option) plus a margin based upon the ratio of the Company's total indebtedness
to the Company's earnings (as defined in the Revolving Facility). As of March
31, 1997, the Company had outstanding borrowings under the Revolving Facility
of $24.6 million, bearing interest at an effective interest rate of 8.9%. The
Company intends to use a portion of the net proceeds from the Offering to repay
a portion of the outstanding borrowings under the Revolving Facility. The
Revolving Facility contains certain affirmative and negative covenants relating
to the Company's operations. See Note 5 to the Company's Consolidated Financial
Statements.
On February 21, 1997, the Company issued Senior Notes in the principal
amounts of $14.0 million and $11.0 million to Triumph and Bachow, respectively.
The Senior Notes are subordinate to borrowings under the Revolving Facility. A
portion of the principal amount of the Senior Notes ($10.0 million) is due and
payable on March 31, 2001 and the balance of the principal ($15.0 million) is
due and payable on February 20, 2002. The Senior Notes bear interest at the
rate of 11% per annum through February 1999 and at the rate of 12.5% per annum
thereafter. The Company used the proceeds of the Senior Notes primarily to fund
flexible industrial staffing acquisitions and to pay shareholder distributions
and other amounts in connection with the Reorganization. In connection with the
issuance of Senior Notes, the Company issued 865,168 of the Warrants (the
"Initial Warrants") to the Senior Note Holders and placed an additional 631,167
Warrants (the "Additional Warrants") in escrow. The Warrants are exercisable at
a price of $.014 per share and, under certain conditions, the holders have a
right to require the Company to repurchase any unexercised Warrants and any
Warrant Shares. See "Description of Securities--Reorganization" and
"Management--Warrants."
As of March 31, 1997, the Company also (i) was indebted to certain of its
shareholders, their family members and certain officers of the Company for
approximately $2.9 million under promissory notes that bear interest at annual
rates ranging from 10% to 21% and are subordinated to the repayment of the
Revolving Facility and the Senior Notes; (ii) had bank standby letters of
credit outstanding, in the aggregate amount of $5.2 million under a $10.0
million letter of credit facility (which is part of the Revolving Facility) to
secure certain workers' compensation obligations; (iii) had $7.0 million of
promissory notes outstanding in connection with certain acquisitions, bearing
interest at rates ranging from 4.0% to 10.0%, which are payable primarily
during the next two years (except for $2.6 million due to a shareholder which
is payable over the next four years at 14% annual interest), and subordinated
to the repayment of the Revolving Facility and the Senior Notes; (iv) had
obligations under capital leases for buildings and equipment in the aggregate
amount of $7.7 million; and (v) had obligations under mortgages totalling $2.4
million. See Notes 5 and 11 to the Company's Consolidated Financial Statements.
One of the key elements of the Company's multi-faceted growth strategy is
expansion through acquisitions, which may require significant sources of
financing. These financing sources include cash from operations, seller
financing, bank financing, and issuance of the Company's Common Stock. The
Company can initially allocate up to $35.0 million under the Revolving Facility
for the financing for certain prescribed acquisitions. The Company is currently
negotiating an increase in the Revolving Facility to $85.0 million, primarily
to finance additional acquisitions by the Company over the next several years.
The Company is a service business and therefore a majority of its tangible
assets are customer accounts receivable. Temporary employees are paid by the
Company on a daily or weekly basis. The Company, however, receives payment from
customers for these services, on average, 35 to 45 days from the date of
invoice. As new flexible staffing offices are established or acquired, or as
existing offices expand, there will be increasing requirements for cash to fund
operations. The Company pays its PEO employees on a weekly, bi-weekly,
semi-monthly or monthly basis for their services, and currently receives
payments on a simultaneous basis from approximately 70% of its existing
customers. The remainder of the Company's PEO customers generally make payment
35 to 45 days after the date of invoice.
27
The Company's principal uses of cash are for wages and related payments to
temporary and PEO employees, operating costs, capital expenditures and advances
made to certain Tandem franchise associates to fund their payroll obligations
and repayment of debt and interest thereon. During the year ended December 31,
1996, cash used in operations was approximately $1.3 million. Cash used in
investing activities was approximately $4.8 million, which included
expenditures for property and equipment of $2.1 million (primarily computers
and software), expenditures of $1.9 million for acquisitions (primarily
intangible assets), and net funding advances to franchises of $0.8 million.
Cash provided by financing activities was approximately $4.6 million, including
$3.6 million from borrowings under a bank line of credit and $0.6 million of
related party borrowings.
During the three months ended March 31, 1997, cash used in operations was
approximately $1.8 million. Cash used in investing activities was approximately
$19.8 million, which included expenditures of $20.6 million for acquisitions
(primarily intangible assets) and expenditures for property and equipment of
$0.5 million (primarily computers and software), offset by cash provided of
$1.3 million due to a decrease in net funding advances to franchises. Cash
provided by financing activities was approximately $21.6 million, including
$22.6 million net proceeds from the Senior Notes and $14.8 million from
borrowings under the Revolving Facility, offset by payments of $10.1 million
for shareholder distributions and other amounts in connection with the
Reorganization and $5.2 million of repayments of long-term debt. See
"Description of Securities--Reorganization" and Notes 1, 2, 5 and 11 to the
Company's Consolidated Financial Statements.
The Company anticipates spending up to approximately $6.0 million during
the next twelve months for new flexible staffing locations and other corporate
facilities, improvements to its management information and operating systems,
exercise of its option to purchase its new national office and support center
and related leasehold improvements, and other capital expenditures.
The Company believes that funds provided by operations, available
borrowings under the Revolving Facility, current cash balances and the net
proceeds from the Offering will be sufficient to meet its presently anticipated
needs for working capital, capital expenditures and acquisitions for the next
twelve months. The Company also believes that sufficient long-term liquidity
for its future needs will be provided by funds from operations, expanded new
borrowing facilities, and/or additional equity offerings.
INFLATION
The effects of inflation on the Company's operations were not significant
during the periods presented in the financial statements. Throughout the
periods discussed above, the increases in revenues have resulted primarily from
higher volumes, rather than price increases.
SEASONALITY
The Company's results of operations reflect the seasonality of higher
customer demand for flexible industrial staffing services in the last two
quarters of the year, as compared to the first two quarters. Even though there
is a seasonal reduction of flexible industrial staffing revenues in the first
quarter of a year as compared to the fourth quarter of the prior year, the
Company does not reduce the related core personnel and other operating expenses
since that infrastructure is needed to support anticipated increased revenues
in subsequent quarters. The reduction of flexible industrial staffing revenues
in the first quarter of a year is substantially offset by increased PEO
revenues, which are generally not subject to seasonality. However, the net
income contribution of PEO revenues, expressed as a percentage of sales, is
significantly lower than for flexible industrial staffing revenues.
28
As a result of the above factors, the Company traditionally experiences
operating income in the first quarter of a year that is significantly less than
(i) the fourth quarter of the preceding year and (ii) the subsequent three
quarters of the same year. In addition, operating income is typically lower in
the fourth quarter of a year as compared to the preceding third quarter due to
a decrease in industrial staffing revenues (versus continuing increases in PEO
revenues) that begins with the November and December holiday season. The
following table sets forth, on an adjusted basis as discussed above, the
amounts of certain items in the Company's consolidated statements of income for
the four quarters of 1995 and 1996.
1995 1996
--------------------------------------- --------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
--------- --------- --------- --------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES)
Net revenues ......... $26,555 $31,724 $41,309 $50,237 $51,169 $64,953 $77,680 $86,369
Gross profit ......... 4,790 5,324 6,530 6,911 6,690 9,062 10,982 11,335
Operating income ...... 1,157 1,139 1,703 1,482 887 1,878 2,764 1,905
NON-OPERATING EXPENSES
The holders of the Warrants have a Put Right as a result of which the
Company recorded a Put Warrants Liability at the time of the issuance of the
Warrants based on their fair value. Until the Offering is consummated, the
Company will adjust this Put Warrants Liability at the end of each accounting
period subsequent to March 31, 1997. Based on an assumed offering price of
$15.00 per share and the consummation of this Offering prior to September 30,
1997, Put Warrants Valuation Adjustments will result in non-operating expenses
in the second and third quarter of 1997 totalling $5.8 million ($5.1 million
net of income tax benefit). See "Management--Warrants."
As a result of the intended use of the proceeds of the Offering to repay
the full balance of the Senior Notes, the Company will record an extraordinary
loss at the time of that early repayment. This loss consists of the unamortized
debt discount and the unamortized debt issuance costs related to the Senior
Notes, and would have been $13.9 million (net of a $6.9 million income tax
benefit), if the repayment had taken place on March 31, 1997. See "Description
of Securities--Reorganization."
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," was issued. SFAS No. 128, which supersedes
Accounting Principles Board ("APB") Opinion No. 15, requires a dual
presentation of basic and diluted earnings per share on the face of the income
statement. Basic earnings per share excludes dilution and is computed by
dividing income or loss attributable to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted earnings per share is computed similarly
to fully diluted earnings per share under APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. See Note
1 to the Company's Consolidated Financial Statements.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 requires
that a company (a) classify items of other
29
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company has not determined the effects,
if any, that SFAS No. 130 will have on its Consolidated Financial Statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued. SFAS No. 131 establishes standards for
the way that public companies report selected information about operating
segments in annual financial statements and requires that those companies
report selected information about segments in interim financial reports issued
to shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131,
which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", but retains the requirement to report information about major
customers, requires that a public company report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. However, SFAS No. 131 does not require the reporting of
information that is not prepared for internal use if reporting it would be
impracticable. SFAS No. 131 also requires that a public company report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and
changes in the measurement of segment amounts from period to period. SFAS No.
131 is effective for financial statements for periods beginning after December
15, 1997. The Company has not determined the effects, if any, that SFAS No. 131
will have on the disclosures in its Consolidated Financial Statements.
30
BUSINESS
GENERAL
The Company is a rapidly growing national provider of human resource
services focusing on the flexible industrial staffing market through its Tandem
division and on the PEO market through its Synadyne division. The Tandem
division recruits, trains and deploys temporary industrial personnel and
provides payroll administration, risk management and benefits administration
services to its clients. Tandem's clients include businesses in the
manufacturing, distribution, hospitality and construction industries. Through
its Synadyne division, the Company offers a comprehensive package of PEO
services including payroll administration, risk management, benefits
administration and human resource consultation to companies in a wide range of
industries. The Company's operations began in Chicago, Illinois in 1974. As of
June 30, 1997, the Company and its franchise associates operated 163 offices,
with an estimated 31,000 employees in 38 states and the District of Columbia.
The Tandem division provides approximately 17,000 flexible industrial
staffing personnel daily to approximately 3,600 client companies through a
nationwide network of 80 Company-owned and 74 franchised offices. Between 1994
and 1996, Company and franchise flexible industrial staffing revenues increased
from $119.8 million to $247.3 million, a compound annual growth rate of
approximately 44%. The Synadyne division, which began in 1994, has
approximately 11,000 employees. Between 1994 and 1996, PEO revenues increased
from $35.6 million to $172.1 million, a compound annual growth rate of
approximately 120%. To implement its expansion strategy, the Company completed
17 acquisitions of flexible industrial staffing companies since January 1,
1995, with 48 offices and approximately $84 million in annual revenue. During
this period, the number of Company-owned flexible staffing and PEO offices
increased from ten to 89, the number of geographic regions served by the
Company increased from one to nine, and the Company implemented advanced
information systems, further developed back office capabilities and invested in
other infrastructure enhancements necessary to support its future growth.
The Company's operation of both a flexible industrial staffing division
and a PEO division provides it with significant competitive advantages. Both
Tandem and Synadyne offer a number of common services including payroll
administration, risk management and benefits administration. The Company
designs and administers these services through common facilities, personnel and
information systems which give the Company the ability to develop and provide a
wider range of services at lower costs than its primary competitors. In
addition, the Company is able to provide a full spectrum of staffing services
to its industrial clients ranging from a temporary employee for one day to
comprehensive outsourcing of human resource functions through the Company's PEO
division. The Company expects Tandem's national network of locations to
facilitate the rapid expansion of the Synadyne division, and over time increase
the Company's penetration of local markets.
THE STAFFING INDUSTRY
The staffing industry consists of companies which provide four basic
services to clients: flexible staffing, PEO services, placement and search, and
outplacement. Based on information provided by NATSS, NAPEO and SIAI, 1996
staffing industry revenues were approximately $74.4 billion. According to
industry sources, approximately 7,000 flexible staffing firms and 2,000 PEO
firms employed approximately 5.2 million people per day, or approximately 4% of
the entire United States workforce, in 1996. Over the last five years, the
staffing industry has experienced compound annual growth of approximately 15%,
due largely to the utilization of temporary help across a broader range of
industries as well as the emergence of the PEO sector.
The flexible staffing sector has traditionally been the largest staffing
industry sector, accounting for an estimated $43.6 billion, or 61%, of
estimated 1996 staffing industry revenues. According to NATSS, flexible
industrial staffing currently represents 31.8% of the estimated $43.6 billion
in 1996 flexible staffing revenues. The Company believes that the flexible
industrial staffing market is highly fragmented
31
and that in excess of 75% of flexible industrial staffing industry revenues are
generated by small local and regional companies. According to NATSS, the
flexible industrial staffing sector grew from $5.6 billion in 1991 to $13.9
billion in 1996, representing a compound annual growth rate of approximately
20%. The Company's goal is to target opportunities in this fragmented, rapidly
growing market which has to date been under-served by large full service
staffing companies.
The PEO sector has recently emerged as one of the largest and fastest
growing sectors within the staffing industry, with an estimated $17.3 billion,
or 23%, of estimated 1996 staffing industry revenues. This sector evolved in
the early 1980's, largely in response to difficulties faced by small and
medium-size businesses in procuring workers' compensation insurance coverage on
a cost-effective basis and in operating in an increasingly complex legal
environment. While various service providers, such as payroll processing firms,
benefits and safety consultants and temporary staffing firms, were available to
assist these business with specific tasks, PEOs began to emerge as providers of
a more comprehensive outsourcing solution to these burdens. As a result, small
and medium size businesses have begun to outsource human resource
administration to PEOs, allowing management to focus on core business
activities.
According to industry sources, there were approximately 5.2 million
businesses in the United States with fewer than 500 employees in 1995.
Collectively, these businesses employed an estimated 50.4 million people, and
represented approximately $1.1 trillion in aggregate annual payroll, of which
PEOs represented less than 2%. Growth in the PEO industry has been significant.
According to NAPEO, the number of employees under PEO arrangements in the
United States has grown from approximately 10,000 in 1984 to approximately two
million in 1995. SIAI, an employment industry research firm, estimates that
gross revenues in the PEO industry grew from $5.0 billion in 1991 to $17.3
billion in 1996, a compound annual growth rate of approximately 29%. The
Company believes there are significant opportunities for companies with proven
PEO success to experience growth as a result of the large number of small
competitors in the industry, low current PEO market penetration and an
increasingly complex regulatory environment.
COMPANY STRATEGY
The Company's objective is to become the dominant provider of flexible
industrial staffing and PEO services in select geographic regions. To achieve
this objective, the Company intends to:
/bullet/ PROVIDE A COMPREHENSIVE PACKAGE OF SINGLE-SOURCE HUMAN RESOURCE
SERVICES. By offering a comprehensive range of high quality, human
resource services to the flexible industrial staffing and PEO markets, the
Company believes that it has a competitive advantage in meeting the
diverse needs of the marketplace. These needs may include flexible
industrial staffing, PEO services, or a combination of both. The Company
believes this single source delivery platform is capable of servicing its
clients needs, thereby fostering a high level of client satisfaction and
retention, and securing a stable source of revenue.
/bullet/ CONTINUE TO FOCUS ON UNDER-SERVED MARKETS WHICH PROVIDE HIGH
GROWTH OPPORTUNITIES. The Company believes that flexible industrial
staffing and PEO market sectors offer high growth opportunities within the
staffing industry. Historically, these market sectors have been
under-served by many small, independent, local staffing companies which
lack both the depth of services and economies of scale necessary to compete
with large national or multi-regional staffing companies such as OutSource.
Moreover, few large companies have focused on these market sectors. Given
its single source delivery platform and 23 year history in the staffing
industry, the Company believes it is well-positioned to capitalize on these
opportunities. The Company's compound annual revenue growth rate from 1994
to 1996 of approximately 86% exceeds industry averages in the flexible
industrial staffing and PEO market sectors.
/bullet/ GEOGRAPHICALLY CLUSTER OFFICES TO ACHIEVE REGIONAL MARKET
LEADERSHIP. The Company believes the geographic clustering of offices
will lead to significant cost savings, higher quality client
32
service, enhanced employee benefits, and ultimately regional market
leadership. Clustering shortens the distance from the Company to the local
workforce, thereby allowing the Company to recruit, train and develop a
broader-skilled and more flexible workforce. The Company believes its
ability to spread relatively fixed, common regional management,
advertising, recruiting, and training costs across a broader employee base
will result in significant cost efficiencies. Ultimately, regional
aggregation will allow the Company to negotiate better regional benefits
and services at favorable rates, which the Company can pass on to its
client and employee base. The Company believes the lower cost structure,
attractive client and employee benefit packages, and flexible workforce
attributable to clustering provides competitive advantages in highly
competitive, major metropolitan markets. The benefits of clustering are
best illustrated in the Chicago, Illinois metropolitan area where, based
upon data provided by the Omnicomp Group, the 19 Company-owned Chicago
metropolitan area offices have achieved approximately 19% of all flexible
industrial staffing revenues in that market, which the Company believes
establishes it as the regional market leader.
/bullet/ INCREASE MARKET PENETRATION THROUGH MULTI-FACETED GROWTH STRATEGY.
To achieve high growth within the flexible industrial staffing and PEO
businesses, the Company has developed an aggressive, multi-faceted growth
strategy which includes: internal growth, acquisitions, franchising and
strategic alliances. This multi-faceted growth strategy has proven
successful over the past three years, as evidenced by the Company's 86%
compound annual revenue growth rate from 1994 to 1996. The key elements of
this multi-faceted growth strategy are:
/bullet/ INTERNAL GROWTH. The Company seeks internal growth by opening
new offices and broadening its offering of high quality services. To
effect its clustering strategy, the Company plans to open additional
offices in each of its nine major regions. In addition, the Company
intends to expand to additional major metropolitan areas where
demographics and business conditions are favorable. During 1996, the
Company opened 25 new Tandem offices, of which eight were located in
new markets. During 1996, the Company increased the number of its PEO
employees by approximately 3,000, or 41%, resulting primarily from the
expansion of its PEO sales force. In addition to opening new offices
and expanding its sales force, the Company will continue to expand its
offering of high quality human resource services to its clients,
including a broader array of staffing and PEO services, consulting
services and other benefits.
/bullet/ ACQUISITIONS. Due to the highly fragmented nature of the
flexible industrial staffing and PEO industries, OutSource believes it
has an excellent opportunity to continue its acquisition strategy of
consolidating small, local businesses into a national network of
staffing and PEO providers. These acquisitions would include existing
franchises and competing businesses. As a potential advantage over
internal growth, OutSource believes acquisitions allow the Company to
quickly access new customer relationships, employees and staff
knowledgeable of the local market, thereby accelerating market
penetration. The Company believes it can quickly improve the
profitability of the acquired businesses by applying its back office
support and lower cost structure. In addition, the Company believes it
can integrate acquisitions using its back office support center and
information processing capabilities to achieve higher operating
margins. Since 1995, the Company completed 17 acquisitions of flexible
industrial staffing companies, representing 48 offices in 23 markets
and approximately $84 million in aggregate revenues.
/bullet/ FRANCHISING. The Company has identified over 150 attractive
markets which it believes are too small to warrant a direct investment
of the Company's resources. In these small markets, the Company intends
to offer franchises. OutSource believes that franchising allows the
Company to quickly, and cost-effectively, build regional brand
awareness and increase market penetration. In addition, these franchise
service centers give the Company the ability to attract large national
accounts which require national service coverage. The Company has a
fully staffed franchise development department and has been successful
in recruiting and
33
awarding flexible industrial staffing franchises. As of June 30, 1997,
the Company had 36 Tandem franchise associates operating 74 Tandem
franchise locations in 34 states. These franchise associates had
revenues of $150 million in 1996. In May 1997, the Company began
marketing its PEO franchise program.
/bullet/ STRATEGIC ALLIANCES. The Company will consider strategic
alliances with those companies that offer significant growth
opportunities for the PEO business. For example, as an approved
provider for Allstate Insurance, OutSource provides its services to
approximately 2,500 independent Allstate agents. As part of its
strategy, the Company intends to enter into, contracts with general
insurance agencies which allow the agencies to act as a marketing agent
for the Company's PEO business. The Company believes it will benefit
significantly from the insurance agencies' network of agents, and their
extensive established business relationships. The Company also intends
to enter into strategic alliances with other service companies
including payroll processing firms and employee-benefit consultants.
/bullet/ CONTINUE TO MAXIMIZE OPERATING EFFICIENCIES THROUGH INTEGRATED
TECHNOLOGY AND BACK OFFICE SUPPORT. Due to the similarities in the
technology and back-office support services utilized by Tandem and
Synadyne, the Company believes that there are significant opportunities to
achieve cost efficiencies. As a result, the Company has invested in the
development of an integrated computer network and related software
packages that improve the communication between the corporate headquarters
and 89 Company-owned and 74 franchised field offices. This integrated
network is designed to improve the Company's ability to monitor and
rapidly respond to client demand and workers' compensation claims for both
the industrial staffing and PEO businesses on a cost-effective basis.
OutSource believes this level of integration will strengthen the Company's
ability to deliver high quality human resource services at competitive
prices.
/bullet/ BECOME THE "GUARDIAN EMPLOYER". The ultimate goal for the Company
is to represent a critical mass of jobs within a defined geographic area
so it will be able to commit to permanent employment, over time, for its
flexible industrial staffing and PEO employees. Employees are thus able to
affiliate with the Company on a permanent basis and concentrate on their
core skills, while the Company keeps them at maximum employability through
job sourcing, career planning and training. As a result of the Company's
ability to provide both PEO and flexible staffing services, it is able to
provide permanent employment benefits to employees and believes it can
attract, maintain and keep employed the best work force for its clients.
This could reduce the Company's and its clients' cost in recruiting,
training and down time and ultimately improve long-term profitability.
COMPANY SERVICES
The Company offers its clients a full array of staffing services
principally through its Tandem and Synadyne divisions. Because the Company
serves as the employer of record with respect to both PEO and flexible staffing
services, the Company provides certain common services to both of these
markets, utilizing a common support system. The degree of utilization of these
common services depends upon the needs of the clients and employees. Common
services offered by both Tandem and Synadyne are:
/bullet/ PAYROLL ADMINISTRATION. The Company assumes responsibility for
payroll and attendant record-keeping, payroll tax deposits, payroll tax
reporting, and all federal, state, county and city payroll tax reports
(including 941s, 940s, W-2s, W-3s, W-4s and W-5s), state unemployment taxes,
employee file maintenance, unemployment claims and monitoring and responding to
changing regulatory requirements. The Company develops and administers
customized payroll policies and procedures for each of its clients, which are
fully integrated from the clients' offices to the Company's central processing
center.
/bullet/ AGGREGATION OF STATUTORY AND NON-STATUTORY EMPLOYEE BENEFITS.
Employee benefits packages can include health care options, such as preferred
provider organizations ("PPOs") and health
34
maintenance organizations ("HMOs"), and supplemental benefit programs such as
dental care, vision care, prescription drugs, an employee assistance plan and
life and disability insurance options. The Company offers Multi-Employer
Retirement Plans and cafeteria plans to its eligible employees and provides
workers' compensation and unemployment insurance. Workers' compensation is a
state-mandated comprehensive insurance program that requires employers to fund
medical expenses, lost wages and other costs that result from work-related
injuries and illnesses, regardless of fault and without any co-payment by the
employee. Unemployment insurance is an insurance tax imposed by both federal
and state governments.
Historically, the largest controllable direct costs incurred by businesses
relate to the provision of health care and workers' compensation benefits. In
order to remain competitive, staffing companies must continue to arrange for
the delivery of these services to their clients at costs below those which
clients could obtain on their own by efficiently managing health care and
workers' compensation costs. The Company intends to aggressively manage health
care and workers' compensation costs through the utilization of vertically
integrated managed care systems. The Company's ultimate goal is to vertically
integrate all employee medical costs through a comprehensive 24-hour medical
management program that can coordinate group health and workers' compensation
for all employees.
As part of its service package, the Company administers all employee
benefit plans and is responsible for negotiating the benefits provided by, and
costs of, each such plan. The Company's human resources and claims
administration departments serve as liaisons for the delivery of such services
to the client employee and monitor and review workers' compensation claims for
loss control purposes. The Company believes that its ability to provide and
administer a wide variety of employee benefit plans on behalf of its clients
tends to mitigate the competitive disadvantages small businesses normally face
in the areas of employee benefits cost control and employee recruiting and
retention.
/bullet/ HUMAN RESOURCE COMPLIANCE ADMINISTRATION. Because OutSource is
the employer of record with respect to both flexible staffing and PEO services
and assumes responsibility for compliance with many employment related
regulations, the Company is prepared and trained to address compliance and
regulatory issues inherent in an employment relationship. For example, the
Company provides compliance administration services with respect to
unemployment claims, workers compensation claims, and claims arising under the
Fair Labor Standards Act. In addition, the Company assists its clients in
understanding and complying with other employment-related requirements for
which the Company does not assume responsibility.
Generally, the most significant compliance administration services
provided by the Company are in the area of workers' compensation and state
unemployment laws. With respect to workers' compensation, the Company provides
claims management services which include prompt identification and reporting of
injuries to the insurance carrier and local branch office, use of designated
health care providers, case management, fee audits and aggressive back-to-work
programs. Services provided by the Company in the area of state unemployment
compliance include ensuring that only eligible personnel receive unemployment
benefits, assisting in re-employing personnel and auditing state reporting
records and rate formulas.
35
/bullet/ PROACTIVE HUMAN RESOURCE MANAGEMENT SERVICES. The basic
differences between the Tandem services and Synadyne services are referred to
by the Company as "Proactive Human Resource Management Services." PEO services
are typically provided for an indefinite time frame, while flexible industrial
staffing assignments are normally contracted for a definite period of time with
the flexibility to meet ongoing business demands. In addition, the flexible
industrial staffing services are often bundled for one base fee, while PEO
services are characterized by a base fee, plus additional fees for added
services.
As part of its base services in both the flexible staffing and PEO
markets, the Company conducts a human resource needs analysis for clients and
client employees. Based on the results of that review, the Company recommends
basic and additional services which the client should implement. Set forth
below are examples of suggested services included within the Company's base
service fee and other services provided on fee-for-service basis in the
flexible industrial staffing and PEO sectors.
PEO
FLEXIBLE INDUSTRIAL STAFFING ---------------------------------
SERVICE BASE FEE BASE FEE FEE-FOR-SERVICE
- -------------------------------------------------- ----------------------------- -------------- ----------------
/bullet/ Continuous H/R Review and Analysis /check mark/ /check mark/
/bullet/ Screening /check mark/ /check mark/
/bullet/ Recruiting /check mark/ /check mark/
/bullet/ Training /check mark/ /check mark/
/bullet/ Workforce Deployment /check mark/ /check mark/
/bullet/ Loss Prevention and Safety Training /check mark/ /check mark/
/bullet/ Pre-employment Testing and Assessment /check mark/ /check mark/
/bullet/ Background Searches /check mark/ /check mark/
/bullet/ Compensation Program Design /check mark/ /check mark/
/bullet/ Customized Personnel Management Reports /check mark/ /check mark/
/bullet/ Job Profiling, Description, Application /check mark/ /check mark/
/bullet/ Turnover Tracking and Analysis /check mark/ /check mark/
/bullet/ Customer Service Training /check mark/ /check mark/
The Company provides certain other services to its PEO clients on a
fee-for-service basis that are also available to its flexible industrial
staffing clients. These services include drug testing policy administration,
outplacement assistance, relocation assistance, executive benefits, affirmative
action plans, opinion surveys and follow-up analysis, exit interviews and
follow-up analysis, management development skills workshops, team building
programs, grammar and business correspondence skills workshops and management
skills assessment.
OPERATIONS
Because of the similarities in the type of services that the Company
offers to its PEO and flexible staffing clients, and due to technological and
communication advances, many of these services are provided from the Company's
national office and support center in Deerfield Beach, Florida.
These services include payroll processing, tax reporting, unemployment
claims, workers' compensation and other insurance claims, insurance
procurement, health and other employee benefits administration, interactive
voice mail, design and production of training programs and materials,
accounting, billing and collections, customized management reporting, employee
background checks, pre-employment testing, affirmative action plans, executive
recruiting, executive benefits, compensation program design, and turnover
tracking and analysis.
TANDEM
Tandem delivers its flexible industrial staffing services through a
nationwide network of 89 Company-owned and 74 franchise recruiting and training
centers. Each Company-owned recruiting and training center is staffed with a
manager, one or two service and recruiting coordinators, two to four
36
staffing consultants, an office administrator and one to four clerical
assistants. The number of people in each of the positions will vary by the size
of the recruiting and training centers and degree of penetration of their
territory within the market.
The Company believes that its success is due in part to its close
familiarity with the businesses of its clients. The Company's sales consultants
visit client job sites regularly to become familiar with the skill required by
the client's business, conduct job site safety inspections and to ensure that
employees are appropriately equipped for the job. To ensure customer
satisfaction, Tandem sales consultants and service coordinators play an active
role in daily work assignments. The Company also attempts to become familiar
with its pool of industrial employees. Each employee is subject to a two-day
screening process that evaluates skills, abilities and attitudes. This not only
permits the Company to institute appropriate training programs and assign its
workers, but also helps the Company retain desirable employees.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Seasonality" for a discussion of the seasonality of the
Company's business.
SYNADYNE
Synadyne delivers basic PEO services through client service teams
consisting of human resource professionals and payroll and benefits specialists
located in each of the two Florida markets the Company serves. The client
service team is assigned as soon as the Company's account executive has secured
the client, thus allowing the account executive to concentrate on sales of PEO
services to additional clients. Although the client service teams have primary
responsibility for servicing their assigned clients, they rely on the Company's
national support center staff to provide advice in specialized areas such as
workers' compensation, unemployment insurance and payroll processing. The
client's principal contact within the client service team is the human resource
professional, whose level of expertise is tailored to each client depending
upon the nature and complexity of the client's business. The Company believes
that its team approach ultimately results in maximum client satisfaction.
SALES AND MARKETING
The Company markets its flexible industrial staffing and PEO services
through a combination of marketing channels including direct sales, franchising
and strategic alliances. The Company believes this multi-channel approach is
unique and allows the Company to quickly access a pool of skilled employees,
develop regional brand awareness and ultimately become a market leader. The
Company believes its compound annual revenue growth rate of approximately 86%
from 1994 to 1996 demonstrates the success of this multi-channel approach. Of
the three marketing channels employed by the Company, direct sales and
franchising are common to both the flexible industrial staffing and PEO
businesses, while strategic alliances are unique to the PEO business.
/bullet/ DIRECT SALES FORCE. The Company believes there are significant
differences in the initial sales process and sales cycle between flexible
industrial staffing and PEO service sales. As a result, the Company
markets these services through four distinct, highly trained sales forces
who share a common profile. Flexible industrial staffing services are
marketed through 99 sales associates located in 89 Company-owned Tandem
offices nationwide. The Company's PEO services are marketed through eight
sales associates located in three Synadyne offices in Florida and one
telemarketing center, with five tele-marketing professionals, located in
the Company's national support center. The Company's eight sales
associates focus on full service PEO clients while the telemarketing
center concentrates on the Company's "small business" clients (those with
fewer than five employees).
Although the sales process and sales cycle are different between the
flexible industrial staffing and PEO businesses, the method and philosophy
that the Company employs in the selection, training and compensation of
its sales force is very similar. It is the Company's philosophy to
37
employ the best sales force available, and all of the Company's sales
associates receive a generous compensation package which includes
commissions throughout the life of the client's relationship with the
Company. All sales associates receive two weeks of initial classroom and
on-the-job training and attend additional training sessions on a regular
basis. The additional training is conducted by specialists and by sales
managers of the respective divisions.
/bullet/ FRANCHISING. The Company offers distinct franchising arrangements
for the flexible industrial staffing and PEO businesses. Under industrial
staffing franchising agreements, the Company grants the franchisee the
exclusive right to operate under the Tandem trade name within a select
geographic market in return for a royalty on staffing services rendered.
In contrast, under the PEO franchising agreement, the franchisee merely
serves as a sales agent, receiving a commission for those services
rendered and collected by the Company with no guarantee of market
exclusivity. In either case, the franchisee assumes the marketing costs
and, as a result, the Company believes franchising is a cost-effective
method of building regional brand awareness. As of June 30, 1997, there
were 74 Tandem and two Office Ours (the Company's clerical staffing
division) franchise locations. The Company initiated its PEO franchise
program in May 1997 although it currently has no PEO franchises.
/bullet/ STRATEGIC ALLIANCES. The Company intends to enter into a
strategic alliance with a general insurance agency whereby such agency
acts as a marketing agent for the Company's PEO business. The general
insurance agency identifies, educates and counsels other insurance agents
who will introduce the PEO product to their client base. The structure of
the arrangement is consistent with traditional insurance commission
arrangements. In addition, the Company plans to provide bonuses and equity
participation based on performance. The Company also intends to enter into
strategic alliances with other service companies including payroll
processing firms and employee-benefit consultants.
CLIENTS
As of June 30, 1997, Tandem employed approximately 17,000 flexible
industrial staffing employees, with approximately 3,600 industrial companies.
These companies represented a cross-section of the industrial sector, of which
no single client represented more than 5% of the Company's total revenues.
As of June 30, 1997, Synadyne employed approximately 11,000 employees
pursuant to PEO contracts with approximately 2,900 companies. These companies
covered a diverse range of industries, including insurance and staffing. The
Company's primary insurance PEO clients are Allstate Insurance agents. The
Company provides basic PEO services to approximately 2,500 Allstate agents,
each of whom has selected OutSource from among Allstate's approved providers.
The Company's primary staffing PEO clients are its Tandem franchises. The
Company provides basic PEO services to the employees of its franchises. For the
three months ended March 31, 1997, approximately 28% and 18% of the Company's
total PEO revenues were attributed to services provided to Allstate agents and
Tandem franchises, respectively.
The Company attempts to maintain diversity within its client base in order
to decrease its exposure to downturns or volatility in any particular industry.
As part of this client selection strategy, the Company currently offers its
services only to those businesses that operate in certain industries,
eliminating industries that it believes present a higher risk of employee
injury (such as roofing, excavation, chemical manufacturing and maritime). All
prospective clients undergo a rigorous underwriting process to evaluate
workers' compensation risk, group medical history, creditworthiness,
unemployment history and operating stability. Generally, flexible industrial
staffing clients do not sign long-term contracts.
RISK MANAGEMENT PROGRAM--WORKERS' COMPENSATION
The Company believes that careful client selection, pro-active accident
prevention programs, and aggressive control of claims will result in reduced
workers' compensation costs. OutSource seeks to
38
prevent workplace injuries by implementing a variety of training, safety, and
mandatory drug-free workplace programs (including pre-employment screening,
random testing, and post-accident drug monitoring) to ensure that safety
awareness is heightened at the sites to which the Company sends its workers.
Further, the Company insists that clients adhere to ongoing safety practices at
the clients' worksite as a necessary condition to a continued business
relationship.
The Company believes that its risk management policy allows for
flexibility, profitability, and cost control. The Company's workers'
compensation insurance coverage for calendar 1997 provides for a $250,000
deductible per accident or industrial illness with an aggregate annual dollar
limit on the Company's potential liability for deductible payments of 2.2% of
aggregate annual payroll. As such, the Company's workers' compensation expense
for claims is effectively capped at a contractually agreed upon percentage of
payroll and cannot exceed these amounts for fiscal year 1997. For claims
related to periods prior to 1997, there was no aggregate maximum dollar limit
on the Company's potential liability for deductible payments. From May 1, 1995
through December 31, 1996, in exchange for a lower excess insurance premium
rate, the Company accepted the responsibility for losses exceeding the $250,000
policy deductible per accident or industrial illness on a dollar-for-dollar
basis, but only to the extent such losses cumulatively exceed 85% of the excess
insurance premium (excluding the profit and administration component), subject
to a maximum additional premium of approximately $750,000 in 1995 and $1.2
million in 1996. The Company secures 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. The Company has
been successful in lowering its workers' compensation costs as a percentage of
revenues (weighted proportionately between PEO and flexible industrial
staffing) by approximately 32% from 1991 to 1996.
