SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 March 31, 1998
OR
[ ] 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
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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
Indicate whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT MAY 12, 1998
----- ---------------------------
Common Stock, par value $.001 per share 8,657,913
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OUTSOURCE INTERNATIONAL, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE
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Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997....................................................................... 2
Consolidated Statements of Income for the three months
ended March 31, 1998 and 1997........................................................... 3
Consolidated Statements of Shareholders' Equity (Deficit) for
the three months ended March 31, 1998 and 1997 ......................................... 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997........................................................... 5
Notes to Consolidated Financial Statements.............................................. 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................. 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................................................ 21
Item 2 - Changes in Securities and Use of Proceeds........................................................ 21
Item 6 - Exhibits and Reports on Form 8-K................................................................. 21
Signatures................................................................................................ 23
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1
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
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ASSETS
CURRENT ASSETS:
Cash.................................................................... $ 2,835,992 $ 1,685,474
Trade accounts receivable, net of allowance for doubtful accounts of
$1,698,632 and $1,639,767.......................................... 49,169,403 47,297,608
Funding advances to franchises.......................................... 1,231,052 2,186,150
Deferred income taxes and other current assets.......................... 6,115,481 5,909,960
------------ ------------
Total current assets............................................... 59,351,928 57,079,192
PROPERTY AND EQUIPMENT, net............................................. 15,833,449 14,953,118
GOODWILL AND OTHER INTANGIBLE ASSETS, net............................... 54,919,854 30,426,731
OTHER ASSETS............................................................ 3,927,672 3,283,817
------------ ------------
Total assets....................................................... $134,032,903 $105,742,858
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 2,704,235 $ 1,498,275
Accrued expenses:
Payroll............................................................ 7,552,247 5,382,295
Payroll taxes...................................................... 2,182,035 2,181,722
Workers' compensation and insurance................................ 10,232,938 9,086,007
Other.............................................................. 1,238,172 1,863,666
Other current liabilities............................................... 2,190,771 907,975
Current maturities of long-term debt to related parties................. 513,333 100,000
Current maturities of other long-term debt.............................. 3,345,752 2,408,060
------------ ------------
Total current liabilities.......................................... 29,959,483 23,428,000
NON-CURRENT LIABILITIES:
Revolving credit facility............................................... 48,320,529 33,800,000
Long-term debt to related parties, less current maturities.............. 1,154,713 --
Other long-term debt, less current maturities........................... 12,372,145 7,736,981
------------ ------------
Total liabilities.................................................. 91,806,870 64,964,981
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COMMITMENTS AND CONTINGENCIES (NOTE 4)
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 10,000,000 shares authorized, none
issued...............................................................
Common stock, $.001 par value; 100,000,000 shares authorized;
8,506,597 and 8,448,788 issued and outstanding at March 31, 1998
and December 31, 1997................................................ 8,507 8,449
Additional paid-in capital ............................................. 53,975,930 53,200,988
Retained earnings (deficit)............................................. (11,758,404) (12,431,560)
------------ ------------
Total shareholders' equity......................................... 42,226,033 40,777,877
------------ ------------
Total liabilities and shareholders' equity......................... $134,032,903 $105,742,858
============ ============
</TABLE>
See notes to consolidated financial statements.
2
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OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
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Net revenues.......................................................... $120,986,387 $ 85,374,194
Cost of revenues...................................................... 102,948,247 74,239,209
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Gross profit.......................................................... 18,038,140 11,134,985
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Selling, general and administrative expenses:
Shareholders' compensation....................................... -- 292,001
Amortization of intangible assets................................ 745,314 330,106
Other selling, general and administrative........................ 15,375,917 9,937,427
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Total selling, general and
administrative expenses...................................... 16,121,231 10,559,534
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Operating income...................................................... 1,916,909 575,451
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Other expense (income):
Interest expense (net)............................................ 1,079,518 1,326,830
Put warrants valuation adjustment................................. -- (1,883,282)
Other expense (income)............................................ (5,526) (68,549)
------------- -------------
Total other expense (income)...................................... 1,073,992 (625,001)
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Income before provision (benefit) for
income taxes...................................................... 842,917 1,200,452
Provision (benefit) for income taxes.................................. 169,761 (406,209)
------------- -------------
Net income............................................................ $ 673,156 $ 1,606,661
============= =============
PRO FORMA DATA:
Income before provision (benefit)
for income taxes.................................................. $ 842,917 $ 1,200,452
Provision (benefit) for income taxes.................................. 169,761 (33,000)
------------- -------------
Net income............................................................ $ 673,156 $ 1,233,452
============= =============
Weighted average common shares:
Basic............................................................. 8,486,685 5,639,431
============= =============
Diluted........................................................... 10,025,379 6,277,718
============= =============
Earnings per share:
Basic............................................................. $ 0.08 $ 0.22
============= =============
Diluted........................................................... $ 0.07 $ 0.20
============= =============
</TABLE>
See notes to consolidated financial statements.
