AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1997
REGISTRATION NO. 333-33443
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT
NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
OUTSOURCE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
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)
---------------
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
---------------
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]
---------------
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.
================================================================================
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 OCTOBER 21, 1997
P R O S P E C T U S
3,700,000 SHARES
[GRAPHIC OMITTED]
[OUTSOURCE/registered trademark/]
[INTERNATIONAL]
[THE LEADER IN HUMAN RESOURCES]
Common Stock
----------------
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. The Common Stock has been approved for listing
on The Nasdaq National Market under the symbol "OSIX."
----------------
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.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
Per Share $ $ $ $
Total(3) $ $ $ $
- --------------------------------------------------------------------------------
(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 $1,340,000.
(3) The Selling Shareholders and certain other shareholders of the Company 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.
----------------
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
October , 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
October , 1997
[INSIDE FRONT COVER]
DESCRIPTION OF GRAPHIC:
An illustration depicting two sources of light, one representing flexible
staffing benefits and services, and one representing PEO benefits and services,
merging into a prism that represents the aggregation of OutSource benefits and
services. The light from the prism then reflects the spectrum of benefits and
services offered to OutSource clients and employees represented in silhouette
at the bottom of the graphic.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE 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".
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 WHICH BECAME EFFECTIVE ON OCTOBER 21, 1997. 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 28,000 employees, in 38
states and the District of Columbia.
The Tandem division provides approximately 17,000 flexible industrial
staffing personnel daily through a nationwide network of 80 Company-owned and 74
franchised offices. The Tandem division has approximately 14,000 clients and on
a daily basis provides services to approximately 3,000 of such clients. 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, excluding
revenues from the provision of PEO services to Tandem franchisees, increased
from $30.9 million to $137.0 million, a compound annual growth rate of
approximately 111%. 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
3
National Association of Temporary and Staffing Services ("NATSS"), the National
Association of Professional Employer Organizations ("NAPEO") and Staffing
Industry Analysts, Inc. ("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
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
fragmented 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 ........................ 8,448,788 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
- ----------------
(1) Excludes an aggregate of 1,972,096 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.
----------------
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,
-----------------------------------------------------------------------
SUPPLEMENTAL
PRO FORMA
1992 1993 1994 1995 1996 1996(1)
---------- ---------- ----------- ----------- ---------- --------------
CONSOLIDATED STATEMENT OF (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME DATA:
Net revenues .............................. $39,737 $43,472 $ 80,647 $149,825 $280,171 $346,753
======= ======= ======== ======== ========= =========
Gross profit .............................. $ 7,771 $ 9,105 $ 14,834 $ 23,555 $ 38,069 $ 54,718
======= ======= ======== ======== ========= =========
Operating income ........................ $ 1,568 $ 1,607 $ 3,581 $ 3,456 $ 5,483 $ 10,134
Net interest expense ..................... 328 263 820 1,259 2,175 2,390
Other expense (income)(2) ............... (59) (237) (51) (11) 1,448 943
------- ------- -------- -------- --------- ---------
Income (loss) before provision (benefit)
for income taxes ........................ 1,299 1,581 2,812 2,208 1,860 6,801
Pro forma income taxes (benefit)(3) ...... 486 595 1,059 859 757 2,620
------- ------- -------- -------- --------- ---------
Pro forma net income (loss)(3) ............ $ 813 $ 986 $ 1,753 $ 1,349 $ 1,103 $ 4,181
======= ======= ======== ======== ========= =========
Pro forma weighted average common
shares outstanding(4) .................. 6,050 6,050 6,050 6,050 6,050 9,950
======= ======= ======== ======== ========= =========
Pro forma earnings (loss) per share ...... $ .13 $ .16 $ .29 $ .22 $ .18 $ .42
======= ======= ======== ======== ========= =========
OTHER DATA(5):
EBITDA, as adjusted ........................ $ 2,792 $ 3,618 $ 5,993 $ 6,276 $ 9,005 $ 14,481
======= ======= ======== ======== ========= =========
Net income (loss), as adjusted ............ $ 1,382 $ 1,715 $ 2,947 $ 2,586 $ 3,220 $ 5,081
======= ======= ======== ======== ========= =========
Pro forma earnings (loss) per share,
as adjusted .............................. $ .53 $ .51
========= =========
SYSTEM OPERATING DATA:
System Revenues(6) ........................ $76,467 $92,496 $151,408 $242,681 $389,314 $433,966
======= ======= ======== ======== ========= =========
Number of employees (end of period) ...... 7,100 7,300 12,200 16,200 23,000
Number of offices (end of period) ......... 26 30 62 101 139
SIX MONTHS ENDED
JUNE 30,
------------------------------------
SUPPLEMENTAL
PRO FORMA
1996 1997 1997(1)
---------- ----------- -------------
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net revenues .............................. $116,122 $193,197 $204,447
========= ======== ========
Gross profit .............................. $ 15,752 $ 27,359 $ 30,020
========= ======== ========
Operating income ........................ $ 1,957 $ 2,798 $ 3,219
Net interest expense ..................... 774 3,513 1,669
Other expense (income)(2) ............... 55 1,219 (59)
--------- -------- --------
Income (loss) before provision (benefit)
for income taxes ........................ 1,128 (1,934) 1,609
Pro forma income taxes (benefit)(3) ...... 459 (467) 612
--------- -------- --------
Pro forma net income (loss)(3) ............ $ 669 $ (1,467) $ 997
========= ======== ========
Pro forma weighted average common
shares outstanding(4) .................. 6,050 6,690 9,950
========= ======== ========
Pro forma earnings (loss) per share ...... $ .11 $ (.22) $ .10
========= ======== ========
OTHER DATA(5):
EBITDA, as adjusted ........................ $ 3,208 $ 5,007 $ 5,539
========= ======== ========
Net income (loss), as adjusted ............ $ 1,178 $ (276) $ 997
========= ======== ========
Pro forma earnings (loss) per share,
as adjusted .............................. $ (.04) $ .10
======== ========
SYSTEM OPERATING DATA:
System Revenues(6) ........................ $164,463 $248,572 $256,095
========= ======== ========
Number of employees (end of period) ...... 21,000 28,000
Number of offices (end of period) ......... 126 163
JUNE 30, 1997
----------------------------
ACTUAL AS ADJUSTED(7)
---------- ---------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital .................................... $17,894 $ 18,626
Total assets ....................................... 96,754 101,330
Total long-term debt, less current maturities ...... 78,007 36,648
Total shareholders' equity (deficit) ............... (8,447) 38,219
- ----------------
NOTE: EBITDA for the six months ended June 30, 1997, on a supplemental pro forma
basis, as adjusted, was incorrectly presented on page 5 and 19 of the
preliminary prospectus dated October 2, 1997. This prospectus reflects the
correct amount of $5,539,000.
(1) 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 1,360,304 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 $13.7 million, net of a $6.8 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
six months ended June 30, 1997 include the elimination of $1.2 million of
non-operating expense arising from a Put Warrants Valuation Adjustment (as
hereinafter defined, see note 2 below) and included in the Company's
historical results for the same period, as discussed in Note 2 below, which
increased supplemental pro forma earnings per share by $0.11.
(2) 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
5
the Put Warrants Liability to fair value at the end of each accounting
period (the "Put Warrants Valuation Adjustment"). Other expense (income) for
the six months ended June 30, 1997 includes non-operating expense of $1.2
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 June 30,
1997. Based on an assumed offering price of $15.00 per share and the
consummation of this Offering prior to December 31, 1997, the Put Warrants
Valuation Adjustment will result in non-operating expenses in the third and
fourth quarters of 1997 totalling $0.6 million ($0.5 million net of income
tax benefit). At the time of the Offering, the Warrants, with an adjusted
carrying value of $20.4 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.
(3) 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 six months ended June 30, 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.
(4) Includes (a) the 5,448,788 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 (336,430) 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.
(5) 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 $809,000 and $262,000 for the six
months ended June 30, 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
$1.2 million of non-operating expense arising from the June 30, 1997 Put
Warrants Valuation Adjustment, both discussed in Note 2 above; and (c)
income taxes computed as if the Company had been subject to federal and
applicable state income taxes for such periods. See footnote 1 to the
table in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations" for summary operating 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. (NOTE: Supplemental
pro forma EBITDA for the six months ended June 30, 1997, as adjusted,
reflects a correction from the preliminary prospectus dated October 2,
1997). 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. Cash flows for the periods
presented were as follows:
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
----------- --------- ----------- ----------- ------------ ------------ ------------
(IN THOUSANDS)
Cash flows provided by (used in):
Operating activities .................. $ 1,489 $ 724 $ 1,267 $ 2,787 $ (1,280) $ (3,202) $ (9,584)
Investing activities .................. (136) (107) (2,246) (2,026) (4,834) (3,817) (22,643)
Financing activities .................. (1,358) (609) 1,028 678 4,647 5,576 33,361
--------- ------ -------- -------- -------- -------- ---------
Net increase (decrease) in cash ...... $ (5) $ 8 $ 49 $ 1,439 $ (1,467) $ (1,443) $ 1,134
========= ====== ======== ======== ======== ======== =========
(6) 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 information regarding the Company's
penetration of the market for its services, as well as the scope and size
of the Company's operations, but are not an alternative to revenues
determined in accordance with generally accepted accounting principles as
an indicator of operating performance. The net revenues of Franchisees,
which are not earned by or available to the Company, are derived from
reports that are unaudited. System revenues consist of the following:
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 $ 346,753
Less Company revenues from:
Franchise royalties ............... (1,393) (1,586) (2,712) (4,138) (5,671) (4,827)
Services to franchisees ............ -- -- (4,698) (7,507) (35,079) (35,079)
Add Franchisees' net revenues ...... 38,123 50,610 78,171 104,501 149,893 127,119
--------- --------- -------- -------- ---------- ----------
System revenues ..................... $ 76,467 $ 92,496 $151,408 $242,681 $ 389,314 $ 433,966
========= ========= ======== ======== ========== ==========
SIX MONTHS ENDED JUNE 30,
--------------------------------------
SUPPLEMENTAL
PRO FORMA
1996 1997 1997
------------ ----------- -------------
Company's net revenues ............ $ 116,122 $ 193,197 $ 204,446
Less Company revenues from:
Franchise royalties ............... (2,640) (2,905) (2,779)
Services to franchisees ............ (13,200) (17,003) (17,003)
Add Franchisees' net revenues ...... 64,181 75,283 71,431
---------- --------- ----------
System revenues ..................... $ 164,463 $248,572 $ 256,095
========== ========= ==========
(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 $50.0 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. On October 21,
1997, the Company effectuated a reverse stock split pursuant to which each then
issued and outstanding share of Common Stock was converted into approximately
0.65 shares of Common Stock. Immediately prior to the Offering, the Company will
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. In
addition, the Internal Revenue Service ("IRS") is conducting an examination
division market segment specialization program to examine PEOs throughout the
United States. See "--Potential Legal Liability" and "--Risk of Loss of
Qualified Status for Certain Tax Purposes."
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
eleven states, has
7
submitted license applications in two other states, and intends to submit
license applications in two other states. The absence of required licenses in
those states where licensing is required could prohibit the Company from
providing PEO services in such states. See "Business--Industry Regulation."
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.
8
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, 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. Although the
Company continuously reviews potential acquisition candidates and currently has
several offers outstanding, it has not entered into any agreement,
understanding or commitment with respect to any additional acquisitions at this
time. There can be no assurance that the Company will be able to continue 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.
9
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 increases in goodwill and other intangible
assets. Net identifiable intangible assets, which include customer lists,
employee lists and covenants not to compete acquired in the acquisitions were
approximately $6.0 million at June 30, 1997, representing approximately 6.2% 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 $25.2 million at June 30, 1997
representing approximately 26.0% 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 June 30, 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
10
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 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
11
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."
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 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 PEOs 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. A
retroactive application by the IRS of an adverse conclusion could have a
material effect on the Company's financial position, results of operations and
liquidity. In such a scenario, the Company would also face the risk of client
dissatisfaction as well as potential litigation. 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. There can be no assurance, however, that the
12
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."
DECREASE IN GROSS PROFIT AND OPERATING MARGINS
The Company's gross profit margin decreased from 18.4% in 1994 to 13.6%
in 1996 and its operating margin decreased from 4.4% in 1994 to 2.0% in 1996.
The decreases in the Company's gross profit and operating margins were primarily
attributable to the increase from 44.2% in 1994 to 61.4% in 1996 of the portion
of the Company's total net revenues generated by its PEO services, which has
significantly lower gross profit and operating margins than its flexible
industrial staffing services. In the event that revenues derived from PEO
services comprise a greater percentage of the Company's total net revenues in
the future, the Company's gross profit and operating margins will continue to
decrease.
POTENTIAL LOSS OF WORKING CAPITAL FUNDING SOURCE
Flexible industrial staffing employees are paid by the Company on a
daily or weekly basis and PEO employees are paid by the Company on a weekly,
bi-weekly, semi-monthly or monthly basis. The Company, however, receives payment
for these services from all its flexible industrial staffing customers and
approximately 10% of its PEO customers, on average, 35 to 45 days from the date
of invoice. As new offices are established or acquired, or as existing offices
expand, there will be increasing requirements for cash to fund these payroll
obligations. The Company's primary source of working capital funds is the
Revolving Facility. If the Revolving Facility became unavailable and the Company
was unable to secure alternative financing on acceptable terms, its business,
financial condition, results of operations and liquidity would be materially
adversely affected.