Each month, the risk management team, comprised of professionals from a
variety of functional areas, reviews workplace accidents for the relevant
period to determine the appropriate reserves. Each quarter, all cases are
reviewed such that the reserves, payments, and expected future costs for each
case are reconciled. The Company believes it has maintained adequate reserves
for all of its workers' compensation claims. In addition, the Company has
selected Gallagher Bassett Services for third-party claims administration and
CRA Managed Care for medical case management. Each vendor has established
designated regional teams for the handling of the Company's workers'
compensation claims. The regional team is managed by a Company in-house claims
analyst. All claims arising within a given region are reported to the claims
analyst who verifies the employment of the claimant and assigns the claim to
Gallagher Bassett Services and as needed to CRA Managed Care, for defense
and/or processing. Together, the team of the in-house analyst, the third-party
administrator and medical case manager aggressively follow each claim from its
origin to its conclusion.
INFORMATION TECHNOLOGY
The Company believes that the effective use of technology to increase
operational efficiency and enhance client service is a key factor in remaining
competitive. The Company has developed, and continues to invest in, information
support systems at its franchise, Company-owned and corporate headquarters
locations. At the field level, custom developed systems support the day-to-day
operational needs of both Tandem and Office Ours. At the corporate
headquarters, centralized accounting, billing and reporting applications
provide support for all of the field offices and a specialized package provides
support for Synadyne.
In November 1996, the Company entered into a series of major projects to
expand its information infrastructure and replace, or re-develop, many of its
major operational systems in order to support future growth. The initial phase
of the project was an installation of a Company-wide data base management
system that now provides consistency across all applications and allows
information to move between applications. This allows for consolidated
reporting and analysis across all of the Company's divisions.
The second phase of the project, completed in February 1997, implemented
an integrated financial management system for all accounting functions to
streamline the central processing of billing and
39
financial reporting. The third phase of the project is the development of a
state-of-the-art system to support Synadyne. Since no comprehensive,
commercially available system exists for the PEO industry, the Company entered
into a developmental agreement with F.W. Davison, a provider of human resource
and benefit systems, to produce a system tailored to the needs of Synadyne. The
final phase of the project is the development of a new support system for the
Tandem and Office Ours offices that will use a centrally based processing
resource. Each field office will be connected to a central processor, via a
FRAME relay network connection.
COMPETITION
The staffing market is highly fragmented, characterized by many small
providers in addition to several large public companies. There are limited
barriers to entry and new competitors frequently enter the market. Although a
large percentage of flexible staffing providers are locally operated with fewer
than five offices, many of the large public companies have significantly
greater marketing, financial and other resources than the Company. However,
unlike the Company, these companies do not focus primarily on the supply of
temporary industrial personnel. The Company believes that by focusing primarily
on the placement of temporary industrial personnel, it enjoys a competitive
advantage over many of its competitors that attempt to provide a broader base
of temporary employees. The Company also believes that by targeting emerging
companies, rather than the larger companies that are generally being pursued by
its competitors, it can also gain certain competitive advantages. The Company
believes that there are several factors that must be met in order to obtain and
retain clients in the flexible staffing market. These factors include an
adequate number of well located offices, an understanding of clients' specific
job requirements, the ability to reliably provide the correct number of
employees on time, the ability to monitor job performance, and the ability to
offer competitive prices. To attract qualified industrial candidates for
flexible employment assignments, companies must offer competitive wages,
vacations and holiday pay, positive work environments, flexibility of work
schedules, and an adequate number of available work hours. The Company believes
it is highly competitive in these areas.
Competition in the highly fragmented PEO sector is generally on a local or
regional basis, and new entries in the market are increasing at 6.5% per year.
The primary competitive factors in this sector are quality of service, choice
and quality of benefits, reputation, and price. The Company believes that name
recognition, regulatory expertise, financial resources, risk management, and
data processing capability distinguish leading PEOs from the rest of the
industry and OutSource is highly competitive in all of these areas. The
Company's competitors include: (i) in-house human resource departments; (ii)
other PEOs; and (iii) providers of discrete employment-related services such as
payroll processing firms, commercial insurance brokers, human resource
consultants, and temporary help firms who might .enter the PEO market. Some of
these companies have greater financial and other resources than the Company.
The Company believes that barriers to entry are increasing and are greater than
those of the flexible staffing business. Some of the barriers to entry include:
(i) the complexity of the PEO business and the need for expertise in multiple
disciplines; (ii) the number of years of experience required to establish
experience ratings in key cost areas of workers' compensation, health
insurance, and unemployment; (iii) the need for sophisticated management
information systems to track all aspects of business in a high-growth
environment; and (iv) increased regulations and licensing requirements in many
states.
INDUSTRY REGULATION
OVERVIEW
As an employer, the Company is subject to all federal, state and local
statutes and regulations governing its relationships with its employees and
affecting businesses generally, including its client employees. In addition, as
a result of its PEO operations, the Company is affected by specifically
applicable licensing and other regulatory requirements and by uncertainty in
the application of numerous federal and state laws relating to labor, tax and
employment matters.
40
UNCERTAINTY AS TO THE EMPLOYER RELATIONSHIP
By entering into a co-employment relationship with client employees, the
Company assumes certain obligations and responsibilities of an employer under
federal and state laws. Many of these federal and state laws were enacted prior
to the development of nontraditional employment relationships, such as PEOs,
temporary employment, and outsourcing arrangements, and do not specifically
address the obligations and responsibilities of PEOs. Whether certain laws
apply to the Company depends in many cases upon whether the Company is deemed
to be an "employer" for purposes of the law. The definition of "employer" under
these laws is not uniform and, therefore, the application of these laws to the
Company's business is not always certain. In many cases, a person's status as
an "employer" is determined by application of a common law test involving the
examination of several factors to determine an employer/employee relationship.
Uncertainty as to the application of certain laws governing "employer"
relationships is particularly important to the Company in federal tax and
employee benefit matters.
FEDERAL AND STATE EMPLOYMENT TAXES. The Company assumes the sole
responsibility and liability for the payment of federal and state employment
taxes with respect to wages and salaries paid to its employees, including
client employees. To date, the IRS has relied extensively on the common law
test of employment in determining employer status and the resulting liability
for failure to withhold. However, the IRS has formed an examination division
market segment specialization program for the purpose of examining selected
PEOs, such as the Company, throughout the United States. Upon examination, the
IRS may determine that a PEO is not the employer of the client employees under
the Code provisions applicable to federal employment taxes and, consequently,
that the client companies are exclusively responsible for payment of employment
taxes on wages and salaries paid to such employees.
A determination by the IRS that the Company is not the employer of the
client employees may impact the Company's ability to report employment taxes on
its own account rather than for the accounts of its clients and would increase
administrative burdens on the Company's payroll service function. In addition,
while the Company believes that it can contractually assume the client
company's withholding obligations, in the event the Company fails to meet these
obligations the client company may be held jointly and severally liable
therefore. The Company's management believes that the economic strength and
reputation of the Company has prevented this potential liability from
discouraging prospective clients.
EMPLOYEE BENEFIT PLANS. The Company offers various benefit plans to its
client employees. These plans include Multi-Employer Retirement Plans, a
cafeteria plan, a group health plan, a group life insurance plan, a group
disability insurance plan and an employee assistance plan. Generally, employee
benefit plans are subject to provisions of both the Code and the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). In order to
qualify for favorable tax treatment under the Code, the plans must be
established and maintained by an employer for the exclusive benefit of the
Company's employees. An IRS examination of the Company and/or a client company
may determine that the Company is not the employer of client employees under
Code provisions applicable to employee benefit plans. Consequently, the Company
may not be able to offer client employees benefit plans that qualify for
favorable tax treatment. If the IRS were to conclude that the Company is not
the employer of its client employees for plan purposes, client employees could
not continue to make tax favored contributions to the Company's Multi-Employer
Retirement Plans or cafeteria plan. The Company believes that, although
unfavorable to the Company, a prospective application by the IRS of an adverse
conclusion would not have a material adverse effect on its financial position
and results of operations. If such conclusion were applied retroactively,
employees' vested account balances may become taxable immediately, the Company
would lose its tax deduction to the extent the contributions were not vested,
the plan trust would become a taxable trust and penalties could be assessed. In
such a scenario, the Company would face the risk of client dissatisfaction, as
well as potential litigation. A retroactive application by the IRS of an
adverse conclusion could have a material adverse effect on the Company's
financial position, results of operations and liquidity. While the Company
believes that a retroactive disqualification is unlikely, there can be no
assurance as to the ultimate resolution of these issues.
41
Employee pension and welfare benefit plans are also governed by ERISA. The
United States Supreme Court has held that the common law test of employment
must be applied to determine whether an individual is an employee or an
independent contractor under ERISA. A definitive judicial interpretation of
employer in the context of a PEO arrangement has not been established. If the
Company were found not to be an employer for ERISA purposes, its plans would
not be subject to ERISA. As a result of such finding, the Company and its plans
would not enjoy the preemption of state law provided by ERISA and could be
subject to varying state laws and regulations, as well as to claims based upon
state common laws.
WORKERS' COMPENSATION
Workers' compensation is a state mandated, comprehensive insurance program
that requires employers to fund medical expenses, lost wages and other costs
resulting from work-related injuries and illnesses. In exchange for providing
workers' compensation coverage for employees, employers are generally immune
from any liability for benefits in excess of those provided by the relevant
state statutes. In most states, the extensive benefits coverage for both
medical costs and lost wages is provided through the purchase of commercial
insurance from private insurance companies, participation in state-run
insurance funds, self insurance funds or, if permitted by the state, employer
self-insurance. Workers' compensation benefits and arrangements vary on a
state-by-state basis and are often highly complex.
The Company's ability to use comprehensive workers' compensation managed
care techniques in its PEO operations depends in part on its ability to
contract with or create networks of health care providers. The Company requires
that injured workers use the Company's network of providers. Laws regulating
the operation of managed care provider networks have been adopted by a number
of states. These laws may apply to managed care provider networks having
contracts with the Company or to provider networks which the Company may
organize. To the extent the Company is governed by these regulations, it may be
subject to additional licensing requirements, financial oversight and
procedural standards for beneficiaries and providers. See "--Risk Management
Program--Workers' Compensation."
PEO LICENSING REQUIREMENTS
Approximately one-third of the states, including Florida, have passed laws
that have licensing or registration requirements for PEOs and several
additional states are considering such regulation. Such laws vary from state to
state but generally provide for monitoring the fiscal responsibility of PEOs.
State regulation assists in screening insufficiently capitalized PEO operations
and, in the Company's view, has the effect of legitimizing the PEO industry
generally by resolving interpretative issues concerning employee status for
specific purposes under applicable state law. Existing regulations are
relatively new and, therefore, limited interpretive or enforcement guidance is
available. The Company cannot predict with certainty the nature or direction of
the development of federal, state and local regulations.
In Florida, the Company's PEO operations are licensed under the Florida
Employee Leasing Licensing Act of 1991 (the "Florida Licensing Act"). Among
other things, the Florida Licensing Act requires PEOs and their controlling
persons to be licensed, mandates reporting requirements, allocates several
employer responsibilities and requires the payment of an annual licensing fee
based upon gross payroll amounts. The Florida Licensing Act also requires
licensed PEOs to submit annual audited financial statements and to maintain a
tangible accounting net worth and positive working capital. In addition, the
Florida Licensing Act requires PEOs to: (i) reserve the right of direction and
control over leased employees, (ii) enter into written agreements with their
clients, (iii) pay wages to leased employees, (iv) pay and collect payroll
taxes, (v) maintain authority to hire, terminate, discipline and reassign
employees, and (vi) reserve the right to direct and control the management of
safety, risk and hazard control at the worksite, including the right to perform
safety inspections, to promulgate and administer employment and safety
policies, and to manage workers' compensation claims, claim filings, and
related procedures.
42
TRADEMARKS AND SERVICE MARKS
The Company has registered the following marks with the United States
Patent and Trademark Office: LABOR WORLD, LABOR WORLD in conjunction with globe
logo, OFFICE OURS, Office Ours clock logo, SYNADYNE, OUTSOURCE
INTERNATIONAL--THE LEADER IN HUMAN RESOURCES and design, and SYNADYNE--A
PROFESSIONAL EMPLOYER and design. The Company has applications pending before
the United States Patent and Trademark Office for federal registration of the
following marks: OSI, TANDEM, TANDEM logo design, HIGH EFFICIENCY STAFFING
SOLUTIONS, LABOR TECHNOLOGIES and Labor Technologies logo. See "--Legal
Proceedings."
The Company has applications pending with the Office for Harmonization in
the Internal Market (Trademark and Designs) for European Community registration
of the following marks: LABOR WORLD, OFFICE OURS, SYNADYNE and OUTSOURCE
INTERNATIONAL. The Company also has applications pending in Canada for
registration of the following marks: SYNADYNE, OFFICE OURS and OUTSOURCE
INTERNATIONAL.
CORPORATE EMPLOYEES
As of June 30, 1997, the Company had 786 corporate employees, of whom 78
were employed in PEO service operations, 560 were employed in flexible staffing
service operations, and 148 were employed in shared support services such as
human resources, risk management, and information systems. None of the
Company's employees are covered by collective bargaining agreements. The
Company believes that its relationships with its employees are good.
PROPERTIES
The Company's national office and support center is currently located in a
50,000 square foot office building in Deerfield Beach, Florida. The lease for
this property expires in December 2011, and provides for annual lease payments
of approximately $610,000. The Company has an option to purchase the property
for $5.3 million during the first two years of the lease term and intends to
exercise that option in the fall of 1997. The Company also leases 91
Company-owned office locations and certain other facilities, with approximately
254,000 total square feet for an annual base rent of approximately $1.4
million. One of these properties, a condominium in Boca Raton, Florida, is
leased from Mr. Burrell, as agent for SMSB Associates Limited Partnership, a
Florida limited partnership ("SMSB") a related party to the Company. A portion
of a warehouse is leased from TMT Properties, Inc., a company controlled by Mr.
Burrell on a month-to-month basis for $1,468 per month. See "Certain
Transactions." The Company also owns a small office building in Chicago,
Illinois and has contracted to purchase the condominium in Boca Raton, Florida
from Mr. Burrell and a small office building in Waukegan, Illinois from an
unrelated party. The Company believes that its facilities are generally
adequate for its needs and does not anticipate difficulty in replacing such
facilities or locating additional facilities, if needed.
LEGAL PROCEEDINGS
The Company is occasionally a party to legal proceedings incidental to its
ordinary business operations. At present, the Company is not a party to any
pending legal proceedings that the Company believes could have a material
adverse effect on its financial condition or results of operations.
In 1996, the Company commissioned and completed an independent
investigation (the "Investigation") which focused on: (i) allegations that the
Company made improper payments to a customer's management employee who made
purchasing decisions regarding the Company's services; and (ii) the likelihood
that other similar payments may have been made by the Company. The
Investigation, which was conducted by a large national law firm and a "big six"
accounting firm did not find any other improper payments. The Company disclosed
the matter, and voluntarily paid
43
approximately $108,000 as a compensatory payment (the estimated amount of the
improper payment) to such customer and filed appropriate amended tax returns.
The customer is continuing to transact business with the Company. The Company
also disclosed the matter to the office of the appropriate State's Attorney's
Office, which has advised the Company that it has no present intention of
pursuing any charges against the Company, its shareholders or management.
The Investigation determined that, although the payments in question were
initially solicited by the customer's management employee from a former
employee of the Company, the Founding Shareholders during that period all had
varying degrees of knowledge of, and participation with respect to, those
payments. The Founding Shareholders resigned as officers and directors in
November 1996 and no longer have any involvement in the operations of the
Company. Effective February 21, 1997, the Company discontinued payment of
compensation to the Founding Shareholders. Finally, in connection with the
issuance of the Senior Notes, all shares of common stock owned by those
shareholders and their families were placed in a voting trust. See
"Management--Voting Trust and Shareholders' Agreement," "Principal and Selling
Shareholders" and "Certain Transactions--Founder Salaries".
On March 21, 1997, Source Services Corporation ("SSC") filed a Petition to
Cancel Registration with the Trademark Trial and Appeal Board in which SSC
seeks cancellation of the Company's service mark "OutSource International--The
Leader in Human Resources". SSC has alleged that it has been using the service
mark "Source" in various forms since 1986 and, in its petition, alleges that
the Company's use of the "OutSource" service mark violates various provisions
of the Lanham Act.
On May 28, 1997, the Company filed an answer to the Petition to Cancel
Registration and asserted various affirmative defenses. If the Company prevails
in the administrative proceeding, the "OutSource" mark will retain its federal
registration. If SSC prevails, the "OutSource" registration would be cancelled.
However, even in the event of a cancellation, the Patent and Trademark Office
has no authority to grant injunctive relief or award damages. Furthermore, the
decision as to whether the Company can continue to use the "OutSource" service
mark cannot be decided in the administrative proceeding, but rather would have
to be separately litigated. See "--Trademarks and Service Marks."
44
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's executive officers, directors, and director nominees are as
follows:
NAME AGE POSITION
- --------------------------- ----- -------------------------------------------------
Paul M. Burrell ......... 37 President, Chief Executive Officer and Chairman
of the Board of Directors
Robert A. Lefcort ......... 51 Executive Vice President, Secretary and Director
Robert E. Tomlinson ...... 40 Chief Financial Officer, Treasurer and Director
James E. Money ............ 55 President, Tandem Division
Robert J. Mitchell ...... 58 President, Office Ours Division
Samuel H. Schwartz ...... 33 Director
Richard J. Williams ...... 36 Director
David S. Hershberg ...... 55 Director Nominee
PAUL M. BURRELL has been President, Chief Executive Officer and Chairman
of the Board of the Company since its formation on April 19, 1996. Since June
1988, Mr. Burrell has served in various officer capacities with the
Subsidiaries, including as Chief Financial Officer and President. Prior to
joining the Company, Mr. Burrell was a Certified Public Accountant with the
accounting firm of Deloitte Haskins & Sells, from 1983 until 1988. Mr. Burrell
is a member of several associations including the American Institute of
Certified Public Accountants, the Florida Institute of Certified Public
Accountants, the National Association of Temporary and Staffing Services, and
the National Association of Professional Employer Organizations, which has
certified him as a Professional Employer Specialist. Mr. Burrell currently
serves as the President of the Broward County Business Roundtable and is the
Treasurer of the Florida Association of Temporary Services.
ROBERT A. LEFCORT has been Executive Vice President and a Director of the
Company since its formation on April 19, 1996. Since August 1990, Mr. Lefcort
has served in various officer capacities with the Subsidiaries, including as
Chief Operating Officer and Director of Franchise Development. Mr. Lefcort was
the President of the Miami International Merchandise Mart, the largest regional
wholesale trade mart in the United States, from October 1974 to September 1984.
ROBERT E. TOMLINSON has been Chief Financial Officer and a Director of the
Company since its formation on April 19, 1996. Since March 1994, Mr. Tomlinson
has served as Chief Financial Officer of the Subsidiaries. Prior to joining the
Company, Mr. Tomlinson served in various financial capacities from August 1982
to January 1993 with Embraer Aircraft Corporation, finally as Senior Vice
President of Finance and Treasurer, and served on its board of directors from
1991 through March 1994. Mr. Tomlinson is a Certified Public Accountant and a
member of the Florida Institute of Certified Public Accountants and worked for
the accounting firm of Price Waterhouse from September 1977 through August
1982.
JAMES E. MONEY has been President of the Tandem Division since March 1995.
From June 1993 to May 1994, Mr. Money served as President and Chief Operating
Officer of J.D. Byrider Systems, a car sales and financing franchise company.
From September 1988 to June 1993, Mr. Money was President and Chief Operating
Officer of Snelling and Snelling, Inc., a temporary placement company and
served on its board of directors from March 1986 to June 1993.
ROBERT J. MITCHELL has been President of the Office Ours Division since
January 1996. From March 1995 to January 1996, Mr. Mitchell served as Senior
Vice President and General Manager of the Office Ours Division. From April 1993
to January 1995, Mr. Mitchell served as Vice President, Marketing for
Homeowners Marketing Services. From September 1988 to September 1992, Mr.
Mitchell was President of REDI Real Estate Information Services, a publisher of
real property data.
SAMUEL H. SCHWARTZ has been a Director of the Company since February 1997.
Since January 1995, Mr. Schwartz has been Vice President and Partner at Bachow
& Associates, Inc., an
45
investment company, in Bala Cynwyd, Pennsylvania. Mr. Schwartz also serves on
the board of directors of CARE Systems, Inc., a provider of workers'
compensation managed care claims administration. From August 1990 to January
1995, Mr. Schwartz was employed as a Manager of The Boston Consulting Group.
RICHARD J. WILLIAMS has been a Director of the Company since February
1997. Since March 1990, Mr. Williams has been a Managing Director of Triumph
Capital Group, Inc., a private equity investment firm based in Boston,
Massachusetts. Mr. Williams also serves on the board of directors of Clarity
Telecom, Inc., Hatten Communications, Inc., International Computer Graphics,
Inc., Longview Group, Inc. and United Natural Foods, Inc.
DAVID S. HERSHBERG has been nominated to become a Director of the Company
immediately following the closing of this Offering. Mr. Hershberg is Vice
President, Assistant General Counsel of the IBM Corporation. Prior to joining
IBM in October 1995, Mr. Hershberg was Executive Vice President and director of
Viatel, Inc., an international long-distance telephone company, with
responsibility for legal, administrative and certain financial matters. From
December 1991 to June 1993, he was an advisor to the Board of Buckeye
Communications, Inc. From 1984 to 1991, he was Vice Chairman, General Counsel
and director of Shearson Lehman Brothers. Prior to 1984, he was Deputy General
Counsel for American Express Company. Mr. Hershberg is an advisory director of
Bank Julius Baer, New York branch, a Swiss private bank.
VOTING TRUST AND SHAREHOLDERS' AGREEMENT
On February 21, 1997, certain shareholders of the Company deposited
5,152,380 shares of Common Stock into the Voting Trust, of which Messrs.
Burrell and Williams are the Trustees. The term of the Voting Trust is ten
years. Pursuant to its terms, the Trustees have sole and exclusive right to
vote the shares of Common Stock deposited in the Voting Trust. Upon
consummation of this Offering, the shares of Common Stock deposited into the
Voting Trust will constitute approximately 49.5% of the issued and outstanding
shares of Common Stock (or 43.3% if the Underwriters' over-allotment option is
exercised in full). Accordingly, the Trustees will retain sufficient voting
power to control the election of the Board or the outcome of any extraordinary
corporate transaction submitted to the shareholders for approval for the
foreseeable future.
Effective February 21, 1997, the shareholders of the Company agreed to
vote their shares for the election of a Board comprised of seven persons: three
Management Directors, two Investor Directors and two additional persons
selected by the Management Directors and the Investor Directors. In the event
of a default under the Senior Notes or the failure of the Company to achieve
certain performance criteria, the holders of the Senior Notes have the right to
designate up to two additional members of the Board. The shareholders of the
Company further agreed to ratify any merger, consolidation or sale of the
Company, any acquisitions made by the Company, and any amendments to the
Articles or Bylaws, to the extent such actions are approved by the Board. Those
shareholders and the Senior Note Holders also have pre-emptive rights to
purchase a pro rata portion of securities the Company may issue and sell from
time to time excluding: (i) Common Stock in an underwritten public offering;
(ii) securities issued in connection with a business acquisition; (iii) the
Warrant Shares; and (iv) certain options to purchase Common Stock.
BOARD OF DIRECTORS
The Company currently has five directors and one director nominee.
Pursuant to the Voting Trust, the Company is actively seeking an additional
non-employee director to fill the vacant seat on the Board. See "--Voting Trust
and Shareholders' Agreement". Prior to the consummation of the Offering, the
Company intends to amend the Articles to classify the Board into three classes,
each class to be as nearly equal in number of directors as possible. One class
will serve initially for a one-year term and thereafter be elected for a
three-year term. A second class of directors will serve initially for a
two-year term and thereafter be elected for a three-year term. The third class
of directors will immediately
46
commence a three-year term. Any director elected to fill a vacancy will hold
office for the remainder of the full term of the class of directors in which
the vacancy occurred and until such director's successor is duly elected and
qualified. If at any time the size of the Board is changed, the increase or
decrease in the number of directors would be apportioned among the three
classes to make all classes as nearly equal as possible. See "Description of
Securities--Certain Anti-Takeover Provisions Included in the Company's Articles
of Incorporation and Bylaws."
COMMITTEES
The Board intends to establish an Executive Committee, a Compensation and
Stock Option Committee, an Audit Committee, and a Nominating Committee prior to
the consummation of the Offering.
From time to time, the Board will delegate to the Executive Committee the
power and authority to act on behalf of the Board. It is expected that Messrs.
Burrell, Tomlinson and Lefcort will comprise the Executive Committee.
The Compensation and Stock Option Committee will administer the Stock
Option Plan including, among other things, determining the amount, exercise
price and vesting schedule of stock options awarded under the plan. The
Compensation and Stock Option Committee will administer the Company's other
compensation programs and perform such other duties as may from time to time be
determined by the Board. It is expected that Messrs. Williams, Schwartz and
Burrell will comprise the Compensation and Stock Option Committee.
The Audit Committee will review the scope and results of the annual audit
of the Company's consolidated financial statements conducted by the Company's
independent accountants, the scope of other services provided by the Company's
independent accountants, proposed changes in the Company's financial and
accounting standards and principles, and the Company's policies and procedures
with respect to its internal accounting, auditing and financing controls. The
Audit Committee will also examine and consider other matters relating to the
financial affairs and accounting methods of the Company, including selection
and retention of the Company's independent accountants. It is expected that
Messrs. Schwartz, Hershberg and Tomlinson will comprise the Audit Committee.
The Nominating Committee will recommend nominees to fill vacancies on the
Board, newly created directorships and expired terms of directors. It is
expected that Messrs. Williams, Hershberg and Burrell will comprise the
Nominating Committee.
DIRECTOR COMPENSATION
Each non-employee director of the Company receives a $1,000 quarterly
retainer and a $1,500 fee for attendance at each meeting of the Board. In
addition, directors receive $500 for attendance at committee meetings of the
Board. Directors are also reimbursed for travel expenses.
Pursuant to the Stock Option Plan, the Board intends to adopt a formula
plan for its non-employee directors (the "Formula Plan") prior to the
consummation of this Offering. Under the Formula Plan, upon his election to the
Board, an eligible non-employee director will receive an option to purchase
10,800 shares of Common Stock ("Initial Option"). The Initial Option will
expire as follows: 3,600 shares on the first anniversary of the grant date,
3,600 on the second anniversary of the grant date and 3,600 on the third
anniversary of the grant date. On the first anniversary of the date of the
grant of his Initial Option, an eligible non-employee director who then owns
3,600 shares of Common Stock at the end of this twelve-month period will
receive an option to purchase 3,600 additional shares of the Common Stock. On
the second anniversary of the date of the grant of his Initial Option, an
eligible non-employee director who has held a minimum of 3,600 shares of Common
Stock throughout the entire preceding twelve-month period will receive an
option to purchase 3,600 additional shares of Common Stock. On the third
anniversary of the date of the Initial Option, an eligible non-employee
47
director who has held a minimum of 3,600 shares of Common Stock throughout the
entire preceding twelve-month period will receive an option to purchase an
additional 3,600 shares of the Common Stock. The exercise price of each option
will be 100% of the fair market value of the Common Stock on the date of grant
of the option.
All options granted under the Formula Plan are 100% vested on the date of
the grant. Except for the Initial Option, the duration of an option granted
under the Formula Plan is three years from the date of grant, or such shorter
period as may result from death, disability, or termination of the services as
a director of the non-employee director to whom the option is granted. The
options are non-transferable other than by will or by the laws of descent and
distribution.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, Messrs. Burrell, Lefcort and Tomlinson participated in
deliberations of the Board concerning executive officer compensation. In
addition, the Founding Shareholders also participated in such deliberations
until their resignation as members of the Board on November 22, 1996. See
"Certain Transactions" for a description of certain payments made to the
Founding Shareholders.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation paid or accrued by the Company during the fiscal years ended
December 31, 1996, 1995 and 1994, to the Company's Chief Executive Officer and
to the other executive officers of the Company whose annual salary and bonuses
exceeded $100,000 during the fiscal year ended December 31, 1996 (collectively,
the "Named Executive Officers").
48
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- -------------
AWARDS
-------------
SECURITIES
UNDERLYING
NAME AND SALARY BONUS OPTIONS/SARS
PRINCIPAL POSITION YEAR ($) ($) (#)
- ------------------------------------------- ------ --------- --------- -------------
Paul M. Burrell 1996 368,208 -- 39,000
President and Chief Executive Officer(1) 1995 428,819 -- --
1994 329,389 -- --
Robert A. Lefcort 1996 128,077 9,574 --
Executive Vice President 1995 120,000 20,000 --
1994 110,000 127,240 --
Robert E. Tomlinson 1996 122,308 24,000 35,100
Chief Financial Officer 1995 90,000 20,700 --
1994 67,560 6,000 --
James E. Money 1996 160,208 45,231 31,200
President, Tandem Division 1995 99,079 22,000 --
1994 -- -- --
Joseph F. Bello 1996 92,418 10,000 19,500
President, Synadyne Division(2) 1995 80,000 200 --
1994 41,539 10,000 --
- ----------------
(1) Effective with the Reorganization, Mr. Burrell's salary was adjusted to
$250,000 per annum plus bonus and benefits. See "--Employment Agreements."
(2) Mr. Bello served as President of the Synadyne Division until July 1997 and
currently serves as Vice President--Mid Atlantic region, Synadyne.
The following table contains information about stock option grants to
Named Executive Officers during the fiscal year ended December 31, 1996.
INDIVIDUAL GRANTS
--------------------------------------------------------------------------
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF SECURITIES % OF TOTAL OPTIONS EXERCISE PRICE STOCK PRICE
UNDERLYING OPTIONS GRANTED TO EMPLOYEES OR BASE PRICE EXPIRATION APPRECIATION
NAME GRANTED(#) IN FISCAL YEAR(1) ($/SHARE)(1) DATE 5%($) 10%($)
- ------------------------ ---------------------- ---------------------- ---------------- ----------- --------- --------
Paul M. Burrell ...... 39,000(3) 11.2 9.44 1/1/06 231,534 586,752
Robert A. Lefcort ... -- -- -- -- -- --
Robert E. Tomlinson ... 35,100(3) 10.1 9.44 1/1/06 208,380 528,077
James E. Money ...... 31,200(3) 9.0 9.44 1/1/06 188,207 469,402
Joseph F. Bello ...... 19,500(3) 5.6 9.44 1/1/06 115,767 293,376
- ----------------
(1) Options were granted under a stock option plan initially adopted by
OutSource International, Inc., an Illinois corporation ("OI"), which was
merged with and into OutSource International of America, Inc., a Florida
corporation and a wholly-owned subsidiary of the Company. The total
options granted during the fiscal year ended December 31, 1996 and the
exercise price per share have been adjusted to reflect the adoption of the
OI stock option plan by the Company. See "--Stock Option Plan."
(2) Amounts reflect hypothetical gains that could be achieved for the options
if they are exercised at the end of the option term. Those gains are based
on assumed rates of stock appreciation of 5% and 10% compounded annually
from the date the option was granted through the expiration date.
(3) Options were granted on January 1, 1996 and vest and become exercisable in
four equal annual installments beginning on January 1, 1997.
49
The following table provides information about the number and value of
options held by the Named Executive Officers at December 31, 1996. None of the
Named Executive Officers exercised any options to purchase Common Stock during
the fiscal year ended December 31, 1996.
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END(#) AT FY-END($)(1)
------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ------------- --------------- ------------- --------------
Paul M. Burrell ......... 9,750 29,250 $9,458 $28,373
Robert A. Lefcort ......... ---- ---- ---- ---
Robert E. Tomlinson ...... 8,775 26,325 $8,512 $25,535
James E. Money ............ 7,800 23,400 $7,566 $22,698
Joseph F. Bello ......... 4,875 14,625 $4,729 $14,186
- ----------------
(1) For purposes of determining the values of the options held by Named
Executive Officers, the Company has assumed that Common Stock had a value
of $10.41 per share on December 31, 1996, which is the estimated fair
market value the Board had attributed to the Common Stock on such date.
The option value is based on the difference between the fair market value
of the shares on December 31, 1996 and the option exercise price per
share, multiplied by the number of shares of Common Stock subject to the
option. See Note 10 to the Company's Consolidated Financial Statements.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Mr. Burrell on
February 21, 1997 and intends to enter into employment agreements with each of
its other current executive officers effective as of March 3, 1997. Except as
described below, these agreements generally contain the same terms and provide
for a base salary, which is reviewed annually and may be increased by the Board
or any committee designated by the Board to review such salary.
Mr. Burrell's employment agreement is for successive one year periods. The
other employment agreements may be terminated by either party at any time and
continue in effect until terminated by either party in accordance with the
terms thereof. In the event Mr. Burrell or another executive officer resigns
without "good reason" or is terminated for "cause," compensation under such
employment agreement will end. In the event that the Company terminates Mr.
Burrell or another executive officer without cause or such officer resigns for
good reason, the terminated officer will receive, among other things, severance
compensation, including a multiple of the officer's annual base salary and
bonus. In addition, all options and stock appreciation rights become
immediately exercisable upon termination of employment and certain other unpaid
awards made previously under any of the Company's compensation plans or
programs immediately vest on the date of such termination.
Severance provisions also apply if an executive officer is terminated
within two years (three years in the case of Mr. Burrell) after the occurrence
of a "change of control." A change of control includes: (i) the acquisition by
an individual, group or entity of 15% or more of the then outstanding shares of
capital stock or voting securities of the Company; (ii) incumbent members of
the Board and individuals whose election to the Board was approved by a vote of
the incumbent directors cease to constitute a majority of the Board; (iii) a
reorganization, merger or consolidation in which all holders of then
outstanding shares of capital stock and voting securities immediately prior to
such event do not, following such event, own 60% of the outstanding shares of
capital stock or voting securities; (iv) a complete liquidation or dissolution
of the Company; or (v) a sale of substantially all of the assets of the Company
to an unaffiliated third party.
In the event the Company terminates an executive officer for any reason
within two years (three years in the case of Mr. Burrell) following the
occurrence of a change in control, or during such two or three-year period an
executive officer resigns for good reason, such executive officer shall be
entitled to
50
receive on the date of such termination an amount equal to, among other things,
a multiple of such executive officer's base salary and target bonus under the
Company's bonus program as well as any other benefits to which any such
employee would be entitled where termination was without cause or with good
reason. In addition, the employment agreements contain confidentiality,
noncompetition and nonsolicitation covenants during the period ending one year
immediately following termination of an executive officer.
STOCK OPTION PLAN
The Stock Option Plan provides for the grant of both nonstatutory stock
options and stock options intended to be treated as incentive stock options
within the meaning of Section 422 of the Code. The Stock Option Plan is
intended to provide incentives to, and rewards for, certain eligible employees
and non-employee directors of the Company who have contributed and will
continue to contribute to the success of the Company. The Stock Option Plan was
initially adopted in December 1995 by the Board of Directors of OutSource
International, Inc., an Illinois corporation ("OI"), which was merged with and
into OutSource International of America, Inc., a Florida corporation, a wholly
owned subsidiary of the Company following consummation of the Reorganization.
On January 1, 1996, OI granted options to purchase 815,860 shares of OI's
common stock at an exercise price of $4.77 per share, which an independent
appraiser determined to be the fair market value of OI's common stock on
January 1, 1996, the date of grant. Following certain forfeitures, options to
purchase 709,512 shares of OI common stock were outstanding on February 18,
1997. On that date, the Company adopted the Stock Option Plan and, pursuant to
the terms of the Stock Option Plan, adjusted the number of shares of Common
Stock subject to outstanding options to 352,527, and the exercise price of such
options to $9.44 per share. The adjustment was made based upon the ratio of the
fair market value of OI common stock to the fair market value of Common Stock,
as determined by an independent appraiser as of the date of grant.
On March 12, 1997, the Board granted options to purchase an additional
221,473 shares of Common Stock of which an aggregate of 21,873 options were
granted to Named Executive Officers. The exercise price of the options granted
on March 12, 1997 was $10.38 per share. The options vest and become exercisable
in four equal annual installments commencing on March 12, 1998. The total
number of shares of Common Stock reserved for issuance under the Stock Option
Plan is 1,144,000, of which 570,439 shares (following certain forfeitures)
remain available for issuance. See Note 10 to the Company's Consolidated
Financial Statements.