3
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OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
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Balance, December 31, 1997................................. $ 8,449 $53,200,988 $(12,431,560) $40,777,877
Issuance of common stock................................... 58 774,942 775,000
Net income................................................. 673,156 673,156
------- ----------- ------------ -----------
Balance, March 31, 1998 ................................... $ 8,507 $53,975,930 $(11,758,404) $42,226,033
======= =========== ============ ===========
Balance, December 31, 1996 ................................ $ 5,785 $ 95,315 $ 4,394,125 $ 4,495,225
Net loss for the period from January 1, 1997
through February 21, 1997 .............................. - - (172,497) (172,497)
Distributions and other payments in connection
with the Reorganization................................. (336) (11,879,636) (4,221,628) (16,101,600)
Contribution of notes payable by shareholders.............. - 4,300,000 - 4,300,000
Net income for the period from February 22, 1997
through March 31, 1997.................................. - - 1,779,158 1,759,158
------- ----------- ------------ -----------
Balance, March 31, 1997.................................... $ 5,449 $(7,484,321) $ 1,779,158 $(5,699,714)
======= =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
4
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OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 673,156 $ 1,606,661
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................................... 1,418,604 784,684
Put warrants valuation adjustment.................................. -- (1,883,282)
Deferred income taxes.............................................. 293,169 (406,209)
Loss on disposal of property
and equipment................................................. -- 2,685
Changes in assets and liabilities (excluding effects of acquisitions):
(Increase) decrease in:
Trade accounts receivable................................. 520,294 (4,117,131)
Prepaid expenses and other current assets................. (325,961) 73,069
Other assets.............................................. 199,486 (706,352)
Increase (decrease) in:
Accounts payable.......................................... (62,611) (725,815)
Accrued expenses:
Payroll............................................... 1,922,952 583,477
Payroll taxes......................................... (200,210) 912,290
Workers' compensation and insurance................... 1,067,931 870,091
Other................................................. (625,494) 648,037
Other current liabilities................................. 480,913 513,229
---------------- ---------------
Net cash provided by (used in) operating activities 5,362,229 (1,844,566)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Funding (advances to) repayments from to franchises, net.............. 955,098 1,336,520
Property and equipment expenditures................................... (1,263,095) (535,700)
Expenditures for acquisitions......................................... (18,168,557) (20,560,000)
---------------- ---------------
Net cash used in investing activities (18,476,554) (19,759,180)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in excess of outstanding checks over
bank balance, included in accounts payable........................ 1,229,334 (494,685)
Net proceeds from line of credit and
revolving credit facility......................................... 14,520,529 14,760,630
Related party borrowings (repayments)................................. (100,000) 2,075,789
Proceeds of senior notes and put warrants, net of
issuance costs.................................................... -- 22,614,984
Repayment of long-term debt........................................... (1,385,020) (2,955,958)
Payments in connection with the Reorganization -- (14,356,600)
---------------- ---------------
Net cash provided by financing activities 14,264,843 21,644,160
---------------- ---------------
Net increase in cash.................................................. 1,150,518 40,414
Cash, beginning of period............................................. 1,685,474 44,790
---------------- ---------------
Cash, end of period................................................... $ 2,835,992 $ 85,204
================ ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid......................................................... $ 1,266,825 $ 905,479
================ ===============
</TABLE>
See notes to consolidated financial statements.
5
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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 March 31, 1998 and for the three months ended
March 31, 1998 and 1997 are unaudited. Such interim consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, reflect all adjustments
(including normal accruals) necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year. The
interim financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1997, included in the
Company's Form 10-K/A filed with the Securities and Exchange Commission on April
2, 1998.
