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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from January 1, 2000 to April 2, 2000
Commission file number 000-23147
OUTSOURCE INTERNATIONAL, INC.
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(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0675628
- - - - - - - ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1690 S. Congress Ave, Delray Beach, Florida 33445
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(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code: (561) 454-3500
Indicate whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at May 12, 2000
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Common Stock, par value $.001 per share 8,657,913
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OUTSOURCE INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
Item 1 - Financial Statements
Consolidated Balance Sheets as of April 2, 2000 and December 31, 1999....................... 2
Consolidated Statements of Operations for the thirteen weeks
ended April 2, 2000 and three months ended March 31, 1999................................... 3
Consolidated Statements of Cash Flows for the thirteen weeks ended
ended April 2, 2000 and the three months ended March 31, 1999............................... 4
Notes to Consolidated Financial Statements.................................................. 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 16
Item 3 - Quantitative and Qualitative Disclosures about Market Risk........................... 32
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................................................... 33
Item 2 - Changes in Securities and Use of Proceeds............................................ 33
Item 3 - Defaults Upon Senior Securities...................................................... 33
Item 4 - Submission of Matters to a Vote of the Security Holders.............................. 33
Item 5 - Other Information.................................................................... 33
Item 6 - Exhibits and Reports on Form 8-K..................................................... 36
Signatures.................................................................................... 37
OUTSOURCE INTERNATIONAL(R), TANDEM(R) and OFFICE OURS(R) are registered
trademarks of Outsource International, Inc. and its subsidiaries.
1
Part I: Financial Information
Item 1: Financial Statements
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
ASSETS April 2, 2000 December 31, 1999
------------- -----------------
Current Assets:
Cash .................................................................... $ 1,546 $ 716
Trade accounts receivable, net of allowance for doubtful accounts of
$1,574 and $2,830 ................................................... 42,584 49,709
Funding advances to franchises .......................................... 206 157
Assets held for disposition ............................................. 2,409 2,439
Income tax receivable and other current assets .......................... 4,577 2,608
--------- ---------
Total current assets ................................................ 51,322 55,629
Property and equipment, net ............................................. 9,154 9,231
Goodwill and other intangible assets, net ............................... 45,783 46,517
Other assets ............................................................ 2,310 2,304
--------- ---------
Total assets ........................................................ $ 108,569 $ 113,681
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable ........................................................ $ 8,887 $ 6,186
Accrued expenses:
Payroll ............................................................. 10,518 8,706
Payroll taxes ....................................................... 4,139 3,842
Workers' compensation and insurance ................................. 5,210 5,342
Other ............................................................... 4,499 4,331
Accrued restructuring charges ........................................... 2,255 2,905
Other current liabilities ............................................... 507 661
Current maturities of long-term debt to related parties ................. 1,195 1,195
Current maturities of other long-term debt .............................. 7,635 7,437
Revolving credit facility ............................................... 50,746 57,067
--------- ---------
Total current liabilities ........................................... 95,591 97,672
Non-Current Liabilities:
Other long-term debt, less current maturities ........................... 1,934 2,300
--------- ---------
Total liabilities ................................................... 97,525 99,972
--------- ---------
Commitments and Contingencies (Notes 5, 6 and 7)
Shareholders' Equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized, no shares
issued or outstanding ............................................... -- --
Common stock, $.001 par value; 100,000,000 shares authorized; 8,657,913
issued and outstanding .............................................. 9 9
Additional paid-in capital .............................................. 53,546 53,546
Accumulated deficit ..................................................... (42,511) (39,846)
--------- ---------
Total shareholders' equity .......................................... 11,044 13,709
--------- ---------
Total liabilities and shareholders' equity .......................... $ 108,569 $ 113,681
========= =========
See accompanying notes to consolidated financial statements.
2
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Thirteen Weeks Ended April 2, 2000 and
Three Months Ended March 31, 1999
(Amounts in thousands, except per share data)
April 2, March 31,
2000 1999
---- ----
Net revenues .......................................... $ 126,011 $ 134,114
Cost of revenues ...................................... 109,157 114,831
----------- -----------
Gross profit .......................................... 16,854 19,250
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Selling, general and administrative expenses:
Amortization of intangible assets ................ 734 924
Provision for doubtful accounts .................. (472) 506
Other selling, general and administrative expenses 17,143 17,311
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Total selling, general and administrative expenses 17,405 18,741
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Restructuring costs .............................. 356 --
----------- -----------
Operating (loss) income ............................... (907) 509
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Other expense (income):
Interest expense (net) ........................... 2,016 1,582
Disposition of assets and other income (net) ..... (259) (43)
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Total other expense (income) ..................... 1,757 1,539
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Loss before benefit for income taxes .................. (2,664) (1,030)
Benefit for income taxes .............................. -- (449)
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Net loss .............................................. $ (2,664) $ (581)
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Weighted average common shares outstanding:
Basic ............................................ 8,657,913 8,657,913
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Diluted .......................................... 8,657,913 8,657,913
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Loss per share:
Basic ............................................ $ (0.31) $ (0.07)
=========== ===========
Diluted .......................................... $ (0.31) $ (0.07)
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See accompanying notes to consolidated financial statements.
3
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Thirteen Weeks Ended April 2, 2000 and
the Three Months Ended March 31, 1999
(Amounts in thousands)
April 2, March 31,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................................... $(2,664) $ (581)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization .......................................................... 1,461 1,807
Provision for losses of assets held for disposition .................................... 67 --
Deferred income taxes .................................................................. -- (77)
(Gain) loss on asset sales as part of Restructuring and related matters, net (91) --
------- -------
(1,227) 1,149
Changes in assets and liabilities (excluding effects of acquisitions and dispositions):
(Increase) decrease in:
Trade accounts receivable .......................................................... 7,155 (5,341)
Prepaid expenses and other current assets .......................................... (1,014) (123)
Other assets ....................................................................... 133 (414)
Increase (decrease) in:
Accounts payable ................................................................... 785 1,749
Accrued expenses:
Payroll .......................................................................... 1,812 1,324
Payroll taxes .................................................................... 298 (133)
Workers' compensation and insurance .............................................. (826) (1,805)
Reserve for restructuring charges ................................................ (650) --
Other ............................................................................ 168 198
Other current liabilities .......................................................... (154) (427)
------- -------
Net cash provided by (used in) operating activities .................................... 6,480 (3,823)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from asset sales as part of Restructuring and related matters ...................... 40 --
Funding repayments from franchises, net ..................................................... (49) 66
Property and equipment expenditures ......................................................... (761) (811)
Expenditures for acquisitions ............................................................... -- (39)
------- -------
Net cash used in investing activities .................................................. (770) (784)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in excess of outstanding checks over bank balance,
included in accounts payable .............................................................. 1,917 1,715
Repayment of lines of credit and revolving credit facilities ................................ (6,321) (252)
Related party debt repayments .................................................... .......... -- 14
Repayment of other long-term debt ........................................................... (476) (953)
------- -------
Net cash (used in) provided by financing activities .................................... (4,880) 524
------- -------
Net increase (decrease) in cash ............................................................. 830 (4,083)
Cash, beginning of period ................................................................... 716 5,501
------- -------
Cash, end of period ......................................................................... $ 1,546 $ 1,418
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SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ............................................................................... $ 1,823 $ 1,292
======= =======
See accompanying notes to consolidated financial statements.
4
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements and the related information in
these notes as of April 2, 2000 and for the thirteen weeks ended April 2, 2000
("Q1 2000") and the three months ended March 31, 1999 ("Q1 1999") have been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, reflect all adjustments (including normal
accruals) necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods presented. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full year. The interim financial statements
should be read in conjunction with the audited financial statements for the year
ended December 31, 1999, included in the Company's Form 10-K filed with the
Securities and Exchange Commission on April 14, 2000.
The Company filed a Form 8-K during the fourth quarter of 1999, indicating among
other things, its change for financial reporting purposes, effective January 1,
2000, from a fiscal year ended December 31 to a fiscal year ending the 52 or 53
week period ending the Sunday closest to March 31.
Certain reclassifications have been made to the presentation of the results of
operations for Q1 1999 to conform to current presentation. These
reclassifications had no effect on previously reported results of operations or
retained earnings.
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
No. 133 defines derivatives and establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 also
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133, as modified by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
and cannot be applied retroactively. The Company intends to implement SFAS No.
133 in its consolidated financial statements as of and for the thirteen weeks
ended July 2, 2001. Although it has not determined the effects, if any, that
implementation will have, the Company is not currently a party to any
transactions involving derivatives. SFAS No. 133 could increase volatility in
earnings and other comprehensive income if the Company enters into any such
transactions in the future.