The Compensation and Stock Option Committee is authorized to administer
the Stock Option Plan, including the selection of employees of the Company to
whom options may be granted and the terms of each option grant. The duration of
an option granted under the Stock Option Plan is ten years from the date of
grant, or such shorter period as may be determined by the Compensation and
Stock Option Committee at the time of grant, or as may result from the death,
disability, or termination of the employment of the employee to whom the option
is granted.
Incentive stock options granted under the Stock Option Plan are
non-transferable other than by will or by the laws of descent and distribution.
The Stock Option Plan may be amended at any time by the Board, although the
Board may condition any amendment on the approval of the shareholders of the
Company if such approval is necessary or advisable with respect to tax,
securities or other applicable laws. The Stock Option Plan terminates in 2007.
WARRANTS
In connection with the issuance of the Senior Notes, the Company issued
the Initial Warrants to the Senior Note Holders and placed the Additional
Warrants in escrow, pending release to either certain shareholders of the
Company or the Senior Note Holders, based upon the achievement by the Company
of certain specified performance criteria. The Initial Warrants are currently
exercisable at an exercise price of $.014 per share and expire on February 20,
2002.
51
Following the successful consummation of certain acquisitions by the
Company, 198,981 Additional Warrants were released from escrow in April 1997
and distributed to certain shareholders of the Company. The remaining 432,186
Additional Warrants will be released to the certain shareholders of the Company
or the Senior Note Holders no later than February 1999. The Additional Warrants
are exercisable upon release from escrow at an exercise price of $.014 per
share and expire on February 20, 2002. If the Company does not consummate an
initial public offering in which the net proceeds received by the Company equal
or exceed $25.0 million (at a minimum offering price of $12.41 per share) prior
to February 20, 2001, the holders of the Warrants have a right to require the
Company to repurchase the unexercised portion of the Warrants and the Warrant
Shares purchased upon exercise of the Warrants at fair market value (the "Put
Right"). The Company has granted the holders of the Warrants demand and
piggyback registration rights with respect to the Warrant Shares. See "Shares
Eligible For Future Sale."
52
CERTAIN TRANSACTIONS
ACQUISITIONS
Effective January 1, 1995, the Company entered into an asset purchase
agreement with All Temps, Inc. ("All Temps") pursuant to which the Company
acquired certain of the assets of All Temps, a former franchise of the Company,
and the parties terminated their franchise agreement. The Founding Shareholders
are the principal shareholders of All Temps. Under the terms of the asset
purchase agreement, as amended, the Company: (i) paid $1,229,043 in cash; and
(ii) delivered a promissory note in an amount equal to 2.1875% of the gross
profits earned through December 31, 1999 by all present and future Tandem
offices in Los Angeles and Orange Counties, California, with annual minimum
payments of $40,000 and a minimum aggregate payment of $150,000.
Effective June 4, 1995, the Company entered into an asset purchase
agreement to acquire certain assets of WAD, Inc. ("WAD"), a former franchise of
the Company, and the parties terminated their franchise agreements. Mr. Paul M.
Burrell, the Company's President, Chief Executive Officer and Chairman of the
Board and Mr. Robert A. Lefcort, the Company's Executive Vice President,
Secretary and a Director of the Company, are the shareholders of WAD. Under the
terms of the asset purchase agreement, as amended, the purchase price was set
at $976,076, and the Company (i) paid $235,094 in cash and (ii) delivered a
promissory note in the aggregate principal amount of $731,982, bearing interest
at the rate of 10% per annum, $331,982 of which was paid on February 24, 1997
with the remaining principal and interest payable in eight quarterly
installments commencing on May 1, 1997. The Company intends to use a portion of
the proceeds of the Offering to repay this indebtedness. See "Use of Proceeds."
Effective April 1, 1996, the Company entered into an asset purchase
agreement with Payray, Inc. ("PRI"), Tri-Temps, Inc. ("TTI") (collectively, the
"Morelli Sellers"), Employees Unlimited, Inc. ("EUI") and Raymond S. Morelli,
pursuant to which the Company acquired substantially all of the assets of PRI
and TTI. In connection with the acquisition of the assets of the Morelli
Sellers, the Company acquired eight of its flexible industrial staffing
franchise offices, four in Illinois and four in Wisconsin by terminating
franchise agreements with TTI and EUI. Raymond S. Morelli, a shareholder of the
Company and the son of Louis A. Morelli, a Founding Shareholder, is the
principal shareholder of each of the Morelli Sellers and EUI. Under the terms
of the asset purchase agreement, as amended, the Company: (i) paid
approximately $2.3 million in cash and (ii) delivered promissory notes in the
aggregate principal amount of approximately $2.6 million, payable in 48 monthly
installments commencing April 1, 1997 and accruing interest at the rate of 14%
per annum. The Company intends to use a portion of the proceeds of the Offering
to repay this indebtedness. See "Use of Proceeds."
Effective June 10, 1996, the Company entered into an asset purchase
agreement, as amended, with Temp Aid, Inc. ("Temp Aid") pursuant to which the
Company acquired substantially all of the assets of Temp Aid, a franchise, for
$26,370. The principal shareholders of Temp Aid are Matthew Schubert, a
shareholder of the Company and the son of Lawrence H. Schubert, a Founding
Shareholder, Louis J. Morelli, the son of Louis A. Morelli, a Founding
Shareholder, and John Janisch, the son-in-law of Louis A. Morelli.
The purchase price with respect to each of the acquisitions described
above was determined by arms-length negotiations based upon the sale price of
comparable companies. Mr. Burrell made such determination for the Company with
respect to the acquisitions of All Temps, PRI, TTI and Temp Aid. The Founding
Shareholders made such determination with respect to WAD.
WORKING CAPITAL LOANS
Certain shareholders, relatives of such shareholders and executive
officers have made working capital loans to the Company from time to time. This
indebtedness bears interest at an annual rate of 21% and is subordinated to the
repayment of the Revolving Facility and the Senior Notes. As of
53
December 31, 1994, 1995 and 1996, the Company was indebted with respect to such
working capital loans: (i) in an aggregate principal amount of $170,019,
$222,124, and $726,192, respectively, to Mr. Burrell and certain relatives of
Mr. Burrell; (ii) in an aggregate principal amount of $0, $0, and $200,000
respectively, to Mr. Tomlinson; (iii) in an aggregate principal amount of
$200,000, $200,000 and $325,000, respectively, to Mr. Louis A. Morelli and
certain of his relatives; and (iv) in an aggregate principal amount of $0, $0
and $50,000, respectively, to Mr. Robert J. Mitchell. The Company intends to
use a portion of the proceeds from this Offering to repay $1,200,000 of this
indebtedness currently outstanding. See "Use of Proceeds."
REORGANIZATION
In connection with the Reorganization, the Company issued promissory notes
in the aggregate principal amount of $1.7 million to the following shareholders
of the Company: (i) Mr. Lawrence H. Schubert, in the principal amount of
$407,000; (ii) Mrs. Nadya I. Schubert, in the principal amount of $408,000;
(iii) Mr. Alan E. Schubert, in the principal amount of $605,000; and (iv) Mr.
Burrell, in the principal amount of $325,000. This indebtedness bears interest
at an annual rate of 10% and is subordinated to the payment of the Revolving
Facility and the Senior Notes. The Company intends to use a portion of the
proceeds from this Offering to repay $1,685,000 of this indebtedness currently
outstanding. See "Use of Proceeds."
The Subsidiaries' Shareholders contributed approximately $4.3 million in
outstanding promissory notes issued on December 31, 1996 to the capitalization
of the Company. On February 20, 1997, certain of the Subsidiaries declared a
dividend to the Subsidiaries' Shareholders of previously taxed, but
undistributed S corporation earnings, in the aggregate amount of approximately
$9.1 million, subject to adjustment based upon the final determination of
taxable income (the "S Corporation Distribution"). Substantially all of the S
Corporation Distribution was paid in cash immediately following the
Reorganization. The Subsidiaries' Shareholders used a portion of the S
Corporation Distribution to repay approximately $4.3 million in outstanding
debt owed to the Company for promissory notes issued on December 31, 1996.
Included in such indebtedness were promissory notes issued by the following
officers and directors of the Company: (i) Mr. Burrell, in the principal amount
of approximately $417,000 and (ii) Mr. Lefcort, in the principal amount of
approximately $130,000. This indebtedness bore interest at the annual rate of
10% and was payable on demand. See "Description of Securities--
Reorganization" and Note 1 to the Company's Consolidated Financial Statements.
At the time of the Reorganization, the Company also decided to purchase
certain real property used in its operations from certain related parties who
had previously leased such property to the Company. A Subsidiary of the Company
has entered into a contract to purchase a residential condominium in Boca
Raton, Florida from Mr. Burrell for $100,000. That condominium is used to house
visiting Company employees and clients and was previously leased from Mr.
Burrell. The property was independently appraised at $99,000 by Ross Realty and
Appraisal. That transaction is expected to close in July 1997.
On June 13, 1997, a Subsidiary of the Company purchased certain commercial
property in Chicago, Illinois from Mr. Burrell, which had previously been
leased by the Company (Mr. Burrell held title to such property as an
accommodation to SMSB). The purchase price of $430,000 was negotiated between
the Company and Mr. Burrell and was less than the $460,000 independent
appraisal which the Company obtained from Norbert L. Gold, Real Estate
Appraiser.
The Company is a guarantor under a first mortgage on its former national
office and support center in Boca Raton, Florida, which property is currently
leased from SMSB. The limited partners of SMSB are the Founding Shareholders
and Mr. Burrell. Mr. Robert E. Tomlinson, the Treasurer, Chief Financial
Officer and a director of the Company, is the chief financial officer of SMSB.
Mr. Burrell and the Founding Shareholders are also the shareholders of SMSB
Incorporated, SMSB's corporate general partner. As a result of the Company's
purchase of certain assets from Labor World USA, Inc. (an inactive affiliate of
the Company), the Company may also be contingently liable under a second
54
mortgage held by an unrelated third party on such property. As of March 31,
1997, the amount of the second mortgage was approximately $0.6 million. SMSB is
a co-maker of the second mortgage note and has made the monthly payments on
that note since its execution. SMSB is attempting to sell the Boca Raton office
building and, upon such sale, intends that the Company's obligations under
these mortgages and its lease will be terminated. The assets and liabilities of
SMSB, including the previously discussed mortgages, are consolidated in the
Company's consolidated financial statements due to the control exercised by the
Company over the assets of SMSB. See Note 1 and Note 5 to the Company's
Consolidated Financial Statements.
The Company also leases warehouse storage space from TMT Properties, Inc.,
a company controlled by Mr. Burrell, on a month-to-month basis for $1,468 per
month.
FRANCHISE ROYALTIES
Certain entities owned by shareholders and executive officers of the
Company have entered into franchise agreements with the Company. During 1994,
the Company was paid an aggregate of $631,486 in franchise royalties from the
following franchise associates pursuant to these agreements: EUI and TTI, All
Temps, WAD, and LM Investors, Inc. ("LM"), an entity owned by Messrs. Matthew
Schubert and Louis J. Morelli, the son of Louis A. Morelli, a Founding
Shareholder. During 1995, the Company was paid an aggregate of $547,477 in
franchise royalties from the following franchise associates pursuant to these
agreements: EUI, TTI, WAD, LM, and Temp Aid. During 1996, the Company was paid
an aggregate of $684,122 from the following franchise associates pursuant to
these agreements: EUI, TTI, LM, Temp Aid and All Staff Temps, Inc. ("AST"), an
entity whose principal shareholder is Raymond S. Morelli.
FRANCHISE PEO SERVICES
During 1994, the Company received revenues of $5,551,806 for the provision
of PEO services to All Temps. During 1995 the Company received revenues of
$4,466,241 for the provision of PEO services to PRI, TTI and LM. During 1996,
the Company received revenues of $13,505,481 for the provision of PEO services
to PRI, TTI, LM and AST. These revenues consisted of payroll, statutory
employee benefits plus an administrative fee, and resulted in gross profit to
the Company of approximately $53,000, $42,000 and $203,000 in 1994, 1995 and
1996, respectively.
FOUNDER SALARIES
Each of the Founding Shareholders received compensation during the fiscal
years ended 1994, 1995, 1996 and the three months ended March 31, 1997. Mr.
Alan E. Schubert received $744,506 in 1994, $616,980 in 1995, $570,721 in 1996,
and $86,000 for the three months ended March 31, 1997. Mr. Louis A. Morelli
received $573,374 in 1994, $689,050 in 1995, $848,011 in 1996, and $86,000 for
the three months ended March 31, 1997. Mr. Lawrence H. Schubert received
$597,625 in 1994, $636,499 in 1995, $532,260 in 1996, and $89,000 for the three
months ended March 31, 1997. Prior to their resignations from the Board in
November 1996, as the principal shareholders of the Subsidiaries, the Founding
Shareholders provided day-to-day operational supervision and ultimate control
over each of the Subsidiaries. Following the Reorganization, the Company
discontinued payment of compensation to the Founding Shareholders. See
"Description of Securities--Reorganization."
LEGAL FEES.
Mr. Louis J. Morelli, a shareholder of the Company, received legal fees
for services rendered to the Company during the years ended December 31, 1994,
1995 and 1996, and the three months ended March 31, 1997, in the approximate
amounts of $131,000, $52,000, $80,000, and $50,000, respectively. In 1996, the
Company advanced $4,645 in legal fees to Mr. Lefcort in connection with the
transfer of Common Stock to his family trust.
55
CONSULTING FEES
During 1996, Mr. David S. Hershberg, a director nominee of the Company,
received $37,500 in consulting fees for services rendered in connection with
the Investigation. See "Business--Legal Proceedings."
CLOSING FEE
Triumph and Bachow received closing fees of $210,000 and $165,000,
respectively, in connection with the issuance of the Senior Notes in February
1997. Mr. Richard J. Williams, a director of the Company, serves as a Managing
Director of Triumph and Mr. Samuel H. Schwartz, a director of the Company,
serves as a Vice President of Bachow. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
56
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus and as
adjusted at that date to reflect the sale of Common Stock offered by the
Company hereby, information with respect to the beneficial ownership of the
Company's Common Stock by: (i) each Selling Shareholder; (ii) each person known
by the Company to beneficially own more than five percent (5%) of the
outstanding shares of the Company's Common Stock; (iii) each director and
director nominee of the Company; (iv) the Company's Named Executive Officers;
and (v) all directors and executive officers as a group. Unless otherwise
indicated, each of the shareholders named in this table: (a) has sole voting
and investment power with respect to all shares of Common Stock beneficially
owned; and (b) has the same address as the Company. This table does not include
warrants to purchase 432,186 shares, currently held in escrow, but immediately
exercisable upon release from escrow. See "Management--Warrants."
BEFORE OFFERING AFTER OFFERING(1) -
------------------------------- NUMBER OF -------------------
NUMBER OF SHARES BEING NUMBER OF
NAME/ADDRESS SHARES PERCENT OFFERED(1) SHARES PERCENT
- ------------------------------------------------- ------------------- --------- ------------- ----------- --------
Paul M. Burrell .............................. 5,727,246(2) 95.0 700,000 5,027,246 55.7
Richard J. Williams(3) ........................ 5,152,380(4) 86.0 700,000 4,452,380 49.5
Alan E. Schubert .............................. 2,273,520(5) 37.5 233,333 2,040,187 22.5
Lawrence H. Schubert ........................... 1,222,484(6) 20.3 233,334 989,150 11.0
Nadya I. Schubert .............................. 1,222,484(7) 20.3 233,334 989,150 11.0
Louis A. Morelli .............................. 935,008(8) 15.5 233,333 701,675 7.8
Lawrence H. Schubert Revocable Trust ......... 578,379(9) 9.6 116,667 461,712 5.1
Nadya I. Schubert Revocable Trust ............ 578,379(10) 9.6 116,667 461,712 5.1
Susan Burrell ................................. 574,866(11) 9.5 -- 574,866 6.4
Triumph-Connecticut Limited Partnership(12) ... 484,494(13) 7.5 -- 484,494 5.1
Matthew B. Schubert ........................... 419,105(14) 7.0 -- 419,105 4.7
Bachow Investment Partners III, L.P.(15) ...... 380,674(16) 6.0 -- 380,674 4.1
Jason Schubert OutSource Trust ............... 355,303(17) 5.9 -- 355,303 3.9
Matthew Schubert OutSource Trust ............... 291,502(18) 4.9 -- 291,502 3.2
Margaret Ann Janisch ........................... 298,593(19) 5.0 -- 289,593 3.3
Robert A. Lefcort .............................. 197,199(20) 3.3 -- 197,199 2.2
Robert E. Tomlinson ........................... 8,775(21) * -- 8,775 *
James E. Money ................................. 7,800(22) * -- 7,800 *
Joseph F. Bello .............................. 4,875(23) * -- 4,875 *
Samuel H. Schwartz(24) ........................ -- -- -- -- --
David S. Hershberg(25) ........................ -- -- -- -- --
All directors and executive officers as a group
(7 persons) ................................. 5,943,945(26) 98.2 700,000 5,243,945 57.9
- ----------------
* Less than 1%
(1) Assumes that the Underwriters' over-allotment option is not exercised.
(2) Represents: (i) 50,050 shares held of record by Paul M. Burrell; (ii)
50,050 shares held of record by Susan Burrell, Mr. Burrell's wife; (iii)
441,994 shares held of record by Mr. and Mrs. Burrell as tenants by the
entirety; (iv) 5,152,380 shares held of record by Messrs. Burrell and
Williams as Trustees under the Voting Trust; (v) the presently exercisable
right to exercise a warrant to purchase 23,022 shares; and (vi) the
presently exercisable right to exercise an option to purchase 9,750
shares. Does not include 108,280 shares held as of record by Scott T.
Burrell as Trustee of the Paul and Susan Burrell Family Trust. See
"Management--Voting Trust and Shareholders' Agreement."
(3) Mr. Williams' address is Triumph Capital Group, Inc., 60 State Street,
21st Floor, Boston, Massachusetts 02109.
(4) Represents 5,152,380 shares held of record by Messrs. Burrell and Williams
as Trustees under the Voting Trust. See "Management--Voting Trust and
Shareholders' Agreement."
(5) Represents: (i) 1,574,860 shares held of record by Messrs. Burrell and
Williams as Trustees for Alan E. Schubert under the Voting Trust; (ii)
343,981 shares held of record by Messrs. Burrell and Williams as Trustees
for Alan E. Schubert and Matthew B. Schubert as Trustees of the Jason
Schubert OutSource Trust under the Voting Trust; (iii) 282,210 shares held
of record by Messrs. Burrell and Williams as Trustees for Alan E. Schubert
and Jason D. Schubert as Trustees of the Matthew Schubert OutSource Trust
under the Voting Trust; and (iv) presently exercisable warrants to
purchase 51,855, 11,322 and 9,292 shares by Alan E. Schubert, the Jason
Schubert OutSource Trust, and the Matthew Schubert OutSource Trust,
respectively.
(6) Represents: (i) 559,933 shares held of record by Messrs. Burrell and
Williams as Trustees for Lawrence H. Schubert as Trustee of the Lawrence
H. Schubert Revocable Trust under the Voting Trust; (ii) 559,933 shares
held of record by Messrs. Burrell and Williams as Trustees for Nadya I.
Schubert, Mr. Schubert's wife, as Trustee of the Nadya I. Schubert
57
Revocable Trust under the Voting Trust; (iii) 63,637 shares held of record
by Nadya I. Schubert as co-trustee of the Robert A. Lefcort Irrevocable
Trust; and (iv) the presently exercisable warrants to purchase 18,446,
18,446 and 2,089 shares held by the Lawrence H. Schubert Revocable Trust,
the Nadya I. Schubert Revocable Trust, and the Robert A. Lefcort
Irrevocable Trust, respectively.
(7) Represents: (i) 559,933 shares held of record by Messrs. Burrell and
Williams as Trustees for Nadya I. Schubert as Trustee of the Nadya I.
Schubert Revocable Trust under the Voting Trust; (ii) 559,933 shares held
of record by Messrs. Burrell and Williams as Trustees for Lawrence H.
Schubert, Mrs. Schubert's husband, as Trustee of the Lawrence H. Schubert
Revocable Trust under the Voting Trust; (iii) 63,637 shares held of record
by Nadya I. Schubert and Robert A. Lefcort as Co-Trustees of the Robert A.
Lefcort Irrevocable Trust; and (iv) presently exercisable warrants to
purchase 18,446, 18,446 and 2,089 shares held by the Nadya I. Schubert
Revocable Trust, the Lawrence H. Schubert Revocable Trust, and the Robert
A. Lefcort Irrevocable Trust, respectively.
(8) Represents: (i) 781,181 shares held of record by Messrs. Burrell and
Williams as Trustees for Louis A. Morelli under the Voting Trust; (ii)
61,853 held of record by Messrs. Burrell and Williams as Trustees for
Louis A. Morelli as Trustee of the Louis J. Morelli S-Stock Trust under
the Voting Trust; (iii) 62,166 shares of record by Messrs. Burrell and
Williams as Trustees for Louis A. Morelli as Trustee of the Margaret Ann
Janisch S-Stock Trust under the Voting Trust; and (iv) presently
exercisable warrants to purchase 25,729, 2,030 and 2,049 shares held by
Louis A. Morelli, the Louis J. Morelli S-Stock Trust, and the Margaret Ann
Janisch S-Stock Trust, respectively.
(9) Represents 559,933 shares held of record and a presently exercisable
warrant to purchase 18,446 shares.
(10) Represents 559,933 shares held of record and a presently exercisable
warrant to purchase 18,446 shares.
(11) Represents: (i) 50,050 shares held of record by Susan Burrell; (ii) 50,050
shares held of record by Paul M. Burrell, Mrs. Burrell's husband; (iii)
441,994 shares held of record by Mr. and Mrs. Burrell as tenants by the
entirety; (iv) the presently exercisable right of Mr. Burrell to exercise
a warrant to purchase 23,022 shares; and (v) the presently exercisable
right of Mr. Burrell to exercise an option to purchase 9,750 shares. Does
not include 108,280 shares held of record by Scott T. Burrell as Trustee
of the Paul and Susan Burrell Family Trust and 5,152,380 shares held of
record by Messrs. Burrell and Williams as Trustees under the Voting Trust.
See "Management-Voting Trust and Shareholders' Agreement."
(12) The address of Triumph-Connecticut Limited Partnership is 60 State Street,
21st Floor, Boston, Massachusetts 02109.
(13) Represents a presently exercisable warrant to purchase 484,494 shares.
(14) Represents: (i) 61,772 shares held of record by Messrs. Burrell and
Williams as Trustees for Matthew Schubert under the Voting Trust; (ii)
343,981 shares held of record by Messrs. Burrell and Williams as Trustees
for Matthew Schubert and Alan E. Schubert as Trustees of the Jason
Schubert OutSource Trust under the Voting Trust; and (iii) presently
exercisable warrants to purchase 2,030 and 11,322 shares held by Matthew
Schubert and the Jason Schubert OutSource Trust, respectively.
(15) The address of Bachow Investment Partners, L.P. is 3 Bala Plaza East, 5th
Floor, Bala Cynwyd, Pennsylvania 19004.
(16) Represents a presently exercisable warrant to purchase 380,674 shares.
(17) Represents 343,981 shares held of record and a presently exercisable
warrant to purchase 11,322 shares.
(18) Represents 282,210 shares held of record and a presently exercisable
warrant to purchase 9,292 shares.
(19) Represents: (i) 289,082 shares held of record by Messrs. Burrell and
Williams as Trustees for Margaret Ann Janisch under the Voting Trust; and
(ii) a presently exercisable warrant to purchase 9,511 shares.
(20) Represents: (i) 127,275 shares held of record; (ii) 63,637 shares held as
co-trustee of the Robert A. Lefcort Irrevocable Trust; (iii) presently
exercisable warrants to purchase 4,198 and 2,089 shares held by Mr.
Lefcort and the Robert A. Lefcort Irrevocable Trust, respectively.
(21) Represents a presently exercisable option to purchase 8,775 shares.
(22) Represents a presently exercisable option to purchase 7,800 shares.
(23) Represents a presently exercisable option to purchase 4,875 shares.
(24) Mr. Schwartz' address is Bachow & Associates, 3 Bala Plaza East, 5th
Floor, Bala Cynwyd, Pennsylvania 19004.
(25) Mr. Hershberg's address is IBM Corporation, Old Orchard Rd, Armonk, NY
10504
(26) Represents: (i) 50,050 shares held of record by Paul M. Burrell; (ii)
50,050 shares held of record by Mrs. Burrell; (iii) 441,994 shares held of
record by Mr. and Mrs. Burrell as tenants by the entirety; (iv) 5,152,380
shares held of record by Mr. Paul M. Burrell and Mr. Richard J. Williams
as Trustees under the Voting Trust; (v) the presently exercisable right by
Mr. Burrell to exercise a warrant to purchase 23,022 shares; (vi) the
presently exercisable right by Mr. Burrell to exercise an option to
purchase 9,750 shares; (vii) 127,275 shares held of record by Mr. Lefcort;
(viii) 63,637 shares held by Mr. Lefcort as co-trustee of the Robert A.
Lefcort Irrevocable Trust; (ix) the presently exercisable right by Mr.
Lefcort to exercise warrants to purchase 4,198 and 2,089 shares held by
Mr. Lefcort and the Robert A. Lefcort Irrevocable Trust, respectively; and
(x) the presently exercisable right by Mr. Tomlinson, Mr. Money and Mr.
Mitchell to exercise options to purchase 8,775, 7,800 and 2,925 shares,
respectively. Does not include 108,280 shares held of record by Scott T.
Burrell as Trustee of the Paul and Susan Burrell Family Trust.
58
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock having a par value of $.001 per share and 10,000,000 shares of
Preferred Stock having a par value of $.001 per share ("Preferred Stock"). As
of the date of this Prospectus, 5,993,666 shares of Common Stock and no shares
of Preferred Stock were outstanding. An additional 573,561 shares of Common
Stock may be issued upon the exercise of outstanding stock options and an
additional 1,496,335 shares of Common Stock upon the exercise of outstanding
warrants.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held.
Shareholders do not have the right to cumulate their votes in elections of
directors. Accordingly, subject to the provisions of the Voting Trust and the
Shareholders' Agreement, holders of a majority of the issued and outstanding
Common Stock will have the right to elect all the Company's directors and
otherwise control the affairs of the Company. See "Management--Voting Trust and
Shareholders' Agreement."
Pursuant to the terms of the Shareholders' Agreement, the Existing
Shareholders and the Senior Note Holders have pre-emptive rights to purchase a
pro rata portion of securities the Company may issue and sell from time to time
excluding: (i) Common Stock in an underwritten public offering; (ii) securities
issued in connection with a business acquisition; (iii) the Warrant Shares; and
(iv) certain options to purchase Common Stock. See "Management--Voting Trust
and Shareholders' Agreement."
Holders of Common Stock are entitled to dividends on a pro rata basis upon
declaration of dividends by the Board. Dividends are payable only out of funds
legally available for the payment of dividends. The Board is not required to
declare dividends, and it currently expects to retain earnings to finance the
development of the Company's business. See "Dividend Policy."
Upon a liquidation of the Company, holders of the Common Stock will be
entitled to a pro rata distribution of the assets of the Company, after payment
of all amounts owed to the Company's creditors, and subject to any preferential
amount payable to holders of Preferred Stock of the Company, if any. Holders of
Common Stock have no preemptive, subscription, conversion, redemption or
sinking fund rights.
Immediately prior to the closing of the Offering, the Company will
effectuate a reverse stock split pursuant to which each then issued and
outstanding share of Common Stock will be converted into approximately 0.715
shares of Common Stock.
PREFERRED STOCK
The Articles permit the Board to issue shares of Preferred Stock in one or
more series and to fix the relative rights, preferences and limitations of each
series. Among such rights, preferences and limitations are dividend rates,
provisions of redemption, rights upon liquidation, conversion privileges and
voting powers. Should the Board elect to exercise this authority, the rights
and privileges of holders of Common Stock could be made subject to the rights
and privileges of any such series of Preferred Stock. The Board currently has
no plans to issue any shares of Preferred Stock. See "--Shareholder Rights
Plan." The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
acquiring, a majority of the outstanding voting stock of the Company.
REORGANIZATION
On February 21, 1997, the Company consummated a Reorganization involving
the Subsidiaries: OutSource International of America, Inc., Synadyne I, Inc.,
Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc.,
OutSource Franchising, Inc., Capital Staffing Fund, Inc., and Employees
Insurance Services, Inc. and the Subsidiaries' Shareholders. Pursuant to the
terms of the
59
Reorganization, the Company acquired all of the outstanding capital stock of
the Subsidiaries from the Subsidiaries' Shareholders in exchange for the
issuance of 5,993,666 shares of Common Stock to those shareholders, and the
payment of approximately $5.7 million in cash and the issuance of promissory
notes in the aggregate principal amount of approximately $1.4 million to
certain of those shareholders. In connection with the Reorganization, the
Subsidiaries' Shareholders contributed approximately $4.3 million in
outstanding promissory notes to the capitalization of the Company. As a result
of the Reorganization, the Subsidiaries became wholly-owned by the Company and
the Subsidiaries' Shareholders owned Common Stock in approximately the same
proportion as the capital stock of the Subsidiaries owned by them immediately
prior to the Reorganization. See Note 1 to the Company's Consolidated Financial
Statements.
Prior to the Reorganization, each Subsidiary had been treated for federal
and state income tax purposes as an S corporation under Subchapter S of the
Code, and comparable provisions of state income tax laws. As a result, earnings
were taxed for federal and certain state income tax purposes directly to the
Subsidiaries' Shareholders. As of February 21, 1997, the Company became
responsible for the payment of state and federal income taxes on earnings. On
February 20, 1997, certain of the Subsidiaries declared a dividend to the
Subsidiaries' Shareholders of the S Corporation Distribution. Substantially all
of the S Corporation Distribution was paid in cash immediately following the
Reorganization. The Subsidiaries' Shareholders used a portion of the S
Corporation Distribution to repay approximately $4.3 million in outstanding
debt owed to the Company. For purposes of this Prospectus, references to the
Company's subchapter S corporation status refers to the S corporation status of
each of the Subsidiaries, and the termination of the Company's S corporation
status refers to termination of the S corporation status of each of the
Subsidiaries. See "Certain Transactions" and Note 1 to the Company's
Consolidated Financial Statements.
CERTAIN ANTI-TAKEOVER PROVISIONS INCLUDED IN THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS
Prior to the closing of the Offering, the Company will amend its Articles
and Bylaws as described below. The following is qualified in its entirety by
reference to the Amended Articles and the Amended Bylaws, copies of which are
included as exhibits to the Registration Statement of which this Prospectus is
a part. The Amended Articles and Bylaws will provide for a classified Board.
The directors will be divided into three classes, as nearly equal in number as
possible. The directors will be elected for three-year terms, which are
staggered so that the terms of approximately one-third of the directors expire
each year. The Amended Articles will permit removal of directors only for cause
by the shareholders of the Company at a meeting by the affirmative vote of at
least 60% of the outstanding shares entitled to vote for the election of
directors (the "Voting Stock"). The Amended Articles will provide that any
vacancy on the Board may be filled only by the remaining directors then in
office. The Amended Articles will also contain provisions which require: (i)
the affirmative vote of 60% of the Voting Stock to amend the Articles or
Bylaws; and (ii) the demand of not less than 50% of all votes entitled to be
cast on any issue to be considered at a proposed special meeting to call a
special meeting of shareholders. The Amended Bylaws will establish an advance
notice procedure for the nomination of candidates for election as directors by
shareholders as well as for shareholder proposals to be considered at
shareholder meetings.
The above-described provisions may have certain anti-takeover effects.
Such provisions, in addition to the provisions described below, may make it
more difficult for persons, without the approval of the Board, to make a tender
offer or acquire substantial amounts of the Common Stock or launch other
takeover attempts that a shareholder might consider in such shareholder's best
interests, including attempts that might result in the payment of a premium
over the market price for the Common Stock held by such shareholder.
CERTAIN PROVISIONS OF FLORIDA LAW
The FBCA prohibits the voting of shares in a publicly-held Florida
corporation that are acquired in a "control share acquisition" unless the
holders of a majority of the corporation's voting shares (exclusive of shares
held by officers of the corporation, inside directors or the acquiring party)
approve
60
the granting of voting rights as to the shares acquired in the control share
acquisition or unless the acquisition is approved by the corporation's board of
directors. A "control share acquisition" is defined as an acquisition that
immediately thereafter entitles the acquiring party to vote in the election of
directors within each of the following ranges of voting power: (i) one-fifth or
more, but less than one-third of such voting power: (ii) one-third or more, but
less than a majority of such voting power; and (iii) more than a majority of
such voting power. The Amended Articles authorize the Company, under certain
circumstances, to redeem shares acquired in a control share acquisition.
SHAREHOLDER RIGHTS PLAN
Prior to the closing of the Offering, the Company will adopt a Shareholder
Protection Rights Agreement (the "Rights Agreement"). The Company anticipates
that the terms of the Rights Agreement will be substantially as described
herein, subject to such changes as may result from negotiations between the
Company and the Rights Agent selected by the Company to administer the Rights
Agreement. Pursuant to the terms of the Rights Agreement, preferred stock
purchase rights (the "Rights") will be distributed, as a dividend, to holders
of record of shares of Common Stock as of the date the Company enters into the
Rights Agreement ("Record Date"), at a rate of one Right for each share of the
Company's Common Stock held on the Record Date. Rights will also be attached to
all shares of Common Stock issued on or after the Record Date. Each Right will
entitle its holder to purchase from the Company, after the Separation Time (as
defined below), one one-hundredth of a share of Preferred Stock, par value
$0.001 per share, for a price to be determined by the Board at a later date
(the "Exercise Price"), subject to adjustment. The Rights will expire on the
close of business on the tenth anniversary of the Record Date unless earlier
terminated by the Company.
Initially, the Rights will be attached to all Common Stock certificates,
and the Rights will automatically trade with shares of Common Stock. However,
ten business days after a person or group announces an offer the consummation
of which would result in such person or group owning 15% or more of the Common
Stock (the "Acquiring Person"), or the first date of a public announcement that
a person or group has acquired 15% or more of the Common Stock (the "Separation
Time"), the Rights will become exercisable, and separate certificates
representing the Rights will be issued.
In the event that any person becomes an Acquiring Person, each holder of a
Right, other than Rights beneficially owned by the Acquiring Person and its
affiliates and associates (which will thereafter be void), will have the right
to receive, upon exercise of each Right, that number of shares of Company Stock
having an aggregate Market Price (as defined in the Rights Agreement), on the
date of the public announcement of a person becoming an Acquiring Person, equal
to twice the Exercise Price for an amount in cash equal to the then current
Exercise Price.
At any time after an Acquiring Person crosses the 15% threshold and prior
to the acquisition by such person of 50 percent or more of the outstanding
shares of Common Stock, the Board may exchange the Rights (other than Rights
owned by the Acquiring Person), in whole or in part, at an exchange ratio of
one Share of Common Stock per Right.
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire the Company
in a manner or on terms not approved by the Board. The Rights, however, should
not deter any prospective offeror willing to negotiate in good faith with the
Board, nor should the Rights interfere with any merger or other business
combination approved by the Board.
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A. (Massachusetts) has been appointed the transfer agent and
registrar for the Common Stock. Its address is 150 Royall Street, Canton,
Massachusetts 02021.
61
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 8,993,666 shares
of Common Stock outstanding (9,548,666 shares of Common Stock if the
Underwriters' over-allotment option is exercised in full). Of these shares, the
3,700,000 shares offered hereby will be freely tradeable without restriction or
further registration under the Securities Act, except that shares purchased by
an "affiliate" of the Company (in general, a person who has a control
relationship with the Company), will be subject to the resale limitations of
Rule 144 promulgated under the Securities Act. The remaining 5,293,666 shares
are deemed to be "restricted securities," as that term is defined under Rule
144, in that such shares were issued and sold by the Company in private
transactions not involving a public offering and, as such, may only be sold:
(i) pursuant to an effective registration under the Securities Act; (ii) in
compliance with the exemption provisions of Rule 144; or (iii) pursuant to
another exemption under the Securities Act. These restricted shares will be
eligible for sale under Rule 144 (subject to certain recurring three-month
volume limitations prescribed by Rule 144 and the lock-up arrangements with the
Underwriters described in the following paragraph) commencing on February 21,
1998.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate), who has
owned restricted shares of Common Stock beneficially for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class or, if Common Stock is quoted on the Nasdaq National Market, the
average weekly trading volume during the four calendar weeks preceding the
sale. A person who has not been an affiliate of the Company for at least three
months immediately preceding the sale and who has beneficially owned shares of
Common Stock for at least two years is entitled to sell such shares under Rule
144 without regard to any of the limitations described above.