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 consummation 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."
The Company has entered enter into a shareholder protection rights
agreement (the "Rights Agreement") and has declared 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."
13
VOTING TRUST AGREEMENT; SHAREHOLDERS' AGREEMENT
On February 21, 1997, certain shareholders of the Company deposited
4,683,982 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 47.2% of the issued and outstanding
shares of Common Stock (or 40.6% 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."
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 4,748,788 shares
of Common Stock (or 4,193,788 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 1,040,000 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
611,792 shares of Common Stock (net of forfeitures) have been
14
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 1,360,304 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 $12.89 per share in the net tangible book value of
their shares. See "Dilution."
15
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 $40.5 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 $34.8 million will
be used to reduce indebtedness under certain credit obligations; and (ii)
approximately $5.7 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) $9.8 million
under the Company's $50.0 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 8.8% per annum at June 30,
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) $2.8 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."
Subject to the consummation of this Offering, the Lenders have agreed to a
$35.0 million increase in the Revolving Credit Facility to $85.0 million,
primarily to finance additional acquisitions by the Company over the next
several years. As a result of the reduction of outstanding indebtedness under
the Revolving Facility, an aggregate of $46.0 million will be available under
the $85.0 million 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. 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.
16
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
June 30, 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."
JUNE 30, 1997
---------------------------------
ACTUAL AS ADJUSTED(1)
--------------- ---------------
Short-term debt:
Current maturities of long term debt to related parties ............... $ 731,797 $ --
Current maturities of obligations under capital leases and other ... 2,784,308 2,784,308
------------ -------------
Total short-term debt ................................................ 3,516,105 2,784,308
------------ -------------
Long-term debt, less current maturities:
Revolving Facility ................................................... 35,113,585 25,280,318
Senior Notes(2) ...................................................... 6,794,074 --
Put Warrants Liability(3) .......................................... 19,785,948 --
Due to related parties ............................................. 4,944,936 --
Other ............................................................... 11,367,960 11,367,960
------------ -------------
Total long-term debt, less current maturities ........................ 78,006,503 36,648,278
------------ -------------
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, 5,448,788 issued and outstanding; as adjusted --
8,448,788 shares issued and outstanding(4) ........................ 5,449 8,449
Additional paid-in capital (deficit)(3) .............................. (7,484,321) 53,406,300
Retained earnings (deficit)(2) ....................................... (968,028) (15,195,721)
------------ -------------
Total shareholders' equity (deficit) ................................. (8,446,900) 38,219,028
------------ -------------
Total capitalization ................................................ $ 73,075,708 $ 77,651,614
============ =============
- ----------------
(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 $13.7 million extraordinary loss (net of a
$6.8 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 $0.6 million ($0.5
million net of income tax benefit) that would have been recognized had the
Offering been consummated on June 30, 1997 at an assumed offering price of
$15.00 per share, due to the Put Warrants Valuation Adjustment. See
"Management--Warrants."
(4) Excludes 611,792 shares of Common Stock issuable pursuant to options
granted under the Stock Option Plan, and 1,360,304 Warrant Shares. See
"Management--Stock Option Plan" and "Management--Warrants."
17
DILUTION
The net tangible book value (deficit) of the Company at June 30, 1997 was
($39.7) million or ($7.28) 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 June 30,
1997 by the number of shares of Common Stock outstanding at June 30, 1997.
After giving effect to (i) the dilutive effects of the Warrants (ii) 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 June 30, 1997 would have
been $2.11 per share of Common Stock. This represents an immediate dilution in
pro forma net tangible book value of $12.89 per share to new investors
purchasing shares in the Offering and an immediate increase in pro forma net
tangible book value of $7.94 (including $2.92 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) ............... ($ 7.28)
Effect of the Warrants ......................................................... $ 1.45
Pro forma increase in net tangible book value per share attributable to:
Termination of the Put Right(2) ................................................ 2.92
New Investors .................................................................. 5.02
-------
Pro forma net tangible book value per share of Common Stock, after the Offering 2.11
--------
Dilution per share to New Investors(1) .......................................... $ 12.89
========
The above calculation does not give effect to the $13.7 million
extraordinary loss (net of a $6.8 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 extraordinary loss, the pro forma net tangible book value would be $0.72
per share of Common Stock. This represents an adjusted dilution in pro forma
net tangible book value of $14.28 per share to new investors purchasing shares
in the Offering and an adjusted increase in pro forma net tangible book value
of $6.55 (including $2.92 attributable to the termination of the Put Right) per
share to the Existing Shareholders.
The following table sets forth, as of June 30, 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 ...... 5,448,788 64.5% $ -- (3) 0.0% $ --
New Investors ............... 3,000,000 35.5 45,000,000(4) 100.0 $15.00
--------- ------ --------------- ------
Total(5) .................. 8,448,788 100.0% $ 45,000,000 100.0%
========= ====== =============== ======
- ----------------
(1) Excludes 611,792 shares of Common Stock issuable pursuant to outstanding
options under the Stock Option Plan.
(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 $0.6
million ($0.5 million net of income tax benefit) that would have been
recognized had the Offering been consummated on June 30, 1997 at an
assumed offering price of $15.00 per share and (ii) the reclassification
of the resulting adjusted Put Warrant Liability of $20.4 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.
(5) Excludes 611,792 shares of Common Stock issuable pursuant to outstanding
options under the Stock Option Plan and 1,360,304 Warrant Shares. See
"Management--Stock Option Plan," "Management--Warrants" and Notes 5 and 10
to the Company's Consolidated Financial Statements.
18
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 six months ended June 30, 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 June 30, 1997 and for the six months ended June
30, 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(1)
---------- ---------- ----------- ----------- ---------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net revenues .............................. $39,737 $43,472 $ 80,647 $149,825 $280,171 $346,753
Cost of revenues ........................... 31,966 34,367 65,813 126,270 242,102 292,035
------- ------- -------- -------- --------- ---------
Gross profit .............................. 7,771 9,105 14,834 23,555 38,069 54,718
Shareholders' compensation .................. 898 1,400 2,245 2,370 2,321 634
Amortization of intangible assets ......... -- -- -- 41 424 2,403
Other selling, general and administrative ... 5,305 6,098 9,008 17,688 29,841 41,547
------- ------- -------- -------- --------- ---------
Operating income ........................... 1,568 1,607 3,581 3,456 5,483 10,134
Net interest expense ..................... 328 263 820 1,259 2,175 2,390
Other expense (income)(2) .................. (59) (237) (51) (11) 1,448 943
------- ------- -------- -------- --------- ---------
Income (loss) before provision (benefit)
for income taxes ........................ 1,299 1,581 2,812 2,208 1,860 6,801
Pro forma income taxes (benefit)(3) ...... 486 595 1,059 859 757 2,620
------- ------- -------- -------- --------- ---------
Pro forma net income(loss)(3) ............ $ 813 $ 986 $ 1,753 $ 1,349 $ 1,103 $ 4,181
======= ======= ======== ======== ========= =========
Pro forma weighted average common
shares outstanding(4) ..................... 6,050 6,050 6,050 6,050 6,050 9,950
======= ======= ======== ======== ========= =========
Pro forma earnings (loss) per share ...... $ .13 $ .16 $ .29 $ .22 $ .18 $ .42
======= ======= ======== ======== ========= =========
OTHER DATA(5):
System Revenues(6) ........................ $76,467 $92,496 $151,408 $242,681 $389,314 $433,966
======= ======= ======== ======== ========= =========
EBITDA, as adjusted ........................ $ 2,792 $ 3,618 $ 5,993 $ 6,276 $ 9,005 $ 14,481
======= ======= ======== ======== ========= =========
Net income (loss), as adjusted ............ $ 1,382 $ 1,715 $ 2,947 $ 2,586 $ 3,220 $ 5,081
======= ======= ======== ======== ========= =========
Pro forma earnings (loss) per share,
as adjusted .............................. $ .53 $ .51
========= =========
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
SUPPLEMENTAL
PRO FORMA
1996 1997 1997(1)
---------- ------------ -------------
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net revenues .............................. $116,122 $193,197 $204,447
Cost of revenues ........................... 100,370 165,838 174,427
--------- -------- --------
Gross profit .............................. 15,752 27,359 30,020
Shareholders' compensation .................. 963 292 72
Amortization of intangible assets ......... 148 892 1,190
Other selling, general and administrative ... 12,684 23,377 25,539
--------- -------- --------
Operating income ........................... 1,957 2,798 3,219
Net interest expense ..................... 774 3,513 1,669
Other expense (income)(2) .................. 55 1,219 (59)
--------- -------- --------
Income (loss) before provision (benefit)
for income taxes ........................ 1,128 (1,934) 1,609
Pro forma income taxes (benefit)(3) ...... 459 (467) 612
--------- -------- --------
Pro forma net income(loss)(3) ............ $ 669 $ (1,467) $ 997
========= ======== ========
Pro forma weighted average common
shares outstanding(4) ..................... 6,050 6,690 9,950
========= ======== ========
Pro forma earnings (loss) per share ...... $ .11 $ (.22) $ .10
========= ======== ========
OTHER DATA(5):
System Revenues(6) ........................ $164,463 $248,572 $256,095
========= ======== ========
EBITDA, as adjusted ........................ $ 3,208 $ 5,007 $ 5,539
========= ======== ========
Net income (loss), as adjusted ............ $ 1,178 $ (276) $ 997
========= ======== ========
Pro forma earnings (loss) per share,
as adjusted .............................. $ (.04) $ .10
======== ========
19
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------------- ----------------
1992 1993 1994 1995 1996 1997
----------- -------- --------- --------- ------------ ----------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) ........................... $ ( 130) $1,313 $ 1,596 $ 1,540 $ (3,172) $ 17,894
Total assets ....................................... 5,191 5,923 13,791 24,708 55,877 96,754
Revolving Facility and line of credit ............... 1,788 1,523 4,827 6,468 9,889 35,114
Senior Notes ....................................... -- -- -- -- -- 6,794
Put Warrants Liability .............................. -- -- -- -- -- 19,786
Long-term debt to related parties,
less current maturities ........................... -- -- -- -- 2,403 4,945
Other long-term debt, less current maturities ...... 370 60 2,713 2,815 10,874 11,368
Total shareholders' equity (deficit) ............... 262 1,843 2,701 3,603 4,495 (8,447)
- ----------------
(1) 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 $13.7 million, net of a $6.8 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
six months ended June 30, 1997 include the elimination of $1.2 million of
non-operating expense arising from a Put Warrants Valuation Adjustment and
included in the Company's historical results for the same period, as
discussed in Note 2 below, which increased supplemental pro forma earnings
per share by $0.11.
(2) 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 six months ended June 30, 1997 includes non-operating expense of
$1.2 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 June 30,
1997. Based on an assumed offering price of $15.00 per share and the
consummation of this Offering prior to December 31, 1997, the Put Warrants
Valuation Adjustment will result in non-operating expenses in the third and
fourth quarters of 1997 totalling $0.6 million ($0.5 million net of income
tax benefit). At the time of the Offering, the Warrants, with an adjusted
carrying value of $20.4 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.
(3) 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 six months ended June 30, 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.
(4) Includes (a) the 5,448,788 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 (336,430) 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.
(5) 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 $809,000 and $262,000 for the six
months ended June 30, 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
$1.2 million of non-operating expense arising from the June 30, 1997 Put
Warrants Valuation Adjustment, both discussed in Note 2 above; and (c)
income taxes computed as if the Company had been subject to federal and
applicable state income taxes for such periods. See footnote 1 to the
table in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations" for summary operating data
reflecting these adjustments.
20
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. (NOTE: Supplemental
pro forma EBITDA for the six months ended June 30, 1997, as adjusted,
reflects a correction from the preliminary prospectus dated October 2,
1997). 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. Cash flows for the periods
presented were as follows:
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
----------- --------- ----------- ----------- ------------ ------------ ------------
(IN THOUSANDS)
Cash flows provided by (used in):
Operating activities .................. $ 1,489 $ 724 $ 1,267 $ 2,787 $ (1,280) $ (3,202) $ (9,584)
Investing activities .................. (136) (107) (2,246) (2,026) (4,834) (3,817) (22,643)
Financing activities .................. (1,358) (609) 1,028 678 4,647 5,576 33,361
--------- ------ -------- -------- -------- -------- ---------
Net increase (decrease) in cash ...... $ (5) $ 8 $ 49 $ 1,439 $ (1,467) $ (1,443) $ 1,134
========= ====== ======== ======== ======== ======== =========
(6) 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
provide information regarding the Company's penetration of the market for
its services, as well as the scope and size of the Company's operations,
but are not an alternative to revenues determined in accordance with
generally accepted accounting principles as an indicator of operating
performance. The net revenues of Franchisees, which are not earned by or
available to the Company, are derived from reports that are unaudited.