NOTE 2: FUTURE LIQUIDITY
As discussed in Note 5 to the Company's Consolidated Financial Statements, the
Company's current bank financing expires on May 22, 2000 and the Company is in
default of certain acquisition debt subordinated to its bank financing. 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 current bank
group will provide financing subsequent to May 22, 2000, there can be no
assurance that the current 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.
5
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR DISPOSITION
On August 6, 1999, the Company announced the following actions to improve its
short-term liquidity, concentrate its operations within one core segment
(Tandem, its flexible industrial staffing division) and improve its operating
performance within that segment:
(i) the sale of Office Ours, the Company's clerical staffing division, effective
August 30, 1999. Revenues of Office Ours, for the three months ended March 31,
1999, were $1.9 million, and the loss before taxes for these operations, on a
basis consistent with the segment information presented in Note 9, was
approximately $21,000;
(ii) the engagement of an investment banking firm to assist in the evaluation of
strategic options, including the possible sale, of Synadyne, the Company's PEO
division. Effective April 8, 2000, the Company sold the operations of Synadyne,
for which the Company received net proceeds of $3.1 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 $44.8 million and
$53.1 million for Q1 2000 and Q1 1999, respectively. On a basis consistent with
the segment information presented in Note 9, the Company reported a net loss of
$0.3 million and income of $0.3 million for Q1 2000 and Q1 1999, 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 and Q1 2000 of 28 of
the 117 Tandem branch offices existing as of June 30, 1999; an immediate
reduction of the Tandem and corporate support center employee workforce by 110
employees (approximately 11% of the Company's workforce), and an anticipated
additional reduction of 56 employees by June 30, 2000, of which 35 employees are
in branch offices that will be sold, franchised, closed or consolidated. A total
of 47 branch offices have been or will be eliminated in connection with the
Restructuring, 30 of which have been sold, franchised, closed, or consolidated
as of May 15, 2000. These offices were not or are not expected to be adequately
profitable in the near future or are inconsistent with the Company's operating
strategy of clustering offices within specific geographic regions. The
restructuring charge accrual and its utilization are as follows (amounts in
thousands):
Utilization
Original Balance at Charges to ------------------- Balance at
Charge 12/31/99 Operations Cash Non-Cash 04/02/00
Employee severance and other termination benefits $ 4,040 $ 2,722 $ (204) $ 379 $ -- $ 2,139
Professional fees ............................... 1,205 34 459 459 -- 34
Lease termination and write-down of leasehold
improvements at closed offices ................ 400 105 1 57 -- 49
Other restructuring costs ....................... 146 44 33 44 -- 33
------- ------- ------- ------- ------- -------
Accrued restructuring charges ................... 5,791 2,905 289 939 -- 2,255
Write-down to fair value of assets identified for
Identified for disposition .................... 5,429 -- 67 -- 67 --
------- ------- ------- ------- ------- -------
Total restructuring and asset impairment activity $11,220 $ 2,905 $ 356 $ 939 $ 67 $ 2,255
======= ======= ======= ======= ======= =======
6
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR DISPOSITION
(CONTINUED)
The $5.4 million write-down of assets identified for disposition, recognized in
the Company's results of operations for the year ended December 31, 1999,
relates to 27 Tandem offices, as follows: (i) a $0.4 million loss related to two
staffing offices in Nevada 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 North Carolina and 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 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 20 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. Based on changes of the estimated fair value of
certain assets held for disposition as of April 2, 2000, the Company recorded an
additional $67,000 write-down of assets to fair value, which was charged to
restructuring costs in Q1 2000.
In addition to the write-down of assets identified for disposition, the original
$11.2 million restructuring charge includes $4.0 million for severance and other
termination benefits, $1.2 million for professional fees, and $0.6 million in
lease termination and other charges. Severance and other termination benefits
were decreased by $0.2 million in Q1 2000 to reflect a reduction of amounts to
be paid in connection with certain severance packages accrued as part of the
restructuring charge in 1999. The remaining liability of $2.1 million for
severance and other termination benefits as of April 2, 2000 consists of (i)
$1.1 million for six employees terminated in 1999 and Q1 2000 and (ii) $1.0
million for 56 employees to be terminated by June 30, 2000.
Professional fees of $1.2 million included in the restructuring charge in 1999
and $0.5 million in 2000 are primarily amounts paid to Crossroads LLC, formerly
Crossroads Capital Partners, LLC ("Crossroads") for its services related to the
Restructuring. The Company also expects to record restructuring charges in the
first quarter of fiscal year 2001 (the thirteen weeks ended July 2, 2000) for
services relating to Restructuring activities to be rendered by Crossroads
during that period.
The Company utilized $0.4 million in 1999 and $0.1 million of the restructuring
charge during Q1 2000 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 April 2, 2000, there were 19 Tandem that offices remained to be sold as
part of the Restructuring, and the Company had classified the related tangible
and intangible assets, excluding cash, accounts receivable and deferred income
taxes, as assets held for disposition. 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
in Q1 2000. In some cases, the estimated fair value of these
7
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR DISPOSITION
(CONTINUED)
assets held for disposition was based on management's judgment and as such,
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, $1.4 million was used
to reduce the Company's bank debt and $0.9 million (of which $0.8 million
remains as of April 2, 2000) was put in escrow and will be released over the
period through October 1, 2002.
The Company's assets held for disposition as of April 2, 2000 are stated at the
lower of original cost (net of accumulated depreciation or amortization) or fair
value (net of selling and disposition costs) are as follows (presented in
thousands):
Net Original Cost
-------------------------------------------- Lower of
Property Goodwill and Other Cost or
and Equipment Intangible Assets Total Fair Value
------------- ----------------- ----- ----------
Tandem branch offices ... $ 619 $5,284 $5,903 $2,167
Synadyne division ....... -- 242 242 242
------ ------ ------ ------
$ 619 $5,526 $6,145 $2,409
====== ====== ====== ======
As part of the Restructuring efforts, 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 and Q1 2000. Certain Synadyne assets, with a carrying
value of $1.3 million, were removed from such classification as of December 31,
1999 when it became apparent that they would not be sold in connection with the
sale of the Synadyne operations on April 8, 2000. The Company expects to sell or
abandon the remainder of the assets held for disposition before June 30, 2000.
The Tandem operations held for sale, as well as those sold, franchised, closed
or consolidated as part of the Restructuring as of April 2, 2000, recorded
revenues of $10.6 million and $14.9 million in Q1 2000 and Q1 1999,
respectively. On a basis consistent with the segment information presented in
Note 9, the Company reported a ($0.3) million and ($0.6) million net loss for Q1
2000 and Q1 1999, respectively, for these operations.
NOTE 4. INCOME TAXES
The Company's effective tax rate differed from the statutory federal rate of 35%
as follows (amounts presented in thousands, except for percentages):
8
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. INCOME TAXES (CONTINUED)
For the Period Ended
------------------------------------------------------
April 2, 2000 March 31, 1999
------------- --------------
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in thousands)
Statutory rate applied to income before income taxes
and extraordinary item ......................... $(932) (35.0%) $(360) (35.0%)
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit ...... (80) (3.0) (30) (2.9)
Effect of termination of S corporation status ... -- -- -- --
Loss prior to termination of S corporation status -- -- -- --
Put warrants valuation adjustment ............... -- -- 141 2.2
Employment tax credits .......................... (97) (3.6) (126) (12.2)
Nondeductible expenses .......................... 29 1.1 56 5.5
Other ........................................... 181 6.8 11 1.0
----- ----- ----- -----
Total before change in valuation allowance .......... (899) (33.7) (449) (43.6)
Change in valuation allowance ....................... 899 33.7 -- --
----- ----- ----- -----
Total ............................................... $ 0 0.0% $(449) (43.6%)
===== ===== ===== =====
Income tax receivable and other current assets at April 2, 2000 includes a $15.0
million deferred tax asset offset by a valuation allowance of $15.0 million, of
which $0.9 million was recognized in the period ended April 2, 2000. The
valuation allowance was established in 1999 and increased by the tax benefits in
Q1 2000 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.
The employment tax credit carryforward of $2.3 million as of April 2, 2000 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 $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 regard to the calculation of the FEZ credit has been challenged by
the Internal Revenue Service as discussed below.
During April 1999, the Company received a preliminary report from the IRS
proposing adjustments to the previously reported taxable income and tax credits
for certain of the Company's subsidiaries for the years ended December 31, 1994,
1995 and 1996. 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 6.
