SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
ACT OF 1934
For the transition period from _______________ to ___________
Commission File Number 000-23147
OUTSOURCE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0675628
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(State or jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
1144 East Newport Center Drive, Deerfield Beach, Florida 33442
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 418-6200
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par
value $.001 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting and non-voting Common Stock held
by nonaffiliates as of March 31, 2000 was approximately $5.9 million (based upon
the closing sale price of $1.625 per share on the NASDAQ Stock Market(R) on
March 31, 2000).
As of March 31, 2000, a total of 8,657,913 shares of the Registrant's
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2000
Annual Meeting of Shareholders are incorporated by reference in Part III.
OUTSOURCE INTERNATIONAL, INC.
INDEX
PART I
Page
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Item 1 - Business ........................................................................................ 2
Item 2 - Properties....................................................................................... 9
Item 3 - Legal Proceedings................................................................................ 9
Item 4 - Submission of Matters to a Vote of Security Holders.............................................. 10
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters........................... 11
Item 6 - Selected Financial Data......................................................................... 12
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................ 15
Item 7A - Quantitative and Qualitative Disclosures about Market Risk...................................... 31
Item 8 - Financial Statements and Supplementary Data..................................................... 33
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................................. 71
PART III
Item 10 - Directors and Executive Officers of the Registrant.............................................. 71
Item 11 - Executive Compensation.......................................................................... 71
Item 12 - Security Ownership of Certain Beneficial Owners and Management.................................. 71
Item 13 - Certain Relationships and Related Transactions.................................................. 71
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 72
Signatures................................................................................................ 76
Schedules................................................................................................. S-1
OUTSOURCE INTERNATIONAL(R), TANDEM(R) and OFFICE OURS(R) are registered
trademarks of Outsource International, Inc. and its subsidiaries.
PART 1
ITEM 1 - BUSINESS
Certain statements included in this Form 10-K are forward-looking
statements and the Company's actual results may differ materially from those
projected or implied in the forward-looking statements. Further, certain
forward-looking statements are based upon assumptions of future events, which
may not prove to be accurate. These forward-looking statements involve risks and
uncertainties, some of which are further discussed under the caption
"Forward-Looking Statements: Certain Cautionary Statements" of Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
GENERAL
Outsource International, Inc. (the "Company") is a national provider of
human resource services focusing on the flexible industrial staffing market
through its Tandem division. Tandem 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 offered a comprehensive
package of professional employer services including payroll administration, risk
management, benefits administration and human resources consultation to
companies in a wide range of industries. The operations of Synadyne were sold
effective April 8, 2000. The Company's office clerical staffing division, Office
Ours, which the Company had operated since 1995, was sold in August 1999.
As of March 31, 2000, the Tandem division provided approximately 22,500
flexible staffing personnel daily through a nationwide network of 98 Company
locations (collectively identified as "Company-owned" offices) and 50 franchised
offices. The Tandem division has approximately 8,200 clients and provides
services to approximately 5,500 of such clients each day. Between 1995 and 1999,
Tandem staffing revenues, excluding revenues generated by franchised offices,
increased from $68.6 million to $339.1 million, a compound annual growth rate of
approximately 49.1%. The Synadyne division, which began in 1994, had
approximately 9,000 employees on March 31, 2000. Between 1995 and 1999, PEO
revenues, excluding revenues from the provision of PEO services to Tandem
franchisees, increased from $67.9 million to $224.5 million, a compound annual
growth rate of approximately 31.3%.
Between January 1995 and October 1998, the Company completed 36
acquisitions, primarily staffing companies. These acquisitions included 89
offices and collectively generated approximately $189.0 million in revenue for
the twelve months preceding such acquisitions (See "Acquisitions" under Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations). Due to these acquisitions, as well as new offices opened by the
Company, the number of Company-owned staffing and PEO offices increased during
this period from ten to 124 and the number of metropolitan markets (measured by
Metropolitan Statistical Areas, or MSAs) served by Company-owned locations
increased from one to 50. Since October 1998, the Company has made no
acquisitions. As of December 31, 1999, the Company operated 90 staffing and PEO
offices.
Staffing companies provide one or more of four basic services to
clients: (i) flexible staffing; (ii) PEO services; (iii) placement and search;
and (iv) outplacement. Based on information provided by the American Staffing
Association (formerly the National Association of Temporary and Staffing
Services), the National Association of Professional Employer Organizations and
Staffing Industry Analysts, Inc., 1999 staffing industry revenues were
approximately $117 billion. 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. Staffing industry revenues grew from approximately $102 billion in 1998
to approximately $117 billion in 1999, or 14.7%. During that same period, the
industrial staffing sector grew from approximately $14.1 billion to
approximately $14.8 billion, or 5.0%. During 1999, the industrial staffing
sector represented 12.6% of the staffing industry, compared to 13.8% during
1998. The Company believes that the industrial staffing market is highly
fragmented and that in excess of 75% of industrial staffing revenues are
generated by small local and regional companies.
Since 1994, when the Company commenced operations of its Synadyne
division, the Company had believed a strategy of operating both a staffing
division and a PEO division provided it with significant competitive advantages.
Both Tandem and Synadyne offered a number of common services including payroll
administration, risk management and benefits administration. The Company
designed and administered these services through common facilities, personnel
and information systems which provided the Company with the ability to develop
and provide a wider range of services at lower costs than its primary
competitors. In addition, the Company was able to provide a full spectrum of
staffing services to its industrial staffing clients ranging from a temporary
employee for one day to comprehensive outsourcing of human resources
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functions through the Company's PEO division. In 1999, the Company recognized
that the strategy of combining staffing and PEO services was not producing the
results that had been anticipated and, as a result, the Company decided to sell
the operations of its Synadyne division (as well as its Office Ours clerical
staffing division), and to focus its future efforts on its Tandem flexible
staffing business.
See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - for information regarding other operating
information for the Company's primary areas of operations, seasonality, and
practices related to working capital items. See Note 15 to the Company's
Consolidated Financial Statements for information regarding operating segment
information.
COMPANY SERVICES
The Tandem division focuses on meeting its clients' flexible staffing
needs, targeting opportunities in that fragmented, growing market which the
Company believes has been under-served by large full service staffing companies.
Significant benefits of Tandem's services to clients include providing the
ability to outsource the recruiting and many logistical aspects of their
staffing needs, as well as converting the fixed cost of employees to the
variable cost of outsourced services. Prior to the sale of Synadyne's operations
effective April 8, 2000, Synadyne focused on providing PEO services to small and
medium sized businesses (those with less than 500 employees), which services
were intended to provide cost savings arising from the economies of scale
associated with this outsourcing of human resources administration.
o Payroll Administration. The Company assumes responsibility for payroll and
attendant record-keeping, payroll tax deposits, payroll tax reporting, and all
federal, state, county and city payroll tax reports (including 941s, 940s, W-2s,
W-3s, W-4s and W-5s), state unemployment taxes, employee file maintenance,
unemployment claims and, monitoring and responding to changing regulatory
requirements. Until the sale of its Synadyne operations, the Company developed
and administered customized payroll policies and procedures for each of its
clients, which were fully integrated from the clients' offices to the Company's
central processing center.
o Aggregation of Statutory and Non-Statutory Employee Benefits. Employee benefit
packages offered to certain PEO worksite employees included health care options
and supplemental benefit programs. The Company also offered multi-employer
retirement plans and cafeteria plans to its eligible employees and provided
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. As part of its service package provided to PEO clients, the
Company administered all employee benefit plans and was responsible for
negotiating the benefits provided by, and the costs of, each such plan. The
Company's human resources and claims administration departments served as
liaisons for the delivery of such services to the client employee and monitored
and reviewed workers' compensation for loss control purposes.
o Human Resources Compliance Administration. As the Company was the employer of
record with respect to PEO services until the sale of Synadyne, it assumed
responsibility for compliance with many employment related regulations and was
prepared and trained to address compliance and regulatory issues inherent in an
employment relationship. For example, the Company provided compliance
administration services with respect to unemployment claims, workers'
compensation claims, and claims arising under the Fair Labor Standards Act. In
addition, the Company assisted its clients in understanding and complying with
employment-related requirements for which the Company did not assume
responsibility.
The Company continues to be the employer of record with respect to flexible
staffing services and assumes responsibility for most employment regulations,
including compliance with workers' compensation and state unemployment laws. As
part of its base services in the flexible staffing market, the Company conducts
a human resources needs analysis for clients and client employees. Based on the
results of that review, the Company recommends basic and additional services
that the client should implement.
The Company provides certain other services to its flexible staffing
clients on a fee-for-service basis. These services include screening,
recruiting, training, workforce deployment, loss prevention and safety training,
pre-employment testing and assessment, background searches, compensation program
design, customized personnel management reports, job profiling, description,
application, turnover tracking and analysis, drug testing policy administration,
affirmative action plans, opinion surveys and follow-up analysis, exit
interviews and follow-up analysis, and management development skills workshops.
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OPERATIONS
Tandem Operations
Tandem delivers its flexible staffing services through a nationwide
network of 98 Company-owned and 50 franchise recruiting and dispatch branches.
Company-owned branches are aggregated into 15 districts, which are combined into
three geographic zones: the East, Midwest and West. Most Company-owned
recruiting and dispatch branches are staffed with a branch manager, one or two
service and recruiting coordinators, one or more staffing consultants and, in
some cases, an office assistant. Some of the centers identified above as
Company-owned are "vendor on premises" locations, where the Company has a
permanent administrative presence at a client's worksite. The number of people
in each of the positions will vary by the size of the recruiting and dispatch
centers and by the degree of penetration of their territory within the market.
The Company believes that its growth is due in part to its familiarity
with the businesses of its clients. The Company's sales consultants visit client
job sites regularly to learn what skills are required by the client's business.
The branch managers conduct job site safety inspections to ensure that employees
are appropriately skilled and equipped for the job. To ensure customer
satisfaction, Tandem staffing consultants and service coordinators play an
active role in daily work assignments. The Company also familiarizes itself with
its pool of industrial employees. Each employee is subject to a three-phase
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.
Synadyne Operations
Until the Company sold the operations of the Synadyne division on April
8, 2000, it offered basic PEO services through Synadyne client service teams
consisting of human resource professionals and payroll and benefits specialists
located in each of the two Florida markets serviced by Synadyne. Although the
client service teams had primary responsibility for servicing their assigned
clients, they relied on the Company's corporate support center staff to provide
advice in specialized areas such as workers' compensation, unemployment
insurance benefits and payroll processing. In connection with the sale of
Synadyne, the Company is obligated to provide certain support services to the
buyer, including accounting and information systems services.
Sales and Marketing
The Company markets its staffing services through two primary marketing
channels, direct sales and franchising. The Company believes this dual-channel
approach allows the Company to quickly access a pool of skilled employees,
develop regional brand awareness and ultimately become a market leader.
o Direct sales force. It is the Company's strategy to employ the best sales
force available, and all of the Company's sales associates receive a competitive
compensation package that includes commissions. 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.
o Franchising. The Company offers franchising arrangements for its flexible
industrial staffing business. Under these 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. The franchisee assumes the marketing costs and, as a result, the
Company believes franchising is a cost-effective method of building regional
brand awareness in secondary and tertiary markets. As of March 31, 2000, there
were 50 industrial Tandem franchise locations.
Clients
The Tandem division has approximately 8,200 clients and provides
services to approximately 5,500 of such clients each day. These clients
represent a cross-section of the industrial sector, of which no single client
represents more than 5% of the Company's total revenues. Tandem's clients
include national companies such as Browning-Ferris Industries, Inc., Michelin
Corporation, Toys "R" Us, Inc. and Waste Management, Inc., plus a large number
of local and regional companies.
Prior to its sale, Synadyne provided PEO services to approximately
2,800 companies. These companies represented a diverse range of industries,
including insurance and, until the year 2000, industrial staffing. The Company's
primary PEO client in the insurance industry was Allstate Insurance. The Company
provided basic PEO services for approximately 2,100 Allstate agents. The
Company's primary PEO clients in the staffing industry were its Tandem
franchises. For the year ended
4
December 31, 1999, approximately 9% and 3% of the Company's total PEO revenues
were attributed to services provided to Allstate Insurance agents and to Tandem
franchises, respectively. The Company discontinued offering PEO services to its
Tandem franchises as of December 31, 1999.
The Company attempts to maintain diversity within its client base in
order to decrease its exposure to downturns or volatility in any particular
industry, but there can be no assurance that the Company will be able to
maintain such diversity or decrease its exposure to such volatility. 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 activities). All prospective
clients undergo a rigorous underwriting process to evaluate workers'
compensation risk, creditworthiness, unemployment history and operating
stability. Generally, flexible staffing clients do not sign long-term contracts.
See Note 9 to the Company's Consolidated Financial Statements for
additional information regarding significant customers and geographical
concentration.
Competition
The flexible staffing market is highly fragmented and characterized by
many small providers in addition to several large public companies, with at
least one other public company focused primarily on industrial staffing. 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.
Unlike the Company, almost none of these companies concentrate primarily on
industrial staffing. The Company believes that by focusing primarily on
industrial staffing, it enjoys a competitive advantage over many of its
competitors that attempt to provide a broader range of temporary employees. The
Company also believes that by targeting regional and emerging companies, rather
than the national companies that are generally being pursued by its competitors,
it can also gain certain competitive advantages.
The Company believes that there are several criteria that must be met
in order to obtain and retain clients in the 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,
positive work environments, flexibility of work schedules, an adequate number of
available work hours and, in some cases, vacation and holiday pay. The Company
believes it is highly competitive in these areas in the Chicago market and is
reasonably competitive in the other markets in which it competes, although there
can be no assurance that such competitive standing can be maintained in the
future.
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. The Company 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 client worksites as a necessary
condition to a continued business relationship.
Each month, the Company's risk management team reviews workplace
accidents for the relevant period to determine the appropriate reserves. Each
quarter, all cases are reviewed to reconcile the reserves, payments, and
expected future costs for each case. The Company believes it has maintained
adequate reserves for all of its workers' compensation claims. In addition, the
Company has selected Special Risk Services for third-party claims administration
and Novaeon Care Management for medical case management. Each vendor has
established designated regional teams for the handling of the Company's workers'
compensation claims. A Company in-house claims analyst manages each regional
team. 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
Special Risk Services or Novaeon for defense and/or processing. Together, a team
of the in-house analyst, the third-party administrator and medical case manager
aggressively follows each claim from its origin to its conclusion. See Note 1 to
the Company's Consolidated Financial Statements for a description of the
financial terms of the program.
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
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systems at its Company-owned and franchise locations, as well as the corporate
support center. At the field level, custom developed systems support the
day-to-day operational needs of the Tandem division. Another specialized system
had provided support for Synadyne. At the corporate support center, centralized
accounting, billing and reporting applications provide support for the Company's
Tandem field offices.
In November 1996, the Company entered into a series of major projects
to expand its information systems infrastructure and replace, or redevelop, 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 database management
system that now provides consistency across all applications and allows
information to move between applications. This allows for consolidated reporting
and analysis for the Company.
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, completed in November 1997, was the
development of a state-of-the-art system to support Synadyne. Since no
comprehensive, commercially available system existed 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. That system was updated with a new release in November 1999. The final
phase of the project was the development of a new support system for the Tandem
offices that uses a centrally based processing resource. Each field office is
connected to a central processor via a frame relay network connection. This new
system was fully implemented in all Company-owned offices during 1999.
INDUSTRY REGULATION
Overview
As an employer, the Company is subject to federal, state and local
statutes and regulations governing its relationships with its employees and
affecting businesses generally, including employees at client worksites. In
addition, the Company had been subject to applicable licensing and other
regulatory requirements and uncertainty in the application of numerous federal
and state laws relating to labor, tax and employment matters as a result of its
PEO operations, which were discontinued as of April 8, 2000.
Uncertainty As To The Employer Relationship
Although the operations of Synadyne, the Company's professional
employer division, were sold, the Company continues to be subject to certain
federal and state laws related to services provided on or before April 8, 2000.
Changes in those laws and possible retroactive application of those laws could
affect the Company, as described below.
By entering into a co-employment relationship with PEO worksite
employees, through its Synadyne division, the Company assumed 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 was 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 "employee" 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,
through April 8, 2000, certain of the Company's PEO worksite 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 throughout the
United States. Upon examination, the IRS may determine that a PEO is not the
employer of the worksite employees under the provisions of the Internal Revenue
Code of 1986, as amended (the "Code") 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. The
Company believes that since it has paid all employment taxes and is no longer in
the PEO business, any such ruling would not have a material effect on the
Company's financial position.
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Employee Benefit Plans. The Company offered various benefit plans to
its PEO worksite employees. These plans included a multiple-employer retirement
plan, 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 was not the employer of its PEO worksite
employees under Code provisions applicable to employee benefit plans. If the IRS
were to conclude that the Company was not the employer of its PEO worksite
employees for plan purposes, those employees would not have qualified to make
tax favored contributions to the Company's multiple-employer retirement plans or
cafeteria plan. If such conclusion were applied retroactively, employees' vested
account balances, prior to April 8, 2000, may become taxable immediately, the
Company could lose its tax deduction to the extent the contributions were not
vested, the plan trust could become a taxable trust and penalties could be
assessed. In such a scenario, the Company could face the risk of potential
litigation by certain of the Company's former PEO clients. As such, the Company
believes that a retroactive application by the IRS of an adverse conclusion
could have a material adverse effect on its 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 the
employer designation 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.
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. As
a result of its PEO operations, Synadyne was licensed or registered in 15
states.
TRADEMARKS AND SERVICE MARKS
The Company has registered the following marks with the United States
Patent and Trademark Office: TANDEM, LABOR WORLD, LM LABOR WORLD in conjunction
with globe logo, LABOR TECHNOLOGIES and Labor Technologies logo, OFFICE OURS,
Office Ours clock logo, OUTSOURCE INTERNATIONAL THE LEADER IN HUMAN RESOURCES
and design. These marks all expire at various times from 2002 to 2007, but are
renewable thereafter for ten year terms. The Company has applications pending
before the United States Patent and Trademark Office for federal registration of
the following marks: FIGURE OF A MAN IN BOX DESIGN, OUTSEARCH, PEOPLE PEOPLE
COMMITTED TO PEOPLE, TANDEM and double oval design, and WE HAVE YOUR FUTURE IN
MIND. In addition, the Company has registered the mark OUTSOURCE INTERNATIONAL -
THE LEADER IN HUMAN RESOURCES in 26 states, which registrations expire at
various times from 2002 to 2007, but are renewable. See Item 3 - Legal
Proceedings.
The Company has registered with the Office for Harmonization in the
International Market (Trademark and Designs) for the European Community
registration of the mark OFFICE OURS. The Company has one application pending
with the European Community for the registration of the mark OUTSOURCE
INTERNATIONAL. The Company also has registered with the Canadian Trademarks
Office for the mark OFFICE OURS. The Company has one application pending with
the Canadian Trademarks Office for registration of the mark OUTSOURCE
INTERNATIONAL.
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The Company believes that all of its marks are important to its sales,
marketing and financial operations.
CORPORATE EMPLOYEES
As of December 31, 1999, the Company had 784 corporate employees, of
whom 575 were employed in flexible staffing service operations, 72 were employed
in PEO service operations, and 137 were employed in shared support services such
as human resources, risk management, and information systems. As set forth
below, the Company sold certain assets of its Synadyne division, effective April
8, 2000. This sale resulted in a reduction of 63 employees, who became employees
of the buyer at the time of purchase. In addition, the Company has contracted
with the buyer of Synadyne to purchase PEO services for the Company's
administrative personnel, in the same manner that Synadyne provided such
services prior to the sale. None of the Company's employees are covered by
collective bargaining agreements. The Company believes that its relationships
with its employees are good.
CHANGES IN BUSINESS PLAN
On August 6, 1999, the Company announced the following actions intended
to improve its short-term liquidity, concentrate its operations within one core
segment (Tandem, its flexible industrial staffing division) and improve its
operating performance within that segment:
(i) the sale of Office Ours, the Company's clerical staffing division,
which was accomplished effective August 30, 1999;
(ii) the engagement of an investment banking firm to assist in the
evaluation of strategic options for Synadyne, which ultimately resulted in the
sale of the operations of Synadyne effective April 8, 2000; and
(iii) a reduction of the Company's flexible staffing and support
operations (the "Restructuring"), consisting primarily of the sale, franchise,
closure or consolidation, during the third and fourth quarters of 1999, of 26 of
the 117 Tandem branch offices existing as of June 30, 1999; a reduction of the
Tandem and corporate support center employee workforce by 107 employees
(approximately 11% of the Company's workforce); and an anticipated additional
reduction of 59 employees by June 30, 2000, of which 35 employees are in branch
offices that will be sold, franchised, closed or consolidated. As a result of
the corporate support center workforce reductions and the anticipated
disposition of Synadyne, the corporate support center building was sold on
December 29, 1999. A total of 47 branch offices have been or will be eliminated
in connection with the Restructuring, 26 and 29 of which had been sold,
franchised, closed, or consolidated as of December 31, 1999 and March 31, 2000,
respectively. These offices were not or are not expected to be adequately
profitable in the near future or are inconsistent with the Company's operating
strategy of clustering offices within specific geographic regions. The Company
acquired many of these branch offices during 1996, 1997 and 1998.
In connection with the Restructuring, the Company has included a charge
of $11.2 million in its results of operations for the year ended December 31,
1999. This restructuring charge included $4.0 million for severance and other
termination benefits and $1.2 million for professional fees and a $5.4 million
write-down of assets related to 27 of the 50 Tandem offices identified for
disposition. Eight offices representing $1.7 million of this write-down, had
been disposed of as of March 31, 2000 and were sold for total proceeds of $2.2
million, of which $1.3 million represented cancellation of the Company's
subordinated indebtedness, and $0.5 million represented notes payable issued by
the Company in connection with the sale of certain assets. The remaining $3.7
million write-down relates to 18 additional offices not sold as of March 31,
2000, and is based on management's estimate of the ultimate sales prices that
will be negotiated for these assets. The Company expects to sell the remainder
of the assets held for disposition before June 30, 2000.
The remaining 20 of the 47 Tandem offices identified for disposition
have been closed or consolidated into other Company-owned locations and the
restructuring charge includes $0.6 million for the costs of terminating the
related leases as well as the carrying value of leasehold improvements and other
assets not usable in other Company operations.
As a result of the corporate support center workforce reductions and
the anticipated disposition of the Synadyne operations, the corporate support
center building was sold in an arms-length transaction to an unaffiliated third
party, effective December 29, 1999. The buyer agreed to lease the building back
to the Company for four months, ending April 30, 2000. In February 2000, the
Company leased a total of 32,553 square feet as its new corporate support center
in an office building in Delray Beach, Florida, with an anticipated move-in date
of May 1, 2000.
Effective April 8, 2000, the Company sold the operations of the
Synadyne division to Team Staff, Inc., in an arms-
8
length transaction, for proceeds of $3.5 million. In addition, the Company could
receive additional sale proceeds of $1.25 million, which is dependent on certain
performance criteria for the one year period subsequent to the sale. In
connection with the sale of Synadyne, the Company is obligated to provide
certain support services to the buyer, including accounting and information
systems services. In addition, the Company has contracted with the buyer to
purchase PEO services for the Company's administrative employees in the same
manner that Synadyne provided services prior to the sale.
To assist the Company during the Restructuring process, the Company
retained the services of Crossroads Capital Partners, LLC, a Newport Beach,
California consulting firm ("Crossroads") in May 1999. In August 1999, Mr. J. G.
(Pete) Ball, a principal of Crossroads, agreed to serve in the newly created
position of interim chief operating officer of the Tandem division during the
Restructuring process. Mr. Ball is working with the Board of Directors and
senior management to help ensure the Company's new business plan, as a result of
the Restructuring, is implemented.
The Company's current bank financing expires as of April 30, 2000. The
Company is seeking to replace the existing credit facilities and,
simultaneously, is negotiating with its syndicate of lenders to extend those
facilities until replacement financing is obtained. Crossroads is assisting the
Company in its efforts to secure replacement financing. Furthermore, the Company
is in default of certain other subordinated indebtedness. See Item 3 - Legal
Proceedings. If the Company does not obtain long-term financing, its financial
condition, cash flows and results of operations could be materially and
adversely affected.
Following the Restructuring, the Company's objective is to concentrate
its activities on becoming the leading provider of industrial staffing services
in select geographic regions. To achieve this objective, the Company's strategy
is to (i) focus on under-served industrial staffing markets which provide high
growth opportunities, (ii) geographically cluster offices to leverage economic
efficiencies and maintain a stable employment base, (iii) increase market
penetration through a combination of internal growth, acquisitions, franchising
and strategic alliances, (iv) continue to maximize operating efficiencies
through integrated technology and back office support and, ultimately, (v) to
become the "Guardian Employer", whereby the Company will represent a critical
mass of jobs within a defined geographic area enabling it to commit to permanent
employment, over time, for its staffing employees.
ITEM 2 - PROPERTIES
The Company leases a 50,000 square foot office building in Deerfield
Beach, Florida that it previously owned, which houses its corporate support
center. The lease, at a monthly net rental of $40,000, expires on April 30,
2000. In February 2000, the Company leased 32,553 square feet of space for its
corporate support center in an office building complex located in Delray Beach
in Palm Beach County, Florida. The lease, which commences on May 1, 2000, has a
term of 64 months and requires a monthly rental payment of $59,360. A portion of
the new office space (approximately 10,300 square feet) will be subleased to the
purchaser of Synadyne for up to 64 months. The Company owns two small staffing
office locations in Chicago, Illinois and Waukegan, Illinois and a residential
condominium in Boca Raton, Florida. As of December 31, 1999 the Company also
leased 88 facilities, primarily flexible staffing office locations, with
approximately 226,000 total square feet for an annual base rent of approximately
$2.6 million. A portion of a warehouse and a staffing office location are leased
from TMT Properties, Inc., a company controlled by Paul Burrell, a current
director of the Company, and the Company's former Chairman, President, and Chief
Executive Officer. The warehouse lease, which is on a month-to-month basis, and
the staffing office lease, which expires in February 2002, each have rental
obligations of approximately $2,000 per month. 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.
ITEM 3 - LEGAL PROCEEDINGS
On March 21, 1997, Source Services Corporation ("SSC") filed a Petition
to Cancel Registration with the Trademark Trial and Appeal Board in which SSC
sought cancellation of the Company's service mark "Outsource International - The
Leader in Human Resources". SSC alleged that it had been using the service mark
"Source" in various forms since 1986 and that the Company's use of the
"Outsource" service mark violated various provisions of the Lanham Act. On
September 23, 1997, SSC filed an action in federal court seeking to enjoin the
Company's use of the name "OUTSOURCE", cancellation by the court of the
Company's "Outsource" service mark and damages. In April 1999, the Company and
SSC entered into a settlement agreement, resulting in no substantive change to
the Company's continued use of the "Outsource" service mark and without any
effect on the Company's financial condition or results of operations.
