SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of earliest event reported: FEBRUARY 18, 1998
OUTSOURCE INTERNATIONAL, INC.
------------------------------------------------
(Exact name of registrant as specified in charter)
FLORIDA 000-23147 65-0675628
---------------------------- ---------- -----------------
(State or other jurisdiction (Commission (IRS employer
of incorporation) file number) 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
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Effective February 16, 1998, OutSource International of America, Inc., a
wholly owned subsidiary of the Registrant ("OSIA"), purchased substantially all
of the tangible and intangible assets, excluding accounts receivable, of LM
Investors, Inc., an Illinois corporation ("LM"), pursuant to the terms of an
Asset Purchase Agreement dated February 18, 1998. The purchase price for the
assets was approximately $6.8 million, which amount was paid (i) $5.0 million in
cash at closing, (ii) $1.7 million in the form of a three-year, junior
subordinated promissory note, which note bears interest at an annual rate of
7.25%, and (iii) OSIA's assumption of LM's liabilities under certain employment
contracts, estimated to be $100,000. In connection with the acquisition, OSIA
entered into five-year non-competition agreements with LM and with Matthew
Schubert and Louis J. Morelli, the shareholders of LM.
The purchase price was arrived at through arm's-length negotiations between
the parties. The cash portion of the purchase price was funded from the
Registrant's revolving credit agreement with Bank Boston, N.A., as agent.
LM had flexible industrial staffing revenues of approximately $11.4 million
in 1997. The assets purchased by the Company included four business locations in
the suburban Chicago, Illinois area and substantially all of the tangible and
intangible assets, excluding accounts receivable, at those locations. Prior to
this purchase, the four locations were being operated by LM in accordance with a
franchise agreement dated November 1, 1994 between LM and OutSource Franchising,
Inc., a wholly owned subsidiary of the Registrant and an affiliate of OSIA. This
franchise agreement was terminated in connection with this purchase although the
Asset Purchase Agreement grants one of the LM owners, Louis J. Morelli,
exclusive rights to purchase and rights of first refusal for franchises in
another five flexible industrial staffing territories not currently franchised
or otherwise operated in by the Registrant. These rights expire at various times
up to forty-two months from the date of this transaction.
Matthew Schubert and Louis J. Morelli are shareholders in the Registrant
but do not individually or in the aggregate hold a controlling interest in the
Registrant. A law firm owned by Louis J. Morelli has received and continues to
receive compensation for legal services rendered to the Registrant.
The Registrant currently intends to continue to operate the business
formerly conducted by LM at all of the purchased locations with the purchased
assets for the foreseeable future. The foregoing statement of the Registrant's
intention is a forward looking statement within the meaning of Section 21E of
the Securities Exchange Act of 1934, and is based on certain assumptions,
including among others, general economic conditions, management's expectations
regarding the operating results of the Registrant and the purchased locations,
the capital requirements of continuing LM's current business, and others. Should
these assumptions change, or prove to be inaccurate, the Registrant's actual
future conduct of LM's business could differ materially from the intention
stated.
The above descriptions of the asset purchase agreement, the non-competition
agreements, the mutual termination agreement, and the promissory note do not
purport to be complete and are qualified in their entirety by the full text of
such documents which are attached as Exhibits hereto.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
INDEPENDENT AUDITORS' REPORT
LM Investors, Inc.
Northbrook, Illinois
We have audited the accompanying balance sheet of LM Investors, Inc. (the
"Company") as of December 31, 1997, and the related statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of LM Investors, Inc. at December 31, 1997, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Chicago, Illinois
April 21, 1998
3
<PAGE>
<TABLE>
<CAPTION>
LM INVESTORS, INC.
BALANCE SHEET
DECEMBER 31, 1997
<S> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful accounts of $30,800 $1,524,852
Other receivables 2,840
Prepaid insurance 170,918
Other current assets 15,543
----------
Total current assets 1,714,153
PROPERTY AND EQUIPMENT - Net 214,208
INTANGIBLE ASSETS - Net of accumulated amortization of $6,601 15,399
----------
TOTAL ASSETS $1,943,760
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 240,752
Accounts payable 18,849
Accrued payroll and related expenses 273,048
Due to related parties 111,535
Line of credit 704,693
Current portion of notes payable 10,470
----------
Total current liabilities 1,359,347
NOTES PAYABLE 9,972
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized and outstanding, 1,000 shares 1,000
Retained earnings 573,441
----------
Total stockholders' equity 574,441
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,943,760
==========
</TABLE>
See notes to financial statements.