NOTE 5. DEBT
As of April 2, 2000, 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"), 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"). Effective April 13, 2000, due in part to
the sale of the Company's Synadyne operations, the maximum availability of the
Receivable Facility was reduced from $50.0 million to $33.0 million and
effective May 1, 2000, the maximum availability of the Revolving Credit Facility
was reduced to $25.3 million, including existing letters of credit of $5.0
million. Both facilities are provided by a syndicate of lenders led by Fleet
National Bank ("Fleet") and expire on May 22, 2000. The Company is currently
negotiating with the lenders' syndicate to obtain an extension of existing
financing beyond May 22, 2000, until such time as long-term financing can be
obtained from alternative lending sources under a mutually acceptable structure
and terms. The above agreements, effective October 1, 1999, replaced the
previously existing $50.0 million
9
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DEBT (CONTINUED)
securitization facility (the "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 under
the revolving credit facility 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, to approximately 12.0% 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 11.0% as of April 2, 2000, while the Revolving Credit
Facility bears interest at base (prime) rate plus 5.0% per annum, which was
14.0% as of April 2, 2000. As of April 2, 2000, the Company had outstanding
borrowings of $16.3 million and $34.6 million under the Revolving Credit
Facility and the Receivable Facility, respectively.
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
4.95% as of March 31, 1999. As of March 31, 1999, a $36.1 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. The Company had not made substantially all of
the scheduled payments due and, as a result, was in default on these debts
having total principal outstanding of $6.9 million as of April 2, 2000. The
terms of these acquisition notes payable, which are subordinated to the
Revolving Credit Facility and the Receivable Facility, allow the payees to
accelerate terms of payment upon default. Acceleration of this debt requires
prior written notice to the Company by the various payees, which has been
received from three payees as of April 2, 2000.
In addition to the Revolving Credit Facility indebtedness discussed above the
Company had bank standby letters of credit outstanding in the aggregate amount
of $5.0 million as of April 2, 2000, of which $4.3 million is to secure the
pre-1999 portion of the workers' compensation obligations recorded as a current
liability on the Company's Consolidated Balance Sheet and $0.7 million, which is
supported by a $0.8 million cash escrow balance, to secure future payments on a
capital lease for furniture that was included with the sale of the Company's
corporate support center building.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Shareholder distribution: Effective February 21, 1997, the Company acquired all
of the outstanding capital stock of nine companies under common ownership and
management, in exchange for shares of the
10
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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 4.
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 April 2, 2000 consolidated balance sheet was approximately $28,000. In
addition, the Company is contacting the taxing agencies of certain states to
arrange payment of payroll taxes owed, primarily for Q1 2000, of approximately
$0.5 million, which is recorded in accrued payroll taxes on the Company's April
2, 2000 consolidated balance sheet.
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 April 2, 2000
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 and substantially completed an audit of the
Company's compliance with escheat (unclaimed property) statutes. The applicable
state escheat laws cover a wide range of situations and property types and have
a ten-year statute of limitations. In addition, it is common for states to share
information in this area. At this time, the Company is unable to estimate any
liability that may result from this audit and has made no provisions in its
financial statements related to this matter.
Workers' compensation: During 1997, and through 1999, the Company's workers'
compensation expense for claims was effectively capped at a contractually agreed
percentage of payroll. In 1997 and 1998, the Company's expense was limited to
the cap since the estimated ultimate cost of the actual claims experience was
greater than the cap. In 1999, the estimated ultimate cost of the actual claims
experience was used as the basis of the Company's workers compensation expense,
since it was approximately $1.7 million less than the cap (3.5% of payroll). The
estimated ultimate cost of the 1999 claims experience was determined based on
information from an independent third-party administrator employed by the
Company plus an allowance for claims incurred but not reported, based on prior
experience and other
11
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
relevant data. The Company methodology for determine workers compensation
expense in 2000 in consistent with 1999.
The Company routinely adjusts the accruals made in prior years for workers'
compensation claims and expenses, based on updated information from its
insurance carriers, its independent third-party administrator and its own
analysis. These adjustments are included as a component of cost of sales in the
period in which they are made. During Q1 2000, the Company increased the reserve
for 1999 claims by $0.2 million due to increased estimates by the third party
administrator of the processing expense from 1999 claims.
Employment agreements: As of April 2, 2000, the Company had certain obligations
under employment agreements it had entered into with its Chief Executive Officer
("CEO"), its former 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. 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.
Between February 1999 and May 2000 nine of the eleven officers referred to above
resigned their positions, which resulted in the Company's agreement to pay two
of those officers' salary for two years, two of those officers' salaries for
one year and five of those officers' salaries for six months, in exchange for
their agreement, among other things, not to compete with the Company during that
period. The aggregate costs of these severance agreements total $3.2 million, of
which $0.7 million has been paid as of April 2, 2000, $1.6 million has been
accrued in the Company's April 2, 2000 consolidated balance sheets and $ 0.9
million will be accrued in the first quarter of fiscal 2001 for these officers
which resigned prior to April 2, 2000.
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 recorded a $0.4 million liability under these agreements in
the Company's consolidated balance sheet as of April 2, 2000.
Consulting contract: In May 1999, the Company engaged Crossroads, LLC, formerly
known as 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 3),
assisting in extending the existing Revolving Credit Facility and Securitization
Facility, arranging for new financing, and periodically reporting to the
Company's Board of Directors and lenders' syndicate. In August 1999, a
representative of Crossroads was appointed as the Company's interim chief
operating officer and the interim President of the Tandem division. The Company
has paid or accrued $1.5 million for services rendered by Crossroads through
April 2, 2000, of which $0.4 million was for Q1 2000. These amounts were
included in the restructuring charge recorded by the Company, and the Company
also expects to
12
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
record restructuring charges in the first quarter of fiscal year 2001 for
services relating to Restructuring activities to be rendered by Crossroads
during that period - see Note 3. The Company's contract with Crossroads, which
originally expired on October 31, 1999, is being extended on a month by month
basis and 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.
Stock options and warrants: As of December 31, 1999, the Company had issued
1,047,579 stock options and 1,208,988 warrants to purchase shares of the
Company's common stock which remain outstanding as of April 2, 2000. During
February 2000 the Company granted options to purchase 400,000 shares of the
Company's common stock to the Company's new CEO at $2.00 per share. In March
2000, the Company granted options to purchase 473,038 shares of the Company's
common stock to various employees at $2.125 per share. Both grants vest over a
four year period from the grant date.
The total number of shares of common stock reserved for issuance under the stock
option plan as of April 2, 2000 was 2,000,000, as agreed to by the Company's
Board of Directors in April 1999 and approved by the Company's shareholders at
their May 1999 annual meeting.
NOTE 7. RELATED PARTY TRANSACTIONS
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. In
March 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. The Company recognized revenue of $0.3
million and $0.6 million in Q1 2000 and Q1 1999 from all franchises owned by
significant shareholders of the Company, which included royalties and payments
under the buyout agreement.
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 5, the Company had not made the renegotiated
payments on this subordinated acquisition note, and, as a result, is 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
a current liability in the Company's Consolidated Financial Statements as of
April 2, 2000.
13
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EARNINGS (LOSS) PER SHARE
The Company calculates earnings (loss) per share in accordance with the
requirements of SFAS No. 128, "Earnings Per Share". Certain of the outstanding
options and warrants to purchase common stock were anti-dilutive for the periods
presented and accordingly were excluded from the calculation of diluted weighted
average common shares for those periods, including the equivalent of 1,218,801
and 826,142 shares Q1 2000 and Q1 1999, respectively, solely because the results
of operations was a net loss instead of net income.
NOTE 9. OPERATING SEGMENT INFORMATION
The Company's reportable operating segments are as follows:
Tandem: This segment derives revenues from recruiting, training and deployment
of temporary industrial personnel and from providing payroll administration,
risk management and benefits administration services.
Synadyne: This segment derives revenues from providing a comprehensive package
of PEO services to its clients including payroll administration, risk
management, benefits administration and human resource consultation. See Note 3
related to the Company's disposition of these operations.
Franchising: This segment derives revenues under agreements with industrial
staffing franchisees that provide those franchises with, among other things,
exclusive geographical areas of operations, continuing advisory and support
services and access to the Company's confidential operating manuals. Franchising
revenues also include revenues from early terminations of franchise agreements,
called "buyouts".
Transactions between segments affecting their reported income are immaterial.
Differences between the reportable segments' operating results and the Company's
consolidated financial statements relate primarily to other operating divisions
of the Company and items excluded from segment operating measurements, such as
corporate support center expenses, interest expense in excess of interest
charged to the segments based on their outstanding receivables. The Company does
not regularly provide information regarding the reportable segments' net assets
to the chief operating decision-maker. Certain reclassifications have been made
between segments to Income (Loss) Before Taxes in Q1 1999 to be consistent with
current period presentation.
