UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 000-23147
OUTSOURCE INTERNATIONAL, INC.
-----------------------------
(Exact Name of Registrant as Specified in Its Charter)
Florida 65-0675628
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1144 East Newport Center Drive, Deerfield Beach, Florida 33442
- - -------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (954) 418-6200
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such 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 CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at August 9, 1999
----- -----------------------------
Common Stock, par value $.001 per share 8,657,913
OUTSOURCE INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
Item 1 - Financial Statements
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 ..... 2
Consolidated Statements of Income for the three months
ended June 30, 1999 and 1998 .............................................. 3
Consolidated Statements of Income for the six months
ended June 30, 1999 and 1998 .............................................. 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 .............................................. 5
Notes to Consolidated Financial Statements ................................ 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................... 18
Item 3 - Quantitative and Qualitative Disclosures about Market Risk ................ 36
PART II - OTHER INFORMATION
Item 3 - Defaults Upon Senior Securities ................................... 37
Item 4 - Submission of Matters to a Vote of Security Holders................ 37
Item 5 - Other Information ................................................. 38
Item 6 - Exhibits and Reports on Form 8-K .................................. 39
Signatures ......................................................................... 41
TANDEM (r), SYNADYNE (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
June 30, 1999 (UNAUDITED) and December 31, 1998
(Amounts in thousands)
ASSETS June 30, 1999 December 31, 1998
------------- -----------------
Current Assets:
Cash ...................................................................... $ 2,563 $ 5,501
Trade accounts receivable, net of allowance for doubtful accounts of
$2,746 and $1,924 .................................................... 17,307 12,946
Funding advances to franchises ............................................ 76 441
Deferred income taxes and other current assets ............................ 9,574 7,795
--------- ---------
Total current assets ................................................. 29,520 26,683
Property, improvements and equipment, net ................................. 17,081 17,628
Goodwill and other intangible assets, net ................................. 62,520 64,262
Other assets .............................................................. 3,506 3,429
--------- ---------
Total assets ......................................................... $ 112,627 $ 112,002
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable........................................................... $ 8,808 $ 5,217
Accrued expenses:
Payroll .............................................................. 7,847 4,322
Payroll taxes ........................................................ 5,377 4,067
Workers' compensation and insurance .................................. 7,861 10,659
Other ................................................................ 2,334 2,482
Other current liabilities ................................................. 1,022 1,312
Current maturities of long-term debt to related parties ................... 1,204 541
Current maturities of other long-term debt ................................ 6,610 6,782
Revolving credit facility ................................................. 18,216 --
--------- ---------
Total current liabilities ................................................. 59,279 35,382
Non-Current Liabilities:
Revolving credit facility ................................................. -- 20,980
Long-term debt to related parties, less current maturities ................ -- 745
Other long-term debt, less current maturities ............................. 9,606 9,257
Other non-current liabilities ............................................. 983 1,050
--------- ---------
Total liabilities .................................................... 69,868 67,414
--------- ---------
Commitments and Contingencies (Notes 3 and 5)
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 ....................................................... (10,796) (8,967)
--------- ---------
Total shareholders' equity ........................................... 42,759 44,588
--------- ---------
Total liabilities and shareholders' equity ........................... $ 112,627 $ 112,002
========= =========
See accompanying notes to consolidated financial statements.
2
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30, 1999 and 1998
(UNAUDITED)
(Amounts in thousands, except per share data)
Three Months Ended
June 30, 1999 June 30, 1998
------------- -------------
Net revenues ............................................ $ 143,454 $ 134,796
Cost of revenues ........................................ 122,871 113,520
----------- -----------
Gross profit .................................. 20,583 21,276
----------- -----------
Selling, general and administrative expenses:
Amortization of intangible assets .................. 934 977
Other selling, general and administrative .......... 20,152 17,388
----------- -----------
Total selling, general and administrative expenses ...... 21,086 18,365
----------- -----------
Operating (loss) income ................................. (503) 2,911
----------- -----------
Other expense (income):
Interest expense (net) ............................. 1,702 1,438
Other income (net) ................................. (20) (33)
----------- -----------
Total other expense (income) ............................ 1,682 1,405
----------- -----------
(Loss) income before (benefit) provision for income taxes (2,185) 1,506
(Benefit) provision for income taxes .................... (936) 411
----------- -----------
Net (loss) income ............................. $ (1,249) $ 1,095
=========== ===========
Weighted average common shares outstanding:
Basic .............................................. 8,657,913 8,609,155
=========== ===========
Diluted ............................................ 8,657,913 10,120,871
=========== ===========
(Loss) earnings per share:
Basic .............................................. $ (0.14) $ 0.13
=========== ===========
Diluted ............................................ $ (0.14) $ 0.11
=========== ===========
See accompanying notes to consolidated financial statements.
3
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1999 and 1998
(UNAUDITED)
(Amounts in thousands, except per share data)
Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
Net revenues ............................................................ $ 277,568 $ 255,782
Cost of revenues ........................................................ 237,523 216,468
----------- -----------
Gross profit .................................................. 40,045 39,314
----------- -----------
Selling, general and administrative expenses:
Amortization of intangible assets .................................. 1,858 1,722
Other selling, general and administrative .......................... 38,182 32,764
----------- -----------
Total selling, general and administrative expenses ............ 40,040 34,486
----------- -----------
Operating income ........................................................ 5 4,828
----------- -----------
Other expense (income):
Interest expense (net) ............................................. 3,283 2,517
Other income (net) ................................................. (64) (38)
----------- -----------
Total other expense (income) .................................. 3,219 2,479
----------- -----------
(Loss) income before (benefit) provision for income taxes ............... (3,214) 2,349
(Benefit) provision for income taxes .................................... (1,385) 581
----------- -----------
Net (loss) income ............................................. $ (1,829) $ 1,768
=========== ===========
Weighted average common shares outstanding:
Basic .............................................................. 8,657,913 8,546,856
=========== ===========
Diluted ............................................................ 8,657,913 10,077,485
=========== ===========
(Loss) earnings per share:
Basic .............................................................. $ (0.21) $ 0.21
=========== ===========
Diluted ............................................................ $ (0.21) $ 0.18
=========== ===========
See accompanying notes to cosolidated financial statements.
4
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 1998
(UNAUDITED)
(Amounts in thousands)
Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income .................................................................... $ (1,829) $ 1,768
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization ..................................................... 3,696 3,150
Deferred income taxes ............................................................. (1,547) 595
Notes received from franchises..................................................... (796) -
Changes in assets and liabilities (excluding effects of acquisitions):
(Increase) decrease in:
Trade accounts receivable ................................................ (3,747) (3,081)
Prepaid expenses and other current assets ................................ 116 (66)
Other assets ............................................................. (90) 1
Increase (decrease) in:
Accounts payable ......................................................... 1,773 (417)
Accrued expenses:
Payroll .............................................................. 3,525 4,032
Payroll taxes ........................................................ 1,310 1,847
Workers' compensation and insurance .................................. (2,798) 811
Other ................................................................ 299 (422)
Other current liabilities ................................................ (291) (396)
-------- --------
Net cash (used in) provided by operating activities .......................... (379) 7,822
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Funding repayments from franchises, net .............................................. 366 992
Property and equipment expenditures .................................................. (1,218) (2,495)
Proceeds from property and equipment sales ........................................... 1,600 --
Expenditures for acquisitions ........................................................ (40) (26,892)
-------- --------
Net cash provided by (used in) investing activities .......................... 708 (28,395)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in excess of outstanding checks over bank balance,
included in accounts payable .................................................... 1,817 2,889
(Repayments) net proceeds from revolving credit facility ............................. (2,764) 20,702
Proceeds from interest collar termination............................................. 250 -
Related party debt repayments ........................................................ (128) (229)
Repayment of other long-term debt .................................................... (2,442) (2,469)
Exercise of warrants ................................................................. -- 2
-------- --------
Net cash provided by (used in) financing activities .......................... (3,267) 20,895
-------- --------
Net (decrease) increase in cash ...................................................... (2,938) 322
Cash, beginning of period ............................................................ 5,501 1,685
-------- --------
Cash, end of period .................................................................. $ 2,563 $ 2,007
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ........................................................................ $ 2,799 $ 2,391
======== ========
See accompanying notes to consolidated financial statements.
5
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements and the related information in
these notes as of June 30, 1999 and for the three and six months ended June 30,
1999 and 1998 are unaudited. Such interim consolidated financial statements have
been prepared on the same basis as the audited consolidated financial statements
and, in the opinion of management, reflect all adjustments (including normal
accruals) necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods presented. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full year. The interim financial statements
should be read in conjunction with the audited financial statements for the year
ended December 31, 1998, included in the Company's Form 10-K filed with the
Securities and Exchange Commission on March 31, 1999.
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
No. 133 defines derivatives and establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 also
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133, as modified by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
and cannot be applied retroactively. The Company intends to implement SFAS No.
133 in its consolidated financial statements as of and for the three months
ended March 31, 2001, although it has not determined the effects, if any, that
implementation will have. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.
NOTE 2. ACQUISITIONS
The Company has made no acquisitions through June 30 1999. The following
pro-forma results of operations for the three months and six months ended June
30, 1998 have been prepared assuming the acquisitions completed by the Company
during 1998 (and described in the Company's audited consolidated financial
statements for that year) had occurred as of the beginning of the periods
presented, including adjustments to the historical financial statements for
additional amortization of intangible assets, increased interest on borrowings
to finance the acquisitions and discontinuance of certain compensation
previously paid by the acquired businesses to their shareholders, as well as the
related income tax effects.
6
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. ACQUISITIONS (CONTINUED)
The pro forma operating results are not necessarily indicative of what would
have occurred had these acquisitions been consummated as of the beginning of the
periods presented, or of future operating results. In certain cases, the
operating results for periods prior to the acquisitions are based on (a)
unaudited financial statements provided by the seller or (b) an estimate of
revenues, cost of revenues and/or selling, general and administrative expenses
based on information provided by the seller or otherwise available to the
Company. In these cases, the Company has made a reasonable attempt to obtain the
most complete and reliable financial information and believes that the financial
information it used is reasonably accurate, although the Company has not
independently verified such information. The following amounts are in thousands,
except per share data:
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
(Historical) (Pro Forma) (Historical) (Pro Forma)
------------ ----------- ------------ -----------
Net revenues $ 143,454 $ 138,814 $ 277,568 $ 274,441
Operating (loss) income (503) 3,289 5 5,887
Net (loss) income (1,249) 1,280 (1,829) 2,021
Weighted average common shares outstanding
Basic 8,657,913 8,609,155 8,657,913 8,556,757
=========== =========== =========== ===========
Diluted 8,657,913 10,120,871 8,657,913 10,087,578
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $ (0.14) $ 0.15 $ (0.21) $ 0.24
=========== =========== =========== ===========
Diluted $ (0.14) $ 0.13 $ (0.21) $ 0.20
=========== =========== =========== ===========
Earnings (loss) per share included in the above 1998 information has been
prepared on the same basis as discussed in Note 8, except for an increase by
9,901 basic and 10,088 diluted shares, for the three and six months ended June
30, 1998. Such increase in shares reflects adjustments for the timing of the
issuance of common stock and options in connection with the acquisitions.