4
<PAGE>
LM INVESTORS, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
NET REVENUES $ 11,426,904
COST OF REVENUES:
Payroll 7,302,282
Taxes 749,538
Workers' compensation insurance 285,108
Commissions 267,653
Royalties 308,341
Other 122,096
------------
Total cost of revenues 9,035,018
------------
GROSS PROFIT 2,391,886
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Stockholders' compensation 341,690
Other selling, general and administrative 1,383,416
------------
Total selling, general and administrative expenses 1,725,106
------------
OPERATING INCOME 666,780
OTHER EXPENSE (INCOME):
Interest income (3,689)
Interest expense 66,910
------------
Total other expense (income) 63,221
------------
NET INCOME $ 603,559
============
See notes to financial statements.
5
<PAGE>
LM INVESTORS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
Common Retained
Stock Earnings Total
BALANCE, January 1, 1997 $ 1,000 $ 358,250 $ 359,250
Net income -- 603,559 603,559
Distributions to stockholders -- (388,368) (388,368)
--------- --------- ---------
BALANCE, December 31, 1997 $ 1,000 $ 573,441 $ 574,441
========= ========= =========
See notes to financial statements.
6
<PAGE>
LM INVESTORS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 603,559
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 33,227
Changes in assets and liabilities:
Accounts receivable (63,816)
Other receivables 105,629
Prepaid insurance (160,212)
Other current assets 12,608
Accounts payable 4,531
Accrued payroll and related expenses (15,433)
Due to related parties 110,732
---------
Net cash flows from operating activities 630,825
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (94,975)
---------
Net cash flows from investing activities (94,975)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under line of credit (287,000)
Net repayments on notes payable (9,657)
Distributions paid to stockholders (388,368)
---------
Net cash flows from financing activities (685,025)
---------
NET DECREASE IN CASH (149,175)
BANK OVERDRAFT - Beginning of year (91,577)
---------
BANK OVERDRAFT - End of year $(240,752)
=========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest $ 66,910
=========
See notes to financial statements.
7
<PAGE>
LM INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997
1. BUSINESS AND ORGANIZATION
LM Investors, Inc. (the "Company") provided temporary industrial
staffing services to various customers under the trade name Tandem, as allowed
by franchise agreements between the Company and OutSource Franchising, Inc. The
Company provided these services through four Company-owned locations in the
Chicago area.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION - All revenues are recognized as the related
service is performed, net of provision for credits and allowances.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. The
Company provides for depreciation using the double-declining balance method and
other tax depreciation rates, which approximate the straight-line method.
INTANGIBLE ASSETS - Intangible assets include capitalized franchise
fees and rights to the use of a customer list. The assets are recorded at cost
and amortized on a straight-line basis over 15 years, the lives of the
agreements.
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets, including
intangible assets, are reviewed for possible impairment whenever events of
changes in circumstances indicate the carrying amount of such assets may not be
recoverable. If such review indicates that the carrying amount of long-lived
assets is not recoverable, the carrying amount of such assets is reduced to its
estimated net realizable value.
INCOME TAXES - The Company has elected to be treated as an S
corporation and, as such, all of its income is taxed directly to its
stockholders for federal and state income tax purposes. Therefore, no provision
or liability for income taxes has been included in these financial statements.
WORKERS' COMPENSATION - The Company manages its workers' compensation
risk through a premium based insurance policy. The Company is potentially
obligated to the extent of 110% of the premium payments made to its insurance
carrier and records a receivable or liability based on actual claims experience
and insurance carrier audits.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997:
Office furniture and equipment $138,912
Leasehold improvements 95,957
Trucks and vehicles 91,083
--------
Total 325,952
Less accumulated depreciation 111,744
--------
Property and equipment - net $214,208
========
8
<PAGE>
LM INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997
4. DUE TO RELATED PARTIES
At December 31, 1997, the Company owed $99,714 and $11,821 to its
affiliated corporations Temp-Aid, Inc. and LM-Aid, Inc., respectively, for
expenses incurred on behalf of the Company. Selling, general and administrative
expenses included $396,093 of these expenses for the year ended December 31,
1997.