For the Period Ended
--------------------
April 2, 2000 March 31, 1999
------------- --------------
REVENUES
Tandem ................................... $ 80,383 $ 73,096
Synadyne ................................. 44,834 53,080
Franchising .............................. 763 1,973
Other Company revenues ................... 31 5,965
--------- ---------
Total Company Revenues ................... $ 126,011 $ 134,114
========= =========
(LOSS) INCOME BEFORE TAXES
Tandem ................................... $ 3,323 $ 1,135
Synadyne ................................. (332) 254
Franchising .............................. 609 1,797
Restructuring and asset impairment charges (356) --
Other Company (loss) income, net ......... (5,908) (4,216)
--------- ---------
Total Company loss before taxes .......... $ (2,464) $ (1,030)
========= =========
14
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SUBSEQUENT EVENTS
Effective April 8, 2000, the Company sold certain of its assets of its Synadyne
division to Teamstaff V, Inc., a Florida corporation ("Teamstaff V"), an
affiliate of Teamstaff, Inc., a New Jersey Corporation for net proceeds of $3.1
million, with up to an additional $1.25 million to be paid to the Company by
Teamstaff on April 30, 2001 based on the total number of employees at each
customer account sold to Teamstaff V, which are still employed by Teamstaff V on
September 30, 2000 and April 30, 2001. The assets included all the customer
accounts relating to the Company's PEO business, the trade name "Synadyne" and
certain desktop computers and marketing material relating to the Company's PEO
business.
In connection with the sale of the Synadyne division, the Company is obligated
to provide certain support services to Teamstaff V through July 31, 2000,
including accounting and information systems services. The Company has also
contracted with Teamstaff V to provide PEO services to the Company and its
employees for an initial term expiring on December 31, 2001.
Effective April 10, 2000, the Company sold its Minnesota operations, classified
as assets held for disposition at their fair market value as of April 2, 2000,
for $60,000.
Effective May 15, 2000, the Company sold its Cincinnati operations, classified
as assets held for disposition, for $20,000.
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with "Forward-looking
information: certain cautionary statements"
GENERAL
The Company offers it clients flexible industrial staffing services through its
Tandem division, targeting opportunities in that fragmented, growing market
which the Company believes has to date been under-served by large full service
staffing companies. Significant benefits of Tandem's services to clients include
providing 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. Tandem delivers its flexible staffing services through a
nationwide network of 87 Company-owned and 50 franchise recruiting and dispatch
branches. Company-owned branches are aggregated into 15 geographic districts,
which are combined into three geographic zones: the East, Midwest and West.
The Company's revenues are based on the salaries and wages of worksite
employees. Revenues, and 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 (trade payroll costs), (ii) employment-related
taxes, (iii) health benefits, (iv) workers' compensation benefits and insurance
and (v) worksite employee transportation.
The Company's Tandem operations generate significantly higher gross profit
margins than those of its former Synadyne operations. The higher staffing
margins reflect compensation for recruiting, training and other services not
required as part of many PEO relationships, where the employees have already
been recruited by the client and are trained and in place at the beginning of
the relationship.
On August 6, 1999, the Company announced the following actions intended to
improve its short-term liquidity, concentrate its operations within one core
segment (Tandem, its flexible industrial staffing division) and improve its
operating performance within that segment:
(i) the sale of Office Ours, the Company's clerical staffing division, which was
completed on August 30, 1999;
(ii) the engagement of an investment banking firm to assist in the evaluation of
strategic options for Synadyne which ultimately resulted in the sale of the
operations of Synadyne on April 8, 2000; and
(iii) a reduction of the Company's flexible staffing and support operations (the
"Restructuring") consisting primarily of: the sale, franchise, closure or
consolidation, during the third and fourth quarters of 1999 and Q1 2000, of 28
of the 117 Tandem branch offices existing as of June 30, 1999; an immediate
reduction of the Tandem and corporate support center employee workforce by 110
employees (approximately 11% of
16
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company's workforce), and an anticipated additional reduction of 56
employees by June 30, 2000, of which 35 employees are in branch offices that
will be sold, franchised, closed or consolidated. A total of 47 branch offices
have been or will be eliminated in connection with the restructuring, 30 of
which have been sold, franchised, closed, or consolidated as of May 15, 2000.
These offices were not or are not expected to be adequately profitable in the
near future or are inconsistent with the Company's operating strategy of
clustering offices within specific geographic regions. The Company acquired many
of these branch offices during 1996, 1997 and 1998. See "Restructuring."
RESULTS OF OPERATIONS
The following tables set forth the amounts and percentages of net revenues of
certain items in the Company's consolidated statements of income for the
indicated periods. The amounts presented are in thousands (except employees and
offices):
For the Period Ended
--------------------
April 2, 2000 March 31, 1999
------------- --------------
Net revenues:
Tandem ......................................... $ 80,383 63.8% $ 73,096 54.5%
Synadyne ....................................... 44,834 35.6 53,080 39.6
Franchising .................................... 763 0.6 1,973 1.5
Other .......................................... 31 0.0 5,965 4.4
--------- ----- --------- -----
Total net revenues ............................. $ 126,011 100.0% $ 134,114 100.0%
========= ===== ========= =====
Gross profit ................................... $ 16,854 13.4% $ 19,250 14.4%
Selling, general and administrative expenses (1) 17,405 13.8 18,741 14.0
Restructuring and asset impairment charges ..... 356 0.3 -- --
--------- ----- --------- -----
Operating (loss) income (1) .................... (907) (0.7) 509 0.4
Net interest and other expense ................. 1,757 1.4 1,539 1.1
--------- ----- --------- -----
Loss before benefit for income taxes (1) ....... (2,664) (2.1) (1,030) (0.8)
Benefit for income taxes ....................... -- -- (449) (0.3)
--------- ----- --------- -----
Net (loss) income (1) .......................... $ (2,664) (2.1)% $ (581) (0.4)%
========= ===== ========= =====
System Operating Data:
System Revenues (2) ............................ $ 145,079 $ 147,396
========= =========
System employees (number at end of period) ..... 26,000 33,000
========= =========
System offices (number at end of period) ....... 145 172
========= =========
- - - - - - - --------------------------------------------------------------------------------
(1) During the quarterly period ended April 2, 2000, the Company recorded an
increase to its restructuring reserve of $0.4 million as well as a non-operating
gain of $0.2 million from the sale of one of its Tandem offices - see Note 3 to
the Company's Consolidated Financial Statements. The following table sets forth
the amounts (in thousands, except for per share data) and the percentage of
certain items in the Company's consolidated statements of income, with 2000
amounts and percentages adjusted for the above items as follows: (i) operating
(loss) income excludes increase in the restructuring reserve, and (ii) net loss
and loss per share excludes the restructuring reserve and the gain from the sale
of one of the Company's Tandem offices.
For the Period Ended
--------------------
April 2, March 31,
2000 1999
---- ----
Operating (loss) income, as adjusted ......... $ (551) $ 509
As a percentage of net revenues .............. (0.4)% 0.4%
Net (loss) income, as adjusted ............... $ (2,506) $ (581)
As a percentage of net revenues .............. (2.0)% (0.4)%
(Loss) earnings per diluted share, as adjusted $ (0.29) $ (0.07)
EBITDA, as adjusted .......................... $ 970 $ 2,360
17
EBITDA is earnings (net income) before the effect of interest income and
expense, income tax benefit and expense, depreciation expense and amortization
expense. EBITDA as adjusted excludes the restructuring reserve and the
non-operating gain on sale of the Company's Tandem office in Washington. EBITDA
is presented because it is a widely accepted financial indicator used by many
investors and analysts to analyze and compare companies on the basis of
operating performance. EBITDA is not intended to represent cash flows for the
period, nor has it been presented as an alternative to operating income or as an
indicator of operating performance and should not be considered in isolation or
as a substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
(2) System revenues are the sum of the Company's net revenues (excluding
revenues from franchise royalties and services performed for the franchisees)
and the net revenues of the franchisees. System revenues provide information
regarding the Company's penetration of the market for its services, as well as
the scope and size of the Company's operations, but are not an alternative to
revenues determined in accordance with generally accepted accounting principles
as an indicator of operating performance. The net revenues of franchisees, which
are not earned by or available to the Company, are derived from reports that are
unaudited. System revenues consist of the following amounts reported in
thousands:
For the Period Ended
--------------------
April 2, 2000 March 31, 1999
------------- --------------
Company's Net Revenue ........ $ 126,011 $ 134,114
Less Company revenues from:
Franchise Royalties ....... (763) (1,973)
Services to Franchises .... (11) (4,024)
Add: Franchisee's net revenues 19,842 19,279
--------- ---------
System revenues .............. $ 145,079 $ 147,396
========= =========
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. The
Company's reportable operating segments under SFAS No. 131 include the Tandem
segment and the Synadyne segment. In prior filings of Form 10K and Form 10Q with
the Securities and Exchange Commission, the Company reported Flexible Staffing
Revenues and PEO Revenues, Franchising Revenues, and Other Revenues. PEO
revenues, as reported below, included certain staffing revenues generated by the
Tandem division that the Company believed were operationally consistent with the
PEO business and operational model, but were not includable in the Synadyne
segment due to the way the Company was organized. As the Company sold the
operations of Synadyne effective April 8, 2000, the Company believes changing
its presentation of Company revenues consistent with the above table is
meaningful in terms of understanding operations and trends of the Company. The
following table reconciles Flexible Staffing net revenues and PEO net revenues,
as presented in past filings to the net revenues shown above, reported by the
Company in accordance with the requirements of SFAS No. 131 - see Note 9 to the
Company's Consolidated Financial Statements. The following amounts are presented
in thousands:
For the Period Ended
--------------------
April 2, 2000 March 31, 1999
------------- --------------
Tandem segment revenues .......................... $ 80,383 63.8% $ 73,096 54.5%
Subtract: Industrial staffing client payrolling .. (6,633) 5.3 (8,297) 6.2
--------- ----- --------- -----
Flexible staffing revenues ....................... $ 73,750 58.5% $ 64,799 48.3%
--------- ----- --------- -----
Synadyne segment revenues ........................ $ 44,834 35.6% $ 53,080 39.6%
Add: Industrial staffing client payrolling ....... 6,633 5.3 8,297 6.2
Add: PEO services to Tandem franchises ........... 11 0.0 4,024 3.0
--------- ----- --------- -----
PEO revenues ..................................... $ 51,478 40.9% $ 65,401 48.8%
--------- ----- --------- -----
Other revenues ................................... 31 0.0% 5,965 4.4%
Less: PEO services to Tandem franchises .......... (11) (0.0) (4,024) (3.0)
--------- ----- --------- -----
Other revenues ................................... 20 0.0% 1,941 1.4%
--------- ----- --------- -----
Franchise revenues ............................... 763 0.6 1,973 1.5
--------- ----- --------- -----
Total net revenues ............................... $ 126,011 100.0 $ 134,114 100.0%
========= ===== ========= =====
- - - - - - - --------------------------------------------------------------------------------
18
The Thirteen Weeks Ended April 2, 2000 as compared to the Three Months Ended
March 31, 1999
Net Revenues. Net revenues decreased $8.1 million, or 6.0%, from $134.1 million
in the three months ended March 31, 1999 ("Q1 1999") to $126.0 million in the
thirteen weeks ended April 2, 2000 ("Q1 2000"). This decrease resulted primarily
from (i) the sale of Office Ours, the Company's former clerical division
effective August 30, 1999, (ii) the termination of PEO services offered to
Tandem franchises as of December 31, 1999 and (iii) a decrease in Synadyne
revenues from Q1 1999 to Q1 2000, offset by an increase in Tandem revenues
during the same period.