System revenues consist of the following:
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 $ 346,753
Less Company revenues from:
Franchise royalties ............... (1,393) (1,586) (2,712) (4,138) (5,671) (4,827)
Services to franchisees ............ -- -- (4,698) (7,507) (35,079) (35,079)
Add Franchisees' net revenues ...... 38,123 50,610 78,171 104,501 149,893 127,119
--------- --------- -------- -------- ---------- ----------
System revenues ..................... $ 76,467 $ 92,496 $151,408 $242,681 $ 389,314 $ 433,966
========= ========= ======== ======== ========== ==========
SIX MONTHS ENDED JUNE 30,
--------------------------------------
SUPPLEMENTAL
PRO FORMA
1996 1997 1997
------------ ----------- -------------
Company's net revenues ............ $ 116,122 $ 193,197 $ 204,446
Less Company revenues from:
Franchise royalties ............... (2,640) (2,905) (2,779)
Services to franchisees ............ (13,200) (17,003) (17,003)
Add Franchisees' net revenues ...... 64,181 75,283 71,431
---------- --------- ----------
System revenues ..................... $ 164,463 $248,572 $ 256,095
========== ========= ==========
21
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.
Flexible staffing and PEO revenues, and related costs of wages, salaries,
employment taxes and benefits related to worksite employees, are recognized in
the period in which the those employees perform the flexible staffing and PEO
services. Because the Company is at risk for all of its direct costs,
independently of whether payment is received from its clients, and consistent
with industry practice, all amounts billed to clients for gross salaries and
wages, related employment taxes, health benefits and workers' compensation
coverage are recognized as revenue by the Company, net of credits and
allowances.
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 seven additional
geographic regions by establishing offices in Arizona, northern California,
southern California, Georgia, Maryland/ Pennsylvania/Virginia,
Massachusetts/New Hampshire and Michigan. This expansion included the Company's
acquisition of 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 June 30, 1997, the Company made eight 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
22
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; a competitor
in Wisconsin with approximately $1.0 million in annual revenue; and a franchise
in Minnesota, with one office and approximately $2.0 million in annual revenue.
The 1997 Acquisitions, which generated adjusted EBITDA of approximately $5.2
million in 1996, were purchased by the Company for $24.6 million, not including
the cost of tangible assets. Adjusted EBITDA is net income before interest,
taxes, depreciation, amortization and discontinued shareholder compensation and
expenses.
The 1996 Acquisitions and 1997 Acquisitions have resulted in a significant
increase in goodwill and other intangible assets. At June 30, 1997, the
unamortized portion of net intangible assets was $31.2 million, including $6.0
million of net identifiable intangible assets and $25.2 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 $31.7 million) was recorded as either 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 $2.4 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.
23
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.
The following tables set forth the amounts and percentage of net revenues
of certain items in the Company's consolidated statements of income for the
indicated periods.
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ -------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ------------
(IN THOUSANDS)
Net revenues:
Flexible industrial staffing ............... $ 41,622 $ 57,791 $ 97,397 $ 37,715 $ 83,298
PEO ....................................... 35,609 85,557 172,069 73,682 103,520
Franchise royalties ........................ 2,712 4,138 5,671 2,640 2,905
Other ....................................... 704 2,339 5,034 2,085 3,474
--------- --------- --------- --------- --------
Total net revenues ........................ $ 80,647 $149,825 $280,171 $116,122 $193,197
========= ========= ========= ========= ========
Gross profit ................................. $ 14,834 $ 23,555 $ 38,069 $ 15,752 $ 27,359
Selling, general and administrative expenses(1) 11,253 20,099 32,586 13,795 24,561
--------- --------- --------- --------- --------
Operating income ........................... 3,581 3,456 5,483 1,957 2,798
Net interest and other expense(1) ............ 769 1,248 3,623 829 4,732
--------- --------- --------- --------- --------
Income (loss) before provision (benefit) for
income taxes .............................. 2,812 2,208 1,860 1,128 (1,934)
Pro forma income taxes (benefit)(1) ......... 1,059 859 757 459 (467)
--------- --------- --------- --------- --------
Pro forma net income (loss)(1) ............... $ 1,753 $ 1,349 $ 1,103 $ 669 $ (1,467)
========= ========= ========= ========= ========
System Revenues(2) ........................... $151,408 $242,681 $389,314 $164,463 $248,572
========= ========= ========= ========= ========
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
Net revenues:
Flexible industrial staffing ............... 51.6% 38.6% 34.8% 32.5% 43.1%
PEO ....................................... 44.2 57.1 61.4 63.4 53.6
Franchise royalties ........................ 3.4 2.8 2.0 2.3 1.5
Other ....................................... 0.8 1.5 1.8 1.8 1.8
------ ------ ------ ------ ---------
Total net revenues ........................ 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== =========
Gross profit ................................. 18.4% 15.7% 13.6% 13.6% 14.1%
Selling, general and administrative expenses(1) 14.0 13.4 11.6 11.9 12.7
------ ------ ------ ------ ---------
Operating income ........................... 4.4 2.3 2.0 1.7 1.4
Net interest and other expense(1) ............ 0.9 0.8 1.3 0.7 2.4
------ ------ ------ ------ ---------
Income (loss) before provision (benefit) for
income taxes .............................. 3.5 1.5 0.7 1.0 (1.0)
Pro forma income taxes (benefit)(1) ......... 1.3 0.6 0.3 0.4 (0.2)
------ ------ ------ ------ ---------
Pro forma net income (loss)(1) ............... 2.2% 0.9% 0.4% 0.6% (0.8)%
====== ====== ====== ====== =========
- ----------------
(1) 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
24
and a portion of the compensation for Mr. Burrell was discontinued after the
Reorganization. The discontinued Shareholder Compensation was $1.9 million
in 1994, $2.0 million in 1995, $2.0 million in 1996, $809,000 for the six
months ended June 30, 1996 and $262,000 for the six months ended June 30,
1997. 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
"Business--Legal Proceedings" and Note 7 to the Company's Consolidated
Financial Statements.) During the six months ended June 30, 1997, the
Company recorded non-operating expense of approximately $1.2 million related
to the Put Warrants Valuation Adjustment (See Note 5 to the Company's
Consolidated Financial Statements). The following table sets forth the
amounts and the percentage of certain items in the Company's consolidated
statements of income, adjusted for the above items as follows: (i) selling,
general and administrative expenses excludes discontinued Shareholder
Compensation; (ii) operating income excludes discontinued Shareholder
Compensation and (iii) net income (loss) excludes discontinued Shareholder
Compensation, the unusual expenses in 1996, and the June 30, 1997 Put
Warrants Valuation Adjustment and is calculated assuming the Company had
been subject to federal and state income taxes and taxed as a C corporation
during each of these periods.
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- ---------------------------
1994 1995 1996 1996 1997
----------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES)
Selling, general and administrative expenses,
as adjusted .............................. $ 9,337 $ 18,074 $ 30,635 $ 12,986 $ 24,299
As a percentage of net revenues ............ 11.6% 12.1% 10.9% 11.2% 12.6%
Operating income, as adjusted ............... $ 5,497 $ 5,481 $ 7,434 $ 2,766 $ 3,060
As a percentage of net revenues ............ 6.8% 3.7% 2.7% 2.4% 1.6%
Net income (loss), as adjusted ............ $ 2,947 $ 2,586 $ 3,220 $ 1,178 $ (276)
As a percentage of net revenues ............ 3.7% 1.7% 1.1% 1.0% (0.1)%
(2) 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
provide information regarding the Company's penetration of the market for
its services, as well as the scope and size of the Company's operations,
but are not an alternative to revenues determined in accordance with
generally accepted accounting principles as an indicator of operating
performance. The net revenues of Franchisees, which are not earned by or
available to the Company, are derived from reports that are unaudited.
System revenues consist of the following:
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- ---------------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ----------- -------------
(IN THOUSANDS)
Company's net revenues ............ $ 80,647 $149,825 $280,171 $116,122 $ 193,197
Less Company revenues from:
Franchise royalties ............... (2,712) (4,138) (5,671) (2,640) (2,905)
Services to franchisees ............ (4,698) (7,507) (35,079) (13,200) (17,003)
Add Franchisees' net revenues ...... 78,171 104,501 149,893 64,181 75,283
-------- -------- --------- --------- ---------
System revenues ..................... $151,408 $242,681 $389,314 $164,463 $ 248,572
======== ======== ========= ========= =========
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
NET REVENUES. Net revenues increased $77.1 million, or 66.4%, from $116.1
million in the first six months of 1996 to $193.2 million in the first six
months of 1997. This increase resulted from growth in PEO revenues from the
first six months of 1996 to the first six months of 1997 of $29.8 million, or
40.5%, and flexible industrial staffing revenues of $45.6 million, or 120.9%.
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 primarily consummated during the
second quarter of 1996) and the 1997 Acquisitions, which resulted in an
increase of $27.0 million in revenues; and (ii) internal growth, which resulted
in an increase of $18.6 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 37 locations
as of June 30, 1996 to 80 locations as of June 30, 1997, with 30 of the 43
additional locations arising from the 1996 Acquisitions and 1997 Acquisitions.
25
System revenues increased $84.1 million, or 51.1%, from $164.5 million in
the first six months of 1996 to $248.6 million in the first six months of 1997.
The increase in system revenues was attributable to the $77.0 million increase
in the Company's net revenues discussed above, of which $4.1 million related to
services provided to franchises, and a $11.1 million increase in franchise
industrial staffing revenues. System revenues include franchise revenues which
are not earned by or available to the Company.
GROSS PROFIT. Gross profit increased $11.6 million, or 73.7%, from $15.8
million in the first six months of 1996 to $27.4 million in the first six
months of 1997. Gross profit as a percentage of net revenues increased from
13.6% in the first six months of 1996 to 14.1% in the first six months of 1997.
This increase was primarily due to 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 six months of
1997, PEO net revenues generated gross profit margins of 3.3% as compared to
gross profit margins of 23.8% generated by flexible industrial staffing
operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, increased $10.8 million, or 78.0%, from $13.8 million
in the first six months of 1996 to $24.6 million in the first six months 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
20 new office locations in existing flexible industrial staffing regions. As a
percentage of net revenues, selling, general and administrative expenses
increased from 11.9% in the first six months of 1996 to 12.7% in the first six
months of 1997.
NET INTEREST AND OTHER EXPENSE. Net interest and other expense increased by
$3.9 million, from $0.8 million in the first six months of 1996 to $4.7 million
in the first six months of 1997. This increase included $1.2 million
attributable to the Put Warrants Valuation Adjustment. The remaining increase of
$2.7 million 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 $25.2 million in
the first six months 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) decreased by $2.2 million, from $0.7
million in net income in the first six months of 1996 to a $1.5 million net
loss in the first six months of 1997. This decrease was primarily due to a $1.2
million Put Warrants Valuation Adjustment with the remainder due to increases
in selling, general and administrative expenses (including a $0.7 million
increase in amortization of intangible assets arising primarily from the 1997
Acquisitions) and net interest expense, as discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
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.
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 above, of which $29.2 million related to services provided to
franchises, and a $45.4 million increase in franchise industrial staffing
revenues. System revenues include franchise revenues which are not earned by or
available to the Company.
26
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 increased $12.5 million, or 62.1%, from $20.1 million
in 1995 to $32.6 million in 1996. The increase in selling, general and
administrative expenses in 1996 was primarily a result of an incremental $6.4
million for salaries and other operating costs incurred in continuing the
establishment of flexible industrial staffing offices in seven 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 13.4% in 1995 to 11.6% 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 AND OTHER EXPENSE. Net interest and other expense increased
by $2.4 million, from $1.2 million in 1995 to $3.6 million in 1996. This
increase included $1.4 million attributable to unusual expenses related to the
Company's withdrawal of a registration statement and an internal investigation
into certain Company transactions. The remaining increase of $1.0 million 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.
NET INCOME (LOSS). Net income decreased by $0.2 million, from $1.3 million
in 1995 to $1.1 million in 1996. This decrease was primarily due to $1.4
million of unusual expenses related to the Company's withdrawal of a
registration statement and an internal investigation into certain Company
transactions, as well as an incremental $0.5 million of operating losses
incurred in continuing the establishment of flexible industrial staffing
offices in seven new geographic regions. The effect of these expenses was
partially offset by increases in net revenues and gross profit, as discussed
above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
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.
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 above, of which $4.2 million related to services provided to
franchises, and a $26.3 million increase in franchise industrial staffing
revenues. System revenues include franchise revenues which are not earned by or
available to the Company.
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
27
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 increased $8.8 million, or 78.6%, from $11.3 million in
1994 to $20.1 million in 1995. The increase in selling, general and
administrative expenses in 1995 was primarily a result of $4.8 million for
salaries and other operating costs incurred in establishing flexible industrial
staffing offices in seven 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 decreased from 14.0% in 1994 to 13.4% in
1995.
NET INTEREST AND OTHER EXPENSE. Net interest and other expense increased
$0.4 million, from $0.8 million in 1994 to $1.2 million in 1995. The increase
in net interest and other 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 decreased by $0.5 million, from $1.8 million
in 1994 to $1.3 million in 1995. This decrease was primarily due to $2.2
million of operating losses incurred in connection with the establishment of
flexible industrial staffing offices in seven new geographic regions, offset by
increases in net revenues and gross profit, as discussed above.
ADDITIONAL OPERATING INFORMATION
The following table sets forth the gross profit margins for the Company's
two primary areas of operations for the indicated periods.
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- ------
Flexible industrial staffing ...... 25.0% 25.2% 24.5% 25.4% 23.8%
PEO .............................. 3.9 3.9 3.7 3.5 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.
FLEXIBLE INDUSTRIAL STAFFING
Net revenues from the Company's flexible industrial staffing services
increased $55.8 million, from $41.6 million in 1994 to $97.4 million in 1996,
or a compound annual growth rate of 53.0%. However, this increase represented a
decreasing share of the Company's total net revenues, from 51.6% in 1994 to
34.8% in 1996.