Goodwill and other intangible assets consist of the following amounts, which are
presented in thousands:
As of As of
June 30, 1999 December 31, 1998
------------- -----------------
Goodwill ........................................... $32,923 $32,806
Territory rights ................................... 24,743 24,743
Customer lists ..................................... 10,105 10,105
Covenants not to compete ........................... 2,191 2,191
Employee lists ..................................... 417 417
------- -------
Goodwill and other intangible assets ............... 70,379 70,262
Less: Accumulated amortization ..................... 7,859 6,000
------- -------
Goodwill and other intangible assets, net .......... $62,520 $64,262
======= =======
7
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. 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):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
Statutory rate applied to income before
income taxes $ (765) (35.0)% $ 527 35.0% $(1,125) (35.0)% $ 822 35.0%
Increase (decrease) in income taxes
resulting from:
State income taxes, net of federal benefit (80) (3.7) 78 5.2 (110) (3.4) 127 5.4
Employment tax credits (165) (7.5) (247) (16.4) (290) (9.0) (450) (19.2)
Other 74 3.4 53 3.5 140 4.4 82 3.4
------- ----- ------- ---- ------- ----- ------- -----
Total $ (936) (42.8)% $ 411 27.3% $(1,385) (43.0)% $ 581 24.6%
======= ===== ======= ==== ======= ===== ======= =====
The employment tax credit carryforward of $1.4 million as of June 30, 1999 will
expire during the years 2012 through 2019. The employment tax credits recorded
by the Company from February 21, 1997 through June 30, 1999 include Federal
Empowerment Zone ("FEZ") credits which represent a net tax benefit of
approximately $0.6 million. Although the Company believes that these FEZ credits
have been reasonably determined, the income tax law addressing how FEZ credits
are determined for staffing companies is evolving. As a result, the Company's
position with regards to the calculation of the FEZ credits has been challenged
by the Internal Revenue Service ("IRS"), as discussed below.
During April 1999, the Company received a report from an IRS agent proposing
adjustments to the previously reported taxable income and tax credits for
certain of the Company's subsidiaries for the years ended December 31, 1994,
1995 and 1996. The Company is currently disputing these proposed adjustments and
as a result, the IRS agent's supervisor has met with the Company's management to
discuss these adjustments and has agreed to hold more meetings with the Company
before the IRS makes a final determination and assessment, if any, with respect
to these matters. 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 shareholder distributions of up to
approximately $5.0 million could result as discussed in Note 5.
Deferred income taxes and other current assets at June 30, 1999 includes $1.7
million which will be available to reduce the tax liability, if any, arising
from the Company's operating results during the remainder of 1999. However,
pending those results, the $1.5 million portion of that benefit arising in the
first six months of 1999 has been reflected as an adjustment to net income
(loss) in arriving at cash provided by operating activities in the Company's
Consolidated Financial Statement of Cash Flow for that period.
8
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. DEBT
The Company's primary sources of funds for working capital and other needs are a
$29.9 million credit line with a syndicate of lenders led by BankBoston, N.A.
(the "Revolving Credit Facility") and a $50.0 million accounts receivable
securitization facility with a BankBoston affiliate.
The Revolving Credit Facility contains certain affirmative and negative
covenants relating to the Company's operations, certain of which were amended in
February 1999 in order to provide additional flexibility to the Company as well
as enabling it to be in compliance with such covenants as of December 31, 1998
and March 31, 1999. These covenant modifications also resulted in a 0.5% per
annum increase in the bank margin component of the interest rate charged
thereunder, which was offset by a 0.6% per annum decrease in the Eurodollar base
rate during the first six months of 1999. At June 30, 1999, the Revolving Credit
Facility was bearing interest at an annualized rate of 7.75%. In addition,
subsequent to June 30, 1999, the lenders syndicate did not allow the Company to
utilize Euro rate based borrowings under the Revolving Credit Facility, which
resulted in an effective increase in the Company's borrowing rate under the
facility of approximately 0.8% per annum. Commencing June 30, 1999, the
Company's lack of compliance with these covenants as of that date was waived by
the lenders syndicate until August 31, 1999 pending completion of an agreement,
currently in negotiation, containing revised covenants to enable the Company's
compliance through December 31, 1999. Such temporary waivers were granted in
conjunction with the extension of the terms of the Liquidity Facility, as
discussed below, as well as a reduction of the Revolving Credit Facility from
$34.0 million to $29.9 million and additional restrictions placed on the
issuance or renewal of letters of credit. As a result of these changes, the
Revolving Credit Facility was classified as current in the Company's
consolidated financial statements as of June 30, 1999.
Effective July 27, 1998, the Company entered into a five year financing
arrangement under which it can sell up to a $50.0 million secured interest in
its eligible accounts receivable to EagleFunding Capital Corporation ("Eagle"),
which uses the receivables to secure A-1 rated commercial paper (the
"Securitization Facility"). The Company's cost for this arrangement is
classified as interest expense and is based on the interest paid by Eagle on the
balance of the outstanding commercial paper, which in turn is determined by
prevailing interest rates in the commercial paper market and was approximately
5.15% as of June 30, 1999. As of June 30, 1999, a $42.4 million interest in the
Company's uncollected accounts receivable had been sold under this agreement,
which amount is excluded from the accounts receivable balance presented in the
Company's consolidated financial statements.
The Securitization Facility requires bank liquidity commitments ("Liquidity
Facility") totaling no less than $51.0 million. The Liquidity Facility has been
provided by the syndicate of lenders that participate in the Revolving Credit
Facility for a one year term originally expiring July 26, 1999 at 0.375% per
annum, which term has currently been extended to September 27, 1999,pending
completion of an extension to December 31, 1999 that the Company and the
syndicate are currently negotiating.
As of June 30, 1999, the Company had bank standby letters of credit outstanding
in the aggregate amount of $8.4 million under a letter of credit facility (which
is part of the Revolving Credit Facility) to secure certain workers compensation
obligations already recorded as a liability on the Company's balance sheet. In
August 1999, the outstanding letters of credit were reduced by $2.0 million
based on corresponding payments made in previous months to the Company's
insurance carrier, which payments reduced the accrued liability supported by the
letter of credit.
9
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. DEBT (CONTINUED)
The Company and the lenders syndicate are currently negotiating modifications to
the Revolving Credit Facility, as well as an extension of the Liquidity
Facility. Although there can be no assurances, the Company expects that the
lenders syndicate will extend adequate financing through December 31, 1999 to
meet the Company's needs, based on the planned restructuring of Company
operations (see Note 10). The Company has already begun the process of
identifying and evaluating alternative financing sources to replace its existing
financing with the lenders syndicate.
In order to remain in compliance with certain covenants in its 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 subordinated acquisition notes payable. As of August 12, 1999 the Company
had not made all scheduled payments due and first became in default under this
debt having a total principal outstanding of $8.2 million (not including related
party amounts as discussed in Note 6). Due to the subordinated status and other
terms of the debt, the payees are unable to take collection actions against the
Company for at least six months. Furthermore, since acceleration of this debt
requires prior written notice to the Company by the various payees, which has
been received from only three of fifteen payees as of August 16, 1999, no change
has been made in the classification of this debt between current and non-current
as reflected in the Company's consolidated financial statements as of June 30,
1999.
During April 1999, the Company received $1.6 million from a financial
institution in connection with a sale/leaseback transaction, which amount
exceeded, at that time of the transaction, the net book value of property and
equipment previously purchased by the Company. The unrealized gain is being
deferred and amortized over the life of the assets. The capital lease obligation
is repayable over three years at an imputed interest rate of approximately 10%
per annum.
Effective June 30, 1999, the Company terminated the interest rate collar
agreement with BankBoston, N.A. which resulted in proceeds of $250,000. Since
the underlying debt and receivable securitization facility previously being
hedged by this agreement are still in place, such proceeds have been recorded as
deferred income and will be amortized, against interest expense, over the
remaining life of those underlying financing arrangements. To the extent those
underlying financing arrangements are terminated in the future (including
modifications substantial enough so that they would be considered to be
terminated), the unamortized portion of the gain related to the terminated
arrangements will be recognized in results of operations at the time of
termination.
10
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. COMMITMENTS AND CONTINGENCIES
Shareholder distribution: Effective February 21, 1997, the Company acquired all
of the outstanding capital stock of nine companies under common ownership and
management, in exchange for shares of the Company's common stock and
distribution of previously undistributed taxable earnings of those nine
companies (the "Reorganization"). 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 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 3.
Stock options and warrants: As of June 30, 1999, 1,026,851 options and 1,208,988
warrants issued prior to 1999 to purchase shares of the Company's common stock
were still outstanding. During January 1999, the Company granted options to
purchase 72,500 shares of the Company's common stock, vesting over a four year
period from the grant date and with an exercise price of $6.00 per share. During
March 1999, the Company granted options to purchase 121,825 shares of the
Company's common stock, 26,150 shares vesting over a four year period from the
grant date and the remainder vesting immediately upon grant and all with an
exercise price of $4.125 per share. During May 1999, the Company granted options
to purchase 98,343 shares of the Company's common stock, vesting over a four
year period from the grant date and with an exercise price of $4.563 per share.
All exercise prices for 1999 grants were based on the market price of the shares
at the grant date.
The total number of shares of common stock reserved for issuance under the stock
option plan as of June 30, 1999 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.
Availability of working capital financing: As discussed in Note 4, the Company
was not in compliance with the financial covenants included in its Revolving
Credit Facility as of June 30, 1999, although the lenders syndicate has
temporarily (through August 31, 1999) waived such non-compliance. In addition,
the Liquidity Facility required by the terms of the Securitization Facility
expired on July 26, 1999, although it has also been extended through September
27, 1999. The Company does not expect to be in compliance with those covenants
in the foreseeable future and is currently negotiating with the lenders
syndicate to revise the covenants to bring the Company into compliance, although
this revision will also shorten the Revolving Credit Facility's termination date
to December 31, 1999. The Company is also negotiating an extension of the
Liquidity Facility to December 31, 1999. Although the Company anticipates
successful completion of those negotiations, there can be no assurance that the
covenants will be revised or the Liquidity Facility will be extended. In the
event the covenants are not revised, the Liquidity Facility is not extended or
waivers are required, but are not granted, 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 other sources. The Company is identifying and evaluating
alternative financing sources. Notwithstanding the foregoing, the Revolving
Credit Facility was classified as current in the Company's consolidated
financial statements as of June 30, 1999.