5. LINE OF CREDIT
The Company entered into a line of credit agreement with American
Charter Bank on March 31, 1997. The available line of credit is $1,200,000, of
which the Company has borrowed $704,693 as of December 31, 1997. The note is
secured by the Company's business assets and accounts receivable. Interest is
calculated at prime plus one-half percent. The note is due on April 30, 1998.
6. NOTES PAYABLE
Notes payable consists of the following at December 31, 1997:
$20,900 note from Ford Motor Credit Corp. for the
purchase of a 1996 Ford Explorer, secured by the vehicle, payable
monthly for 48 months from January 8, 1996. The interest rate is
8.5%. $ 11,311
$20,000 note from American Charter Bank for the purchase of
a 1996 Ford Explorer, secured by the vehicle, payable monthly for
48 months from November 11, 1996. The interest rate is 8.75%. 9,131
-------
Total 20,442
Less current portion 10,470
-------
Long-term notes payable $ 9,972
=======
9
<PAGE>
LM INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997
7. COMMITMENTS AND CONTINGENCIES
The Company conducts its operations in various leased facilities under
leases that are classified as operating leases for financial reporting purposes.
Rental expense totaled $78,439 in 1997. As of December 31, 1997, future minimum
rental commitments under noncancellable operating leases were:
1998 $ 91,146
1999 81,684
2000 64,074
2001 26,700
2002 4,450
--------
$268,054
========
8. SUBSEQUENT EVENT
Effective February 16, 1998, the assets, excluding receivables, and
business of the Company were acquired by OutSource International of America,
Inc. a company under common ownership with OutSource Franchising, Inc., and the
franchise agreements between the Company and OutSource Franchising, Inc. were
terminated.
10
<PAGE>
(b) PRO FORMA FINANCIAL INFORMATION.
The following Unaudited Pro Forma Consolidated Statement of Income for
the year ended December 31, 1997 includes the Company's historical results of
operations, adjusted to reflect (a) the 1997 and 1998 Acquisitions (see Note 1
for the acquired businesses included), (b) the elimination of the amount of
compensation expense for the Company's three principal shareholders and its
president and chief executive officer (who is also a shareholder) which is in
excess of the compensation for such individuals subsequent to the Reorganization
and the elimination of the amount of compensation expense for the former owners
of the 1997 and 1998 Acquisitions which is in excess of the compensation for
such individuals subsequent to the Acquisitions and (c) the effects of the
October 1997 sale by the Company of 3,000,000 shares of Common Stock (the
"Offering"), as if all such events and transactions had occurred as of January
1, 1997. In addition, income taxes were computed as if the Company and the 1997
and 1998 Acquisitions had been fully subject to federal and applicable state
income taxes as of January 1, 1997.
The Unaudited Pro Forma Consolidated Balance Sheet as of December 31,
1997 includes the Company's historical balance sheet adjusted to reflect the
1998 Acquisitions as if they had occured on such date.
The Unaudited Pro Forma Consolidated Financial Information is not
necessarily indicative of the results that would have occurred if the events and
transactions referred to above had occurred on January 1, 1997 or which may be
realized in the future. The Unaudited Pro Forma Consolidated Financial
Information should be read in conjunction with the historical financial
statements and the notes thereto included in the Company's Form 10-K/A filed
with the Securities and Exchange Commission effective April 2, 1998.