9
On November 12, 1997, an action was commenced against the Company in
the Circuit Court for Oakland County, Michigan under the title Vervaecke vs.
Outsource International, Inc., et al (Case No. 97-1283-CL). In September 1999, a
settlement was reached between the parties, with no material impact on the
Company's past or future financial condition or results of operations, and the
action was dismissed.
On September 24, 1998, an action was commenced against Outsource
International of America, Inc. ("Outsource America"), a wholly-owned subsidiary
of the Company, in the United States District Court, Eastern District of
Louisiana, under the title Corporate Personnel Services and Temps, Inc. v.
Outsource International of America, Inc. (Case No. 85089). In November 1999, the
Court entered an order granting the Company's motion to dismiss the complaint
and the plaintiff has not appealed that order and the time to appeal has
expired.
In addition to the foregoing, the Company is involved in routine
litigation arising in the ordinary course of its business which the Company
believes will not have a material adverse effect on its financial position.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, $.001 par value ("Common Stock"), commenced
trading on the NASDAQ National Market(R) under the symbol "OSIX" on October 24,
1997. There were approximately 128 holders of record of Common Stock as of March
31, 2000. This number does not include the number of shareholders whose shares
were held in "nominee" or "street name", which the Company believes to be
approximately 3,000 as of that date. The table below sets forth, for the periods
indicated, the high and low bid prices of the Company's Common Stock as reported
by the NASDAQ Stock Market(R).
Bid Prices
----------
High Low
---- ---
Fiscal Year 1998
First Quarter 1998.......................................... $ 25.00 $ 10.63
Second Quarter 1998......................................... 24.25 7.75
Third Quarter 1998.......................................... 11.13 3.50
Fourth Quarter 1998......................................... 5.69 3.25
Fiscal Year 1999
First Quarter 1999.......................................... $ 7.00 $ 3.25
Second Quarter 1999......................................... 4.88 3.06
Third Quarter 1999.......................................... 3.81 0.63
Fourth Quarter 1999......................................... 2.06 0.50
- ----------------
On March 31, 2000, the closing price of the Company's Common Stock as,
reported by the NASDAQ Stock Market (R), was $1.625 per share.
The Company has never paid dividends on its Common Stock. The Company
intends to retain earnings, if any, to finance future operations and expansion
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. Any future payment of dividends will depend upon the financial
condition, capital requirements and earnings of the Company and compliance with
cash flow and other financial covenants contained in the Company's revolving
credit facility with a syndicate of lenders led by Fleet National Bank, formerly
BankBoston, N.A. (the "Revolving Credit Facility") or in any replacement credit
facility, as well as upon other factors that the Board of Directors may deem
relevant.
11
ITEM 6 - SELECTED FINANCIAL DATA
The consolidated balance sheet data and consolidated statement of
operations data set forth below as of and for each of the five years in the
period ended December 31, 1999 have been derived from the audited consolidated
financial statements of the Company. The system operating data and other data
have been derived from the Company's records. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and related notes thereto.
Years ended December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues.................................... $594,047 $565,394 $447,579 $280,171 $149,825
Cost of revenues................................ 512,136 480,574 381,273 242,102 126,270
-------- -------- -------- -------- --------
Gross profit.................................... 81,911 84,820 66,306 38,069 23,555
Shareholders' compensation...................... - -- 292 2,321 2,370
Provision for doubtful accounts................. 5,505 1,572 1,506 556 321
Amortization of intangible assets............... 3,702 3,684 1,853 424 41
Restructuring costs............................. 11,220 -- -- -- --
Impairment charges for write-off of goodwill
and other long-lived assets................... 2,603 -- -- -- --
Other selling, general and administrative expenses 77,512 67,596 52,246 29,285 17,367
-------- -------- -------- -------- --------
Operating (loss) income......................... (18,631) 11,968 10,409 5,483 3,456
Net interest expense............................ 8,604 5,529 7,877 2,175 1,259
Other (income) expense (1)...................... (479) (53) 1,821 1,448 (11)
-------- -------- -------- -------- --------
(Loss) income before provision (benefit)
for income taxes and extraordinary item (2)... (26,756) 6,492 711 1,860 2,208
Pro forma income taxes (3)...................... 4,123 1,611 296 757 859
-------- -------- -------- -------- --------
Pro forma (loss) income before
extraordinary item (2)(3)...................... $(30,879) $ 4,881 $ 415 $ 1,103 $ 1,349
======== ========= ======== ======== ========
Pro forma weighted average basic common
shares outstanding (4)........................ 8,658 8,604 6,055 5,785 5,785
======== ========= ======== ======== ========
Pro forma weighted average diluted common
shares outstanding (4)........................ 8,658 9,919 7,320 5,844 5,785
======== ========= ======== ======== ========
Pro forma basic (loss) earnings per share before
extraordinary item............................ $ (3.57) $ .57 $ .07 $ .19 $ .23
======== ========= ======== ======== ========
Pro forma diluted (loss) earnings per share before
extraordinary item............................ $ (3.57) $ .49 $ .06 $ .19 $ .23
======== ========= ======== ======== ========
Other Data (5):
EBITDA, as adjusted............................. $ 4,949 $ 18,777 $ 14,871 $ 9,027 $ 6,258
======== ========= ======== ======== ========
Net (loss) income, as adjusted.................. $ (6,135) $ 5,022 $ 2,139 $ 3,220 $ 2,586
======== ========= ======== ======== ========
Pro forma diluted (loss) earnings per share,
as adjusted................................... $ (.71) $ .51 $ .29
======== ========= ========
System Operating Data:
System Revenues (6)............................. $654,589 $ 647,301 $555,802 $389,314 $242,681
======== ========= ======== ======== ========
Number of employees (end of period)............. 35,000 36,000 32,000 23,000 16,200
Number of offices (end of period)............... 148 165 163 150 109
12
As of December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Consolidated Balance Sheet Data:
Working capital (deficiency).................... $ (42,043) $ (8,699) $ 33,651 $(3,172) $ 1,540
Total assets (7)................................ 113,681 112,002 105,743 55,877 24,708
Revolving Credit Facility and line of credit (7) 57,067 20,980 33,800 9,889 6,468
Long-term debt to related parties, with
current maturities............................ 1,195 1,286 100 11,275 -
Other long-term debt, with current maturities... 9,737 16,039 10,145 12,866 3,254
Other non-current liabilities................... - 1,050 - -
Total shareholders' equity...................... 13,709 44,588 40,778 4,494 3,603
(1) In 1997, the Company issued warrants ("Warrants") to purchase 1,360,304
shares of the Company's Common Stock. The holders of the Warrants had a put
right, as a result of which the Company recorded a put warrants liability.
Other (income) expense for the year ended December 31, 1997 includes
non-operating expense of $1.8 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 the time of the Offering ("Put Warrants Valuation
Adjustment"), when the put right terminated. At the time of the Offering,
the Warrants, with an adjusted carrying value of $20.4 million, were
reclassified from debt to additional paid-in capital. See Note 7 to the
Company's Consolidated Financial Statements.
Other expense (income) for the year ended December 31, 1996 includes $1.4
million of unusual charges, primarily professional fees 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.
(2) As a result of the use of the proceeds of the Offering to repay the full
balance of the Senior Notes, the Company recorded an extraordinary loss in
1997 of approximately $13.4 million (net of a $6.6 million income tax
benefit). This loss consists of the unamortized debt discount and the
unamortized debt issuance costs related to the Senior Notes. As a result of
the reduction of the income tax benefit included in the 1997 extraordinary
loss and related to the release of certain put warrants in 1998, the
Company recorded an extraordinary loss of approximately $1.4 million in
1998. See Note 6 to the Company's Consolidated Financial Statements.
(3) On February 21, 1997, a reorganization was consummated in which nine
companies under common ownership and management became wholly-owned
subsidiaries of the Company (the "Reorganization"). 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 $429,000 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 year ended December 31, 1997, but has been removed from
the pro forma results presented for that period.
(4) Basic shares outstanding includes (a) the 5,448,788 shares of Common Stock
issued in connection with the Reorganization, (b) 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, (c) for the periods after the Offering, the sale by the
Company of 3,000,000 shares of Common Stock and (d) for 1998, 209,125
shares representing the weighted average of 154,733 shares issued and
warrants exercised during the year. Diluted shares outstanding include the
above plus all outstanding options to purchase Common Stock and Warrants
calculated using the treasury stock method. See Notes 1, 11 and 14 to the
Company's Consolidated Financial Statements.
(5) The other data is presented to reflect the Company's historical results of
operations, before extraordinary items and adjusted to reflect (a) the
elimination of the amount of compensation expense ($0, $0, $0.3 million,
$2.0 million and $2.0 million, for the years ended December 31, 1999, 1998,
1997, 1996 and 1995, respectively) for the Company's founding shareholders
and for the Company's former Chairman, President and Chief Executive
Officer, who remains a director and is also a shareholder of the Company,
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 $1.8 million of non-operating
expense arising from the 1997 Put Warrants Valuation Adjustment, both
discussed in Note 1 above; (c) the removal of unusual charges of $17.1
million in the year ended December 31, 1999, including restructuring and
asset impairment charges of $13.8 million, accelerated amortization of loan
fees of $1.1 (net of gain on interest hedge) in connection with
modifications in the Company's borrowing facilities, and an incremental
$2.7 million loss on the sale of certain accounts receivable, primarily
greater than 180 days past due; (d) the elimination of the $14.1 million
tax valuation allowance recorded in 1999 income taxes - see Note 6 to the
Company's Consolidated Financial Statements; and (e) income taxes computed
as if the Company had been subject to federal and applicable state income
taxes for such periods. This adjusted computation of income taxes excludes
a $141,000 expense included in the Company's 1998 income tax provision due
to the adjustment for tax return purposes of the 1997 put warrants
valuation adjustment associated with the Warrants (see Notes 6 and 7 to the
Company's Consolidated Financial Statements). See footnote 2 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. 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:
13
Years ended December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Cash flows provided by (used in):
Operating activities (7)............ $(43,084) $50,761 $(12,910) $ (1,280) $2,787
Investing activities ............... 9,049 (31,316) (24,744) (4,834) (2,026)
Financing activities (7)............ 29,250 (15,629) 39,295 4,647 678
-------- ------- -------- --------- ------
Net increase (decrease) in cash..... $ (4,785) $ 3,816 $ 1,641 $ (1,467) $1,439
======== ======= ======== ========= ======
(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,
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Company's net revenues................. $ 594,047 $565,394 $447,579 $ 280,171 $149,825
Less Company revenues from:
Franchise royalties.................. (7,109) (7,352) (6,997) (5,671) (4,138)
Services to franchisees.............. (18,009) (25,199) (34,642) (35,079) (7,507)
Add Franchisees' net revenues.......... 85,660 114,458 149,862 149,893 104,501
--------- --------- -------- --------- --------
System revenues........................ $ 654,589 $647,301 $555,802 $ 389,314 $242,681
========= ======== ======== ========= ========
(7) As of December 31, 1998 the Company's primary sources of funds for working
capital and other needs were a $34.0 million credit line with a syndicate
of lenders led by Fleet National Bank, formerly BankBoston, N.A. (the
"Revolving Credit Facility") and a $50.0 million accounts receivable
securitization facility with a Fleet National Bank affiliate (the
"Securitization Facility"). Under the Securitization Facility, the Company
received cash equivalent to the gross outstanding balance of the accounts
receivable being sold, less reserves which were adjusted on a periodic
basis based on collection experience and other defined factors. As of
October 1, 1999, the Company and its syndicate of lenders entered into
various agreements that (a) replaced the previously existing securitization
facility with a $50.0 million credit facility based on and secured by the
Company's accounts receivable, expiring April 30, 2000, (the "Receivable
Facility") and (b) amended the previously existing revolving credit
facility to reduce the maximum availability to $25.5 million (including
letters of credit of $5.0 million). For comparative purposes, December 31,
1998 total assets, Revolving Credit Facility and Line of Credit have been
adjusted below to include the balance of the Company's uncollected accounts
receivable that had been sold under this agreement. Accordingly, Cash
provided by (used in) operating activities, and Cash provided by (used in)
financing activities for the years ended December 31, 1999 and 1998, have
been adjusted to remove effect of the sale of the Company's uncollected
accounts receivable in 1998.
Years ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Total assets, as adjusted.............. $ 113,681 $156,808 $105,743 $ 55,877 $ 24,708
Revolving Credit Facility and line
of credit, as adjusted............... 57,067 65,786 33,800 9,889 6,468
Cash provided by (used in) operating
activities, as adjusted.............. $ 1,722 $ 5,955 $(12,910) $ (1,280) $ 2,787
Cash (used in) provided by financing
activities, as adjusted.............. (15,556) 29,177 39,295 4,647 678
14
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company offers it clients staffing services through its Tandem
division. Tandem focuses on meeting its clients' industrial staffing needs
("flexible staffing"), targeting opportunities in that fragmented, growing
market which the Company believes has to date been under-served by large full
service staffing companies. Significant benefits of Tandem's services to clients
include providing the ability to outsource the recruiting and many logistical
aspects of their staffing needs, as well as converting the fixed cost of
employees to the variable cost of outsourced services. Until the Company sold
the operations of Synadyne, effective April 8, 2000, it focused on providing
professional employer organization ("PEO") services to small and medium sized
businesses (those with less than 500 employees), which were intended to provide
cost savings arising from the economies of scale associated with this
outsourcing of human resources administration.
Flexible staffing services include recruiting, training and deployment
of temporary industrial personnel as well as payroll administration, risk
management and benefits administration services. PEO services included payroll
administration, risk management, benefits administration and human resource
consultation.
The Company's revenues are based on the salaries and wages of worksite
employees. 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 services. Since the Company is at risk for all of
its direct costs, independent of whether payment is received from its clients,
all amounts billed to clients for gross salaries and wages, related employment
taxes, health benefits and workers' compensation coverage are recognized as
revenue by the Company, net of credits and allowances, which is consistent with
industry practice. The Company's primary direct costs are (i) the salaries and
wages of worksite employees (payroll cost), (ii) employment related taxes, (iii)
health benefits, (iv) workers' compensation benefits and insurance and (v)
worksite employee transportation.
The Company's flexible staffing operations generate significantly
higher gross profit margins than those of its former PEO operations. The higher
staffing margins reflect compensation for recruiting, training and other
services not required as part of many PEO relationships, where the employees
have already been recruited by the client and are trained and in place at the
beginning of the relationship.
While implementing its growth strategies, the Company completed 36
acquisitions, primarily staffing companies, from January 1995 through October
1998. These acquisitions included 89 offices and collectively generated
approximately $189.0 million in revenue for the twelve months preceding such
acquisitions. The Company acquired 30 of those offices in 1997 (the "1997
Acquisitions") and 40 of those offices in 1998 (the "1998 Acquisitions"). See
"Acquisitions" below. Due to these acquisitions, as well as new offices opened
by the Company, the number of Company-owned flexible staffing and PEO offices
increased during this period from ten to 124 and the number of metropolitan
markets (measured by Metropolitan Statistical Areas, or MSAs) served by
Company-owned locations increased from one to 50. As of December 31, 1999, the
Company operated 90 offices. In order to support its growth, the Company
implemented new information systems, further developed back office capabilities
and invested in other infrastructure enhancements.
The Company discontinued its acquisition program as of December 31,
1998, primarily due to a desire to focus on and improve existing operations plus
a lack of capital for new acquisitions. Up to that time, the Company had made a
significant investment in new information systems, additional back office
capabilities and other infrastructure enhancements. The Company does not
anticipate making any acquisitions in the foreseeable future.
On August 6, 1999, the Company announced the following actions intended
to improve its short-term liquidity, concentrate its operations within one core
segment (Tandem, its flexible industrial staffing division) and improve its
operating performance within that segment:
(i) the sale of Office Ours, the Company's clerical staffing division,
which was accomplished effective August 30, 1999;
(ii) the engagement of an investment banking firm to assist in the
evaluation of strategic options for Synadyne which ultimately resulted in the
sale of the operations of Synadyne on April 8, 2000; and
15
(iii) a reduction of the Company's flexible staffing and support
operations (the "Restructuring"), consisting primarily of the sale, franchise,
closure or consolidation, during the third and fourth quarters of 1999, of 26 of
the 117 Tandem branch offices existing as of June 30, 1999; a reduction of the
Tandem and corporate support center employee workforce by 107 employees
(approximately 11% of the Company's workforce); and an anticipated additional
reduction of 59 employees by June 30, 2000, of which 35 employees are in branch
offices that will be sold, franchised, closed or consolidated. As a result of
the corporate support center workforce reductions and the anticipated
disposition of Synadyne, the corporate support center building was sold on
December 29, 1999. A total of 47 branch offices have been or will be eliminated
in connection with the Restructuring, 26 and 29 of which had been sold,
franchised, closed, or consolidated as of December 31, 1999 and March 31, 2000,
respectively. These offices were not or are not expected to be adequately
profitable in the near future or are inconsistent with the Company's operating
strategy of clustering offices within specific geographic regions. The Company
acquired many of these branch offices during 1996, 1997 and 1998.
The Company, which currently files an annual report on Form 10-K as
required by the Securities and Exchange Act of 1934, as amended, on a calendar
year basis, has changed its fiscal year to end on the Sunday closest to March
31. The Company will file a Form 10-Q for the transition period of January 1,
2000 through April 2, 2000.
Results Of Operations
Effective February 21, 1997, the Company acquired all of the
outstanding capital stock of nine companies under common ownership and
management (the "Reorganization"). The historical operating results of the
Company presented and discussed herein include the historical operating results
of those common ownership companies for the periods noted. The following tables
set forth, on an unaudited basis, the amounts and percentage of net revenues of
certain items in the Company's consolidated statements of income for the
indicated periods.
Years Ended December 31,
-------------------------------------------
1999 1998 1997
-------- -------- ---------
(Dollars in thousands)
Net revenues:
Flexible industrial staffing (1)............................ $307,496 $ 296,267 $ 207,312
PEO (1)..................................................... 274,128 253,271 225,836
Franchising................................................. 7,109 7,352 7,027
Other....................................................... 5,314 8,504 7,404
-------- --------- --------
Total net revenues.......................................... $594,047 $ 565,394 $447,579
======== ========= ========
Gross profit................................................ $ 81,911 $ 84,820 $ 66,306
Selling, general and administrative expenses (2)............ 86,719 72,852 55,897
Restructuring............................................... 11,220 -- --
Reserve for impairment of assets............................ 2,603 -- --
-------- --------- --------
Operating (loss) income..................................... (18,631) 11,968 10,409
Net interest and other expenses (2)......................... 8,125 5,476 9,698
-------- --------- -----
(Loss) income before provision for
income taxes and extraordinary item..................... (26,756) 6,492 711
Pro forma income taxes (2).................................. 4,123 1,611 296
-------- --------- --------
Pro forma (loss) income before
extraordinary item (2).................................. $(30,879) $ 4,881 $ 415
======== ========= ========
System Revenues (3)......................................... $654,589 $ 647,301 $555,802
======== ========= ========
Years Ended December 31,
---------------------------------------------
1999 1998 1997
------------- ------------- ---------
Net revenues:
Flexible industrial staffing (1)............................ 51.8% 52.4% 46.3%
PEO (1)..................................................... 46.1 44.8 50.5
Franchising................................................. 1.2 1.3 1.6
Other......................................................... 0.9 1.5 1.6
-------- -------- --------
Total net revenues 100.0% 100.0% 100.0%
======== ======== ========
16
Years Ended December 31,
----------------------------------------------
1999 1998 1997
------------- ------------- ----------
Gross profit................................................ 13.8% 15.0% 14.8%
Selling, general and administrative expenses (2)............ 14.6 12.9 12.5
Restructuring............................................... 1.9 -- --
Reserve for impairment of assets............................ 0.4 -- --
-------- -------- --------
Operating (loss) income..................................... (3.1) 2.1 2.3
Net interest and other expenses (2)......................... 1.4 1.0 2.1
-------- -------- --------
(Loss) income before provision for
income taxes and extraordinary item..................... (4.5) 1.1 0.2
Pro forma income taxes (2).................................. 0.7 0.2 0.1
-------- -------- --------
Pro forma (loss) income before extraordinary item (2)....... (5.2)% 0.9% 0.1%
======== ======== ========
- ----------
(1) SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for reporting information about
operating segments in financial statements. Operating segments are defined
as components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating decision
maker, or decision making group, in deciding how to allocate resources and
in assessing performance. The Company's reportable operating segments under
SFAS No. 131 include the Tandem segment and the Synadyne segment. PEO
revenues, as reported above, include certain industrial revenues that the
Company believes are operationally consistent with the PEO business and
operational model, but are not includable in the Synadyne segment due to
the way the Company is organized. Following is a reconciliation of Flexible
Industrial Staffing net revenues and the PEO net revenues, as shown above,
to the revenues reported by the Company in accordance with the requirements
of SFAS No. 131 - see Note 15 to the Company's Consolidated Financial
Statements.
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Flexible staffing revenues $307,496 $ 296,267 $ 207,312
Add: Flexible staffing client payrolling 31,620 25,184 14,149
-------- --------- ---------
Tandem operating segment revenues $339,116 $ 321,451 $ 221,461
======== ========= =========
PEO revenues $274,128 $ 253,271 $ 225,836
Less: Flexible staffing client payrolling (31,620) (25,184) (14,149)
Less: PEO services to staffing franchises (18,009) (25,199) (34,642)
-------- --------- ---------
Synadyne operating segment revenues $224,499 $ 202,888 $ 177,045
======== ========= =========
Gross profit amounts and percentages discussed herein are calculated on a
consistent basis with the revenues reported herein.
(2) 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 this period,
the Company paid compensation to the Company's founding shareholders and to
the Company's former President, Chief Executive Officer, and Chairman of
the Board, who is also a shareholder of the Company ("Shareholder
Compensation"). All of the compensation for the founding shareholders and a
portion of the compensation for the Company's President was discontinued
after the Reorganization. The discontinued Shareholder Compensation was $0
in 1999, $0 in 1998 and $0.3 million in 1997. In 1997, the Company recorded
non-operating expense of approximately $1.8 million related to the Put
Warrants Valuation Adjustment and incurred an extraordinary loss (net of
income tax benefit) of approximately $13.4 million (See Note 7 to the
Company's Consolidated Financial Statements). In 1998, as a result of the
reduction of the income tax benefit included in the 1997 extraordinary loss
and relating to the release of certain put warrants in 1998, the Company
recorded an extraordinary loss of approximately $1.4 million (See Note 6 to
the Company's Consolidated Financial Statements). In 1999, the Company
recorded restructuring charges of $11.2 million, as well as a non-operating
gain of $0.5 million from the sale of the Company's clerical division - see
Note 3 to the Company's Consolidated Financial Statements. In 1999, the
Company recognized an operating expense of $2.6 million for the write-down
of impaired goodwill and other long-lived assets - see Note 4 to the
Company's Consolidated Financial Statements, and the Company recognized a
$2.7 million loss, recorded as bad debt expense, arising from sale to third
parties of certain accounts receivable primarily more than 180 days past
due. The Company also recorded a deferred tax valuation allowance of $14.1
million in 1999 (see Notes 6 to the Company's Consolidated Financial
Statements). In addition, in 1999 the Company recognized interest expense
of $1.4 million arising from accelerated amortization of loan fees and a
gain of $0.3 million on the sale of an interest rate hedge arising from the
modification of the Company's Revolving Credit Facility and the termination
of the Securitization Facility.
The following table sets forth the amounts and the percentage of certain
items in the Company's consolidated statements of operations, adjusted for
the above items as follows: (i) selling, general and administrative
expenses excludes discontinued Shareholder Compensation in 1997 and the
incremental provision for doubtful accounts in 1999; (ii) operating (loss)
income excludes discontinued Shareholder Compensation in 1997, the 1999
restructuring charges, asset impairment charges, loss on the sale of
certain trade accounts receivable recorded as bad debt expense, accelerated
amortization of loan fees, gain on the sale of the interest rate hedge, and
(iii) net (loss) income excludes discontinued Shareholder Compensation, the
1997 Put Warrants Valuation Adjustment, 1999 restructuring charges, asset
impairment charges, gain from the sale of the Company's clerical division,
accelerated amortization of loan fees, gain on the sale
17
of the interest rate hedge, loss on the sale of certain trade accounts
receivable recorded as bad debt expense, and the valuation allowance
established for the deferred tax asset. In addition, operating (loss)
income excludes the 1997 and 1998 extraordinary losses and is calculated
assuming the Company had been subject to federal and state income taxes and
was taxed as a C corporation during 1997. This adjusted computation of
income taxes excludes a $141,000 expense included in the Company's 1998
income tax provision due to the adjustment for tax return purposes of the
1997 put warrants valuation adjustment associated with the Warrants (see
Notes 6 and 7 to the Company's Consolidated Financial Statements).
Years Ended December 31,
1999 1998 1997
---- ---- ----
(Dollars in thousands, except for percentages)
Selling, general and administrative expenses,
as adjusted................................... $84,052 $72,852 $55,635
As a percentage of net revenues................. 14.2% 12.9% 12.4%
Operating (loss) income, as adjusted............ $(2,140) $11,968 $10,671
As a percentage of net revenues................. (0.4)% 2.1% 2.4%
Net (loss) income, as adjusted.................. $(6,135) $ 5,022 $ 2,139
As a percentage of net revenues................. 1.0% 0.9% 0.5%
(3) System revenues represent 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,
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Company's net revenues....................... $594,047 $565,394 $447,579
Less Company revenues from:
Franchise royalties....................... (7,109) (7,352) (6,997)
Services to franchisees................... (18,009) (25,199) (34,642)
Add Franchisees' net revenues................ 85,660 114,458 149,862
-------- -------- --------
System revenues.............................. $654,589 $647,301 $555,802
======== ======== ========
Year Ended December 31, 1999 Compared To Year Ended December 31, 1998
Net Revenues. Net revenues increased $28.6 million, or 5.1%, to $594.0
million in 1999 from $565.4 million in 1998. This increase resulted from growth
in flexible industrial staffing revenues of $11.2 million, or 3.8%, and PEO
revenues growth of $20.9 million, or 8.2%; offset by a decrease in revenues of
$2.9 million generated from the Company's former clerical division, sold on
August 30, 1999, and a decrease in franchise royalties and other revenues of
$0.6 million. Flexible staffing revenues increased due to a full year of
revenues generated in 1999 by the 1998 Acquisitions, which were primarily
consummated between February and October, and internal growth. Tandem revenues,
which include flexible industrial staffing plus flexible staffing client
payrolling ("payrolling"), increased by 5.5%, from $321.5 million in 1998, to
$339.1 million in 1999. The increase in PEO revenues was primarily due to new
PEO clients, as well as an increase in the number of worksite employees at
certain existing PEO clients. Synadyne revenues, which include PEO revenues,
less revenues produced by payrolling and PEO services provided to Tandem
franchises, increased 10.7% from $202.9 million in 1998 to $224.5 million in
1999.