11
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other assets as of June 30, 1999 includes $1.5 million of unamortized deferred
costs incurred in connection with the establishment of the Revolving Credit
Facility and the Securitization Facility, which would be expensed in the event
those financial arrangements were terminated.
Employment Agreements: As of June 30, 1999, the Company had certain obligations
under employment agreements it had entered into with its Chief Executive Officer
("CEO") and nine other officers. Under the terms of those agreements, in the
event that the Company terminates any of those officers without cause or the
officer resigns for good reason, the terminated officer will receive, among
other things, severance compensation, including a portion (ranging from three
months to two years) of the officer's annual base salary and bonus. In addition,
all incentive stock options held by such employees would become immediately
exercisable. More substantial severance provisions apply if any of those
officers are terminated within two years (three years for the CEO) after the
occurrence of a "change of control", as defined in the employment agreements. In
July 1999, the Company entered into a similar employment agreement with a new
controller. In February 1999 and August 1999, two of the nine officers referred
to above resigned their positions, which resulted in the Company's agreement to
pay those two officers' salaries for one year, in exchange for their agreement,
among other things, to not compete with the Company during that period.
Significant Customer: For the six months ended June 30, 1999, approximately
eight percent of the Company's revenues were from professional employer
organization ("PEO") services performed for individual insurance agent offices
under a preferred provider designation previously granted to the Company on a
regional basis by the agents' common corporate employer. The corporate employer
recently began granting that designation on a national basis only and the
Company has been granted that designation for 1999.
In addition, the Company is aware of pending litigation against that corporate
employer regarding its use in general of PEO services. The Company has not
determined what impact, if any, the ultimate result of these developments will
have on its financial position or results of operations.
Litigation: On September 24, 1998, an action was commenced against the Company
for breach of contract in connection with a purported services arrangement,
seeking damages of approximately $0.6 million. The Company filed an answer
denying any breach of contract and moved to transfer the action to Florida. The
motion for removal was granted and the case has been transferred to, and is now
pending in, the Southern District of Florida, Fort Lauderdale division. No trial
date has been set. The Company believes that the claim is without merit and the
resolution of this lawsuit will not have a material adverse effect on its
financial position or future operating results; however, no assurance can be
given as to the ultimate outcome of this lawsuit.
12
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On November 12, 1997, an action was commenced against the Company, alleging
state law claims of pregnancy/maternity discrimination and violations of the
Family and Medical Leave Act as a result of an alleged demotion following the
plaintiff's return from maternity leave. The complaint also asserted a claim for
unpaid overtime based on both state law and the Fair Labor Standards Act. The
case is presently in discovery and the trial date has been set for the September
27, 1999 trial docket. The Company believes the claims are without merit and is
vigorously defending this action.
Employee Benefit Plan: Pursuant to the terms of a now inactive 401(k) plan
(containing previous contributions still managed by the Company), highly
compensated employees were not eligible to participate. However, as a result of
administrative errors in 1996 and prior years, some highly compensated employees
were inadvertently permitted to make elective salary deferral contributions. The
Company has sought IRS approval regarding the proposed correction under the
Voluntary Closing Agreement Program ("VCAP"). There will be a penalty payable by
the Company associated with a correction under the VCAP, although the Company
believes this penalty will be insignificant.
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.
Workers' Compensation: During 1997 and 1998, the Company's workers' compensation
expense for claims was effectively capped at a contractually agreed percentage
of payroll, which the Company's expense was limited to, since the estimated
ultimate cost of the actual claims experience was greater than the cap.
Effective January 1, 1999, the cap was increased to 2.7% of payroll, reflecting
the inclusion of general and automobile liability coverage as well as an
adjustment based on the changing business mix of the Company. For the six months
ended June 30, 1999, the estimated ultimate cost of the actual claims experience
was used as the basis of the Company's expense, since it was approximately
$850,000 less than the cap. The estimated ultimate cost of the 1999 claims
experience was determined based on information from an independent third-party
administrator employed by the Company plus an allowance for claims incurred but
not reported, based on prior experience and other relevant data.
13
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consulting contract: In May 1999, the Company engaged Crossroads Capital
Partners, LLC ("Crossroads"), a consulting firm based in Newport Beach,
California, to review the Company's existing business plan and make
recommendations for adjustments to strategy as well as financial and operational
improvements. In June 1999, the Crossroads engagement was further extended to
include its assistance in verifying the Company's cash flow projections and
requiring Crossroads to report to management and the lenders syndicate. In July
1999, the engagement was further modified to add additional services, including
working with management to develop a revised business plan based on the
restructured company, 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. See Note 10. The Company has paid Crossroads $107,078 for
services rendered through June 30, 1999. The Company's contract with Crossroads
for the four month period ending October 31, 1999, provides for a monthly fee of
$125,000, which fee is subject to renegotiation for the period after October 31,
1999. In addition, the Company is obligated to compensate Crossroads for
financing sources found by it, a fee of one percent of senior financing obtained
and four percent of subordinated financing, subject to a $150,000 and $300,000
minimum fee, respectively.
NOTE 6. RELATED PARTY TRANSACTIONS
Effective August 31, 1998, certain shareholders of the Company owning franchises
entered into a buyout agreement with the Company. Buyouts are early termination
of the 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 have
continued to receive quarterly payments from the former franchisee based on the
gross revenues of the formerly franchised locations for two years after the
termination date, which was generally consistent with the terms of buyout
agreements between the Company and unrelated third parties. Effective March 31,
1999, the Company received another payment from the former franchisee in
consideration of the elimination of the equivalent of the last five months of
payments under the initial agreement. The amount of this payment was generally
consistent with the terms of similar agreements between the Company and
unrelated third parties. During the six months ended June 30, 1999, the Company
recognized revenue of $0.9 million 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 payments totaling $0.3 million in the first year and $0.6
million in the second year, plus a $0.4 million payment at the end of the two
year term. As discussed in Note 4, as of August 12, 1999, the Company had not
made the renegotiated payments on this and its other subordinated acquisition
notes, and first became in default of this note. Furthermore, the payee has
provided the required notice to the Company accelerating the entire balance due,
which as a result is classified as current in the Company's consolidated
financial statements as of June 30, 1999.
14
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7. SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
The consolidated statements of cash flows do not include the following noncash
investing and financing transactions, except for the net cash paid for
acquisitions. The following amounts are presented in thousands:
Six Months Ended June 30,
1999 1998
Acquisitions:
Tangible and intangible assets acquired .... $ 117 $ 40,438
Liabilities assumed ........................ -- (1,367)
Debt issued ................................ (77) (11,404)
Common stock issued ........................ -- (775)
-------- --------
Net cash paid for acquisitions ................. $ 40 $ 26,892
======== ========
Increase in Notes receivable from franchises
for buyouts................................. $ 796 $ --
======== ========
Reduction of deferred loss
on interest rate collar agreement .......... $ 413 $ --
======== ========
Insurance premium financing .................... $ 348 $ --
======== ========
Increase in long term debt, due to sale/leaseback $ 1,600 $ --
======== ========
Decrease in accrued interest due to inclusion in
renegotiated long term debt ................ $ 448 $ --
======== ========
Increase in long term debt due to renegotiation at
higher interest rate and removal of imputed
discount ................................... $ 275 $ --
======== ========
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". The weighted average shares
outstanding used to calculate basic and diluted earnings (loss) per share were
calculated as follows:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Shares issued in connection with the Reorganization 5,448,788 5,448,788 5,448,788 5,448,788
Shares sold by the Company in October 1998 3,000,000 3,000,000 3,000,000 3,000,000
Shares issued in connection with a February 1998 acquisition 57,809 57,809 57,809 47,908
Warrants exercised in May 1998 151,316 102,558 151,316 50,160
---------- ---------- ---------- ----------
Weighted average common shares - basic 8,657,913 8,609,155 8,657,913 8,546,856
Outstanding options and warrants to purchase common stock
- remaining shares after assumed repurchase using
proceeds from exercise -- 1,511,716 -- 1,530,629
---------- ---------- ---------- ----------
Weighted average common shares - diluted 8,657,913 10,120,871 8,657,913 10,077,485
========== ========== ========== ==========
Certain of the outstanding options and warrants to purchase common stock were
anti-dilutive for certain of the periods presented above and accordingly were
excluded from the calculation of diluted weighted average common shares for
those periods, including the equivalent of 1,204,270 and 1,208,822 shares
excluded for the three and six months ended June 30, 1999, respectively, solely
because the results of operations was a net loss instead of net income.
15
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9. OPERATING SEGMENT INFORMATION
The Company's reportable operating segments are as follows:
Industrial Staffing: This segment derives revenues from recruiting, training and
deployment of temporary industrial personnel and from providing payroll
administration, risk management and benefits administration services.
PEO: 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.
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. As of June 30, 1999 there was $796,000 in outstanding notes
receivable from these former franchises for buyout revenue recognized during the
six months then ended.
Transactions between segments affecting their reported income are immaterial.
Differences between the reportable segments' operating results and the Company's
consolidated financial statements relate primarily to other operating divisions
of the Company and items excluded from segment operating measurements, such as
corporate support center expenses and interest expense in excess of interest
charged to the segments based on their outstanding receivables (before deducting
amounts sold under the Securitization Facility). See Note 5 for information
regarding a significant customer. Financial information for the Company's
operating segments, reconciled to Company totals and presented in thousands, is
as follows:
16
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9. OPERATING SEGMENT INFORMATION (CONTINUED)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
Industrial Staffing $ 79,855 $ 78,230 $ 152,951 $ 144,368
PEO 55,079 46,509 108,160 91,251
Franchising 2,469 1,829 4,441 2,924
Other Company revenues 6,051 8,228 12,016 17,239
--------- --------- --------- ---------
Total Company Revenues $ 143,454 $ 134,796 $ 277,568 $ 255,782
========= ========= ========= =========
(LOSS) INCOME BEFORE TAXES
Industrial Staffing $ 689 $ 3,187 $ 1,272 $ 5,653
PEO 522 222 777 595
Franchising 2,191 1,485 3,988 2,310
Other Company (loss) income, net (5,587) (3,389) (9,251) (6,209)
--------- --------- --------- ---------
Total Company (loss) income before taxes $ (2,185) $ 1,505 $ (3,214) $ 2,349
========= ========= ========= =========
NOTE 10. SUBSEQUENT EVENTS
On August 6, 1999, the Company announced the following actions intended to
improve its short-term liquidity, better concentrate its operations within one
core segment (industrial staffing) and improve its operating performance within
that segment:
(i) the sale of Office Ours, its clerical staffing division, effective on or
about August 30, 1999. The Company expects to receive proceeds at closing of
approximately $2.1 million, of which approximately $0.5 million will be used to
satisfy obligations under the Securitization Facility and the remainder will be
applied to the Revolving Credit Facility.