Gross profit from the Company's flexible industrial staffing services
increased $13.5 million, from $10.4 million in 1994 to $23.9 million in 1996,
or a compound annual growth rate of 51.4% per year. Although this represented a
decreasing share of the Company's total gross profit, from 70.1% in 1994 to
62.7% in 1996, this decrease was less than the decrease in the share of the
Company's total net revenues attributable to flexible industrial staffing
because of the higher gross profit percentage from flexible industrial staffing
as compared to PEO.
28
The percentages of the Company's total net revenues and gross profit from
flexible industrial staffing services increased to 43.1% and 72.5%,
respectively, for the six months ended June 30, 1997, primarily due to the 1997
Acquisitions, all of which were flexible industrial staffing businesses.
PEO
Net revenues from the Company's PEO services increased $136.5 million,
from $35.6 million in 1994 to $172.1 million in 1996, or a compound annual
growth rate of 119.8%. This also represented an increasing share of the
Company's total net revenues, from 44.2% in 1994 to 61.4% in 1996.
Gross profit from the Company's PEO services increased $5.0 million, from
$1.4 million in 1994 to $6.4 million in 1996, or a compound annual growth rate
of 114.1%. Although this represented an increasing share of the Company's total
gross profit, from 9.4% in 1994 to 16.7% in 1996, this increase was less than
the increase in the share of the Company's total net revenues attributable to
PEO because of the lower gross profit percentage from PEO as compared to
flexible industrial staffing.
The percentages of the Company's total net revenues and gross profit from
PEO services decreased to 53.6% and 12.4%, respectively, for the six months
ended June 30, 1997, primarily due to the 1997 Acquisitions, all of which were
flexible industrial staffing businesses.
FRANCHISE AND OTHER
Net revenues from the Company's franchise and other services increased
$7.3 million, from $3.4 million in 1994 to $10.7 million in 1996, or a compound
annual growth rate of 77.0%. This increase represented a slightly decreasing
share of the Company's total net revenues, from 4.2% in 1994 to 3.8% in 1996.
Gross profit from the Company's franchise and other services increased
$4.8 million, from $3.0 million in 1994 to $7.8 million in 1996, or a compound
annual growth rate of 60.6%. This increase represented a slightly increasing
share of the Company's total gross profit, from 20.5% in 1994 to 20.6% in 1996.
The percentage of the Company's total net revenues and gross profit from
franchise and other services decreased to 3.3% and 15.1%, respectively, for the
six months ended June 30, 1997, primarily due to the 1997 Acquisitions, all of
which were flexible industrial staffing businesses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds for working capital and other needs
have been a $50.0 million Revolving Facility with the Lenders, the Senior Notes
and borrowings from related parties.
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 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 June 30, 1997,
the Company had outstanding borrowings under the Revolving Facility of $35.1
million, bearing interest at an effective interest rate of 8.8%. 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
29
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 786,517 of the
Warrants (the "Initial Warrants") to the Senior Note Holders and placed an
additional 573,787 Warrants (the "Additional Warrants") in escrow. The Warrants
are exercisable at a price of $.015 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 June 30, 1997, the Company also (i) was indebted to certain of its
shareholders, their family members and an executive officer 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 $5.7 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 $6.2 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 $1.9 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 $8.0 million; and (v) had obligations under mortgages totalling $2.5
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. Subject to consummation
of this Offering, the Lenders have agreed to a $35.0 million 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. Flexible industrial staffing employees
are paid by the Company on a daily or weekly basis. The Company, however,
receives payment from customers for these services, on average, 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 10% of its
existing customers. The remainder of the Company's PEO customers generally make
payment 35 to 45 days after the date of invoice.
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 six months ended June 30, 1997, cash used in operations was
approximately $9.6 million. Cash used in investing activities was approximately
$22.6 million, which included expenditures of $21.4 million for acquisitions
(primarily intangible assets) and expenditures for property and
30
equipment of $1.8 million (primarily computers and software). Cash provided
by financing activities was approximately $33.4 million, including $22.6 million
net proceeds from the Senior Notes and Warrants and $25.2 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 $5.4 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.
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 the amounts of certain items in the Company's
consolidated statements of income for the four quarters of 1995 and 1996 and the
first two quarters of 1997.
1995 1996 1997
--------------------------------------- --------------------------------------- -------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Net revenues ...... $26,555 $31,724 $41,309 $50,237 $51,169 $64,953 $77,680 $86,369 $85,374 $107,823
Gross profit ...... 4,790 5,324 6,530 6,911 6,690 9,062 10,982 11,335 11,135 16,224
Operating (1)
income ............ 661 633 1,184 978 483 1,474 2,345 1,181 575 2,223
- ---------
(1) Discontinued Shareholder Compensation is deducted in arriving at
operating income. See footnote 1 to the table in "--Results of
Operations".
31
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 June 30, 1997. Based on an assumed offering price of
$15.00 per share and the consummation of this Offering prior to December 31,
1997, Put Warrants Valuation Adjustments will result in non-operating expenses
in the third and fourth quarters of 1997 totalling $0.6 million ($0.5 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 $13.7 million (net of a $6.8 million income tax
benefit), if the repayment had taken place on June 30, 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 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
32
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.
33
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 28,000 employees in 38 states and the District of Columbia.
The Tandem division provides approximately 17,000 flexible industrial
staffing personnel daily through a nationwide network of 80 Company-owned and 74
franchised offices. The Tandem division has approximately 14,000 clients and on
a daily basis provides services to approximately 3,000 of such clients. 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, excluding
revenues from the provision of PEO services to Tandem franchisees, increased
from $30.9 million to $137.0 million, a compound annual growth rate of
approximately 111%. 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
34
staffing revenues. The Company believes that the flexible industrial staffing
market is highly fragmented 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
35
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 and
franchised Chicago metropolitan area offices, with 5,400 service employees
and 1996 revenues of $80.2 million, have achieved approximately 19% of all
flexible industrial staffing revenues in that market, which the Company
believes establishes it as the regional market leader. The region
experienced a 22.7% compound annual revenue growth rate from 1992 through
1996 and the operating profit from those offices averaged 12.9% of
revenues in 1996.
/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. Although the
Company continuously reviews potential acquisition candidates and
currently has several offers outstanding, it has not entered into any
agreement, understanding or commitment with respect to any additional
acquisitions at this time.
/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,
36
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 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
37
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 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.
38
/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 80 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
39
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 80 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
40
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. The Tandem division has approximately 14,000
clients and on a daily basis provides services to approximately 3,000 of such
clients. 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. Tandem's clients includes such companies as Michelin Corporation,
AT&T Wireless Services, Inc., Toys "R" Us, Inc., Hon Industries Inc., the
Thomas J. Lipton Company, a subsidiary of Unilever PLC, and Waste Management,
Inc.
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
six months ended June 30, 1997, approximately 28% and 16% 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.
41
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 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. The Company's
claims experience in 1996 was approximately 2.0% of 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. 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
42
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 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.
43
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.
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
44
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.
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
45
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.
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 89 flexible
industrial staffing office locations and certain other facilities, with
approximately 224,000 total square feet for an annual base rent of
approximately $1.5 million. 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. The Company also owns small office buildings in
Chicago, Illinois and Waukegan, Illinois and a condominium in Boca Raton,
Florida. See "Certain Transactions." 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.
46
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 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. Two officers of the Company also were aware of the payments but, upon
objection, were overruled by the Founding Shareholders. 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. On September 23, 1997, SSC filed an action in
federal court seeking to enjoin the Company's use of the name "OUTSOURCE",
damages and cancellation by the court of the Company's "OutSource" service mark.
See "-Trademarks and Service Marks."
On September 26, 1997, Tandem Personnel, Inc. filed a complaint in the
Court of Common Pleas of Montgomery County, Pennsylvania seeking a temporary and
permanent injunction in Pennsylvania against the Company's use of "Tandem",
"Tandem Labor World" and/or "Tandem Staffing for Industry", and damages.
The Company intends to vigorously defend both service mark matters.
Although both matters are in very preliminary stages of litigation, the Company
believes that an adverse decision in either or both cases would not have a
material adverse effect on its financial condition or results of operations.
47
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
Benjamin J. Cueto.......... 61 President, Synadyne 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.
BENJAMIN J. CUETO has been President of the Synadyne Division since
September 1997. From May 1994 to August 1997, Mr. Cueto was the Sales Director,
Latin America, for the Marriott Corporation. From April 1993 to May 1994, Mr.
Cueto was responsible for Latin American sales for Disney Vacation Development,
Inc. From January 1992 to April 1993, Mr. Cueto was the Chief Operating Officer
of the Texas Back Institute.
48
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 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
4,683,982 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 47.2% of the issued and outstanding
shares of Common Stock (or 40.6% 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.
49
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
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,
50
upon his election to the Board, an eligible non-employee director will receive
an option to purchase 9,818 shares of Common Stock ("Initial Option"). The
Initial Option will expire as follows: 3,273 shares on the first anniversary of
the grant date, 3,273 on the second anniversary of the grant date and 3,272 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 3,273 shares of Common Stock at the end of this twelve-month period will
receive an option to purchase 3,273 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 3,273 shares of Common
Stock throughout the entire preceding twelve-month period will receive an
option to purchase 3,273 additional shares of Common Stock. On the third
anniversary of the date of the Initial Option, an eligible non-employee
director who has held a minimum of 3,272 shares of Common Stock throughout the
entire preceding twelve-month period will receive an option to purchase an
additional 3,272 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 $100,000 during the fiscal year ended December 31, 1996 (collectively,
the "Named Executive Officers").
51
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- -------------
AWARDS
-------------
SECURITIES
UNDERLYING
NAME AND SALARY BONUS OPTIONS/SARS
PRINCIPAL POSITION YEAR ($) ($) (#)
- ------------------------------------------- ------ --------- --------- -------------
Paul M. Burrell 1996 368,208 -- 35,456
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 31,908
Chief Financial Officer 1995 90,000 20,700 --
1994 67,560 6,000 --
James E. Money 1996 160,208 45,231 28,364
President, Tandem Division 1995 99,079 22,000 --
1994 -- -- --
Joseph F. Bello 1996 92,418 10,000 17,728
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
$250,000 per annum plus bonus and benefits. See "--Employment Agreements."
(2) Mr. Bello served as President of the Synadyne Division until July 1997 and
as Vice President--Mid Atlantic region, Synadyne from July 1997 until his
resignation effective October 31, 1997.
The following table contains information about stock option grants to
Named Executive Officers during the fiscal year ended December 31, 1996.
INDIVIDUAL GRANTS
-------------------------------------------------------------------------
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
NUMBER OF SECURITIES % OF TOTAL OPTIONS EXERCISE PRICE FOR OPTION TERM(2)
UNDERLYING OPTIONS GRANTED TO EMPLOYEES OR BASE PRICE EXPIRATION ------------------
NAME GRANTED(#) IN FISCAL YEAR(1) ($/SHARE)(1) DATE 5%($) 10%($)
- ------------------------ ---------------------- ---------------------- --------------- ----------- --------- --------
Paul M. Burrell ...... 35,456(3) 11.2 10.38 1/1/06 231,454 586,550
Robert A. Lefcort ... -- -- -- -- -- --
Robert E. Tomlinson ... 31,908(3) 10.1 10.38 1/1/06 208,293 527,856
James E. Money ...... 28,364(3) 9.0 10.38 1/1/06 185,158 469,227
Joseph F. Bello ...... 17,728(3) 5.6 10.38 1/1/06 115,727 293,275
- ----------------
(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.
52
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 ......... 8,864 26,592 $9,484 $28,453
Robert A. Lefcort ......... ---- ---- ---- ---
Robert E. Tomlinson ...... 7,977 23,931 $8,535 $25,606
James E. Money ............ 7,091 21,273 $7,587 $22,762
Joseph F. Bello ......... 4,432 13,296 $4,742 $14,227
- ----------------
(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 $11.45 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
53
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 318,568, and the exercise price of such
options to $10.38 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
201,339 shares of Common Stock of which an aggregate of 19,885 options were
granted to Named Executive Officers. The exercise price of the options granted
on March 12, 1997 was $11.42 per share based on the fair market value of Common
Stock, as determined by an independent appraiser as of the date of the grant.
The options vest and become exercisable in four equal annual installments
commencing on March 12, 1998. On September 2, 1997 the Board granted options to
purchase an additional 106,303 shares of Common Stock of which an aggregate of
2,303 options were granted to Named Executive Officers and an aggregate of
29,455 options were granted to non-employee directors. The exercise price of
the options granted on September 2, 1997 will be the initial public offering
price. The options vest and become exercisable in four equal annual
installments commencing on September 2, 1998 except for the options granted to
non-employee directors, which vest and become exercisable as of the date of the
grant (See "Director Compensation"). The total number of shares of Common Stock
reserved for issuance under the Stock Option Plan is 1,040,000, of which
428,208 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.
54
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 the shareholders of the Company
at the time the Initial Warrants were issued 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 $.015
per share and expire on February 20, 2002.
Following the successful consummation of certain acquisitions by the
Company, 180,891 Additional Warrants were released from escrow in April 1997
and distributed to the shareholders of the Company at the time the Initial
Warrants were issued. The remaining 392,896 Additional Warrants will be
released to those same shareholders or the Senior Note Holders no later than
February 1999. The Additional Warrants are exercisable upon release from escrow
at an exercise price of $.015 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 $13.65 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."