Tandem
Net revenues from the Company's Tandem division, which provides flexible
staffing services, increased $7.3 million, to $80.3 million for Q1 2000 from
$73.1 million for Q1 1999, or an annualized growth rate of 10.0%. The increase
in Tandem revenues was primarily due to new customers and growth with existing
customers in certain geographic markets that recorded double digit growth,
although the Company also experienced lower growth or declining revenues in
other geographic markets due to the loss or cancellation by the Company of some
large customers. Despite the sale, franchise, closure or consolidation 28 Tandem
offices due to the Restructuring, Tandem's revenue generation remains strong as
the Company contracted with twenty five new large clients subsequent to Q1 1999
that generated revenues of approximately $9 million in Q1 2000. Excluding
offices sold, franchised, closed or consolidated during 1999, Tandem revenue
growth was 15.6%.
Tandem's share of the Company's total net revenues increased to 63.8% for Q1
2000 from 54.5% for Q1 1999, reflecting an increased internal growth rate for
staffing services as well as the discontinuance by the Company of other
operations that do not fit its core business strategy.
Synadyne
Net revenues from the Company's Synadyne division, which provides PEO services,
decreased $8.2 million, to $44.8 million for Q1 2000 from $53.1 million for Q1
1999. This decrease was due primarily to the loss of Synadyne's three largest
non-insurance customers because of a lower pricing structure obtained from a
competitor and the uncertainty surrounding the ownership of Synadyne. Synadyne
revenues represented a decreasing share of the Company's total net revenues, to
35.6% for Q1 2000 from 39.6% for Q1 1999.
Approximately 34% of the Company's Q1 2000 Synadyne 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
Franchise royalty revenues ("Royalties") and gross profit from the Company's
franchising operations decreased from $2.0 million in Q1 1999 to $0.8 million
for Q1 2000. Royalties from Franchising operations represented a decreasing
share of the Company's total net revenues, to 0.6% in Q1 2000 from 1.5% for Q1
1999, primarily due to a decrease in revenues from buyout payments received in
connection with the early termination of certain franchises. (The Company
allowed the early termination of franchise agreements of 38 locations in 1998
and 1999 to enable the Company to develop the related territories. At the time
the Company agreed to terminate a franchise agreement, it received an initial
buyout payment from the former franchisee. The Company continues to receive
payments from some former franchisees based on a percentage of the gross
revenues of the formerly franchised locations for up to three years after the
termination dates. Although those gross revenues are not included in the
Company's net franchisee or system revenue totals, the initial buyout payment,
as well as subsequent payments from the former franchisees, are reflected in
total Royalties reported by the Company).
As part of its growth efforts, the Company expects to increase franchisee net
revenues by continuing 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. The Company also expects to allow few, if any,
remaining franchisees to buyout of their franchise agreements, since nearly all
remaining franchises are in secondary U.S. markets.
19
Net Revenues earned by Tandem franchisees, which are included in the Company's
system revenues, but are not available to the Company, increased from $19.3
million in Q1 1999 to $19.8 million in Q1 2000, due to strong growth from
continuing franchises, which offset the loss of revenues from franchises no
longer in the system.
Gross Profit. Gross profit (margin) decreased $2.4 million, from $19.3 million
in Q1 1999, to $16.9 million in Q1 2000. Gross profit as a percentage of net
revenues decreased to 13.4% in Q1 2000 from 14.4% in Q1 1999. This decrease in
margin percent was primarily due the sale of Office Ours and royalties
comprising a lower percentage of the Company's gross margin dollars in Q1 2000
(4.5%) than in Q1 1999 (10.2%).
Tandem
Gross profit decreased $0.1 million, to $14.9 million for Q1 2000 from $15.0
million for Q1 1999. Consistent with the revenue trend discussed above, this
represented an increased share of the Company's total gross profit, to 88.2% for
Q1 2000 from 80.0% for Q1 1999.
Gross profit margin percent of the Company's Tandem division decreased to 18.5%
in Q1 2000 from 20.5% in Q1 1999, primarily due to the impact of the increased
wages necessary to recruit staffing employees in periods of historically low
unemployment and a greater proportion of larger, longer-term service agreements
which have higher per hour billing and pay rates but lower gross profit margin.
Gross profit margin percent also decrease because of higher workers compensation
costs that were due to claim rates in Q1 2000 and greater than anticipated
expenses for claims still open from 1999. In addition, certain payroll costs
paid temporary employees to provide transportation were not segregated from
other non-billable support costs in Q1 1999; and were therefore included in Q1
1999 SG&A costs, as compared to Q1 2000, when these costs were segregated and
reported in the Company's gross margin results reducing margin accordingly.
Despite the decline in gross profit percent from Q1 1999 to Q1 2000 the decline
in gross margin percent that the Company has experienced over the last two
fiscal years has stabilized as gross margin percent of 18.5% for Q1 2000 is
consistent with the gross profit margin percent from Q4 1999 of 18.3% (adjusted
to be presented a comparable basis to Q1 2000). The Company's profit margin
percent, before taxes and workers compensation costs, improved approximately
1.0%, which was offset by increased workers compensation and payroll tax costs,
due in part to an increase to the reserve for 1999 workers compensation claims
as discussed above, and the change in mix of customers serviced in various
states, which utilize differing payroll tax structures.
The Company anticipates that low unemployment and competition for workers will
continue to affect gross profit margins in Tandem, although in many cases the
Company expects the impact to be offset by operating efficiencies resulting from
the consolidation of offices and the negotiation of price increases to most of
its customers to reflect the value of services being provided. The Company is
also encouraging an increased focus on certain margin related performance
criteria by providing rewards to field personnel commensurate with their
accomplishments. Workers compensation costs will also continue to be a
significant factor affecting Tandem margins, and the Company employs safety
specialists whose roles are to increase safety training and awareness, approve
job-sites and duties, and reduce workers' compensation costs. Based on these
initiatives, the Company expects improvement in its staffing margins; however,
the Company's actual results during fiscal year 2001 may vary depending on,
among other things, competition, unemployment, and general business conditions.
Synadyne
Gross profit from the Company's PEO services decreased $0.4 million, to $1.2
million for Q1 2000 from $1.6 million for Q1 1999, primarily due to decreased
revenues as discussed above. Gross profit margin as a percent of revenues was
2.6% in Q1 2000 compared to 3.1% in Q1 1999, primarily due to increased
20
payroll tax costs based on the change in mix of customers serviced in various
states, which utilize differing payroll tax structures.