(ii) the engagement of an investment banking firm to assist in the evaluation of
the possible sale of, or other strategic options for, Synadyne, its PEO
division. See Note 9 for additional segment information.
(iii) a reduction of its industrial staffing and support operations (the
"Restructuring"), consisting primarily of: the sale, closure, consolidation or
franchising, during the third and fourth quarters of 1999, of approximately 20
of the 117 Tandem branch offices existing as of June 30, 1999; an immediate
reduction of its Tandem and corporate support center employee work-force by
approximately 15 percent each; and an additional 16 percent reduction of the
corporate support center work-force by early 2000. The timing of the latter
work-force reduction will be affected by the ultimate disposition of Synadyne.
The 20 branch offices subject to the Restructuring will be (a) locations not
expected to be adequately profitable or (b) locations which are inconsistent
with the Company's operating strategy of clustering offices within a geographic
region.
In connection with the Restructuring, the Company will include a restructuring
charge in its third quarter 1999 results of operations. At this time, the
Company is unable to estimate the amount of such restructuring charge.
17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following information should be read in conjunction with "__Forward-looking
information: certain cautionary statements" below.
The Company is a national provider of human resource services focusing on the
flexible industrial staffing ("staffing") market through its Tandem division and
on the professional employer organization ("PEO") market through its Synadyne
division. The Company provides its industrial staffing services through
locations owned or leased by the Company (collectively identified as
"Company-owned") and franchise locations, and its PEO services through
Company-owned locations.
Industrial staffing services include recruiting, training and deployment of
temporary industrial personnel as well as payroll administration, risk
management and benefits administration services. PEO services include payroll
administration, risk management, benefits administration and human resource
consultation.
The Company's revenues are based on the salaries and wages of worksite
employees. Staffing and PEO revenues, and related costs of wages, salaries,
employment taxes and benefits related to worksite employees, are recognized in
the period in which those employees perform the staffing and PEO services. Since
the Company is at risk for all of its direct costs, independent of whether
payment is received from its clients, all amounts billed to clients for gross
salaries and wages, related employment taxes, health benefits and workers'
compensation coverage are recognized as revenue by the Company, net of credits
and allowances, which is consistent with industry practice. The Company's
primary direct costs are (i) the salaries and wages of worksite employees
(payroll cost), (ii) employment related taxes, (iii) health benefits and (iv)
workers' compensation benefits and insurance.
The Company's staffing operations generate significantly higher gross profit
margins than its PEO operations. The higher staffing margin reflects
compensation for recruiting, training and other services not required as part of
many PEO relationships, where the employees have already been recruited by the
client and are trained and in place at the beginning of the relationship.
The Company acquired 41 industrial staffing offices during 1998 (the "1998
Acquisitions") and 48 additional offices during the three years prior to that -
see "_Acquisitions" below. The Company discontinued its acquisition program in
October 1998 primarily due to a desire to focus on and improve existing
operations plus a lack of capital for new acquisitions. Up to that time, the
Company had made a significant investment in new information systems, additional
back office capabilities and other infrastructure enhancements in order to
support the prior growth as well as the future growth that was being anticipated
at that time. The Company does not anticipate making any acquisitions during the
next twelve months.
18
On August 6, 1999, the Company announced the following actions intended to
improve its short-term liquidity, better concentrate its operations within one
core segment (industrial staffing) and improve its operating performance within
that segment:
(i) the sale of Office Ours, its clerical staffing division, effective on or
about August 30, 1999.
(ii) the engagement of an investment banking firm to assist in evaluating of the
possible sale of, or other strategic options for, Synadyne, its PEO division.
(iii) a reduction of its industrial staffing and support operations (the
"Restructuring"), consisting primarily of: the sale, closure, consolidation or
franchising, during the third and fourth quarters of 1999, of approximately 20
of the 117 Tandem branch offices existing as of June 30, 1999; an immediate
reduction of its Tandem and corporate support center employee work-force by
approximately 15 percent each; and an additional 16 percent reduction of the
corporate support center work-force by early 2000. The timing of the latter
work-force reduction will be affected by the ultimate disposition of Synadyne.
The 20 branch offices subject to the Restructuring will be (a) locations not
expected to be adequately profitable or (b) locations inconsistent with the
Company's operating strategy of clustering offices within a geographic region.
In addition, the Company is not currently in compliance with all of the
financial covenants contained in its existing financing arrangements and, in
cooperation with its current syndicate of lenders, who have temporarily waived
the requirement for compliance with those covenants, has already begun the
process of identifying and evaluating alternative financing arrangements.
Furthermore, the Company is in default of certain other subordinated
indebtedness. See "_Liquidity and Capital Resources" below.
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) and are unaudited:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net revenues:
Flexible industrial staffing (1) $ 71,625 $ 72,699 $ 136,426 $ 133,331
PEO (1) 67,287 58,050 132,687 115,363
Franchising 2,469 1,829 4,441 2,924
Other 2,073 2,218 4,014 4,164
--------- --------- --------- ---------
Total net revenues $ 143,454 $ 134,796 $ 277,568 $ 255,782
========= ========= ========= =========
Gross profit $ 20,583 $ 21,276 $ 40,045 $ 39,314
Selling, general and administrative expenses 21,086 18,365 40,040 34,486
--------- --------- --------- ---------
Operating (loss) income (503) 2,911 5 4,828
Net interest and other expense 1,682 1,405 3,219 2,479
--------- --------- --------- ---------
(Loss) income before (benefit) provision for
income taxes (2,185) 1,506 (3,214) 2,349
(Benefit) provision for income taxes (936) 411 (1,385) 581
--------- --------- --------- ---------
Net (loss) income $ (1,249) $ 1,095 $ (1,829) $ 1,768
========= ========= ========= =========
19
Three Months EndedJune 30, Six Months EndedJune 30,
-------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
Other Data:
EBITDA (2) $ 1,406 $ 4,677 $ 3,765 $ 8,017
========== ========== ========== ==========
System Revenues (3) $ 159,350 $ 156,920 $ 306,748 $ 296,981
========== ========== ========== ==========
System employees (number at end of period) 35,000 34,000 35,000 34,000
========== ========== ========== ==========
System offices (number at end of period 172 178 172 178
========== ========== ========== ==========
Net revenues:
Flexible industrial staffing (1) 49.9% 53.9% 49.2% 52.1%
PEO (1) 46.9 43.1 47.8 45.1
Franchising 1.7 1.4 1.6 1.2
Other 1.5 1.6 1.4 1.6
---------- ---------- ---------- ----------
Total net revenues 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ==========
Gross profit 14.3% 15.8% 14.4% 15.4%
Selling, general and administrative expenses 14.7 13.6 14.4 13.5
---------- ---------- ---------- ----------
Operating (loss) income (0.4) 2.2 0.0 1.9
Net interest and other expense 1.2 1.1 1.2 1.0
---------- ---------- ---------- ----------
(Loss) income before (benefit) provision for
income taxes (1.6) 1.1 (1.2) 0.9
(Benefit) provision for income taxes (0.7) 0.3 (0.5) 0.2
---------- ---------- ---------- ----------
Net (loss) income (0.9)% 0.8% (0.7)% 0.7%
========== ========== ========== ==========
- - -------------------
(1) SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. The
Company's reportable operating segments under SFAS No. 131 include the
Industrial Staffing segment and the PEO segment. PEO revenues, as reported
above, include certain industrial revenues that the Company believes are
operationally consistent with the PEO business and operational model, but are
not includable in the PEO segment due to the way the Company is organized.
Following is a reconciliation of Flexible Industrial Staffing net revenues and
the PEO net revenues, as shown above, to the revenues reported by the Company in
accordance with the requirements of SFAS No. 131 - see Note 9 to the Company's
Consolidated Financial Statements. The following amounts are presented in
thousands:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Flexible Industrial Staffing revenues $ 71,625 $ 72,699 $ 136,426 $ 133,331
Add: Industrial staffing client payrolling 8,230 5,531 16,525 11,037
--------- --------- --------- ---------
Industrial Staffing operating segment revenues $ 79,855 $ 78,230 $ 152,951 $ 144,368
========= ========= ========= =========
PEO Revenues $ 67,287 $ 58,050 $ 132,687 $ 115,363
Less: Industrial staffing client payrolling (8,230) (5,531) (16,525) (11,037)
Less: PEO services to industrial staffing franchises (3,979) (6,010) (8,003) (13,075)
--------- --------- --------- ---------
PEO operating segment revenues $ 55,079 $ 46,509 $ 108,159 $ 91,251
========= ========= ========= =========
Gross profit amounts and percentages discussed herein are calculated on a
consistent basis with the revenues reported herein.
- - ------------------------
(2) EBITDA is earnings (net income) before the effect of interest income and
expense, income tax benefit and expense, depreciation expense and amortization
expense. EBITDA is presented because it is a widely accepted financial indicator
used by many investors and analysts to analyze and compare companies on the
basis of operating performance. EBITDA is not intended to represent cash flows
for the period, nor has it been presented as an alternative to operating income
or as an indicator of operating performance and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles.
- - ------------------------
(3) 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:
20
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Company's Net Revenue $ 143,454 $ 134,796 $ 277,568 $ 255,782
Less: Company revenues from:
Franchise Royalties (2,469) (1,829) (4,441) (2,924)
Services to Franchises (3,979) (6,010) (8,003) (13,075)
Add: Franchisee's net revenues 22,344 29,963 41,624 57,198
--------- --------- --------- ---------
System revenues $ 159,350 $ 156,920 $ 306,748 $ 296,981
========= ========= ========= =========
Three Months Ended June 30, 1999 as compared to the Three Months Ended June 30,
1998
Net Revenues. Net revenues increased $8.7 million, or 6.4%, to $143.5 million in
the three months ended June 30, 1999 ("Q2 1999") from $134.8 million in the
three months ended June 30, 1998 ("Q2 1998"). This increase resulted primarily
from growth in PEO revenues in Q2 1999 of $9.2 million, or 15.9%, compared to Q2
1998 which is partially offset by the $1.1 million, or 1.5%, decrease in
staffing revenues during the same periods. The increase in PEO revenues was
primarily due to new PEO clients, as well as an increase in the number of
work-site employees at certain existing PEO clients. The decrease in staffing
revenues was primarily due to high employee turnover and low sales in certain
geographic markets where Company locations had not been operating consistently
with the Company's strategy. Certain geographic markets recorded double digit
growth, but those increases were more than offset by declines in other markets.