55
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 certain 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
56
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. Robert E. Tomlinson, the Treasurer, Chief Financial
Officer and a director of the Company; (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, President, Office Ours
Division. 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. 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 Associates
Limited Partnership, a Florida limited partnership ("SMSB")). The limited
partners of SMSB are the Founding Shareholders and Mr. Burrell. Mr. Tomlinson
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. 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
("Gold").
On July 31, 1997, a Subsidiary of the Company purchased certain commercial
property in Waukegan, Illinois from an unrelated third party, which had
previously been leased by the Company from SMSB. SMSB had an interest in the
property by virtue of an installment agreement for warranty deed between SMSB
and the unrelated third party, which interest was assigned to the Company as
part of the July 1997 transaction. The purchase price of $310,000 ($102,968 of
which was paid to SMSB) was negotiated between the Company and SMSB. Although
the property was appraised at $240,000 by Gold, the Company believes that the
purchase price more accurately reflects the fair value of the property to the
Company.
57
On August 14, 1997, a Subsidiary of the Company purchased 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.
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. 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 mortgage held by an unrelated third
party on such property. As of June 30, 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.
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 six months ended June 30, 1997. Mr. Alan
E. Schubert received $744,506 in 1994, $616,980 in 1995, $570,721 in 1996, and
$86,000 for the six months ended June 30, 1997. Mr. Louis A. Morelli received
$573,374 in 1994, $689,050 in 1995, $848,011 in 1996, and $86,000 for the six
months ended June 30, 1997. Mr. Lawrence H. Schubert received $597,625 in 1994,
$636,499 in 1995, $532,260 in 1996, and $89,000 for the six months ended June
30, 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." Mr. Jason Schubert, a shareholder of the Company
and the son of Lawrence H. Schubert, a Founding Shareholder, is employed by the
Company as a field consultant, a non-management position, with an annual salary
of $40,000 plus the Company's standard employee benefits.
58
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 six months ended June 30, 1997, in the approximate
amounts of $131,000, $52,000, $80,000, and $97,000, 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.
RENTAL PAYMENTS
Mr. Raymond Morelli, a shareholder of the Company, received rental
payments for three Chicago area properties leased by him to the Company during
the years ended December 31, 1994, 1995, and 1996 and the six months ended June
30, 1997, in the approximate amounts of $0, $0, $27,000, and $18,000,
respectively. The Company vacated two of these properties as of March and
August 1997, respectively, and intends to vacate the third property in October
1997, but is obligated to pay monthly rent of approximately $3,000 until Mr.
Morelli obtains new tenants or the lease expiration date of September, 2003,
whichever is sooner.
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.
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."
59
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, director nominees 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 392,896 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 .............................. 5,206,587(2) 95.0 700,000 4,506,587 53.2
Richard J. Williams(3) ........................ 4,693,800(4) 86.0 700,000 3,993,800 47.2
Alan E. Schubert .............................. 2,001,836(5) 36.3 233,333 1,768,503 20.8
Lawrence H. Schubert ........................ 1,176,349(6) 21.4 233,334 943,015 11.1
Nadya I. Schubert ........................... 1,176,349(7) 21.4 233,334 943,015 11.1
Louis A. Morelli .............................. 850,008(8) 15.5 233,333 616,675 7.3
Lawrence H. Schubert Revocable Trust ......... 525,799(9) 9.6 116,667 409,132 4.8
Susan Burrell ................................. 522,605(10) 9.5 -- 522,605 6.2
Nadya I. Schubert Revocable Trust ............ 493,299(11) 9.0 116,667 376,632 4.4
Triumph-Connecticut Limited Partnership(12) ... 440,449(13) 7.5 -- 440,449 5.0
Matthew B. Schubert ........................... 381,004(14) 7.0 -- 381,004 4.5
Bachow Investment Partners III, L.P.(15) ...... 346,068(16) 6.0 -- 346,048 3.9
Jason Schubert OutSource Trust ............... 323,003(17) 5.9 -- 323,003 3.8
Margaret Ann Janisch ........................ 271,448(18) 5.0 -- 271,448 3.2
Robert A. Lefcort ........................... 179,273(19) 3.3 -- 179,273 2.1
Robert E. Tomlinson ........................... 7,977(20) * -- 7,977 *
James E. Money .............................. 7,091(21) * -- 7,091 *
Joseph F. Bello .............................. 4,432(22) * -- 4,432 *
Samuel H. Schwartz(23) ........................ 9,818(24) * -- 9,818 *
David S. Hershberg(25) ........................ 9,818(26) * -- 9,818 *
All directors, director nominees and executive
officers as a group (9 persons) ............... 5,433,041(27) 98.2 700,000 4,733,041 55.5
- ----------------
* Less than 1%
(1) Assumes that the Underwriters' over-allotment option is not exercised.
(2) Represents: (i) 45,500 shares held of record by Paul M. Burrell; (ii)
45,500 shares held of record by Susan Burrell, Mr. Burrell's wife; (iii)
401,812 shares held of record by Mr. and Mrs. Burrell as tenants by the
entirety; (iv) 4,683,982 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 20,929 shares; and (vi) the
presently exercisable right to exercise an option to purchase 8,864 shares.
Does not include 98,437 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 4,683,982 shares held of record by Messrs. Burrell and Williams
as Trustees under the Voting Trust and the presently exercisable option to
purchase 9,818 shares. See "Management--Voting Trust and Shareholders'
Agreement."
(5) Represents: (i) 1,431,691 shares held of record by Messrs. Burrell and
Williams as Trustees for Alan E. Schubert under the Voting Trust; (ii)
312,710 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) 191,554 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
47,140, 10,293 and 8,448 shares by Alan E. Schubert, the Jason Schubert
OutSource Trust, and the Matthew Schubert OutSource Trust, respectively.
(6) Represents: (i) 509,030 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) 476,530 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
Revocable Trust under the Voting Trust; (iii) 32,500 shares held of record
by Messrs. Burrell and Williams as Trustees for
60
Lawrence H. Schubert, Trustee of the Nadya I. Schubert GRAT-1997, under a
trust agreement dated May 16, 1997; (iv) 57,852 shares held of record by
Nadya I. Schubert as co-trustee of the Robert A. Lefcort Irrevocable Trust;
(v) 32,500 shares held of record by Messrs. Burrell and Williams as
Trustees for Lawrence H. Schubert as Trustee of the Rachel Schubert Trust;
(vi) 32,500 shares held of record by Messrs. Burrell and Williams as
Trustees for Lawrence H. Schubert as Trustee of the Adam Pugh Trust and
(vii) the presently exercisable warrants to purchase 16,769, 16,769 and
1,899 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) 476,530 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) 509,030 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) 32,500 shares held of record
by Messrs. Burrell and Williams as Trustees for Lawrence H. Schubert,
Trustee of the Nadya I. Schubert GRAT-1997, under a trust agreement dated
May 16, 1997; (iv) 57,852 shares held of record by Nadya I. Schubert and
Robert A. Lefcort as Co-Trustees of the Robert A. Lefcort Irrevocable
Trust; and (v) 32,500 shares held of record by Messrs. Burrell and Williams
as Trustees for Lawrence H. Schubert as Trustee of the Rachel Schubert
Trust; (vi) 32,500 shares held of record by Messrs. Burrell and Williams as
Trustees for Lawrence H. Schubert as Trustee of the Adam Pugh Trust and
(vii) presently exercisable warrants to purchase 16,769, 16,769 and 1,899
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) 710,165 shares held of record by Messrs. Burrell and
Williams as Trustees for Louis A. Morelli under the Voting Trust; (ii)
56,230 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) 56,516 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 23,389, 1,845 and 1,863 shares held by Louis A.
Morelli, the Louis J. Morelli S-Stock Trust, and the Margaret Ann Janisch
S-Stock Trust, respectively.
(9) Represents 509,030 shares held of record and a presently exercisable
warrant to purchase 16,769 shares.
(10) Represents: (i) 45,500 shares held of record by Susan Burrell; (ii) 45,500
shares held of record by Paul M. Burrell, Mrs. Burrell's husband; (iii)
401,812 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 20,929 shares; and (v) the presently exercisable right
of Mr. Burrell to exercise an option to purchase 8,864 shares. Does not
include 98,437 shares held of record by Scott T. Burrell as Trustee of the
Paul and Susan Burrell Family Trust and 4,683,982 shares held of record by
Messrs. Burrell and Williams as Trustees under the Voting Trust. See
"Management-Voting Trust and Shareholders' Agreement."
(11) Represents 476,530 shares held of record and a presently exercisable
warrant to purchase 16,769 shares.
(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 440,449 shares.
(14) Represents: (i) 56,156 shares held of record by Messrs. Burrell and
Williams as Trustees for Matthew Schubert under the Voting Trust; (ii)
312,710 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 1,845 and 10,293 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 346,068 shares.
(17) Represents 312,710 shares held of record and a presently exercisable
warrant to purchase 10,293 shares.
(18) Represents: (i) 262,801 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 8,647 shares.
(19) Represents: (i) 115,705 shares held of record; (ii) 57,852 shares held as
co-trustee of the Robert A. Lefcort Irrevocable Trust; (iii) presently
exercisable warrants to purchase 3,817 and 1,899 shares held by Mr.
Lefcort and the Robert A. Lefcort Irrevocable Trust, respectively.
(20) Represents a presently exercisable option to purchase 7,977 shares.
(21) Represents a presently exercisable option to purchase 7,091 shares.
(22) Represents a presently exercisable option to purchase 4,432 shares.
(23) Mr. Schwartz' address is Bachow & Associates, 3 Bala Plaza East, 5th
Floor, Bala Cynwyd, Pennsylvania 19004.
(24) Represents a presently exercisable option to purchase 9,818 shares.
(25) Mr. Hershberg's address is IBM Corporation, Old Orchard Rd, Armonk, NY
10504.
(26) Represents a presently exercisable option to purchase 9,818 shares.
(27) Represents: (i) 45,500 shares held of record by Paul M. Burrell; (ii)
45,500 shares held of record by Mrs. Burrell; (iii) 401,812 shares held of
record by Mr. and Mrs. Burrell as tenants by the entirety; (iv) 4,683,982
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 20,929 shares; (vi) the
presently exercisable right by Mr. Burrell to exercise an option to
purchase 8,864 shares; (vii) 115,705 shares held of record by Mr. Lefcort;
(viii) 57,852 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 3,817 and 1,899 shares held by
Mr. Lefcort and the Robert A. Lefcort Irrevocable Trust, respectively; and
(x) the presently exercisable right by Mr. Tomlinson, Mr. Money, Mr.
Mitchell, Mr. Williams, Mr. Schwartz and Mr. Hershberg to exercise options
to purchase 7,977, 7,091, 2,659, 9,818, 9,818 and 9,818 shares,
respectively. Does not include 98,437 shares held of record by Scott T.
Burrell as Trustee of the Paul and Susan Burrell Family Trust.
61
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, 5,448,788 shares of Common Stock and no shares
of Preferred Stock were outstanding. An additional 611,792 shares of Common
Stock may be issued upon the exercise of outstanding stock options and an
additional 1,360,304 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.
On October 21, 1997, the Company effectuated a reverse stock split pursuant
to which each then issued and outstanding share of Common Stock was converted
into approximately 0.65 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
62
Reorganization, the Company acquired all of the outstanding capital stock of
the Subsidiaries from the Subsidiaries' Shareholders in exchange for the
issuance of 5,448,788 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, although it is subject to adjustment based upon the final
determination of taxable income. 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 consummation 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
63
(exclusive of shares held by officers of the corporation, inside directors or
the acquiring party) approve 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
The Company has adopted a Shareholder Protection Rights Agreement (the
"Rights Agreement"). Pursuant to the terms of the Rights Agreement, preferred
stock purchase rights (the "Rights") were distributed, as a dividend, to
holders of record of shares of Common Stock as of October 6, 1997 ("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.
64
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 8,448,788 shares
of Common Stock outstanding. 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 4,748,788 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 4,748,788 shares of Common Stock upon
consummation of the Offering (4,193,788 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 1,040,000 shares of Common Stock for issuance
under the Stock Option Plan. As of the date of this Prospectus, options to
purchase up to 611,792 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 1,360,304 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.
65
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 ................................................... 3,700,000
==========
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 and certain other shareholders of the Company
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.
66
The Company, its officers, directors and the Existing Shareholders, who
will beneficially own (excluding options and Warrants) an aggregate of
4,748,788 shares of Common Stock upon consummation of the Offering (4,193,788
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 (i) 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 and (ii) there were no "reportable
events" as defined in Item 304(a)(1)(v) of Regulation S-K. 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.
67
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 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
68
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 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 to make available quarterly reports for the first three
quarters of each fiscal year containing unaudited interim financial
information.
69
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 June 30, 1997 ...... F-5
Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1996 and 1997 .................................... F-6
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December
31, 1994, 1995 and 1996 and the six months ended June 30, 1997 ...................... F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and the six months ended June 30, 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 six months ended June 30, 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.