The Existing Shareholders, who will beneficially own (excluding options
and Warrants) an aggregate of 5,293,666 shares of Common Stock upon
consummation of the Offering (4,738,666 if the Underwriters' over-allotment
option is exercised in full), have agreed with the Underwriters not to sell or
otherwise dispose of any of those shares of Common Stock for a period of 180
days after the date of this Prospectus without the written consent of Smith
Barney Inc., one of the Representatives of the Underwriters. Smith Barney Inc.
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to the Lock-up Agreements.
The Company has reserved 1,144,000 shares of Common Stock for issuance
under the Stock Option Plan. As of the date of this Prospectus, options to
purchase up to 573,561 shares of Common Stock have been granted and are
outstanding under the Stock Option Plan. The Company intends to file a
registration statement on Form S-8 under the Securities Act to register shares
of Common Stock reserved for issuance under the Stock Option Plan, thereby
permitting the resale of such shares by non-affiliates in the public market
without restriction under the Securities Act. See "Management--Stock Option
Plan."
After the consummation of this Offering, the Company has agreed, upon
demand, to register up to 1,496,335 Warrant Shares, subject to certain terms
and conditions of a registration rights agreement. The Company has also agreed
to include the Warrant Shares and shares of Common Stock owned by the Existing
Shareholders in certain registration statements under the Securities Act which
may be filed by the Company with respect to an offering of Common Stock for its
own account or the account of any of its shareholders. See
"Management--Warrants."
No prediction can be made as to the effect, if any, that public sales of
shares of Common Stock or the availability of such shares for sale will have on
the market prices of the Common Stock prevailing from time to time.
Nevertheless, the possibility that substantial amounts of Common Stock may be
sold in the public market may adversely affect prevailing market prices for the
Common Stock and could impair the Company's ability in the future to raise
additional capital through the sale of its equity securities.
62
UNDERWRITING
Under the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and the Selling Shareholders have agreed to
sell to such Underwriter, the respective number of shares of Common Stock set
forth opposite the name of such Underwriter.
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------ ----------
Smith Barney Inc. .......................................
Robert W. Baird & Co. Incorporated ........................
Donaldson, Lufkin & Jenrette Securities Corporation ......
----------
Total ...................................................
==========
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions. The Underwriters are obligated to take and pay for
all shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Robert W. Baird & Co.
Incorporated, and Donaldson, Lufkin & Jenrette Securities Corporation are
acting as Representatives (the "Representatives"), propose to offer part of the
shares of Common Stock directly to the public at the public offering price set
forth on the cover page hereof and part of the shares of Common Stock to
certain dealers at a price which represents a concession not in excess of $ per
share under the public offering price. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering, the public offering price, such
concessions and other selling terms may be changed by the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend
to confirm sales to accounts over which they exercise discretionary authority.
The Selling Shareholders have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 555,000 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus minus the underwriting
discounts and commissions. The Underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, incurred in connection with
the sale of the shares offered hereby. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares as the
number of shares set forth opposite such Underwriter's name in the preceding
table bears to the total number of shares in such table.
In connection with this Offering and in compliance with applicable law,
the Underwriters may overallot (i.e., sell more Common Stock than the total
amount shown on the list of Underwriters which appears above) and may effect
transactions which stablilize, maintain or otherwise affect the market price of
Common Stock at levels above those which might otherwise pervail in the open
market. Such transactions may include placing bids for Common Stock or
effecting purchases of Common Stock for the purpose of pegging, fixing or
maintaining the price of Common Stock or for purpose of reducing a syndicate
short position created in connection with the Offering. In addition, the
contractual arrangements among the Underwriters include a provision whereby, if
the Representatives purchase Common Stock in the open market for the account of
the underwriting syndicate and Common Stock purchased can be traced to a
particular Underwriter or member of the selling group, the underwriting
syndicate may require the Underwriter or selling group member in question to
purchase the Common Stock in question at the cost price to the syndicate or may
recover from (or decline to pay to) the Underwriter or selling group member in
question the selling concession applicable to the Common Stock in question. The
Underwriters are not required to engage in any of these activities and any such
activities, if commenced, may be discontinued at any time. In addition, a
syndicate short position may be covered by exercise of the option described
above in lieu of or in addition to open market purchases.
63
The Company, its officers, directors and the Existing Shareholders, who
will beneficially own (excluding options and Warrants) an aggregate of
5,293,666 shares of Common Stock upon consummation of the Offering (4,738,666
if the Underwriters' over-allotment option is exercised in full) have agreed
that, for a period of 180 days from the date of this Prospectus, they will not,
without the prior written consent of Smith Barney Inc., offer, sell, contract
to sell or otherwise dispose of any shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, Common Stock.
At the Company's request, the Representatives have agreed to reserve up to
185,000 shares of Common Stock for sale at the public offering price to Company
employees and other persons having certain business relationships with the
Company. The number of shares available for sale to the general public will be
reduced to the extent these persons purchase such reserved shares. Any reserved
shares not purchased will be offered by the Underwriters to the general public
on the same basis as the other shares offered hereby.
Prior to the Offering, there has not been any public market for the Common
Stock. Consequently, the initial public offering price for the shares of Common
Stock included in this Offering has been determined by negotiations between the
Company, the Selling Shareholders and the Representatives. Among the factors
considered in determining such price were the history of and the prospects for
the Company's business and the industry in which it competes, an assessment of
the Company's management and the present state of the Company's development,
the past and present revenues and earnings of the Company, the prospects for
growth of the Company's revenues and earnings, the current state of the economy
in the United States and the current level of economic activity in the industry
in which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
market valuations of publicly traded companies which are comparable to the
Company.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriter may be
required to make in respect thereof.
INDEPENDENT PUBLIC ACCOUNTANTS
On March 4, 1996, the Board approved the dismissal of McGladrey & Pullen,
LLP and approved the appointment of Deloitte & Touche LLP as the Company's
independent auditors.
During the year ended December 31, 1994 and subsequently through the date
of dismissal there was no disagreement between the Company and McGladrey &
Pullen, LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of McGladrey & Pullen, LLP would have caused
McGladrey & Pullen, LLP to make reference to the subject matter of such
disagreement in connection with their report. The report of McGladrey & Pullen,
LLP on the Company's consolidated financial statements for the year ended
December 31, 1994 did not contain an adverse opinion or a disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope, or
accounting principles.
EXPERTS
The consolidated financial statements of OutSource International, Inc. and
Subsidiaries as of December 31, 1995 and 1996 and for the years then ended
included in this prospectus and the related financial statement schedule
included elsewhere in the registration statement have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the registration statement, and are included in reliance upon
the reports of such firm given upon their authority as experts in accounting
and auditing.
The consolidated financial statements of OutSource International, Inc. and
Subsidiaries for the year ended December 31, 1994 included in this prospectus
and the related financial statement schedule
64
included elsewhere in the registration statement have been audited by McGladrey
& Pullen, LLP, independent auditors, as stated in their reports appearing
herein and elsewhere in the registration statement, and are included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The combined financial statements of Payray, Inc. and Tri-Temps, Inc. as
of December 31, 1995 and for the year then ended included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The financial statements of CST Services Inc., as of December 31, 1994 and
1995 and for the years then ended included in this prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of Standby Personnel of Colorado Springs, Inc. as
of December 31, 1996 and for the year then ended and of Stand-By, Inc. as of
September 30, 1996 and for the year then ended, included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein, and are included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of Superior Temporaries, Inc. as of December 31,
1995 and 1996 and for the years then ended included in this prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the Offering will be passed upon for
the Company by the law firm of Holland & Knight LLP, One East Broward
Boulevard, Suite 1300, Fort Lauderdale, Florida 33301. Certain legal matters
will be passed upon for the Underwriters by Steel Hector & Davis LLP, 200 South
Biscayne Boulevard, Suite 4000, Miami, Florida 33131. Certain legal matters
with respect to the Offering will be passed upon for the Selling Shareholders
by Bell Boyd & Lloyd, Suite 3300, 70 West Madison Street, Chicago, Illinois
60607.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the securities offered
hereby. This Prospectus, which constitutes part of the Registration Statement,
does not contain all the information set forth in the Registration Statement,
certain portions of which have been omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the securities offered hereby, reference is made to the
Registration Statement and to the exhibits and schedules thereto. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048 and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
65
Reference Section of the Commission located at Judiciary Plaza, Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission with a Web site address of
http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by the Company's independent
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited interim financial information.
66
INDEX TO FINANCIAL STATEMENTS
PAGE
------
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Independent Auditors' Report of McGladrey & Pullen, LLP .............................. F-3
Independent Auditors' Report of Deloitte & Touche LLP ................................. F-4
Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 ...... F-5
Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996
and the three months ended March 31, 1996 and 1997 .................................... F-6
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December
31, 1994, 1995 and 1996 and the three months ended March 31, 1997 .................... F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1996 and 1997 .............................. F-8
Notes to Consolidated Financial Statements ............................................. F-9
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Financial Information (Introduction) .................. F-33
Unaudited Pro Forma Consolidated Statement of Income for
the year ended December 31, 1996 ...................................................... F-34
Unaudited Pro Forma Consolidated Statement of Income for
the three months ended March 31, 1997 ................................................ F-35
Notes to Unaudited Pro Forma Consolidated Statements of Income ........................ F-36
PAYRAY, INC. AND TRI-TEMPS, INC.
Independent Auditors' Report ......................................................... F-40
Combined Balance Sheet as of December 31, 1995 ....................................... F-41
Combined Statement of Operations and Retained Earnings for the year ended
December 31, 1995 ..................................................................... F-42
Combined Statement of Cash Flows for the year ended December 31, 1995 .................. F-43
Notes to the Combined Financial Statements ............................................. F-44
CST SERVICES INC.
Independent Auditors' Report ......................................................... F-46
Balance Sheets as of December 31, 1994 and 1995 and March 30, 1996 ..................... F-47
Statements of Income for the years ended December 31, 1994 and 1995 and
the three months ended April 1, 1995 and March 30, 1996 .............................. F-48
Statements of Stockholder's Equity for the years ended December 31, 1994 and 1995 and
the three months ended April 1, 1995 and March 30, 1996 .............................. F-49
Statements of Cash Flows for the years ended December 31, 1994 and 1995 and
the three months ended April 1, 1995 and March 30, 1996 .............................. F-50
Notes to Financial Statements ......................................................... F-51
F-1
PAGE
-----
STANDBY PERSONNEL OF COLORADO SPRINGS, INC.
Independent Auditors' Report ...................................................... F-53
Balance Sheet as of December 31, 1996 ............................................. F-54
Statement of Income for the year ended December 31, 1996 ........................... F-55
Statement of Stockholder's Equity for the year ended December 31, 1996 ............ F-56
Statement of Cash Flows for the year ended December 31, 1996 ..................... F-57
Notes to the Financial Statements ................................................ F-58
SUPERIOR TEMPORARIES, INC.
Independent Auditors' Report ...................................................... F-60
Balance Sheets as of December 31, 1995 and 1996 .................................... F-61
Statements of Income for the years ended December 31, 1995 and 1996 ............... F-62
Statements of Shareholders' Equity for the years ended December 31, 1995 and 1996 F-63
Statements of Cash Flows for the years ended December 31, 1995 and 1996 ............ F-64
Notes to Financial Statements ...................................................... F-65
STAND-BY, INC.
Independent Auditors' Report ...................................................... F-69
Balance Sheets as of September 30, 1996 and December 31, 1996 ..................... F-70
Statements of Income for the year ended September 30, 1996 and
the three months ended December 31, 1995 and 1996 ................................. F-71
Statements of Stockholder's Equity for the year ended September 30, 1996 and
the three months ended December 31, 1995 and 1996 ................................. F-72
Statements of Cash Flows for the year ended September 30, 1996 and
the three months ended December 31, 1995 and 1996 ................................. F-73
Notes to Financial Statements ................................................... F-74
F-2
INDEPENDENT AUDITORS' REPORT
OutSource International, Inc. and Subsidiaries:
We have audited the consolidated statements of income, shareholders'
equity (deficit), and cash flows of OutSource International, Inc. and
Subsidiaries (the "Company") for the year ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of OutSource
International, Inc. and Subsidiaries for the year ended December 31, 1994 in
conformity with generally accepted accounting principles.
Certified Public Accountants
Fort Lauderdale, Florida
March 7, 1995
(September , 1997 as to the
effects of the reverse stock
split discussed in Note 10)
----------------
The accompanying consolidated financial statements reflect the .715 for
one reverse split of the Company's outstanding common stock which is to be
effected on or about September 30, 1997. The above report is in the form which
will be furnished by McGladrey & Pullen, LLP upon completion of such reverse
split, which is described in Note 10 to the consolidated financial statements
and assuming that from March 7, 1995 to the date of such reverse split, no
other events shall have occurred that would affect the accompanying
consolidated financial statements and notes thereto.
MCGLADREY & PULLEN, LLP
Fort Lauderdale, Florida
August 12, 1997
F-3
INDEPENDENT AUDITORS' REPORT
OutSource International, Inc. and Subsidiaries:
We have audited the consolidated balance sheets of OutSource
International, Inc. and Subsidiaries (the "Company") as of December 31, 1995
and 1996, and the related consolidated statements of income, shareholders'
equity (deficit), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of OutSource International, Inc.
and Subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Certified Public Accountants
Fort Lauderdale, Florida
April 4, 1997
(September , 1997 as to the effects of the reverse stock split discussed in
Note 10)
----------------
The accompanying consolidated financial statements reflect the .715 for
one reverse split of the Company's outstanding common stock which is to be
effected on or about September 30, 1997. The above report is in the form which
will be furnished by Deloitte & Touche LLP upon completion of such reverse
split, which is described in Note 10 to the consolidated financial statements
and assuming that from April 4, 1997 to the date of such reverse split, no
other events shall have occurred that would affect the accompanying
consolidated financial statements and notes thereto.
DELOITTE & TOUCHE LLP
Fort Lauderdale, Florida
August 12, 1997
F-4
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
------------------------------- -----------------
1995 1996 1997
-------------- -------------- -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash ............................................................... $ 1,511,399 $ 44,790 $ 85,204
Trade accounts receivable, net of allowance for doubtful accounts of
$375,243, $978,250 and $818,665 .................................... 14,934,160 26,349,648 30,466,779
Funding advances to franchises ....................................... 2,401,858 3,231,839 1,895,319
Notes receivable and other amounts due from related parties ......... 355,761 4,887,604 82,533
Prepaid expenses and other current assets ........................... 627,163 420,021 346,950
------------- ------------- -------------
Total current assets ............................................. 19,830,341 34,933,902 32,876,785
PROPERTY AND EQUIPMENT, net ....................................... 4,322,177 13,127,107 13,776,087
GOODWILL AND OTHER INTANGIBLE ASSETS, net ........................... 227,521 7,454,806 30,987,061
OTHER ASSETS ......................................................... 327,590 361,333 3,849,931
------------- ------------- -------------
Total assets ...................................................... $ 24,707,629 $ 55,877,148 $ 81,489,864
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ................................................... $ 2,082,925 $ 2,676,093 $ 1,455,592
Accrued expenses:
Payroll ............................................................ 1,979,224 4,213,723 4,797,200
Payroll taxes ...................................................... 3,405,090 2,180,130 3,092,420
Workers' compensation and insurance .............................. 1,855,499 5,463,845 6,333,936
Other ............................................................... 779,692 1,440,118 1,948,155
Other current liabilities .......................................... 618,679 1,377,559 1,589,099
Line of credit ...................................................... 6,468,327 9,888,507 --
Current maturities of long-term debt .............................. 439,291 1,992,962 1,988,678
Current maturities of long-term debt to related parties ............ 661,226 8,872,497 651,840
------------- ------------- -------------
Total current liabilities ....................................... 18,289,953 38,105,434 21,856,920
NON-CURRENT LIABILITIES:
Revolving credit facility .......................................... -- -- 24,649,137
Senior notes ......................................................... -- -- 6,596,482
Put warrants liability ............................................. -- -- 16,658,714
Long-term debt to related parties, less current maturities ......... -- 2,402,661 5,180,725
Other long-term debt, less current maturities ..................... 2,815,139 10,873,828 12,247,600
------------- ------------- -------------
Total liabilities ................................................ 21,105,092 51,381,923 87,189,578
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTES 6,9)
SHAREHOLDERS' EQUITY (DEFICIT) (NOTE 10):
Preferred stock, $.001 par value; 10,000,000 shares authorized, none
issued ............................................................ -- -- --
Common stock, $.001 par value; 100,000,000 shares authorized;
5,993,666 issued and outstanding at March 31, 1997 .................. 6,364 6,364 5,994
Additional paid-in capital (deficit) ................................. 94,736 94,736 (7,484,866)
Retained earnings ................................................... 3,501,437 4,394,125 1,779,158
------------- ------------- -------------
Total shareholders' equity (deficit) .............................. 3,602,537 4,495,225 (5,699,714)
------------- ------------- -------------
Total liabilities and shareholders' equity (deficit) ............... $ 24,707,629 $ 55,877,148 $ 81,489,864
============= ============= =============
See notes to consolidated financial statements.
F-5
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1994 1995 1996
---------------- ------------------ ------------------
Net revenues .................................... $ 80,646,707 $ 149,825,165 $ 280,171,104
------------ -------------- --------------
Cost of revenues:
Payroll .......................................... 58,509,787 112,241,752 214,038,992
Taxes .......................................... 5,422,367 10,010,329 19,251,276
Workers' compensation and insurance ............ 1,262,837 2,787,850 6,133,597
Other .......................................... 617,305 1,230,391 2,678,525
------------ -------------- --------------
Total cost of revenues ........................ 65,812,296 126,270,322 242,102,390
------------ -------------- --------------
Gross profit .................................... 14,834,411 23,554,843 38,068,714
------------ -------------- --------------
Selling, general and administrative expenses:
Shareholders' compensation ..................... 2,244,894 2,370,350 2,321,201
Amortization of intangible assets ............... -- 40,565 423,550
Other selling, general and administrative ...... 9,008,462 17,687,765 29,840,722
------------ -------------- --------------
Total selling, general and
administrative expenses ........................ 11,253,356 20,098,680 32,585,473
------------ -------------- --------------
Operating income ................................. 3,581,055 3,456,163 5,483,241
------------ -------------- --------------
Other expense (income):
Interest income ................................. (25,465) (22,821) (42,396)
Interest expense ................................. 845,626 1,281,560 2,218,245
Put warrants valuation adjustment ............... -- -- --
Other expense (income) ........................... (51,580) (10,995) --
Other charges ................................. -- -- 1,447,555
------------ -------------- --------------
Total other expense (income) .................. 768,581 1,247,744 3,623,404
------------ -------------- --------------
Income before provision (benefit) for
income taxes .................................... 2,812,474 2,208,419 1,859,837
Provision (benefit) for income taxes ............ -- -- --
------------ -------------- --------------
Net income ....................................... $ 2,812,474 $ 2,208,419 $ 1,859,837
============ ============== ==============
UNAUDITED PRO FORMA DATA:
Income before provision (benefit) for
income taxes .................................... $ 2,812,474 $ 2,208,419 $ 1,859,837
Provision (benefit) for income taxes ............ 1,059,000 859,000 757,000
------------ -------------- --------------
Net income ....................................... 1,753,474 1,349,419 1,102,837
============ ============== ==============
Weighted average common shares outstanding . 6,821,317 6,821,317 6,821,317
============ ============== ==============
Earnings per share .............................. $ .26 $ .20 $ .16
============ ============== ==============
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1996 1997
----------------- -----------------
(UNAUDITED)
Net revenues .................................... $ 51,168,960 $ 85,374,194
------------- -------------
Cost of revenues:
Payroll .......................................... 39,263,706 65,134,860
Taxes .......................................... 3,605,594 6,204,139
Workers' compensation and insurance ............ 1,103,422 2,044,992
Other .......................................... 506,518 855,218
------------- -------------
Total cost of revenues ........................ 44,479,240 74,239,209
------------- -------------
Gross profit .................................... 6,689,720 11,134,985
------------- -------------
Selling, general and administrative expenses:
Shareholders' compensation ..................... 481,780 292,001
Amortization of intangible assets ............... 10,400 330,106
Other selling, general and administrative ...... 5,714,054 9,937,427
------------- -------------
Total selling, general and
administrative expenses ........................ 6,206,234 10,559,534
------------- -------------
Operating income ................................. 483,486 575,451
------------- -------------
Other expense (income):
Interest income ................................. (9,874) (72,368)
Interest expense ................................. 339,320 1,399,198
Put warrants valuation adjustment ............... -- (1,883,282)
Other expense (income) ........................... 35,501 (68,549)
Other charges ................................. -- --
------------- -------------
Total other expense (income) .................. 364,947 (625,001)
------------- -------------
Income before provision (benefit) for
income taxes .................................... 118,539 1,200,452
Provision (benefit) for income taxes ............ -- (406,209)
------------- -------------
Net income ....................................... $ 118,539 $ 1,606,661
============= =============
UNAUDITED PRO FORMA DATA:
Income before provision (benefit) for
income taxes .................................... $ 118,539 $ 1,200,452
Provision (benefit) for income taxes ............ 48,000 (33,000)
------------- -------------
Net income ....................................... 70,539 1,233,452
============= =============
Weighted average common shares outstanding . 6,821,317 7,187,792
============= =============
Earnings per share .............................. $ .01 $ .17
============= =============
See notes to consolidated financial statements.
F-6
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL (DEFICIT) EARNINGS TOTAL
----------- ------------------- ---------------- ----------------
Balance, December 31, 1993 ..................... $ 6,364 $ 94,736 $ 1,747,366 $ 1,848,466
Distributions to shareholders .................. -- -- (1,959,599) (1,959,599)
Net income .................................... -- -- 2,812,474 2,812,474
------- ------------ ------------- -------------
Balance, December 31, 1994 .................. 6,364 94,736 2,600,241 2,701,341
Distributions to shareholders ............... -- -- (1,307,223) (1,307,223)
Net income .................................... -- -- 2,208,419 2,208,419
------- ------------ ------------- -------------
Balance, December 31, 1995 ..................... 6,364 94,736 3,501,437 3,602,537
Distributions to shareholders .................. -- -- (967,149) (967,149)
Net income .................................... -- -- 1,859,837 1,859,837
------- ------------ ------------- -------------
Balance, December 31, 1996 .................. 6,364 94,736 4,394,125 4,495,225
Net loss for the period from January 1, 1997
through February 21, 1997 (unaudited) ......... -- -- (172,497) (172,497)
Distributions and other adjustments in
connection with the Reorganization
(unaudited) ................................. (370) (7,579,602) (4,221,628) (11,801,600)
Net income for the period from February 22,
1997 through March 31, 1997 (unaudited) ...... -- -- 1,779,158 1,779,158
------- ------------ ------------- -------------
Balance, March 31, 1997 (unaudited) ............ $ 5,994 $ (7,484,866) $ 1,779,158 $ (5,699,714)
======= ============ ============= =============
See notes to consolidated financial statements.
F-7
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996
--------------- ---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 2,812,474 $ 2,208,419 $ 1,859,837
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................ 445,529 765,580 1,592,166
Put warrants valuation adjustment ..................... -- -- --
Deferred income taxes ................................. -- -- --
(Gain) loss on disposal of property
and equipment ....................................... (18,051) -- 23,032
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable ........................... (2,786,750) (7,292,532) (11,353,115)
Prepaid expenses and other current assets ............ (294,769) (301,784) 94,297
Other assets ....................................... 64,701 153,093 (112,674)
Increase (decrease) in:
Accounts payable .................................... 189,345 644,458 315,061
Accrued expenses:
Payroll ............................................. 593,467 1,311,169 2,234,500
Payroll taxes ....................................... 369,718 2,757,651 (1,224,960)
Workers' compensation and insurance ............... (268,073) 1,628,127 3,608,345
Other ............................................. (18,188) 618,304 817,352
Other current liabilities ........................... 177,315 294,644 866,088
------------- -------------- ---------------
Net cash provided by (used in)
operating activities .............................. 1,266,718 2,787,129 (1,280,071)
------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Funding (advances) repayments to franchises, net ......... (1,750,158) (651,700) (805,124)
Property and equipment expenditures ..................... (521,815) (1,283,975) (2,128,826)
Expenditures for acquisitions ........................... -- (120,374) (1,949,595)
Proceeds from disposal of property and equipment ...... 25,500 30,318 50,093
------------- -------------- ---------------
Net cash used in investing activities ............... (2,246,473) (2,025,731) (4,833,452)
------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in excess of outstanding checks over
bank balance, included in accounts payable ............ (214,517) 956,171 278,106
Net proceeds (repayments) from line of credit and
revolving credit facility .............................. 2,898,904 1,641,660 3,620,180
Related party borrowings (repayments) .................. 484,017 (475,172) 576,503
Proceeds of senior notes and put warrants, net of
issuance costs ....................................... -- -- --
Proceeds of long-term debt .............................. 1,749,500 510,000 1,500,000
Repayment of long-term debt .............................. (1,929,937) (647,704) (1,327,875)
Payments in connection with the Reorganization ......... -- -- --
Distributions paid to shareholders ..................... (1,959,599) (1,307,223) --
------------- -------------- ---------------
Net cash provided by (used in) financing
activities ....................................... 1,028,368 677,732 4,646,914
------------- -------------- ---------------
Net increase (decrease) in cash ........................ 48,613 1,439,130 (1,466,609)
Cash, beginning of period .............................. 23,656 72,269 1,511,399
------------- -------------- ---------------
Cash, end of period .................................... $ 72,269 $ 1,511,399 $ 44,790
============= ============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid .......................................... $ 795,567 $ 976,295 $ 1,841,624
============= ============== ===============
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1996 1997
--------------- ----------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 118,539 $ 1,606,661
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................ 212,403 909,698
Put warrants valuation adjustment ..................... -- (1,883,282)
Deferred income taxes ................................. -- (406,209)
(Gain) loss on disposal of property
and equipment ....................................... -- 2,685
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable ........................... (96,265) (4,117,131)
Prepaid expenses and other current assets ............ 349,426 73,069
Other assets ....................................... -- (831,366)
Increase (decrease) in:
Accounts payable .................................... (625,950) (725,815)
Accrued expenses:
Payroll ............................................. 1,991,488 583,477
Payroll taxes ....................................... (1,804,178) 912,290
Workers' compensation and insurance ............... 415,918 870,091
Other ............................................. 356,420 648,037
Other current liabilities ........................... 144,478 513,229
------------- --------------
Net cash provided by (used in)
operating activities .............................. 1,062,279 (1,844,566)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Funding (advances) repayments to franchises, net ......... (50,562) 1,336,520
Property and equipment expenditures ..................... (502,759) (535,700)
Expenditures for acquisitions ........................... (134,591) (20,560,000)
Proceeds from disposal of property and equipment ...... -- --
------------- --------------
Net cash used in investing activities ............... (687,912) (19,759,180)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in excess of outstanding checks over
bank balance, included in accounts payable ............ (474,735) (494,685)
Net proceeds (repayments) from line of credit and
revolving credit facility .............................. (575,866) 14,760,630
Related party borrowings (repayments) .................. (576,866) (2,224,211)
Proceeds of senior notes and put warrants, net of
issuance costs ....................................... -- 22,614,984
Proceeds of long-term debt .............................. 760,275 --
Repayment of long-term debt .............................. (607,053) (2,955,958)
Payments in connection with the Reorganization ......... -- (10,056,600)
Distributions paid to shareholders ..................... (359,391) --
------------- --------------
Net cash provided by (used in) financing
activities ....................................... (1,833,636) 21,644,160
------------- --------------
Net increase (decrease) in cash ........................ (1,459,269) 40,414
Cash, beginning of period .............................. 1,511,399 44,790
------------- --------------
Cash, end of period .................................... $ 52,130 $ 85,204
============= ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid .......................................... $ 278,449 $ 905,479
============= ==============
See notes to consolidated financial statements.
F-8
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: OutSource International, Inc. and Subsidiaries (the
"Company") provide emerging businesses with a single source of customized,
flexible human resource solutions principally through its professional employer
organization ("PEO") services under the tradename of Synadyne and its flexible
industrial staffing services under the tradenames of Labor World and Tandem.
The Company provides these services through company-owned and franchise
locations.
PEO services include payroll administration, workers' compensation
insurance, health, life and disability insurance, retirement plans, and human
resource compliance, administration and management. Flexible industrial
staffing services include certain PEO services, as well as recruiting, training
and workforce re-deployment services.
REORGANIZATION: On February 21, 1997, a Reorganization was consummated in
which nine companies under common ownership and management became wholly-owned
subsidiaries of OutSource International, Inc. (the "Reorganization"). OutSource
International, Inc. was incorporated in April 1996 for the purpose of becoming
the parent holding company, but was inactive with no assets, liabilities or
operations prior to the Reorganization.
The nine companies which became subsidiaries of OutSource International,
Inc. are OutSource International of America, Inc., OutSource Franchising, Inc.,
Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc.,
Synadyne V, Inc., Employees Insurance Services, Inc. and Capital Staffing Fund,
Inc. (the "Subsidiaries"). Except for Capital Staffing Fund, Inc., the
outstanding common stock of each of the Subsidiaries was owned prior to the
Reorganization by the same shareholders with identical ownership percentages.
The shareholders and their ownership percentages were: (a) a control group
consisting of two brothers, who were founders, their immediate families and
four family trusts (the "S Group")--58.2%; (b) a control group consisting of an
individual, who was a founder, his immediate family and two family trusts (the
"M Group")--29.1%; (c) the chief executive officer of the Subsidiaries (the
"CEO")--9.7%; and (d) the executive vice president of the Subsidiaries and a
family trust (the "EVP")--3.0%. The shareholders and their ownership
percentages of Capital Staffing Fund, Inc. prior to the Reorganization were: S
Group--48.5%; M Group--24.25 %; CEO--24.25% and EVP--3.0%.
In 1974, the three founders began the flexible industrial staffing
services business which became the operations of the Subsidiaries, and these
operations expanded to also include franchising of flexible industrial staffing
services, PEO services, and funding services to certain franchises. The
operations of the Subsidiaries historically have been integrated to provide a
single source of human resource services for customers under the direction of a
single executive management group and with a centralized administrative and
business support center.
The Reorganization consisted of (a) the distribution by the Subsidiaries,
which were S corporations, of previously undistributed accumulated taxable
earnings to all shareholders, in proportion to their ownership interests, a
portion of which was used to repay $4,300,000 in notes receivable of OutSource
Franchising, Inc. from its shareholders, in proportion to their ownership
interests; (b) the contribution to paid-in capital of Synadyne II, Inc. and
Synadyne III, Inc. of $4,300,000 in notes payable by such Subsidiaries to their
shareholders, in proportion to their ownership interests;
F-9
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
and (c) the exchange by all of the shareholders of all of their shares of
common stock in the Subsidiaries for shares of common stock in OutSource
International, Inc., except that the founders in the S Group and M Group
received cash and notes for a portion of their common stock, aggregating 5.8%
of the total ownership interests in the Subsidiaries (the equivalent of 370,072
shares of common stock of OutSource International, Inc.). The following is a
summary of the cash paid, notes issued, repayment of notes receivable,
contribution to additional paid-in capital, and common stock of OutSource
International, Inc. issued in the Reorganization:
ISSUANCE OF
COMMON STOCK
-----------------------
REPAYMENT OF
CASH NOTES NOTES RECEIVABLE TOTAL SHARES PERCENTAGE
------------- ------------ ------------------ ------------- ----------- -----------
S Group ...... $ 5,840,800 $1,420,000 $2,502,000 $ 9,762,800 3,444,723 57.5%
M Group ...... 3,849,900 -- 1,251,000 5,100,900 1,707,656 28.5%
CEO ......... 225,760 325,000 417,000 967,760 650,375 10.8%
EVP ......... 140,140 -- 130,000 270,140 190,912 3.2%
------------ ----------- ----------- ------------ ---------- ------
$10,056,600 $1,745,000 $4,300,000 16,101,600 5,993,666 100.0%
============ =========== =========== ========== ======
Less contribution to additional paid-in capital of notes
payable of Synadyne II, Inc. and Synadyne III, Inc. . (4,300,000)
-------------
Net charge to shareholders' equity ..................... $ 11,801,600
=============
All shareholders of the Subsidiaries owned virtually the same proportion
of the common stock of OutSource International, Inc. after the Reorganization
as they owned of the Subsidiaries prior to the Reorganization. Additionally,
all of the Subsidiaries were historically an integrated operation under the
direction of a single executive management group and with a centralized
administrative and business support center, which continued after the
Reorganization. Accordingly, the Reorganization was accounted for as a
combination of companies at historical cost. The effects of the Reorganization
on common stock have been reflected retroactively in the financial statements
of prior years. In addition, the results of operations and cash flows of Labor
World USA, Inc. for the year ended December 31, 1994 have been included in
these financial statements. This company, now inactive, was owned by the same
shareholders with identical ownership percentages as OutSource International of
America, Inc., one of the Subsidiaries, which succeeded to its operations as of
January 1, 1995.
Subsequent to the Reorganization, all compensation for the three founders
(principal shareholders) was discontinued, and the Subsidiaries terminated
their elections to be treated as S corporations.
A summary of the Company's significant accounting policies follows:
BASIS OF PRESENTATION: The accompanying consolidated financial statements
present the financial position, results of operations and cash flows of
OutSource International, Inc. and the Subsidiaries, as well as SMSB Associates
("SMSB"), a Florida limited partnership comprised of the Company's three
principal shareholders and the CEO. SMSB, a special purpose entity which leases
certain properties to the Company, is consolidated in these financial
statements, based on the criteria for a non-substantive
F-10
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
lessor in Emerging Issues Task Force No. 90-15, due to the control exercised by
the Company over the assets of SMSB. All significant intercompany balances and
transactions are eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL STATEMENTS: The interim consolidated
financial statements and the related information in these notes as of March 31,
1997 and for the three months ended March 31, 1996 and 1997 are unaudited. Such
interim consolidated financial statements 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.
PERVASIVENESS OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION: All flexible staffing and PEO revenues are based
upon the gross payroll of the Company's flexible staffing and PEO employees
plus a corresponding fee. The Company's fee structure is based upon the
estimated costs of employment related taxes, health benefits, workers'
compensation benefits, insurance and other services offered by the Company plus
a negotiated mark-up. All flexible staffing and PEO customers are invoiced on a
weekly to monthly billing cycle. The flexible staffing and PEO revenues are
recognized as the related service is performed, net of provisions for credits
and allowances.
Initial franchise fees are generally recognized when substantially all
services or conditions relating to the sale have been performed or satisfied by
the Company. Costs relating to such fees are charged to selling, general and
administrative expenses when incurred. When the fees are collected over an
extended period of time and no reasonable basis for estimating collections
exists, the fees are recognized as income when received through the use of the
installment method. Royalties, which are based on gross sales and gross profit
of the related franchisees, are recognized as revenue when earned and become
receivable from the franchisees.
FUNDING ADVANCES: The Company makes advances on behalf of certain of its
franchises to fund the payroll and other related costs for industrial personnel
provided by those franchises to their clients. The advances are secured by the
franchises' accounts receivable from these clients. The Company invoices the
clients and receives payment directly from the clients as part of this
arrangement. These payments are applied to reimburse outstanding advances, and
to pay franchise royalties and the fee charged for these funding and billing
services, with any remaining amounts remitted to the franchise. The funding fee
is charged and recognized as revenue by the Company as the weekly invoices are
produced.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost and
depreciated or amortized on an accelerated and straight-line bases over the
estimated useful service lives of the respective assets.
F-11
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Leasehold improvements are stated at cost and amortized over the shorter of the
term of the lease or estimated useful life of the improvement. Amortization of
property under capital leases, leasehold improvements and computer software is
included in depreciation expense. The estimated useful lives of buildings range
from 15 to 32 years, while the estimated useful lives of other items range from
5 to 7 years.
LONG-LIVED ASSETS: Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS No. 121 requires that impairments, measured using fair value, are
recognized whenever events or changes in circumstances indicate that the
carrying amount of long-lived assets may not be recoverable and the future
undiscounted cash flows attributed to the assets are less than their carrying
values. Adoption of this statement did not have a material effect on the
Company's consolidated financial statements.