System revenues, which include franchise revenues not earned by or available to
the Company, increased $2.4 million, or 1.5%, to $159.4 million in Q2 1999 from
$156.9 million in Q2 1998. The increase in system revenues was attributable to
the $8.7 million increase in the Company's net revenues discussed above.
Franchise revenues of franchisees operating as of June 30, 1999 increased $3.0
million, or 17.6%, in Q2 1999 as compared to Q2 1998, offset by a $10.6 million
decrease in revenues for the same period resulting from other franchisees no
longer operating. The result is a net decrease of franchise revenues of $7.6
million. The Company acquired and converted 17 franchise locations to
Company-owned locations during 1998 and also allowed the early termination of
franchise agreements in 1998 and 1999 attributable to another 18 locations to
enable the Company to develop the related territories. At the time the Company
agrees to terminate a franchise agreement, it receives an initial buyout payment
from the former franchisee. The Company continues to receive payments from the
former franchisees based on a percentage of the gross revenues of the formerly
franchised locations for up to three years after the termination dates. Although
those gross revenues are not included in the Company's franchisee or system
revenues totals, the initial buyout payment, as well as subsequent payments from
the former franchisees, is reflected in total royalties reported by the Company.
Gross Profit. Gross profit (margin) decreased $0.7 million, or 3.3%, to $20.6
million in Q2 1999, from $21.3 million in Q2 1998. Gross profit as a percentage
of net revenues decreased to 14.3% in Q2 1999 from 15.8% in Q2 1998. This
decrease was primarily due to (i) decreased gross profit margin percent for the
Company's staffing operations and (ii) the lower growth rate for staffing
revenues as compared to the growth rate for PEO revenues, which generate lower
gross profit margins. In Q2 1999, PEO operations generated gross profit margins
of 4.3% as compared to gross profit margins of 20.5% generated by staffing
operations.
21
Margin percent for the Company's staffing operations decreased to 20.5% in Q2
1999 from 22.5% in Q2 1998. The decrease was primarily due to the impact of (i)
fewer small contracts of a just-in-time nature or shorter duration for which the
Company historically earned higher margins and (ii) the increased wages
necessary to recruit staffing employees in areas of historically low
unemployment. The Company anticipates stabilization or some improvement in
margin by the end of 1999 as a result of refocusing sales efforts on
just-in-time business in those locations where such business is more typical of
the local market.
PEO gross profit margin percent increased to 4.3% in Q2 1999 from 4.0% in Q2
1998 primarily due to an increase in the volume of PEO services provided to
industrial clients having higher gross profit margins than the more typical
white-collar clients.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased $2.7 million, or 14.8%, to $21.1
million in Q2 1999 from $18.4 million in Q2 1998. This increase was primarily a
result of operating costs related to the 1998 Acquisitions, general wage
increases, incentive payments at top performing locations, increased
telecommunication costs for the new field operating system, increased
professional fees, increased allowances for doubtful accounts, and increased
costs associated with recruiting key management and service employees. Total
direct operating costs associated with the 1998 Acquisition locations (for the
portion of Q2 1999 for which there was no corresponding Q2 1998 activity) were
$0.5 million in Q2 1999.
Net Interest and Other Expense. Net interest and other expense increased by $0.3
million, to $1.7 million in Q2 1999 from $1.4 million in Q2 1998. This increase
was primarily due to a $0.3 million increase in interest expense, arising from
(i) an increase in total debt outstanding related to the purchases of the 1998
Acquisitions and (ii) financing costs related to increased accounts receivable
arising from those acquisitions, partially offset by a decrease in the average
interest rate as a result of the Securitization Facility.
Net (Loss) Income. Net (loss) income decreased by $2.3 million, to a $1.2
million loss in Q2 1999 from $1.1 million net income in Q2 1998. This decrease
was primarily due to a $3.4 million reduction in operating income (resulting
from the $2.7 million increase in SG&A and the $0.7 million decrease in gross
profit) and a $0.3 million increase in interest expense, both discussed above,
partially offset by a related $1.3 million decrease in income taxes.
Six Months Ended June 30, 1999 as compared to the Six Months Ended June 30, 1998
Net Revenues. Net revenues increased $21.8 million, or 8.5%, to $277.6 million
in the six months ended June 30, 1999 ("YTD 1999") from $255.8 million in the
six months ended June 30, 1998 ("YTD 1998"). This increase resulted primarily
from PEO revenue growth of $17.3 million, or 15.0%, and growth in staffing
revenues in YTD 1999 of $3.1 million, or 2.3%, compared to YTD 1998. The
increase in PEO revenues was primarily due to new PEO clients, as well as an
increase in the number of work-site employees at certain existing PEO clients.
The increase in staffing revenues was primarily due to the 1998 Acquisitions.
22
System revenues, which include franchise revenues not earned by or available to
the Company, increased $9.8 million, or 3.3%, to $306.7 million in YTD 1999 from
$297.0 million in YTD 1998. The increase in system revenues was attributable to
the $21.8 million increase in the Company's net revenues discussed above.
Franchise revenues of franchisees operating as of June 30, 1999 increased $4.9
million, or 17.0%, YTD 1999 as compared to YTD 1998, offset by a $20.5 million
decrease in revenues for the same period resulting from other franchisees no
longer operating. The result is a net decrease of franchise revenues of $15.6
million. The Company acquired and converted 17 franchise locations to
Company-owned locations during 1998 and also allowed the early termination of
franchise agreements in 1998 and 1999 attributable to another 18 locations to
enable the Company to develop the related territories.
Gross Profit. Gross profit (margin) increased $0.7 million, or 1.9%, to $40.0
million in YTD 1999, from $39.3 million in YTD 1998. Gross profit as a
percentage of net revenues decreased to 14.4 % in YTD 1999 from 15.4% in YTD
1998. This decrease was primarily due to (i) decreased gross profit margin
percent for the Company's staffing operations and (ii) the lower growth rate for
staffing revenues as compared to the growth rate for PEO revenues, which
generate lower gross profit margins. In YTD 1999, PEO operations generated gross
profit margins of 4.2% as compared to gross profit margins of 21.2% generated by
staffing operations.
Margin percent for the Company's staffing operations decreased to 21.2% in YTD
1999 from 22.8% in YTD 1998. The decrease was primarily due to the impact of (i)
fewer small contracts of a just-in-time nature or shorter duration for which the
Company historically earned higher margins and (ii) the increased wages
necessary to recruit staffing employees in areas of historically low
unemployment. The Company anticipates some stabilization or improvement in
margin by the end of 1999 as a result of refocusing sales efforts on
just-in-time business in those locations where such business is more typical of
the local market.
PEO gross profit margin percent increased to 4.2% in YTD 1999 from 4.0% in YTD
1998 primarily due to an increase in the volume of PEO services provided to
industrial clients at higher gross profit margins than the more typical white
collar clients.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased $5.5 million, or 16.1%, to $40.0
million in YTD 1999 from $34.5 million in YTD 1998. This increase was primarily
a result of operating costs related to the 1998 Acquisitions, general wage
increases, incentive payments at top performing locations, increased
telecommunication costs for the new field operating system, increased
professional fees, increased allowances for doubtful accounts, and increased
costs associated with recruiting key management and service employees. Total
direct operating costs associated with the 1998 Acquisition locations (for the
portion of YTD 1999 for which there was no corresponding YTD 1998 activity) were
$3.1 million in YTD 1999.
Net Interest and Other Expense. Net interest and other expense increased by $0.8
million, to $3.3 million in YTD 1999 from $2.5 million in YTD 1998. This
increase was primarily due to a $0.8 million increase in interest expense,
arising from (i) an increase in total debt outstanding related to the purchases
of the 1998 Acquisitions and (ii) financing costs related to increased accounts
receivable arising from increased staffing revenues as discussed above,
partially offset by a decrease in the average interest rate as a result of the
Securitization Facility.
23
Net (Loss) Income. Net (loss) income decreased by $3.6 million, to a $1.8
million loss in YTD 1999 from $1.8 million net income in YTD 1998. This decrease
was primarily due to a $4.8 million reduction in operating income (resulting
from the $5.5 million increase in SG&A offset by the $0.7 million increase in
gross profit) and a $0.8 million increase in interest expense, both discussed
above, partially offset by a related $2.0 million decrease in income taxes.
ADDITIONAL OPERATING AND SEGMENT INFORMATION
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. The
Company's reportable operating segments under SFAS No. 131 differ from the
operating information presented below, as explained in footnote 1 to the table
in " Results of Operations" above. Gross profit amounts and percentages
discussed below are also calculated on a consistent basis with the revenues
reported below. See Note 9 to the Company's Consolidated Financial Statements.
Flexible Industrial Staffing:
Net revenues from the Company's staffing services increased $3.1 million, to
$136.4 million for the six months ended June 30, 1999 from $133.3 million for
the six months ended June 30, 1998, or an annualized growth rate of 2.3%.
Staffing's share of the Company's total net revenues decreased to 49.2% for YTD
1999 from 52.1% for YTD 1998, reflecting a lower internal growth rate for
staffing services as well as the Company's discontinuance of staffing
acquisitions since October 1998. The Company expects this lower internal growth
rate and the absence of acquisition activity to continue for the remainder of
1999. As a result, the Company expects industrial staffing's share of the
Company's total net revenues to continue to decline throughout 1999, unless and
until Synadyne, the PEO division, is sold.
Gross profit from the Company's staffing services decreased $1.5 million, to
$28.9 million for YTD 1999 from $30.4 million for YTD 1998, or an annualized
decrease of 4.9%. Consistent with the revenue trend discussed above, this
represented a decreased share of the Company's total gross profit, to 72.3% for
YTD 1999 from 77.3% for YTD 1998.
PEO:
Net revenues from the Company's PEO services increased $17.3 million, to $132.7
million for YTD 1999 from $115.4 million for YTD 1998, or an annualized growth
rate of 15.0%. Due to a higher internal growth rate for PEO services as well as
the Company's discontinuance of staffing acquisitions since October 1998, PEO
revenues represented an increased share of the Company's total net revenues, to
47.8% for YTD 1999 from 45.1% for YTD 1998. The Company expects that PEO sales
growth will continue at its present rate during most of 1999, although the
Company may dispose of these operations before the end of the year. See
"_General" above.