Franchising
Royalties generated from franchising operations are received by the Company from
its franchisees and the Company does not incur the expense for payroll and
payroll related taxes. Accordingly, gross profit equals Royalties and gross
margin trends are consistent with the revenue trends discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") decreased $1.3 million, or 7.0%, to $17.4
million in Q1 2000 from $18.7 million in Q1 1999. This decrease was primarily
the result of lower compensation costs of $0.9 million, of which $1.5 million is
due to reduced employee headcount as discussed below, offset by a $0.8 million
increase in variable pay compensation, and credits to the Company's bad debt
provision of $0.5 million in Q1 2000 due to improved collections, as compared to
charges to the Company's bad debt provision in Q1 1999 of $0.5 million - see
"Accounts Receivable". As a percentage of net revenues, Company SG&A decreased
to 13.8% in Q1 2000 from 14.0% in Q1 1999.
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 "Accounts Receivable", and (iii) streamlined other support functions, all of
which should continue the trend of increased SG&A savings in fiscal year 2001.
Restructuring and Asset Impairment Charges. During Q1 2000, the Company recorded
restructuring charges of $0.4 million. As part of the restructuring charges, the
Company has (i) adjusted the carrying value of assets held for disposition by
approximately $67,000 to reflect the estimated fair value of those assets, (ii)
reduced accrued severance costs by approximately $0.2 million to reflect
decreased payments required to be paid to certain severed employees, and (iii)
incurred $0.5 million in professional consulting fees. The Company anticipates
that restructuring charges, including professional consulting fees, will
continue at a reduced level in the first quarter of fiscal year 2001.
Net Interest and Other Expense. Net interest and other expense increased by $0.3
million, to $1.8 million in Q1 2000 from $1.5 million in Q1 1999. This increase
was primarily due to a $0.4 million increase in interest expense arising from
higher interest rates paid for the Company's borrowing facilities in Q1 2000 as
compared to Q1 1999 (see "Liquidity and Capital Resources") offset by a $0.2
million gain on the sale of one of the Company's Tandem branch offices. See
Notes 3 and 5 to the Company's Consolidated Financial Statements.
Income Taxes. The provision for income taxes in Q1 2000 consists of potential
tax benefits of $0.9 million resulting from losses incurred in that period
offset by a deferred tax asset valuation allowance of $0.9 million. The
valuation allowance was established in 1999 and increased by the tax benefits in
Q1 2000 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. See Note 4 to the Company's Consolidated
Financial Statements.
Net (Loss) Income. The net loss in Q1 2000 was $2.7 million, as compared to Q1
1999 net loss of $0.6 million. As discussed above, the change in the net loss is
primarily due to (i) decreased gross profit margin, (ii) increased interest
costs, (iii) restructuring costs, and (v) recognition of the deferred tax
valuation allowance of $0.9 million in Q1 2000, as compared to an income tax
benefit recorded in the Company's income statement in Q1 1999 of $0.4 million.
Adjusted to remove restructuring costs and the non-operating gain from the sale
of the Company's Tandem office in the state of Washington, the Company's net
loss in Q1 2000 was $2.5 million.
21
LIQUIDITY AND CAPITAL RESOURCES
Debt and Other Financing
As of April 2, 2000, 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"), 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"). Effective April 13, 2000, due in part to
the sale of the Company's Synadyne operations, the maximum availability of the
Receivable Facility was reduced from $50.0 million to $33.0 million and
effective May 1, 2000, the maximum availability of the Revolving Credit Facility
was reduced to $25.3 million, including existing letters of credit of $5.0
million. Both facilities are provided by a syndicate of lenders led by Fleet
National Bank ("Fleet") and expire on May 22, 2000. The Company is currently
negotiating with the lenders' syndicate to obtain an extension of existing
financing beyond May 22, 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. 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 (the
"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 under the revolving credit facility to $25.3
million (as of May 1, 2000), 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, to approximately
12.0% 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, while the Revolving Credit Facility bears interest at base
(prime) rate plus 5.0%. As of April 2, 2000 borrowings were $16.3 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 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
4.95% as of March 31, 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. The Company had not made all of the scheduled
payments due under its acquisition notes payable and, as a result, was in
default of these debts having a total principal outstanding of $9.2 million as
of September 30, 1999, but subsequently reduced to $6.9 million as of April 2,
2000 in connection with the Company's sale of certain operations. The terms of
these acquisition notes payable, which are subordinated to the Revolving Credit
Facility and the Receivable Facility, allow the payees to accelerate terms of
payment upon default. 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 Note 5 to the Company's Consolidated Financial
Statements.
22
In addition to the Revolving Credit Facility indebtedness discussed above the
Company had (i) bank standby letters of credit outstanding in the aggregate
amount of $5.0 million as of April 2, 2000, of which $4.3 million is to secure
the pre-2000 portion of the workers' compensation obligations recorded as a
current liability on the Company's consolidated balance sheet and $0.7 million,
which is supported by a $0.8 million cash escrow balance, is to secure future
payments on a capital lease for furniture that was included with the sale of the
Company's corporate support center building; (ii) obligations under capital
leases for property and equipment in the aggregate of $2.8 million; (iii)
obligations under mortgages totaling $0.6 million and (iv) obligations for
annual insurance premiums and other matters totaling $0.6 million, of which a
portion represents prepayment for future benefits and would be refundable to the
Company should the policy be cancelled.
Summary of Cash Flows
The Company's principal uses of cash are for wages and related payments to
job-site employees, operating costs, capital expenditures and repayment of debt
and interest thereon. In Q1 2000 cash provided by operating activities was $6.5
million, as compared with $3.8 million used in operating activities in Q1 1999.
The significant increase in cash from operations is due to the effect of the
termination of the Company's Securitization Facility in 1999, discussed below,
and improved collections of the Company's accounts receivable in Q1 2000 - see
"Accounts Receivable".
As part of the Company's borrowing facilities, in Q1 1999, the Company sold
certain trade accounts receivable to obtain working capital for the Company's
operations. Under this agreement the Company had sold $36.1 million of trade
accounts receivable as of March 31, 1999, which was excluded from the
uncollected accounts receivable balance presented in the Company's Consolidated
Financial Statements. This agreement was subsequently terminated as of October
1, 1999 and replaced by the Receivable Facility, under which the Company
currently obtains working capital. See Note 5 to the Company's Consolidated
Financial Statements. Adjusted to remove the effects of the Securitization
agreement in 1999, cash provided by operating activities increased from $4.8
million in Q1 1999 to $6.5 million in Q1 2000, primarily due to, as previously
stated, improved collections of accounts receivable.
The tables below set forth the Company's cash flows, (i) as presented in the
Company's Consolidated Financial Statements for Q1 2000 and Q1 1999 and (ii)
adjusted to remove the effect of the sale of the Company's uncollected accounts
receivable under the Securitization Facility during Q1 1999.
For the Period Ended
--------------------
Cash flows provided by (used in): April 2, 2000 March 31, 1999
------------- --------------
(Dollars in thousands)
Historical cash flow
- - - - - - - --------------------
Operating activities ................ $ 6,480 $(3,823)
Investing activities ................ (770) (784)
Financing activities ................ (4,880) 524
------- -------
Net increase (decrease) in cash ..... $ 830 $(4,083)
======= =======
Cash flow - as adjusted
- - - - - - - -----------------------
Operating activities, as adjusted ... $ 6,480 $ 4,835
Investing activities ................ (770) (784)
Financing activities, as adjusted ... (4,880) (8,134)
------- -------
Net increase (decrease) in cash ..... $ 830 $(4,083)
======= =======
Cash used in investing activities during Q1 2000 was $0.8 million, as compared
to $0.8 million used in investing activities in Q1 1999, primarily due, in both
periods, to expenditures for property, plant and equipment.
Cash used in financing activities during Q1 2000 was $4.9 million, as compared
to $0.5 million provided by financing activities in Q1 1999. The significant
decrease in cash from financing activities was primarily
23
due to the termination of the Company's Securitization Facility, as mentioned
above, which was replaced by the Receivable Facility, and the paydown of the
Company's borrowing facilities due to improved collections of the Company's
accounts receivable; the sale, franchise, closure or consolidation of offices in
connection with the Company's restructuring efforts - see "Restructuring" and
decreased outstanding accounts receivable due to seasonal fluctuations in
revenue generation - see "Seasonality." However, the seasonal decrease in
revenue generation in Q1 2000 has not been as significant as the first quarters
of past years, such as 1999. Adjusted to remove the effects of the
Securitization Facility in Q1 1999, cash used in financing activities in Q1 1999
was $8.1 million, which was due primarily to the paying down of the Company's
bank borrowing facilities.