INTANGIBLE ASSETS: Identifiable intangible assets include customer lists,
employee lists and covenants not to compete acquired in connection with
acquisitions. Such assets are recorded at fair value on the date of acquisition
as determined by management with assistance by an independent valuation
consultant and are being amortized over the estimated periods to be benefitted,
ranging from 1 to 15 years.
Goodwill relates to the excess of cost over the fair value of net assets
of the businesses acquired. Amortization is calculated on a straight-line basis
over periods ranging from 15 to 40 years. The overall business strategy of the
Company includes the acquisition and integration of independent and franchise
flexible staffing and PEO operations. The Company believes that this strategy
creates synergies, achieves operating efficiencies and allows the Company to be
more competitive in its pricing, all of which will provide benefits for the
foreseeable future.
Management assesses on an ongoing basis if there has been an impairment in
the carrying value of its intangible assets. If the undiscounted future cash
flows over the remaining amortization period of the respective intangible asset
indicates that the value assigned to the intangible asset may not be
recoverable, the carrying value of the respective intangible asset will be
reduced. The amount of any such impairment would be determined by comparing
anticipated discounted future cash flows from acquired businesses with the
carrying value of the related assets. In performing this analysis, management
considers such factors as current results, trends and future prospects, in
addition to other relevant factors.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value.
CASH, RECEIVABLES, FUNDING ADVANCES TO FRANCHISES, ACCOUNTS PAYABLE,
ACCRUED EXPENSES, EXCEPT WORKERS' COMPENSATION AND INSURANCE, OTHER CURRENT
LIABILITIES AND OTHER AMOUNTS DUE FROM AND TO RELATED PARTIES: The carrying
amounts approximate fair value because of the short maturity of those
instruments. Although the accrued workers' compensation and insurance liability
is anticipated to be
F-12
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
paid over a number of years, due to the lack of a defined payment schedule and
the estimates inherent in establishing the recorded liability amount,
management believes that it is not practical to estimate the fair value of this
financial instrument.
NOTES RECEIVABLE, LINE OF CREDIT, REVOLVING CREDIT FACILITY, LONG-TERM
DEBT AND SENIOR NOTES: The carrying amounts approximate the fair value at
December 31, 1995 and 1996 and March 31, 1997, because the interest rates on
these instruments, including amortization of debt discount, approximate
interest rates currently available for similar borrowings.
PUT WARRANTS LIABILITY: The carrying amounts are recorded at fair value as
of March 31, 1997. See Note 5.
INCOME TAXES: Effective February 21, 1997, the Subsidiaries terminated
their elections to be treated as S corporations under applicable provisions of
the Internal Revenue Code. Prior to the date such election was terminated,
items of income, loss, credits, and deductions were not taxed within the
Company but were reported on the income tax returns of the Company's
shareholders. Accordingly, no provision for income taxes was recorded.
Since the Reorganization, the Company provides for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes," which requires an
asset and liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed annually for the
differences between financial statement and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense equals the taxes payable or refundable for the
period plus or minus the change in the period of deferred tax assets and
liabilities.
WORKERS' COMPENSATION: Effective January 1, 1997, the Company's workers'
compensation insurance coverage provides for a $250,000 deductible per accident
or industrial illness with an aggregate maximum dollar limit based on 2.2% of
covered payroll. For claims related to periods prior to 1997, there was no
aggregate maximum dollar limit on the Company's liability for deductible
payments. From May 1, 1995 through December 31, 1996, in exchange for a lower
excess insurance premium rate, the Company accepted the responsibility for
certain losses exceeding the $250,000 policy deductible per accident or
industrial illness on a dollar-for-dollar basis, but only to the extent such
losses cumulatively exceed 85% of the excess insurance premiums (excluding the
profit and administration component) and subject to a maximum additional
premium (approximately $750,000 in 1995 and $1,200,000 in 1996). The Company
employs an independent third-party administrator to assist management in
establishing an appropriate accrual for the uninsured portion of workers'
compensation claims, including claims incurred but not reported, based on prior
experience and other relevant data. However, the Company is only required to
pay such claims as they actually arise, which may be over a period extending up
to 5 years after the related incident occurred.
AMORTIZATION OF DEBT DISCOUNT AND ISSUANCE COSTS: The Company records
debt discount as a contra-liability and debt issuance costs as a non-current
asset. Both are amortized to interest expense using the interest method.
F-13
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
STOCK BASED COMPENSATION: Effective January 1, 1996, the Company adopted
SFAS 123, "Stock Based Compensation". This statement requires the Company to
choose between two different methods of accounting for stock options. The
statement defines a fair-value-based method of accounting for stock options but
allows an entity to continue to measure compensation cost for stock options
using the accounting prescribed by APB Opinion 25 (APB 25) "Accounting for
Stock Issued to Employees". The Company has elected to continue using the
accounting methods prescribed by APB 25 and to provide the pro forma
disclosures required by SFAS 123.
ADVERTISING: The Company expenses advertising and promotional
expenditures as incurred. Total advertising and promotional expenses were
approximately $353,000, $651,000 and $726,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
NEW ACCOUNTING PRONOUNCEMENTS: In February 1997, SFAS No. 128, "Earnings
Per Share," was issued. SFAS No. 128, which supersedes Accounting Principles
Board ("APB") Opinion No. 15, requires a dual presentation of basic and diluted
earnings per share on the face of the income statement. Basic earnings per
share excludes dilution and is computed by dividing income or loss attributable
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. Diluted
earnings per share is computed similarly to fully diluted earnings per share
under APB Opinion No. 15. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. Had SFAS No. 128 been adopted for the
year ended December 31, 1996 and the three months ended March 31, 1996 and
1997, pro forma basic earnings per share would have been $0.17, $0.01 and
$0.20, respectively, and pro forma diluted earnings per share would have been
$0.17, $0.01 and $0.17, respectively.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 requires
that a company (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required. The Company has not determined the effects, if any, that SFAS No. 130
will have on its consolidated financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued. SFAS No. 131 establishes standards for
the way that public companies report selected information about operating
segments in annual financial statements and requires that those companies
report selected information about segments in interim financial reports issued
to
F-14
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131,
which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", but retains the requirement to report information about major
customers, requires that a public company report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. However, SFAS No. 131 does not require the reporting of
information that is not prepared for internal use if reporting it would be
impracticable. SFAS No. 131 also requires that a public company report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and
changes in the measurement of segment amounts from period to period. SFAS No.
131 is effective for financial statements for periods beginning after December
15, 1997. The Company has not determined the effects, if any, that SFAS No. 131
will have on the disclosures in its consolidated financial statements.
RECLASSIFICATIONS: Certain reclassifications have been made in amounts
for prior periods to conform to current period presentation.
NOTE 2. ACQUISITIONS
Goodwill and other intangible assets consist of the following:
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------- ----------------- WEIGHTED AVERAGE
1995 1996 1997 AMORTIZATION PERIODS
---------- ------------ ----------------- ---------------------
Goodwill ........................... $268,086 $7,072,872 $25,709,784 32.7 years
Customer lists ..................... -- 658,015 4,672,178 5.5 years
Covenants not to compete ............ -- 110,644 1,202,841 9.4 years
Employee lists ..................... -- 77,390 196,479 .2 year
--------- ----------- ------------
Goodwill and other intangible
assets ........................... 268,086 7,918,921 31,781,282 27.7 years
Less accumulated amortization ...... 40,565 464,115 794,221
--------- ----------- ------------
Goodwill and other intangible
assets, net ..................... $227,521 $7,454,806 $30,987,061
========= =========== ============
The costs of each acquisition have been allocated to the assets acquired
and liabilities assumed based on their fair values at the date of acquisition
as determined by management with the assistance of an independent valuation
consultant. As of March 31, 1997 the costs of the acquisitions in 1997 and as
of December 31, 1996, the costs of the acquisitions in 1996 have been allocated
on a preliminary basis
F-15
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 2. ACQUISITIONS--(CONTINUED)
while the Company obtains final information regarding the fair value of assets
acquired and liabilities assumed. Although the allocation and amortization
periods are subject to adjustment, the Company does not expect that such
adjustments will have a material effect on the consolidated financial
statements.
Effective January 1, 1995, the Company purchased the franchise rights for
two flexible staffing locations from All Temps, Inc. and converted these
locations to Company-owned locations. The terms of the purchase, as set forth
in an asset purchase agreement, required the Company to pay a purchase price
based on a percentage of gross profits for 5 years. Three of the four
shareholders of the franchise are shareholders with a cumulative controlling
interest in the Company. The acquisition was accounted for as a business
combination of entities under common control and the purchase of the remaining
minority interest in the franchise. No material tangible assets were acquired.
Effective October 1, 1996 the purchase price was renegotiated and the remaining
portion of the five year earnout due to the Company's shareholders was settled
in exchange for a promissory note of $799,000 bearing interest at 10% per
annum, due on demand. This note, including accrued interest, was paid on
February 24, 1997. The remaining portion of the five year earnout, due to the
minority interest, will continue to be paid as originally agreed. However, as
part of the purchase price renegotiation, the Company agreed that the remaining
payments to the minority interest would be no less than $40,000 per year from
1997 through 1999 and no less than $150,000 on a cumulative basis for that
three year period. During 1995 and 1996, $250,907 and $1,128,136, respectively,
of the purchase price was accrued, with $219,543 and $967,151 payable to the
Company shareholders in 1995 and 1996, respectively, recorded as a distribution
and the remainder as goodwill.
Effective June 4, 1995, the Company purchased the franchise rights for one
flexible staffing location from WAD, Inc. and converted this location to a
Company-owned location. The terms of the purchase, as set forth in an asset
purchase agreement, require the Company to pay a purchase price based on a
percentage of gross profits for five years. Both shareholders of the franchise
are shareholders and officers of the Company but do not hold a controlling
interest. Effective October 1, 1996 the purchase price was renegotiated and the
remaining portion of the five year earnout was settled in exchange for a
promissory note of $731,982 bearing interest at 10% per annum, with the portion
in excess of $400,000 due on demand. The demand portion of $331,982 plus
accrued interest was paid on February 24, 1997 and the remaining balance of
$400,000 is payable in equal quarterly installments of principal and interest
over the next two years. During 1995 and 1996, $79,693 and $887,383,
respectively, of the purchase price was accrued.
During 1995, the Company purchased the franchise rights for two flexible
staffing locations from Komco Inc. and Demark, Inc. and converted them to
Company-owned locations. The terms of the purchases, as set forth in asset
purchase agreements, required the Company to pay $178,292 plus a percentage of
revenues for a period ranging up to two years. The total purchase price
recorded as of December 31, 1996 was $227,926.
Effective April 1, 1996, the Company purchased the franchise rights for
eight flexible staffing locations from Payray, Inc. and Tri-Temps, Inc. and
converted these locations to Company-owned locations. Some shareholders of the
franchises are shareholders of the Company but do not hold a
F-16
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 2. ACQUISITIONS--(CONTINUED)
controlling interest in the Company. The terms of the purchase, as set forth in
an asset purchase agreement, required the Company to pay $4,922,745 with
$750,000 due at closing and a note for the remainder to be paid in 60 monthly
installments plus 10% per annum interest through July 1, 1996 and 14% per annum
interest thereafter. On February 21, 1997, these payment terms were
renegotiated. The renegotiated terms called for a payment of $1,250,000 against
the outstanding balance and a note for the remainder of $2,573,703 to be paid
in 48 equal monthly installments including interest of 14% per annum,
commencing April 1, 1997. This obligation is fully payable at the time of an
initial public offering.
Effective May 4, 1996, the Company purchased certain assets and the
business of CST Services Inc., a flexible staffing operation not previously
affiliated with the Company. The terms of the purchase, as set forth in an
asset purchase agreement, required the Company to pay up to $1,780,000 with
$1,200,000 due at closing, a $200,000 note to be paid in two annual
installments plus interest at 7% per annum and annual contingent payments, not
to exceed an aggregate of $380,000, based upon income before taxes of the
acquired operation for the two years following the acquisition. The total
purchase price recorded was $1,400,000 and $1,592,000 as of December 31, 1996
and March 31, 1997, respectively.
During 1996, the Company purchased the franchise rights for four flexible
staffing locations from Temp Aid, Inc., LL Corps, Inc. and Kesi, Inc. and
converted them to Company-owned locations. The terms of the purchases, as set
forth in asset purchase agreements, required the Company to pay $250,912 plus a
percentage of revenues for a period ranging up to two years. The total purchase
price recorded as of December 31, 1996 was $260,734.
Effective February 14, 1997, the Company purchased the franchise rights
for two flexible staffing locations from LaPorte, Inc. and converted these
locations to Company-owned locations. The purchase price was $1,300,000, with
$650,000 paid at closing and issuance of two notes for $400,000 and $250,000.
The first note plus accrued interest at 10% per annum is due in June 1997 and
the second note bearing interest at 7% per annum is payable in 18 monthly
installments ending August 1998.
Effective February 21, 1997, the Company purchased a flexible staffing
operation with one location from Apex, Inc. (not previously affiliated with the
Company) for $1,000,000 which was paid at closing. The seller also received
options to purchase 5,363 shares of the Company's common stock at their fair
market value at the date of issuance. Such options were issued March 12, 1997.
Effective February 24, 1997, the Company purchased a flexible staffing
operation with four locations from Standby Personnel of Colorado Springs, Inc.
(not previously affiliated with the Company) for $3,100,000, with $2,250,000
paid at closing and issuance of a $850,000 note to be paid in two installments
in March 1998 and March 1999 with interest at 4% per annum (imputed at 12% for
financial statement purposes). These installments may each increase or decrease
by an amount not to exceed $250,000, based on the gross margin from the
acquired locations for the two years following the acquisition.
Effective February 24, 1997, the Company purchased a flexible staffing
operation from Staff Net, Inc. (not previously affiliated with the Company) for
$320,000, with $160,000 paid at closing and
F-17
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 2. ACQUISITIONS--(CONTINUED)
issuance of a $160,000 note having no stated interest rate (imputed at 12% for
financial statement purposes), to be paid in four quarterly installments
maturing March 1998.
Effective March 3, 1997, the Company purchased the franchise rights for
ten flexible staffing locations from Superior Temporaries, Inc. and converted
these locations to Company-owned locations. The purchase price was $9,000,000
paid at closing.
Effective March 3, 1997, the Company purchased a flexible staffing
operation with six locations from Staff Management, Inc. (not previously
affiliated with the Company) for $4,150,000, with $2,500,000 paid at closing
and issuance of a $1,650,000 note bearing interest at 4% per annum (imputed at
12% for financial statement purposes), to be paid in two installments: $925,000
plus interest in March 1998 and $725,000 plus interest in March 1999. The
seller also received options to purchase 3,575 shares of the Company's common
stock at their fair market value at the date of issuance. Such options were
issued on March 12, 1997.
Effective March 31, 1997, the Company purchased a flexible staffing
operation with six locations from Stand-By, Inc. (not previously affiliated
with the Company) for $5,500,000, with $5,000,000 paid at closing and issuance
of a $500,000 note having no stated interest rate (imputed at 12% for financial
statement purposes), to be paid in two equal installments in April 1998 and
April 1999. These installment payments may each increase by an amount not to
exceed $30,000 or decrease by an amount not to exceed $250,000, based on the
gross margin from the acquired locations for the two years following the
acquisition.
The above acquisitions, except All Temps, Inc., have been accounted for as
purchases. The results of operations of the acquired businesses are included in
the Company's consolidated statements of income from the effective date of
acquisition. The additional payments based on future revenues, gross margin or
income before income taxes of certain acquired businesses are not contingent on
continuing employment of the sellers. Such additional amounts, if paid, will be
recorded as additional purchase price.
F-18
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 2. ACQUISITIONS--(CONTINUED)
The following unaudited pro forma results of operations have been prepared
assuming the acquisitions described above had occurred as of the beginning of
the periods presented, including adjustments to the historical financial
statements for additional amortization of intangible assets, increased interest
on borrowings to finance the acquisitions and discontinuance of certain
compensation previously paid by the acquired businesses to their shareholders.
The unaudited pro forma operating results are not necessarily indicative of
operating results that would have occurred had these acquisitions been
consummated as of the beginning of the periods presented, or of future
operating results.
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------------- -------------------
1995 1996 1997
----------------- -------------- -------------------
UNAUDITED PRO FORMA:
Net revenues ..................... $ 211,766,362 $345,081,300 $95,781,503
Operating income .................. 4,881,811 8,525,890 666,245
Income before provision (benefit) for
income taxes ..................... (1,067,669) 576,631 538,103
Net income (loss) .................. (1,067,669) 576,631 944,312
The following unaudited pro forma, as adjusted, information has been
prepared on the same basis as the preceding data and also reflects the pro
forma adjustments and weighted average shares outstanding as discussed in Note
13 except that the number of shares attributable to outstanding options and
warrants has been increased by 568,867 shares for the year ended December 31,
1996 and 328,249 shares for the three months ended March 31, 1997, in order to
reflect an adjustment in the calculation of proceeds from the exercise of
warrants associated with the portion of the Senior Notes utilized to finance
the above acquisitions:
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------- -------------------
1996 1997
-------------- -------------------
UNAUDITED PRO FORMA, AS ADJUSTED:
Income before provision (benefit) for income taxes ...... 576,631 538,103
Pro forma provision (benefit) for income taxes ......... 270,692 (265,973)
----------- -----------
Pro forma net income .................................... $ 305,939 $ 804,076
=========== ===========
Weighted average common shares outstanding ............... 7,390,184 7,516,041
=========== ===========
Earnings per share .................................... $ 0.04 $ 0.11
=========== ===========
Effective June 30, 1997, the Company purchased the franchise rights for
one flexible staffing location from Pembroke, Inc. for $825,000, paid at
closing.
F-19
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
AS OF DECEMBER 31,
----------------------------
1995 1996
------------- ------------
Buildings and land ................................. $ 3,093,700 $ 6,459,439
Furniture, fixtures and equipment .................. 2,025,117 4,108,625
Computer software .................................... 708,814 2,321,094
Leasehold improvements .............................. 471,940 1,031,106
Vehicles ............................................. 167,234 132,703
Assets held for disposal ........................... -- 2,090,000
------------ ------------
Property and equipment .............................. 6,466,805 16,142,967
Less accumulated depreciation and amortization ...... 2,144,628 3,015,860
------------ ------------
Property and equipment, net ........................ $ 4,322,177 $13,127,107
============ ============
Depreciation and amortization expense for property and equipment for the
years ended December 31, 1994, 1995 and 1996 amounted to $418,529, $725,016 and
$1,093,546, respectively, and $161,372 and $379,137 for the three months ended
March 31, 1996 and 1997, respectively.
Building and land owned by SMSB and formerly utilized by the Company as
its national office and support center have been held for disposal since
December 1996. The Company has determined that the fair market value of these
assets, less disposal costs, exceeds their current net carrying value which was
$1,950,000, after an impairment loss of $140,000 that was recognized by SMSB in
the three months ended March 31, 1997.
NOTE 4. INCOME TAXES
The net deferred tax asset as of March 31, 1997 includes deferred tax
assets and liabilities attributable to the following items, including amounts
recorded as a result of the February 21, 1997 termination of the elections by
the Subsidiaries to be treated as S corporations:
MARCH 31, 1997
---------------
Workers' compensation accrual ........................... $ 1,632,701
Allowance for doubtful accounts ........................ 308,064
Debt discount related to warrants ..................... (204,688)
Change from cash to accrual tax basis .................. (1,415,020)
Other ................................................ 85,152
-------------
Net deferred tax asset, included in other assets ...... $ 406,209
=============
F-20
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 4. INCOME TAXES--(CONTINUED)
The components of the income tax benefit for the three months ended March
31, 1997 are as follows:
Federal-Deferred ......... $ (346,837)
State-Deferred ............ (59,372)
-----------
Income tax benefit ...... $ (406,209)
===========
The Company's effective tax rate for the three months ended March 31, 1997
differed from the statutory federal rate of 35% as follows:
AMOUNT RATE
-------------- ----------
Statutory rate applied to loss before income taxes ......... $ 420,158 35.0%
Increase (decrease) in income taxes resulting from:
Effect of termination of S corporation status ......... (385,693) (32.1)
Loss prior to termination of S corporation status ...... 58,652 4.9
Put warrants valuation adjustment ..................... (455,374) (37.9)
Other ................................................... (43,952) (3.7)
---------- ---------
Total ................................................ $ (406,209) (33.8)%
========== =========
NOTE 5. DEBT
BANK FINANCING: On February 21, 1997, following the Reorganization, the
Company entered into a revolving credit facility ("Revolving Credit Facility").
The Revolving Credit Facility is for a term of four years and expires on
February 20, 2001. The maximum amount available for borrowing is $45,000,000
which includes a letter of credit facility of $10,000,000. The interest rate on
the Revolving Credit Facility is based upon: 1) the bank's prime rate (8.25% at
March 31, 1997) plus a margin of up to 1.75% according to the Company's
consolidated debt to earnings ratio (as defined by the terms of the Revolving
Credit Facility) or 2) the Eurodollar base rate (5.625% at March 31, 1997) plus
a margin from 1.25% to 3.25% according to the Company's consolidated debt to
earnings ratio. The effective interest rate at March 31, 1997 was 8.9%.
Revolving Credit Facility borrowings are collateralized by all tangible and
intangible assets of the Company and are governed by certain covenants, which
include an interest coverage ratio, a cash flow coverage ratio, an indebtedness
to EBITDA (earnings before interest, taxes, depreciation and amortization)
ratio and the current ratio.
Prior to February 21, 1997, the Company had a line of credit facility
("Line of Credit") dated July 20, 1995 with two commercial lending institutions
which was amended on November 21, 1995, May 8, 1996 and June 28, 1996. The Line
of Credit, which included a letter of credit facility ("Letter of Credit"), was
for a term of three years with an expiration date of June 30, 1998. The maximum
amount available for Line of Credit borrowings and Letter of Credit issuances
was $14,900,000. These Line of Credit borrowings and Letter of Credit issuances
were permitted based upon certain formulas outlined in the Line of Credit
Agreement and were collateralized by the accounts receivable of the Company and
the personal guarantees of the Company's principal shareholders. At December
31, 1996 the Line of Credit borrowing interest rate was at prime plus 2%
(10.25% per annum) and the Letter of Credit fee was 1% per annum.
F-21
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 5. DEBT--(CONTINUED)
The Company secures its liability for the deductible portion of its
workers' compensation coverage by the issuance of Letters of Credit to its
insurance carriers which amounted to $4,651,000 at December 31, 1996 and
$5,175,763 at March 31, 1997.
Prior to July 20, 1995, the Company had a line of credit agreement with
terms requiring the shareholders' personal guarantees, allowing for borrowings
up to $5,300,000 limited by eligible receivables and collateralized by
substantially all of the assets of the Subsidiaries. These borrowings incurred
interest at prime plus 2% per annum.
SENIOR NOTES: On February 21, 1997, following the Reorganization, the
Company entered into senior subordinated agreements ("Senior Notes") with two
investors (the "Investors") for borrowings totaling $25,000,000, with payments
of $10,000,000 in March 2001 and $15,000,000 in February 2002. The Senior Notes
require quarterly interest payments at 11% per annum through February 1999 and
12.5% thereafter. The Senior Notes are subordinated to the Revolving Credit
Facility and are governed by certain covenants which include an indebtedness to
EBITDA (earnings before interest, taxes, depreciation and amortization) ratio.
The Company also issued to the Investors warrants to purchase 865,168 shares of
common stock at $.014 per share to be exercised at the discretion of the
Investors and expiring five years from issuance (the "A warrants").
In connection with the Senior Notes, warrants to purchase 631,167 shares
of the Company's common stock at $.014 per share were issued by the Company
into escrow. Warrants to purchase 198,981 shares (the "B warrants") became
eligible for release from escrow to the now existing Company shareholders on
March 31, 1997 when the Company consummated the last of certain acquisitions in
accordance with conditions of the agreements related to the Senior Notes. The
remaining warrants to purchase 432,186 shares (the "C warrants") will be
released from escrow on or before February 1999. The C warrants will be
released to the now existing Company shareholders, if by that date the Company
has fully repaid the Senior Notes and has had a qualified public offering or
qualified sale that results in a specified market valuation of the A warrants.
In the event that all conditions have been met at that time except that the
market valuation of the A warrants meets a specified lower threshold, 50% of
the C warrants will be released to the Investors and 50% will be released to
the now existing Company shareholders. If the Senior Notes have not been repaid
or such lower market valuation threshold for the A warrants is not achieved by
February 1999, all of the C warrants will be released to the Investors. The
warrants in escrow are exercisable any time after being released from escrow
and expire in February 2002.
The A warrants issued to the Investors, as well as the B and C warrants
placed in escrow, all contain a put option, whereby the Company would be
required at the holder's option to purchase the warrants for the "publicly
traded" fair value of those warrants should the Company not consummate a
qualified initial public offering, as defined in the warrant agreement, by
February 2001. This put option, if it becomes effective, expires in February
2003. The Company may satisfy the required purchase of the warrants by the
issuance of a three year subordinated note payable in equal quarterly principal
installments with the first payment due six months from the issuance of the
note. Interest would be payable quarterly at the rate of 13% per annum.
The proceeds of the Senior Notes were recorded as a liability. The fair
value of the A warrants issued to the Investors, plus the fair value of the B
and C warrants, was recorded as debt discount,
F-22
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 5. DEBT--(CONTINUED)
which is a contra-account to the Senior Notes liability and is periodically
amortized using the interest method, resulting in a level effective rate of
55.7% per annum applied to the sum of the face amount of the debt less the
unamortized discount. Interest expense (including discount amortization of
$138,475) of $404,169 was recorded related to these Senior Notes for the three
months ended March 31, 1997.
The B and C warrants were designed to provide the Investors with
additional consideration for their $25 million investment if certain
performance criteria (in the case of the B warrants) are not met or if certain
triggering events (in the case of the C warrants) do not occur. Therefore, the
value of the the B and C warrants is, in substance, embedded within the $25
million subordinated debt proceeds and, as such, was accounted for in the same
manner as the A warrants. Accordingly, the amount allocated from the $25
million subordinated debt proceeds to the detachable stock purchase warrants
includes the fair value of the B and C warrants. The original debt discount,
based on the fair value of the A warrants issued to the Investors plus the fair
value of B and C warrants, was $18,541,993.
Due to the put option included in all of the warrants, their fair value of
$18,541,996 at the date of issuance was classified as a liability which will be
adjusted to fair value at each reporting date until the put option terminates.
This liability was adjusted to a fair value of $16,658,714 as of March 31,
1997, with the adjustment of $1,883,282 included in non-operating income for
the three months ended March 31, 1997.
The Company incurred $2,385,016 of costs related to the issuance of the
Senior Notes, which are recorded in other non-current assets and are being
amortized to interest expense using the interest method. Amortization of
$40,136 was recorded for the three months ended March 31, 1997.
F-23
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 5. DEBT--(CONTINUED)
LONG-TERM DEBT:
AS OF DECEMBER 31,
---------------------------- AS OF MARCH 31,
1995 1996 1997
------------ ------------- ----------------
Obligations under capital leases. See
discussion below. ................................. $ 33,262 $ 7,801,224 $ 7,667,745
Acquisition notes payable, subordinated to the
Revolving Credit Facility. See Note 2. ............ -- 200,689 3,828,609
Mortgage notes payable in monthly installments
and collateralized by buildings and land. The
interest rates range from 8.5% to prime plus 2%
per annum (10.50% at March 31, 1997). ............... 2,611,059 2,472,063 2,436,780
Notes payable in monthly installments and a
balloon payment of $100,000 in November 1997,
collateralized by property and equipment. The
interest rates range from 5.9% to 13% per
annum. ............................................. 172,609 126,147 303,144
Term and equipment notes payable in quarterly
installments through July 1997, with an interest
rate of prime plus 2% (10.25% at December 31,
1996). The balance was paid in February 1997. ...... 437,500 2,266,667 --
----------- ------------ ------------
Long-term debt ....................................... 3,254,430 12,866,790 14,236,278
Less current maturities of long-term debt ............ 439,291 1,992,962 1,988,678
----------- ------------ ------------
Long-term debt, less current maturities ............... $2,815,139 $10,873,828 $12,247,600
=========== ============ ============
The aggregate annual principal payments on long-term debt are as follows:
YEAR AS OF DECEMBER 31, 1996
- --------------------- ------------------------
1997 ............... $ 1,992,962
1998 ............ 1,015,490
1999 ............ 1,114,584
2000 ............ 1,908,870
2001 ............ 889,515
Thereafter ...... 5,945,369
------------
$12,866,790
============
CAPITAL LEASES: Since December 1996, the Company has occupied an office
building for its national office and support center under a 15 year capital
lease agreement with an unrelated party, having annual lease payments of
approximately $610,000. The Company has an option to buy the building during
the first two years of the lease term and it is the Company's intention to
exercise that option. Accordingly, the capitalized costs relating to this lease
are equal to the purchase option price.
F-24
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 5. DEBT--(CONTINUED)
As of December 31, 1996, buildings and other assets held under capital
leases and included in property and equipment were $7,818,393, net of
accumulated depreciation of approximately $57,000.
The following is a summary of future minimum lease payments, and their
present value, required under all capital leases for the years ended after
December 31, 1996:
1997 ............................................. $ 1,186,364
1998 ............................................. 1,217,281
1999 ............................................. 1,289,988
2000 ............................................. 1,324,088
2001 ............................................. 1,278,215
Thereafter ....................................... 9,828,208
-------------
Total future minimum lease payments ............... 16,124,144
Less amount representing interest ............... (8,322,920)
-------------
Present value of net minimum lease payments ...... $ 7,801,224
=============
NOTE 6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS: The Company conducts its operations in various leased
facilities under leases that are classified as operating leases for financial
reporting purposes. The leases provide for the Company to pay real estate
taxes, common area maintenance and certain other expenses. Lease terms,
excluding renewal option periods exercisable by the Company at escalated rents,
expire between 1997 and 2001. Also, certain equipment used in the Company's
operations are leased under operating leases. A schedule of fixed minimum lease
commitments as of March 31, 1997 consisted of the following:
YEAR RENTAL AMOUNT
- ---------------------------------------------------- --------------
For the nine months ended December 31, 1997 ...... $1,166,311
1998 .......................................... 963,314
1999 .......................................... 673,924
2000 .......................................... 442,299
2001 .......................................... 251,521
-----------
Total .......................................... $3,497,369
===========
Rent expense, including equipment rental, was $57,195, $373,090 and
$878,300 for the years ended December 31, 1994, 1995 and 1996, and $275,658 and
$611,702 for the three months ended March 31, 1996 and 1997, respectively.
FRANCHISE AGREEMENTS: The Company has granted 50, 67 and 75 Labor World
franchises as of December 31, 1994, 1995 and 1996, respectively. In
consideration for royalties paid by the franchise holders, the agreements
provide among other things, that the Company will provide the franchise holder
with the following for terms ranging from 10 to 15 years with varying renewal
options: exclusive geographical areas of operations, continuing advisory and
support services and access to the Company's confidential operating manuals.
F-25
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 7. OTHER CHARGES
In 1996, the Company incurred $1,447,555 of expenses, primarily
professional fees, related to (i) a Form S-1 Registration Statement filed by
the Company with the Securities and Exchange Commission that the Company
withdrew and (ii) subsequent due diligence, which included an internal
investigation of allegations regarding payments by the Company to a management
employee of a customer of the Company. Based on the findings of the
investigation, the Company paid restitution to the customer, is continuing to
transact business with the customer and believes that further expenses or
liabilities, if any, related to this matter will not be material to its
financial position or results of operations. These expenses have been
separately disclosed as other charges in the consolidated statement of income
due to their unusual nature.
NOTE 8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
For the years ended December 31, 1994, 1995 and 1996, approximately 19%,
21% and 16%, respectively, of the Company's revenues were from services
performed for individual insurance agent offices under a Preferred Provider
designation granted to the Company on a regional basis by the agents' common
corporate employer. The Company had received this designation in 15, 22 and 31
states as of December 31, 1994, 1995 and 1996, respectively. In addition, for
the years ended December 31, 1994, 1995 and 1996, approximately 66% , 39% and
27%, respectively, of the Company's revenues were from the provision of
services to customers in the Chicago, Illinois area. For the years ended
December 31, 1994, 1995 and 1996, approximately 17%, 29% and 29% of the
Company's revenues were from the provision of services to customers in the
South Florida area.
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash, trade accounts receivable and funding
advances to franchises. The Company places its cash with what it believes to be
high credit quality institutions. At times cash deposits may be in excess of
the FDIC insurance limit. The Company grants credit to its customers generally
without collateral and regularly assesses their financial strength. Funding
advances to franchises are collateralized by the franchises' accounts
receivable from their clients. The Company believes that credit risk related to
its trade accounts receivable and funding advances is limited.
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company had a 401(k) profit-sharing plan and a 413(c) multi-employer
retirement plan covering all employees except for (1) employees under the age
of 21 for both plans, (2) employees with less than one year of service for both
plans, and (3) all highly compensated employees as defined by the Internal
Revenue Code for the 401(k) plan and certain highly compensated employees under
the 413(c) plan.
On February 28, 1997, the above 401(k) plan was made inactive by the
Company. All participating employees were enrolled in the 413(c) for future
contributions and all net assets remained in the 401(k) plan.
Eligible employees who participate elect to contribute to the plan from 2%
to 15% of their salary. Each year, the Company's Board of Directors determines
a matching percentage to contribute to each
F-26
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 9. EMPLOYEE BENEFIT PLANS--(CONTINUED)
participant's account; if a determination is not made, the matching percentage
is 50% of the participant's contributions. The matching contribution is limited
to the first 6% of each participant's salary contributed by the participants.
Matching contributions by the Company for its employees, which includes PEO
employees, were $26,264, $39,070 and $309,222 for the years ended December 31,
1994, 1995 and 1996, respectively, and $69,345 for the three months ended March
31, 1997.
Pursuant to the terms of the previous 401(k) plan, highly compensated
employees were not eligible to participate. However, as a result of
administrative errors, some highly compensated employees have been permitted to
make elective salary deferral contributions. The Company has sought IRS
approval regarding the proposed correction under the Voluntary Closing
Agreement Program ("VCAP"). There will be a penalty payable by the Company,
associated with a correction under the VCAP, although the Company believes this
penalty will be insignificant.
NOTE 10. SHAREHOLDERS' EQUITY
VOTING TRUST: The Company's three principal shareholders resigned from
the Company's Board of Directors in November 1996. On February 21, 1997, in
connection with the issuance of the Senior Notes and the closing of the
Revolving Credit Facility, 5,152,380 shares of the common stock of the Company,
owned by the those shareholders and their families, were placed in a voting
trust. Under the terms of the voting trust and agreement among the Company, the
Company's shareholders and the Investors, the shares of common stock in the
voting trust, which represent approximately 86% of the voting interest of the
Company, will be voted in favor of the election of a Board of Directors having
seven members and comprised of three directors nominated by the CEO of the
Company, two directors nominated by the Investors, and two independent
directors nominated by the vote of both directors nominated by the Investors
and at least two of the directors nominated by the CEO of the Company. Should
there be a default of the terms of the Senior Notes or should the warrants to
purchase 432,186 shares, as discussed in Note 5, be released from escrow to the
Investors, the number of directors would be increased by two, with the
additional directors nominated by the Investors. Further, the shares in the
voting trust will be voted as recommended by the Board of Directors for any
merger, acquisition or sale of the Company, or any changes to the Articles of
Incorporation or Bylaws of the Company. On any other matter requiring a vote by
the shareholders, the shares in the voting trust will be voted as directed by
the current CEO of the Company.
REVERSE STOCK SPLIT: On , 1997, a .715 for one stock split was
effected. The effect of this reverse split has been retroactively applied to
all share, option and warrant amounts, including the related option and warrant
exercise prices.
INCENTIVE STOCK OPTION PLAN: During 1995, a Subsidiary of the Company
established an incentive stock option plan ("Stock Option Plan") for that
Subsidiary only, whereby incentive stock options could be granted to employees
to purchase a specified number of shares of common stock at a price not less
than fair market value on the date of the grant and for a term not to exceed 10
years. Once awarded, these options became vested and exercisable at 25% per
year.