24
Approximately 17% of the Company's YTD 1999 PEO revenues were from services
performed for individual insurance agent offices under a preferred provider
designation previously granted to the Company on a regional basis by the agents'
common corporate employer. The corporate employer recently began granting that
designation on a national basis only and the Company has been granted that
designation for 1999. In addition, the Company is aware of pending litigation
against that corporate employer regarding its use of PEO services. The Company
has not determined what impact, if any, that the ultimate result of these
developments will have on its financial position or results of operations.
Gross profit from the Company's PEO services increased $0.9 million, to $5.5
million for YTD 1999 from $4.6 million for YTD 1998, or an annualized growth
rate of 19.5%. This also represented an increased share of the Company's total
gross profit, to 13.9% for YTD 1999 from 11.8% for YTD 1998.
Franchising:
Net revenues from the Company's franchising operations increased $1.5 million,
to $4.4 million for YTD 1999 from $2.9 million for YTD 1998, or an annualized
growth rate of 51.9%. Franchising operations represented an increased share of
the Company's total net revenues, to 1.6% in YTD 1999 from 1.2% for YTD 1998,
reflecting buyout payments received in 1999 from former franchisees. The Company
allowed the early termination (buyout) of certain franchise agreements in 1998
and 1999, attributable to 18 locations, to enable the Company to develop the
related territories. Due to the reduced number of remaining franchises, the
Company does not anticipate buyout payments in the future to be of the magnitude
recorded in YTD 1999, although the Company expects to continue to convert select
franchise locations to Company-owned locations after 1999 and to allow
terminations of franchise agreements in key markets that the Company believes it
can develop further. Such acquisitions and terminations will be subject to the
Company's ability to negotiate them on acceptable terms. The Company also
expects to continue to sell new franchises in smaller, less populated geographic
areas, and to sell franchise rights to certain existing Company-owned locations
that the Company believes are not sufficiently profitable or no longer fit in
its clustering market strategy, that the Company fees are not sufficiently
profitable or no longer fit in its clustering market strategy. See "__General"
above. Franchise sales will be subject to, among other factors, the success of
the Company's marketing efforts in this regard.
Gross profit from the Company's franchising operations increased $1.5 million,
to $4.4 million for YTD 1999 from $2.9 million for YTD 1998, or an annualized
growth rate of 51.9%. Consistent with the revenue trend discussed above, this
area represented an increased share of the Company's total gross profit, to
11.1% for YTD 1999 from 7.4% for YTD 1998.
25
LIQUIDITY AND CAPITAL RESOURCES
Debt and Other Financing
The Company's primary sources of funds for working capital and other needs are a
$29.9 million credit line with a syndicate of lenders led by BankBoston, N.A.
(the "Revolving Credit Facility") and a $50.0 million accounts receivable
securitization facility with a BankBoston affiliate.
Effective July 27, 1998, the Company entered into a five year financing
arrangement under which it can sell up to a $50.0 million secured interest in
its eligible accounts receivable to EagleFunding Capital Corporation ("Eagle"),
which uses the receivables to secure A-1 rated commercial paper (the
"Securitization Facility"). Under this arrangement, the Company receives cash
equivalent to the gross outstanding balance of the accounts receivable being
sold, less reserves which are adjusted on a monthly basis based on collection
experience and other defined factors. There is no recourse to the Company for
the initial funds received. Amounts collected in excess of the reserves are
retained by the Company. The Company's cost for this arrangement is classified
as interest expense and is based on the interest paid by Eagle on the balance of
the outstanding commercial paper, which in turn is determined by prevailing
interest rates in the commercial paper market and was approximately 5.15% as of
June 30, 1999. As of June 30, 1999, a $42.4 million interest in the Company's
uncollected accounts receivable had been sold under this agreement, which amount
is excluded from the accounts receivable balance presented in the Company's
consolidated financial statements.
The Securitization Facility contains certain minimum default, delinquency and
dilution ratios with respect to the Company's receivables and requires bank
liquidity commitments ("Liquidity Facility") totaling no less than $51.0
million. A default under the Securitization Facility constitutes a default under
the Revolving Credit Facility. The Liquidity Facility has been provided by the
syndicate of lenders that participate in the Revolving Credit Facility for a one
year term originally expiring July 26, 1999 at 0.375% per annum, which term has
currently been extended to September 27, 1999, pending completion of an
extension to December 31, 1999 that the Company and the syndicate are currently
negotiating. Eagle may draw against the Liquidity Facility to fund cash
shortfalls caused by an inability for any reason to issue commercial paper based
on the Company's receivables. There is no recourse to the Company for amounts
drawn under the Liquidity Facility, although such amounts would be repaid from
and to the extent receivables sold by the Company were collected. Amounts drawn
under the Liquidity Facility bear interest at the same rates incurred under the
Revolving Credit Facility.
Concurrent with the completion of the Securitization Facility, the Revolving
Credit Facility was amended, primarily to reduce the maximum amount available
for borrowing from $85.0 million to $34.0 million and to extend the remaining
term of the Revolving Credit Facility to five years from the date of that
amendment. In conjunction with the extension of the Liquidity Facility discussed
above, the amount currently available under the Revolving Credit Facility has
been reduced to $29.9 million. As discussed below, the remaining term for this
facility is expected to be substantially reduced. 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. Amounts borrowed under the Revolving Credit Facility bear
interest at the Eurodollar rate (prior to June 30, 1999 only, at the Company's
option) or BankBoston's base rate plus a margin based upon the ratio of the
Company's total indebtedness to the Company's earnings (as defined in the
Revolving Credit Facility). As of June 30, 1999, the Company had outstanding
borrowings
26
under the Revolving Credit Facility of $18.2 million, bearing interest at an
annualized rate of 7.75%. The Revolving Credit Facility contains certain
affirmative and negative covenants relating to the Company's operations, certain
of which were amended in February 1999 in order to provide additional
flexibility to the Company as well as to enable it to be in compliance with such
covenants as of December 31, 1998 and March 31,1999. These covenant
modifications also resulted in a 0.5% per annum increase in the bank margin
component of the interest rate charged thereunder, which was offset by a 0.6%
per annum decrease in the Eurodollar base rate during the first six months of
1999.
In addition to the related changes made in the Revolving Credit Facility as
discussed above, subsequent to June 30, 1999, the bank syndicate did not allow
the Company to utilize Euro rate based borrowings under the Revolving Credit
Facility, which resulted in an effective increase in the Company's borrowing
rate under that facility of approximately 0.8% per annum. In addition, the
lenders syndicate placed restrictions on the issuance or renewal of letters of
credit.
As discussed in Note 4 to the Company's Consolidated Financial Statements, the
Company was not in compliance with the financial covenants included in its
Revolving Credit Facility as of June 30, 1999, although the lenders syndicate
has waived such non-compliance through August 31, 1999. The Company does not
expect to be in compliance with those covenants in the foreseeable future and is
currently negotiating with the lenders syndicate to revise the covenants to
enable the Company's compliance, although this revision will also shorten the
facilities termination date to December 31, 1999. The Company anticipates the
negotiations will be completed successfully, however there can be no assurance
that the covenants will be revised. In the event the covenants are not revised
or waivers are required, but are not granted, 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 other sources. The Company has already begun the process of
identifying and evaluating alternative financing sources. Accordingly, the
Revolving Credit Facility has been classified as current on the Company's
Consolidated Balance Sheet as of June 30, 1999.
In February 1998, the Company entered into a five year notional $42.5 million
interest rate collar agreement with Bank Boston, N.A., whereby the Company
receives interest on that notional amount to the extent 30 day LIBOR exceeds
6.25% per annum, and pays interest on that amount to the extent 30 day LIBOR is
less than 5.43% per annum. This derivative financial instrument was being used
by the Company to reduce interest rate volatility and the associated risks
arising from the floating rate structure of its Revolving Credit Facility and
its Securitization Facility, and was not held or issued for trading purposes.
Effective June 30, 1999, the Company terminated the interest rate collar
agreement with BankBoston, N.A. which resulted in proceeds of $250,000.
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 subordinated acquisition notes payable. As of August 12, 1999 the Company
had not made all of the scheduled payments due and first became in default of
this debt having a total principal outstanding of $9.4 million. Due to the
subordinated status and other terms of the debt, the payees are unable to take
collection actions against the Company for at least six months. Acceleration of
this debt requires prior written notice to the Company by the various payees,
which has been received from only four of sixteen payees as of August 16, 1999.
See Notes 4 and 6 to the Company's Consolidated Financial Statements.
27
As of June 30, 1999, the Company had (i) bank standby letters of credit
outstanding in the aggregate amount of $8.4 million under a letter of credit
facility (which is part of the Revolving Credit Facility) to secure certain
workers' compensation obligations already recorded as a liability on the
Company's balance sheet; (ii) $9.4 million of promissory notes outstanding in
connection with certain acquisitions, primarily bearing interest at imputed
rates from 8.5% to 12.0% per annum and payable during the next two years, and
subordinated to the repayment of the Revolving Credit Facility; (iii)
obligations under capital leases for property and equipment in the aggregate
amount of $3.4 million; and (iv) obligations under mortgages totaling $4.2
million.
Historical Summary of Cash Flows
The Company's principal uses of cash are for wages and related payments to
temporary and PEO employees, operating costs, acquisitions, capital expenditures
and repayment of debt and interest thereon. For YTD 1999, cash used by
operations was approximately $0.4 million, compared to $7.8 million provided in
YTD 1998. Cash provided by investing activities during YTD 1999 was
approximately $0.7 million, compared to $28.4 million used in YTD 1998,
primarily expenditures of $26.9 million for acquisitions (primarily intangible
assets). Cash used in financing activities during YTD 1999 was approximately
$3.3 million, comprised primarily of a $2.8 million net repayment of the
Revolving Credit Facility and $2.6 million of repayments of long term debt,
offset by a $1.8 million increase in the Company's liability for outstanding
payroll checks (in excess of the funded bank balances). Cash provided by
financing activities during YTD 1998 was approximately $20.9 million, primarily
$20.7 million from borrowings under the Revolving Credit Facility.
Workers' Compensation
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. This new arrangement could
adversely affect the Company's ability to meet certain financial covenants,
although the Company was successful in reducing the letter of credit outstanding
as of December 31, 1998 by $2.0 million in April 1999 and another $2.0 million
in August 1999 based on corresponding payments made in previous months to the
Company's insurance carrier which reduced the accrued liability supported by the
letter of credit.