Workers' Compensation Collateral
Prior to 1999, the Company secured its workers' compensation obligations by the
issuance of bank standby letters of credit to its insurance carriers, minimizing
the required current cash outflow for such items. In 1999, the Company selected
a pre-funded deductible program whereby expected claims expenses are funded in
advance in exchange for reductions in administrative costs. The required advance
funding is provided through either cash flows from operations or additional
borrowings under the Revolving Credit Facility.
In January 2000, the Company renewed its pre-funded deductible program for one
year. Under the new agreement, the Company will fund $10.1 million in 12
installments for projected 2000 claims expenses. This claim fund requirement
will be adjusted upward or downward each quarter based on the projected cost of
the actual claims incurred during 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.
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 43 days at April 2, 2000. Accounts
receivable decreased by approximately $2 million, due to the sale of 10 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 $3 million related to the 19 staffing
offices that are expected to be sold to third parties in fiscal year 2001.
The Company paid its PEO employees on a weekly, bi-weekly, semi-monthly or
monthly basis for their services, and received payments simultaneously from
approximately 80% (based on revenues) of its existing customers and 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.
24
Capital Expenditures
The Company anticipates spending up to $2 million during the next twelve months
to improve its management information and operating systems, upgrade existing
locations and other capital expenditures including, but not limited to, opening
new staffing locations.
Future Liquidity
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, for 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 May 22, 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 and Revolving Credit Facility under similar terms, including
interest rates, for a period subsequent to May 22, 2000; however, the Company
believes existing facilities will need to be replaced by a combination of
financing secured by receivables ("Receivable Debt"), medium-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
25
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. The
Company recorded an adjustment to the carrying value of assets held for
disposition of approximately $67,000 in 2000 to reflect their estimated fair
value as of April 2, 2000. See Note 3 to the Company's Consolidated Financial
Statements. While the remaining net unamortized balance of intangible assets as
of April 2, 2000 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
The restructuring charge accrual and its utilization, amounts in thousands, are
as follows:
Utilization
Original Balance at Charges to ----------- Balance at
Charge 12/31/99 Operations Cash Non-Cash 04/02/00
Employee severance and other termination benefits .. $ 4,040 $ 2,722 $ (204) $ 379 $ -- $ 2,139
Professional fees .................................. 1,205 34 459 459 -- 34
Lease termination and write-down of leasehold
improvements at closed offices ................... 400 105 1 57 -- 49
Other restructuring costs .......................... 146 44 33 44 -- 33
------- ------- ------- ------- ------- -------
Accrued restructuring charges ...................... 5,791 2,905 289 939 -- 2,255
Write-down to fair value of assets identified for
Identified for disposition ....................... 5,429 -- 67 -- 67 --
------- ------- ------- ------- ------- -------
Total restructuring and asset impairment activity .. $11,220 $ 2,905 $ 356 $ 939 $ 67 $ 2,255
======= ======= ======= ======= ======= =======
The $5.4 million write-down of assets identified for disposition, recognized in
the Company's results of operations for the year ended December 31, 1999,
relates to 27 Tandem offices, as follows: (i) a $0.4 million loss related to two
staffing offices in Nevada 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 North Carolina and 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 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 20 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. Based on changes of the estimated fair value of
certain assets held for disposition as of April 2, 2000, the Company recorded an
additional $67,000 write-down of assets to fair value, which was charged to
restructuring costs in Q1 2000.
In addition to the write-down of assets identified for disposition, the original
$11.2 million restructuring charge includes $4.0 million for severance and other
termination benefits, $1.2 million for professional
26
fees, and $0.6 million in lease termination and other charges. Severance and
other termination benefits were decreased by $0.2 million in Q1 2000 to reflect
a reduction of amounts to be paid in connection with certain severance packages
accrued as part of the restructuring charge in 1999. The remaining liability of
$2.1 million for severance and other termination benefits as of April 2, 2000
consists of (i) $1.1 million for six employees terminated in 1999 and Q1 2000
and (ii) $1.0 million for 56 employees to be terminated by June 30, 2000.
Professional fees of $1.2 million included in the restructuring charge in 1999
and $0.5 million in 2000 are primarily amounts paid to Crossroads LLC, formerly
Crossroads Capital Partners, LLC ("Crossroads") for its services related to the
Restructuring. The Company also expects to record restructuring charges in the
first quarter of fiscal year 2001 (the thirteen weeks ended July 2, 2000) for
services relating to Restructuring activities to be rendered by Crossroads
during that period.
The Company utilized $0.4 million in 1999 and $0.1 million of the restructuring
charge during Q1 2000 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 April 2, 2000, there were 19 Tandem offices remaining to be sold as part
of the Restructuring, and the Company had classified the related tangible and
intangible assets, excluding cash, accounts receivable and deferred income
taxes, as assets held for disposition. 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
in Q1 2000. In some cases, the estimated fair value of these assets held for
disposition was based on management's judgment, and as such, 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, $1.4 million was used
to reduce the Company's bank debt and $0.9 million (of which $0.8 million
remains as of April 2, 2000) was put in escrow and will be released over the
period through October 1, 2002.
The Company's assets held for disposition as of April 2, 2000 are stated at the
lower of original cost (net of accumulated depreciation or amortization) or fair
value (net of selling and disposition costs) are as follows (presented in
thousands):
Net Original Cost Lower of
Property Goodwill and Other Cost or
and Equipment Intangible Assets Total Fair Value
------------- ----------------- ----- ----------
Tandem branch offices ... $ 619 $5,284 $5,903 $2,167
Synadyne division ....... -- 242 242 242
------ ------ ------ ------
$ 619 $5,526 $6,145 $2,409
====== ====== ====== ======
As part of the Restructuring efforts, 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 and Q1 2000. Certain Synadyne assets, with a carrying
value of $1.3 million, were removed from such classification as of December 31,
1999 when it became apparent that they would not be sold in connection with the
sale of the Synadyne operations on April 8, 2000. The Company expects to sell or
abandon 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
27
operations and operations from assets held for disposition or sold as part of
the Company's restructuring efforts and other disposed operations. Those
operations include: (i) the Synadyne division, sold as of April 8, 2000, (ii)
Office Ours, the Company's clerical division, sold during the third quarter of
1999, (iii) franchise PEO operations, which were ceased on December 31, 1999,
and (iv) Tandem branch offices disposed or held for sale as of April 2, 2000.
Ongoing operations include (i) the Tandem division, which provides flexible
industrial staffing and (ii) franchising.
For the Period Ended
--------------------
April 2, 2000 March 31, 1999
------------- --------------
(Dollars in thousands)
Net revenues:
Total Company ................................................. $ 126,011 $ 134,114
Less revenues from assets held for sale and disposed/ceased
operations:
Synadyne .................................................. (44,834) (53,080)
Clerical, franchise PEO and other ......................... (8,278) (17,911)
--------- ---------
Subtotal - revenues from assets held for disposal and
disposed/ceased operations ................................ (53,112) (70,991)
--------- ---------
Net revenues from ongoing operations .......................... $ 72,899 $ 63,123
========= =========
Gross profit:
Total Company ................................................. $ 16,854 $ 19,250
Less assets gross profit from held for sale and disposed/ceased
operations:
Synadyne .................................................. (1,160) (1,625)
Clerical, franchise PEO and other ......................... (1,420) (2,857)
--------- ---------
Subtotal - gross profit from assets held for disposal and
disposed/ceased operations ................................ (2,580) (4,482)
--------- ---------
Gross profit margin from ongoing operations ................... $ 14,274 $ 14,768
========= =========
Gross profit margin as a percentage of net revenues:
Ongoing operations ............................................ 19.6% 23.4%
Operations from assets held for sale and
disposed/ceased operations ................................. 4.9% 6.3%
Tandem branches sold, franchised or held for sale as of April 2, 2000 generated
revenues of $8.3 million, and $12.0 million for the quarters ended April 2, 2000
and March 31, 1999, respectively, and earned gross profit margin of $1.4 million
and $2.2 million for those years. Those same branches incurred SG&A expense of
$1.4 million and $2.1 million, excluding depreciation and amortization costs, in
the quarters ended April 2, 2000 and March 31, 1999 respectively. Office Ours,
the Company's former clerical division which was sold on August 30, 1999,
generated revenues of $1.9 million and earned gross profit of $0.5 million in Q1
1999. In addition, Office Ours incurred $0.5 in SG&A expense, excluding
depreciation and amortization expense during Q1 1999. SG&A for the Synadyne
division, excluding depreciation and amortization expense, was $1.3 million and
$1.2 million for the Q1 2000 and Q1 1999, respectively. Results of flexible
industrial staffing offices that were consolidated in 1999 into existing
offices, as part of the Company's Restructuring efforts, are included in ongoing
operations.
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
28
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.
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 thirteen weeks
ended July 2, 2001. Although it has not determined the effects, if any, that
implementation will have, the Company is not currently a party to any
transactions involving derivatives. SFAS No. 133 could increase volatility in
earnings and other comprehensive income if the Company enters into any such
transactions in the future.