On January 1, 1996, the Subsidiary granted options to purchase 815,860
shares of common stock at an exercise price of $4.77 per share, which an
independent appraiser determined to be the fair market
F-27
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 10. SHAREHOLDERS' EQUITY--(CONTINUED)
value of that Subsidiary's common stock on the date of grant. On February 18,
1997, the Company adopted the Stock Option Plan and, pursuant to the terms of
the Stock Option Plan, adjusted the number of shares of Common Stock subject to
then outstanding options to 352,527, and the exercise price of such options to
$9.44 per share, such conversion determined by an independent appraiser as of
the date of grant. On March 12, 1997, the Company awarded options to purchase
221,473 shares of the Company's common stock, with the exercise price of
$10.38. As of March 31, 1997, the status of all outstanding options was as
follows:
GRANT DATE TOTAL OPTIONS EXERCISABLE OPTIONS EXERCISE PRICE
- ------------------------- --------------- --------------------- ---------------
January 1, 1996 ...... 352,527 88,132 $ 9.44
March 12, 1997 ........ 221,034 -- 10.38
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options. Under APB 25, because the
exercise price of the Company's employee stock option equals the fair value of
the underlying stock on the grant date, no compensation is recognized. However
SFAS 123, "Accounting for Stock-Based Compensation", requires presentation of
pro forma net income as if the Company had accounted for its employee stock
options granted subsequent to December 31, 1994, under the fair value method.
The Company has estimated the fair value of stock options granted to employees
on January 1, 1996 and March 12, 1997 to be $2.00 and $2.36 per option as of
the respective grant dates, using the Black-Scholes option pricing model with
the following assumptions: risk free interest rate of 6.12% for the 1996 grant
and 6.65% for the 1997 grant; no volatility factor because the Company was not
a public entity when the options were granted; and expected option life of 4
years. For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the vesting period. Under the fair value
method, the Company's net income on a pro forma basis would have been
$1,693,102 for the year ended December 31, 1996 and $1,575,990 for the three
months ended March 31, 1997.
In the event that a vested option becomes unexercisable or expires in
accordance with the plan prior to a successful completion of an initial public
offering, the option holder will be entitled to receive 50% of the increase of
the fair market value of the vested options from the date of grant to the last
day of the Company's taxable year immediately preceding the date on which the
option becomes unexercisable or expires. This plan feature, which terminates
upon completion of an initial public offering, is accounted for as a variable
provision in accordance with APB 25. The amount of related compensation expense
for the year ended December 31, 1996 and the three months ended March 31, 1997
was not material.
F-28
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 11. RELATED PARTY TRANSACTIONS
REVENUES: Certain shareholders of the Company owned franchises from which
the Company received the following revenues in the periods indicated:
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------- -------------------
1994 1995 1996 1997
------------ ------------ ------------- -------------------
PEO services .................. $5,551,806 $4,466,241 $13,505,481 $185,202
Royalties ..................... 631,486 547,477 684,122 154,078
----------- ----------- ------------ ---------
Included in net revenues ...... $6,183,292 $5,013,718 $14,189,603 $339,280
=========== =========== ============ =========
These franchises owed the Company $251,912 and $150,763 at December 31,
1995 and 1996, respectively, and $84,479 at March 31, 1997, which are included
in trade accounts receivable, relating to the above revenues.
RECEIVABLES: The Company had the following notes and advances receivable
due on demand from shareholders and affiliates. The notes had an interest rate
at 10% per annum and the advances are non-interest bearing.
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------- ----------------
1995 1996 1997
---------- ------------ ----------------
Notes receivable from shareholders ...... $ -- $4,300,000 $ --
Advances due from:
Shareholders ........................... 249,978 477,417 82,533
Affiliates .............................. 105,783 110,187 --
--------- ----------- --------
Notes receivable and other amounts due from
related parties ........................ $355,761 $4,887,604 $82,533
========= =========== ========
Total interest income from notes receivable and other amounts due from
related parties was $12,899, $-0- and $29,223 for the years ended December 31,
1994, 1995, and 1996, respectively and $68,099 for the three months ended March
31, 1997.
F-29
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 11. RELATED PARTY TRANSACTIONS--(CONTINUED)
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------ ----------------
1995 1996 1997
LONG-TERM DEBT: ---------- ------------- ----------------
Acquisition notes payable, subordinated to the Revolving Credit
Facility and Senior Notes. The interest rates range from 7% to
14% per annum. See Note 2. ....................................... $239,101 $ 5,573,966 $2,942,565
Demand notes payable due to shareholders of the Company with
an interest rate of 10% per annum. These notes were
contributed to the additional paid-in capital of Synadyne II,
Inc. and Synadyne III, Inc. in connection with the
Reorganization. See Note 1. ....................................... -- 4,300,000 --
Notes payable in quarterly installments beginning in February
1999, subordinated to the Revolving Credit Facility and Senior
Notes. The interest rate is 21% per annum. ........................ 422,125 1,401,192 1,200,000
Notes payable for amounts due to shareholders in connection
with the Reorganization, subordinated to the Revolving Credit
Facility and the Senior Notes. These notes are payable in
quarterly installments beginning in February 1999 through
2001. The interest rate is 10% per annum. ........................ -- -- 1,690,000
--------- ------------ -----------
Long-term debt to related parties ................................. 661,226 11,275,158 5,832,565
Less current maturities of long-term debt to related parties ...... 661,226 8,872,497 651,840
--------- ------------ -----------
Long-term debt to related parties, less current maturities ......... $ -- $ 2,402,661 $5,180,725
========= ============ ===========
The aggregate annual principal payments on long-term debt to related
parties are as follows:
AS OF DECEMBER 31, 1996 AS OF MARCH 31, 1997
------------------------- ---------------------
1997 ............... $ 8,872,497 $ 512,438
1998 ............ 784,338 575,543
1999 ............ 718,342 2,065,571
2000 ............ 762,294 1,187,147
2001 ............ 137,687 1,491,866
Thereafter ...... -- --
------------ -----------
Total ............ $11,275,158 $5,832,565
============ ===========
Total interest expense for long-term debt to related parties was $67,847,
$136,326, $667,265 and $284,111 for the years ended December 31, 1994, 1995 and
1996 and for the three months ended March 31, 1997, respectively.
The Company has agreed in principle to purchase certain real estate now
owned by SMSB and consolidated in these financial statements. The agreed
purchase price is $840,000 for assets with a net book value of $618,732 at
December 31, 1996. On June 13, 1997, the Company consummated a portion of this
purchase for a price of $430,000, corresponding to assets with a net book value
of $299,374 at December 31, 1996.
F-30
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 11. RELATED PARTY TRANSACTIONS--(CONTINUED)
A law firm owned by a shareholder of the Company received legal fees for
services rendered to the Company during 1994, 1995, 1996 and for the three
months ended March 31, 1997, in the approximate amounts of $131,000, $52,000,
$80,000 and $50,000, respectively.
NOTE 12. SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
The consolidated statements of cash flows do not include the following
noncash investing and financing activities:
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------- --------------------------------
1994 1995 1996 1996 1997
---------- ------------- --------------- ------------- ----------------
Acquisitions:
Tangible and intangible
assets acquired ......... $ -- $ 248,666 $ 8,497,841 $ 219,343 $ 24,242,375
Liabilities assumed ......... -- (4,885) (146,991) -- (54,455)
Debt issued ............... -- (123,407) (6,401,255) (84,752) (3,627,920)
--------- ---------- ------------ ---------- -------------
Cash paid .................. $ -- $ 120,374 $ 1,949,595 $ 134,591 $ 20,560,000
========= ========== ============ ========== =============
Increase in property and
equipment and long-term
debt, primarily capitalized
leases ..................... $311,741 $ 55,926 $ 7,370,322 $ -- $ --
========= ========== ============ ========== =============
Debt to shareholders for
distributions and amounts
in connection with the
Reorganization ............ $ -- $ -- $ 967,150 $ -- $ 1,745,000
========= ========== ============ ========== =============
Increase in line of credit
due to retirement of
long-term debt-other ...... $405,110 $ -- $ -- $ -- $ --
========= ========== ============ ========== =============
Shareholders' contribution
to additional paid-in
capital in connection with
the Reorganization ......... $ -- $ -- $ -- $ -- $ 4,300,000
========= ========== ============ ========== =============
F-31
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 13. UNAUDITED PRO FORMA DATA
Pro forma net income includes adjustments made to historical net income
for pro forma income taxes computed as if the Company had been fully subject to
federal and applicable state income taxes. The pro forma weighted average
shares outstanding (6,821,317 for the years ended December 31, 1994, 1995 and
1996 and 7,187,792 for the three months ended March 31, 1997) used to calculate
adjusted pro forma earnings per share includes (a) the 5,993,666 shares of
common stock issued in connection with the Reorganization, (b) all outstanding
options and warrants to purchase common stock calculated using the treasury
stock method and an assumed offering price of $15.00 per share, as if all such
options and warrants had been outstanding for all periods presented (457,579
for the years ended December 31, 1994, 1995 and 1996 and 980,307 for the three
months ended March 31, 1997) and (c) for the periods prior to the
Reorganization, the equivalent number of shares (370,072 for the years ended
December 31, 1994, 1995 and 1996 and 213,819 for the three months ended March
31, 1997) of common stock represented by the shares of common stock of the
Subsidiaries purchased from certain shareholders for cash and notes in the
Reorganization. See Note 1.
F-32
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro forma Consolidated Statements of Income for
the year ended December 31, 1996 and the three months ended March 31, 1997
include the Company's historical results of operations, adjusted to reflect (a)
the 1996 Acquisitions and 1997 Acquisitions (see Note 1 for the acquired
businesses included); (b) the elimination of the amount of compensation expense
for the Company's three principal shareholders and its president and chief
executive officer (who is also a shareholder) which is in excess of the
compensation for such individuals subsequent to the Reorganization and the
elimination of the amount of compensation expense for the former owners of the
1996 Acquisitions and 1997 Acquisitions which is in excess of the compensation
for such individuals subsequent to the Acquisitions; (c) the distributions to
shareholders, the purchase of shares of common stock of the Subsidiaries from
certain shareholders and the contribution to capital by shareholders, each of
which occurred in connection with the Reorganization; (d) the issuance of the
Senior Notes and Warrants; and (e) the sale by the Company of the 3,000,000
shares of Common Stock offered hereby at an assumed offering price of $15.00
per share and the application of the net proceeds therefrom, as if all such
events and transactions had occurred as of January 1, 1996. In addition, income
taxes were computed as if the Company and the 1996 Acquisitions and the 1997
Acquisitions had been fully subject to federal and applicable state income
taxes as of January 1, 1996.
The Unaudited Pro Forma Consolidated Financial Information is not
necessarily indicative of the results that would have occurred if the events
and transactions referred to above had occurred on January 1, 1996 or which may
be realized in the future. The Unaudited Pro Forma Consolidated Financial
Information should be read in conjunction with the historical financial
statements and the notes thereto included elsewhere in this Prospectus.
F-33
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
-------------------------------
ACQUIRED PRO FORMA
COMPANY BUSINESSES(1) ADJUSTMENTS
--------------- --------------- ------------------
Net revenues .............................. $ 280,171 $ 65,743 $ 827(2)
Cost of revenues ........................... 242,102 49,457 (827)(2)
------------ --------
Gross profit .............................. 38,069 16,286
Selling, general and administrative expenses:
Shareholders' compensation ............... 2,321 1,806 (3,757)(3)
Amortization of intangible assets ......... 424 1,925(4)
Other selling, general and administrative
expenses ................................. 29,841 11,351 168(4)
------------ --------
Operating income ........................... 5,483 3,129
Interest expense (income) .................. 2,175 376 5,827(5)
Other expense (income) ..................... 1,448 (531) 500(6)
------------ --------
Income before provision (benefit) for
income taxes .............................. 1,860 3,284
Pro forma provision (benefit) for
income taxes .............................. 757(7) (516)(8)
------------ -------------
Pro forma net income ..................... $ 1,103 $ 3,284 $ 5,043
============ ======== =============
Pro forma weighted average common shares
outstanding .............................. 6,821(9)
============
Pro forma earnings per share ............... $ 0.16
============
OFFERING SUPPLEMENTAL
PRO FORMA ADJUSTMENTS (11) PRO FORMA
------------------ ------------------ ------------------
Net revenues .............................. $ 345,087 $ 345,087
Cost of revenues ........................... 290,732 290,732
------------- -------------
Gross profit .............................. 54,355 54,355
Selling, general and administrative expenses:
Shareholders' compensation ............... 370 370
Amortization of intangible assets ......... 2,349 2,349
Other selling, general and administrative
expenses ................................. 41,360 41,360
------------- -------------
Operating income ........................... 10,276 10,276
Interest expense (income) .................. 8,378 $ (6,080) 2,298
Other expense (income) ..................... 1,417 1,417
------------- -------------
Income before provision (benefit) for
income taxes .............................. 481 6,561
Pro forma provision (benefit) for
income taxes .............................. 241 2,288 2,529
------------- --------- -------------
Pro forma net income ..................... $ 240 $ (4,129) $ 4,032
============= ========= =============
Pro forma weighted average common shares
outstanding .............................. 7,687(10) 10,687(11)
============= =============
Pro forma earnings per share ............... $ .03 $ .38
============= =============
See notes to unaudited pro forma statements of income.
F-34
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
---------------------------------
ACQUIRED PRO FORMA
COMPANY BUSINESSES (1) ADJUSTMENTS
---------------- ---------------- ----------------
Net revenues .............................. $ 85,374 $ 10,494 $ 100(2)
Cost of revenues ........................... 74,239 8,026 (100)(2)
----------- --------
Gross profit .............................. 11,135 2,468
Selling, general and administrative expenses:
Shareholders' compensation ............... 292 168 (429)(3)
Amortization of intangible assets ......... 330 -- 266(4)
Other selling, general and administrative
expenses ................................. 9,938 2,057 58(4)
----------- --------
Operating income ........................... 575 243
Interest expense (income) .................. 1,327 24 889(5)
Other expense (income) ..................... (1,952) (39)
----------- --------
Income before provision (benefit) for
income taxes .............................. 1,200 258
Pro forma provision (benefit) for
income taxes .............................. (407)(7) 166(8)
----------- -----------
Pro forma net income ..................... $ 1,607 $ 258 $ 950
=========== ======== ===========
Pro forma weighted average common shares
outstanding .............................. 7,188(9)
===========
Pro forma earnings per share ............... $ .22
===========
OFFERING SUPPLEMENTAL
PRO FORMA ADJUSTMENTS (11) PRO FORMA
----------------- ------------------ ------------------
Net revenues .............................. $ 95,768 $ 95,768
Cost of revenues ........................... 82,165 82,165
------------ -------------
Gross profit .............................. 13,603 13,603
Selling, general and administrative expenses:
Shareholders' compensation ............... 31 31
Amortization of intangible assets ......... 596 596
Other selling, general and administrative
expenses ................................. 12,053 12,053
------------ -------------
Operating income ........................... 923 923
Interest expense (income) .................. 2,240 $ (1,652) 588
Other expense (income) ..................... (1,991) 1,883(12) (108)
------------ -------------
Income before provision (benefit) for
income taxes .............................. 674 443
Pro forma provision (benefit) for
income taxes .............................. (241) 415 174
------------ ------------- -------------
Pro forma net income ..................... $ 915 $ 646 $ 269
============ ============= =============
Pro forma weighted average common shares
outstanding .............................. 7,687(10) 10,687(11)
============ =============
Pro forma earnings per share ............... $ .12 $ .03
============ =============
See notes to unaudited pro forma statements of income.
F-35
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF INCOME
NOTE 1
Includes the historical results of operations of the 1996 Acquisitions and
1997 Acquisitions from January 1, 1996 to the date of acquisition. All of such
acquisitions have been accounted for as purchases, and consist of the
following:
DATE OF ACQUISITION PURCHASE PRICE
--------------------- ---------------
1996 ACQUISITIONS:
LL Corps., Inc. ................................. March 15, 1996 $ 84,752
Payray, Inc. and Tri-Temps, Inc. .................. April 1, 1996 4,922,745
CST Services Inc. ................................. May 6, 1996 1,592,000
Temp Aid, Inc. .................................... June 10, 1996 15,322
Kesi, Inc. ....................................... September 30, 1996 160,660
1997 ACQUISITIONS:
Laporte Enterprises, Inc. ........................ February 14, 1997 1,300,000
Apex, Inc. ....................................... February 21, 1997 1,000,000
Standby Personnel of Colorado Springs, Inc. ...... February 24, 1997 3,090,302
Staff Net, Inc. ................................. February 24, 1997 308,333
Staff Management, Inc. ........................... March 3, 1997 3,970,997
Superior Temporaries, Inc. ........................ March 3, 1997 9,000,000
Stand-By, Inc. .................................... March 31, 1997 5,444,437
The terms of the above acquisitions are discussed in Note 2 to the
Company's consolidated financial statements. The agreements for certain
acquisitions contain provisions for contingent payments of additional purchase
price based on the net revenues, gross margin or income before income taxes of
the acquired businesses over periods of two years after the acquisition. Should
the contingent payments be made, they would be recorded as additional purchase
price and increase the amount of goodwill. The above purchase prices have been
adjusted to reflect imputed interest on acquisition financing.
NOTE 2
To eliminate revenues of the company and (i) related expenses and costs of
Payray, Inc. and Tri-Temps, Inc., LL Corps., Inc., Temp Aid, Inc., Kesi, Inc.,
Laporte Enterprises, Inc. and Superior Temporaries, Inc. related to franchise
royalties and (ii) expenses and costs of Laporte Enterprises, Inc. related to
funding fees, for services provided by the Company to these acquired
businesses, which were franchisees prior to their acquisition.
NOTE 3
To (i) eliminate the amount of compensation for the Company's three
principal shareholders and its president and chief executive officer (who is
also a shareholder) which is in excess of the compensation for such individuals
subsequent to the Reorganization, and (ii) to reflect a reduction in expenses
for the amount of compensation and other expenses of the former owners of the
1996 Acquisitions and 1997 Acquisitions that was discontinued after such
acquisitions occurred. The discontinued amounts represent estimated amounts in
excess of the average compensation for a person performing similar duties on an
ongoing basis.
F-36
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF INCOME--(CONTINUED)
NOTE 4
To reflect additional depreciation and amortization of the assets
purchased in the 1996 Acquisitions and 1997 Acquisitions. The following table
summarizes the values assigned to the assets acquired and the weighted average
amortization or depreciation periods.
WEIGHTED AVERAGE
AMORTIZATION OR
AMOUNT DEPRECIATION PERIODS
------------ ---------------------
Tangible assets, primarily equipment ...... $ 935,807 5 years
Identifiable intangible assets:
Covenants not to compete .................. 1,202,841 9.4 years
Customer lists ........................... 4,395,981 5.5 years
Employee lists ........................... 155,049 .2 year
Goodwill ................................. 24,199,870 32.7 years
------------
$30,889,548
============
The costs of each acquisition have been allocated to the assets acquired
and liablilities assumed based on their fair values at the date of acquisition
as determined by management with the assistance of an independent valuation
consultant. The allocation of the costs of acquisition for the 1997
Acquisitions is preliminary while the Company obtains final information
regarding the fair values of all assets acquired; however, management believes
that any adjustments to the amounts allocated will not have a material effect
on the Company's financial position or results of operations.
NOTE 5
To adjust for the additional interest and amortization expense for
indebtedness incurred (a) to pay the purchase price and acquisition costs and
to provide working capital for the 1996 Acquisitions and 1997 Acquisitions; and
(b) to pay the distributions to shareholders and the consideration for the
purchase of shares of common stock of the Subsidiaries from certain
shareholders, each of which occurred in connection with the Reorganization. The
following is a summary of the additional interest and amortization expense:
INTEREST YEAR ENDED THREE MONTHS ENDED
RATES DECEMBER 31, 1996 MARCH 31, 1997
---------- ------------------- -------------------
ADDITIONAL INTEREST EXPENSE
Notes due to sellers:
1996 Acquisitions ................................. 7 - 14% $ 147,781 $ --
1997 Acquisitions ................................. 12% 393,848 27,919
Borrowings under line of credit and
Revolving Credit Facility ........................ 8.75% 975,169 90,989
Senior Notes ....................................... 11% 2,750,000 428,215
----------- ---------
4,266,798 547,123
ADDITIONAL AMORTIZATION EXPENSE
Discount on Senior Notes ........................... 1,259,559 262,945
Debt issuance costs, Senior Notes .................. 300,794 45,183
Debt issuance costs, Revolving Credit Facility . -- 33,427
----------- ---------
$5,827,151 $888,678
=========== =========
F-37
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF INCOME--(CONTINUED)
NOTE 6
To eliminate life insurance proceeds for a key officer of Stand-By, Inc.
NOTE 7
To reflect income taxes computed as if the Company had been fully subject
to federal and applicable state income taxes. The Company recognized a one-time
tax benefit of $385,693, as a result of the termination at the time of
Reorganization of the Subsidiaries' elections to be treated as S corporations,
that is not reflected in these proforma statements.
NOTE 8
To adjust for the effects of income taxes on (a) the historical earnings
of the 1996 Acquisitions and the 1997 Acquisitions, all of which (except
Stand-By, Inc.) were S corporations prior to acquisition, as if they had been
fully subject to federal and applicable state income taxes and (b) the effect
of the pro forma adjustments.
NOTE 9
Pro forma shares outstanding consist of the following:
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
------------------- -------------------
Shares issued in the Reorganization, weighted for the
equivalent shares representing the Subsidiaries'
common stock purchased in connection with the
Reorganization on February 21, 1997 .................. 6,363,738 6,207,485
Effects of options and warrants to purchase common
stock, calculated using the treasury stock method and
an assumed offering price of $15.00 per share, as if
they had been outstanding for the entire period ...... 457,579 980,307
---------- ----------
Total outstanding shares .............................. 6,821,317 7,187,792
========== ==========
NOTE 10
To reflect the effect on outstanding shares of the purchase of shares of
common stock of the Subsidiaries from certain shareholders in the
Reorganization and the issuance of the Warrants as if both transactions had
occurred as of January 1, 1996.
NOTE 11
To adjust for the effects of the sale by the Company of the 3,000,000
shares of Common Stock offered hereby at an assumed offering price of $15.00
per share and the reduced interest and other debt related expenses, net of
income taxes, as a result of the application of the net proceeds therefrom to
retire (a) the balance of the Senior Notes in full, (b) a portion of the
outstanding indebtedness under the Revolving Credit Facility, (c) various
promissory notes due to certain existing shareholders of the
F-38
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF INCOME--(CONTINUED)
NOTE 11--(CONTINUED)
Company, their family members and an executive officer of the Company, and (d)
various promissory notes issued in connection with certain acquisitions. The
retirement of the Senior Notes will also result in an extraordinary loss of
$13,868,205, net of a $6,880,194 income tax benefit, which is not reflected in
the supplemental pro forma net income.
NOTE 12
To reverse income arising from a put warrants valuation adjustment
included in the Company's historical results for the three months ended March
31, 1997, which decreased supplemental pro forma earnings per share by $0.10
per share.
The holders of the warrants have a put right, as a result of which the
Company recorded a liability at the time of the issuance of the warrants based
on their fair value. Until the Offering is consummated, the Company will adjust
this liability to fair value at the end of each accounting period. Based on an
assumed offering price of $15.00 per share and the consummation of this
Offering prior to September 30, 1997, these put warrants valuation adjustments
will result in non-operating expenses in the second and third quarters of 1997
totaling $5,771,348 ($5,144,080 net of income tax benefit).
Although this pro forma data was prepared assuming the issuance of the put
warrants as of January 1, 1996, these statements do not contain a put warrants
valuation adjustment for the year ended December 31, 1996 and the put warrant
valuations adjustment included in the pro forma results for the three months
ended March 31, 1997 (and eliminated in arriving at the supplemental pro forma
results) is the adjustment based on the actual warrant issuance date of
February 21, 1997.
F-39
INDEPENDENT AUDITORS' REPORT
Payray, Inc. and Tri-Temps, Inc.:
We have audited the combined balance sheet of Payray, Inc. and Tri-Temps,
Inc. (the "Company") as of December 31, 1995, and the related combined
statements of operations and retained earnings and of cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of Payray, Inc. and Tri-Temps, Inc.
as of December 31, 1995, and the results of their operations and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Chicago, Illinois
March 29, 1996
F-40
PAYRAY, INC. AND TRI-TEMPS, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1995
ASSETS
CURRENT ASSETS:
Trade accounts receivable less allowance for doubtful accounts of $90,000 ... $ 925,576
PROPERTY AND EQUIPMENT, net ................................................ 55,054
DEPOSITS .................................................................. 287,145
-----------
TOTAL ASSETS ............................................................... $1,267,775
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft ............................................................ $ 77,351
Accounts payable ......................................................... 107,638
Accrued expenses ......................................................... 381,487
Line of credit ............................................................ 640,000
-----------
Total current liabilities ................................................ 1,206,476
-----------
COMMITMENTS AND CONTINGENCIES (NOTE 5, 7)
STOCKHOLDERS' EQUITY:
Common stock, no par value, 20,000 shares authorized, 2,000 shares issued and
outstanding ............................................................... 2,000
Retained earnings ......................................................... 59,299
-----------
Total stockholders' equity ............................................. 61,299
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. $1,267,775
===========
See notes to combined financial statements.
F-41
PAYRAY, INC. AND TRI-TEMPS, INC.
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1995
NET REVENUES ................................. $ 7,141,948
COST OF REVENUES .............................. 5,784,631
------------
TOTAL GROSS PROFIT .............................. 1,357,317
------------
OPERATING EXPENSES:
Stockholder's compensation .................. 264,818
Office rent paid to stockholder ............... 61,650
Other general and administrative ............ 1,224,727
------------
Total operating expenses ..................... 1,551,195
------------
OPERATING LOSS ................................. (193,878)
OTHER EXPENSE:
Interest expense ........................... 38,268
------------
NET LOSS ....................................... (232,146)
RETAINED EARNINGS, Beginning of the year ...... 291,445
------------
RETAINED EARNINGS, End of the year ............ $ 59,299
============
See notes to combined financial statements.
F-42
PAYRAY, INC. AND TRI-TEMPS, INC.
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (232,146)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Allowance for doubtful accounts ................................................ 31,029
Depreciation and amortization ................................................... 15,275
Change in assets and liabilities:
Accounts receivable--net ................................................... 20,129
Deposits ..................................................................... (232,127)
Accounts payable and accrued expenses ....................................... 364,191
-----------
Net cash flows used in operating activities ................................. (33,649)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......................................... (32,105)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in cash overdraft ...................................................... 22,174
Net borrowings under the line of credit ....................................... 43,580
-----------
Net cash flows provided by financing activities .............................. 65,754
-----------
NET CHANGE IN CASH ............................................................... $ -0-
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................................ $ 38,268
===========
See notes to combined financial statements.
F-43
PAYRAY, INC. AND TRI-TEMPS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Payray, Inc and Tri-Temps, Inc. (the "Companies") are
Illinois corporations, which provide temporary industrial staffing services in
eight regions throughout Illinois and Wisconsin.
BASIS OF PRESENTATION: The accompanying combined financial statements
present the financial position, results of operations and cash flows of the
Companies. The Companies have common ownership and management. All significant
intercompany balances and transactions are eliminated in combination.
USE OF ESTIMATES: The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets,
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expense during
the reporting period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. The
Companies provide for depreciation of leasehold improvements using the
straight-line method over the remaining lease term. All other property and
equipment are depreciated using the double declining balance method over the
estimated useful lives of the related assets which range from 5 to 7 years.
DEPOSITS: Deposits consist of loss collateral deposits paid to an
insurance company for pending workers' compensation claims.
INCOME TAXES: The Companies have elected to be treated as S corporations
under the provisions of the Internal Revenue Code. The taxable income of the
Companies is directly taxable to the stockholder for federal tax purposes and
the stockholder is responsible for the payment of income taxes thereon. The
Companies are subject to the Illinois replacement tax. No allowance for such
tax has been made at December 31, 1995 as each Company reported a loss.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of financial
instruments included in current assets and liabilities approximates fair values
due to the short-term maturities of these instruments.
REVENUE RECOGNITION: Revenues are recognized when the related service is
performed net of provision for credits and allowances.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Furniture, fixtures and equipment $23,075
Vehicles 24,669
Leasehold improvements 29,590
--------
Total 77,334
Less accumulated depreciation and amortization 22,280
--------
Property and equipment--net $55,054
========
NOTE 3. LINE OF CREDIT
The Companies maintain a line of credit for $750,000 collateralized by
accounts receivable and fixed assets and bearing interest at prime plus .25%
(8.75% at December 31, 1995). Borrowings are limited to 75% of trade accounts
receivable. Borrowings under the line of credit amounted to $640,000 at
December 31, 1995.
F-44
PAYRAY, INC. AND TRI-TEMPS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. ACCRUED EXPENSES
Accrued expenses consist of:
Workers' compensation ...... $221,012
Payroll ..................... 84,477
Royalties .................. 42,170
Other ..................... 33,828
---------
$381,487
=========
NOTE 5. LEASE COMMITMENTS
The Companies lease office facilities and certain office equipment under
operating leases which expire through 2003. Three office facilities are leased
from the principal stockholder of the Companies (see Note 6). The following is
a schedule of future minimum annual rental commitments required under
noncancelable operating leases as of December 31, 1995 including $362,700 on
leases with the stockholder:
1996 ............ $ 80,022
1997 ............ 65,457
1998 ............ 54,525
1999 ............ 48,901
Thereafter ...... 175,500
---------
Total ............ $424,405
=========
Rent expense was $51,650 for the year ending December 31, 1995, including
$32,200 on leases with the stockholder.
NOTE 6. RELATED PARTY TRANSACTIONS
Operating expenses include amounts paid to or on behalf of the stockholder
as follows:
Management fees to stockholder ............... $ 180,752
Expenses paid on behalf of stockholder ...... 79,666
Rent paid for office locations ............... 61,650
Other ....................................... 4,400
NOTE 7. CONTINGENCIES
The Companies are subject to legal proceedings and claims which have
arisen in the ordinary course of their businesses. These actions, when
ultimately concluded and determined, will not, in the opinion of management,
have a material adverse effect on the financial positions of the Companies.
NOTE 8. SUBSEQUENT EVENT
On February 23, 1996 the Companies signed a letter of intent to sell its
business and certain assets to a subsidiary of OutSource International, Inc.
The sale was subsequently consummated.
F-45
INDEPENDENT AUDITORS' REPORT
CST Services Inc.:
We have audited the accompanying balance sheets of CST Services Inc. as of
December 31, 1994 and 1995, and the related statements of income, stockholder's
equity, and cash flows for each of the two years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of CST Services Inc. as of December 31, 1994
and 1995, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 4 to the financial statements, the Company has sold
its business and certain assets to a subsidiary of OutSource International,
Inc.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Boston, Massachusetts
April 18, 1996, except as to Note 4 for which the date is May 6, 1996
F-46
CST SERVICES INC.
BALANCE SHEETS
DECEMBER 31, MARCH 30,
----------------------------- ------------
1994 1995 1996
------------- ------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash ............................................. $ 500,720 $ 531,376 $ 554,195
Trade accounts receivable, net of allowance for
doubtful accounts of $3,000 at December 31, 1995
and March 30, 1996 .............................. 263,525 314,696 323,105
Prepaid and other assets ........................ 21,707 51,827 49,848
--------- --------- ---------
Total current assets ........................... 785,952 897,899 927,148
--------- --------- ---------
EQUIPMENT:
Office equipment ................................. 13,342 13,342 15,382
Accumulated depreciation ........................ (3,933) (7,627) (8,523)
--------- --------- ---------
Equipment, net ................................. 9,409 5,715 6,859
--------- --------- ---------
$ 795,361 $ 903,614 $ 934,007
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and other ........................ $ 14,190 $ 7,665 $ 6,043
Accrued payroll expenses ........................... 176,317 112,114 118,977
Accrued workers' compensation expense ............ 54,586 95,489 101,531
Accrued professional fees ........................ 25,000 40,000 46,000
--------- --------- ---------
Total current liabilities ........................ 270,093 255,268 272,551
--------- --------- ---------
CONTINGENCY (NOTE 3)
STOCKHOLDER'S EQUITY
Common stock, no par value:
Authorized, 200,000 shares; issued and outstanding,
100 shares .................................... 8,500 8,500 8,500
Retained earnings ................................. 516,768 639,846 652,956
--------- --------- ---------
Total stockholder's equity ..................... 525,268 648,346 661,456
--------- --------- ---------
$ 795,361 $ 903,614 $ 934,007
========= ========= =========
See notes to financial statements.
F-47
CST SERVICES INC.
STATEMENTS OF INCOME
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, ------------------------
APRIL 1, MARCH 30,
1994 1995 1995 1996
------------ ------------ ---------- -----------
(UNAUDITED)
NET REVENUES ........................... $3,684,244 $4,421,992 $901,761 $1,047,081
----------- ----------- --------- -----------
COST OF REVENUES:
Payroll .............................. 2,318,455 2,814,776 585,024 667,238
Payroll taxes ........................ 313,448 367,658 75,815 84,469
Workers' compensation insurance ...... 153,328 232,651 43,875 71,906
----------- ----------- --------- -----------
Total cost of revenues ............ 2,785,231 3,415,085 704,714 823,613
----------- ----------- --------- -----------
GROSS PROFIT ........................... 899,013 1,006,907 197,047 223,468
----------- ----------- --------- -----------
OPERATING EXPENSES ..................... 488,667 520,680 117,230 126,202
----------- ----------- --------- -----------
OTHER INCOME:
Placement fees ..................... 35,660 8,850 2,250 2,000
Interest income ..................... 2,595 3,997 814 794
----------- ----------- --------- -----------
Total other income .................. 38,255 12,847 3,064 2,794
----------- ----------- --------- -----------
NET INCOME ........................... $ 448,601 $ 499,074 $ 82,881 100,060
=========== =========== ========= ===========
See notes to financial statements.
F-48
CST SERVICES INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON RETAINED
STOCK EARNINGS
-------- --------------
BALANCE, JANUARY 1, 1994 ........................ $8,500 $ 173,491
Distributions to stockholder .................. -- (105,324)
Net income .................................... -- 448,601
------- -----------
BALANCE, DECEMBER 31, 1994 ..................... 8,500 516,768
Distributions to stockholder .................. -- (375,996)
Net income .................................... -- 499,074
------- -----------
BALANCE, DECEMBER 31, 1995 ..................... 8,500 639,846
Distributions to stockholder (unaudited) ...... -- (86,950)
Net income (unaudited) ........................ -- 100,060
------- -----------
BALANCE, MARCH 30, 1996 (UNAUDITED) ............ $8,500 $ 652,956
======= ===========
See notes to financial statements.
F-49
CST SERVICES INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, ---------------------------
------------------------------ APRIL 1, MARCH 30,
1994 1995 1995 1996
-------------- ------------- ----------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 448,601 $ 499,074 $ 82,881 $ 100,060
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ....................................... 2,639 3,694 923 896
Increase (decrease) arising from working
capital items:
Accounts receivable .............................. (135,865) (51,171) 14,987 (8,409)
Prepaids and other assets ........................ (20,349) (30,120) (1,397) 1,979
Accounts payable and other ..................... 9,413 (6,525) (10,246) (1,622)
Accrued payroll ................................. 101,902 (64,203) (69,095) 6,863
Accrued workers' compensation .................. 14,086 40,903 29,140 6,042
Accrued professional fees ........................ 7,000 15,000 5,500 6,000
----------- ---------- --------- ----------
Net cash provided by operating activities ...... 427,427 406,652 52,693 111,809
----------- ---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of office equipment ..................... (6,679) -- -- (2,040)
----------- ---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loan from stockholder .................. (10,200) -- -- --
Distributions to stockholder ........................ (105,324) (375,996) (48,000) (86,950)
----------- ---------- --------- ----------
Net cash used for financing activities ......... (115,524) (375,996) (48,000) (86,950)
----------- ---------- --------- ----------
NET INCREASE IN CASH ................................. 305,224 30,656 4,693 22,819
CASH, BEGINNING OF YEAR .............................. 195,496 500,720 500,720 531,376
----------- ---------- --------- ----------
CASH, END OF YEAR .................................... $ 500,720 $ 531,376 $505,413 $ 554,195
=========== ========== ========= ==========
See notes to financial statements.
F-50
CST SERVICES INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 30, 1996 AND THE THREE MONTHS ENDED APRIL 1,
1995 AND MARCH 30, 1996 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - CST Services Inc. (the "Company") is a Massachusetts
corporation which provides temporary light industrial and clerical staffing
services.