In July 1999, the Company renegotiated the schedule of payments due under the
pre-funded deductible program, in order to improve its liquidity. Although the
$13.3 million total of the 1999 payments was unchanged from the original
agreement, the originally scheduled May and June payments were deferred and
incorporated into revised monthly payments for the remainder of the year. The
revised schedule calls for 21% of the annual total to be paid in the third
quarter and 49% of the annual total to be paid in the fourth quarter.
28
Accounts Receivable
The Company is a service business and therefore a majority of its tangible
assets are customer accounts receivable. 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, 45 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 are past due. As a result, the Company has taken several actions including,
among other things, increasing the number of employees focusing on accounts
receivable issues and establishing employee compensation plans based on
satisfactory collections, which it believes will satisfactorily address this
issue so that there is no adverse long-term impact to the Company. As new
staffing offices are established or acquired, or as existing offices expand,
there will be increasing requirements for cash to fund operations. The Company
pays its PEO employees on a weekly, bi-weekly, semi-monthly or monthly basis for
their services, and currently receives payments on a simultaneous basis from
approximately 80% (based on revenues) of its existing customers, with the
remainder paying on average 30 to 45 days from the presentation date of the
invoice.
Capital Expenditures
One of the key elements of the Company's growth strategy in 1997 and 1998 had
been expansion through acquisitions, which require significant sources of
financing. The Company has decided not to complete further acquisitions until
its internal revenue growth rate and the resulting operating performance of its
existing locations improve. The financing sources for its acquisitions had been
cash from operations, seller financing, bank financing and issuances of the
Company's Common Stock. The Company's acquisitions were primarily in the
industrial staffing area, and, if and when it resumes acquisition activity, the
Company expects this trend to continue, consistent with a primary objective of
the current Restructuring, which is to focus the Company's operations within the
industrial staffing area.
The Company anticipates spending up to $2.0 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. This amount does not include expenditures for
goodwill or other intangible assets arising from previous acquisitions, which
the Company does not expect to be significant during that period.
Future Liquidity
The Company has announced several recent actions that are expected to improve
the Company's liquidity, both immediately and over a longer period of time,
including the divestiture of certain Company operations and reduction of its
workforce (see " General" above and Note 10 the Company's Consolidated Financial
Statements). Although there can be no assurances, the Company expects that the
current lenders syndicate will extend adequate financing through December 31,
1999 to meet the Company's needs, based on this planned restructuring of Company
operations. The Company believes that it will need to find alternative funding
sources after that date and is identifying and evaluating those alternatives.
29
The Company believes that funds provided by operations, including sales of
accounts receivable under the Securitization Facility (or replacement
financing), plus borrowings under the Revolving Credit Facility (or replacement
financing) and current cash balances will be sufficient to meet its presently
anticipated needs for working capital and capital expenditures, not including
new acquisitions, for the next twelve months. Significant new acquisitions,
which the Company does not expect to pursue during the next twelve months, would
require expanded or new borrowing facilities, issuance of Common Stock and/or
additional debt or equity offerings. There can be no assurance that additional
capital will be available to the Company on acceptable terms.
ACQUISITIONS
From 1995 to 1998, the Company made 34 staffing acquisitions including 65
offices and approximately $180.0 million in revenues for the twelve months
preceding each acquisition. These acquisitions have resulted in a significant
increase in goodwill and other intangible assets and correspondingly have
resulted and will continue to result in increased amortization expense. In
addition, the amount of these intangible assets as a percentage of the Company's
total assets and shareholders' equity has increased significantly. While the net
unamortized balance of intangible assets as of June 30, 1999 is not considered
to be impaired, any future determination requiring the write-off of a
significant portion of unamortized intangible assets including any write-offs
which might be included in the anticipated charge for restructuring in the third
quarter of 1999 (see Note 10 to the Company's Consolidated Financial Statements)
could have a material adverse effect on the Company's financial condition and
results of operations. As of August 9, 1999, no acquisitions were made during
1999 and it is not anticipated that any acquisitions will be made in the next
twelve months.
SEASONALITY
The Company's quarterly results of operations reflect the seasonality of higher
customer demand for industrial staffing services in the last two quarters of the
year, as compared to the first two quarters. In 1998, the seasonal increase in
industrial staffing revenue was lower than that experienced in prior years,
which the Company attributes to slower economic activity in U.S. manufacturing
and distribution. The Company believes there is evidence that this sector has
begun to improve in 1999, although there can be no assurance that this trend
exists or will continue.
Though there is a seasonal reduction of industrial staffing revenues in the
first two quarters of a year as compared to the third and fourth quarters of the
prior year, the Company does not reduce the related core personnel and other
operating expenses proportionally. The related core personnel and other
operating expenses are not reduced because most of that infrastructure is needed
to support anticipated increased revenues in subsequent quarters. PEO revenues
are generally not subject to seasonality to the same degree as industrial
staffing revenues although the net income contribution of PEO revenues expressed
as a percentage of sales is significantly
30
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 two quarters of a year that is significantly less than (i)
the third and fourth quarters of the preceding year and (ii) the subsequent
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. Throughout the periods
discussed above, the increases in revenues have resulted primarily from higher
volumes, rather than price increases.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
No. 133 defines derivatives and establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 also
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133, as modified by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
and cannot be applied retroactively. The Company intends to implement SFAS No.
133 in its consolidated financial statements as of and for the three months
ended March 31, 2001, although it has not determined the effects, if any, that
implementation will have. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.
YEAR 2000 ISSUE
As many computer systems, software programs and other equipment with embedded
chips or processors (collectively, "Information Systems") use only two digits
rather than four to define the applicable year, they may be unable to process
accurately certain data, during or after the year 2000. As a result, business
and governmental entities are at risk for possible miscalculations or systems
failures causing disruptions in their business operations. This is commonly
known as the Year 2000 ("Y2K") issue. The Y2K issue concerns not only
Information Systems used solely within a company but also concerns third
parties, such as customers, vendors and creditors, using Information Systems
that may interact with or affect a company's operations. The Y2K issue can
affect the Company's flexible staffing and PEO operations, including, but not
limited to, payroll processing, cash and invoicing transactions, and financial
reporting and wire transfers from and to the Company's banking institutions. In
1996, the Company initiated a conversion of the primary software being used in
its flexible staffing and PEO operations, as well as its corporate-wide
accounting and billing software. Although this conversion was undertaken for the
primary purpose of achieving a common data structure for all significant Company
applications as well as enhancing processing capacity and efficiency, the
Company
31
believes that it also will result in software that properly interprets dates
beyond the year 1999 ("Year 2000 Compliant").
The Company's State of Readiness:
The Company has implemented a Y2K readiness program with the objective of having
all of the Company's significant Information Systems functioning properly with
respect to Y2K before January 1, 2000. The first component of the Company's
readiness program was to identify the internal Information Systems of the
Company that are susceptible to system failures or processing errors as a result
of the Y2K issue. This effort is substantially complete. All operating divisions
have identified the Information Systems that may require remediation or
replacement and have established priorities for repair or replacement. Those
Information Systems considered most critical to continuing operations have been
given the highest priority. The second component of the Y2K readiness program
involves the actual remediation and replacement of Information Systems. The
Company is using both internal and external resources to complete this process.
Information Systems ranked highest in priority, such as the corporate accounting
and billing software, have either been remediated or replaced or scheduled for
remediation or replacement. The remediation and replacement of internal
Information Systems, including the final testing and certification for Y2K
readiness, was recently completed. This does not include the Information Systems
utilized in franchise locations, which the Company anticipates will be Year 2000
Compliant no later than September 30, 1999. The Company has retained a
consulting firm to perform a third party review of its software programs which
will be completed by September 30, 1999. The Company expects that the final
phase of remediation for its desktop-related hardware will be finished by
October 31, 1999.
As to the third component of the Y2K readiness program, the Company has
identified its significant customers, vendors and creditors that are believed,
at this time, to be critical to business operations subsequent to January 1,
2000, and steps are underway to reasonably ascertain their respective stages of
Y2K readiness through the use of questionnaires, interviews, on-site visits and
other available means. The Company will take appropriate action based on those
responses, but there can be no assurance that the Information Systems provided
by or utilized by other companies which affect the Company's operations will be
timely converted in such a way as to allow them to continue normal business
operations or furnish products, services or data to the Company without
disruption.
32
Risks:
If needed remediations and conversions to the Information Systems are not made
on a timely basis by the Company or its materially-significant customers or
vendors, the Company could be affected by business disruption, operational
problems, financial loss, legal liability to third parties and similar risks,
any of which could have a material adverse effect on the Company's operations,
liquidity or financial condition. Although not anticipated, the most reasonably
likely worst case scenario in the event the Company or its key customers or
vendors fail to resolve the Y2K issue would be an inability on the part of the
Company to perform its core functions of payroll administration, tax reporting,
unemployment and insurance claims filings, billing and collections, and health
benefits administration. Factors which could cause material differences in
results, many of which are outside the control of the Company, include, but are
not limited to, the Company's ability to identify and correct all relevant
computer software, the accuracy of representations by manufacturers of the
Company's Information Systems that their products are Y2K compliant, the ability
of the Company's customers and vendors to identify and resolve their own Y2K
issues and the Company's ability to respond to unforeseen Y2K complications.
Contingency Plans:
While the Company continues to focus on solutions for Y2K issues, and expects to
be Y2K compliant in a timely manner, the Company, concurrently with the Y2K
readiness measures described above, has established a Y2K project team whose
mission is to develop contingency plans intended to mitigate the possible
disruption in business operations that may result from the Y2K issue. The
Company's Y2K project team, consisting of personnel from management, information
systems/technology and legal areas, is in the process of developing such plans
and the cost estimates to implement them. Contingency plans may include
purchasing or developing alternative software programs, the purchase of computer
hardware and peripheral equipment, and other appropriate measures. Once
developed, contingency plans and related cost estimates will be continually
refined as additional information becomes available. The Y2K project team
expects to conclude the development of these contingency plans by September 30,
1999.
Y2K Costs:
The Company's management estimates that the total cost to the Company of its Y2K
compliance activities will not exceed $200,000, which is not considered material
to the Company's business, results of operations or financial condition. The
costs and time necessary to complete the Y2K modification and testing processes
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors; however, there can
be no assurance that these estimates will be achieved and actual results could
differ from the estimates.
33
The Company has capitalized and will continue to capitalize the costs of
purchasing and developing new Y2K compliant Information Systems, but will
expense the costs of the modifications to existing hardware and software made
solely for purposes of Y2K compliance. Most of the cost of purchasing or
modifying software in this regard had been incurred as of March 31, 1999. Any
remaining capitalized balance for Information Systems no longer utilized because
of replacement by Y2K compliant Information Systems will be expensed at the time
such hardware and software is replaced. The Company's Y2K readiness program is
an ongoing process and the estimates of costs and completion dates for various
components of the Y2K readiness program described above are subject to change.