The Company-owned flexible staffing offices decreased by 26 locations
to 89 locations as of December 31, 1999. This decrease is primarily the result
of the sale, franchise, closure or consolidation of offices in connection with
the restructuring plan implemented during the third quarter of 1999.
Revenue growth from the Company's Tandem branches was uneven
geographically. For the year ended December 31, 1999 as compared to the year
ended December 31, 1998; revenues generated by the West and Midwest zones grew
by 1.9% and 16.5%, respectively, offset by a 2.4% decrease in revenues generated
from the East, which was primarily due to a 8.7% decrease in revenues generated
in the mid-Atlantic states.
System revenues, which include Tandem franchise revenues not earned by
or available to the Company, increased $7.3 million, or 1.1%, to $654.6 million
in 1999 from $647.3 million in 1998. The increase in system revenues was
attributable to the $28.6 million increase in the Company's net revenues
discussed above. Revenues from franchises operating
18
in 1998, but not on December 31, 1999, decreased by $41.9 million in 1999. That
decrease was partly offset by a $13.1 million increase in revenues from
franchisees operating as of December 31, 1999. The net result was a decrease in
franchise revenues of $28.8 million. The Company allowed the early termination
of franchise agreements of 38 locations in 1998 and 1999 to enable the Company
to develop the related territories. At the time the Company agrees to terminate
a franchise agreement, it receives an initial buyout payment from the former
franchisee. The Company continues to receive payments from the former
franchisees based on a percentage of the gross revenues of the formerly
franchised locations for up to three years after the termination dates. Although
those gross revenues are not included in the Company's franchise or system
revenues totals, the initial buyout payment, as well as subsequent payments from
the former franchisees, are reflected in total royalties reported by the
Company.
Gross Profit. Gross profit (margin) decreased $2.9 million, or 3.4%, to
$81.9 million in 1999, from $84.8 million in 1998 primarily due to the sale of
Office Ours and lower industrial staffing margins. Gross profit as a percentage
of net revenues decreased from 15.0% in 1998 to 13.8% in 1999. This decrease in
margin percent was primarily due to the significantly higher growth rate for PEO
revenues as compared to the growth rate for flexible staffing revenues, which
generate higher gross profit margins than the PEO segment, as well as the sale
of Office Ours and higher payroll costs in the flexible staffing market due to
competitive labor markets. In 1999, PEO operations generated gross profit
margins of 3.8% as compared to gross profit margins of 20.4% generated by
flexible staffing operations. Tandem gross profit, which includes flexible
industrial staffing plus payrolling, decreased by 2.5%, from $68.0 million in
1998, to $66.2 million in 1999. Synadyne gross profit, which includes PEO
revenues, less revenues produced by payrolling and PEO services provided to
Tandem franchises, increased 8.1% from $6.5 million in 1998 to $7.1 million in
1999.
Gross profit margin percent for the Company's flexible staffing
operations decreased to 20.4% in 1999 from 22.2% in 1998, primarily due to the
impact of (i) the increased wages necessary to recruit staffing employees in
periods of historically low unemployment and (ii) a greater proportion of
larger, longer-term service agreements which have higher per hour billing and
pay rates but lower gross profit margin.
The Company anticipates that low unemployment will continue to affect
margins from flexible staffing operations, although in many cases the Company
expects the impact to be offset by (i) operating efficiencies resulting from the
consolidation of offices and (ii) negotiation of price increases to most of its
customers to reflect the value of services being provided. Based on these price
increases, the Company expects flexible staffing margins to improve by up to one
percentage point during the calendar year 2000; however, the Company's actual
results during the calendar year 2000 may vary depending on, among other things,
competition, unemployment, and general business conditions.
PEO gross profit margin percent, which consisted of gross profit margin
results from the Synadyne operating segment, the flexible staffing client
payrolling, and the sale of PEO services to franchisees, increased from 3.6% in
1998 to 3.8% in 1999 primarily due to increased revenues from flexible staffing
client payrolling, which historically generated higher gross profit margins than
that of the Synadyne operating segment. Flexible staffing payrolling gross
profit margin, as a percent of revenues, was 10.8% in 1999 and 8.8% in 1998, as
compared to 2.9% and 3.0% generated by the Synadyne operating segment, for the
same years.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased $13.9 million, or 19.0%, to $86.7
million in 1999 from $72.9 million in 1998. This increase was primarily the
result of a $2.7 million increase in bad debt expense which resulted from the
sale of certain accounts receivable, a $1.2 million increase in the provision
for doubtful accounts, $3.2 million in SG&A related to the 1998 Acquisitions
(for the portion of 1999 for which there was no corresponding 1998 activity), a
$2.2 million increase in professional fees, due in part to the Company's
turnaround efforts, and $4.0 million in additional core employee compensation,
including $2.7 million in variable pay and commissions related to the Company's
performance-based compensation plan. As a percentage of net revenues, SG&A
increased to 14.6% in 1999 from 12.9% in 1998.
As part of the Restructuring plan and other initiatives to improve
profitability the Company has (i) reduced headcount by over 170 employees due to
both voluntary and involuntary terminations and the sale of certain branches
(ii) improved its collection performance of trade accounts receivable, as
discussed in "Receivables", and (iii) streamlined other support functions, all
of which should produce substantial SG&A savings in calendar 2000.
Restructuring and Asset Impairment Charges. During 1999, the Company
recorded restructuring charges of $11.2 million and $2.6 million in write-downs
of impaired goodwill and other long-lived assets. As part of the Restructuring
charges, the Company has (i) written down assets held for disposition by $5.4
million to reflect the estimated fair value of those assets, (ii) recorded $4.0
million in severance and retention costs, and (iii) incurred $1.2 million in
19
professional consulting fees. The Company anticipates that restructuring
charges, including professional consulting fees, will continue at a reduced
level in the first and calendar second quarter of 2000. The second calendar
quarter of 2000 will be the Company's first fiscal quarter of 2001.
Net Interest and Other Expenses. Net interest and other expense
increased by $2.6 million, to $8.1 million in 1999 from $5.5 million in 1998.
This increase was primarily due to a $3.1 million increase in interest expense
arising from (i) an increase in total debt outstanding related to the 1998
acquisitions, (ii) higher interest rates paid on the Revolving Credit Facility
in 1999 as compared to 1998 and (iii) interest expense of $1.4 million arising
from the accelerated amortization of loan fees offset by a $0.3 million gain on
the sale of the interest rate hedge. The increase in interest expense was
partially offset by a non-operating gain of $0.5 million from the sale of Office
Ours, the Company's former clerical staffing division. See Notes 3 and 7 to the
Company's Consolidated Financial Statements.
Income Taxes. The provision for income taxes in 1999 consists of a
deferred tax asset valuation allowance of $14.1 million offset by potential tax
benefits of $9.9 million resulting from losses incurred in that period. The
valuation allowance was recorded because it is not clear that the tax benefits
resulting from operating losses and other temporary differences are "more likely
than not" to be realized, as required by SFAS 109.
Income (Loss) Before Extraordinary Item. The net loss in 1999 was $30.9
million, as compared to 1998 income before extraordinary item of $4.9 million.
As discussed above, the change in income (loss) before extraordinary item is
primarily due to (i) decreased gross profit margin, (ii) increased selling,
general and administrative costs, (iii) increased interest costs, (iv)
restructuring and asset impairment costs, and (v) recognition of the deferred
tax valuation allowance.
Extraordinary Item. As a result of a reduction of the income tax
benefit included in the 1997 extraordinary loss and release of certain put
warrants in 1998, the Company recorded an extraordinary loss of approximately
$1.4 million in 1998.
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997
Net Revenues. Net revenues increased $117.8 million, or 26.3%, to
$565.4 million in 1998 from $447.6 million in 1997. This increase resulted from
growth in flexible staffing revenues in 1998 of $89.0 million, or 42.9%, and PEO
revenues growth of $27.4 million, or 12.1%, compared to 1997. Flexible staffing
revenues increased due to (i) the 1998 Acquisitions, (ii) the 1997 Acquisitions
(which were primarily consummated in late February and March) and (iii) internal
growth. Company-owned staffing offices increased by 24 locations to 111
locations as of December 31, 1998. This increase was the result of the 40
additional flexible staffing locations attributable to the 1998 Acquisitions,
partially offset by offices closed and consolidated into other Company-owned
locations. The increase in PEO revenues was primarily due to new PEO clients, as
well as an increase in the number of worksite employees at certain existing PEO
clients.
System revenues, which include franchise revenues not earned by or
available to the Company, increased $91.5 million, or 16.5%, to $647.3 million
in 1998 from $555.8 million in 1997. The increase in system revenues was
attributable to the $117.8 million increase in the Company's net revenues
discussed above. Franchise revenues of franchisees operating as of December 31,
1998 increased $14.6 million, or 22.3%, in 1998 as compared to 1997, offset by a
$50.0 million decrease in revenues for the same period resulting from other
franchisees no longer operating. The result is a net decrease of franchise
revenues of $35.4 million. The Company acquired and converted 30 franchise
locations to Company-owned locations during 1997 and 1998 and also allowed the
early termination of franchise agreements in 1997 and 1998 attributable to
another 38 locations to enable the Company to develop the related territories.
At the time the Company agrees to terminate a franchise agreement, it receives
an initial buyout payment from the former franchisee. The Company continues to
receive payments from the former franchisees based on a percentage of the gross
revenues of the formerly franchised locations for up to three years after the
termination dates. Although those gross revenues are not included in the
Company's franchise or system revenue totals, the initial buyout payment, as
well as subsequent payments from the former franchisees, are reflected in total
royalties reported by the Company.
Gross Profit. Gross profit (margin) increased $18.5 million, or 27.9%,
to $84.8 million in 1998, from $66.3 million in 1997. Gross profit as a
percentage of net revenues increased to 15.0% in 1998 from 14.8% in 1997. This
increase was primarily due to the significantly higher growth rate for flexible
staffing revenues as compared to the growth rate for PEO revenues, which
generate lower gross profit margins. In 1998, PEO operations generated gross
profit margins of 3.6% as compared to gross profit margins of 22.2% generated by
staffing operations.
Gross profit margin percent for the Company's staffing operations
decreased to 22.2% in 1998 from 23.5% in 1997, primarily due to the impact of
(i) the increased wages necessary to recruit staffing employees in periods of
historically low
20
unemployment, (ii) continued execution of a strategy to obtain larger contracts
which have higher per hour billing and pay rates but lower gross profit margin
percentages and (iii) an increase in the minimum wage on September 1, 1997, for
which the Company increased billing rates without a related profit increase.
PEO gross profit margin percent was unchanged at 3.6% in 1998 and 1997.
Selling, General and Administrative Expenses. SG&A increased $17.0
million, or 30.3%, to $72.9 million in 1998 from $55.9 million in 1997. This
increase was primarily a result of operating costs related to the 1998
Acquisitions and the 1997 Acquisitions and sales costs associated with increased
staffing volume at existing locations. Total direct operating costs associated
with the 1998 Acquisition locations and the 1997 Acquisition locations (for the
portion of 1998 for which there was no corresponding 1997 activity) were $9.4
million in 1998. In addition, the Company incurred indirect infrastructure costs
to evaluate, acquire and integrate these operations, as well as to support the
larger customer base.
As a percentage of net revenues, SG&A increased to 12.9% in 1998 from
12.5% in 1997. In addition to the items previously discussed, this percentage
increase was also due to the significant increase in 1998 of staffing revenues
in proportion to total Company revenues. The flexible staffing operations have
higher associated SG&A (as a percentage of revenues) than PEO operations.
Net Interest and Other Expense. Net interest and other expense
decreased by $4.2 million, to $5.5 million in 1998 from $9.7 million in 1997.
This decrease was primarily due to a $2.4 million reduction in interest expense
arising from a decrease in total debt outstanding as well as a decrease in the
average interest rate which resulted from the Company's October 1997 IPO, plus
non-operating expense in 1997 of $1.8 million attributable to a Put Warrants
Valuation Adjustment, with no corresponding item in 1998.
Pro Forma Income Before Extraordinary Item. Pro forma income before
extraordinary item increased by $4.5 million, to $4.9 million in 1998 from $0.4
million in 1997. This increase was primarily due to the $4.2 million decrease in
interest and other expense discussed above and an increase of $1.6 million in
operating income as a result of increases in sales and gross profit discussed
above, partially offset by the related income taxes.
Extraordinary Item. As a result of the reduction of the income tax
benefit included in the 1997 extraordinary loss and relating to the release of
certain put warrants in 1998, the Company recorded an extraordinary loss of
approximately $1.4 million in 1998.
Additional Operating and Segment Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. The
Company's reportable operating segments under SFAS No. 131 differ from the
operating information presented below, as explained in footnote 1 to the table
in "Results of Operations" above. Gross profit amounts and percentages discussed
below are also calculated on a consistent basis with the revenues reported
below. See Note 15 to the Company's Consolidated Financial Statements.
Flexible Staffing
Net revenues from the Company's flexible staffing services increased
$100.2 million, to $307.5 million for 1999 from $207.3 million for 1997, or a
compound annual growth rate of 21.8%. Flexible staffing comprised an increasing
share of the Company's total net revenues, to 51.8% for 1999 from 46.3% for
1997, reflecting the Company's focus on growth of these staffing operations
through acquisitions in 1998, as well as new office openings.
Gross profit from the Company's flexible staffing services increased
$14.1 million, to $62.8 million for 1999 from $48.7 million for 1997, or a
compound annual growth rate of 13.5%. Gross profit margin generated from
flexible staffing services represented an increasing share of the Company's
total gross profit, to 76.7% for 1999, from 73.5% for 1997. Although gross
margin as a percentage of revenue has trended downward from 1997 to 1999, the
Company's flexible staffing division continues to generate significantly higher
gross profit margins than its former PEO division. The higher flexible staffing
division margin reflects compensation for recruiting, training and other
services not required as part of many PEO
21
relationships, where the employees have already been recruited by the client and
are trained and in place at the beginning of the relationship.
PEO
Net revenues from the Company's PEO services increased $48.3 million,
to $274.1 million for 1999 from $225.8 million for 1997, or a compound annual
growth rate of 10.2%. Due to the Company's greater focus on growth of its
flexible staffing operations during this period as well as conditions beginning
in 1997 that resulted in changes made in the PEO management structure and
marketing approach, PEO revenues represented a decreasing share of the Company's
total net revenues, to 46.1% for 1999 from 50.5% for 1997. As discussed earlier
the Company ceased providing PEO services to industrial staffing franchises as
of December 31, 1999, and effective April 8, 2000, the Company sold the
operations of Synadyne, the major division providing PEO services. The Company
will continue to provide, within the Company's PEO division, payrolling, which
represented 6.6% of the revenues generated by the Company's PEO segment and 1.3%
of the Company's revenues in 1999.
Gross profit from the Company's PEO services increased $2.6 million, to
$10.6 million for 1999 from $8.0 million for 1997, or a compound annual growth
rate of 14.7%, representing 12.9% of the Company's gross total gross profit in
1999, as compared to 12.1% in 1997.
Approximately 20% of the Company's 1999 PEO revenues were from services
performed for individual insurance agent offices under a preferred provider
designation previously granted to the Company on a regional basis by the agents'
common corporate employer.
Franchising
Net revenues and gross profit margin from the Company's franchising
operations increased $0.1 million, to $7.1 million for 1999 from $7.0 million
for 1997, or a compound annual growth rate of 0.6%. Franchising operations
represented a decreasing share of the Company's total net revenues, to 1.2% in
1999 from 1.6% for 1997, reflecting the Company's greater focus on growth of its
Company-owned flexible staffing operations during this period. The Company
expects to continue to sell new franchises in smaller, less populated geographic
areas, subject to, among other factors, the success of the Company's marketing
efforts in this regard.
As revenue generated from franchising operations are received by the
Company from its franchisees in the form of royalties, the Company does not
incur the expense for payroll and payroll related taxes. Accordingly, trends in
gross profit margin are consistent with the revenue trends discussed above.
Liquidity and Capital Resources
Debt and Other Financing
The Company's primary sources of funds for working capital and other
needs are (i) a $25.5 million credit line (the "Revolving Credit Facility"),
including existing letters of credit of $5.0 million and (ii) a $50.0 million
credit facility, based on and secured by the Company's accounts receivable (the
"Receivable Facility"). Both facilities are provided by a syndicate of lenders
led by Fleet National Bank ("Fleet") and expire on April 30, 2000. The Company
is currently negotiating with the lenders' syndicate to obtain an extension of
its existing financing beyond April 30, 2000, until such time as long-term
financing can be obtained from alternative lending sources under a mutually
acceptable structure and terms. See "Future Liquidity".
The existing credit facilities, which were effective as of October 1,
1999 (a) replaced the previously existing $50.0 million securitization facility
and (b) amended the previously existing $29.9 million revolving credit facility
(which included letters of credit of $8.4 million) to (i) reduce the maximum
availability to $25.5 million, including existing letters of credit of $5.0
million, (ii) eliminate certain financial covenants and (iii) add events of
default, including a provision enabling the lenders syndicate to accelerate the
maturity date of the facility if, in their sole discretion, the lenders are not
satisfied with the Company's business operations or prospects. Outstanding
amounts under the Revolving Credit 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 its subsidiaries. The new agreements also contain terms that
increased the weighted average interest rate payable on the outstanding balances
during the period, exclusive of related fees and expenses and not including a
higher default rate, to approximately 11.2% per annum, compared to approximately
7.1% per annum under the old agreements. The Receivable Facility bears interest
at Fleet's base (prime) rate plus 2.0% per annum (currently 10.5%), while the
Revolving Credit Facility bore interest at base plus 2.5% per annum in October
1999, base plus 4.0% per annum in November 1999 and base plus 5.0%
23
per annum thereafter. In addition, the Company paid an initial fee related to
the Receivable Facility that is approximately equal to another 1.0% per annum
for the three-month term of that loan plus legal fees and other expenses related
to both facilities totaling approximately $0.3 million. As of March 31, 2000
borrowings were $16.4 million under the Revolving Credit Facility at an interest
rate of 14.0% and $34.6 million under the Receivable Facility at an interest
rate of 11.0%.
The previously existing securitization facility, which was terminated
as of October 1, 1999, was a financing arrangement under which the Company could
sell up to a $50.0 million secured interest in its eligible accounts receivable
to EagleFunding Capital Corporation ("Eagle"), which used the receivables to
secure A-1 rated commercial paper (the "Securitization Facility"). The Company's
cost for this arrangement was classified as interest expense and was based on
the interest paid by Eagle on the balance of the outstanding commercial paper,
which in turn was determined by prevailing interest rates in the commercial
paper market and was approximately 5.45% as of September 30, 1999.
In order to remain in compliance with certain covenants in the
Revolving Credit Facility, and to reduce the cash impact of scheduled payments
under its subordinated acquisition debt, during 1999 the Company had negotiated
extensions of the payment dates and modified the interest rates and other terms
of certain of its acquisition notes payable. As of August 12, 1999, the Company
had not made all of the scheduled payments due and, as a result, an event of
default occurred of this debt having a total principal outstanding of $9.2
million as of September 30, 1999, but subsequently reduced to $7.0 million as of
December 31, 1999 in connection with the Company's sale of certain operations as
part of the Restructuring and related actions. The terms of these notes payable,
which are subordinated to the Revolving Credit Facility, allow the payees to
accelerate terms of payment. Acceleration of this debt requires prior written
notice to the Company by the various payees, which has been received from three
payees as of December 31, 1999. See Notes 7 and 8 to the Company's Consolidated
Financial Statements.
In addition to the indebtedness discussed above, as of December 31,
1999 the Company had (i) bank standby letters of credit outstanding in the
aggregate amount of $5.0 million (which are issued as part of the Revolving
Credit Facility, although reduction of letters of credit does not currently
result in additional borrowing capacity) to secure the pre-1999 portion ($4.8
million) of the workers' compensation obligations recorded as a current
liability on the Company's balance sheet; (ii) obligations under capital leases
for property and equipment in the aggregate amount of $3.1 million; (iii)
obligations under mortgages totaling $0.6 million and (iv) obligations for
insurance premiums and other matters totaling $0.4 million.
Summary of Cash Flows
The Company's principal uses of cash are for wages and related payments
to temporary, and prior to April 8, 2000, PEO employees, operating costs,
capital expenditures and repayment of debt and interest thereon. In 1999, cash
used in operating activities was $43.1 million, as compared with $50.8 million
provided by operating activities in 1998. The significant decrease in cash from
operations was due to the effect of the termination of the Company's
Securitization Facility. As discussed above, as part of the Company's borrowing
facilities, the Company sold certain trade accounts receivable to obtain working
capital for the Company's operations. The Company had sold $44.8 million of
trade accounts receivable at December 31, 1998 under this agreement, which was
subsequently terminated as of October 1, 1999 and replaced by the Receivable
Facility, under which the Company currently obtains working capital. See Note 7
to the Company's Consolidated Financial Statements. Adjusted to remove the
effects of the Securitization agreement in 1998 and 1999, cash provided by
operating activities decreased from $6.0 million in 1998 to $1.7 million in
1999, primarily due to the additional cash needed to convert to a pre-funded
workers compensation program.
The tables below set forth the Company's cash flows, (i) as presented
in the Company's Consolidated Financial Statements for the years ended December
31, 1999 and 1998, and (ii) adjusted to remove the effect of the sale of the
Company's uncollected accounts receivable under the Securitization Facility
during 1998. As of December 31, 1998, a $44.8 million interest in the Company's
uncollected accounts receivable had been sold under the Securitization Facility
and was excluded from the accounts receivable balance presented in the Company's
Consolidated Financial Statements.
23
Years ended December 31,
Cash flows provided by (used in): 1999 1998
---- ----
(Dollars in thousands)
Historical cash flow
--------------------
Operating activities ............... $ (43,084) $50,761
Investing activities ............... 9,049 (31,316)
Financing activities ............... 29,250 (15,629)
------------ ----------
Net (decrease) increase in cash..... $ (4,785) $ 3,816
============ ==========
Years ended December 31,
Cash flows provided by (used in): 1999 1998
---- ----
(Dollars in thousands)
Cash flow - as adjusted
-----------------------
Operating activities, as adjusted... $ 1,722 $ 5,955
Investing activities................ 9,049 (31,316)
Financing activities, as adjusted... (15,556) 29,177
------------- --------------
Net decrease (increase) in cash..... $ (4,785) $ 3,816
============= ==============
Cash provided by investing activities during 1999 was $9.0 million, as
compared to $31.3 million used in investing activities in 1998. Of the $9.0
million provided by investing activities in 1999, $8.9 million represented
proceeds from sales of assets held for disposition and the sale of the corporate
support center. See Note 3 to the Company's Consolidated Financial Statements.
During 1998, the Company paid $27.8 million for acquisitions (primarily
intangible assets).
Cash provided by financing activities during 1999 was $29.3 million, as
compared to $15.7 million used in financing activities in 1998. The significant
increase in cash from financing activities was primarily due to the termination
of the Company's Securitization facility, as mentioned above, which was replaced
by the Receivable Facility. Adjusted to remove the effects of the Securitization
facility in 1998 and 1999, cash used in financing activities was $15.6 million
in 1999, compared to cash provided by financing activities of $29.2 million in
1998. During 1998, the Company increased borrowings by $32.0 million, primarily
used to fund additional trade payroll arising from the daily operational
activity of acquisitions made in 1998. This is in contrast to 1999, during which
the Company repaid $16.0 million of debt primarily from the sale of the
corporate support center building and other assets as part of the Company's
restructuring efforts, and improvement in accounts receivable collections. See
"Restructuring" and Note 3 to the Company's Consolidated Financial Statements.
Workers' Compensation Collateral
Prior to 1999, the Company secured its workers' compensation
obligations by the issuance of bank standby letters of credit to its insurance
carriers, minimizing the required current cash outflow for such items. In 1999,
the Company selected a pre-funded deductible program whereby expected claims
expenses are funded in advance in exchange for reductions in administrative
costs. The required advance funding is provided through either cash flows from
operations or additional borrowings under the Revolving Credit Facility.
In July and November 1999, the Company renegotiated the schedule of
payments due under the pre-funded deductible program, in order to improve its
liquidity. As a result of both negotiations, the original $13.3 million total of
the 1999 payments was reduced to $11.4 million, the originally scheduled May and
June payments were deferred and incorporated into revised monthly payments for
the remainder of the year and the originally scheduled December payment was
substantially reduced. In January 2000, the Company renewed its pre-funded
deductible program for one year. Under the new agreement, the Company will fund
$10.1 million in 12 installments for projected 2000 claims expenses. On a
quarterly basis, this claim fund requirement will be adjusted upward or downward
based on the projected cost of the actual claims incurred during 2000, up to a
maximum liability of $19.0 million. In addition, the Company has agreed to
establish a $3.0 million trust account naming Hartford Insurance Company as
beneficiary to secure any liability for claim funding for 1999 and/or 2000 that
might exceed the pre-funded amounts up to the aggregate maximum cap for each
year of $13.6 million and $19.0 million, respectively. This trust account is
being funded in 11 installments through December 2000.
24
Accounts Receivable
The Company is a service business and therefore a majority of its
tangible assets are customer accounts receivable. Flexible staffing employees
are paid by the Company on a daily or weekly basis. The Company, however,
receives payment from customers for these services, on average, 30 to 60 days
from the presentation date of the invoice. Beginning in the fourth quarter of
1998, the Company experienced an increase in the percentage of its staffing
accounts receivable that were past due. During 1999, the Company placed greater
emphasis on its accounts receivable collection process. As a result, the average
number of days to collect accounts receivable from invoice presentation has
decreased from 53 days at December 31, 1998 to 44 days at December 31, 1999.