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.
29
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Form 10-Q
are forward-looking statements, including but not limited to, statements
regarding the Company's expectations or beliefs concerning the Company's
strategy and objectives, expected sales and other operating results, the effect
of changes in the Company's gross margin, the Company's liquidity, anticipated
capital spending, the availability of financing, equity and working capital to
meet the Company's future needs, economic conditions in the Company's market
areas, costs and the tax-qualified status of the Company's 401(k) and 413(c)
plans. The words "aim," "believe," "expect," "anticipate," "intend," "estimate,"
"will," "should," "could" and other expressions which indicate future events and
trends identify forward-looking statements. Such forward-looking statements
involve known and unknown risks and are also based upon assumptions of future
events, which may not prove to be accurate. Therefore, actual results may differ
materially from any future results expressed or implied in the forward-looking
statements. These known and unknown risks and uncertainties include, but are not
limited to, changes in U.S. economic conditions, particularly in the
manufacturing sector; 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 new ones; the Company's ability to raise capital in the public equity
markets; 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.
30
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-Q, and in other reports filed by the Company with the Securities and Exchange
Commission, including, but not limited to the Company's Form 10-K for the year
ended December 31, 1999.
31
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's assessment of its sensitivity
to market risk as of April 2, 2000, as compared to the information included in
Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk",
of the Company's Form 10-K for the year ended December 31, 1999, as filed with
the Securities and Exchange Commission on April 14, 2000.
32
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None to report.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
None to report.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
The Company had not made all of the scheduled payments due on its subordinated
acquisition notes payable, and, as a result, was in default on these debts
having total principal outstanding of $6.9 million as of April 2, 2000. The
terms of these acquisition notes payable, which are subordinated to the credit
facilities with the syndicate of lenders, allow the payees to accelerate terms
of payment upon default. Acceleration of this debt requires prior written notice
to the Company by the various payees, which has been received from three payees
as of April 2, 2000.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to report.
ITEM 5 - OTHER INFORMATION
Effective April 8, 2000, the Company sold certain of the assets of its Synadyne
division to Teamstaff V, Inc., a Florida corporation ("Teamstaff V") an
affiliate of Teamstaff, Inc., a New Jersey corporation for $3.5 million cash,
with up to an additional $1.25 million to be paid to the Company by Teamstaff on
April 30, 2001 based on the total number of employees at each of the customer
accounts sold to Teamstaff V which are still employed by Teamstaff V on
September 30, 2000 and April 30, 2001. The assets included all of the customer
accounts relating to the Company's PEO business, the trade name "Synadyne,"
certain desktop computers and marketing materials relating to the Company's PEO
business.
In connection with the sale of the Synadyne division, the Company is obligated
to provide certain support services to Teamstaff V through July 31, 2000,
including accounting and information systems services. The Company has also
contracted with Teamstaff V to provide PEO services to the Company and its
employees for an initial term expiring on December 31, 2001.
During the first week of May 2000, the Company moved its corporate headquarters
to 1690 South Congress Avenue, Delray Beach, Florida 33445.
Separation Agreement and Release
The Company entered into a Separation Agreement and Release with Paul Burrell,
its former Chief Executive Officer on February 21, 2000, with Robert Lefcort,
the former President of its Synadyne division on April 6, 2000 and with Brian
Nugent, former Vice President, Secretary and General Counsel of the Company on
April 21, 2000.
33
Pursuant to the terms of the agreement with Mr. Burrell, Mr. Burrell resigned as
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company and as an officer, director and/or manager of any affiliates of the
Company. The Company agreed to pay Mr. Burrell total severance compensation of
$750,000, payable in bi-weekly installments of 14423.07. Mr. Burrell shall have
the right to exercise any stock option previously granted to him during the
three year period beginning on February 21, 2000, however, certain restrictions
were placed on the amount of profit Mr. Burrell can realize on the exercise of
the options and the sale of the underlying stock.
Pursuant to the terms of the agreement with Mr. Lefcort, Mr. Lefcort resigned as
President of the Company's Synadyne division. The Company agreed to pay Mr.
Lefcort total severance compensation of $395,286, payable in equal bi-weekly
installments of $7,601.64 and a retention bonus in the amount of $80,000, which
was paid on April 15, 2000. The Company agreed to provide an interest-free loan
to Mr. Lefcort in the amount of $200,000 on June 1, 2000. Mr. Lefcort agreed to
repay the loan in equal bi-weekly installments and to repay the remaining
balance of the loan on or before June 1, 2002. Mr. Lefcort shall have the right
to exercise any stock option previously granted to him during the three year
period beginning on April 6, 2000.
Pursuant to the terms of the agreement with Mr. Nugent, Mr. Nugent resigned as
Vice President, Secretary and General Counsel of the Company and any affiliates
of the Company. The Company agreed to pay Mr. Nugent total severance
compensation of $229,500, payable in equal bi-weekly installments of $12,736.11.
Mr. Nugent shall have the right to exercise any stock option previously granted
to him during the two year period beginning on April 21, 2000, however, certain
restrictions were placed on the amount of profit Mr. Nugent can realize on the
exercise of the options and the sale of the underlying stock.
34
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Number Description
3.1 Amended and Restated Articles of Incorporation of the Company (1)
3.2 Amended and Restated Bylaws of the Company (2)
10.60 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 (3)
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 (3)
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 (3)
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 (3)
10.64 Seventh 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 April 30, 2000
10.65 Fourth 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 April 30, 2000
10.66 Eighth Amendment to Third Amended and Restated Credit Agreement among
Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc., Outsource International of America, Inc., Mass Staff,
Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
East, LLC, Guardian Employer West, LLC, each of the banks party to the
Credit Agreement and BankBoston, N.A, as agent for the banks, dated as
of May 5, 2000
10.67 Fifth Amendment to Revolving Credit Agreement among Outsource Funding
Corporation, the banks from time to time parties thereto, and
BankBoston, N.A., as agent for the banks, dated May 5, 2000
10.80 Employment agreement between Jon Peterson and the Company dated as of
February 14, 2000 (3)
10.81 Employment agreement between Garry E. Meier and the Company dated as of
February 7, 2000 (3)
10.82 Separation Agreement and Release between Paul Burrell and the Company
effective February 14, 2000.
10.83 Separation Agreement and Release between Robert Lefcort and the Company
effective April 6, 2000.
10.84 Separation Agreement and Release between Brian Nugent and the Company
effective April 21, 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 (3)
10.86 Shared Services Agreement by and between Team Staff, Inc. and Outsource
International, Inc., dated as of April 7, 2000 (3)
27 Financial Data Schedule
- - - - - - - --------------------------------------------------------------------------------
(1) Incorporated by reference to the Exhibits to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration Statement No.
333-33443) as filed with the Securities and Exchange Commission on October 21,
1997.
(2) Incorporated by reference to the Exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Registration Statement No.
333-33443) as filed with the Securities and Exchange Commission on September 23,
1997.
35
(3) Incorporated by reference to the exhibits to the Company's Form 10-K for the
year ended December 31, 1999, as filed with the Securities and Exchange
Commission on April 14, 2000.
- - - - - - - --------------------------------------------------------------------------------
(b) Reports on Form 8 - K:
No reports were filed on Form 8-K during the transition period ended April 2,
2000.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OUTSOURCE INTERNATIONAL, INC.
Date: May 17, 2000 By: /s/ Garry E. Meier
-------------------------------------
Garry E. Meier
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: May 17, 2000 By: /s/ Scott R. Francis
-------------------------------------
Scott R. Francis
Chief Financial Officer
(Principal Financial Officer)
37
EXHIBIT INDEX
Exhibit No. Description
10.64 Seventh 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 April 30, 2000.
10.65 Fourth 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
April 30, 2000.
10.66 Eighth Amendment to Third Amended and Restated Credit
Agreement among Outsource International, Inc., Capital
Staffing Fund, Inc., Outsource Franchising, Inc., Synadyne I,
Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV,
Inc., Synadyne V, Inc., Employees Insurance Services, Inc.,
Outsource International of America, Inc., Mass Staff, Inc.,
Staff All, Inc., Outsource of Nevada, Inc., Employment
Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian
Employer East, LLC, Guardian Employer West, LLC, each of the
banks party to the Credit Agreement and BankBoston, N.A, as
agent for the banks, dated as of May 5, 2000.
10.67 Fifth Amendment to Revolving Credit Agreement among Outsource
Funding Corporation, the banks from time to time parties
thereto, and BankBoston, N.A., as agent for the banks, dated
May 5, 2000.
10.82 Separation Agreement and Release between Paul Burrell and the
Company effective February 14, 2000.
10.83 Separation Agreement and Release between Robert Lefcort and
the Company effective April 6, 2000.
10.84 Separation Agreement and Release between Brian Nugent and the
Company effective April 21, 2000.
27 Financial Data Schedule
38