11
<PAGE>
<TABLE>
<CAPTION>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1997
(in thousands, except per share data)
HISTORICAL
-----------------------
ACQUIRED PRO FORMA
COMPANY BUSINESSES (1) ADJUSTMENTS PRO FORMA
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 447,579 $ 50,178 $ 1,350 (2) $ 496,407
Cost of revenues 381,273 39,100 (1,350)(2) 419,023
--------- -------- ---------
Gross profit 66,306 11,078 77,384
Selling, general and administrative expenses:
Shareholders' compensation 292 1,918 (1,869)(3) 341
Amortization of intangible assets 1,853 - 1,123 (4) 2,976
Other selling, general and administrative expenses 53,752 7,619 31 (2, 4) 61,402
--------- -------- ---------
Operating income 10,409 1,541 12,665
Interest expense (income) 7,877 127 (1,915)(5) 6,089
Other expense (income) 1,821 (62) (1,842)(6) (83)
--------- -------- ---------
Income before provision for income taxes 711 1,476 6,659
Pro forma provision for income taxes 296 (7) - 1,705 (8) 2,001
--------- -------- ------- ---------
Pro forma net income $ 415 $ 1,476 $ 2,767 $ 4,658
========= ======== ======= =========
Pro forma weighted average common shares outstanding (9):
Basic 6,055 8,507
========= =========
Diluted 7,320 9,958
========= =========
Pro forma earnings per share:
Basic $ 0.07 $ 0.55
========= =========
Diluted $ 0.06 $ 0.47
========= =========
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
(in thousands)
PRO FORMA
HISTORICAL ADJUSTMENTS (1) PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,686 $ - $ 1,686
Trade receivables, net 47,298 600 47,898
Funding advances to franchises 2,186 - 2,186
Notes receivable - 780 780
Deferred income taxes 5,910 - 5,910
-------- -------- --------
Total current assets 57,079 1,380 58,459
PROPERTY AND EQUIPMENT, NET 14,953 240 15,193
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 30,427 16,365 46,792
OTHER ASSETS 3,284 - 3,284
-------- -------- --------
Total assets $105,743 $ 17,985 $123,728
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,498 $ - $ 1,498
Accrued expenses:
Payroll 5,382 - 5,382
Payroll taxes 2,182 - 2,182
Workers' compensation 9,086 - 9,086
Other 1,864 - 1,864
Other current liabilities 908 - 908
Current maturities of long-term debt to related parties 100 - 100
Current maturities of other long-term debt 2,408 1,200 3,608
-------- -------- --------
Total current liabilities 23,428 1,200 24,628
NON-CURRENT LIABILITIES
Revolving credit facility 33,800 12,335 46,135
Other long-term debt, less current maturities 7,737 3,675 11,412
-------- -------- --------
Total liabilities 64,965 17,210 82,175
-------- -------- --------
SHAREHOLDERS' EQUITY
Common stock 9 - 9
Additional paid-in capital 53,201 775 53,976
Retained earnings (deficit) (12,432) - (12,432)
-------- -------- --------
Total shareholders' equity 40,778 775 41,553
-------- -------- --------
Total liabilities and shareholders' equity $105,743 $ 17,985 $123,728
======== ======== ========
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
13
<PAGE>
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
The pro forma adjustments include the historical results of operations
of the following acquisitions ("the 1997 and 1998 Acquisitions") from January 1,
1997 to the earlier of December 31, 1997 or the date of acquisition, as well as
the assets purchased and the consideration given for those acquisitions
occurring after December 31, 1997.
Primarily during the first three months of 1997, the Company purchased
the franchise rights for 13 flexible staffing locations from LaPorte, Inc.,
Superior Temporaries, Inc. and Labor World of Minneapolis, Inc., and converted
these locations to Company-owned locations. The total purchase price was
$11,125,000 (of which $9,000,000 related to Superior Temporaries, Inc.), with
$10,475,000 paid at closing and a note issued for $650,000.
During the first three months of 1997, the Company purchased flexible
staffing operations with 17 locations from Apex, Inc., Standby Personnel of
Colorado Springs, Inc., Staff Net, Inc., Staff Management, Inc. and Stand-By,
Inc. (none previously affiliated with the Company). The total purchase price was
$14,070,000, with $10,910,000 paid at closing and notes issued for $3,160,000.