Accounts receivable decreased by approximately $2 million, due to the sale of
nine staffing offices and the clerical division to third parties, during the
last two quarters of 1999, although the working capital benefit was
substantially less due to the corresponding reduction in liabilities such as
accrued payroll, payroll taxes and workers' compensation. In addition, the
Company expects its accounts receivable to decrease by approximately $6 million
related to the 20 staffing offices that are expected to be sold to third parties
in 2000.
The Company paid its PEO employees on a weekly, bi-weekly, semi-monthly
or monthly basis for their services, and received payments on a simultaneous
basis from approximately 80% (based on revenues) of its existing customers,
within 7 days from certain customers, with the remainder paying on average 30 to
45 days from the presentation date of the invoice. As part of the sale of
Synadyne, the Company expects its accounts receivable to decrease by
approximately $6 million, although the working capital benefit will be
substantially offset by the corresponding reduction in liabilities such as
accrued payroll, payroll taxes and workers' compensation.
On November 4, 1999, the Company sold certain trade accounts
receivable, with a face value of approximately $4.3 million and primarily more
than 180 days past due, to unrelated third parties for proceeds of approximately
$220,000. The Company recorded an additional $2.7 million charge to bad debt
expense related to that sale.
Capital Expenditures
One of the key elements of the Company's growth strategy in 1997 and
1998 had been expansion through acquisitions, which require significant third
party financing. The Company has decided not to complete further acquisitions
until its internal revenue growth rate and the resulting operating performance
of its existing locations improve. The financing sources for its acquisitions
had been cash from operations, seller financing, bank financing and issuances of
the Company's Common Stock. The Company's acquisitions were primarily in the
industrial staffing area. The Company anticipates spending up to $2 million
during the next twelve months to improve its management information and
operating systems, upgrade existing locations and other capital expenditures
including, but not limited to, opening new staffing locations.
Future Liquidity
The Company's Consolidated Financial Statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
Company's Consolidated Financial Statements, during the year ended December 31,
1999, the Company incurred a net loss of $30.9 million and, as of that date, the
Company's current liabilities exceeded its current assets by $42.0 million, and
the Company is in default in repayment of certain acquisition debt subordinated
to its bank financing. The Company's bank facilities and financial covenants
were modified effective October 1, 1999, with a maturity of December 31, 1999,
to enable the Company to continue to meet certain financial covenants during
1999. Prior to year end, as previously stated, the Company's bank group extended
financing through March 31, 2000, and subsequently through April 30, 2000. These
factors could indicate that the Company may be unable to continue as a going
concern for a reasonable period of time.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet obligations on a timely basis,
to comply with the terms and covenants of its financing agreements, to obtain
additional financing or refinancing as may be required, and ultimately to attain
successful operations. To improve the Company's liquidity position and attain
successful operations, both immediately and for the future, the Company has
announced several actions including the divestiture of certain Company
operations and a reduction of its workforce (see "General" above and Note 3 to
the Company's Consolidated Financial Statements).
Based on recent discussions with the lenders' syndicate and other
financing sources, the Company believes that it will be able to replace or
extend the Receivable Facility under similar terms, including interest rates,
for a period subsequent to April 30, 2000; however, the Company believes that
the Revolving Credit Facility, which had a $14.9 million outstanding balance
plus letters of credit of $5.0 million as of December 31, 1999, will need to be
replaced by a combination of medium-
25
term debt secured primarily by property and equipment and a second lien on
accounts receivable ("Term Debt"), and medium-term subordinated debt
("Subordinated Debt"). The Company expects that the combined Term Debt and
Subordinated Debt would be approximately $15.0 to $25.0 million based on and
subject to the following items affecting liquidity in addition to the results of
the Company's operations: (i) net after-tax proceeds from the sale of the Tandem
branches identified for disposition, (ii) successful renegotiation of the
payment schedules for the defaulted and/or accelerated subordinated acquisition
debt, and (iii) working capital requirements for the Company's increased
workers' compensation program for current and prior years. The Company believes
that it will be able to find alternative financing resources, as discussed
above; however, the Company could experience liquidity problems depending on the
ability and willingness of the lenders' syndicate to continue lending to the
Company, and the availability and cost of financing from alternative sources.
Acquisitions
During 1997, the Company made eight staffing acquisitions including 30
offices and approximately $61.0 million in annual historical revenue. During
1998, the Company made 17 staffing acquisitions including 40 offices and
approximately $96.0 million in annual historical revenue. These acquisitions
resulted in a significant increase in goodwill and other intangible assets and
correspondingly resulted in increased amortization expense. In addition, the
amount of these intangible assets as a percentage of the Company's total assets
and shareholders' equity increased significantly in those periods.
During 1999, the Company wrote down approximately $8.0 million of these
intangible assets, $5.4 million representing the excess of the book value over
the expected net realizable value of assets identified for disposition and
expensed as part of the restructuring charge and another $2.6 million related to
assets to be retained by the Company that were considered impaired based on its
analysis of anticipated discounted future cash flows at that time. See Notes 3
and 4 to the Company's Consolidated Financial Statements. While the remaining
net unamortized balance of intangible assets as of December 31, 1999 is not
considered to be impaired, any future determination requiring the write-down of
a significant portion of unamortized intangible assets could have a material
adverse effect on the Company's results of operations. As of the date of this
filing, no further acquisitions have been made and it is not anticipated that
any acquisitions will be made in the next twelve months.
Restructuring
In connection with the Restructuring, the Company has included a charge
of $11.2 million in its results of operations for the year ended December 31,
1999. This restructuring charge accrual and its utilization are as follows, with
all amounts presented in thousands:
Paid through Balance at
Original ------------ ----------
Charge December 31, 1999
------ -----------------
Employee severance and other termination benefits $ 4,040 $ 1,318 $ 2,722
Professional fees................................ 1,205 1,171 34
Lease termination and write-down of leasehold
improvements at closed offices................. 400 295 105
Other restructuring costs........................ 146 102 44
-------- -------- --------
Accrued restructuring charges.................... 5,791 $ 2,886 $ 2,905
======== ========
Write-down to fair value of assets identified
for disposition ............................... 5,429
--------
Total restructuring charge activity.............. $ 11,220
========
The $5.4 million write-down of assets identified for disposition
relates to 27 Tandem offices, as follows: (i) a $0.4 million loss related to two
staffing offices in Las Vegas purchased by the Company in 1998 - one office
closed by the Company and one office sold on September 6, 1999 to an
unaffiliated party which paid a nominal amount and entered into a standard
franchise agreement with the Company for the territory; (ii) a $1.5 million loss
related to four staffing offices in Raleigh, North Carolina and Greenville,
South Carolina, purchased by the Company in 1998 - one office closed by the
Company and three offices sold on October 18, 1999 to the former franchisee and
previous seller for $1.8 million. The sales
26
price was comprised of $0.2 million in cash, two promissory notes totaling $0.3
million, and cancellation of the Company's remaining indebtedness from the
original acquisition of $1.3 million. As part of this transaction, the Company
cancelled covenants not to compete previously given to it by the buyers and
certain affiliates and agreed not to compete for 39 months (27 months in the
case of franchising) in the counties where the assets are located. This
transaction also included an option, which was exercised on November 8, 1999, to
purchase, for nominal consideration, one staffing office in Virginia, which had
been purchased by the Company from a related party in 1996, and (iii) a $3.5
million write-down related to 21 additional staffing offices based on
management's estimate of the ultimate sales prices that will be negotiated for
these assets. Effective February 28, 2000, the Company sold its staffing office
in the state of Washington for $0.3 million, which was comprised primarily of a
promissory note of $0.2 million.
In addition to the write-down of assets identified for disposition, the
$11.2 million restructuring charge includes $4.0 million for severance and other
termination benefits, $1.2 million for professional fees, and $0.6 million in
lease termination and other charges. Severance and other termination benefits
include retention bonuses paid to certain employees that remained with the
Company through the last day of the year. The remaining liability of $2.7
million for severance and other termination benefits as of December 31, 1999
consists of (i) $0.2 million for four employees terminated in 1999, to be paid
in 2000 and (ii) $2.5 million for 59 employees to be terminated by June 30,
2000.
Professional fees of $1.2 million included in the restructuring charge
are primarily amounts paid to Crossroads Capital Partners, LLC for its services
related to the Restructuring during the third and fourth quarter of 1999 - see
Note 8. The Company also expects to record restructuring charges in the first
calendar quarter of 2000 and the first quarter of fiscal year 2001 for services
relating to Restructuring activities to be rendered by Crossroads during that
period.
As of December 31, 1999, the Company had closed, franchised, sold or
consolidated into other existing Company-owned locations 26 of the 47 staffing
offices identified as part of the Restructuring and utilized $0.4 million of the
restructuring charge for the costs of terminating the related leases as well as
writing down the carrying value of leasehold improvements and other assets not
usable in other Company operations.
As of December 31, 1999, 21 Tandem offices remained to be sold as part
of the Restructuring, and the Company has classified the related tangible and
intangible assets, excluding cash, accounts receivable and deferred income
taxes, as assets held for disposition. As of September 30, 1999, the Company had
also classified the assets of the Synadyne division as assets held for
disposition; however, when it became apparent that certain assets would not be
sold in connection with the disposition of Synadyne, those assets were removed
from such classification. Upon classification as assets held for disposition,
the Company discontinued the related depreciation and amortization for these
assets, which reduced operating expenses by approximately $0.4 million for the
year ended December 31, 1999. The estimated fair value of these assets held for
disposition was based, in some cases, on management's judgment; accordingly,
actual results could vary significantly from such estimates.
In connection with the corporate support center workforce reductions
and the then anticipated disposition of Synadyne, the corporate support center
building was sold on December 29, 1999. The Company received $6.1 million in net
proceeds from the sale of the support center building and certain assets, of
which $3.8 million was used to satisfy the mortgage obligations, $0.9 million is
being held in escrow and will be released over the period through October 1,
2002, and $1.4 million was used to reduce the Company's outstanding obligation
to Fleet National Bank.
The Company's assets held for disposition as of December 31, 1999 are
stated at the lower of original cost (net of accumulated depreciation or
amortization) or fair value (net of selling and disposition costs) and presented
in thousands, as follows:
Original Cost, Net Lower of
Property Goodwill and Other Cost or
and Equipment Intangible Assets Total Fair Value
------------- ----------------- ----- ----------
Tandem branch offices.................. $ 640 $ 5,279 $ 5,919 $ 2,250
Synadyne division...................... -- 189 189 189
--------- ---------- --------- ---------
$ 640 $ 5,468 $ 6,108 $ 2,439
========= ========== ========= =========
27
As part of the Restructuring efforts in 1999, the Company had
classified assets with a carrying value of $11.8 million as assets held for
disposition. As described above, the Company sold Tandem branch offices and the
corporate support center building, with a combined carrying value of $8.1
million during the third and fourth quarters of 1999. The Synadyne assets, with
a carrying value of $1.3 million, were removed from such classification as of
December 31, 1999. The Company expects to sell the remainder of the assets held
for disposition before June 30, 2000.
The following table reflects the Company's net revenues and gross
profit margin segregating ongoing operations and operations from assets held for
disposal or sold as part of the Company's restructuring efforts and other
disposed operations. Those operations include: (i) the Synadyne division, sold
as of April 8, 2000, (ii) Office Ours, the Company's clerical division, sold
during the third quarter of 1999, (iii) franchise PEO operations, which were
ceased on December 31, 1999, and (iv) flexible staffing branches disposed or
held for sale as of December 31, 1999. Ongoing operations include (i) the Tandem
division, which includes flexible staffing and flexible staffing payrolling
clientele, and (ii) franchising.
Years Ended December 31,
---------------------------------------------
1999 1998 1997
---------- ----------- ---------
(Dollars in thousands)
Net revenues:
Total Company ......................................... $ 594,047 $ 565,394 $ 447,579
Less assets held for sale and disposed/ceased operations:
Synadyne........................................... (224,499) (202,888) (177,045)
Clerical, franchise PEO and other.................. (73,959) (89,472) (79,918)
---------- ----------- ----------
Subtotal - assets held for disposal and
disposed/ceased operations........................... (298,458) (292,360) (256,963)
---------- ----------- ----------
Net revenues from ongoing operations................... $ 295,589 $ 273,034 $ 190,616
========== =========== ==========
Gross profit margin:
Total Company ......................................... $ 81,911 $ 84,820 $ 66,306
Less assets held for sale and disposed/ceased operations:
Synadyne........................................... (7,053) (6,524) (6,496)
Clerical, franchise PEO and other.................. (10,822) (13,002) (9,414)
---------- ----------- ----------
Subtotal - assets held for disposal and
disposed/ceased operations........................... (17,875) (19,526) (17,123)
---------- ----------- ----------
Gross profit margin from ongoing operations............ $ 64,036 $ 65,294 $ 50,396
========== =========== ==========
Gross margin as a percentage of net revenues:
Ongoing operations.................................... 21.7% 23.9% 26.4%
Operations from assets held for sale and
disposed/ceased operations......................... 6.0% 6.7% 6.7%
Flexible staffing branches sold, franchised or held for sale as of
December 31, 1999 generated revenues of $50.7 million, $56.1 million and $38.6
million during 1999, 1998 and 1997, respectively, and earned gross profit margin
of $9.4 million, $10.4 million and $7.1 million for those years. Those same
branches incurred SG&A expense of $8.7 million, $7.8 million and $5.6 million,
excluding depreciation and amortization costs, in 1999, 1998 and 1997,
respectively. Office Ours, the Company's former clerical division which was sold
on August 30, 1999, generated revenues of $5.3 million, $8.1 million and $6.7
million in 1999, 1998 and 1997 and earned gross profit of $1.4 million, $2.2
million and $1.8 million for those years. In addition, Office Ours incurred $1.4
million, $2.2 million and $1.6 million in SG&A expense, excluding depreciation
and amortization expense in 1999, 1998 and 1997, respectively. SG&A for the
Synadyne division, excluding depreciation and amortization expense, was $4.9
million, $5.3 million and $5.3 million in 1999, 1998 and 1997, respectively.
Results of flexible staffing offices that were consolidated in 1999 with
existing offices, as part of the Company's Restructuring efforts, are included
in ongoing operations.
28
Seasonality
The Company's quarterly results of operations reflect the seasonality
of higher customer demand for industrial staffing services in the last two
calendar quarters of the year, as compared to the first two quarters. Even
though there is a seasonal reduction of industrial staffing revenues in the
first calendar quarter of a year as compared to the fourth quarter of the prior
year, the Company does not reduce the related core personnel and other operating
expenses proportionally because most of that infrastructure is needed to support
anticipated increased revenues in subsequent quarters. PEO revenues are
generally not subject to seasonality to the same degree as industrial staffing
revenues although the net income contribution of PEO revenues expressed as a
percentage of sales is significantly lower than the net income contribution of
industrial staffing revenues. As a result of the above factors, the Company
historically experiences operating income in the first calendar 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. See Note 16 to the
Company's Consolidated Financial Statements.
Inflation
The effects of inflation on the Company's operations were not
significant during the periods presented in the financial statements. Generally,
throughout the periods discussed above, the increases in revenues and expenses
have resulted primarily from higher volumes, rather than price increases.
New Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" was issued.
SFAS No. 133 defines derivatives and establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133, as modified by SFAS
No. 137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000, and cannot be applied retroactively. The Company intends to
implement SFAS No. 133 in its consolidated financial statements as of and for
the three months ended July 2, 2001, although it has not determined the effects,
if any, that implementation will have. However, SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
Year 2000 Issue
As of the date of this filing, the Company had not experienced any
significant Y2K problems or disruptions with internal systems, nor had any
material problems or disruptions been experienced with key customers or
suppliers.
Forward-Looking Information: Certain Cautionary Statements
Certain statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Form 10-K are forward-looking statements, including but not limited to,
statements regarding the Company's expectations or beliefs concerning the
Company's strategy and objectives, expected sales and other operating results,
the effect of changes in the Company's gross margin, the Company's liquidity,
anticipated capital spending, the availability of financing, equity and working
capital to meet the Company's future needs, economic conditions in the Company's
market areas, the potential for and effect of future acquisitions, costs and the
tax-qualified status of the Company's 401(k) and 413(c) plans. The words "aim,"
"believe," "expect," "anticipate," "intend," "estimate," "will," "should,"
"could" and other expressions which indicate future events and trends identify
forward-looking statements. Such forward-looking statements involve known and
unknown risks and are also based upon assumptions of future events, which may
not prove to be accurate. Therefore, actual results may differ materially from
any future results expressed or implied in the forward-looking statements. These
known and unknown risks and uncertainties include, but are not limited to,
changes in U.S. economic conditions, particularly in the manufacturing sector;
the Company's dependence on regulatory approvals; its future cash flows, sales,
gross margins and operating costs, including the Company's ability to implement
and maintain cost reductions in connection with the Restructuring; the Company's
ability to sell or otherwise dispose of non-strategic assets under satisfactory
terms and timing; the effect of changing market and other conditions in the
staffing industry; the ability of the Company to continue to grow; legal
proceedings, including those related to the actions of the Company's temporary
or leased employees; the availability and cost of financing; the ability to
maintain existing banking relationships and to establish
29
new ones; the Company's ability to raise capital in the public equity markets;
the ability to successfully integrate past and future acquisitions into the
Company's operations; the recoverability of the recorded value of goodwill and
other intangible assets arising from past acquisitions; the general level of
economic activity and unemployment in the Company's markets, specifically within
the construction, manufacturing, distribution and other light industrial trades;
increased price competition; changes in and the Company's ability to comply with
government regulations or interpretations thereof, particularly those related to
employment; the continued availability of qualified temporary personnel; the
financial condition of the Company's clients and their demand for the Company's
services (which in turn may be affected by the effects of, and changes in, U.S.
and worldwide economic conditions); collection of accounts receivable; the
Company's ability to retain large clients; the Company's ability to recruit,
motivate and retain key management personnel; the costs of complying with
government regulations (including occupational safety and health provisions,
wage and hour and minimum wage laws and workers' compensation and unemployment
insurance laws) and the ability of the Company to increase fees charged to its
clients to offset increased costs relating to these laws and regulations;
volatility in the workers' compensation, liability and other insurance markets;
inclement weather; interruption, impairment or loss of data integrity or
malfunction of information processing systems; changes in government regulations
or interpretations thereof, and other risks detailed from time to time by the
Company or in its press releases or in its filings with the Securities and
Exchange Commission.
In addition, the market price of the Company's stock may from time to
time be volatile as a result of, among other things, the Company's operating
results, the operating results of other temporary staffing companies, economic
conditions, the proportion of the Company's stock available for active trading
and the performance of the stock market in general.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for management to predict all of such factors. Further, management
cannot assess the impact of each such factor on the business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
Subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by cautionary statements in this paragraph and elsewhere in this Form
10-K, and in other reports filed by the Company with the Securities and Exchange
Commission, including, but not limited to the Company's Registration Statement
on Form S-3 (File No. 333-69125), including the "Risk Factors" section thereof,
filed with the Securities and Exchange Commission on December 17, 1998, and
declared effective on January 6, 1999.
30
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the Year Ended December 31, 1999
The Company, as a result of borrowings associated with its operating
and investing activities, is exposed to changes in interest rates that may
adversely affect its results of operations and financial position. As of
December 31, 1999, the Company's primary sources of funds for working capital
and other needs were (i) a $25.5 million credit line (the "Revolving Credit
Facility") and (ii) a $50.0 million credit facility, based on and secured by the
Company's accounts receivable (the "Receivable Facility"). Facility borrowings
are collateralized by all tangible and intangible assets of the Company and its
subsidiaries.
Of the $68.0 million of short-term and long-term borrowings on the
Company's balance sheet as of December 31, 1999, approximately 16.1% represented
fixed rate instruments. The Revolving Credit Facility bears interest at base
(prime) rate plus 5% per annum (currently 13.5%), and the Receivable Facility
bears interest at base plus 2% per annum (currently 10.5%).
There is inherent rollover risk for borrowings as they mature and are
renewed at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements. The Company does not utilize financial instruments for
trading or other speculative purposes.
A hypothetical 10% (about 111 basis points) adverse move in interest
rates along the entire interest rate yield curve would increase the Company's
2000 interest expense by approximately $0.8 million and decrease 2000 net income
after taxes by approximately $0.5 million, or $0.06 per diluted share. This
assumes that the Company's financing requirements in 2000 would approximate the
actual outstanding debt as of December 31, 1999.
For the Year Ended December 31, 1998
To fund most of its working capital needs in 1998, and through
September 30, 1999, the Company utilized proceeds from the sale of its accounts
receivable to a third party, who in turn used the receivables to secure U.S.
dollar-denominated short-term commercial paper. The Company's cost for this
funding was based on the interest paid by the third party on the outstanding
commercial paper. Long-term debt was generally used to finance long-term
investments. Approximately 45% of the $38.3 million of long-term borrowings on
the Company's balance sheet as of December 31, 1998 represented fixed rate
instruments. Approximately 20% of the $83.1 million arrived at by including the
outstanding commercial paper from the securitization that is not on the
Company's balance sheet as of December 31, 1998 represented fixed rate
instruments.
In seeking to minimize the risks and/or costs associated with its
borrowing activities, the Company entered into a derivative financial instrument
transaction to limit exposure to the risk of interest rate fluctuations and to
minimize interest expense - See Note 7 to the Company's Consolidated Financial
Statements for additional information. The Company did not utilize financial
instruments for trading or other speculative purposes. The Company's financial
instrument counterparty was a high quality commercial bank with significant
experience with such instruments. The Company managed exposure to counterparty
credit risk through specific minimum credit standards. The maximum credit
exposure at December 31, 1998 was not significant to the Company.
The above discussion and the estimated amounts generated from the
analyses referred to above include forward-looking statements of market risk
which assume for analytical purposes that certain adverse market conditions may
occur. Actual future market conditions may differ materially from such
assumptions because the amounts noted previously are the result of analyses used
for the purpose of assessing possible risks and the mitigation thereof. The SEC
disclosures on market risk require that all financial instruments, as defined by
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about
Fair Value of Financial Instruments", should be included in the quantitative
disclosure calculation. Operating leases are not required to be disclosed by
SFAS No. 107, and have not been included as part of the above analysis. This is
a significant limitation to the analysis presented. As a result, the overall
impact to the Company's operating results from a hypothetical change in interest
rates may be overstated. There are certain other shortcomings inherent to the
analyses presented. The model assumes interest rate changes are instantaneous
parallel shifts in the yield curve. In reality, changes are rarely
instantaneous. Although certain liabilities may have similar maturities or
periods to repricing, they may not react correspondingly to changes in market
interest rates. The effect of the hypothetical change in interest rates ignores
the effect this movement may have on other variables including changes in actual
sales volumes that could be indirectly attributed to changes in interest rates.
The actions that management would take in response to such a change are also
ignored. Accordingly, the forward-looking statements should not be considered
projections by the Company of future events or losses
31
and are subject to the factors discussed under the caption "Forward-Looking
Statements: Certain Cautionary Statements" of Item 7 - "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
32
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report........................................................................ 34
Consolidated Balance Sheets as of December 31, 1999 and 1998........................................ 35
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.......... 36
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998, and 1997................................................... 37
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......... 38
Notes to Consolidated Financial Statements.......................................................... 39
33
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, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedule listed in the index at
Item 14(a)2. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements for the year ended December
31, 1999 have been prepared assuming the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company's losses from operations, working capital deficiency and non-compliance
with the terms of its borrowing facilities raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
April 14, 2000
34
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------------
1999 1998
------------- --------------
ASSETS (Dollars in thousands, except per share data)
CURRENT ASSETS:
Cash.................................................................... $ 716 $ 5,501
Trade accounts receivable, net of allowance for doubtful accounts of
$2,830 and $1,924..................................................... 49,709 12,946
Funding advances to franchises.......................................... 157 441
Assets held for disposition............................................. 2,439 --
Other current assets, including deferred income taxes in 1998........... 2,608 7,795
--------- ---------
Total current assets............................................... 55,629 26,683
PROPERTY AND EQUIPMENT, net............................................. 9,231 17,628
GOODWILL AND OTHER INTANGIBLE ASSETS, net............................... 46,517 64,262
OTHER ASSETS............................................................ 2,304 3,429
--------- ---------
Total assets....................................................... $113,681 $ 112,002
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 6,186 $ 5,217
Accrued expenses:
Payroll............................................................. 8,706 4,322
Payroll taxes....................................................... 3,842 4,067
Workers' compensation and insurance................................. 5,342 10,659
Other............................................................... 4,331 2,482
Accrued restructuring charges........................................... 2,905 --
Other current liabilities............................................... 661 1,312
Current maturities of long-term debt to related parties................. 1,195 541
Current maturities of other long-term debt.............................. 7,437 6,782
Revolving credit facility............................................... 57,067 --
--------- ---------
Total current liabilities........................................... 97,672 35,382
NON-CURRENT LIABILITIES:
Revolving credit facility............................................... -- 20,980
Long-term debt to related parties, less current maturities.............. -- 745
Other long-term debt, less current maturities........................... 2,300 9,257
Other non-current liabilities........................................... -- 1,050
--------- ---------
Total liabilities 99,972 67,414
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 1, 2, 3, 4, 6, 7, 8, 9, 10 and 11)
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 10,000,000 shares authorized, none
issued.............................................................. -- --
Common stock, $.001 par value; 100,000,000 shares authorized; 8,657,913
issued and outstanding at December 31, 1999 and 1998................ 9 9
Additional paid-in capital ............................................. 53,546 53,546
Accumulated deficit..................................................... (39,846) (8,967)
--------- ---------
Total shareholders' equity.......................................... 13,709 44,588
--------- ---------
Total liabilities and shareholders' equity.......................... $ 113,681 $112,002
========= ========
See notes to consolidated financial statements.