MCGLADREY & PULLEN, LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 7, 1995
(October 21, 1997 as to the
effects of the reverse stock split
discussed in Note 10)
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.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
April 4, 1997
(October 21, 1997 as to the effects of the reverse stock split discussed in
Note 10)
F-4
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
------------------------------- ----------------
1995 1996 1997
-------------- -------------- ----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash ............................................................... $ 1,511,399 $ 44,790 $ 1,178,615
Trade accounts receivable, net of allowance for doubtful accounts of
$375,243, $978,250 and $1,255,611.................................... 14,934,160 26,349,648 40,667,344
Funding advances to franchises ....................................... 2,401,858 3,231,839 2,684,705
Notes receivable and other amounts due from related parties ......... 355,761 4,887,604 --
Prepaid expenses and other current assets ........................... 627,163 420,021 557,883
------------- ------------- ------------
Total current assets ............................................. 19,830,341 34,933,902 45,088,547
PROPERTY AND EQUIPMENT, net ....................................... 4,322,177 13,127,107 15,417,271
GOODWILL AND OTHER INTANGIBLE ASSETS, net ........................... 227,521 7,454,806 31,215,644
OTHER ASSETS ......................................................... 327,590 361,333 5,032,210
------------- ------------- ------------
Total assets ...................................................... $ 24,707,629 $ 55,877,148 $ 96,753,672
============= ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ................................................... $ 2,082,925 $ 2,676,093 $ 3,983,040
Accrued expenses:
Payroll ............................................................ 1,979,224 4,213,723 5,275,921
Payroll taxes ...................................................... 3,405,090 2,180,130 3,136,950
Workers' compensation and insurance .............................. 1,855,499 5,463,845 7,414,659
Other ............................................................... 779,692 1,440,118 2,871,415
Income taxes payable ................................................ 732,394
Other current liabilities .......................................... 618,679 1,377,559 263,585
Line of credit ...................................................... 6,468,327 9,888,507 --
Current maturities of long-term debt .............................. 439,291 1,992,962 2,784,308
Current maturities of long-term debt to related parties ............ 661,226 8,872,497 731,797
------------- ------------- ------------
Total current liabilities ....................................... 18,289,953 38,105,434 27,194,069
NON-CURRENT LIABILITIES:
Revolving credit facility .......................................... -- -- 35,113,585
Senior notes ......................................................... -- -- 6,794,074
Put warrants liability ............................................. -- -- 19,785,948
Long-term debt to related parties, less current maturities ......... -- 2,402,661 4,944,936
Other long-term debt, less current maturities ..................... 2,815,139 10,873,828 11,367,960
------------- ------------- ------------
Total liabilities ................................................ 21,105,092 51,381,923 105,200,572
------------- ------------- ------------
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;
5,448,788 issued and outstanding at June 30, 1997 .................. 5,785 5,785 5,449
Additional paid-in capital (deficit) ................................. 95,315 95,315 (7,484,321)
Retained earnings (deficit) .......................................... 3,501,437 4,394,125 (968,028)
------------- ------------- ------------
Total shareholders' equity (deficit) .............................. 3,602,537 4,495,225 (8,446,900)
------------- ------------- ------------
Total liabilities and shareholders' equity (deficit) ............... $ 24,707,629 $ 55,877,148 $ 96,753,672
============= ============= ============
See notes to consolidated financial statements.
F-5
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
-------------- --------------- --------------- -------------- ----------------
(UNAUDITED)
Net revenues .................................... $80,646,707 $ 149,825,165 $ 280,171,104 $116,121,790 $193,197,372
----------- ------------- ------------- ------------ ------------
Cost of revenues:
Payroll .......................................... 58,509,787 112,241,752 214,038,992 88,591,375 145,920,461
Taxes .......................................... 5,422,367 10,010,329 19,251,276 8,063,306 13,582,711
Workers' compensation and insurance ............ 1,262,837 2,787,850 6,133,597 3,292,747 4,352,761
Other .......................................... 617,305 1,230,391 2,678,525 422,372 1,982,427
----------- ------------- ------------- ------------ ------------
Total cost of revenues ........................ 65,812,296 126,270,322 242,102,390 100,369,800 165,838,360
----------- ------------- ------------- ------------ ------------
Gross profit .................................... 14,834,411 23,554,843 38,068,714 15,751,990 27,359,012
----------- ------------- ------------- ------------ ------------
Selling, general and administrative expenses:
Shareholders' compensation ..................... 2,244,894 2,370,350 2,321,201 962,560 292,001
Amortization of intangible assets ............... -- 40,565 423,550 147,940 892,573
Other selling, general and administrative ...... 9,008,462 17,687,765 29,840,722 12,684,500 23,376,689
----------- ------------- ------------- ------------ ------------
Total selling, general and
administrative expenses ..................... 11,253,356 20,098,680 32,585,473 13,795,000 24,561,263
----------- ------------- ------------- ------------ ------------
Operating income ................................. 3,581,055 3,456,163 5,483,241 1,956,990 2,797,749
----------- ------------- ------------- ------------ ------------
Other expense (income):
Interest income ................................. (25,465) (22,821) (42,396) (20,000) (75,909)
Interest expense ................................. 845,626 1,281,560 2,218,245 793,820 3,588,794
Put warrants valuation adjustment ............... -- -- -- -- 1,243,952
Other expense (income) ........................... (51,580) (10,995) -- 55,290 (24,979)
Other charges ................................. -- -- 1,447,555 -- --
----------- ------------- ------------- ------------ ------------
Total other expense (income) .................. 768,581 1,247,744 3,623,404 829,110 4,731,858
----------- ------------- ------------- ------------ ------------
Income (loss) before provision (benefit) for
income taxes .................................... 2,812,474 2,208,419 1,859,837 1,127,880 (1,934,109)
Provision (benefit) for income taxes ............ -- -- -- -- (793,584)
----------- ------------- ------------- ------------ ------------
Net income (loss) ................................. $ 2,812,474 $ 2,208,419 $ 1,859,837 $ 1,127,880 $ (1,140,525)
=========== ============= ============= ============ ============
UNAUDITED PRO FORMA DATA:
Income (loss) before provision (benefit) for
income taxes .................................... $ 2,812,474 $ 2,208,419 $ 1,859,837 $ 1,127,880 $ (1,934,109)
Provision (benefit) for income taxes ............ 1,059,000 859,000 757,000 459,000 (467,000)
----------- ------------- ------------- ------------ ------------
Net income (loss) ................................. 1,753,474 1,349,419 1,102,837 668,880 (1,467,109)
=========== ============= ============= ============ ============
Weighted average common shares
outstanding .................................... 6,050,000 6,050,000 6,050,000 6,050,000 6,690,214
=========== ============= ============= ============ ============
Earnings (loss) per share ........................ $ .29 $ .22 $ .18 $ .11 $ (.22)
=========== ============= ============= ============ ============
See notes to consolidated financial statements.
F-6
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) (DEFICIT) TOTAL
-------- ------------------- -------------- ---------------
Balance, December 31, 1993 .................. $5,785 $ 95,315 $ 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 .................. 5,785 95,315 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 .................. 5,785 95,315 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 .................. 5,785 95,315 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) ................................. (336) (7,579,636) (4,221,628) (11,801,600)
Net loss for the period from February 22, 1997
through June 30, 1997 (unaudited) ......... -- -- (968,028) (968,028)
------ ------------ ------------ -------------
Balance, June 30, 1997 (unaudited) ......... $5,449 $ (7,484,321) $ (968,028) $ (8,446,900)
====== ============ ============ =============
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 (loss) ....................................... $ 2,812,474 $ 2,208,419 $ 1,859,837
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................ 445,529 765,580 1,592,166
Amortization of debt discount and issuance costs ...... -- -- --
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
Income taxes payable ..............................
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 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
============= ============= ==============
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1996 1997
--------------- ----------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................... $ 1,127,880 $ (1,140,525)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................ 555,789 1,877,072
Amortization of debt discount and issuance costs ...... -- 430,050
Put warrants valuation adjustment ..................... -- 1,243,952
Deferred income taxes ................................. -- (1,525,978)
(Gain) loss on disposal of property
and equipment ....................................... -- 2,686
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable ........................ (4,531,634) (14,317,696)
Prepaid expenses and other current assets ......... (451,055) (137,862)
Other assets ....................................... (306,814) (1,509,066)
Increase (decrease) in:
Accounts payable .................................... 700,938 333,720
Accrued expenses:
Payroll .......................................... (567,289) 1,062,198
Payroll taxes .................................... (1,378,705) 956,820
Workers' compensation and insurance ............... 1,558,804 1,950,814
Other ............................................. 264,183 1,571,297
Income taxes payable .............................. -- 732,394
Other current liabilities ........................... (173,676) (1,113,974)
------------- --------------
Net cash provided by (used in)
operating activities ........................... (3,201,579) (9,584,098)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Funding (advances) repayments to franchises, net ...... (987,402) 547,134
Property and equipment expenditures .................. (879,114) (1,804,708)
Expenditures for acquisitions ........................ (1,950,000) (21,385,000)
Proceeds from disposal of property and equipment ...... -- --
------------- --------------
Net cash used in investing activities ............ (3,816,516) (22,642,574)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in excess of outstanding checks over
bank balance, included in accounts payable ............ 2,675,271 973,227
Net proceeds (repayments) from line of credit and
revolving credit facility ........................... 4,183,187 25,225,078
Related party borrowings (repayments) .................. (32,286) (2,455,821)
Proceeds of senior notes and put warrants, net of
issuance costs ....................................... -- 22,614,984
Proceeds of long-term debt ........................... -- --
Repayment of long-term debt ........................... (805,357) (2,940,371)
Payments in connection with the Reorganization ......... -- (10,056,600)
Distributions paid to shareholders ..................... (445,233) --
------------- --------------
Net cash provided by financing activities ......... 5,575,582 33,360,497
------------- --------------
Net increase (decrease) in cash ........................ (1,442,513) 1,133,825
Cash, beginning of period .............................. 1,511,399 44,790
------------- --------------
Cash, end of period .................................... $ 68,886 $ 1,178,615
============= ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid .......................................... $ 868,769 $ 1,973,998
============= ==============
See notes to consolidated financial statements.
F-8
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 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 JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 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 336,430
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 3,131,667 57.5%
M Group ...... 3,849,900 -- 1,251,000 5,100,900 1,552,315 28.5%
CEO ......... 225,760 325,000 417,000 967,760 591,249 10.8%
EVP ......... 140,140 -- 130,000 270,140 173,557 3.2%
------------ ----------- ----------- ------------ ---------- ------
$10,056,600 $1,745,000 $4,300,000 16,101,600 5,448,788 100.0%
============ =========== =========== ========== ======
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. The distribution by the
Subsidiaries to all shareholders at the time of the Reorganization is subject
to adjustment based upon the final determination of taxable income through
February 21, 1997.
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
F-10
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 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 June 30,
1997 and for the six months ended June 30, 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, and
related costs of wages, salaries, employment taxes and benefits related to
worksite employees, are recognized in the period in which those employees
perform the flexible staffing and PEO services. Because the Company is at risk
for all of its direct costs, independently of whether payment is received from
its clients, and consistent with industry practice, all amounts billed to
clients for gross salaries and wages, related to employment taxes, health
benefits and workers' compensation coverage are recognized as revenue by the
Company, net of 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
F-11
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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. 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
F-12
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 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 June 30, 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 June 30, 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
F-13
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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 six months ended June 30, 1996 and 1997,
pro forma basic earnings (loss) per share would have been $0.19, $0.12 and
$(0.26), respectively, and pro forma diluted earnings (loss) per share would
have been $0.19, $0.11 and $(0.26), 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,
F-14
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 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.
F-15
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 2. ACQUISITIONS
Goodwill and other intangible assets consist of the following:
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------- --------------- WEIGHTED AVERAGE
1995 1996 1997 AMORTIZATION PERIODS
---------- ------------ --------------- ---------------------
Goodwill ........................... $268,086 $7,072,872 $26,500,834 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 32,572,332 27.7 years
Less accumulated amortization ...... 40,565 464,115 1,356,688
--------- ----------- ------------
Goodwill and other intangible
assets, net ........................ $227,521 $7,454,806 $31,215,644
========= =========== ============
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 June 30, 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 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,
F-16
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 2. ACQUISITIONS--(CONTINUED)
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 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 June 30, 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
F-17
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 2. ACQUISITIONS--(CONTINUED)
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 4,876 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 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 3,250 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.
Effective June 30, 1997, the Company purchased the franchise rights for
one flexible staffing location from Labor World of Minneapolis, Inc., and
converted this location to a Company-owned location. The purchase price was
$825,000 paid at closing.
F-18
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 2. ACQUISITIONS--(CONTINUED)
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.
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 SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------- -----------------
1995 1996 1997
-------------- -------------- -----------------
UNAUDITED PRO FORMA:
Net revenues .............................. $211,941,170 $346,752,517 $204,446,519
Operating income ........................ 4,777,322 8,182,631 2,958,454
Income before provision (benefit) for income
taxes .................................... (1,146,058) 1,184,014 (2,436,164)
Net income (loss) ........................ (1,146,058) 1,184,014 (1,642,580)
The following unaudited pro forma information, as adjusted, has been
prepared on the same basis as the preceding data and also reflects the pro
forma adjustment for income taxes 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 568,883 shares for the
year ended December 31, 1996, and 164,158 shares for the six months ended June
30, 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 SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------- -----------------
1996 1997
-------------- -----------------
UNAUDITED PRO FORMA, AS ADJUSTED:
Income before provision (benefit) for income taxes ...... 1,184,014 (2,436,164)
Pro forma provision (benefit) for income taxes ......... 530,930 (554,630)
----------- ------------
Pro forma net income .................................... $ 653,084 $ (1,881,534)
=========== ============
Weighted average common shares outstanding ............... 6,618,883 6,854,372
=========== ============
Earnings per share .................................... $ .10 $ (.27)
=========== ============
F-19
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------- ---------------
1995 1996 1997
------------- ------------- ---------------
Buildings and land ................................. $ 3,093,700 $ 6,459,439 $ 6,369,756
Furniture, fixtures and equipment .................. 2,025,117 4,108,625 5,893,254
Computer software .................................... 708,814 2,321,094 3,339,108
Leasehold improvements .............................. 471,940 1,031,106 1,450,012
Vehicles ............................................. 167,234 132,703 321,876
Assets held for disposal ........................... -- 2,090,000 1,950,000
------------ ------------ ------------
Property and equipment .............................. 6,466,805 16,142,967 19,324,006
Less accumulated depreciation and amortization ...... 2,144,628 3,015,860 3,906,735
------------ ------------ ------------
Property and equipment, net ........................ $ 4,322,177 $13,127,107 $15,417,271
============ ============ ============
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 $416,926 and $984,499 for the six months ended
June 30, 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 six months ended June 30, 1997.