Certain sellers received options to purchase a total of 8,126 shares of the
Company's common stock at their fair market value at the date of issuance. Such
options were issued March 12, 1997 and were still outstanding at December 31,
1997. The contractual purchase price of Standby Personnel of Colorado Springs,
Inc. was $3,100,000, which may increase or decrease by an amount not to exceed
$500,000, based on the gross profit from the acquired locations for the two
years following the acquisition. The contractual purchase price of Stand-By,
Inc. was $5,500,000, which may increase by an amount not to exceed $60,000 or
decrease by an amount not to exceed $500,000, based on the gross profit from the
acquired locations for the two years following the acquisition.
During January 1998, the Company purchased the franchise rights for
three flexible staffing locations from Freuhling and Jackson, Inc. and F.J.R.
Enterprises, Inc. and converted these locations to Company-owned locations. The
total purchase price was $2,800,000, with $2,000,000 paid at closing and notes
issued for $800,000, payable over two years plus interest at 6.0% per annum.
During January 1998, the Company purchased 100% of the common stock of
Employment Consultants, Inc., (not previously affiliated with the Company),
which was a flexible staffing operation with one location. The total purchase
price (which includes $600,000 for net tangible assets) was $3,650,000, with
$2,000,000 in cash and $775,000 in the Company's common stock (57,809 shares)
delivered at closing. The remainder of the purchase price was satisfied with the
issuance of notes totalling $875,000 and payable over two years plus interest at
6.0% per annum. However, one of the notes may increase without limit or decrease
by up to $875,000 based on the gross profit from the acquired locations for the
two years following the acquisition. In the event gross profit for those two
years was equal to 1997 gross profit, the note would decrease by approximately
$125,000. In the event gross profit increased by 25% in each of those two years
as compared to the prior year, the note would increase by approximately
$150,000.
During February 1998, the Company purchased the franchise rights for
four flexible staffing locations from LM Investors, Inc. and converted these
locations to Company-owned locations. The shareholders of the franchises are
shareholders of the Company but do not hold a controlling interest in the
Company. The purchase price was $6,800,000, with $5,000,000 paid at closing plus
a note for $1,700,000 bearing interest at 7.25% per annum and payable quarterly
over three years. The remaining $100,000 represents the Company's assumption of
the seller's liabilities under certain employment contracts. In addition, the
Company has agreed to concessions amounting to approximately $60,000 and
agreements not to compete of up to six months (excluding acquisitions) in the
event the sellers wish to buy out of their remaining franchise agreements
(representing four flexible staffing locations) with the Company. In connection
with the Company's acquisition of the above franchise rights, the Company
granted one of the principals of the sellers (and a minority shareholder in the
Company) the exclusive option to purchase franchise rights in five specifically
identified geographic areas. These options expire at various times from 12 to 42
months after the acquisition date.
During the first three months of 1998, the Company purchased flexible
staffing operations with 18 locations from Tempus, Inc. and Grafton, Inc. (none
previously affiliated with the Company). The total purchase price was
$4,835,000, with $3,335,000 paid at closing plus a $1,500,000 note payable over
two years plus interest at 6.5% per annum. The amount due under the note may
decrease by up to $300,000, based on the 1997 gross profit of the acquired
locations.
14
<PAGE>
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 (Continued)
Immediately following the acquisition from Tempus, Inc., the Company
sold four of the acquired locations to Cruel Dave Enterprises, LLC (a franchisee
of the Company) for a $780,000 note, payable over five years plus interest at
8.0% per annum.
The agreements for certain acquisitions contain provisions for
contingent payments of additional purchase price based on the net revenues,
gross margin or income before income taxes of the acquired businesses over
periods of two years after the acquisition. Should the contingent payments be
made, they would be recorded as additional purchase price and increase the
amount of goodwill. The above purchase prices are stated before the Company's
adjustment to reflect imputed interest on acquisition financing.
NOTE 2
To eliminate revenues of the Company and (i) related expenses and costs
of Laporte Enterprises, Inc., Superior Temporaries, Inc., Labor World of
Minneapolis, Inc., Freuhling and Jackson, Inc., F.J.R. Enterprises, Inc. and LM
Investors, Inc. related to franchise royalties, (ii) related expenses and costs
of Laporte Enterprises, Inc. related to funding fees and (iii) related expenses
and costs of Labor World of Minneapolis, Inc. related to PEO services, for
services provided by the Company to these acquired businesses, which were
franchisees prior to their acquisition.