35
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands, except per share data)
Net revenues.................................................... $ 594,047 $ 565,394 $ 447,579
Cost of revenues................................................ 512,136 480,574 381,273
----------- ----------- -----------
Gross profit.................................................... 81,911 84,820 66,306
----------- ----------- -----------
Selling, general and administrative expenses:
Shareholders' compensation................................. -- -- 292
Provision for doubtful accounts............................ 5,505 1,572 1,506
Amortization of intangible assets.......................... 3,702 3,684 1,853
Other selling, general and administrative.................. 77,512 67,596 52,246
----------- ----------- -----------
Total selling, general and
administrative expenses................................ 86,719 72,852 55,897
----------- ----------- -----------
Restructuring and asset impairment charges:
Restructuring costs 11,220 -- --
Impairment charges for write-off of goodwill
and other long-lived assets............................ 2,603 -- --
----------- ----------- -----------
Total restructuring and impairment charges................ 13,823 -- --
----------- ----------- -----------
Operating (loss) income......................................... (18,631) 11,968 10,409
------------ ----------- -----------
Other expense, net:
Interest expense (net)...................................... 8,604 5,529 7,877
Put warrants valuation adjustment........................... -- -- 1,842
Other income................................................ (479) (53) (21)
----------- ----------- -----------
Other expense, net........................................ 8,125 5,476 9,698
----------- ----------- -----------
(Loss) income before provision (benefit) for
income taxes and extraordinary item......................... (26,756) 6,492 711
Provision (benefit) for income taxes............................ 4,123 1,611 (69)
----------- ----------- -----------
(Loss) income before extraordinary item......................... (30,879) 4,881 780
Extraordinary item - loss on early retirement
of debt, net of income tax benefit (Notes 6 and 7).......... -- (1,417) (13,384)
----------- ----------- -----------
Net (loss) income............................................... $ (30,879) $ 3,464 $ (12,604)
=========== ============ ===========
Unaudited pro forma data:
Income before provision for
income taxes and extraordinary item......................... $ 711
Provision for income taxes...................................... 296
-----------
Income before extraordinary item................................ 415
Extraordinary item, net of income tax benefit................... (13,384)
-----------
Net loss........................................................ $ (12,969)
===========
Weighted average common shares outstanding:
Basic....................................................... 8,657,913 8,603,521 6,055,439
=========== =========== ===========
Diluted..................................................... 8,657,913 9,919,492 7,320,362
=========== =========== ===========
(Loss) earnings per share:
Basic
(Loss) income before extraordinary item................. $ (3.57) $ 0.57 $ 0.07
Extraordinary item, net of income tax benefit........... -- (0.17) (2.21)
----------- ----------- -----------
Net (loss) income....................................... $ (3.57) $ 0.40 $ (2.14)
=========== =========== ===========
Diluted
(Loss) income before extraordinary item................. $ (3.57) $ 0.49 $ 0.06
Extraordinary item, net of income tax benefit........... -- (0.14) (1.83)
----------- ----------- -----------
Net (loss) income ...................................... $ (3.57) $ 0.35 $ (1.77)
=========== =========== ===========
See notes to consolidated financial statements.
36
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Retained
Additional Earnings/
Common Paid in Accumulated
Stock Capital Deficit Total
----- ------- ------- -----
(Dollars in thousands)
Balance, December 31, 1996 ........................... $ 5 $ 95 $ 4,394 $ 4,494
Net loss for the period from January 1, 1997
through February 21, 1997 ........................ -- -- (172) (172)
Distributions and other payments in
connection with the Reorganization ............... -- (11,880) (4,222) (16,102)
Contribution of notes payable by shareholders ........ -- 4,300 -- 4,300
Net loss for the period from February 22, 1997
through December 31, 1997 ........................ -- -- (12,431) (12,431)
Termination of put warrants liability ................ -- 20,384 -- 20,384
Sale of common stock ................................. 3 40,302 -- 40,305
-------- -------- -------- --------
Balance, December 31, 1997 ........................... 8 53,201 (12,431) 40,778
Issuance of common stock ............................. -- 775 -- 775
Exercise of warrants ................................. 1 2 -- 3
Distributions and other payments in
connection with the Reorganization .............. -- (432) -- (432)
Net income ........................................... -- -- 3,464 3,464
-------- -------- -------- --------
Balance, December 31, 1998 ........................... 9 53,546 (8,967) 44,588
Net loss ............................................. -- -- (30,879) (30,879)
-------- -------- -------- --------
Balance, December 31, 1999 ........................... $ 9 $ 53,546 $(39,846) $ 13,709
======== ======== ======== ========
See notes to consolidated financial statements.
37
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.............................................. $ (30,879) $ 3,464 $ (12,604)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization............................... 7,134 6,756 4,179
Impairment charges for write-off of goodwill and other
long-lived assets......................................... 2,603 -- --
Provision for losses on assets held for disposition......... 5,429 -- --
Loss on sale of accounts receivable......................... 2,667 -- --
Amortization/Write-off of debt discount and issuance costs.. 1,377 -- 938
Put warrants valuation adjustment........................... -- -- 1,842
Loss on early retirement of debt............................ -- -- 20,031
Deferred income tax provision (benefit)..................... 5,732 1,106 (6,716)
(Gain) loss on disposal of property and equipment........... (303) 61 (19)
----------- ----------- -----------
(6,240) 11,387 7,651
Changes in assets and liabilities (excluding effects
of acquisition):
(Increase) decrease in:
Trade accounts receivable.......................... (39,596) 36,744 (20,948)
Prepaid expenses and other current assets.......... 293 (326) (379)
Other assets....................................... (1,542) (419) (1,405)
Increase (decrease) in:
Accounts payable................................... 867 (443) (519)
Accrued expenses:
Payroll........................................ 4,384 749 (888)
Payroll taxes.................................. (225) 1,685 2
Workers' compensation and insurance............ (5,317) 1,494 3,622
Reserve for restructuring charges.............. 2,905 -- --
Other.......................................... 2,038 287 463
Other current liabilities.......................... (651) (397) (509)
----------- ----------- -----------
Net cash (used in) provided by operating
activities................................... (43,084) 50,761 (12,910)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from asset sales as part of Restructuring and
related matters.............................................. 2,740 -- --
Proceeds from sale of building................................. 6,207 -- --
Funding repayments from franchises, net........................ 284 1,745 1,046
Property and equipment expenditures............................ (1,569) (5,296) (4,105)
Expenditures for acquisitions.................................. (213) (27,769) (21,948)
Proceeds from property and equipment sales leaseback........... 1,600 -- --
Proceeds from disposal of property and equipment............... -- 4 263
----------- ----------- -----------
Net cash provided by (used in) investing activities... 9,049 (31,316) (24,744)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in excess of outstanding checks over
bank balance, included in accounts payable................. 102 2,066 1,398
Net proceeds from (repayment of) lines of credit and
revolving credit facilities................................ 36,088 (12,820) 23,912
Proceeds from sale of interest rate hedge...................... 250 -- --
Related party debt repayments.................................. (127) (483) (1,988)
Proceeds of senior notes and put warrants, net of issuance costs -- -- 22,615
Repayment of senior notes...................................... -- -- (25,000)
Repayment of other long-term debt.............................. (7,283) (3,963) (5,845)
Proceeds from the sale of accounts receivable.................. 220 -- --
Proceeds from sale of common stock, net of offering costs...... -- 3 40,305
Distributions and other payments in connection with the
Reorganization............................................... -- (432) (16,102)
----------- ----------- -----------
Net cash provided by (used in) financing activities............ 29,250 (15,629) 39,295
----------- ----------- -----------
Net (decrease) increase in cash................................ (4,785) 3,816 1,641
Cash, beginning of period...................................... 5,501 1,685 44
----------- ----------- -----------
Cash, end of period............................................ $ 716 $ 5,501 $ 1,685
=========== ============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................................. $ 6,030 $ 4,960 $ 7,091
=========== ============ ===========
See notes to consolidated financial statements.
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Outsource International, Inc. and Subsidiaries (the
"Company") is a national provider of human resource services focusing on the
flexible industrial staffing ("staffing") market through its Tandem division and
on the professional employer organization ("PEO") market through its Synadyne
division. The Company also operated a small office clerical staffing business
through its Office Ours division. As discussed further in Note 3, the Company
sold the Office Ours division effective August 30, 1999. The Company provides
its industrial staffing services through locations owned or leased by the
Company (collectively identified as "Company-owned") and franchise locations and
its PEO and clerical staffing services through Company-owned locations.
Industrial staffing services include recruiting, training and workforce
re-deployment, as well as certain PEO services. PEO services include payroll
administration, workers' compensation insurance, health, life and disability
insurance, retirement plans, and human resource compliance, administration and
management.
Public Offering: The Company sold 3 million shares of its common stock
to the public (the "Offering") at $15.00 per share on October 24, 1997, and
received proceeds of $40.3 million, net of offering costs and expenses of $4.7
million.
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 "Initial Subsidiaries"). Except for Capital
Staffing Fund, Inc., the outstanding common stock of each of the Initial
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 Initial Subsidiaries (the "CEO")--9.7%; and
(d) the executive vice president of the Initial 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 industrial staffing services
business which became the operations of the Initial Subsidiaries, and these
operations expanded to also include franchising of staffing services, PEO
services, and funding services to certain franchises. The operations of the
Initial 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 Initial
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 $4.3 million 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 $4.3 million in notes payable by such Initial
Subsidiaries to their shareholders, in proportion to their ownership interests;
and (c) the exchange by all of the shareholders of all of their shares of common
stock in the Initial 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 Initial 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 (which were paid in full at the time
of the Offering), cash paid and immediately returned to the Company by the
Shareholders for repayment of Outsource Franchising, Inc. notes receivable,
contribution to additional paid-in capital, and common stock of Outsource
International, Inc. issued in the Reorganization (all dollars in thousands):
39
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash Paid Notes (Paid Total Issuance of
(Returned to Repay at time of Shareholder Common Stock
Cash Notes Receivable) the Offering) Distributions Shares Percentage
---- ----------------- ------------- ------------- ------ ----------
S Group............ $ 5,841 $ 2,502 $ 1,420 $ 9,763 3,131,667 57.5%
M Group............ 3,850 1,251 -- 5,101 1,552,315 28.5%
CEO................ 226 417 325 968 591,249 10.8%
EVP................ 140 130 -- 270 173,557 3.2%
--------- ---------- ---------- --------- ---------- -------
$ 10,057 $ 4,300 $ 1,745 16,102 5,448,788 100.0%
========= ========== ========== ========= ======
Less contribution to additional paid-in capital of notes
payable to Synadyne II, Inc. and Synadyne III, Inc................ (4,300)
--------
Net charge to shareholders' equity................................ $ 11,802
========
All shareholders of the Initial Subsidiaries owned virtually the same
proportion of the common stock of Outsource International, Inc. after the
Reorganization as they owned of the Initial 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.
Subsequent to the Reorganization, all compensation for the three
founders (principal shareholders) was discontinued, and the Initial Subsidiaries
terminated their elections to be treated as S corporations. The distribution by
the Initial 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. In September 1998, the Company completed and filed
its Federal and state tax returns for the period from January 1, 1997 through
February 21, 1997. Based on that filing, the Company made an additional
distribution of $432,000 to the shareholders at the time of the Reorganization.
The distribution was recorded as a reduction of the Company's paid-in capital.
Further distributions may be required in the event the taxable income for any
period through February 21, 1997 is adjusted due to audits or any other reason.
Internal Reorganization: On, January 1, 1999 an internal reorganization
was consummated to better align the legal entities on a geographic basis. This
internal reorganization had no effect on the consolidated financial position or
results of operations of the Company. Outsource International, Inc. retained
100% direct or indirect ownership of all Subsidiaries after this reorganization.
A summary of the Company's significant accounting policies follows:
Basis of presentation: The accompanying consolidated financial
statements present the financial position, results of operations and cash flows
of Outsource International, Inc. and the Subsidiaries, as well as SMSB
Associates ("SMSB"), a Florida limited partnership comprised of the Company's
three principal shareholders and the CEO. SMSB, a special purpose entity which
leases certain properties to the Company, is consolidated in these financial
statements from January 1, 1995 to September 30, 1997, 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 during that period.
Effective October 1, 1997 the Company discontinued the consolidation of SMSB's
assets and liabilities in these financial statements, based on the Company's
determination that SMSB was no longer a non-substantive lessor as defined by
EITF No. 90-15. All significant intercompany balances and transactions are
eliminated in consolidation.
The Company's reportable operating segments are the Industrial Staffing
segment, the PEO segment and the Franchising segment - see Note 15. The
accounting policies of the operating segments are the same as those described in
the summary of significant accounting policies except that the disaggregated
financial results have been prepared using a
40
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
management approach, which is consistent with the basis and manner in which the
Company internally disaggregates financial information for the purposes of
assisting in making internal operating decisions.
Going Concern: The Company's Consolidated Financial Statements have
been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
shown in the Company's Consolidated Financial Statements, during the year ended
December 31, 1999, the Company incurred a net loss of $30.9 million and, as of
that date, the Company's current liabilities exceeded its current assets by
$42.0 million, and the Company is in default in repayment of certain acquisition
debt subordinated to its bank financing. The Company's bank facilities and
financial covenants were modified effective October 1, 1999, with a maturity of
December 31, 1999, to enable the Company to continue to meet certain financial
covenants during 1999. Prior to year-end, as previously stated, the Company's
bank group extended financing through March 31, 2000, and subsequently through
April 30, 2000.
The Company's Consolidated Financial Statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet obligations on a timely basis, to comply with the
terms and covenants of its financing agreements, to obtain additional financing
or refinancing as may be required, and profitably operate its business. Due to
the factors described above, the Company may be unable to continue as a going
concern for a reasonable period of time. Management is continuing its efforts to
obtain additional financing so that the Company can meet its obligations and
sustain operations from sources that are described in Note 2 to the Company's
Consolidated Financial Statements.
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 staffing and PEO revenues are based upon the
gross payroll of the Company's 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 staffing
and PEO customers are invoiced on a periodic basis ranging from weekly to
monthly. The 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 staffing and PEO services.
Because the Company is at risk for all of its direct costs, independent 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.
Initial franchise fees are generally recognized when substantially all
services or conditions relating to the franchise sale have been performed or
satisfied by the Company. Costs relating to such fees are charged to selling,
general and administrative expenses when incurred. When the fees are collected
over an extended period of time and no reasonable basis for estimating
collections exists, the fees are recognized as income when received through the
use of the installment method. Royalties, which are based on gross sales and
gross profit of the related franchisees, are recognized as revenue when earned
and become receivable from the franchisees.
Funding advances: The Company makes advances on behalf of certain of
its franchises to fund the payroll and other related costs for industrial
personnel provided by those franchises to their clients. The advances are
secured by the franchises' accounts receivable from these clients. The Company
invoices the clients and receives payment directly from the clients as part of
this arrangement. These payments are applied to reimburse outstanding advances,
and to pay franchise royalties and the fee charged for these funding and billing
services, with any remaining amounts remitted to the franchise. The funding fee
is charged and recognized as revenue by the Company as the weekly invoices are
produced.
Property and equipment: Property and equipment is stated at cost and
depreciated or amortized on straight-line bases
41
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
.
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 life of buildings is 39 years,
while the estimated useful lives of other items range from five to seven years.
Long-lived assets: In accordance with 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", 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
projected future undiscounted cash flows attributed to the assets are less than
their carrying values - see Note 4.
Intangible assets: Identifiable intangible assets include territory
rights, 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
benefited, ranging from less than one year to 15 years, except territory rights
which are being amortized over periods ranging from 15 to 40 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 included the acquisition and integration of independent and
franchise staffing and PEO operations through 1998. 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. During 1999, the Company ceased acquiring
industrial staffing operations and focused on improving operational
efficiencies.
Management assesses on an ongoing basis if there has been an impairment
in the carrying value of its intangible assets. If the undiscounted future cash
flows over the remaining amortization period of the respective intangible asset
indicates that the value assigned to the intangible asset may not be
recoverable, the carrying value of the respective intangible asset will be
reduced. The amount of any such impairment would be determined by comparing
anticipated discounted future cash flows from acquired businesses with the
carrying value of the related assets. In performing this analysis, management
considers such factors as current results, trends and future prospects, in
addition to other relevant factors - see Notes 3 and 4.
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.
Revolving credit facility and long-term debt: The carrying amounts
approximate the fair value at December 31, 1998 and 1999, because the interest
rates on these instruments approximate interest rates currently available for
similar borrowings. The carrying amount of the unrealized hedge loss (included
in other non-current liabilities) as of December 31, 1998 was based on its fair
value determined primarily from information provided by Fleet National Bank,
formerly BankBoston, N.A. - see Note 7.
Income taxes: Effective February 21, 1997, the Initial 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 Initial
Subsidiaries' shareholders. Accordingly, no provision for income taxes was
recorded.
42
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Since the Reorganization on February 21, 1997, 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 (a) 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 and (b)
net operating loss and tax credit carryforwards. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount more
likely than not 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 through December 31,
1999, the Company's workers' compensation insurance coverage provided for a
$250,000 deductible per accident or industrial illness with an aggregate maximum
dollar limit based on 3.5%, 2.4% and 2.2% of covered payroll for 1999, 1998 and
1997, respectively. The Company employs an independent third-party administrator
to assist it in establishing an appropriate accrual for the uninsured portion of
workers' compensation claims arising in those years, including claims incurred
but not reported, based on prior experience and other relevant data. The
Company's policy is to accrue worker's compensation expense equal to the fully
developed cost of claims incurred up to those maximum dollar limits, using
internally generated rates that reflect the specific risk profile of each
Company segment in order to allocate the maximum dollar limit between segments.
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 $0.8
million in 1995 and $1.2 million in 1996).
For claims arising through December 31, 1998, 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. In 1999, the
Company selected a prefunded deductible program whereby expected 1999 claims
expenses are funded in advance in exchange for reductions in administrative
costs. The required advance funding has been provided through either cash flows
from operations or additional borrowings under the Revolving Credit Facility.
This new arrangement adversely affected the Company's ability to meet certain
financial covenants. See Note 7.
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: The Company uses the accounting methods
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees",
and provides the pro forma disclosures required by SFAS No. 123, "Accounting for
Stock-based Compensation". See Note 11.
Advertising: The Company expenses advertising and promotional
expenditures as incurred. Total advertising and promotional expenses were
approximately $1.1 million, $1.5 million, and $1.8 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
New accounting pronouncements: In June 1998, SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133
defines derivatives and establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS No. 133 also requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000, pursuant to SFAS No. 137, "Deferring of
SFAS 133 Effective Date," and cannot be applied retroactively. The Company
intends to first implement SFAS No. 133 in its consolidated financial statements
as of and for the three months ending July 2,
43
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2001, although it has not determined the effects, if any, that implementation
will have. If the Company acquires any derivative instruments, SFAS No. 133
could increase volatility in earnings and other comprehensive income.
Reclassifications: Certain reclassifications have been made in amounts
for prior periods to conform to current period presentation.
NOTE 2: FUTURE LIQUIDITY
As discussed in Note 7 to the Company's Consolidated Financial
Statements, the Company's current bank financing expires on April 30, 2000 and
the Company is in default in repayment of certain acquisition debt subordinated
to the bank financing. The Company's borrowing facilities and financial
covenants were modified effective October 1, 1999, with a maturity of December
31, 1999, to enable the Company to continue to meet certain financial convenants
during 1999. Prior to year-end, as previously stated, the Company's bank group
extended financing through March 31, 2000, and subsequently through April 30,
2000.
The Company is pursuing various strategies, including, but not limited
to, negotiating with alternative lending sources and renegotiating acquisition
debt that is in default. In addition, the Company announced a Restructuring plan
on August 6, 1999, which when completed, will allow the Company to focus on its
core business, flexible industrial staffing. See Note 3 to the Company's
Consolidated Financial Statements. While the Company believes that its efforts
to obtain alternative financing will be successful and that the bank group will
provide financing subsequent to April 30, 2000, there can be no assurance that
the bank group will continue to provide financing or that these actions will be
sufficient to provide adequate funds for the Company's current level of
operations or to pay the Company's past due obligations.
NOTE 3. RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR DISPOSITION
On August 6, 1999, the Company announced the following actions to
improve its short-term liquidity, concentrate its operations within one core
segment (Tandem, its flexible staffing division) and improve its operating
performance within that segment:
(i) the sale of Office Ours, the Company's clerical staffing division,
effective August 30, 1999. The Company received proceeds at closing of $1.9
million, not including $0.1 million to be held in escrow until December 31, 1999
and subject to verification of sold accounts receivable, and another $0.1
million to be held in escrow until August 31, 2000 and subject to compliance
with warranties and representations. Approximately $0.5 million of the proceeds
was used to satisfy obligations under the Securitization Facility and the
remainder was applied to the Revolving Credit Facility (See Note 7). A gain of
$0.5 million has been included as a component of other income in the Company's
consolidated statement of operations for the year ended December 31, 1999.
Revenues of Office Ours, prior to the sale, were $5.3 million, $8.1 million and
$6.7 million for the years ended December 31, 1999, 1998 and 1997, respectively.
The loss before taxes for these operations, on a basis consistent with the
segment information presented in Note 15, was $0.3 million, $0.4 million and
$0.2 million for the years ended December 31, 1999, 1998 and 1997, respectively;
(ii) the engagement of an investment banking firm to assist in the
evaluation of the possible sale, or other strategic options, of Synadyne, the
Company's PEO division. Effective April 8, 2000, the Company sold the operations
of Synadyne, for which the Company received proceeds of $3.5 million at closing.
In addition, the Company could receive additional proceeds of $1.25 million,
which is dependent on certain performance criteria for the one year period
subsequent to the sale. Revenues of Synadyne, prior to the sale, were $224.5
million, $202.9 million and $177.0 million for the years ended December 31,
1999, 1998 and 1997, respectively. The income before taxes for these operations,
on a basis consistent with the segment information presented in Note 15, was
$1.4 million, $1.1 million and $1.1 million for the years ended December 31,
1999, 1998 and 1997, respectively; and
(iii) a reduction of the Company's flexible staffing and support
operations (the "Restructuring") consisting primarily of: the sale, franchise,
closure or consolidation, during the third and fourth quarters of 1999, of 26 of
the 117 Tandem
44
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR
DISPOSITION(CONTINUED)
branch offices existing as of June 30, 1999; a reduction of the Tandem and
corporate support center employee workforce by 107 employees (approximately 11%
of the Company's workforce), and an anticipated additional reduction of 59
employees by June 30, 2000, of which 35 employees are in branch offices that
will be sold, franchised, closed or consolidated. In connection with the
corporate support center workforce reductions and the anticipated disposition of
Synadyne, the corporate support center building was sold on December 29, 1999. A
total of 47 branch offices have been or will be eliminated in connection with
the restructuring, 26 of which have been sold, franchised, closed, or
consolidated as of December 31, 1999. These offices were not or are not expected
to be adequately profitable in the near future or are inconsistent with the
Company's operating strategy of clustering offices within specific geographic
regions.
In connection with the Restructuring, the Company has included a charge
of $11.2 million in its results of operations for the year ended December 31,
1999. This restructuring charge accrual and its utilization are as follows:
Paid through Balance at
Original December 31, December 31,
Charge 1999 1999
------ --------------- ----------
(Dollars in thousands)
Employee severance and other termination benefits $ 4,040 $ 1,318 $ 2,722
Professional fees................................ 1,205 1,171 34
Lease termination and write-down of leasehold
improvements at closed offices................. 400 295 105
Other restructuring costs........................ 146 102 44
-------- -------- --------
Accrued restructuring charges.................... 5,791 $ 2,886 $ 2,905
======== ========
Write-down to fair value of assets identified for
Identified for disposition..................... 5,429
--------
Total restructuring charge activity.............. $ 11,220
========
(i) The $5.4 million write-down of assets identified for disposition
relates to 27 Tandem offices, as follows: (i) a $0.4 million loss related to two
staffing offices in Las Vegas purchased by the Company in 1998 - one office
closed by the Company and one office sold on September 6, 1999 to an
unaffiliated party, which paid a nominal amount and entered into a standard
franchise agreement with the Company for the territory; (ii) a $1.5 million loss
related to four staffing offices in Raleigh, North Carolina and Greenville,
South Carolina, purchased by the Company in 1998 - one office closed by the
Company and three offices sold on October 18, 1999 to the former franchisee and
former seller for $1.8 million. The sales price was comprised of $0.2 million in
cash, two promissory notes totaling $0.3 million, and cancellation of the
Company's remaining indebtedness from the original acquisition of $1.3 million.
As part of this transaction, the Company cancelled covenants not to compete
previously given to it by the buyers and certain affiliates and agreed not to
compete for 39 months (27 months in the case of franchising) in the counties
where the assets are located. This transaction also included an option, which
was exercised on November 8, 1999, to purchase, for nominal consideration, one
staffing office in Virginia, which had been purchased by the Company from a
related party in 1996; and (iii) a $3.5 million write-down related to 21
additional staffing offices based on management's estimate of the ultimate sales
prices that will be negotiated for these assets. Effective February 28, 2000,
the Company sold its staffing office in the state of Washington for $0.3
million. The sales price was comprised primarily of a promissory note of $0.2
million.
45
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR
DISPOSITION (CONTINUED)
In addition to the write-down of assets identified for disposition, the
$11.2 million restructuring charge includes $4.0 million for severance and other
termination benefits, $1.2 million for professional fees, and $0.6 million in
lease termination and other charges. Severance and other termination benefits
include retention bonuses paid to certain employees that remained with the
Company through the last day of the year. The remaining liability of $2.7
million for severance and other termination benefits as of December 31, 1999
consists of (i) $0.2 million for four employees terminated in 1999, to be paid
in 2000 and (ii) $2.5 million for 59 employees to be terminated by June 30,
2000.
Professional fees of $1.2 million included in the restructuring charge
are primarily amounts paid to Crossroads Capital Partners, LLC for its services
related to the Restructuring during the third and fourth quarter of 1999 - see
Note 8. The Company also expects to record restructuring charges in the first
calendar quarter of 2000 and the first quarter of fiscal year 2001 for services
relating to Restructuring activities to be rendered by Crossroads during that
period.
As of December 31, 1999, the Company had sold, franchised, closed or
consolidated into other existing Company-owned locations 26 of the 47 staffing
offices identified as part of the Restructuring and utilized $0.4 million of the
restructuring charge for the costs of terminating the related leases as well as
the carrying value of leasehold improvements and other assets not usable in
other Company operations.
As of December 31, 1999, 21 Tandem offices remained to be sold as part
of the Restructuring, and the Company has classified the related tangible and
intangible assets, excluding cash, accounts receivable and deferred income
taxes, as assets held for disposition. As of September 30, 1999, the Company had
also classified the assets of the Synadyne division as assets held for
disposition; however, when it became apparent that certain assets would not be
sold in connection with the disposition of Synadyne, those assets were removed
from such classification. Upon classification as assets held for disposition,
the Company discontinued the related depreciation and amortization for these
assets, which reduced operating expenses by approximately $0.4 million for the
year ended December 31, 1999. The estimated fair value of these assets held for
disposition was based, in some cases, on management's judgment. Accordingly,
actual results could vary significantly from such estimates.
In connection with the corporate support center workforce reductions
and the anticipated disposition of Synadyne, the corporate support center
building was sold on December 29, 1999. The Company received $6.1 million in net
proceeds from the sale of the support center building and certain assets, of
which $3.8 million was used to extinguish the mortgage obligations, $0.9 million
is being held in escrow and will be released over the period through October 1,
2002, and $1.4 million was used to reduce the Company's outstanding obligation
to Fleet National Bank.