UNAUDITED INTERIM FINANCIAL STATEMENTS - The interim financial statements
and the related information in the notes as of March 30, 1996 and for the three
months ended April 1, 1995 and March 30, 1996 are unaudited. Such interim
financial statements have been prepared on the same basis as the audited
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.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets,
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expense during
the reporting period. Actual results could differ from these estimates.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. The
Company provides for depreciation using the straight-line method over the
estimated useful lives of the related assets which range from 3 to 5 years.
INCOME TAXES - The Company has elected to be treated as an S corporation
under the provisions of the Internal Revenue Code. The Company is subject to
Massachusetts excise tax based on the Company's net worth. These amounts have
been recorded as operating expenses in the financial statements. The taxable
income of the Company is directly taxable to the stockholder for federal and
state tax purposes and the stockholder is responsible for the payment of income
taxes thereon.
REVENUE RECOGNITION - All revenues are recognized as the related service
is performed net of provision for credits and allowances.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of the accounts
receivable and accounts payable balances approximate their fair values.
NOTE 2. OFFICE SPACE
The Company rents office space on a month-to-month basis. Total rent
expense amounted TO $8,600 in 1994 and $9,600 in 1995.
NOTE 3. CONTINGENCY
As of December 31, 1995 there is a disagreement between the Company and
its former insurance carrier relating to premiums paid under a general
liability insurance policy for the year ended December 1994. The insurance
carrier has asserted that the Company owes additional premiums in the amount of
$48,000, plus accrued interest on this amount. The Company is attempting to
settle this
F-51
CST SERVICES INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 30, 1996 AND THE THREE MONTHS ENDED APRIL 1,
1995 AND MARCH 30, 1996 IS UNAUDITED)
NOTE 3. CONTINGENCY--(CONTINUED)
matter out-of-court. In the event that the matter proceeds to litigation, the
likelihood of an unfavorable outcome cannot be predicted and, accordingly, an
accrual for this matter has not been provided for in the accompanying financial
statements.
NOTE 4. SUBSEQUENT EVENT
On May 6, 1996, the Company signed an agreement to sell its business and
certain assets to a subsidiary of OutSource International, Inc. for a purchase
price of $1,780,000. The price is comprised of $1,200,000 in cash, a $200,000
note to be paid in two annual installments plus interest of 7% per annum, and
annual contingent payments, not to exceed $380,000, based upon net income of
the Company for two years following the acquisition.
F-52
INDEPENDENT AUDITORS' REPORT
Standby Personnel of Colorado Springs, Inc.:
We have audited the accompanying balance sheet of Standby Personnel of
Colorado Springs, Inc. (the "Company") as of December 31, 1996, and the related
statements of income, stockholder's equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Standby Personnel of
Colorado Springs, Inc. at December 31, 1996, and the results of its operations
and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Denver, Colorado
June 6, 1997
F-53
STANDBY PERSONNEL OF COLORADO SPRINGS, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
CURRENT ASSETS:
Cash ................................................ $139,461
Trade accounts receivable, net of allowance for
doubtful accounts of $15,000 ..................... 429,000
---------
Total current assets .............................. 568,461
PROPERTY AND EQUIPMENT, net ........................ 147,698
OTHER ASSETS ....................................... 11,138
---------
TOTAL ASSETS ....................................... $727,297
=========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable .................................... $ 4,954
Accrued compensation .............................. 24,806
Note payable ....................................... 5,534
---------
Total current liabilities ........................ 35,294
=========
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDER'S EQUITY:
Common stock, $1 par value, 50,000 shares authorized,
10,000 shares issued and outstanding ............ 10,000
Additional paid-in capital ........................ 8,384
Retained earnings ................................. 673,619
---------
Total stockholder's equity ........................ 692,003
---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ......... $727,297
=========
See notes to financial statements.
F-54
STANDBY PERSONNEL OF COLORADO SPRINGS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
NET REVENUES ............................................... $5,346,882
-----------
COST OF REVENUES:
Payroll ................................................... 3,137,746
Taxes ...................................................... 269,270
Workers' compensation and insurance ........................ 176,993
Other ...................................................... 47,643
-----------
Total cost of revenues ................................. 3,631,652
-----------
GROSS PROFIT ................................................ 1,715,230
-----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Stockholder compensation ................................. 235,636
Other selling, general and administrative expenses ......... 866,801
-----------
Total selling, general and administrative expenses ...... 1,102,437
-----------
OPERATING INCOME .......................................... 612,793
-----------
OTHER INCOME:
Interest income .......................................... 15,179
Gain on sale of equipment ................................. 527
-----------
Total other income ....................................... 15,706
-----------
NET INCOME ................................................ 628,499
===========
See notes to financial statements.
F-55
STANDBY PERSONNEL OF COLORADO SPRINGS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1996
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------- --------- ------------ -------------- --------------
BALANCE, JANUARY 1, 1996 ......... 10,000 $10,000 $8,384 $ 838,274 $ 856,658
Distributions to stockholder ...... -- -- -- (793,154) (793,154)
Net income ........................ -- -- -- 628,499 628,499
------- -------- ------- ----------- -----------
BALANCE, DECEMBER 31, 1996 ......... 10,000 $10,000 $8,384 $ 673,619 $ 692,003
======= ======== ======= =========== ===========
See notes to financial statements.
F-56
STANDBY PERSONNEL OF COLORADO SPRINGS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................... $ 628,499
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................... 60,179
Amortization .................................... 1,653
Gain on sale of equipment ........................ (527)
Changes in operating assets and liabilities:
Trade accounts receivable ........................ 331,523
Other assets .................................... 212
Accounts payable ................................. (18,978)
Accrued compensation ........................... 12,016
----------
Net cash provided by operating activities ...... 1,014,577
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............... (108,768)
Proceeds from sale of equipment .................. 2,300
----------
Net cash used in investing activities ............ (106,468)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of note payable ........................... (9,402)
Cash distributions ................................. (793,154)
----------
Net cash used in financing activities ......... (802,556)
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ......... 105,553
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...... 33,908
----------
CASH AND CASH EQUIVALENTS, END OF YEAR ............ $ 139,461
==========
See notes to financial statements.
F-57
STANDBY PERSONNEL OF COLORADO SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Standby Personnel of Colorado Springs, Inc. (the
"Company") is in the business of providing temporary employees to construction,
commercial and light industrial companies located in the Colorado Springs
metropolitan area.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents and trade accounts receivable. The Company invests
temporary cash in demand deposits with federally insured financial
institutions. Such deposit amounts at times exceed federally insured limits.
The Company has not experienced any losses in such accounts. The Company's
trade receivables are geographically concentrated in the Colorado Springs
metropolitan area. The Company believes that concentrations of credit risk with
respect to receivables are limited due to the large number of customers and
generally short payment terms.
USE OF ESTIMATES - The preparation of the Company's financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements. Actual results could differ from those estimates.
REVENUE RECOGNITION - All revenues are recognized as the related service
is performed, net of provision for credits and allowances.
CASH EQUIVALENTS - For purposes of the statement of cash flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost and
depreciated or amortized on an accelerated basis over the estimated useful
service lives of the respective assets. Amortization of property under capital
leases, leasehold improvements and computer software is included in
depreciation expense. The estimated useful lives of property and equipment
range from 3 to 7 years.
LONG-LIVED ASSETS - SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," requires that
long-lived assets and certain identifiable intangibles to be held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Adoption of this statement had no effect on the financial position
or results of operations of the Company for the year ended December 31, 1996.
INCOME TAXES - Effective for the year ended December 31, 1991, the Company
elected to be treated as an S corporation under applicable provisions of the
Internal Revenue Code. Accordingly, any liability for income taxes is the
obligation of the stockholder and no income tax liability has been recorded by
the Company.
WORKER'S COMPENSATION - The Company manages its workers compensation risk
through a premium based insurance policy. The Company is responsible for
payment of premiums only to the insurance carrier and is not obligated to
reimburse its insurance carrier for claim payments.
ADVERTISING - The Company expenses advertising and promotional
expenditures as incurred. Total advertising and promotional expenses was
$15,405 for the year ended December 31, 1996.
F-58
STANDBY PERSONNEL OF COLORADO SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1996:
Furniture, fixtures and equipment ..................... $138,496
Leasehold improvements .............................. 24,053
Vehicles ............................................. 134,691
---------
Property and equipment .............................. 297,240
Less: accumulated depreciation and amortization ...... 149,542
---------
Property and equipment, net ........................... $147,698
=========
Depreciation and amortization for property and equipment amounted to
$61,832 for the year ended December 31, 1996.
NOTE 3. CREDIT AGREEMENT AND NOTE PAYABLE
Pursuant to a revolving line of credit agreement, in effect at December
31, 1996 and expiring April 30, 1997, the Company may borrow from a commercial
bank up to $150,000. The line of credit is secured by accounts receivable and
equipment. At December 31, 1996, no funds are outstanding on the line of
credit.
The Company has a note payable to a commercial bank, payable in monthly
installments of $784 including interest at a rate of 8.5% with final payment of
principal and interest due July 31, 1997. At December 31, 1996, $5,534 is
outstanding on the note payable.
NOTE 4. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company leases four facilities. One of these
facilities is owned by a relative of the sole stockholder. These renewable
lease agreements are classified as operating leases and range in term from two
to five years with renewal rights for additional years. Total rental expense
related to these leases was $45,792 for the year ended December 31, 1996. The
Company is obligated, pursuant to these lease agreements, to pay property taxes
and special assessments during the term of the leases. Future minimum rental
payments under these leases are as follows:
RELATED
TOTAL PARTY OTHER
--------- --------- --------
1997 ...... $53,534 $18,000 $35,534
1998 ...... 33,000 18,000 15,000
1999 ...... 12,000 12,000 --
-------- -------- --------
Total ...... $98,534 $48,000 $50,534
======== ======== ========
NOTE 5. SUBSEQUENT EVENTS
On February 24, 1997, the business and certain assets of the Company were
acquired by a subsidiary of OutSource International, Inc.
F-59
INDEPENDENT AUDITORS' REPORT
Superior Temporaries, Inc.
We have audited the accompanying balance sheets of Superior Temporaries,
Inc. as of December 31, 1995 and 1996, and the related statements of income,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Superior Temporaries, Inc. as of December
31, 1995 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
July 14, 1997
F-60
SUPERIOR TEMPORARIES, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
1995 1996
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 326,839 $ 44,947
Trade accounts receivable, net of allowance for doubtful
accounts of $153,679 in 1995 and 195,475 in 1996 ...... 1,412,246 2,240,034
Notes receivable due from shareholders ............... -- 84,377
Due from related party ................................. 16,778 733
Prepaid expenses and other current assets ............ 25,925 32,540
----------- -----------
Total current assets .............................. 1,781,788 2,402,631
PROPERTY AND EQUIPMENT, net ........................... 425,681 494,533
INTANGIBLE ASSETS, net ................................. 31,311 23,408
OTHER ASSETS .......................................... 74,248 121,878
----------- -----------
Total assets ....................................... $2,313,028 $3,042,450
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 56,285 $ 82,953
Accrued expenses:
Workers' compensation and insurance .................. 507,620 599,778
Other ................................................ 27,473 55,347
Line of credit ....................................... 550,000 589,552
Current maturities of long-term debt .................. 104,151 27,933
Due to related party ................................. 12,046 46,077
----------- -----------
Total current liabilities ........................... 1,257,575 1,401,640
----------- -----------
LONG-TERM DEBT, less current maturities ............... 99,425 73,592
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5) ...............
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 7,500 shares authorized,
600 shares issued and outstanding ..................... 600 600
Additional paid-in capital ........................... 45,400 45,400
Retained earnings .................................... 910,028 1,521,218
----------- -----------
Total shareholders' equity ........................ 956,028 1,567,218
----------- -----------
Total liabilities and shareholders' equity ......... $2,313,028 $3,042,450
=========== ===========
See notes to financial statements.
F-61
SUPERIOR TEMPORARIES, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
--------------- ----------------
Net revenues ................................................ $ 9,794,777 $ 14,048,034
----------- ------------
Cost of revenues:
Payroll ................................................... 5,768,750 8,499,107
Taxes ...................................................... 517,989 730,086
Workers' compensation and insurance ........................ 708,651 853,051
Other ...................................................... 310,132 407,189
----------- ------------
Total cost of revenues ................................. 7,305,522 10,489,433
----------- ------------
Gross profit ............................................. 2,489,255 3,558,601
----------- ------------
Selling, general and administrative expenses:
Shareholders' compensation ................................. 127,422 182,074
Other selling, general and administrative .................. 1,807,427 2,324,763
----------- ------------
Total selling, general and administrative expenses ...... 1,934,849 2,506,837
----------- ------------
Operating income .......................................... 554,406 1,051,764
----------- ------------
Other expense (income):
Interest income .......................................... (8,117) (15,577)
Interest expense .......................................... 58,943 52,378
Other ...................................................... 15,176 (949)
----------- ------------
Total other expense (income) ........................... 66,002 35,852
----------- ------------
Net income ................................................ $ 488,404 $ 1,015,912
=========== ============
See notes to financial statements.
F-62
SUPERIOR TEMPORARIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
-------- ----------- --------------
Balance, January 1, 1995 ............ $600 $42,515 $ 567,624
Capital contributions ............... -- 2,885 --
Distributions to shareholders ...... -- -- (146,000)
Net income ........................ -- -- 488,404
----- -------- ----------
Balance, December 31, 1995 ......... 600 45,400 910,028
Distributions to shareholders ...... -- -- (404,722)
Net income ........................ -- -- 1,015,912
----- -------- ----------
Balance, December 31, 1996 ......... $600 $45,400 $1,521,218
===== ======== ==========
See notes to financial statements.
F-63
SUPERIOR TEMPORARIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 488,404 $ 1,015,912
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............................. 42,921 56,744
Changes in assets and liabilities:
Trade accounts receivables, net ........................... (602,542) (827,788)
Due to related party ....................................... (111,423) 34,031
Prepaid expenses and other current assets .................. (11,443) (6,615)
Other assets ............................................. (55,379) (47,630)
Accounts payable and accrued expenses ..................... 500,336 146,700
----------- -----------
Net cash provided by operating activities ............... 250,874 371,354
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................ (343,293) (109,193)
Other assets ................................................ (11,710) (8,500)
----------- -----------
Net cash used in investing activities ..................... (355,003) (117,693)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit ........................ 550,000 39,552
Capital contributions ....................................... 2,885 --
Notes receivable due from shareholders ..................... -- (84,377)
Due from related party ....................................... (303,225) 16,045
Long-term debt borrowings (repayments) ..................... 146,615 (102,051)
Distributions paid to shareholders ........................... (146,000) (404,722)
----------- -----------
Net cash provided by (used in) financing activities ...... 250,275 (535,553)
----------- -----------
Net increase (decrease) in cash .............................. 146,146 (281,892)
Cash and cash equivalents, beginning of year ............... 180,693 326,839
----------- -----------
Cash and cash equivalents, end of year ..................... $ 326,839 $ 44,947
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash payments for interest ................................. $ 54,039 $ 53,327
=========== ===========
See notes to financial statements.
F-64
SUPERIOR TEMPORARIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Superior Temporaries , Inc. ("Company") provides
flexible industrial staffing services to various clients under the trade name
Labor World, as allowed by franchise agreements between the Company and
OutSource Franchising, Inc. The Company provides these services through ten
Company-owned locations.
A summary of the Company's significant accounting policies follows:
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION: All revenues are recognized as the related service
is performed, net of provision for credits and allowances.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments purchased with an original maturity date of three months or less to
be cash equivalents.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost and
depreciated or amortized on a straight-line basis over the estimated useful
service lives of the respective assets. Leasehold improvements are stated at
cost and amortized over the shorter of the term of the lease or estimated
useful life of the improvement. Amortization of leasehold improvements is
included in depreciation expense. The estimated useful lives of property and
equipment range from 3 to 7 years.
LONG-LIVED ASSETS: Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS 121 requires that impairments, measured using fair market value, are
recognized whenever events or changes in circumstances indicate that the
carrying amount of long-lived assets may not be recoverable and the future
undiscounted cash flows attributed to the assets are less than their carrying
values. Adoption of this statement did not have a material effect on the
Company's financial statements.
INTANGIBLE ASSETS: The Company has customer lists that are being
amortized on a straight line basis over five years. Accumulated amortization
was $69,767 and $86,170 as of December 31, 1995 and 1996, respectively.
INCOME TAXES: The Company has elected to be treated as an S corporation
and, as such, all of its income is taxed directly to its shareholders for
federal income tax purposes. Therefore, no provision or liability for income
taxes has been included in these financial statements.
WORKERS' COMPENSATION: The Company manages its workers compensation risk
through a loss sensitive insurance policy. The Company is obligated to
reimburse its insurance carriers for claim payments up to a maximum of $250,000
per occurrence as well as for certain fixed and variable expenses. Provisions
for expected future payments are accrued based on the Company's estimate of its
aggregate liability for all open claims and claims incurred but not reported.
F-65
SUPERIOR TEMPORARIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
ADVERTISING: The Company expenses advertising and promotional
expenditures as incurred. Total advertising and promotional expenses were
$17,007 and $27,685 for the years ended December 31, 1995 and 1996,
respectively.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1995 1996
---------- ---------
Land ................................................... $ 81,850 $ 81,850
Buildings .......................................... 277,804 326,805
Furniture, fixtures and equipment .................. 84,994 123,773
Leasehold improvements .............................. 6,126 29,386
--------- ---------
Property and equipment .............................. 450,774 561,814
Less accumulated depreciation and amortization ...... 25,093 67,281
--------- ---------
Property and equipment, net ........................ $425,681 $494,533
========= =========
Depreciation expense, including amortization of leasehold improvements,
was $17,248 and $42,188 for the years ended December 31, 1995 and 1996,
respectively.
NOTE 3. LONG-TERM DEBT
Long-term debt consists of the following:
1995 1996
---------- ---------
Mortgage note payable in monthly principal installments of $1,650
and collateralized by real estate. The interest rate was prime
plus 2% (8.25% at December 31, 1996) per annum. The note
matures on October 1, 2000 .................................... $ 95,250 77,550
Mortgage note payable in monthly principal and interest
installments of $973, with an interest rate of 8% per annum and
collateralized by real estate. The note matures on April 1, 1999 33,326 23,975
Note payable with interest only paid monthly and a balloon
payment in 1996. The note was collateralized by the assets of
the Company and personally guaranteed by the shareholders.
The note had an interest rate of prime plus 1.5% (8.5% at
December 31, 1995) per annum ................................. 75,000 --
--------- ---------
Long-term debt ................................................... 203,576 101,525
Less current maturities of long-term debt ..................... 104,151 27,933
--------- ---------
Long-term debt, less current maturities ........................ $ 99,425 73,592
========= =========
NOTE 4. LINE OF CREDIT
The Company maintained a line of credit which matured on April 30, 1997
and was not renewed. The borrowing amount was limited to $1,250,000, was
secured by the assets of the Company and was
F-66
SUPERIOR TEMPORARIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. LINE OF CREDIT--(CONTINUED)
personally guaranteed by the shareholders. The line of credit had a stated
interest rate equivalent to the 30 day commercial paper rate (which was 5.95%
per annum at December 31, 1996) plus 2.65%.
NOTE 5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company conducts its operations in various leased facilities under
leases that are classified as operating leases for financial reporting
purposes. The leases provide for the Company to pay real estate taxes, common
area maintenance and certain other expenses. Lease terms, excluding renewal
option periods exercisable by the Company at escalated rents, expire between
1997 and 2000. The Company does not have any fixed minimum lease commitments
with related parties. A schedule of fixed minimum lease commitments is as
follows:
YEAR RENTAL AMOUNT
- ------------- --------------
1997 ........ $ 79,823
1998 ...... 67,475
1999 ...... 26,832
2000 ...... 11,669
2001 ...... --
---------
Total ...... $185,799
=========
Rent expense was $89,000 and $98,000 for the years ended December 31, 1995
and 1996, respectively.
The Company owns real property at one of its operating locations in which
groundwater contamination was detected in 1995 at levels that exceeded the
Florida groundwater standards for certain pollutants. Although the source of
the contamination has not been definitively identified, it is the Company's
position that the contamination was caused by a third party neighbor to the
Company's property. The Company cannot estimate the amount of clean up costs,
if any, that will have to be paid by the Company until testing of the sites has
been completed and the source of the contamination has been definitively
identified. Due to the uncertainty of the outcome of this environmental matter,
the financial statements do not include any provision for any loss that may
result from the resolution of this matter.
NOTE 6. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company places its cash with what it believes to be high credit
quality institutions. At times cash deposits may be in excess of the FDIC
insurance limit. The Company has not incurred any losses in such accounts. The
Company grants credit to its customers generally without collateral and
regularly assesses their financial strength. The Company believes that credit
risk related to its accounts receivable is limited.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company had notes receivable due from shareholders of $84,377 at
December 31, 1996. The notes bear interest at 12% per annum and are unsecured.
The notes are due on demand.
F-67
SUPERIOR TEMPORARIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. RELATED PARTY TRANSACTIONS--(CONTINUED)
The Company leases certain personnel from Productivity Partners, which is
an affiliated company due to common ownership. The Company owed Productivity
Partners $12,046 and $46,077 as of December 31, 1995 and 1996, respectively.
Productivity Partners incurs certain corporate office expenses on behalf of the
Company, which are subsequently reimbursed to Productivity Partners by the
Company. Selling general and administrative expenses include $293,500 and
$395,576 of corporate expenses for the years ended December 31, 1995 and 1996,
respectively, that the Company reimbursed to Productivity Partners.
In the normal course of business, the Company enters into transactions
with Genesis Financial Services, Inc., which is an affiliated company due to
common ownership. Such transactions consist primarily of cash advances, which
do not bear interest and have no stated maturity dates. Genesis Financial
Services, Inc. owed the Company $16,778 and $733 as of December 31, 1995 and
1996, respectively. The Company did not incur any interest expense or recognize
any interest income in connection with its transactions with Genesis Financial
Services, Inc. during the years ended December 31, 1995 and 1996, respectively.
NOTE 8. SUBSEQUENT EVENTS
On March 3, 1997, the assets and business of the Company were acquired by
a subsidiary of OutSource International, Inc. and the franchise agreements
between the Company and OutSource Franchising, Inc. were terminated.
F-68
INDEPENDENT AUDITORS' REPORT
Stand-By, Inc.
We have audited the accompanying balance sheet of Stand-By, Inc. (the
"Company") as of September 30, 1996, and the related statements of income,
stockholder's equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Stand-By, Inc. at September
30, 1996, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Denver, Colorado
June 6, 1997
F-69
STAND-BY, INC.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1996
--------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 683,494 $ 819,875
Trade accounts receivable, net of allowance for doubtful
accounts of $47,000 ................................. 1,823,947 1,684,875
Advances to affiliates ................................. 1,392,951 1,234,114
Other accounts receivable .............................. 752,268 346,646
Deferred tax asset .................................... 310,872 310,872
Prepaid expenses and other current assets ............ 54,784 13,035
----------- -----------
Total current assets ................................. 5,018,316 4,409,417
PROPERTY AND EQUIPMENT, net ........................... 802,656 781,593
MARKETABLE SECURITIES, available for sale ............... 924,134 918,494
OTHER ASSETS .......................................... 388,321 384,230
----------- -----------
TOTAL ASSETS ....................................... $7,133,427 $6,493,734
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 303,257 $ 181,324
Accrued payroll ....................................... 822,577 348,036
Accrued workers' compensation and insurance ............ 768,502 767,099
Line of credit ....................................... 1,802,603 1,736,331
Current maturities of long-term debt .................. 182,215 181,875
----------- -----------
Total current liabilities ........................... 3,879,154 3,214,665
----------- -----------
LONG-TERM DEBT, LESS CURRENT MATURITIES ............... 126,365 13,592
----------- -----------
DEFERRED INCOME TAXES ................................. 39,618 39,618
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 6, 8)
STOCKHOLDER'S EQUITY:
Common stock, no par value, 70,000 shares authorized,
10,000 shares issued and outstanding ............... 10,000 10,000
Retained earnings .................................... 3,078,290 3,215,859
----------- -----------
Total stockholder's equity ........................... 3,088,290 3,225,859
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY . $7,133,427 $6,493,734
=========== ===========
See notes to financial statements.
F-70
STAND-BY, INC.
STATEMENTS OF INCOME
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------- ---------------------------------
1996 1995 1996
--------------- --------------- ---------------
(UNAUDITED)
NET REVENUES ................................................ $ 13,693,776 $ 3,138,437 $ 3,876,609
------------ ----------- -----------
COST OF REVENUES:
Payroll ................................................... 7,169,335 1,658,865 1,986,277
Payroll taxes ............................................. 678,936 130,935 141,348
Workers' compensation and insurance ........................ 971,857 318,761 279,232
Other ...................................................... 90,844 56,711 57,070
------------ ----------- -----------
Total cost of revenues ................................. 8,910,972 2,165,272 2,463,927
------------ ----------- -----------
GROSS PROFIT ................................................ 4,782,804 973,165 1,412,682
------------ ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES:
Stockholder compensation ................................. 657,472 62,317 53,802
Other selling, general and administrative expenses ......... 3,976,882 980,377 1,098,177
------------ ----------- -----------
Total selling, general and administrative expenses ...... 4,634,354 1,042,654 1,151,979
------------ ----------- -----------
OPERATING INCOME (LOSS) .................................... 148,450 (69,489) 260,703
------------ ----------- -----------
OTHER EXPENSE (INCOME):
Proceeds from life insurance policy ........................ (500,000) -- --
Interest income .......................................... (124,226) (16,296) (13,995)
Interest expense .......................................... 158,000 56,778 62,778
Other ...................................................... (31,368) (8,865) (7,488)
------------ ----------- -----------
Total other expense (income) ........................... (497,594) 31,617 41,295
------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ........................... 646,044 (101,106) 219,408
INCOME TAXES PROVISION (BENEFIT):
Current ................................................... 106,296 7,324 81,839
Deferred ................................................... (60,274) -- --
------------ ----------- -----------
NET INCOME (LOSS) .......................................... $ 600,022 $ (108,430) $ 137,569
============ =========== ===========
See notes to financial statements.
F-71
STAND-BY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON STOCK TOTAL
-------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
-------- --------- ------------ --------------
BALANCE, OCTOBER 1, 1995 ..................... 10,000 $10,000 $2,478,268 $2,488,268
Net income ................................. -- -- 600,022 600,022
------- -------- ----------- -----------
BALANCE, SEPTEMBER 30, 1996 .................. 10,000 10,000 3,078,290 3,088,290
Net income (unaudited) ..................... -- -- 137,569 137,569
------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1996 (unaudited) ...... 10,000 $10,000 $3,215,859 $3,225,859
======= ======== =========== ===========
See notes to financial statements.
F-72
STAND-BY, INC.
STATEMENTS OF CASH FLOWS
SEPTEMBER 30, DECEMBER 31,
--------------- -------------------------------
1996 1995 1996
--------------- --------------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................. $ 600,022 $ (108,430) $ 137,569
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation ................................................... 116,987 25,581 25,581
Amortization of investment premium ........................... 22,560 5,640 5,640
(Gain) loss on sale of equipment .............................. 3,513 -- (700)
Provision for deferred income taxes ........................... (60,274) -- --
Changes in operating assets and liabilities:
Trade accounts receivable, net .............................. (107,078) 406,844 139,072
Other accounts receivable .................................... (379,051) 68,165 405,621
Prepaids and other current assets ........................... (11,181) (24,077) 41,749
Other assets ................................................ (42,203) (48,850) 4,093
Accounts payable ............................................. 114,062 66,894 (121,933)
Accrued payroll ............................................. 497,587 (81,732) (474,541)
Accrued workers' compensation and insurance .................. (221,854) 168,312 (1,403)
---------- ----------- ----------
Net cash provided by operating activities .................. 533,090 478,347 160,748
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .............................. (223,763) (2,175) (5,839)
Advances to affiliates, net .................................... (458,256) (348,648) 158,837
Proceeds from sale of equipment ................................. 1,075 -- 2,021
---------- ----------- ----------
Net cash provided by (used in) investing activities ......... (680,944) (350,823) 155,019
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit of credit
and other borrowings .......................................... 1,051,603 -- 480,000
Principal payments on revolving line of credit
and other borrowings .......................................... (656,455) (271,709) (659,386)
---------- ----------- ----------
Net cash provided by (used in) by financing activities ...... 395,148 (271,709) (179,386)
---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................................. 247,294 (144,185) 136,381
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD .......................................... 436,200 436,200 683,494
---------- ----------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD ................................................ $ 683,494 $ 292,015 $ 819,875
========== =========== ==========
SUPPLEMENTAL INFORMATION ON NONCASH
INVESTING AND FINANCING ACTIVITIES
Interest paid ................................................... $ 168,216 $ 50,499 $ 50,966
========== =========== ==========
Income taxes paid ................................................ $ 156,000 $ -- $ 104,298
========== =========== ==========
See notes to financial statements.
F-73
STAND-BY, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Stand-By, Inc. (the "Company") is in the business of
providing temporary employees to construction, commercial and light industrial
companies located in the Denver metropolitan area.
UNAUDITED INTERIM FINANCIAL STATEMENTS - The interim unaudited financial
statements and the related information in the notes as of December 31, 1996 and
for the three months ended December 31, 1995 and 1996 are unaudited. Such
interim financial statements have been prepared on the same basis as the
audited 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.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents and trade accounts receivable. The Company invests
temporary cash in demand deposits with federally insured financial
institutions. Such deposit amounts at times exceed federally insured limits.
The Company has not experienced any losses in such accounts. The Company's
trade receivables are geographically concentrated in the Denver metropolitan
area. The Company believes that concentrations of credit risk with respect to
receivables are limited due to the large number of customers and generally
short payment terms.
USE OF ESTIMATES - The preparation of the Company's financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements. Actual results could differ from those estimates.
REVENUE RECOGNITION - All revenues are recognized as the related service
is performed, net of provision for credits and allowances.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost and
depreciated or amortized on an accelerated or straight-line basis over the
estimated useful service lives of the respective assets. Amortization of
property under capital leases, leasehold improvements and computer software is
included in depreciation expense. The estimated useful lives of property and
equipment range from 3 to 7 years.
INVESTMENT IN MARKETABLE SECURITIES - SFAS No. 115, "ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES," requires debt and equity
securities with readily determinable fair values be segregated into one of the
following categories: trading, available-for-sale, or held-to-maturity. The
Company does not hold securities for trading or as held-to-maturity.
Available-for-sale securities are carried at their fair values, as determined
from published prices of recent trading in the securities. Changes in the fair
values of available for sale securities are recognized as a component of
stockholder's equity until such securities are sold. The difference between the
cost and the face amount of the
F-74
STAND-BY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
marketable debt security is treated as premium. The amount of premium is
amortized as expense over the life of the security or its earliest call date in
such a way as to result in a constant rate of interest being recognized in the
financial statements over the Company's holding period for the debt security.
LONG-LIVED ASSETS - SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," requires that
long-lived assets and certain identifiable intangibles to be held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Adoption of this statement had no effect on the financial position
or results of operations of the Company for the year ended September 30, 1996.
INCOME TAXES: - The Company provides for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes," which requires an asset and
liability approach to financial accounting and reporting for income taxes.
Deferred income tax assets and liabilities are computed annually for the
differences between financial statement and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense equals the taxes payable or refundable for the
period plus or minus the change in the period of deferred tax assets and
liabilities.
WORKERS COMPENSATION - Since October 1, 1990, the Company has participated
in a large deductible workers compensation insurance program. Under this
arrangement, the Company has a deductible of $250,000 per occurrence with an
overall deductible limit of $1,643,400 in the aggregate. Total workers
compensation expense under this program was $971,857 for the year ended
September 30, 1996. The estimated unpaid expense is reported in the
accompanying financial statements as a liability.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 1996:
Furniture, fixtures and equipment ..................... 709,140
Leasehold improvements .............................. 352,800
Vehicles ............................................. 212,119
-----------
Property and equipment .............................. 1,274,059
Less: accumulated depreciation and amortization ...... 471,403
-----------
Property and equipment, net ........................... 802,656
===========
Depreciation and amortization expense for property and equipment amounted
to $116,987 for the year ended September 30, 1996.
F-75
STAND-BY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE 3. MARKETABLE DEBT SECURITIES
The Company holds municipal debt securities at September 30, 1996 with a
fair value of $924,134 at September 30, 1996, which approximates the amortized
cost. At September 30, 1996 contractual maturities of marketable debt
securities were $510,000 after one year through five years and $385,000 after
10 years. As a condition of a letter of credit these securities have been
pledged to a commercial bank.
NOTE 4. LONG-TERM DEBT
Long-term debt consists of the following at September 30, 1996:
Term loan, payable in monthly installments of $6,667 plus interest at the bank's
prime rate (8.25% at September 30, 1996) plus 1% with final payment of
principal and interest due February 28, 1998. Secured by the Company's assets,
a first deed of trust and assignment of leases and rents on real estate owned by
the Company's sole stockholder, and assignment of a life insurance policy on
the life of the Company's sole stockholder .................................... $119,986
Term loan payable in monthly installments of $1,890 including interest at 8.25%
with final payment of principal and interest due April 15, 1999, secured by
four vehicles ............................................................... 52,453
Term loan payable in monthly installments of $2,017 including interest at 8.25%
with final payment of principal and interest due July 15, 1999, secured by
four vehicles ............................................................... 60,834
Obligations under capital leases. See Note 5 ................................. 75,307
---------
Long-term debt .................................................................. 308,580
Less current maturities of long-term debt ....................................... 182,215
---------
Long-term debt, less current maturities ....................................... $126,365
=========
The aggregate annual principal payments on long-term debt and the future
minimum lease payments, at present value, for capitalized lease obligations are
as follows:
CAPITAL
LONG-TERM LEASE
SEPTEMBER 30, DEBT OBLIGATIONS
- ------------------------ ----------- ------------
1997 ............... $119,330 $ 67,272
1998 ............... 82,666 12,630
1999 ............... 31,277 --
--------- ---------
79,902
Less: interest ...... (4,595)
---------
Total ............... $233,273 $ 75,307
========= =========
F-76
STAND-BY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE 5. LINE OF CREDIT
Pursuant to a revolving line of credit agreement, in effect at September
30, 1996 and expiring February 28, 1997, the Company along with its affiliated
companies, may borrow from a commercial bank up to the lesser of $2,500,000 or
a percentage of the three affiliated companies' accounts receivable and certain
investments. The obligation for this line of credit is joint and several.
Therefore, the entire balance on this loan is shown as an obligation of the
Company. Amounts borrowed by the two affiliates are treated as amounts
receivable from these companies. Amounts borrowed by the affiliated companies
are collateralized by substantially all of those companies' assets. Interest is
due monthly at the bank's prime rate (8.25% at September 30, 1996) plus 3/4%
with principal of $1,802,603 as of September 30, 1996 and accrued interest due
February 28, 1997.
NOTE 6. LETTER OF CREDIT
In connection with the Company's participation in a large deductible
workers compensation insurance program, the Company is required to maintain an
irrevocable standing letter of credit from its commercial bank in an amount
equal to the estimated incurred losses for workers compensation insurance. The
letter is secured by certain investments in money market accounts, investment
grade municipal securities and the personal guarantee of the Company's sole
stockholder. The letter of credit is automatically renewable for one year
periods, unless the bank provides notice within sixty (60) days, with a final
expiration of December 31, 1998. As of September 30, 1996, no funds have been
drawn against the letter of credit.