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, the Restructuring and related actions, 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
and cost of financing, equity and working capital to meet the Company's future
needs, economic conditions in the Company's market areas, the potential for and
effect of future acquisitions, the Company's ability to resolve the Year 2000
issue and the related 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 rends 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; 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; the Company's ability to raise capital
in the public equity markets; the availability of capital for additional
acquisitions and the Company's ability to identify suitable acquisition
candidates and to successfully negotiate and complete those acquisitions on
favorable terms; the ability to successfully integrate past and future
acquisitions into the Company's operations; the recoverability of the recorded
value of goodwill and other intangible assets arising from past and future
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 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,
34
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, particularly those related to PEOs, including the
possible adoption by the IRS of an unfavorable position as to the tax-qualified
status of employee benefit plans maintained by PEOs, 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
significantly volatile as a result of, among other things, the Company's
operating results, the operating results of other temporary staffing and PEO
companies, economic conditions, the proportion of the Company's stock available
for active trading and the performance of the stock market in general.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
Subsequent written and oral forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by cautionary statements in this paragraph and elsewhere in this Form
10-Q, and in other reports filed by the Company with the Securities and Exchange
Commission, including, but not limited to, the Company's Registration Statement
on Form S-3 (File No. 333-69125), including the "Risk Factors" section thereof,
filed with the Securities and Exchange Commission on December 17, 1998, and
declared effective on January 6, 1999.
35
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In seeking to minimize the risks and/or costs associated with its borrowing
activities, the Company had entered into a derivative financial instrument
transaction to maintain the desired level of exposure to the risk of interest
rate fluctuations and to minimize interest expense. This financial instrument
was terminated on June 30, 1999, resulting in a gain that will be deferred and
amortized into income over the life of the financial transactions previously
being hedged by that instrument - See Note 4 to the Company's Consolidated
Financial Statements for additional information. This hedge did not result in a
material change in the Company's recorded interest expense while it was in
effect.
Accordingly, there has been no material change in the Company's assessment of
its sensitivity to market risk as of June 30, 1999, 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, 1998, as filed with the Securities and Exchange Commission on March
31, 1999.
As part of recent changes made to the Revolving Credit Facility (See Note 4 to
the Company's Consolidated Financial Statements), subsequent to June 30, 1999
the lenders syndicate did not allow the Company to choose Euro rate borrowings,
which resulted in an effective increase in the Company's borrowing rate under
that facility of approximately 0.8% per annum.
36
PART II - OTHER INFORMATION
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
As discussed in Note 4 to the Company's Consolidated Financial Statements, the
Company was not in compliance with the financial covenants included in its
Revolving Credit Facility as of June 30, 1999, although the lenders syndicate
has temporarily (through August 31, 1999) waived such non-compliance. In
addition, the Liquidity Facility required by the terms of the Securitization
Facility expired on July 27, 1999, although it has also been temporarily
extended through September 27, 1999. The Company does not expect to be in
compliance with those covenants in the foreseeable future and is currently
negotiating with the lenders syndicate to revise the covenants to enable the
Company's compliance although this will also shorten the facility's termination
date to December 31, 1999. Although the Company anticipates successful
completion of these negotiations, there can be no assurance that the covenants
will be revised or the Liquidity Facility will be extended. In the event the
covenants are not revised, the Liquidity Facility is not extended, or waivers
are required, but are not granted, 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
other sources. The Company is identifying and evaluating alternative financing
sources. Accordingly, the Revolving Credit Facility has been classified as
current on the Company's Consolidated Balance Sheet as of June 30, 1999.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the Company (the "Meeting") was held
on May 14, 1999. The Company solicited proxies for the Meeting and there was no
solicitation in opposition to management's nominees for directors. At the
Meeting, the shareholders voted:
(1a) To elect director Jay D. Seid for a three-year term:
Votes For 7,274,847
Votes Against 362,775
Votes Abstained --
Votes Withheld --
(1b) To elect director Richard J. Williams for a three-year term:
Votes For 7,274,297
Votes Against 363,325
Votes Abstained --
Votes Withheld --
The names of the directors whose term of office continued after the Meeting are
Paul M. Burrell, Scott R. Francis, Robert A. Lefcort, Dr. Lawrence Chimerine and
David S. Hershberg.
(2) To ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending December
31, 1999:
Votes For 7,625,757
Votes Against 3,400
Votes Abstained 8,465
Votes Withheld 0
(3) To approve an amendment to the Company's Stock Option Plan, which
amendment increases the total number of shares of common stock
reserved for issuance to 2,000,000.
Votes For 5,347,229
Votes Against 634,592
Votes Abstained 6,100
Votes Withheld 1,649,701
37
ITEM 5 - OTHER INFORMATION
Effective August 2, 1999, J.G. (Pete) Ball, a principal of Crossroads Capital
Partners, LLC, agreed to serve in the newly created position of interim chief
operating officer of the Company and President of the Tandem division during the
restructuring process. Mr. Ball will work with the Board of Directors and senior
management to ensure the Company's new business plan, as a result of the
restructuring, is implemented. See Note 5 to the Company's Consolidated
Financial Statements.
Effective August 5, 1999, Ronald Blain resigned his position as Tandem's chief
operating officer. The Company has contracted with an executive search firm to
identify a new President and CEO of Tandem.
Effective August 4, 1999, Carolyn Noonan joined the Company as Controller and
Chief Accounting Officer, and Robert Tomlinson, formerly Chief Accounting
Officer, was appointed as the Company's Treasurer.
38
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)
4.3 Shareholder Protection Rights Agreement (2)
4.6 Warrant Dated February 21, 1997 Issued to Triumph-Connecticut Limited
Partnership (3)
4.7 Warrant Dated February 21, 1997 Issued to Bachow Investment Partners
III, L.P. (3)
4.8 Warrant Dated February 21, 1997 Issued to State Street bank and Trust
Company of Connecticut, N.A., as Escrow Agent (3)
10.16 Employment Agreement between Carolyn Noonan and the Company dated as of
July 22, 1999.
10.19 Third Amended and Restated Credit Agreement among OutSource
International, Inc., the banks from time to time parties hereto and
BankBoston, N.A., successor by merger to Bank of Boston, Connecticut,
as agent - Revolving Credit Facility dated as of July 27, 1998. (4)
10.34 Receivables Purchase and Sale Agreement dated July 27, 1998 among
OutSource International, Inc., OutSource Franchising, Inc., Capital
Staffing Fund, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., and OutSource International
of America, Inc., each as an originator, and OutSource Funding
Corporation, as the buyer, and OutSource International, Inc., as the
servicer. (4)
10.35 Receivables Purchase Agreement dated July 27, 1998 among OutSource
Funding Corporation, as the seller, and EagleFunding Capital
Corporation, as the purchaser, and BancBoston Securities, Inc., as the
deal agent and OutSource International, Inc., as the servicer (4)
10.36 Intercreditor Agreement dated July 27, 1998 by and among BankBoston,
N.A., as lender agent; OutSource Funding Corporation, OutSource
International, Inc., OutSource Franchising, Inc., Capital Staffing
Fund, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc.,
Synadyne IV, Inc., Synadyne V, Inc. and OutSource International of
America, Inc., as originators; OutSource International, in its separate
capacity as servicer; EagleFunding Capital Corporation, as purchaser;
and BancBoston Securities Inc., individually and as purchaser agent.
(4)
10.50 First Amendment to Third Amended and Restated Credit Agreement among
OutSource International, Inc., each of the banks party to the Credit
Agreement and BankBoston, N.A., as agent for the banks, dated as of
February 22, 1999. (5)
10.51 Temporary Waiver and Second Amendment to Third Amended and Restated
Credit Agreement among OutSource International, Inc., its subsidiaries,
each of the banks party to the Credit Agreement and BankBoston, N.A.,
as agent for the banks, dated as of June 30, 1999.
10.53 Third Temporary Waiver to Third Amended and Restated Credit Agreement
among OutSource International, Inc., its subsidiaries, each of the
banks party to the Credit Agreement and BankBoston, N.A., as agent for
the banks, dated as of August 5, 1999.
10.90 Engagement Letter between OutSource International, Inc. and
Crossroads Capital Partners LLC, dated as of May 7, 1999 and three
addenda dated June 18, July 1 and August 2, 1999.
10.91 Finder Services Agreement between OutSource International, Inc. and
Crossroads Capital Partners LLC, dated as of June 30, 1999.
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.
(3) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-1 (Registration Statement No. 333-33443) as filed
with the Securities and Exchange Commission on August 12, 1997.
(4) Incorporated by reference to the exhibits to the Company's Form 10-Q
for the quarterly period ended June 30, 1998, as filed with the
Securities and Exchange Commission on August 14, 1998.
(5) Incorporated by reference to the exhibits to the Company's Form 10-K
for the year ended December 31, 1998, as filed with the Securities and
Exchange Commission on March 31, 1999.
- - --------------------------------------------------------------------------------
(b) Reports on Form 8 - K:
No reports were filed on Form 8-K during the quarter ended June 30, 1999.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OUTSOURCE INTERNATIONAL, INC.
Date: August 16, 1999 By: /s/ Paul M. Burrell
---------------------------------------
Paul M. Burrell
President, Chief Executive Officer and
Chairman of the Board of Directors
Date: August 16, 1999 By: /s/ Scott R. Francis
---------------------------------------
Scott R. Francis
Chief Financial Officer
(Principal Financial Officer)
Date: August 16, 1999 By: /s/ Robert E. Tomlinson
---------------------------------------
Robert E. Tomlinson
Treasurer
40
EXHIBIT INDEX
Exhibit No. Description
10.16 Employment Agreement between Carolyn Noonan and the Company dated as of
July 22, 1999.
10.51 Temporary Waiver and Second Amendment to Third Amended and Restated
Credit Agreement among OutSource International, Inc., its subsidiaries,
each of the banks party to the Credit Agreement and BankBoston, N.A.,
as agent for the banks, dated as of June 30, 1999.
10.53 Third Temporary Waiver to Third Amended and Restated Credit Agreement
among OutSource International, Inc., its subsidiaries, each of the
banks party to the Credit Agreement and BankBoston, N.A., as agent for
the banks, dated as of August 5, 1999.
10.90 Engagement Letter between OutSource International, Inc. and Crossroads
Capital Partners LLC, dated as of May 7, 1999 and three addenda dated
June 18, July 1 and August 2, 1999.
10.91 Finder Services Agreement between OutSource International, Inc. and
Crossroads Capital Partners LLC, dated as of June 30, 1999.
27 Financial Data Schedule