The Company's assets held for disposition as of December 31, 1999 are
stated at the lower of original cost (net of accumulated depreciation or
amortization) or fair value (net of selling and disposition costs) and presented
in thousands, as follows:
Original Cost, Net Lower of
Property Goodwill and Other Cost or
and Equipment Intangible Assets Total Fair Value
------------- ----------------- ----- ----------
Tandem branch offices.................. $ 640 $ 5,279 $ 5,919 $ 2,250
Synadyne division...................... 189 189 189
--------- ---------- --------- ---------
$ 640 $ 5,468 $ 6,108 $ 2,439
========= ========== ========= =========
46
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR
DISPOSITION (CONTINUED)
As part of the Restructuring efforts in 1999, the Company classified
assets with a carrying value of $11.8 million as assets held for disposition. As
described above, the Company sold Tandem branch offices and the corporate
support center building, with a combined carrying value of $8.1 million during
the third and fourth quarters of 1999. The Synadyne assets, with a carrying
value of $1.3 million, were removed from such classification as of December 31,
1999. The Company expects to sell the remainder of the assets held for
disposition before June 30, 2000.
The Tandem operations held for sale as of December 31, 1999, as well as
those sold, franchised, closed or consolidated as part of the Restructuring
prior to that date, recorded revenues of $63.1 million, $67.2 million and $42.3
million for the years ended December 31, 1999, 1998 and 1997, respectively. The
income (loss) before taxes for these operations, on a basis consistent with the
segment information presented in Note 15, was a ($1.8) million net loss, ($0.3)
million net loss and net income of $1.3 million for the years ended December 31,
1999, 1998 and 1997, respectively. See Note 15 for Synadyne segment information.
NOTE 4. ACQUISITIONS
Goodwill and other intangible assets consist of the following amounts,
which are presented in thousands and, with respect to the December 31, 1999
balances, are after the effect of (i) the impairment reduction discussed later
in this note, (ii) the reclassification of assets identified for disposition,
including the sale of a former Tandem office in Nevada, North Carolina and South
Carolina (see Note 3) and (iii) the sale of the Office Ours division (see Note
3):
As of December 31, Weighted Average
1999 1998 Amortization Periods
---- ---- --------------------
(Dollars in thousands)
Goodwill............................. $ 23,809 $ 32,806 30.2 years
Territory rights..................... 20,398 24,743 34.3 years
Customer lists....................... 7,720 10,105 6.5 years
Covenants not to compete............. 1,561 2,191 9.0 years
Employee lists....................... 291 417 0.1 year
----------- ----------
Goodwill and other intangible
assets............................ 53,779 70,262 27.6 years
Less accumulated amortization........ 7,262 6,000
----------- ----------
Goodwill and other intangible
assets, net....................... $ 46,517 $ 64,262 25.4 years
=========== ===========
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.
In January 1995, the Company purchased the franchise rights for two
staffing locations and converted these locations to Company-owned locations. At
the time of the transaction, three of the four shareholders of the franchise
were shareholders with a cumulative controlling interest in the Company.
Therefore, the acquisition was accounted for as a business combination of
entities under common control and treated as the purchase of the remaining
minority interest in the franchise. No material tangible assets were acquired.
During 1995 and 1996, $0.3 million and $1.1 million, respectively, of the
purchase price was accrued, with $0.2 million and $1.0 million payable to
shareholders of the Company in 1995 and 1996, respectively, recorded as a
distribution and the remainder as goodwill. 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. In December 1997, the Company paid $141,000 to the
minority interest, which was the final amount due under the renegotiated terms
of the purchase agreement.
47
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. ACQUISITIONS (CONTINUED)
In April 1996, the Company purchased the franchise rights for eight
flexible staffing locations and converted these locations to Company-owned
locations. Some shareholders of the two franchises were 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 $4.9 million with $0.8 million due at closing and a note for the remainder
to be paid in 60 monthly installments plus 10.0% per annum interest through July
1, 1996 and 14.0% per annum interest thereafter. On February 21, 1997, these
payment terms were renegotiated. The renegotiated terms called for a payment of
$1.3 million against the outstanding balance and a note for the remainder of
$2.6 million to be paid in 48 equal monthly installments including interest of
14.0% per annum, commencing April 1, 1997, but fully payable at the time of an
initial public offering. The remaining outstanding balance was accordingly paid
at the time of the Offering, except for $0.1 million repaid in March 1998.
During 1997, the Company purchased the franchise rights from three
franchisees for 13 flexible staffing locations and converted these locations to
Company-owned locations. The total purchase price was $11.1 million in cash and
notes. During 1997, the Company also purchased five flexible staffing
operations, none previously affiliated with the Company, with 17 locations. The
total initial purchase price was $14.2 million in cash and notes, plus certain
sellers received options to purchase a total of 8,126 shares of the Company's
common stock at their fair market value at the date of issuance. Such options
were issued March 12, 1997 and were still outstanding at December 31, 1999 - See
Note 11. During 1997 and 1998, the initial contractual purchase prices of the
two of the aforementioned acquisitions were reduced by a total of $0.6 million,
based on the gross profit from the acquired locations for the two years
following the acquisition.
During the first quarter of 1998, the Company purchased the franchise
rights from four franchisees for six flexible staffing locations and converted
these locations to Company-owned locations. The total purchase price was $5.5
million in cash and notes. During the first quarter of 1998, the Company also
purchased two flexible staffing operations, none previously affiliated with the
Company, with 18 locations. The total purchase price was $4.8 million in cash
and notes. Immediately following one of the acquisitions, the Company sold four
of the acquired locations to a franchisee of the Company in exchange for the
issuance of a $0.8 million note, payable over five years plus interest at 8.0%
per annum.
During the first quarter of 1998, the Company purchased 100% of the
common stock of Employment Consultants, Inc., X-Tra Help, Inc. and Co-Staff,
Inc. (none previously affiliated with the Company), which were flexible staffing
operations with four locations. The total purchase price (which includes $2.5
million for the excess of net tangible assets over liabilities assumed) was
$11.7 million, paid in cash, notes and $0.8 million in the Company's common
stock (57,809 shares) delivered at closing. One of the notes may increase
without limit or decrease by up to $875,000 based on the gross profit from the
acquired locations for the two years following the acquisition. For example, in
the event gross profit for those two years was equal to 1997 gross profit, the
note would decrease by approximately $125,000 or, in the event gross profit
increased by 25% in each of those two years as compared to the prior year, the
note would increase by approximately $150,000. Based on performance
stipulations, the note to the seller was increased by $0.1 million in 1999.
Certain sellers received options to purchase a total of 6,000 shares of the
Company's common stock at fair market value on the date of issuance. Such
options were issued January 31, 1998 and were still outstanding at December 31,
1999.
Effective February 16, 1998, the Company purchased the franchise rights
from one franchise group for four flexible staffing locations and converted
these locations to Company-owned locations. The shareholders of the franchise
group are shareholders of the Company but do not hold a controlling interest in
the Company. The purchase price was $6.9 million, with $5.0 million paid in cash
at closing plus the issuance of a note for $1.7 million bearing interest at
7.25% per annum (imputed at 8.75% for financial statement purposes) and payable
quarterly over three years. The remaining $0.2 million of purchase price
represents the Company's assumption of approximately $0.1 million of the
seller's liabilities under certain employment contracts and the Company's
agreement to reduce by approximately $0.1 million the sellers' obligation to the
Company in connection with the termination of their remaining franchise
agreements with the Company - see Note 11. See Note 8 regarding options for
certain franchise territories also granted in connection with this transaction.
Effective February 1, 1999, the note was renegotiated so that the remaining
principal balance of $1.3 million would bear interest at 8.50% per annum and
would be payable in monthly payments totaling $0.3 million in the first year and
$0.6 million in the second year, plus a $0.4 million payment at the end of the
two year term. During the second quarter of 1998, the Company also purchased the
franchise
48
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. ACQUISITIONS (CONTINUED)
rights from three franchisees for five flexible staffing locations and converted
these locations to Company-owned locations. The total purchase price was $1.6
million in cash and notes.
During the second quarter of 1998, the Company purchased four flexible
staffing operations, none previously affiliated with the Company, with a total
of five locations. The total purchase price was $9.2 million, with $7.1 million
paid in cash at closing (which included $0.9 million placed in escrow) plus
notes issued for $2.1 million. The escrowed portion was payable to one of the
sellers approximately fourteen months after closing, less any portion paid to
the Company as compensation for any losses resulting from certain breaches of
one of the asset purchase agreements. The Company was obligated for (i) an
additional payment to one of the sellers equivalent to any increase in the
amount of gross profit of the locations acquired from such seller for the twelve
months ending May 31, 1999, as compared to the greater of a contractually
defined amount or the gross profit of those locations for the twelve months
ended March 31, 1998 and (ii) an additional payment up to $0.2 million
contingent primarily upon the gross profit of one of the acquired locations for
the twelve months following the acquisition. As of December 31, 1999, the
Company paid an additional $0.2 million to the sellers based on the previously
stated stipulations.
During the third and fourth quarters of 1998, the Company (i) purchased
the franchise rights from two franchisees for three flexible staffing operations
and converted these locations to Company-owned locations and (ii) purchased
certain PEO operations from an unaffiliated party which were immediately
transferred to existing Company locations. The total purchase price was $1.2
million in cash and the Company's assumption of liabilities. Approximately $0.1
million of this purchase price is contingent upon the gross profit of certain of
the acquired locations for the three years following the acquisition, and this
amount may increase to $0.5 million. The Company was obligated for additional
payments to another of the sellers of up to $125,000 based on the gross profit
of the location acquired from such seller for the twelve months ended December
31, 1998 and the workers' compensation premium related to that location for the
six months ended December 31, 1998. As of December 31, 1999, no additional
payments had been made by the Company based on the aforementioned contractual
stipulations.
The above acquisitions 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 gross profit of certain acquired businesses
are not contingent on the continued employment of the sellers. Such additional
amounts, if paid, will be recorded as additional purchase price and increase
goodwill. The above purchase prices are stated before adjustments to reflect
imputed interest on acquisition financing and do not include acquisition related
professional fees and other costs capitalized 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. In certain cases, the operating results for periods prior to the
acquisition are based on (a) unaudited financial statements provided by the
seller or (b) an estimate of revenues, cost of revenues and/or selling, general
and administrative expenses based on information provided by the seller or
otherwise available to the Company. In these cases, the Company has made an
attempt to obtain the most complete and reliable financial information and
believes that the financial information it used is materially accurate, although
the Company has not independently verified such information.
The pro forma operating results include 1998 acquisitions which have
disposed of or identified as subject to disposition as part of the Restructuring
- - see Note 3. These 1998 acquisitions, as well as the Wisconsin operations
discussed below, recorded historical revenues for the year ended December 31,
1999 of $15.3 million, and the pro forma results include revenues for these
operations for the year ended December 31, 1998 of $21.3 million. The Company
sold the operating assets of its 1998 Tandem staffing office acquisition in
Wisconsin to an affiliate of the former owner on October 25, 1999 for $2.4
million, comprised of $0.4 million in cash, a promissory note of $1.1 million
and cancellation of the Company's remaining indebtedness to the buyer of $0.9
million arising from the original acquisition. As part of this transaction, the
Company cancelled covenants not to compete previously given to it by the buyers
and certain affiliates and agreed not to compete for 60 months in certain
Wisconsin counties. In addition, the buyer agreed not to compete in certain
other Wisconsin
49
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. ACQUISITIONS (CONTINUED)
counties for 60 months and granted the Company a seven year, first
right-of-refusal on any subsequent sale by the buyer of the acquired business.
Years Ended December 31,
------------------------
1999 1998
---- ----
(Dollars in thousands)
Unaudited Pro Forma:
Net revenues.......................................................... $ 594,047 $584,991
Operating (loss) income............................................... (18,631) 13,108
(Loss) income before provision for income taxes and extraordinary item (26,756) 6,934
(Loss) income before extraordinary item............................... (30,879) 5,124
(Loss) earnings per share, before extraordinary item:
Basic.............................................................. $ (3.57) $ .60
=============== ===============
Diluted............................................................ $ (3.57) $ .52
=============== ===============
In accordance with SFAS No. 121, management assesses on an ongoing
basis if there has been an impairment in the carrying value of its long-lived
assets. During the third and fourth quarter of 1999, it was determined that the
undiscounted future cash flows over the remaining amortization period of certain
intangible assets indicated that the value assigned to the intangible asset
might not be recoverable, and as such, the carrying value of the respective
intangible asset was reduced. The operating results of these acquired offices
had declined over time, primarily due to the attrition of customers existing as
of the respective acquisition dates. The amount of the impairment ($2.6 million
included in operating expenses for the year ended December 31, 1999) was
primarily determined by comparing anticipated discounted future cash flows from
the acquired businesses with the carrying value of the related assets. In
performing this analysis, management considered such factors as current results,
trends and future prospects, in addition to other relevant factors.
The original carrying value of the goodwill and other intangible assets
exceeded the discounted projected cash flow by approximately $2.1 million for
five 1997 and 1998 Tandem acquisitions. The Company also recorded an impairment
as of September 30, 1999 of $0.4 million based on the October 1999 sale of its
1998 Tandem acquisition in Wisconsin, as discussed above. In addition, the
Company recognized an impairment of $0.1 million arising from doubt concerning
the Company's ability to enforce a non-compete agreement with the former owner
of an acquisition in Illinois.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
As of December 31,
------------------
1999 1998
---- ----
(Dollars in thousands)
Buildings and land............................................ $ 816 $ 6,210
Furniture, fixtures and equipment............................. 7,766 9,158
Computer software............................................. 6,364 6,187
Leasehold improvements........................................ 2,059 2,756
Vehicles...................................................... 516 592
---------- ---------
Property and equipment........................................ 17,521 24,903
Less accumulated depreciation and amortization................ 8,290 7,275
---------- ---------
Property and equipment, net................................... $ 9,231 $ 17,628
========== =========
50
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation and amortization expense for property and equipment for
the years ended December 31, 1999, 1998 and 1997 was $3.4 million, $3.1 million,
and $2.3 million, respectively.
As part of the Restructuring, during 1999 the Company classified
certain assets previously recorded as property and equipment to assets held for
disposition. The carrying value of those assets transferred was comprised of (i)
the corporate support center building, (ii) furniture, fixtures and equipment,
(iii) software, and (iv) leasehold improvements, was $6.7 million. In addition,
assets with a carrying value of $0.4 million were sold as part of the
disposition of Office Ours - see Note 3.
NOTE 6. INCOME TAXES
The net deferred tax asset as of December 31, 1999 and 1998 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 Initial Subsidiaries to be treated as S corporations:
As of December 31,
1999 1998
---- ----
(Dollars in thousands)
Current:
Workers' compensation accrual................................. $ 4,766 $ 4,048
Debt discount and valuation adjustment related to warrants.... -- 678
Allowance for doubtful accounts............................... 935 741
Change from cash to accrual tax basis......................... (499) (483)
Net operating loss carryforward............................... 2,899 --
Employment tax credit carryforward............................ 2,179 1,476
Restructuring costs........................................... 1,168 --
Other......................................................... 320 (91)
--------- ---------
Net current deferred tax asset, included in prepaid
expenses and other current assets ......................... 11,768 6,369
--------- --------
Non-current:
Fixed assets and intangible assets basis differences.......... 2,030 (646)
Change from cash to accrual tax basis......................... (11) (540)
Other......................................................... 285 549
------- --------
Net non-current deferred tax asset (liability)................ 2,304 (637)
--------- -----------
Net deferred tax asset before valuation allowance............. 14,072 5,732
Less: Valuation allowance..................................... 14,072 --
--------- --------
Net deferred tax asset........................................ $ -- $ 5,732
========= ========
In 1998, the net current deferred tax asset of $6.4 million is included
in other current assets and the net non-current deferred tax liability of $0.6
million is included in other non-current liabilities.
The provision for income taxes in 1999 consists of the valuation
allowance of $14.1 million above offset by potential tax benefits of $9.9
million resulting from losses incurred in that period. The valuation allowance
was recorded during the fourth quarter 1999 because it is not clear that
utilization of the tax benefits resulting from operating losses and other
temporary differences are "more likely than not" to be realized, as required by
SFAS 109.
51
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES (CONTINUED)
The employment tax credit carryforward of $2.2 million as of December
31, 1999 will expire during the years 2012 through 2019. The employment tax
credits recorded by the Company from February 21, 1997 through December 31, 1999
include Federal Empowerment Zone ("FEZ") credits which represent a net tax
benefit of approximately $0.6 million. Although the Company believes that these
FEZ credits have been reasonably determined, the income tax law addressing how
FEZ credits are determined for staffing companies is evolving. As a result, the
Company's position with regards to the calculation of the FEZ credits has been
challenged by the Internal Revenue Service ("IRS"), as discussed below.
During April 1999, the Company received a preliminary report from an
IRS agent proposing adjustments to the previously reported taxable income and
tax credits for certain of the Company's subsidiaries for the years ended
December 31, 1994, 1995 and 1996. The Company is currently disputing these
proposed adjustments. Since the subsidiaries were "S" corporations for the
periods under examination, the proposed adjustments, if ultimately proven to be
appropriate, would not result in a materially unfavorable effect on the
Company's results of operations although additional shareholder distributions
could result as discussed in Note 8.
The components of the income tax provision (benefit) are as follows:
Years Ended December 31,
------------------------
1999 1998 1997
---- ----- ----
(Dollars in thousands)
Federal - Current $ (1,816) $ 1,682 $ 2,054
State - Current 208 362 494
Federal - Deferred (6,637) (357) (2,235)
State - Deferred (1,704) (76) (382)
---------- --------- ---------
Income tax (benefit) provision (9,949) 1,611 (69)
Change in valution allowance 14,072 - -
---------- -------- --------
Income tax provision (benefit) $ 4,123 $ 1,611 $ (69)
========= ======== =========
During 1997, the Company recorded a $6.6 million income tax benefit as
a direct reduction of the extraordinary loss arising from early debt retirement
- - see Note 7. The 1998 extraordinary expense of $1.4 million recognized by the
Company represents a reduction of the 1997 tax benefit, arising from the final
valuation for income tax purposes of the deduction allowable to the Company
related to warrants to purchase 392,896 shares of the Company's common stock.
The warrants were issued by the Company into escrow in 1997 but the ultimate
recipient was not determined until February 21, 1999 - see Note 7. Although the
Company recognized a tax benefit in 1997 associated with the debt discount
amortization expense for these warrants, the benefits were initially recorded as
a deferred tax asset since these expenses would be tax deductible by the Company
as interest expense only if and when the warrants were released to the Senior
Note Holders and only to the extent of the fair value of the warrants upon
release. As the public market price of the Company's shares on February 21, 1999
was less than the public market price on the Offering valuation date, the
estimated tax benefit initially recorded was adjusted to the tax benefit as
finally determined. In addition to the $1.4 million extraordinary item, another
$141,000 expense was included in the Company's 1998 income tax provision due to
the adjustment for tax return purposes of the 1997 put warrants valuation
adjustment - see Note 7 associated with these warrants.
52
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES (CONTINUED)
The Company's effective tax rate differed from the statutory federal
rate of 35%, as follows:
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
Statutory rate applied to income before income taxes
and extraordinary item ......................... $ (9,364) (35.0%) $ 2,272 35.0% $ 249 35.0%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit ...... (987) (3.7) 189 2.9 74 10.4
Effect of termination of S corporation status ... -- -- -- -- (424) (59.6)
Loss prior to termination of S corporation status -- -- -- -- 59 8.2
Put warrants valuation adjustment ............... -- -- 141 2.2 445 62.6
Employment tax credits .......................... (285) (1.1) (975) (15.0) (551) (77.4)
Nondeductible expenses .......................... 299 1.1 215 3.3 57 8.0
Other ........................................... 388 1.5 (231) (3.6) 22 3.1
----- ----- ----- ----- ---- -----
Total before change in valuation allowance .......... (9,949) (37.2) 1,611 24.8 (69) (9.7)
Change in valuation allowance ....................... 14,072 52.6 -- -- -- --
------ ---- ----- ------ ----- -----
Total ............................................... $ 4,123 15.4% $ 1,611 24.8% $ (69) (9.7)
======== ===== ======== ===== ====== =====
NOTE 7. DEBT
Borrowing facilities: The Company's primary sources of funds for
working capital and other needs are (i) a $25.5 million credit line (the
"Revolving Credit Facility"), including existing letters of credit of $5.0
million and (ii) a $50.0 million credit facility, based on and secured by the
Company's accounts receivable (the "Receivable Facility"). Both facilities are
provided by a syndicate of lenders led by Fleet National Bank ("Fleet"),
formerly known as BankBoston N.A., and expire on April 30, 2000. The Company is
currently negotiating with the lenders' syndicate to obtain an extension of
existing financing beyond April 30, 2000, until such time as long-term financing
can be obtained from alternative lending sources under a mutually acceptable
structure and terms. The Company is also discussing with other potential lenders
the possibility of providing long-term financing.
The above agreements, which were effective October 1, 1999 replaced the
previously existing $50.0 million securitization facility and amended the
previously existing $29.9 million revolving credit facility (which included
letters of credit of $8.4 million) to (i) reduce the maximum availability to
$25.5 million, including existing letters of credit of $5.0 million, (ii)
eliminate certain financial covenants and (iii) add events of default, including
a provision enabling the lenders' syndicate to increase the stated interest rate
and/or accelerate the maturity date of the facility if, in their sole
discretion, the lenders are not satisfied with the Company's business operations
or prospects. Outstanding amounts under the Revolving Credit 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 its subsidiaries. The new
agreements also contain terms that increase the weighted average interest rate
payable on the outstanding balances during the period, exclusive of related fees
and expenses and not including a higher default rate, to approximately 11.2% per
annum, compared to approximately 7.1% per annum under the old agreements.
The Receivable Facility bears interest at Fleet's base (prime) rate
plus 2.0% per annum, which was 10.5% as of December 31, 1999, while the
Revolving Credit Facility bore interest at base plus 2.5% per annum in October
1999, base plus 4.0% per annum in November 1999 and base plus 5.0% per annum
thereafter. As of December 31, 1999, the Revolving Credit Facility bore interest
of 13.5%. In addition, the Company paid an initial fee related to the Receivable
Facility that is approximately equal to another 1.0% per annum for the
three-month term of that loan plus legal fees and other expenses related to both
facilities totaling approximately $0.3 million. Due to the modification of terms
discussed above, the Company recorded a $1.4 million expense in the fourth
quarter of 1999 from the acceleration of the amortization of certain loan fees,
offset by a gain of $0.3 million from the sale of the interest rate hedge.
As of December 31, 1999, the Company had outstanding borrowings under
the Revolving Credit Facility of $14.9 million bearing interest at an annualized
rate of 13.5%, and outstanding borrowings under the Receivable Facility of $42.2
million bearing interest at an annualized rate of 10.5%.
53
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. DEBT (CONTINUED)
The previously existing Securitization Facility, which was terminated
October 1, 1999, was a financing arrangement under which the Company could sell
up to a $50.0 million secured interest in its eligible accounts receivable to
EagleFunding Capital Corporation ("Eagle"), which used the receivables to secure
A-1 rated commercial paper. The Company's cost for this arrangement was
classified as interest expense and was based on the interest paid by Eagle on
the balance of the outstanding commercial paper, which in turn was determined by
prevailing interest rates in the commercial paper market and was approximately
5.65% as of December 31, 1998. As of December 31, 1998, a $44.8 million interest
in the Company's uncollected accounts receivable had been sold under this
agreement and was excluded from the accounts receivable balance presented in the
Company's Consolidated Financial Statements.
In order to remain in compliance with certain covenants in the
Revolving Credit Facility, and to reduce the cash impact of scheduled payments
under its subordinated acquisition debt, during 1999 the Company had negotiated
extensions of the payment dates and modified the interest rates and other terms
of certain of its acquisition notes payable. As of August 12, 1999, the Company
had not made all of the scheduled payments due and, as a result, an event of
default occurred on this debt having total principal outstanding of $9.2 million
as of September 30, 1999, but subsequently reduced to $7.0 million as of
December 31, 1999 in connection with the Company's sale of certain operations.
The terms of these notes payable, which are subordinated to the Revolving Credit
Facility, allow the payees to accelerate terms of payment. Acceleration of this
debt requires prior written notice to the Company by the various payees, which
has been received from three payees as of December 31, 1999.
In addition to the indebtedness discussed above, as of December 31,
1999 the Company had bank standby letters of credit outstanding in the aggregate
amount of $5.0 million (which are issued as part of the Revolving Credit
Facility, although reduction of letters of credit does not currently result in
additional borrowing capacity) to secure the pre-1999 portion ($4.8 million) of
the workers' compensation obligations recorded as a current liability on the
Company's consolidated balance sheet.
During April 1999 the Company received $1.6 million from a financial
institution in connection with a sales/leaseback transaction, which amount
exceeded, at the time of the transaction, the net book value of the property and
equipment previously purchased by the Company. The unrealized gain is being
deferred and amortized over the life of the assets. The capital lease obligation
is repayable over three years at an imputed interest rate of approximately
10.0%.
Senior Notes: On February 21, 1997, following the Reorganization, the
Company entered into senior subordinated note agreements ("Senior Notes") with
two investors (the "Senior Note Holders") for borrowings totaling $25 million,
with payments of $10 million in March 2001 and $15 million in February 2002, and
quarterly interest payments at 11% per annum through February 1999 and 12.5%
thereafter. The Senior Notes were repaid in full from the proceeds of the
Offering. The Company also issued to the Senior Note Holders warrants to
purchase 786,517 shares of common stock at $.015 per share to be exercised at
the discretion of the Senior Note Holders and expiring five years from issuance
(the "A warrants"). These warrants had not been exercised as of December 31,
1999.
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. As of December 31, 1999, 29,575 of the B warrants had not been
exercised and expire in February 2002. The terms for the release of the
remaining warrants to purchase 392,896 shares (the "C warrants") provided for
their release to either (i) 100% to the Senior Note Holders, (ii) 100% to the
then existing Company shareholders or (iii) 50% to each group, depending on
certain conditions including the market valuation, over the two year period
ended February 21, 1999, of the A warrants. One hundred percent of the C
warrants were released to the Senior Note Holders. The warrants in escrow are
exercisable any time after being released from escrow and expire in February
2002.
The A, B and C warrants all contained a put right, 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 right was terminated as a result of the Company's
October 1997 Offering.