NOTE 4. INCOME TAXES
The net deferred tax asset as of June 30, 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:
JUNE 30, 1997
--------------
Workers' compensation accrual ........................ $ 2,309,782
Allowance for doubtful accounts ........................ 360,413
Debt discount related to warrants ..................... 135,201
Change from cash to accrual tax basis .................. (1,306,173)
Other ................................................ 26,755
------------
Net deferred tax asset, included in other assets ...... $ 1,525,978
============
F-20
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 4. INCOME TAXES--(CONTINUED)
The components of the income tax benefit for the six months ended June 30,
1997 are as follows:
Federal--Current ......... $ 625,347
State--Current ............ 107,047
Federal-Deferred ......... (1,302,941)
State-Deferred ............ (223,037)
------------
Income tax benefit ...... $ (793,584)
============
The Company's effective tax rate for the six months ended June 30, 1997
differed from the statutory federal rate of 35% as follows:
AMOUNT RATE
-------------- ------------
Statutory rate applied to loss before income taxes ...... $ (676,938) (35.0)%
Increase (decrease) in income taxes resulting from:
Effect of termination of S corporation status ......... (385,693) (19.9)
Loss prior to termination of S corporation status ...... 58,652 3.0
Put warrants valuation adjustment ..................... 300,785 15.6
Other ................................................... (90,390) (4.7)
---------- ---------
Total ................................................ $ (793,584) (41.0)%
========== =========
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 $50,000,000
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 (8.5% at
June 30, 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 (5.6875% at June 30, 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 June 30, 1997 was 8.8%.
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
F-21
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 5. DEBT--(CONTINUED)
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.
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
$5,740,000 at June 30, 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 786,517 shares of
common stock at $.015 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 573,787 shares
of the Company's common stock at $.015 per share were issued by the Company
into escrow. In April 1997, warrants to purchase 180,891 shares (the "B
warrants") were released from escrow to the Company's shareholders as of
February 21, 1997, as a result of the Company's consummation of the last of
certain acquisitions in accordance with conditions of the agreements related to
the Senior Notes. The remaining warrants to purchase 392,896 shares (the "C
warrants") will be released from escrow on or before February 1999. The C
warrants will be released to the same Company shareholders that received the B
warrants, 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
F-22
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 5. DEBT--(CONTINUED)
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, 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 $336,070) of $1,266,803 was recorded
related to these Senior Notes for the six months ended June 30, 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 $18,541,996. The fair value of the warrants was
determined by an independent appraiser as of the date of their issuance.
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 $19,785,948 as of June 30, 1997,
with the adjustment of $1,243,952 included in non-operating expense for the six
months ended June 30, 1997. The fair value of the warrants as of June 30, 1997
was estimated by the Company with the assistance of an independent valuation
consultant.
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
$93,980 was recorded for the six months ended June 30, 1997.
F-23
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 5. DEBT--(CONTINUED)
LONG-TERM DEBT:
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------- ---------------
1995 1996 1997
------------ ------------- ---------------
Obligations under capital leases. See
discussion below. ................................. $ 33,262 $ 7,801,224 $ 8,033,616
Acquisition notes payable, subordinated to the
Revolving Credit Facility. See Note 2. ............ -- 200,689 3,370,337
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 June 30, 1997). .................. 2,611,059 2,472,063 2,467,385
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. 172,609 126,147 280,930
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 14,152,268
Less current maturities of long-term debt ............ 439,291 1,992,962 2,784,308
----------- ------------ ------------
Long-term debt, less current maturities ............ $2,815,139 $10,873,828 $11,367,960
=========== ============ ============
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 JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 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 2003. Also, certain equipment used in the Company's
operations are leased under operating leases. A schedule of fixed minimum lease
commitments as of June 30, 1997 consisted of the following:
YEAR RENTAL AMOUNT
- ------------------------------------------------------ --------------
For the six months ended December 31, 1997 ...... $ 903,395
1998 ............................................. 1,412,625
1999 ............................................. 1,107,213
2000 ............................................. 788,374
2001 ............................................. 545,215
-----------
Total .......................................... $4,756,822
===========
Rent expense, including equipment rental, was $57,195, $373,090 and
$878,300 for the years ended December 31, 1994, 1995 and 1996, and $612,151 and
$1,304,329 for the six months ended June 30, 1996 and 1997, respectively.
FRANCHISE AGREEMENTS: The Company has granted 50, 67 and 75 Labor World
franchises (some covering multiple locations) 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 JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The following tables set forth various revenues from franchises as well as
a schedule showing franchise offices opened and purchased by the Company, as
well as the number of Company owned locations.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------- ------------- ------------- ------------
PEO services ............ $4,698,190 $ 7,507,774 $35,078,655 $13,200,058 $17,002,820
Royalties ............... 2,712,605 4,137,150 5,670,458 2,639,477 2,905,389
Payroll funding services 313,550 718,807 1,288,205 604,150 351,852
Initial franchise fees ... 250,000 446,000 84,000 41,000 --
Other ..................... 5,778 70,000 41,000 30,000 --
----------- ------------ ------------ ------------ ------------
Total revenues ......... $7,980,123 $12,879,731 $42,162,318 $16,514,685 $20,260,061
=========== ============ ============ ============ ============
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------ JUNE 30,
1994 1995 1996 1997
--------- --------- ------ -----------------
Number of franchise locations, beginning ...... 37 57 83 95
New franchises sold ........................... 22 31 24 2
Franchises closed/Buyouts ..................... (2) -- -- (10)
Franchises purchased by the Company ............ -- (5) (12) (13)
---- ---- ---- ----
Number of franchise locations, ending ......... 57 83 95 74
Number of Company owned locations ............ 11 25 51 89
---- ---- ---- ----
Total locations .............................. 68 108 146 163
==== ==== ==== ====
PEO services revenues are based on the payroll and other related costs for
industrial personnel provided by the franchises to their clients, under a
relationship whereby the Company is the employer of those industrial personnel.
The Company's gross profit on these services is approximately 1.5% of the
related revenues. See Note 1 for a discussion of initial franchise fees,
royalties, and payroll funding services (funding advances). The Company's gross
profit on these services is 100% of the related revenues.
LITIGATION: The Company is involved in litigation with regards to certain
service marks used by it. Although these matters are in very preliminary stages,
the Company believes that an adverse decision in any or all cases would not have
a material adverse effect on its financial condition or results of operations.
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.
F-26
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
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 PEO 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. The following is a
summary of net revenues cost of revenues and gross profits related to all PEO
services, including the above:
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ ---------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ----------- ------------
Net revenues $35,609,000 $85,557,000 $172,069,000 $73,682,000 $103,520,000
----------- ----------- ------------ ----------- ------------
Cost of revenues 34,220,000 82,220,000 165,702,000 71,103,000 100,104,000
----------- ----------- ------------ ----------- ------------
Gross profits 1,389,000 3,337,000 6,367,000 2,579,000 3,416,000
----------- ----------- ------------ ----------- ------------
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 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 $239,424 for the six months ended June 30, 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.
F-27
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
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, 4,683,982 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 392,896 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 October 21, 1997, the Company effectuated a
reverse stock split pursuant to which each then issued and outstanding share of
Common Stock was converted into approximately 0.65 shares of Common Stock.
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 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 318,568, and the exercise price of such options to
$10.38 per share, such conversion determined by an independent appraiser as of
the date of grant. On March 12, 1997, the Company granted options to purchase
201,339 shares of the Company's Common Stock, with the exercise price of $11.42
based on the fair market value of the Company's Common Stock, as determined by
an independent appraiser as of the date of the grant. The total number of
shares of Common Stock reserved for issuance under the stock option plan is
1,040,000. As of June 30, 1997, the status of all outstanding options was as
follows:
GRANT DATE TOTAL OPTIONS EXERCISABLE OPTIONS EXERCISE PRICE
- --------------------------- --------------- --------------------- ---------------
January 1, 1996 ...... 309,072 77,268 $10.38
March 12, 1997 ...... 196,417 --
11.42
F-28
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 10. SHAREHOLDERS' EQUITY--(CONTINUED)
The weighted average remaining contractual life of the above options was
9.0 years as of December 31, 1996 and June 30, 1997.
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 $2.20 and $2.59 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; no expected dividends; 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 (loss) on a pro
forma basis (including the effect of income taxes, only for periods subsequent
to the Reorganization) would have been $1,693,102 for the year ended December
31, 1996 and $(1,218,930) for the six months ended June 30, 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 six months ended June 30, 1997 was
not material.
On September 2, 1997, the Company granted options to purchase 106,303
shares of the Company's Common Stock, with the exercise price to be equal to
the price of the shares sold in the Offering..
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:
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- -----------------
1994 1995 1996 1997
------------ ------------ ------------- -----------------
PEO services .................. $5,551,806 $4,466,241 $13,505,481 $462,019
Royalties ..................... 631,486 547,477 684,122 317,979
----------- ----------- ------------ ---------
Included in net revenues ...... $6,183,292 $5,013,718 $14,189,603 $779,998
=========== =========== ============ =========
F-29
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 11. RELATED PARTY TRANSACTIONS--(CONTINUED)
These franchises owed the Company $251,912 and $150,763 at December 31,
1995 and 1996, respectively, and $119,663 at June 30, 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,
------------------------
1995 1996
---------- -----------
Notes receivable from shareholders .............................. $ -- $4,300,000
Advances due from:
Shareholders ................................................... 249,978 477,417
Affiliates ...................................................... 105,783 110,187
--------- -----------
Notes receivable and other amounts due from related parties ...... $355,761 $4,887,604
========= ===========
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 six months ended June
30, 1997.
AS OF DECEMBER 31, AS OF JUNE 30,
-------------------------- ---------------
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 $2,791,733
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. ............... -- -- 1,685,000
--------- ------------ -----------
Long-term debt to related parties ................................. 661,226 11,275,158 5,676,733
Less current maturities of long-term debt to related parties ...... 661,226 8,872,497 731,797
--------- ------------ -----------
Long-term debt to related parties, less current maturities ......... $ -- $ 2,402,661 $4,944,936
========= ============ ===========
F-30
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 11. RELATED PARTY TRANSACTIONS--(CONTINUED)
The aggregate annual principal payments on long-term debt to related
parties are as follows:
AS OF DECEMBER 31, 1996 AS OF JUNE 30, 1997
------------------------- --------------------
1997 ............ $ 8,872,497 $ 731,797
1998 ............ 784,338 1,349,506
1999 ............ 718,342 1,662,265
2000 ............ 762,294 1,913,690
2001 ............ 137,687 19,475
Thereafter ...... -- --
------------ -----------
Total ............ $11,275,158 $5,676,733
============ ===========
Total interest expense for long-term debt to related parties was $67,847,
$136,326 and $667,265 for the years ended December 31, 1994, 1995 and 1996,
respectively, and $482,131 for the six months ended June 30, 1997.
The Company has purchased certain real estate previously owned by SMSB and
consolidated in these financial statements. The total purchase price was
$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 $293,467 on the
date of purchase. In July and August 1997 the Company consummated the remainder
of this purchase, for a price of $410,000, corresponding to assets with a net
book value of $314,659 on the date of purchase.
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 Six months
ended June 30, 1997, in the approximate amounts of $131,000, $52,000, $80,000
and $97,000, respectively.