NOTE 7. INCOME TAXES
A reconciliation of income taxes determined using the statutory U.S. rate
of 34% to actual income taxes provided was as follows:
Tax at U.S. statutory rate ...... $ 219,655
Life insurance proceeds ......... (170,000)
Municipal bond interest ......... (14,805)
Other ........................... 11,172
-----------
$ 46,022
===========
F-77
STAND-BY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE 7. INCOME TAXES--(CONTINUED)
The tax-effected temporary differences and carryforwards which comprised
deferred tax assets and liabilities were as follows:
TAX TAX
ASSETS LIABILITIES
--------- ------------
Allowance for doubtful accounts ...... $ 15,980 $ --
Accrued compensation .................. 174,053 --
Accrued workers compensation ......... 114,897 --
Alternative minimum tax ............... 20,879 --
Depreciation ........................ 54,555
--------
Total ................................. 325,809 $54,555
========= ========
Net deferred tax asset ............... $271,254
=========
NOTE 8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company leases four facilities owned by its sole
stockholder, one facility owned by its sole stockholder and another Company
officer and two facilities owned by third parties. These renewable lease
agreements are classified as operating leases and range in term from five to
ten years with renewal rights for an additional ten years. Total rental expense
related to these leases was $175,819 for the year ended September 30, 1996. The
Company is obligated, pursuant to these lease agreements, to pay property taxes
and special assessments during the term of the leases. Total property tax
expense related to these leases was $17,587 for the year ended September 30,
1996. Future minimum rental payments under these leases are as follows:
RELATED
SEPTEMBER 30, TOTAL PARTY OTHER
- -------------------- ---------- --------- ---------
1997 ............ $175,700 $31,500 $144,200
1998 ............ 118,800 26,400 92,400
1999 ............ 108,900 16,500 92,400
2000 ............ 100,650 8,250 92,400
2001 ............ 75,200 -- 75,200
Thereafter ...... 155,000 -- 155,000
--------- -------- ---------
Total ............ $734,250 $82,650 $651,600
========= ======== =========
NOTE 9. RELATED PARTY TRANSACTIONS
The Company has made cash advances to corporations affiliated by common
stock ownership. Total advances as of September 30, 1996 were $1,392,951 of
which $607,819 was drawn on the line of credit as of September 30, 1996. The
Company receives reimbursement for the cost of interest from these affiliates
on this revolving line. All other advances are payable with interest at 1% over
the Company's cost of money.
The Company earned management fees of $ 24,000 by providing administrative
and accounting services to one of the companies affiliated by common stock
ownership during the year ended September 30, 1996.
F-78
STAND-BY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE 10. SUBSEQUENT EVENTS
On March 31, 1997, the business and certain assets of the Company were
acquired by a subsidiary of OutSource International, Inc.
F-79
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS; IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES, OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
THE SHARES OF COMMON STOCK TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
PAGE
----------
Prospectus Summary ........................ 3
The Company .............................. 7
Risk Factors .............................. 7
Use of Proceeds ........................... 15
Dividend Policy ........................... 15
Capitalization ........................... 16
Dilution ................................. 17
Selected Consolidated Financial Data ...... 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ............... 21
Business ................................. 31
Management ................................. 45
Certain Transactions ..................... 53
Principal and Selling Shareholders ......... 57
Description of Securities .................. 59
Shares Eligible for Future Sale ............ 62
Underwriting .............................. 63
Independent Public Accountants ............ 64
Experts .................................... 64
Legal Matters .............................. 65
Available Information ..................... 65
Index to Financial Statements ............ F-1
-----------------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,700,000 SHARES
[OUTSOURCE LOGO]
Common Stock
-----------------
P R O S P E C T U S
, 1997
-----------------
Smith Barney Inc.
Robert W. Baird & Co.
Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth expenses and costs (other than underwriting
discounts and commissions) expected to be incurred in connection with the
issuance and distribution of the securities being registered and payable by the
Company. All amounts except the Securities and Exchange Commission registration
fee, the NASD filing fee and the Nasdaq National Market filing fee are
estimated.
Securities and Exchange Commission Registration Fee ...... $ 20,630
NASD filing fee .......................................... 7,308
Nasdaq National Market listing fee ........................ *
Transfer Agent and Registrar fees ........................ *
Legal fees and expenses ................................. *
Representative's expenses ................................. *
Accounting fees and expenses .............................. *
Blue Sky fees and expenses .............................. *
Printing expenses ....................................... *
Miscellaneous ............................................. *
----------
Total ................................................... $ *
==========
- ----------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has authority to indemnify its directors and officers to the
extent provided in the FBCA. Section 607.0850 of the FBCA permits a Florida
corporation to indemnify a present or former director or officer of the
corporation (and certain other persons serving at the request of the
corporation in related capacities) for liabilities, including legal expenses,
arising by reason of service in such capacity if such person shall have acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and in any criminal proceeding if such
person had no reasonable cause to believe his conduct was unlawful. However, in
the case of actions brought by or in the right of the corporation, no
indemnification may be made with respect to any matter as to which such
director or officer shall have been adjudged liable, except in certain limited
circumstances.
The Articles and Bylaws provide that the Company shall indemnify its
officers and directors to the fullest extent provided by law. At present, there
is no pending litigation or proceeding involving a director or officer of the
Company as to which indemnification is being sought, nor is the Company aware
of any threatened litigation that may result in claims for indemnification by
an officer or director.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three years, the Company issued the following securities
without registration under the Securities Act:
SYNADYNE II, INC. On December 28, 1994, Synadyne II, Inc. issued an
aggregate of 10,000 shares of its common stock to Alan E. Schubert, Lawrence H.
Schubert, Louis A. Morelli, Paul M. Burrell, Louis J. Morelli, Raymond S.
Morelli, Margaret Morelli Janisch, Matthew B. Schubert and Jason D. Schubert.
Synadyne II, Inc. received nominal consideration for the issuance of these
shares. The securities were issued pursuant to Section 4(2) of the Securities
Act. No underwriting commissions were recorded in connection with the foregoing
issuances of stock.
SYNADYNE IV, INC. On January 24, 1995, Synadyne IV, Inc. issued an
aggregate of 10,000 shares of its common stock to Alan E. Schubert, Lawrence H.
Schubert, Louis A. Morelli, Paul M. Burrell, Louis
II-1
J. Morelli, Raymond S. Morelli, Margaret Morelli Janisch, Matthew B. Schubert
and Jason D. Schubert. Synadyne IV, Inc. received nominal consideration for the
issuance of these shares. The securities were issued pursuant to Section 4(2)
of the Securities Act. No underwriting commissions were recorded in connection
with the foregoing issuances of stock.
SYNADYNE V, INC. On January 24, 1995, Synadyne V, Inc. issued an
aggregate of 10,000 shares of its common stock to Alan E. Schubert, Lawrence H.
Schubert, Louis A. Morelli, Paul M. Burrell, Louis J. Morelli, Raymond S.
Morelli, Margaret Morelli Janisch, Matthew B. Schubert and Jason D. Schubert.
Synadyne V, Inc. received nominal consideration for the issuance of these
shares. The securities were issued pursuant to Section 4(2) of the Securities
Act. No underwriting commissions were recorded in connection with the foregoing
issuances of stock.
OUTSOURCE FRANCHISING, INC. On February 7, 1995, Outsource Franchising,
Inc. issued an aggregate of 10,000 shares of its common stock to Alan E.
Schubert, Lawrence H. Schubert, Louis A. Morelli, Paul M. Burrell, Louis J.
Morelli, Raymond S. Morelli, Margaret Morelli Janisch, Matthew B. Schubert,
Jason D. Schubert and Mindi Wagner. As consideration, Outsource Franchising
received nominal consideration for the issuance of these shares. The securities
were issued pursuant to Section 4(2) of the Securities Act. No underwriting
commissions were recorded in connection with the foregoing issuances of stock.
OUTSOURCE INTERNATIONAL, INC. On February 15, 1996, OutSource
International, Inc., an Illinois corporation ("OI") effectuated a 9,000 for 1
stock split pursuant to which OI issued an aggregate of 9,000,000 shares of its
common stock to the following shareholders: Robert A. Lefcort, Lawrence H.
Schubert as Trustee of the Lawrence H. Schubert Revocable Trust dated 8/25/95,
Nadya I. Schubert as Trustee of the Nadya I. Schubert Revocable Trust dated
8/25/95, Paul M. Burrell, Alan E. Schubert, Louis A. Morelli as Trustee of the
Louis J. Morelli S Stock Trust dated 1/1/95, Louis J. Morelli, Matthew B.
Schubert, Jason D. Schubert and Alan E. Schubert as Trustees of the Matthew
Schubert Outsource Trust dated 11/24/95, Matthew B. Schubert and Alan E.
Schubert as Trustees of the Jason Schubert Outsource Trust dated 11/24/95,
Mindi Wagner, Louis A. Morelli, Raymond S. Morelli, Louis A. Morelli as Trustee
of the Margaret Ann Janisch S Stock Trust dated 1/1/95 and Margaret Morelli
Janisch. No consideration was received by OI in connection with the stock
split. The securities were issued pursuant to Section 4(2) of the Securities
Act. No underwriting commissions were recorded in connection with the foregoing
issuances of stock.
EMPLOYEES INSURANCE SERVICES, INC. On January 14, 1997, Employees
Insurance Services, Inc. issued an aggregate of 315.79 shares of its common
stock to Robert A. Lefcort, Robert A. Lefcort and Nadya I. Schubert as
Co-Trustees of the Robert A. Lefcort Irrevocable Trust dated 2/28/96, Lawrence
H. Schubert as Trustee of the Lawrence H. Schubert Revocable Trust dated
8/25/95, Nadya I. Schubert as Trustee of the Nadya I. Schubert Revocable Trust
dated 8/25/95, Paul M. Burrell, Alan E. Schubert, Louis A. Morelli as Trustee
of the Louis J. Morelli S Stock Trust dated 1/1/95, Louis J. Morelli, Matthew
B. Schubert, Jason D. Schubert and Alan E. Schubert as Trustees of the Matthew
Schubert Outsource Trust dated 11/24/95, Matthew B. Schubert and Alan E.
Schubert as Trustees of the Jason Schubert Outsource Trust dated 11/24/95,
Mindi Wagner, Louis A. Morelli, Raymond S. Morelli, Louis A. Morelli as Trustee
of the Margaret Ann Janisch S Stock Trust dated 1/1/95 and Margaret Morelli
Janisch (the "Subsidiary Shareholders"). Employees Insurance Services, Inc.
received nominal consideration for the issuance of these shares. The securities
were issued pursuant to Section 4(2) of the Securities Act. No underwriting
commissions were recorded in connection with the foregoing issuances of stock.
OUTSOURCE INTERNATIONAL OF AMERICA, INC. On February 21, 1997, Outsource
International of America, Inc. ("OIA") issued an aggregate of 1,000 shares of
its common stock to the Subsidiary Shareholders. The shares were issued in
connection with the merger of OI with and into OIA. The securities were issued
pursuant to Section 4(2) of the Securities Act. No underwriting commissions
were recorded in connection with the foregoing issuances of stock.
REORGANIZATION. On February 21, 1997, the Company consummated a
reorganization (the "Reorganization") with the Subsidiaries: OutSource
International of America, Inc., Synadyne I, Inc.,
II-2
Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc.,
OutSource Franchising, Inc., Capital Staffing Fund, Inc., and Employees
Insurance Services, Inc. and the Subsidiaries' Shareholders. Pursuant to the
terms of the Reorganization, the Company acquired all of the outstanding
capital stock of the Subsidiaries from the Subsidiaries' Shareholders in
exchange for the issuance of 5,993,666 shares of newly issued Common Stock to
those shareholders, and the payment of approximately $5.7 million in cash and
the issuance of promissory notes in the aggregate principal amount of
approximately $1.4 million to certain of those shareholders (the
"Reorganization"). The Common Stock was issued pursuant to Section 4(2) under
the Securities Act. In connection with the Reorganization, the Subsidiaries'
Shareholders contributed approximately $4.3 million in outstanding promissory
notes to the capitalization of the Company. As a result of the Reorganization,
the Subsidiaries became wholly-owned by the Company and the Subsidiaries'
Shareholders owned Common Stock in virtually the same proportion as the capital
stock of the Subsidiaries was owned by them immediately prior to the
Reorganization.
SENIOR NOTES. On February 21, 1997, the Company issued Senior Notes in
the principal amounts of $14,000,000 and $11,000,000 to Triumph and Bachow,
respectively. A portion of the principal amount of the Senior Notes
($10,000,000) is due and payable on March 31, 2001 and the balance of the
principal ($15,000,000) is due and payable on February 20, 2002. The Senior
Notes bear interest at the rate of 11% per annum through February 1999 and at
the rate of 12.5% per annum thereafter. The securities were issued pursuant to
Section 4(2) of the Securities Act.
WARRANTS. In connection with the issuance of the Senior Notes, the
Company issued the Initial Warrants to the Senior Note Holders and issued the
Additional Warrants into escrow, pending release to either certain shareholders
of the Company or the Senior Note Holders, based upon the achievement by the
Company of certain specified criteria. The Initial Warrants are currently
exercisable at an exercise price of $.014 per share and expire on February 20,
2002. Following the successful consummation of certain acquisitions by the
Company in April 1997, 198,981 of the Additional Warrants were released from
escrow and distributed to certain shareholders of the Company. The remaining
432,186 Additional Warrants will be released to certain shareholders of the
Company or the Senior Note Holders no later than February 1999. The Additional
Warrants are exercisable upon release from escrow at an exercise price of $.014
per share and expire on February 20, 2002. If the Company does not consummate
an initial public offering in which the net proceeds received by the Company
equal or exceed $25.0 million prior to February 20, 2001, the holders of the
Warrants have a right to require the Company to repurchase the unexercised
portion of the warrants and the Warrant Shares purchased upon exercise of the
Warrants at fair market value. The Company has granted the holders of the
Warrants demand and piggyback registraion rights with respect to the Warrant
Shares. The securities were issued pursuant to Section 4(2) of the Securities
Act.
Triumph and Bachow received closing fees of $210,000 and $165,000,
respectively, and Smith Barney Inc. received a placement fee of $1,500,000, in
connection with the issuance of the Senior Notes and the Warrants.
II-3
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
1 Form of Underwriting Agreement among the Company, Smith Barney Inc., Robert W. Baird &
Co. Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation, as
Representatives of the several Underwriters
2.1 Amended and Restated Agreement Among Shareholders dated February 21, 1997
2.2 Articles of Share Exchange 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. and OutSource International of
America, Inc. dated February 21, 1997
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Bylaws of the Company
3.3 Amended and Restated Articles of Incorporation of the Company, as amended*
3.4 Amended and Restated Bylaws of the Company*
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws of the
Company defining the rights of holders of Common Stock of the Company
4.2 Form of Common Stock Certificate of the Company*
4.3 Shareholder Protection Rights Agreement*
4.4 Senior Subordinated Note due February 20, 2002 issued to Triumph-Connecticut Limited
Partnership
4.5 Senior Subordinated Note due February 20, 2002 issued to Bachow Investment Partners III,
L.P.
4.6 Warrant dated February 21, 1997 issued to Triumph-Connecticut Limited Partnership
4.7 Warrant dated February 21, 1997 issued to Bachow Investment Partners III, L.P.
4.8 Warrant dated February 21, 1997 issued to State Street Bank and Trust Company of
Connecticut, N.A., as Escrow Agent
4.9 See Exhibit 10.4 for certain pre-emptive rights provisions
5 Opinion of Holland & Knight LLP*
9 Voting Trust Agreement among OutSource International, Inc., Richard J. Williams and Paul
M. Burrell, as Trustees, and certain shareholders of Outsource International, Inc. dated as of
February 21, 1997
10.1 Securities Purchase Agreement among Triumph-Connecticut Limited Partnership, Bachow
Investment Partners III, L.P., 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. and OutSource International of
America, Inc. dated as of February 21, 1997
10.2 Escrow Agreement Among State Street Bank and Trust Company of Connecticut, N.A.,
certain shareholders of OutSource International, Inc., and OutSource International, Inc. dated
as of February 21, 1997
10.3 Registration Rights Agreement among OutSource International, Inc., Triumph-Connecticut
Limited Partnership, Bachow Investment Partners III, L.P., and shareholders of OutSource
International, Inc. dated as of February 21, 1997
10.4 Agreement among Shareholders and Investors in OutSource International, Inc. dated as of
February 21, 1997
10.5 Asset Purchase Agreement among Payray, Inc., Tri-Temps, Inc., Employees Unlimited, Inc.
and OutSource International, Inc. dated as of April 1, 1996, as amended on February 21, 1997
10.6 Asset Purchase Agreement among CST Services, Inc., Claire Schmidt and OutSource
International, Inc. dated as of May 6, 1996
10.7 Asset Purchase Agreement among Standby Personnel of Colorado Springs, Inc., Adrian
Walker and OutSource International, Inc. dated as of February 24, 1997
II-4
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ------------------------------------------------------------------------------------------------
10.8 Asset Purchase Agreement between Staff Management Services, Inc. and OutSource
International, Inc. dated as of March 3, 1997
10.9 Asset Purchase Agreement between Superior Temporaries, Inc. and OutSource International,
Inc. dated as of March 3, 1997
10.10 Asset Purchase Agreement among Stand-By, Inc., Carlene Walker and OutSource
International of America, Inc. dated as of March 31, 1997
10.11 Employment Agreement between Paul M. Burrell and the Company dated as of February 21,
1997
10.12 Form of Employment Agreement between Robert A. Lefcort and the Company dated as of
March 3, 1997
10.13 Form of Employment Agreement between Robert E. Tomlinson and the Company dated as of
March 3, 1997
10.14 Form of Employment Agreement between James E. Money and the Company dated as of
March 3, 1997
10.15 Form of Employment Agreement between Robert J. Mitchell and the Company dated as of
March 3, 1997
10.16 Stock Option Plan, As Amended and Restated Effective February 1, 1997
10.17 Lease dated October 19, 1995 between Daniel S. Catalfumo, as Trustee, and OutSource
International, Inc., as amended
10.18 Option Agreement dated October 19, 1995 between Daniel S. Catalfumo, as Trustee, and
OutSource International, Inc.
10.19 Credit Agreement among Bank of Boston Connecticut, Comerica Bank, Lasalle National Bank
and OutSource International, Inc. dated as of February 21, 1997 and amended and restated as
of March 18, 1997
10.20 OI Pledge Agreement made by OutSource International, Inc. in favor of Bank of Boston
Connecticut, as Agent, dated as of February 21, 1997
10.21 OI Security Agreement made by OutSource International, Inc. in favor of Bank of Boston
Connecticut, as Agent, dated as of February 21, 1997
10.22 Subsidiary Security Agreement made by 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. and OutSource International of America, Inc. in favor
of Bank of Boston Connecticut, As Agent, dated as of February 21, 1997
10.23 Subsidiary Guarantee by 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. and OutSource International of America, Inc. in favor of Bank of
Boston Connecticut, As Agent, dated as of February 21, 1997
10.24 Trademark Security Agreement made by OutSource International, Inc. and OutSource
Franchising, Inc. in favor of Bank of Boston Connecticut dated as of February 21, 1997
10.25 Promissory Note dated February 21, 1997 issued by the Company to Paul M. Burrell
10.26 Promissory Note dated February 21, 1997 issued by the Company to Alan Schubert
10.27 Promissory Note dated February 21, 1997 issued by the Company to the Lawrence H. Schubert
Revocable Trust
10.28 Promissory Note dated February 21, 1997 issued by the Company to the Nadya I. Schubert
Revocable Trust
10.29 Form of Promissory Note dated February 21, 1997 issued by Capital Staffing Fund, Inc. to the
following shareholders of the Company, relatives of such shareholders, or executive officers of
the Company, in the following principal amounts: Paul M. Burrell-$500,000; Richard E.
Burrell-$125,000; Scott T. Burrell-$50,000; Robert E. Tomlinson-$200,000; Louis J. Morelli-
$100,000; Raymond L. Morelli-$100,000; and Rachele Spadoni-$125,000
II-5
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------
10.30 Form of Promissory Note dated December 31, 1996 issued by Synadyne II, Inc. to the
following shareholders of the Company in the following principal amounts: Lawrence H.
Schubert Revocable Trust-$219,017; Robert A. Lefcort Irrevocable Trust-$22,000; Nadya I.
Schubert Revocable Trust-219,017; Louis J. Morelli S Stock Trust-$22,000; Margaret Ann
Janisch S Stock Trust-$22,000; Matthew Schubert OutSource Trust-$100,509; Jason Schubert
OutSource Trust-$122,509; Alan E. Schubert-$575,923; Louis A. Morelli-$311,300; Louis J.
Morelli-$80,300; Raymond S. Morelli-$102,300; Matthew B. Schubert-$22,000; Mindi Wagner-
$21,426; Margaret Morelli Janisch-$102,300; Robert A. Lefcort-$44,000; and Paul M. Burrell-
$213,400
10.31 Form of Promissory Note dated December 31, 1996 issued by Synadyne III, Inc. to the
following shareholders of the Company in the following principal amounts: Lawrence H.
Schubert Revocable Trust-$209,061; Robert A. Lefcort Irrevocable Trust-$21,000; Nadya I.
Schubert Revocable Trust-209,061; Louis J. Morelli S Stock Trust-$21,000; Margaret Ann
Janisch S Stock Trust-$21,000; Matthew Schubert OutSource Trust-$95,941; Jason Schubert
OutSource Trust-$116,941; Alan E. Schubert-$549,744; Louis A. Morelli-$297,150; Louis J.
Morelli-$76,650; Raymond S. Morelli-$97,650; Matthew B. Schubert-$21,000; Mindi Wagner-
$20,452; Margaret Morelli Janisch-$97,650; Robert A. Lefcort-$42,000; and Paul M. Burrell-
$203,700
10.32 Form of Promissory Note dated December 31, 1996 issued to OutSource Franchising, Inc. by
the following shareholders of the Company in the following principal amounts: Lawrence H.
Schubert Revocable Trust-$428,078; Robert A. Lefcort Irrevocable Trust-$43,000; Nadya I.
Schubert Revocable Trust-428,078; Louis J. Morelli S Stock Trust-$43,000; Margaret Ann
Janisch S Stock Trust-$43,000; Matthew Schubert OutSource Trust-$196,450; Jason Schubert
OutSource Trust-$239,450; Alan E. Schubert-$1,125,667; Louis A. Morelli-$608,450; Louis J.
Morelli-$156,950; Raymond S. Morelli-$199,950; Matthew B. Schubert-$43,000; Mindi Wagner-
$41,878; Margaret Morelli Janisch-$199,950; Robert A. Lefcort-$86,000; and Paul M. Burrell-
$417,000
10.33 Form of Accumulated Adjustments Account Promissory Note dated February 20, 1997 issued
by Capital Staffing Fund, Inc., OutSource Franchising, Inc. and OutSource International of
America, Inc. to the following shareholders of the Company and Schedule of Allocation of
AAA Distribution to such shareholders: Lawrence H. Schubert Revocable Trust; Robert A.
Lefcort Irrevocable Trust; Nadya I. Schubert Revocable Trust; Louis J. Morelli S Stock
Trust;
Margaret Ann Janisch S Stock Trust; Matthew Schubert OutSource Trust; Jason Schubert
OutSource Trust; Alan E. Schubert; Louis A. Morelli; Louis J. Morelli; Raymond S. Morelli;
Matthew B. Schubert; Mindi Wagner; Margaret Morelli Janisch; Robert A. Lefcort; and Paul
M. Burrell
10.34 Workers' Compensation and Employees Liability Insurance Policy from January 1, 1997 to
January 1, 1998 Policy Period
10.35 Standby Letter of Credit issued by The First National Bank of Boston in favor of National
Union Fire Insurance Company
10.36 Form of Standard Franchise Agreement
10.37 Form of Standard PEO Services Agreement
10.38 Form of Standard Service Agreement with Allstate Insurance Company
16 Letter from McGladrey & Pullen, LLP
21 Subsidiaries of the Company
23.1 Consent of Holland & Knight LLP (included in Exhibit 5 above)*
23.2 Consent of McGladrey & Pullen, LLP
23.3 Consent of Deloitte & Touche LLP-OutSource International, Inc. and Subsidiaries
23.4 Consent of Deloitte & Touche LLP-Payray, Inc. and Tri-Temps, Inc.
23.5 Consent of Deloitte & Touche LLP-CST Services Inc.
23.6 Consent of Deloitte & Touche LLP-Superior Temporaries, Inc.
II-6
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------
23.7 Consent of Deloitte & Touche LLP-Standby Personnel of Colorado Springs, Inc. and Stand-By,
Inc.
24 Power of Attorney (included on signature page of this Registration Statement)
27 Financial Data Schedule
99 Consent of David Hershberg
- ----------------
* To be filed by amendment.
(b) Financial Statement Schedules
(i) Schedule II-Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
a Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
(c) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Deerfield
Beach, Florida on August 12, 1997.
OUTSOURCE INTERNATIONAL, INC.
By: /s/ PAUL M. BURRELL
---------------------------------------------
Paul M. Burrell, President,
Chief Executive Officer and
Chairman of the Board of Directors
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul M. Burrell and Robert E. Tomlinson, and
each of them, his true and lawful attorney-in-fact and agents, with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, including a Registration
Statement filed pursuant to Rule 462 under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1993, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ------------------------------ ------------------------------------ ----------------
/s/ PAUL M. BURRELL President, Chief Executive August 12, 1997
Paul M. Burrell Officer and Chairman of the
Board of Directors
(Principal Executive Officer)
/s/ ROBERT A. LEFCORT Executive Vice President, August 12, 1997
Robert A. Lefcort Secretary and Director
/s/ ROBERT E. TOMLINSON Chief Financial Officer, Treasurer August 12, 1997
Robert E. Tomlinson and Director
(Principal Financial and
Accounting Officer)
/s/ RICHARD J. WILLIAMS Director August 12, 1997
Richard J. Williams
/s/ SAMUEL H. SCHWARTZ Director August 12, 1997
Samuel H. Schwartz
II-8
SCHEDULE II
OUTSOURCE INTERNATIONAL, INC. AND AFFILIATES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
CHARGED TO CREDITS
BALANCE, COSTS AND ISSUED AND BALANCE,
DESCRIPTION JANUARY 1, 1994 EXPENSES OTHER CHARGE OFFS DECEMBER 31, 1994
- --------------------------------- ----------------- ------------ ------- ------------- ------------------
Allowance for doubtful accounts
and credit memos ............... $125,293 $244,662 $ -- $(246,119) $123,836
CHARGED TO CREDITS
BALANCE, COSTS AND ISSUED AND BALANCE,
DESCRIPTION JANUARY 1, 1995 EXPENSES OTHER CHARGE OFFS DECEMBER 31, 1995
- --------------------------------- ----------------- ------------ ------- ------------- ------------------
Allowance for doubtful accounts
and credit memos ............... $123,836 $867,953 $ -- $(616,546) $375,243
CHARGED TO CREDITS
BALANCE, COSTS AND ISSUED AND BALANCE,
DESCRIPTION JANUARY 1, 1996 EXPENSES OTHER CHARGE OFFS DECEMBER 31, 1996
- --------------------------------- ----------------- ------------ ------- ------------- ------------------
Allowance for doubtful accounts
and credit memos ............... $375,243 $1,442,370 $ -- $(839,363) $978,250
The amounts shown above include uncollectible amounts as well as customer
credits issued for early payment discounts, pricing adjustments, customer
service concessions, billing corrections, and other matters.
S-1
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------
1 Form of Underwriting Agreement among the Company, Smith Barney Inc.,
Robert W. Baird & Co. Incorporated and Donaldson, Lufkin & Jenrette
Securities Corporation, as Representatives of the several Underwriters
2.1 Amended and Restated Agreement Among Shareholders dated February 21,
1997
2.2 Articles of Share Exchange 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. and OutSource International of America, Inc. dated
February 21, 1997
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Bylaws of the Company
4.4 Senior Subordinated Note due February 20, 2002 issued to Triumph-Connecticut
Limited Partnership
4.5 Senior Subordinated Note due February 20, 2002 issued to Bachow Investment
Partners III, L.P.
4.6 Warrant dated February 21, 1997 issued to Triumph-Connecticut Limited
Partnership
4.7 Warrant dated February 21, 1997 issued to Bachow Investment Partners III, L.P.
4.8 Warrant dated February 21, 1997 issued to State Street Bank and Trust
Company of Connecticut, N.A., as Escrow Agent
9 Voting Trust Agreement among OutSource International, Inc., Richard J.
Williams and Paul M. Burrell, as Trustees, and certain shareholders of
Outsource International, Inc. dated as of February 21, 1997
10.1 Securities Purchase Agreement among Triumph-Connecticut Limited
Partnership, Bachow Investment Partners III, L.P., 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. and OutSource International of America,
Inc. dated as of February 21, 1997
10.2 Escrow Agreement Among State Street Bank and Trust Company of
Connecticut, N.A., certain shareholders of OutSource International, Inc., and
OutSource International, Inc. dated as of February 21, 1997
10.3 Registration Rights Agreement among OutSource International, Inc., Triumph-
Connecticut Limited Partnership, Bachow Investment Partners III, L.P., and
shareholders of OutSource International, Inc. dated as of February 21, 1997
10.4 Agreement among Shareholders and Investors in OutSource International, Inc.
dated as of February 21, 1997
10.5 Asset Purchase Agreement among Payray, Inc., Tri-Temps, Inc., Employees
Unlimited, Inc. and OutSource International, Inc. dated as of April 1, 1996, as
amended on February 21, 1997
10.6 Asset Purchase Agreement among CST Services, Inc., Claire Schmidt and
OutSource International, Inc. dated as of May 6, 1996
10.7 Asset Purchase Agreement among Standby Personnel of Colorado Springs, Inc.,
Adrian Walker and OutSource International, Inc. dated as of February 24, 1997
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------
10.8 Asset Purchase Agreement between Staff Management Services, Inc. and
OutSource International, Inc. dated as of March 3, 1997
10.9 Asset Purchase Agreement between Superior Temporaries, Inc. and OutSource
International, Inc. dated as of March 3, 1997
10.10 Asset Purchase Agreement among Stand-By, Inc., Carlene Walker and
OutSource International of America, Inc. dated as of March 31, 1997
10.11 Employment Agreement between Paul M. Burrell and the Company dated as of
February 21, 1997
10.12 Form of Employment Agreement between Robert A. Lefcort and the Company
dated as of March 3, 1997
10.13 Form of Employment Agreement between Robert E. Tomlinson and the
Company dated as of March 3, 1997
10.14 Form of Employment Agreement between James E. Money and the Company
dated as of March 3, 1997
10.15 Form of Employment Agreement between Robert J. Mitchell and the Company
dated as of March 3, 1997
10.16 Stock Option Plan, As Amended and Restated Effective February 1, 1997
10.17 Lease dated October 19, 1995 between Daniel S. Catalfumo, as Trustee, and
OutSource International, Inc., as amended
10.18 Option Agreement dated October 19, 1995 between Daniel S. Catalfumo, as
Trustee, and OutSource International, Inc.
10.19 Credit Agreement among Bank of Boston Connecticut, Comerica Bank, Lasalle
National Bank and OutSource International, Inc. dated as of February 21, 1997
and amended and restated as of March 18, 1997
10.20 OI Pledge Agreement made by OutSource International, Inc. in favor of Bank
of Boston Connecticut, as Agent, dated as of February 21, 1997
10.21 OI Security Agreement made by OutSource International, Inc. in favor of Bank
of Boston Connecticut, as Agent, dated as of February 21, 1997
10.22 Subsidiary Security Agreement made by 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. and
OutSource International of America, Inc. in favor of Bank of Boston
Connecticut, As Agent, dated as of February 21, 1997
10.23 Subsidiary Guarantee by 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. and OutSource
International of America, Inc. in favor of Bank of Boston Connecticut, As
Agent, dated as of February 21, 1997
10.24 Trademark Security Agreement made by OutSource International, Inc. and
OutSource Franchising, Inc. in favor of Bank of Boston Connecticut dated as of
February 21, 1997
10.25 Promissory Note dated February 21, 1997 issued by the Company to Paul M.
Burrell
10.26 Promissory Note dated February 21, 1997 issued by the Company to Alan
Schubert
10.27 Promissory Note dated February 21, 1997 issued by the Company to the
Lawrence H. Schubert Revocable Trust
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------
10.28 Promissory Note dated February 21, 1997 issued by the Company to the Nadya
I. Schubert Revocable Trust
10.29 Form of Promissory Note dated February 21, 1997 issued by Capital Staffing
Fund, Inc. to the following shareholders of the Company, relatives of such
shareholders, or executive officers of the Company, in the following principal
amounts: Paul M. Burrell-$500,000; Richard E. Burrell-$125,000; Scott T.
Burrell-$50,000; Robert E. Tomlinson-$200,000; Louis J. Morelli-$100,000;
Raymond L. Morelli-$100,000; and Rachele Spadoni-$125,000
10.30 Form of Promissory Note dated December 31, 1996 issued by Synadyne II, Inc.
to the following shareholders of the Company in the following principal
amounts: Lawrence H. Schubert Revocable Trust-$219,017; Robert A. Lefcort
Irrevocable Trust-$22,000; Nadya I. Schubert Revocable Trust-219,017; Louis J.
Morelli S Stock Trust-$22,000; Margaret Ann Janisch S Stock Trust-$22,000;
Matthew Schubert OutSource Trust-$100,509; Jason Schubert OutSource Trust-
$122,509; Alan E. Schubert-$575,923; Louis A. Morelli-$311,300; Louis J.
Morelli-$80,300; Raymond S. Morelli-$102,300; Matthew B. Schubert-$22,000;
Mindi Wagner-$21,426; Margaret Morelli Janisch-$102,300; Robert A. Lefcort-
$44,000; and Paul M. Burrell-$213,400
10.31 Form of Promissory Note dated December 31, 1996 issued by Synadyne III, Inc.
to the following shareholders of the Company in the following principal
amounts: Lawrence H. Schubert Revocable Trust-$209,061; Robert A. Lefcort
Irrevocable Trust-$21,000; Nadya I. Schubert Revocable Trust-209,061; Louis J.
Morelli S Stock Trust-$21,000; Margaret Ann Janisch S Stock Trust-$21,000;
Matthew Schubert OutSource Trust-$95,941; Jason Schubert OutSource Trust-
$116,941; Alan E. Schubert-$549,744; Louis A. Morelli-$297,150; Louis J.
Morelli-$76,650; Raymond S. Morelli-$97,650; Matthew B. Schubert-$21,000;
Mindi Wagner-$20,452; Margaret Morelli Janisch-$97,650; Robert A. Lefcort-
$42,000; and Paul M. Burrell-$203,700
10.32 Form of Promissory Note dated December 31, 1996 issued to OutSource
Franchising, Inc. by the following shareholders of the Company in the following
principal amounts: Lawrence H. Schubert Revocable Trust-$428,078; Robert A.
Lefcort Irrevocable Trust-$43,000; Nadya I. Schubert Revocable Trust-428,078;
Louis J. Morelli S Stock Trust-$43,000; Margaret Ann Janisch S Stock Trust-
$43,000; Matthew Schubert OutSource Trust-$196,450; Jason Schubert
OutSource Trust-$239,450; Alan E. Schubert-$1,125,667; Louis A. Morelli-
$608,450; Louis J. Morelli-$156,950; Raymond S. Morelli-$199,950; Matthew B.
Schubert-$43,000; Mindi Wagner-$41,878; Margaret Morelli Janisch-$199,950;
Robert A. Lefcort-$86,000; and Paul M. Burrell-$417,000
10.33 Form of Accumulated Adjustments Account Promissory Note dated February 20, 1997
issued by Capital Staffing Fund, Inc., OutSource Franchising, Inc. and
OutSource International of America, Inc. to the following shareholders
of the Company and Schedule of Allocation of AAA Distribution to such
shareholders: Lawrence H. Schubert Revocable Trust; Robert A. Lefcort
Irrevocable Trust; Nadya I. Schubert Revocable Trust; Louis J. Morelli S Stock
Trust; Margaret Ann Janisch S Stock Trust; Matthew Schubert OutSource Trust;
Jason Schubert OutSource Trust; Alan E. Schubert; Louis A. Morelli; Louis J.
Morelli; Raymond S. Morelli; Matthew B. Schubert; Mindi Wagner; Margaret
Morelli Janisch; Robert A. Lefcort; and Paul M. Burrell
10.34 Workers' Compensation and Employees Liability Insurance Policy from
January 1, 1997 to January 1, 1998 Policy Period
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------
10.35 Standby Letter of Credit issued by The First National Bank of Boston in favor
of National Union Fire Insurance Company
10.36 Form of Standard Franchise Agreement
10.37 Form of Standard PEO Services Agreement
10.38 Form of Standard Service Agreement with Allstate Insurance Company
16 Letter from McGladrey & Pullen, LLP
21 Subsidiaries of the Company
23.2 Consent of McGladrey & Pullen, LLP
23.3 Consent of Deloitte & Touche LLP-OutSource International, Inc. and
Subsidiaries
23.4 Consent of Deloitte & Touche LLP-Payray, Inc. and Tri-Temps, Inc.
23.5 Consent of Deloitte & Touche LLP-CST Services Inc.
23.6 Consent of Deloitte & Touche LLP-Superior Temporaries, Inc.
23.7 Consent of Deloitte & Touche LLP-Standby Personnel of Colorado Springs, Inc.
and Stand-By, Inc.
27 Financial Data Schedule
99 Consent of David Hershberg