54
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. DEBT (CONTINUED)
The proceeds of the Senior Notes were recorded as a liability. The fair
value of the A, B and C warrants was recorded as debt discount, which was a
contra-account to the Senior Notes liability and was 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 $0.7 million) of
$2.6 million was recorded related to these Senior Notes for the year ended
December 31, 1997.
The B and C warrants were designed to provide the Senior Note Holders
with additional consideration for their $25 million investment if certain
performance criteria (in the case of the B warrants) were not met or if certain
triggering events (in the case of the C warrants) did not occur. Therefore, the
value of the B and C warrants was, 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 included
the fair value of the B and C warrants. The original debt discount was $18.5
million, based on the fair value of the A, B and C warrants as 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 $18.5 million at the date of issuance was classified as a liability which was
adjusted to fair value at each reporting date until the put option terminated.
This liability was adjusted to a fair value of $20.4 million as of October 24,
1997, with the cumulative adjustment of $1.8 million included in non-operating
expense for the year ended December 31, 1997. The fair value of the warrants
recorded as of October 24, 1997 was equal to the price of the Company's shares
sold to the public at that time (see Note 1), less the warrant exercise price.
As a result of the termination of the put right at the time of the Company's
October 1997 Offering, the final put warrants liability was reclassified from
debt to additional paid-in capital at that time.
The Company incurred $2.4 million of costs related to the issuance of
the Senior Notes, which were recorded in other non-current assets and amortized
to interest expense using the interest method. Amortization of $0.2 million was
recorded for the year ended December 31, 1997.
As a result of the early repayment of the Senior Notes in October 1997,
the Company recorded an extraordinary loss of $13.4 million (net of a $6.6
million income tax benefit). This loss consists of the unamortized debt discount
and the unamortized debt issuance costs related to the Senior Notes. See Note 6
regarding the 1998 extraordinary expense of $1.4 million recognized by the
Company which represents the reduction of the 1997 income tax benefit, arising
from the final valuation for income tax purposes of the deduction allowable to
the Company related to the unamortized debt discount.
55
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. DEBT (CONTINUED)
Long-Term Debt :
As of December 31,
------------------
1999 1998
---- ----
(Dollars in thousands)
Obligations under capital leases. See
discussion below.............................................. $ 3,068 $ 2,217
Acquisition notes payable, subordinated to the
Revolving Credit Facility and payable over three years
at imputed interest rates ranging from 8.75% to
12.0% per annum. See Note 4................................... 5,723 9,156
Mortgage notes payable in monthly installments and
collateralized by buildings and land. The interest
rates range from 8.0% to 9.5% per annum.......................... 570 4,229
Notes payable in monthly installments and
collateralized by property and equipment. The
interest rates range from 8.25% to 13.7% per annum............ 160 119
Insurance premium note payable................................. 216 318
--------- ----------
Long-term debt................................................. 9,737 16,039
Less current maturities of long-term debt...................... 7,437 6,782
--------- ----------
Long-term debt, less current maturities........................ $ 2,300 $ 9,257
========= ==========
The Company had an acquisition note payable, subordinated to the
Revolving Credit Facility, due to a shareholder of the Company, which is not
included in the table above, with an outstanding balance of $1.2 million and
$1.3 million as of December 31, 1999 and 1998, respectively. See Note 12.
The aggregate annual principal payments on long-term debt (including
obligations under capital leases) are as follows as of December 31, 1999:
Year (Dollars in thousands)
----
2000.......................................... $ 7,437
2001.......................................... 1,454
2002.......................................... 717
2003.......................................... 45
2004.......................................... 21
Thereafter.................................... 63
---------
$ 9,737
=========
Capital Leases: From December 1996 to December 1997, the Company
occupied an office building for its corporate office and support center under a
15-year capital lease agreement with an unrelated party, having annual lease
payments of approximately $0.6 million. The Company had an option to buy the
building during the first two years of the lease term and in December 1997 it
exercised that option. Prior to that purchase, the capitalized costs relating to
this lease were equal to the purchase option price. The building was
subsequently sold on December 29, 1999. See Note 3 to the Company's Consolidated
Financial Statements.
Furniture, fixtures, equipment and computer software held under capital
leases and included in property and equipment were $2.1 million and $2.2
million, net of accumulated depreciation of $1.1 million and $0.9 million, as of
56
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. DEBT (CONTINUED)
December 31, 1999 and 1998, respectively.
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, 1999:
Year (Dollars in thousands)
----
2000............................................ $ 1,579
2001............................................ 1,485
2002............................................ 397
2003............................................ 11
Thereafter...................................... --
-----------
Total future minimum lease payments............. 3,472
Less amount representing interest............... (404)
-----------
Present value of net minimum lease payments..... $ 3,068
===========
NOTE 8. 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 2000 and 2005. Also, certain equipment used in the Company's
operations is leased under operating leases. The following is a summary of fixed
minimum lease commitments required under all noncancellable operating leases for
the years ended after December 31, 1999:
Year (Dollars in thousands)
----
2000........................... $ 3,194
2001........................... 2,597
2002........................... 1,782
2003........................... 1,222
2004........................... 715
Thereafter..................... 254
----------
Total.......................... $ 9,764
===========
Rent expense, including equipment rental, was $3.4 million, $3.4
million, and $2.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
As a result of the corporate support center workforce reductions and
the anticipated disposition of Synadyne, the corporate support center building
was put on the market for sale in September 1999 and was sold in an arms-length
transaction to an unaffiliated third party, effective December 29, 1999. The
buyer agreed to lease the building back to the Company for four months, ending
April 30, 2000. In February 2000, the Company leased a total of 32,553 square
feet as its new corporate support center in an office building in Delray Beach,
Florida, with an anticipated move-in date of May 1, 2000. The total obligation
for the Company's 64-month lease commitment is $2.2 million.
Franchise Agreements: The Company had granted 27, 24 and 55 Tandem
franchises (some covering multiple locations) which remained outstanding as of
December 31, 1999, 1998 and 1997, 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.
57
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
During February 1998 and in connection with the Company's acquisition
of certain franchise rights (see Note 4), the Company granted one of the
principals of the sellers (and a minority shareholder in the Company) the
exclusive option to purchase franchise rights in five specifically identified
geographic areas. These options expire at various times from 12 to 42 months
after the February 1998 acquisition date; however, as of December 31, 1999, none
of these options had been exercised.
The following tables set forth various revenues from staffing
franchises, as well as staffing franchise offices opened and purchased by the
Company, and the number of Company owned staffing locations. There are no other
franchising activities.
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
PEO services....................................... $ 18,009 $ 25,199 $ 34,642
Royalties.......................................... 7,109 7,352 6,997
Payroll funding services........................... 70 327 713
Initial franchise fees............................. -- -- 15
Other.............................................. -- -- 15
---------- ---------- ---------
Total revenues.................................. $ 25,188 $ 32,878 $ 42,382
========== ========== =========
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Number of franchise locations, beginning................. 43 65 95
New franchise locations.................................. 14 10 6
Franchises closed/bought out............................. (7) (15) (23)
Franchises converted to
Company-owned locations................................ -- (17) (13)
----- --- ---
Number of franchise locations, ending.................... 50 43 65
Number of Company-owned locations........................ 98 111 87
----- ----- ---
Total locations........................................ 148 154 152
=== === ===
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 margin on these services is approximately 0.3% 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 margin on these services is 100% of the related revenues.
Buyouts are early terminations of franchise agreements allowed by the
Company in order to enable the Company to develop the related territories. At
the time the Company agrees to terminate a franchise agreement, it receives an
initial buyout payment from the former franchisee. The Company continues to
receive payments from the former franchisees based on a percentage of the gross
revenues of the formerly franchised locations for up to three years after the
termination dates. The initial buyout payment, as well as subsequent payments
from the former franchisees, are included in total royalties shown above.
Shareholder distribution: Effective February 21, 1997, the Company
acquired all of the outstanding capital stock of nine companies under common
ownership and management, in exchange for shares of the Company's common stock
and distribution of previously undistributed taxable earnings of those nine
companies (the "Reorganization"). Such distribution, supplemented by an
additional distribution made in September 1998, is subject to adjustment based
upon the final determination of taxable income through February 21, 1997.
Although the Company has completed and filed its Federal and
58
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
state tax returns for all periods through February 21, 1997, further cash
distributions may be required in the event the Company's taxable income for any
period through February 21, 1997 is adjusted due to audits or any other reason -
see Note 6.
Litigation: On September 24, 1998, an action was commenced against the
Company for breach of contract in connection with a purported services
arrangement, seeking damages of approximately $0.6 million. The Company filed an
answer denying any breach of contract and moved to transfer the action to
Florida. The motion for removal was granted and the case was transferred to the
United States District Court, Southern District of Florida, Fort Lauderdale
division. In November, 1999, the court entered an order granting the Company's
motion to dismiss the complaint and the plaintiff has not appealed that order
and the time to appeal has expired.
On November 12, 1997, an action was commenced against the Company,
alleging state law claims of pregnancy/maternity discrimination and violations
of the Family and Medical Leave Act as a result of an alleged demotion following
the plaintiff's return from maternity leave. The complaint also asserted a claim
for unpaid overtime based on both state law and the Fair Labor Standards Act.
The plaintiff and the Company settled this case in the third quarter of 1999,
with no material impact on the Company's past or future financial condition or
results of operations.
Unemployment taxes: Federal and state unemployment taxes represent a
significant component of the Company's cost of revenues. State unemployment
taxes are determined as a percentage of covered wages. Such percentages are
determined in accordance with the laws of each state and usually take into
account the unemployment history of the Company's employees in that state. The
Company has realized reductions in its state unemployment tax expense as a
result of changes in its organizational structure from time to time. Although
the Company believes that these expense reductions were achieved in compliance
with applicable laws, taxing authorities of a particular state have recently
indicated that they may challenge these reductions. The Company is unable, at
this time, to reasonably estimate the effect of such a challenge by this state
or by other states.
The Company has made arrangements with several states to pay quarterly
unemployment tax payments originally due in July and October, 1999 in monthly
installments over one year, bearing interest at rates ranging from 12.0% to
24.0% per annum. The unpaid balance, included in accrued payroll taxes on the
Company's December 31, 1999 consolidated balance sheet was approximately $0.7
million.
Federal employment tax reporting penalties: During September 1999, the
Company was notified by the IRS of its intent to assess penalties of $500,000
related to W-2s issued by the Company for 1997. The Company has requested an
abatement of the penalty and does not currently expect that the penalty
ultimately charged will exceed $300,000 which was included in selling, general
and administrative expenses in 1999, and is reflected as a current liability on
the December 31, 1999 consolidated balance sheet. There can be no assurance that
the Company will not be required to ultimately pay a higher penalty in
connection with this matter.
Unclaimed property audit: A state in which the Company conducts a
significant portion of its operations has begun an audit of the Company's
compliance with escheat (unclaimed property) statutes in the near future. The
applicable state escheat laws cover a wide range of situations and property
types and have a ten-year statute of limitations. In addition, it is common for
states to share information in this area. At this time, the Company is unable to
estimate any liability that may result from this audit and has made no
provisions in its financial statements related to this matter.
INS audits: The United States Immigration and Naturalization Service
("INS") had begun audits at several of the Company's locations as to the
Company's compliance in obtaining the necessary documentation before employing
certain individuals. The Company paid a $150,000 penalty, which was charged to
selling, general and administrative expenses during 1999.
59
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Workers' compensation: During 1997 and 1998, the Company's workers'
compensation expense for claims was effectively capped at a contractually agreed
percentage of payroll, which the Company's expense was limited to, since the
estimated ultimate cost of the actual claims experience was greater than the
cap. Effective January 1, 1999, the cap was increased to 2.7% of initially
estimated 1999 payroll, reflecting the inclusion of general and automobile
liability coverage as well as an adjustment based on the changing business mix
of the Company. The 1999 cap rate was subject to an absolute dollar minimum, and
as a result of lower than initially estimated payroll in 1999, due to the
Restructuring and other events, the ultimate 1999 cap rate amounted to
approximately 3.5% of actual payroll. For the year ended December 31, 1999, the
estimated ultimate cost of the actual claims experience was used as the basis of
the Company's expense related to 1999 claims experience, since it was
approximately $1.7 million less than the cap (3.5% of payroll). The estimated
ultimate cost of the 1999 claims experience was determined based on information
from an independent third-party administrator employed by the Company plus an
allowance for claims incurred but not reported, based on prior experience and
other relevant data.
The Company routinely adjusts on an ongoing basis the accruals made in
prior years for workers' compensation claims and expenses, based on updated
information from its insurance carriers, its independent third-party
administrator and its own analysis. These adjustments are included as a
component of cost of sales in the period in which they are made.
Employment agreements: As of December 31, 1999, the Company had certain
obligations under employment agreements it had entered into with its former
Chief Executive Officer ("CEO") and ten other officers. Under the terms of those
agreements, in the event that the Company terminates the employment of any of
those officers without cause or the officer resigns for good reason, the
terminated officer will receive, among other things, severance compensation,
including a portion (ranging from three months to two years) of the officer's
annual base salary and bonus. In addition, all incentive stock options held by
such employees would become immediately exercisable. More substantial severance
provisions apply if any of those officers are terminated within two years (three
years for the CEO) after the occurrence of a "change of control", as defined in
the employment agreements. In February 1999, August 1999 and November 1999,
three of the ten officers referred to above resigned their positions, which
resulted in the Company's agreement to pay two of those officers' salaries for
one year and one of those officers' salary for six months, in exchange for their
agreement, among other things, to not compete with the Company during that
period. As of December 31, 1999, the Company has paid $0.3 million in severance
costs to those officers.
During the third quarter of 1999, the Company entered into employment
agreements with six senior Tandem operating executives, which included
provisions obligating the Company to pay severance equal to six months salary
under certain conditions. On February 7, 2000, the Company entered into an
employment agreement with the Company's new CEO. Under the terms of this
agreement, in the event that the Company terminates the employment of this
officer without cause or the officer resigns for good reason, the terminated
officer will receive, among other things, severance compensation, including two
years of the officer's annual base salary and bonus. In addition, all incentive
stock options held by such employee would become immediately exercisable. More
substantial severance provisions apply if this officer is terminated within
three years after the occurrence of a "change of control", as defined in the
employment agreement.
Employee retention: The Company had entered into agreements obligating
it to pay retention bonuses to employees of the Synadyne division on April 15,
2000 if they remained employed with the Company and Synadyne was not sold by
March 31, 2000. The Company will record its $0.3 million liability under these
agreements in the quarter ending July 2, 2000.
Consulting contract: In May 1999, the Company engaged Crossroads
Capital Partners, LLC ("Crossroads"), a consulting firm based in Newport Beach,
California, to review the Company's existing business plan and make
recommendations for adjustments to strategy as well as financial and operational
improvements. In June 1999, the Crossroads engagement was further extended to
include its assistance in verifying the Company's cash flow projections and
requiring Crossroads to report to management and the lenders' syndicate. In July
1999, the engagement was further modified to add additional services, including
working with management to develop the Restructuring plan and a revised business
plan based on the restructured company (see Note 2), assisting in extending the
existing Revolving Credit Facility and Securitization Facility, arranging for
new financing, and periodically reporting to the Company's Board of Directors
and lenders' syndicate. In August
60
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
1999, a representative of Crossroads was appointed as the Company's interim
chief operating officer and the interim President of the Tandem division. The
Company has paid or accrued $1.1 million for services rendered by Crossroads
through December 31, 1999. This amount was included in the restructuring charge
recorded by the Company, and the Company also expects to record restructuring
charges in 2000 for services relating to Restructuring activities to be rendered
by Crossroads during that period (see Note 2). The Company's contract with
Crossroads, which originally expired on October 31, 1999 but is being extended
on a month by month basis, provides for a monthly fee of $125,000 plus expenses.
In addition, the Company is obligated to compensate Crossroads for financing
sources found by it, and subject to closing on such financing, a fee of one
percent of senior financing obtained and four percent of subordinated financing
obtained, subject to a $150,000 and $300,000 minimum fee, respectively.
Interest Rate Collar Agreement: In February 1998, the Company entered
into an interest rate collar agreement with Fleet National Bank, formerly
BankBoston, N.A., which involved the exchange of 30 day floating rate interest
payments periodically over the life of the agreement without the exchange of the
underlying principal amounts. The differential to be paid or received was
accrued as interest rates changed and was recognized over the life of the
agreement as an adjustment to interest expense. This derivative financial
instrument was being used by the Company to reduce interest rate volatility and
the associated risks arising from the floating rate structure of its Revolving
Credit Facility and its Securitization Facility, which was terminated in 1999,
and was not held or issued for trading purposes.
On July 27, 1998, the Company redesignated a portion of this hedge, no
longer applicable to its Revolving Credit Facility, to anticipated transactions
under the Securitization Facility. The Company adjusted the carrying value of
the redesigned portion of the hedge from zero to its fair value based primarily
on information from Fleet National Bank resulting in a $0.4 million liability as
of December 31, 1998 which was included in other non-current liabilities on the
Company's balance sheet. The associated loss was deferred and included in other
assets. During the second quarter of 1999, the hedge agreement was sold for gain
of $250,000, which gain was deferred over the remaining life of the designated
loans. As part of the modification of the Revolving Credit Facility and the
termination of the Securitization Facility on October 1, 1999, the Company
recognized the unamortized portion of the deferred $250,000 gain, which
represented the amount of the remaining deferred gain at the date of the
modification - see Note 7 to the Company's Consolidated Financial Statements.
In accordance with the guidance of SFAS No. 80, "Accounting for Futures
Contracts", the Company had identified net proceeds from the Company's weekly
sale of receivables under the Securitization Facility as anticipated
transactions which would vary with high correlation to changes in the 30 day
LIBOR interest rates that were the subject of the Company's interest rate collar
agreement. Accordingly, the collar fixed within a certain range the variability
in those net proceeds and was accounted for as a hedge in accordance with SFAS
No. 80.
Synadyne Operations. In connection with the sale of Synadyne, the
Company is obligated to provide certain support services to the buyer, including
accounting and information systems services. In addition, the Company has
contracted with the buyer to provide PEO services to the Company and its
employees.
NOTE 9. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
For the years ended December 31, 1999, 1998 and 1997, approximately
21%, 20% and 19%, respectively, of the Company's revenues were from the
provision of services to customers in the Chicago, Illinois area. For each of
the years ended December 31, 1999, 1998 and 1997, approximately 28%, 27% and 29%
of the Company's revenues were from the provision of services to customers in
the South Florida area.
For the year ended December 31, 1999, revenues representing
approximately 9% and 25% of total revenues of the Company and the Synadyne
segment, respectively, were from PEO services performed for individual insurance
agent offices under a preferred provider designation previously granted to the
Company on a regional basis by the agents' common corporate employer. In 1999,
the corporate employer began granting that designation on a national basis only
and the Company was
61
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK (CONTINUED)
granted that designation for 1999; however, beginning in 2000, the corporate
employer stopped evaluating PEO providers for its independent agents.
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 due to diversification of
the accounts based on geography and industry as well as the lack of material
concentration of balances due from any one customer.
NOTE 10. EMPLOYEE BENEFIT PLANS
The Company had a 401(k) single-employer retirement plan and two 413(c)
multiple-employer retirement plans covering all employees except for (a)
employees under the age of 21 for all plans, (b) employees with less than one
year of service for all plans, (c) certain temporary employees for the 413(c)
plans and (d) all highly compensated employees as defined by the Internal
Revenue Code for the 401(k) plan and certain highly compensated employees for
the 413(c) plans. One of the 413(c) plans was established for use by
not-for-profit employers only, effective January 1, 1996. On February 28, 1997,
the 401(k) plan and the 413(c) plan established for use by not-for-profit
employers were made inactive by the Company. All participating employees were
enrolled in the currently active 413(c) plan for future contributions and all
previously contributed net assets remained in the inactive plans for eventual
distribution to the employees upon retirement or other qualifying event.
Eligible employees who participate contribute to the plan an amount up
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, limited to the first 6% of each participant's salary contributed
by the participants. This matching policy may vary in the case of PEO employees,
although all matching amounts related to PEO employees are recovered by the
Company in its charges to the respective PEO customers. Matching contributions
by the Company for its employees, which includes PEO employees, were $0.6
million, $0.5 million and $0.5 million for the years ended December 31, 1999,
1998 and 1997, respectively.
Pursuant to the terms of a now inactive 401(k) plan (containing
previous contributions still managed by the Company), highly compensated
employees were not eligible to participate; however, as a result of
administrative errors in 1996 and prior years, some highly compensated employees
were inadvertently permitted to make elective salary deferral contributions. The
Company obtained IRS approval regarding the proposed correction under the
Voluntary Closing Agreement Program ("VCAP"). The Company paid an insignificant
penalty associated with this VCAP correction, and believes that this matter will
have no future material impact on its financial condition or results of
operations.
NOTE 11. 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 those shareholders and their families, were placed in a voting trust,
with a term of ten years. On October 24, 1997, at the time of the Offering,
700,000 shares were released from the voting trust and sold to the public. On
May 12, 1998, as the result of their exercise of certain warrants (see Note 7)
the Company issued 124,671 shares to certain of those shareholders and their
families, which were immediately deposited into the voting trust. During 1999,
these shareholders and their families (a) purchased an additional 50,000 shares
in open market transactions which were deposited into the voting trust, and (b)
sold an aggregate of 237,327 shares in open market transactions.
Under the terms of the voting trust and agreements among the Company,
the Company's shareholders at the time the trust was established and the Senior
Note Holders, the 4,003,266 shares of common stock currently in the voting
trust, which represent approximately 46.2% of the common stock of the Company as
of December 31, 1999, will be voted in favor of the
62
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SHAREHOLDERS' EQUITY (CONTINUED)
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
Senior Note Holders, and two independent directors nominated by the vote of both
directors nominated by the Senior Note Holders and at least two of the directors
nominated by the CEO of the Company. As a result of the warrants to purchase
392,896 shares, as discussed in Note 7, being released from escrow to the Senior
Note Holders, the number of directors may be increased by two, with the
additional directors nominated by the Senior Note Holders. 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 Company's current CEO.
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 become vested and exercisable at 25% per
year, unless special terms are established at the time the option is granted. On
January 1, 1996, the Subsidiary granted options to purchase 815,860 shares of
its 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 (i)
the number of outstanding options to 318,568, corresponding to shares of its
common stock, and (ii) the exercise price of such options to $10.38 per share.
The ratios utilized in such conversion were determined by an independent
appraiser as of the date of the Subsidiary's initial grant.
The total number of shares of common stock reserved for issuance under
the stock option plan is 2,000,000, as agreed to by the Company's Board of
Directors in April 1999 and approved by the Company's shareholders at their May
1999 annual meeting. As of December 31, 1999, the status of all outstanding
option grants was as follows:
Grant Date Options Granted Options Outstanding Exercisable Options Exercise Price
---------- --------------- ------------------- ------------------- --------------
January 1996................ 318,568 140,096 105,072 $10.38
March 1997.................. 221,473 60,396 30,198 $11.42
September 1997.............. 116,933 56,795 28,398 $15.00
October 1997................ 1,625 1,625 813 $14.75
December 1997............... 2,238 2,238 1,119 $11.75
January 1998.................. 265,646 126,471 83,702 $13.88
March 1998.................. 71,700 22,919 5,730 $18.88
May 1998.................... 18,375 5,000 1,250 $19.50 to $20.13
June 1998...................... 4,432 4,432 1,108 $16.75
August 1998.................. 75,000 75,000 18,750 $10.38 to $13.88
August 1998.................. 52,500 42,500 10,625 $6.00 to $7.25
November 1998.............. 386,318 290,381 72,594 $6.00
January 1999.................. 72,500 72,500 - $6.00
March 1999.................... 121,825 85,725 67,324 $4.13
May 1999 ..................... 98,343 65,123 - $4.56
November 1999............... 20,000 20,000 - $1.00
---------- --------
1,071,201 426,683
========== =======
The above exercise prices were equal to the market price of the shares
at the grant date, except the exercise prices for the August 1998 grant of
75,000 options, which represented the cancellation of a May 1998 grant and
reissuance at exercise prices in excess of the market price of the shares at the
new grant date. The exercise price of options granted prior to the Offering are
based on the fair market value of the Company's common stock, as determined by
an independent appraiser as of
63
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SHAREHOLDERS' EQUITY (CONTINUED)
the date of the grant. The above options vest over a four year period from the
date of issuance, except 77,221 and 95,675 options issued in January 1998 and
March 1999, respectively, which vested immediately upon grant.
The weighted average remaining contractual life of the above options
was 7.2, 8.9 and 8.7 years as of December 31, 1999, 1998 and 1997, respectively.
The weighted average exercise price was $8.70 and $10.59 per share as of
December 31, 1999 and 1998, respectively. No options had been exercised as of
December 31, 1999.
The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") in accounting for its stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the fair value of the underlying stock on the grant date, no compensation
is recognized. However SFAS No. 123, "Accounting for Stock-based Compensation",
requires presentation of pro forma net income (loss) as if the Company had
accounted for its employee stock options under the fair value method. The
Company has estimated the fair value of stock options granted to employees prior
to the Offering to be from $2.20 to $3.41 per option as of the respective grant
dates, using the Black-Scholes option pricing model with the following
assumptions: risk free interest rate from 6.12% to 6.65%; 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 options granted
subsequent to the Offering through December 31, 1999, the Company has estimated
the fair value of stock options granted to employees to be from $0.31 to $6.21
per option as of the respective grant dates, using the Black-Scholes option
pricing model with the following assumptions: risk free interest rate from 5.22%
to 6.65%; an anticipated volatility factor of 93.9% to 101.2%; 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 unaudited pro
forma loss would have been $31.3 million ($3.62 basic and diluted loss per
share) for the year ended December 31, 1999. The Company's proforma income
before extraordinary item would have been $4.3 million ($0.50 basic and $0.44
diluted earnings per share) for the year ended December 31, 1998, and $0.2
million ($0.04 basic and $0.03 diluted earnings per share) for the year ended
December 31, 1997.
The March 1997 and January 1998 grants include 8,126 and 6,000 options,
respectively, issued in connection with acquisitions - see Note 4.
During March 2000, the Company granted options to purchase 873,038
shares of the Company's common stock, vesting over a 4 year period from the
grant date and with an exercise price of $2.125 per share based on the market
price of the shares at the grant date.
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.
NOTE 12. RELATED PARTY TRANSACTIONS
Revenues: Certain shareholders of the Company owned franchises from
which the Company received the following revenues in the periods indicated:
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Royalties.......................... $ 1,235 $ 1,289 $ 194
PEO services....................... - - 349
---------- ----------- ----------
Included in net revenues........... $ 1,235 $ 1,289 $ 543
========== =========== ==========
These franchises owed the Company $368,000, $100,000 and $92,000 at
December 31, 1999, 1998 and 1997 respectively, primarily related to the above
items.