NOTE 3
To (i) eliminate the amount of compensation for the Company's three
principal shareholders and its president and chief executive officer (who is
also a shareholder) which is in excess of the compensation for such individuals
established at the time of the Reorganization, (ii) to reduce the amount of
compensation and other expenses of the former owners of the 1997 and 1998
Acquisitions to the amounts paid to them in accordance with the terms of their
compensation contracts after such acquisitions and (iii) to eliminate the amount
of compensation and other expenses of the former owners of the 1997 and 1998
Acquisitions that was discontinued due to the termination of their employment at
the time of the acquisition.
On February 21, 1997, the Company consummated a reorganization (the
"Reorganization") with nine operating companies existing under the laws of the
State of Florida: OutSource International of America, Inc., Synadyne I, Inc.,
Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc.,
OutSource Franchising, Inc., Capital Staffing Fund, Inc., and Employees
Insurance Services, Inc. (collectively, the "Subsidiaries") and the shareholders
of each of the Subsidiaries (the "Existing Shareholders"). As a result of the
Reorganization, the Subsidiaries became wholly-owned by the Company and the
Existing Shareholders received Common Stock in approximately the same proportion
as the capital stock of the Subsidiaries was owned by them immediately prior to
the Reorganization.
NOTE 4
To reflect additional depreciation and amortization of the assets
purchased in the 1997 and 1998 Acquisitions. The following table summarizes the
values assigned to the assets acquired and the weighted average amortization or
depreciation periods.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
AMORTIZATION OR
AMOUNT DEPRECIATION PERIODS
----------- --------------------
<S> <C> <C>
Tangible assets, primarily equipment............. $ 1,734,398 4.3 years
Identifiable intangible assets:
Covenants not to compete..................... 1,554,390 8.7 years
Customer lists............................... 6,127,220 6.4 years
Employee lists............................... 214,590 0.1 year
Goodwill......................................... 33,176,079 33.2 years
-----------
$42,806,677
===========
</TABLE>
15
<PAGE>
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 (Continued)
The costs of each acquisition have been allocated to the assets
acquired and liabilities assumed based on their fair values at the date of
acquisition as determined by management with the assistance of an independent
valuation consultant. The allocation of the costs of acquisition for the 1998
Acquisitions is preliminary while the Company obtains final information
regarding the fair values of all assets acquired; however, management believes
that any adjustments to the amounts allocated will not have a material effect on
the Company's financial position or results of operations.
NOTE 5
To adjust for the additional interest and amortization expense for
indebtedness incurred (a) to pay the purchase price and acquisition costs and to
provide working capital for the 1997 and 1998 Acquisitions; and (b) to pay the
distributions to shareholders and the consideration for the purchase of shares
of common stock of the Subsidiaries from certain shareholders, each of which
occurred in connection with the Reorganization.
This also includes the effects of the sale by the Company of the
3,000,000 shares of Common Stock at an offering price of $15.00 per share and
the reduced interest and other debt related expenses as a result of the
application of the net proceeds therefrom to retire (a) the balance of the
Senior Notes in full, (b) a portion of the outstanding indebtedness under the
Revolving Credit Facility, (c) various promissory notes due to certain existing
shareholders of the Company, their family members and an executive officer of
the Company and (d) various promissory notes issued in connection with certain
acquisitions.