F-31
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
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, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -------------------------------
1994 1995 1996 1996 1997
---------- ------------- --------------- --------------- ---------------
Acquisitions:
Tangible and intangible assets
acquired ........................... $ -- $ 248,666 $ 8,497,841 $ 6,322,745 $ 25,067,375
Liabilities assumed .................. -- (4,885) (146,991) -- (54,455)
Debt issued ........................... -- (123,407) (6,401,255) (4,372,745) (3,627,920)
--------- ---------- ------------ ------------ ------------
Cash paid .............................. $ -- $ 120,374 $ 1,949,595 $ 1,950,000 $ 21,385,000
========= ========== ============ ============ ============
Increase in property and equipment
and long-term debt, primarily
capitalized leases .................. $311,741 $ 55,926 $ 7,370,322 $ -- $ 720,815
========= ========== ============ ============ ============
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
========= ========== ============ ============ ============
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 (6,050,000 for the years ended December 31, 1994, 1995 and
1996 and the six months ended June 30, 1996 and 6,690,214 for the six months
ended June 30, 1997) used to calculate adjusted pro forma earnings per share
includes (a) the 5,448,788 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 (264,782 for the years ended December 31, 1994, 1995
and 1996 and the six months ended June 30, 1996 and 1,144,235 for the six
months ended June 30, 1997) and (c) for the periods prior to the
Reorganization, the equivalent number of shares (336,430 for the years ended
December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and
97,191 for the six months ended June 30, 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 six months ended June 30, 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 $67,505 $ 923(2)
Cost of revenues ........................... 242,102 50,856 (923)(2)
----------- -------
Gross profit .............................. 38,069 16,649
Selling, general and administrative expenses:
Shareholders' compensation ............... 2,321 1,806 (3,493) (3)
Amortization of intangible assets ......... 424 -- 1,979 (4)
Other selling, general and administrative
expenses ................................. 29,841 11,535 171 (4)
----------- -------
Operating income ........................... 5,483 3,308
Interest expense (income), net ............ 2,175 380 5,915 (5)
Other expense (income), net ............... 1,448 (505)
----------- -------
Income before provision (benefit) for
income taxes .............................. 1,860 3,433
Pro forma provision (benefit) for
income taxes .............................. 757(6) -- (367) (7)
----------- ------- ------------
Pro forma net income ..................... $ 1,103 $ 3,433 $ 4,205
=========== ======= ============
Pro forma weighted average common shares
outstanding .............................. 6,050(8)
===========
Pro forma earnings per share ............... $ .18
===========
OFFERING SUPPLEMENTAL
PRO FORMA ADJUSTMENTS (10) PRO FORMA
---------------- ------------------ ----------------
Net revenues .............................. $ 346,753 $ 346,753
Cost of revenues ........................... 292,035 292,035
----------- -----------
Gross profit .............................. 54,718 54,718
Selling, general and administrative expenses:
Shareholders' compensation ............... 634 634
Amortization of intangible assets ......... 2,403 2,403
Other selling, general and administrative
expenses ................................. 41,547 41,547
----------- -----------
Operating income ........................... 10,134 10,134
Interest expense (income), net ............ 8,470 $ (6,080) 2,390
Other expense (income), net ............... 943 943
----------- -----------
Income before provision (benefit) for
income taxes .............................. 721 6,801
Pro forma provision (benefit) for
income taxes .............................. 390 2,230 2,620
----------- -------- -----------
Pro forma net income ..................... $ 331 $ (3,850) $ 4,181
=========== ======== ===========
Pro forma weighted average common shares
outstanding .............................. 6,950 (9) 9,950(10)
=========== ===========
Pro forma earnings per share ............... $ .05 $ .42
=========== ===========
See notes to unaudited pro forma statements of income.
F-34
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
----------------------------------
ACQUIRED PRO FORMA
COMPANY BUSINESSES (1) ADJUSTMENTS
----------------- ---------------- -----------------
Net revenues .............................. $ 193,197 $11,389 $ 139(2)
Cost of revenues ........................... 165,838 8,728 (139)(2)
---------- -------
Gross profit .............................. 27,359 2,661
Selling, general and administrative expenses:
Shareholders' compensation ............... 292 168 (388) (3)
Amortization of intangible assets ......... 892 -- 298 (4)
Other selling, general and administrative
expenses ................................. 23,377 2,136 26 (4)
---------- -------
Operating income ........................... 2,798 357
Interest expense (income), net ............ 3,513 32 1,484 (5)
Other expense (income), net ............... 1,219 (34)
---------- -------
Income (loss) before provision (benefit) for
income taxes .............................. (1,934) 359
Pro forma provision (benefit) for
income taxes .............................. (467) (6) (273)(7)
---------- ----------
Pro forma net income (loss) ............... $ (1,467) $ 359 $ 1,147
========== ======= ==========
Pro forma weighted average common shares
outstanding .............................. 6,690 (8)
==========
Pro forma earnings (loss) per share ...... $ (.22)
==========
OFFERING SUPPLEMENTAL
PRO FORMA ADJUSTMENTS (10) PRO FORMA
---------------- ------------------ ------------------
Net revenues .............................. $ 204,447 $ 204,447
Cost of revenues ........................... 174,427 174,427
----------- -----------
Gross profit .............................. 30,020 30,020
Selling, general and administrative expenses:
Shareholders' compensation ............... 72 72
Amortization of intangible assets ......... 1,190 1,190
Other selling, general and administrative
expenses ................................. 25,539 25,539
----------- -----------
Operating income ........................... 3,219 3,219
Interest expense (income), net ............ 5,029 $ (3,360) 1,669
Other expense (income), net ............... 1,185 (1,244)(11) (59)
----------- -----------
Income (loss) before provision (benefit) for
income taxes .............................. (2,995) 1,609
Pro forma provision (benefit) for
income taxes .............................. (740) 1,352 612
----------- ------------ -----------
Pro forma net income (loss) ............... $ (2,255) $ (3,252) $ 997
=========== ============ ===========
Pro forma weighted average common shares
outstanding .............................. 6,950 (9) 9,950 (10)
=========== ===========
Pro forma earnings (loss) per share ...... $ (.32) $ .10
=========== ===========
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. These
historical results for the year ended December 31, 1996 include $500,000 of
other income attributable to life insurance proceeds for a key officer of
Stand-By, Inc. 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
Labor World of Minneapolis, Inc. .................. June 30, 1997 825,000
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., Superior Temporaries, Inc. and Labor World of
Minneapolis, 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
established at the time of the Reorganization, (ii) to reduce the amount of
compensation and other expenses of the former owners of the 1996 Acquisitions
and 1997 Acquisitions to the amounts paid to them in accordance with the terms
of their compensation contracts after such acquisitions and (iii) to eliminate
the amount of compensation and other expenses of the former owners of the 1996
Acquisitions and 1997 Acquisitions that was discontinued due to the termination
of their employment at the time of the acquisition.
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 ...... $ 949,407 5 years
Identifiable intangible assets:
Covenants not to compete .................. 1,204,841 9.4 years
Customer lists ........................... 4,395,981 5.5 years
Employee lists ........................... 155,049 .2 year
Goodwill ................................. 25,009,270 32.7 years
------------
$31,714,548
============
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 SIX MONTHS ENDED
RATES DECEMBER 31, 1996 JUNE 30, 1997
---------- ------------------- -----------------
ADDITIONAL INTEREST EXPENSE
Notes due to sellers:
1996 Acquisitions ................................. 7 - 14% $ 147,781 $ --
1997 Acquisitions ................................. 12% 393,848 73,200
Borrowings under line of credit and Revolving
Credit Facility .................................... 8.75% 1,062,843 236,479
Senior Notes ....................................... 11% 2,750,000 458,334
----------- -----------
4,354,472 768,013
ADDITIONAL AMORTIZATION EXPENSE
Discount on Senior Notes ........................... 1,259,559 602,484
Debt issuance costs, Senior Notes .................. 300,794 79,582
Debt issuance costs, Revolving Credit Facility ...... -- 33,427
----------- -----------
$5,914,825 $1,483,506
=========== ===========
F-37
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF INCOME--(CONTINUED)
NOTE 6
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 7
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 8
Pro forma weighted average common shares outstanding on a historical basis
consist of the following:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 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 ..................... 5,785,216 5,545,978
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 ............ 264,784 1,144,236
---------- ---------
Total outstanding shares ................................. 6,050,000 6,690,214
========== =========
For purposes of the above application of the treasury stock method for the
period from January 1, 1996 through February 21, 1997, the proceeds from the
warrants were assumed to be the actual proceeds of $18,541,996, or $13.63 per
warrant, received by the Company at the time of their February 21, 1997
issuance. The actual exercise price of $.015 per share was used after that
date.
F-38
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF INCOME--(CONTINUED)
NOTE 9
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, calculated as follows:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
------------------- -----------------
Total outstanding shares, historical .................. 6,050,000 6,690,214
Decrease in weighted average number of shares issued in
the Reorganization, based on assumed transaction date
of January 1, 1996 .................................... (336,430) (97,191)
Increase in weighted average number of shares calculated
using the treasury stock method, based on the assumed
issuance of warrants on January 1, 1996 and the actual
exercise price of $.015 per share ..................... 1,236,164 356,711
---------- ---------
Total outstanding shares, pro forma .................. 6,949,734 6,949,734
========== =========
NOTE 10
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 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 $13,694,979,
net of a $6,801,983 income tax benefit, which is not reflected in the
supplemental pro forma net income.
NOTE 11
To eliminate expense arising from a put warrants valuation adjustment
included in the Company's historical results for the six months ended June 30,
1997, which increased supplemental pro forma earnings per share by $0.11 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 December 31, 1997, these put warrants valuation adjustments
will result in non-operating expenses in the third and fourth quarters of 1997
totaling $597,673 ($532,714 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 six months
ended June 30, 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
YEARS ENDED DECEMBER THREE MONTHS ENDED
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 (with no aggregate maximum dollar limit on the Company's
liability for claim payments) 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. Based on a preliminary
oral communication to the Company of the results of recent testing performed to
identify the nature and source of the contamination, it is the Company's belief
that the contamination was caused by a third party neighbor to the Company's
property. The Company believes that the clean up costs that will have to be
paid related to this matter will be the responsiblity of the third party
neighbor and furthermore will be funded by a Florida tax levied on businesses
similar to the third party neighbor for this purpose. Based on the above the
financial statements do not include any provision for any loss related to this
matter. However, legal fees and related expenses, which have not been material,
are being incurred to protect the Company's interest in the event, which the
Company believes is remote, that the State of Florida does not fund the payment
of the clean up costs.
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.
F-67
SUPERIOR TEMPORARIES, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
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.
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
YEAR ENDED THREE MONTHS ENDED
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. ................................................ 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 --
--------- --------
Total future minimum payments ......... $233,273 79,902
=========
Less: interest ........................ (4,595)
--------
Obligations under capital leases ...... $ 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
[INSIDE BACK COVER]
DESCRIPTION OF GRAPHIC:
A map of the United States that shows all of OutSource's offices by division
throughout the United States. One legend indicates that Tandem division offices
are represented by blue dots, Synadyne division offices by red dots and Office
Ours division offices by yellow dots. In addition, OutSource's headquarters
location is represented by the Company's logo. There is an additional legend
that shows various sized dots that represent the number of offices in a
particular area.
================================================================================
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 ........................... 16
Dividend Policy ........................... 16
Capitalization ........................... 17
Dilution ................................. 18
Selected Consolidated Financial Data ...... 19
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ............... 22
Business ................................. 34
Management ................................. 48
Certain Transactions ..................... 56
Principal and Selling Shareholders ......... 60
Description of Securities .................. 62
Shares Eligible for Future Sale ............ 65
Underwriting .............................. 66
Independent Public Accountants ............ 67
Experts .................................... 67
Legal Matters .............................. 68
Available Information ..................... 68
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
[GRAPHIC OMITTED]
[OUTSOURCE/registered trademark/]
[INTERNATIONAL]
[THE LEADER IN HUMAN RESOURCES]
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 ........................ 40,000
Transfer Agent and Registrar fees ........................ 4,500
Legal fees and expenses ................................. 280,000
Accounting fees and expenses .............................. 600,000
Blue Sky fees and expenses .............................. 7,500
Printing expenses ....................................... 320,000
Miscellaneous ............................................. 60,062
-----------
Total ................................................... $1,340,000
===========
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 in reliance upon the exemption from
registration provided by 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 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
II-1
issued in reliance upon the exemption from registration provided by 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 in reliance upon the exemption from
registration provided by 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 in reliance upon the exemption from registration provided by
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 in reliance upon the exemption from
registration provided by 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 in reliance upon the exemption from registration provided by
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
in reliance upon the exemption from registration provided by 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 5,448,788 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 in reliance upon the exemption
from registration provided by 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 in reliance
upon the exemption from registration provided by 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 $.015 per share and expire on February 20,
2002. Following the successful consummation of certain acquisitions by the
Company in April 1997, 180,891 of the Additional Warrants were released from
escrow and distributed to certain shareholders of the Company. The remaining
392,896 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 $.015
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 registration rights with respect to the Warrant
Shares. The securities were issued in reliance upon the exemption from
registration provided by 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 Form of Amended and Restated Articles of Incorporation of the Company, as amended
3.4 Form of 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 Form of 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*
27 Financial Data Schedule*
99 Consent of David Hershberg*
- ----------------
* Previously Filed.
(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 Amendment No. 2 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Deerfield Beach, Florida on October 21, 1997.
OUTSOURCE INTERNATIONAL, INC.
By: /s/ PAUL M. BURRELL
Paul M. Burrell, President,
Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1993, as amended,
this Amendment No. 2 to the 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 October 21, 1997
Paul M. Burrell Officer and Chairman of the
Board of Directors
(Principal Executive Officer)
*/s/ ROBERT A. LEFCORT Executive Vice President, October 21, 1997
Robert A. Lefcort Secretary and Director
*/s/ ROBERT E. TOMLINSON Chief Financial Officer, Treasurer October 21, 1997
Robert E. Tomlinson and Director
(Principal Financial and
Accounting Officer)
*/s/ RICHARD J. WILLIAMS Director October 21, 1997
Richard J. Williams
*/s/ SAMUEL H. SCHWARTZ Director October 21, 1997
Samuel H. Schwartz
- ----------------
*By: /s/ PAUL M. BURRELL October 21, 1997
Paul M. Burrell
Attorney-in-Fact
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
- -------- -----------------------------------------------------------------------------
3.3 Form of Amended and Restated Articles of Incorporation of the
Company, as amended
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.