64
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
Effective August 31, 1998, certain Company shareholders owning
franchises with a total of four locations entered into a buyout agreement with
the Company. Buyouts are early terminations of franchise agreements entered into
by the Company in order to allow the Company to develop the related territories.
At the time of the buyout, the Company received an initial payment from the
former franchisee and was to continue to receive quarterly payments from the
former franchisee based on the gross revenues of the formerly franchised
locations for two years after the termination date, which was generally
consistent with the terms of buyout agreements between the Company and unrelated
third parties. Effective March 31, 1999, the Company received final payment from
the former franchisee in consideration of the elimination of the equivalent of
the last five months of payments due under the initial agreement, generally
consistent with the terms of similar agreements between the Company and
unrelated third parties. The initial buyout payment, as well as subsequent
payments under the buyout agreement, are included in total royalties included in
the table above.
Receivables and interest income: During 1997 the Company had notes and
advances receivable due on demand from shareholders and affiliates, although
there were no outstanding balances due as of December 31, 1997. The notes had an
interest rate of 10% per annum and the advances were non-interest bearing. Total
interest income from notes receivable and other amounts due from related parties
was $66,000 for the year ended December 31, 1997. There were no amounts due from
those related parties as of December 31, 1999 or 1998.
Long-term debt and interest expense: Effective February 16, 1998, the
Company purchased certain staffing locations and the related franchise rights
from certain Company shareholders. The $6.9 million purchase price included the
issuance of a $1.7 million note bearing interest at 7.25% per annum and payable
quarterly over three years. Effective February 1, 1999, the note was
renegotiated so that the remaining principal balance of $1.3 million would bear
interest at 8.50% per annum and would be payable in monthly installments
totaling $0.3 million in the first year and $0.6 million in the second year,
plus a $0.4 million payment at the end of the two year term. As discussed in
Note 7, as of August 12, 1999, the Company had not made the renegotiated
payments on this and its other subordinated acquisition notes, and, as a result,
at that time was in default of this note. Furthermore, the payee has provided
the required notice to the Company accelerating the entire balance due, which as
a result is classified as current in the Company's consolidated financial
statements as of December 31, 1999.
See Note 4 for the details of acquisition notes payable to related
parties as of December 31, 1999 and 1998, respectively. Total interest expense
for long-term debt to related parties was $196,000, $113,000 and $547,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
Other transactions: During 1997, the Company purchased certain real
estate from SMSB for $840,000, such assets having a net book value as reflected
on SMSB's financial statements of $608,000 at the time of purchase.
A law firm owned by a shareholder of the Company received legal fees
for services rendered to the Company during 1999, 1998 and 1997 in the
approximate amounts of $6,000, $388,000 and $148,000, respectively.
The Company employed one of its minority shareholders (a member of the
S group) in a non-management position at an annual salary of approximately
$40,000 during 1998 and 1997. This arrangement was discontinued in March 1998.
Since July 1997, the Company has leased on a month-to-month basis a
portion of a warehouse controlled by the Company's former CEO for approximately
$2,000 per month. Effective February 1999, the Company entered into a three year
staffing office lease with a company controlled by the former CEO, with rental
payments of approximately $2,000 per month.
As a result of the Company's 1996 acquisition of certain franchise
rights (see Note 4), the Company subsequently leased from one of the sellers, a
minority shareholder of the Company, four industrial staffing offices, for
rental payments of $49,000 in 1997. The Company made an additional payment of
$71,000 to that seller shareholder in 1997 in order to terminate the leases and
satisfy the Company's remaining liability.
65
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
The consolidated statements of cash flows do not include the following
noncash investing and financing activities, except for the net cash paid for
acquisitions:
Years Ended December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Acquisitions:
Tangible and intangible assets
acquired ............................ $ 290 $ 41,913 $ 25,651
Liabilities assumed ................... -- (1,794) (186)
Debt issued ........................... (77) (11,575) (3,517)
Common stock issued ................... -- (775) --
-------------- -------------- --------
Net cash paid for acquisitions ............ $ 213 $ 27,769 $ 21,948
============== ============== ========
Increase (decrease) of deferred loss
on interest rate collar agreement ....... $ (413) $ 413 $ --
============== ============== ========
Decrease in goodwill and long-term
debt, due to earnout adjustments ........ $ -- $ 539 $ --
============== ============== ========
Decrease in accrued interest due to
inclusion in renegotiated long-term debt $ 448 $ -- $ --
============== ============== ========
Debt forgiven in connection with sale of
assets to noteholder .................. $ 2,132 $ -- $ --
============== ============== ========
Increase in other current assets and notes
payable, due to insurance financing ..... $ 503 $ 356 $ --
============== ============== ========
Increase in long-term debt, primarily
due to sale/leaseback and capital leases $ 2,017 $ 38 $ 813
============== ============== ========
Refinancing of capitalized leases and
mortgages on buildings and land ......... $ -- $ -- $ 4,339
============== ============== ========
Reclassification of put warrants
Liability to additional paid-in
capital ............................... $ -- $ -- $ 20,384
============== ============== ========
Shareholders' contribution to additional
paid-in capital in connection
with the Reorganization ............... $ -- $ -- $ 4,300
============== ============== ========
Discontinuance of consolidation of
SMSB-owned building and related
mortgage debt ......................... $ -- $ -- $ 1,665
============== ============== ========
66
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EARNINGS (LOSS) PER SHARE
Pro forma net loss for 1997 includes adjustments made to historical net
loss for pro forma income taxes computed as if the Company had been fully
subject to federal and applicable state income taxes. The Company calculates pro
forma earnings per share in accordance with the requirements of SFAS No. 128,
"Earnings Per Share". The historical (for 1999 and 1998) and pro forma (for
1997) weighted average shares outstanding used to calculate pro forma basic and
diluted earnings (loss) per share were calculated as follows:
Years Ended December 31,
----------------------------------------------------
1999 1998 1997
---- ---- ----
(Historical) (Historical) (Pro forma)
Shares issued in connection with the Reorganization 5,448,788 5,448,788 5,448,788
Equivalent shares represented by shares
of common stock of certain Subsidiaries
purchased in the Reorganization ................ -- -- 46,211
Shares sold by the Company in the October 1997
Offering (see Note 1) ........................ 3,000,000 3,000,000 560,440
Shares issued in connection with a February 1998
acquisition (see Note 4) ....................... 57,809 52,886 --
Warrants exercised in May 1998 (see Notes 7 and 11) 151,316 101,847 --
--------- --------- ---------
Weighted average common shares - basic ............ 8,657,913 8,603,521 6,055,439
Outstanding options and warrants to purchase common
stock-remaining shares after assumed repurchase
using proceeds from exercise ................... -- 1,315,971 1,264,923
--------- --------- ---------
Weighted average common shares - diluted .......... 8,657,913 9,919,492 7,320,362
========= ========= =========
Certain of the outstanding options and warrants to purchase common
stock were anti-dilutive for certain of the periods presented above and
accordingly were excluded from the calculation of diluted weighted average
common shares for those periods, including the equivalent of 1,205,091 shares
excluded for the year ended December 31, 1999.
NOTE 15. OPERATING SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. The
Company's chief operating decision maker is its CEO. The operating segments are
managed separately because each operating segment represents a strategic
business unit that offers different products and serves different markets. The
Company evaluates performance based on stand-alone operating segment income,
which does not include any allocation of corporate support center costs or
income taxes (other than employment tax credits).
The Company's reportable operating segments are (i) the Tandem segment,
which derives revenues from recruiting, training and deployment of temporary
industrial personnel and provides payroll administration, risk management and
benefits administration services to its clients, (ii) the Synadyne segment,
which until April 8, 2000, derived revenues from providing a comprehensive
package of PEO services to its clients including payroll administration, risk
management, benefits administration and human resource consultation and (iii)
the Franchising segment, which derives revenues from agreements
67
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. OPERATING SEGMENT INFORMATION (CONTINUED)
with industrial staffing franchisees that provide those franchises with, among
other things, exclusive geographical areas of operations, continuing advisory
and support services and access to the Company's confidential operating manuals
- - see Note 8.
Transactions between segments affecting their reported income are
immaterial. Differences between the reportable segments' operating results and
the Company's Consolidated Financial Statements relate primarily to other
operating divisions of the Company and items excluded from segment operating
measurements, such as corporate support center expenses and interest expense in
excess of interest charged to the segments based on their outstanding
receivables (before deducting any amounts sold under the Company's former
Securitization Facility). The Company does not regularly provide information
regarding the reportable segments' net assets to the chief operating decision
maker.
The Company does not derive any of its revenue from markets outside of
the United States. See Note 9 for information regarding significant customers
and geographic concentration. Financial information for the Company's operating
segments, reconciled to Company totals, is as follows:
Years Ended December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
REVENUES
Tandem ................................................................ $ 339,116 $ 321,451 $ 221,461
Synadyne .............................................................. 224,499 202,888 177,045
Franchising ........................................................... 7,109 7,352 7,027
Other Company revenues ................................................ 23,323 33,703 42,046
--------- --------- ---------
Total Company revenues ................................................ $ 594,047 $ 565,394 $ 447,579
========= ========= =========
INCOME
Tandem (1) ........................................................... $ 3,016 $ 13,534 $ 10,245
Synadyne (1) .......................................................... 1,394 1,120 1,058
Franchising (1) ....................................................... 6,353 5,943 5,764
Shareholders' compensation ............................................ -- -- (292)
Put Warrants valuation adjustment ..................................... -- -- (1,842)
Charges for restructuring and impairment of assets .................... (13,823) -- --
Other Company (expenses) income ....................................... (23,696) (14,105) (14,222)
--------- --------- ---------
Total Company (loss) income before taxes and extraordinary item ....... $ (26,756) $ 6,492 $ 711
========= ========= =========
(1) Excluding any allocation of common services provided by the corporate
support center.
DEPRECIATION AND AMORTIZATION OF INTANGIBLE ASSETS
Tandem ........................................................... $5,053 $5,077 $2,711
Synadyne ......................................................... 260 363 163
Franchising ...................................................... 83 41 23
Other Company depreciation and amortization ...................... 1,738 1,275 1,282
------ ------ ------
Total Company depreciation and amortization ...................... $7,134 $6,756 $4,179
====== ====== ======
68
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
NOTE 15. OPERATING SEGMENT INFORMATION (CONTINUED)
Years Ended December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
INTEREST EXPENSE, NET
Tandem .................................................... $4,273 $3,407 $2,402
Synadyne .................................................. 364 321 361
Franchising ............................................... 40 43 69
Other Company interest expense, net ....................... 3,927 1,758 5,045
------ ------ ------
Total Company interest expense, net ....................... $8,604 $5,529 $7,877
====== ====== ======
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth the amounts of certain items in the
Company's consolidated statements of income for the four quarters of 1999 and
1998:
1999
------------------------------------------------------------------
Quarters Ended
March 31 June 30 September 30 December 31
------------------------------------------------------------------
(Dollars in thousands, except per share data)
Net revenues ................................... $ 134,114 $ 143,454 $ 159,124 $ 157,355
Gross profit ................................... 19,463 20,583 21,055 20,810
Charges for restructuring and
Impairment of assets (1) ..................... -- -- (7,554) (6,269)
Operating income (loss) (2) .................... 509 (503) (12,007) (6,630)
Deferred tax valuation allowance ............... -- -- -- (14,072)
Net loss ....................................... (581) (1,249) (8,320) (20,729)
Loss per share (basic) ......................... (.07) (.14) (.96) (2.40)
Loss per share (diluted) ....................... (.07) (.14) (.96) (2.40)
1998
------------------------------------------------------------------
Quarters Ended
March 31 June 30 September 30 December 31
------------------------------------------------------------------
(Dollars in thousands, except per share data)
Net revenues ....................................$120,986 $134,796 $153,416 $156,196
Gross profit .................................... 18,038 21,276 22,767 22,739
Operating income ................................ 1,917 2,911 3,613 3,527
Income before
extraordinary item ............................ 673 1,095 1,512 1,601
Earnings per share (basic) before
extraordinary item ............................ .08 .13 .17 .19
Earnings per share (diluted)
before extraordinary item ..................... .07 .11 .15 .16
Net income ...................................... 673 1,095 1,512 184
69
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. As of August 6, 1999, the Company announced a restructuring plan intended
to improve profitability and liquidity. The Company recognized $5.1 million
and $6.1 million in restructuring charges during the third and fourth
quarters of 1999, respectively. In addition, the Company recognized
impairment charges of $2.4 million and $0.2 million during the third and
fourth quarters of 1999, respectively in compliance with SFAS 121. See
Notes 3 and 4 to the Company's Consolidated Financial Statements.
2. During the third quarter of 1999, the Company recognized (i) $5.1 million
of restructuring charges, (ii) $2.4 million impairment charge in compliance
with SFAS 121, and (iii) a $2.7 million loss, recognized as bad debt
expense, on the then anticipated sale of certain of the Company's trade
accounts receivable, which were primarily over 180 days. During the fourth
quarter of 1999, the Company recognized $6.1 million in restructuring
charges and $0.2 million in asset impairment charges, in compliance with
SFAS 121.
70
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This item is not applicable.
PART III
The information required by Items 10, 11, 12 and 13 of this Part III is
hereby incorporated by reference to the Definitive Proxy Statement that the
Company will file with the Securities and Exchange Commission not later than 120
days after December 31, 1999.
71
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following Financial Statements (with accompanying
notes) have been included in Part II, Item 8 of this 10-K:
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
2. The following schedules are filed herewith:
Schedule
Number Schedule Description
II Valuation and Qualifying Accounts - Years ended
December 31, 1999, 1998 and 1997
(b) The Company filed a report on Form 8-K on October 19, 1999, reporting
that the Company had (i) entered into agreements with its syndicate of
lenders to amend certain components and replace other components of
its pre-existing credit facilities, and (ii) changed its fiscal year
to the 52 or 53 week period ending the Sunday closest to March 31.
(c) The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
2.1 Amended and Restated Agreement Among Shareholders dated February 21,
1997(1)
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(1)
3.1 Amended and Restated Articles of Incorporation of the Company(2)
3.2 Amended and Restated Bylaws of the Company(3)
4.3 Shareholder Protection Rights Agreement(3)
4.6 Warrant Dated February 21, 1997 Issued to Triumph-Connecticut Limited
Partnership(1)
4.7 Warrant Dated February 21, 1997 Issued to Bachow Investment Partners
III, L.P.(1)
4.8 Warrant Dated February 21, 1997 Issued to State Street Bank and Trust
Company of Connecticut, N.A., as Escrow Agent(1)
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(1)
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(1)
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(1)
72
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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(1)
10.4 Agreement among Shareholders and Investors in Outsource International,
Inc. dated as of February 21, 1997(1)
10.7 Asset Purchase Agreement among Standby Personnel of Colorado Springs,
Inc., Adrian Walker and Outsource International, Inc. dated as of
February 24, 1997(1)
10.8 Asset Purchase Agreement between Staff Management Services, Inc. and
Outsource International, Inc. dated as of March 3, 1997(1)
10.9 Asset Purchase Agreement between Superior Temporaries, Inc. and
Outsource International, Inc. dated as of March 3, 1997(1)
10.10 Asset Purchase Agreement among Stand-By, Inc., Carlene Walker and
Outsource International of America, Inc. dated as of March 31, 1997(1)
10.11 Employment Agreement between Paul M. Burrell and the Company dated as
of February 21, 1997(1)*
10.12 Employment Agreement between Robert A. Lefcort and the Company dated as
of March 3, 1997(1)*
10.13 Employment Agreement between Robert E. Tomlinson and the Company dated
as of March 3, 1997(1)*
10.14 Employment Agreement between Robert J. Mitchell and the Company dated
as of March 3, 1997(1)*
10.15 Employment Agreement between Brian Nugent and the Company dated as of
March 11, 1997(7)*
10.16 Employment Agreement between Carolyn Noonan and the Company dated as of
July 22, 1999(8)*
10.17 Employment Agreement between Scott R. Francis and the Company dated as
of April 1, 1998(6)*
10.18 Stock Option Plan, As Amended Effective May 8, 1998(6)*
10.19 Third Amended and Restated Credit Agreement among Outsource
International, Inc., the banks from time to time parties hereto and
BankBoston, N.A., successor by merger to Bank of Boston, Connecticut,
as agent - Revolving Credit Facility dated as of July 27, 1998(6)
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(1)
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(1)
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(1)
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(1)
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(1)
10.25 Interest Rate Collar Transaction between BankBoston, N.A. and Outsource
International, Inc. dated as of February 20, 1998(5)
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(1)
73
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
10.34 Receivables Purchase and Sale Agreement dated July 27, 1998 among
Outsource International, Inc., Outsource Franchising, Inc., Capital
Staffing Fund, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., and Outsource International
of America, Inc., each as an originator, and Outsource Funding
Corporation, as the buyer, and Outsource International, Inc., as the
servicer(6)
10.35 Receivables Purchase Agreement dated July 27, 1998 among Outsource
Funding Corporation, as the seller, and EagleFunding Capital
Corporation, as the purchaser, and BancBoston Securities, Inc., as the
deal agent and Outsource International, Inc., as the servicer(6)
10.36 Intercreditor Agreement dated July 27, 1998 by and among BankBoston,
N.A., as lender agent; Outsource Funding Corporation, Outsource
International, Inc., Outsource Franchising, Inc., Capital Staffing
Fund, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc.,
Synadyne IV, Inc., Synadyne V, Inc. and Outsource International of
America, Inc., as originators; Outsource International, in its separate
capacity as servicer; EagleFunding Capital Corporation, as purchaser;
and BancBoston Securities Inc., individually and as purchaser agent(6)
10.50 First Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., each of the banks party to the Credit
Agreement and BankBoston, N.A., as agent for the banks, dated as of
February 22, 1999(7)
10.51 Temporary Waiver and Second Amendment to Third Amended and Restated
Credit Agreement among Outsource International, Inc., it subsidiaries,
each of the banks party to the Credit Agreement and BankBoston, N.A.,
as agent for the banks, dated June 30, 1999(8)
10.53 Third Temporary Waiver to Third Amended and Restated Credit Agreement
among Outsource International, Inc., its subsidiaries, each of the
banks party to the Credit Agreement and BankBoston, N.A., as agent for
the banks, dated as of August 5, 1999(8)
10.55 Third Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc., Outsource International of America, Inc., Mass Staff,
Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
East, LLC, Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A, as agent for the banks, dated as
of October 1, 1999(9)
10.56 Revolving Credit Agreement among Outsource Funding Corporation, the
banks from time to time parties thereto, and BankBoston, N.A., as agent
for the banks, dated October 1, 1999(9)
10.57 Amended and Restated Receivables Purchase and Sale Agreement dated as
of October 1, 1999 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. and Outsource International of America, Inc., each as an
originator, and Outsource Funding Corporation, as the buyer, and
Outsource International, Inc., as the servicer(9)
10.58 Fourth Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc., Outsource International of America, Inc., Mass Staff,
Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
East, LLC, Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A, as agent for the banks, dated as
of December 29, 1999
10.59 First Amendment to Revolving Credit Agreement among Outsource Funding
Corporation, the banks from time to time parties thereto, and
BankBoston, N.A., as agent for the banks, dated December 29, 1999
10.60 Second Amendment to Revolving Credit Agreement among Outsource Funding
Corporation, the banks from time to time parties thereto, and
BankBoston, N.A., as agent for the banks, dated January 31, 2000
10.61 Fifth Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc., Outsource International of America, Inc., Mass Staff,
Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
East, LLC, Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A, as agent for the banks, dated as
of January 31, 2000
74
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
10.62 Sixth Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc., Outsource International of America, Inc., Mass Staff,
Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
East, LLC, Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A, as agent for the banks, dated as
of March 30, 2000
10.63 Third Amendment to Revolving Credit Agreement among Outsource Funding
Corporation, the banks from time to time parties thereto, and
BankBoston, N.A., as agent for the banks, dated March 30, 2000
10.80 Employment agreement between Jon Peterson and the Company dated as of
February 14, 2000
10.81 Employment agreement between Garry E. Meier and the Company dated as of
February 7, 2000
10.85 Asset Purchase Agreement by and between Team Staff, Inc., Teamstaff V,
Inc. and Outsource International, Inc., Synadyne I, Inc., Synadyne II,
Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Guardian
Employer East LLC and Guardian Employer West LLC, dated as of April 7,
2000
10.86 Shared Services Agreement by and between Team Staff, Inc. and Outsource
International, Inc., dated as of April 7, 2000
10.90 Engagement Letter between Outsource International, Inc. and Crossroads
Capital Partners LLC, dated as of May 7, 1999 and three addenda dated
June 18, July 1 and August 2, 1999(8)
10.91 Finder Services Agreement between Outsource International, Inc. and
Crossroads Capital Partners LLC, dated as of June 30, 1999(8)
21 Subsidiaries of the Company
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- ------------------------
* Compensatory plan or arrangement.
(1) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-1 (Registration Statement No. 333-33443) as filed
with the Securities and Exchange Commission on August 12, 1997
(2) Incorporated by reference to the Exhibits to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration Statement
No. 333-33443) as filed with the Securities and Exchange Commission on
October 21, 1997
(3) Incorporated by reference to the Exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Registration Statement
No. 333-33443) as filed with the Securities and Exchange Commission on
September 23, 1997
(4) Incorporated by reference to the Exhibits to the Company's Form 10-K
for the year ended December 31, 1997 as filed with the Securities and
Exchange Commission on March 31, 1998
(5) Incorporated by reference to the Exhibits to the Company's Form 10-Q
for the quarterly period ended March 31, 1998, as filed with the
Securities and Exchange Commission on May 15, 1998
(6) Incorporated by reference to the Exhibits to the Company's Form 10-Q
for the quarterly period ended June 30, 1998, as filed with the
Securities and Exchange Commission on August 14, 1998
(7) Incorporated by reference to the Exhibits to the Company's Form 10-K
for the year ended December 31, 1998 as filed with the
Securities and Exchange Commission on March 30, 1999
(8) Incorporated by reference to the Exhibits to the Company's Form 10-Q
for the quarterly period ended June 30, 1999, as filed with the
Securities and Exchange Commission on August 16, 1999
(9) Incorporated by reference to the Exhibits to the Company's Form 8-K, as
filed with the Securities and Exchange Commission on October 19, 1999
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf of the undersigned, thereunto duly authorized.
OUTSOURCE INTERNATIONAL, INC.
By: /s/ GARRY E. MEIER
----------------------
Garry E. Meier
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: April 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ GARRY E. MEIER President, Chief Executive April 14, 2000
- ------------------------------------ Officer and Chairman of the Board
Garry E. Meier of Directors
(Principal Executive Officer)
Vice President,
/s/ SCOTT R. FRANCIS Chief Financial Officer, April 14, 2000
- ------------------------------------ and Director
Scott R. Francis (Principal Financial
Officer)
/s/ PAUL M. BURRELL Director April 14, 2000
- ------------------------------------
Paul M. Burrell
/s/ DAVID S. HERSHBERG Director April 14, 2000
- ------------------------------------
David S. Hershberg
/s/ LAWRENCE CHIMERINE Director April 14, 2000
- ------------------------------------
Lawrence Chimerine
/s/ JAY D. SEID Director April 14, 2000
- -----------------------------------
Jay D. Seid
/s/ CAROLYN H. NOONAN Vice President and Controller April 14, 2000
- ------------------------------------ (Principal Accounting Officer)
Carolyn H. Noonan
76
SCHEDULE II
OUTSOURCE INTERNATIONAL, INC. AND AFFILIATES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998 and 1997
Charged to Credits
Balance, Costs and Issued and Balance
Description January 1, 1999 Expenses Other Charge-Offs December 31, 1999
----------- ---------------- --------- ------ ------------ ------------------
Allowance for doubtful
accounts and credit memos..... $1,924,146 $ 6,070,768 $ -- $(5,165,268) $ 2,829,646
Tax valuation allowance ........ -- 14,071,996 -- -- 14,071,996
Charged to Credits
Balance, Costs and Issued and Balance
Description January 1, 1998 Expenses Other Charge-Offs December 31, 1998
----------- ---------------- --------- ------ ------------ ------------------
Allowance for doubtful
accounts and credit memos..... $1,639,767 $ 3,355,571 $ -- $(3,071,192) $ 1,924,146
Charged to Credits
Balance, Costs and Issued and Balance
Description January 1, 1997 Expenses Other Charge-Offs December 31, 1997
----------- ---------------- --------- ------ ------------ ------------------
Allowance for doubtful
accounts and credit memos..... $978,250 $ 3,123,861 $ -- $(2,462,344) $ 1,639,767
The amounts shown above include credits issued and charge-offs for
uncollectible amounts as well as customer credits issued for early payment
discounts, pricing adjustments, customer service concessions, billing
corrections, and other matters.
77
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
10.58 Fourth Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc., Outsource International of America, Inc., Mass Staff,
Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
East, LLC, Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A, as agent for the banks, dated as
of December 29, 1999
10.59 First Amendment to Revolving Credit Agreement among Outsource Funding
Corporation, the banks from time to time parties thereto, and
BankBoston, N.A., as agent for the banks, dated December 29, 1999
10.60 Second Amendment to Revolving Credit Agreement among Outsource Funding
Corporation, the banks from time to time parties thereto, and
BankBoston, N.A., as agent for the banks, dated January 31, 2000
10.61 Fifth Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc., Outsource International of America, Inc., Mass Staff,
Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
East, LLC, Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A, as agent for the banks, dated as
of January 31, 2000
10.62 Sixth Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc., Outsource International of America, Inc., Mass Staff,
Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
East, LLC, Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A, as agent for the banks, dated as
of March 30, 2000
10.63 Third Amendment to Revolving Credit Agreement among Outsource Funding
Corporation, the banks from time to time parties thereto, and
BankBoston, N.A., as agent for the banks, dated March 30, 2000
10.80 Employment agreement between Jon Peterson and the Company dated as of
February 14, 2000
10.81 Employment agreement between Garry E. Meier and the Company dated as of
February 7, 2000
10.85 Asset Purchase Agreement by and between Teamstaff, Inc., Teamstaff V,
Inc. and Outsource International, Inc., Synadyne I, Inc., Synadyne II,
Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Guardian
Employer East LLC and Guardian Employer West LLC dated as of April 7,
2000
10.86 Shared Services Agreement by and between Teamstaff, Inc. and Outsource
International, Inc. dated as of April 7, 2000
21 Subsidiaries of the Company
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
78