The following is a summary of the adjustments to interest and
amortization expense:
<TABLE>
<CAPTION>
INTEREST YEAR ENDED
RATES DECEMBER 31, 1997
-------- -----------------
<S> <C> <C>
ADDITIONAL INTEREST EXPENSE
Notes due to sellers for 1997 and 1998 Acquisitions............. 8-12% $ 419,323
Borrowings under Revolving Credit Facility...................... 8.75% 1,722,916
Senior Notes.................................................... 11% 365,620
-----------
2,507,859
ADDITIONAL AMORTIZATION EXPENSE
Discount on Senior Notes........................................ 296,520
Debt issuance costs, Senior Notes............................... 244,810
Debt issuance costs, Revolving Credit Facility.................. 133,596
-----------
674,926
REDUCTION OF INTEREST AND AMORTIZATION EXPENSE
Senior Notes - interest......................................... 11% (2,275,342)
Senior Notes - discount and debt issuance costs................. -- (1,436,827)
Retirement of acquisition debt.................................. 10-14% (333,991)
Retirement of other promissory notes............................ 10-21% (358,727)
Reduction of Revolving Credit Facility.......................... 8.75% (693,062)
------------
(5,097,949)
Total....................................... $(1,915,164)
===========
</TABLE>
NOTE 6
To eliminate expense arising from a put warrants valuation adjustment
included in the Company's historical results for the twelve months ended
December 31, 1997, which elimination increased pro forma diluted earnings per
share by $0.17 per share.
16
<PAGE>
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 (Continued)
The holders of the warrants had a put right, as a result of which the
Company recorded a liability at the time of the issuance of the warrants based
on the fair market value. Until the Offering was consummated, the Company
adjusted this liability at the end of each accounting period.
Although the Senior Notes were assumed to be paid in full as of January
1, 1997, the Warrants issued in connection with the Senior Notes would remain
outstanding, and therefore were included in the calculation of both the
historical and pro forma diluted shares outstanding.
NOTE 7
To reflect income taxes computed as if the Company had been fully
subject to federal and applicable state income taxes. The Company recognized a
one-time tax benefit of $423,897, as a result of the termination at the time of
Reorganization of the Subsidiaries' elections to be treated as S corporations,
that is not reflected in these pro forma statements.
NOTE 8
To adjust for the effects of income taxes on (a) the historical
earnings of the 1997 and 1998 Acquisitions, all of which (except Stand-By, Inc.)
were S corporations prior to acquisition, as if they had been fully subject to
federal and applicable state income taxes and (b) the effect of the pro forma
adjustments.
NOTE 9
To reflect the effect on outstanding shares of the purchase of shares
of common stock of the Subsidiaries from certain shareholders in the
Reorganization and the issuance of the Warrants as if both transactions had
occurred as of January 1, 1997, calculated as follows:
<TABLE>
<CAPTION>
BASIC DILUTED
--------- ---------
<S> <C> <C>
Total outstanding shares, historical................................... 6,055,439 7,320,362
Decrease in weighted average number of shares issued in the
Reorganization, based on assumed transaction date of
January 1, 1997.................................................... (46,213) (46,213)
Increase in weighted average shares issued in 1998 Acquisitions........ 57,809 57,809
Increase in weighted average number of shares calculated using the treasury
stock method, based on the assumed issuance of Warrants on January 1, 1997
and the actual exercise price of
$0.15 per share.................................................... - 186,643
Increase in weighted average number of shares issued in the
Offering, based on assumed transaction date of January 1, 1997...... 2,439,560 2,439,560
--------- -----------
Total outstanding shares, pro forma.................................... 8,506,595 9,958,161
========= ===========
</TABLE>
17
<PAGE>
(c) Exhibits.
2.1 Asset Purchase Agreement, dated February 18, 1998, by and
among OutSource International of America, Inc., L.M.
Investors, Inc., Louis J. Morelli and Matthew Schubert.*
10.1 Non-Competition Agreement, dated February 18, 1998,
between OutSource International of America, Inc. and
Matthew Schubert.*
10.2 Non-Competition Agreement, dated February 18, 1998,
between OutSource International of America, Inc. and Louis
J. Morelli.*
10.3 Non-Competition Agreement, dated February 18, 1998,
between OutSource International of America, Inc. and L.M.
Investors, Inc.*
10.4 Mutual Termination Agreement dated February 18, 1998
between OutSource Franchising, Inc., L.M. Investors, Inc.,
Louis J. Morelli and Matthew Schubert.*
10.5 Junior Subordinated Promissory Note, dated as of February
16, 1998, issued by OutSource International of America,
Inc. to L.M. Investors, Inc.*
* Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on March 5,
1998.
18
<PAGE>
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.
By:/s/ Paul M. Burrell
----------------------------
Paul M. Burrell
President
Dated: May 4, 1998
19