In June 1997, Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," were issued. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 131 establishes standards for the
way that public companies report selected information about operating segments
in annual financial statements and requires that those companies report selected
information about segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 130 and SFAS No. 131
are effective for financial statements for periods beginning after December 15,
1997, although interim period application of SFAS No. 131 is not required. The
Company has adopted SFAS No. 130 and the disclosures required by SFAS No. 130
are included in Note 6. The Company has not determined the effects, if any, that
SFAS No. 131 will have on the disclosures in its consolidated financial
statements.
NOTE 2. ACQUISITIONS
During the first quarter of 1998, the Company purchased the franchise
rights for six flexible staffing locations from Freuhling and Jackson, Inc.,
F.J.R. Enterprises, Inc., EJ Services, Inc. and EAZY Temporary, Inc., and
converted these locations to Company-owned locations. The total purchase price
was $5,531,050, with $3,365,525 paid at closing and notes issued for $2,165,525,
payable over two years plus interest at 6.0% per annum (imputed at 8.75% for
financial statement purposes). The amount due under one of these notes may
increase or decrease by an amount not to exceed $250,000, based on the gross
profit from the acquired locations for the year following the acquisition.
During the first quarter 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 (imputed at 8.75% for financial
statement purposes). The amount due under the note may decrease by up to
$300,000, based on the 1997 gross profit of the acquired locations. 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.
During the first quarter of 1998, the Company purchased 100% of the
common stock of Employment Consultants, Inc., X-Tra Help, Inc. and Co-Staff,
Inc. (none previously affiliated with the Company), which were flexible staffing
operations with four locations. The total purchase price (which includes
$2,100,000 for net tangible assets) was $11,259,500, with $7,509,500 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 $2,975,000 and payable over two years plus interest at 6.0% per annum
(imputed at 8.75% for financial statement purposes). 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.
6
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OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 2. ACQUISITIONS (CONTINUED)
Effective February 16, 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 (imputed at 8.75% for
financial statement purposes) 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. See Note 4 regarding options for
certain franchise territories granted in connection with this transaction.
The above acquisitions have been accounted for as purchases. The
results of operations of the acquired businesses are included in the Company's
consolidated statements of income from the effective date of acquisition. The
additional payments based on future gross profit of certain acquired businesses
are not contingent on continuing employment of the sellers. Such additional
amounts, if paid, will be recorded as additional purchase price.
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 costs of the acquisitions in 1998 have been allocated
on a preliminary basis while the Company obtains final information regarding the
fair value of assets acquired and liabilities assumed Although the allocation
and amortization periods are subject to adjustment, the Company does not expect
that such adjustments will have a material effect on its consolidated financial
statements.
The following unaudited pro forma results of operations have been
prepared assuming the acquisitions described above had occurred as of the
beginning of the periods presented, including adjustments to the historical
financial statements for additional amortization of intangible assets, increased
interest on borrowings to finance the acquisitions and discontinuance of certain
compensation previously paid by the acquired businesses to their shareholders.
The unaudited pro forma operating results are not necessarily indicative of
operating results that would have occurred had these acquisitions been
consummated as of the beginning of the periods presented, or of future operating
results.
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THREE MONTHS ENDED MARCH 31,
---------------------------
1998 1997
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UNAUDITED PRO FORMA:
Net revenues....................................... $127,813,105 $108,451,165
Operating income................................... 2,124,752 1,253,834
Income before provision (benefit)for income taxes.. 730,315 493,099
Net income......................................... 565,288 1,102,684
</TABLE>
7
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OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 2. ACQUISITIONS (CONTINUED)
The following unaudited pro forma information, as adjusted, has been
prepared on the same basis as the preceding data and also reflects the pro forma
adjustment for income taxes and weighted average shares outstanding as discussed
in Note 7, except that the number of weighted average shares has been increased
by 57,809 basic shares and 376,262 diluted shares for the three months ended
March 31, 1997 and 19,912 basic and diluted shares for the three months ended
March 31, 1998, in order to reflect adjustments for (i) the calculation of
proceeds from the exercise of warrants associated with certain debt utilized to
finance the above acquisitions and (ii) the timing of the issuance of common
stock in connection with the above acquisitions:
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THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
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UNAUDITED PRO FORMA, AS ADJUSTED:
Income before provision (benefit) for income taxes $ 730,315 $ 493,099
Pro forma provision (benefit) for income taxes 165,027 (236,376)
-------------- ---------------
Pro forma net income......................................... $ 565,288 $ 729,475
============== ===============
Weighted average common shares outstanding:
Basic.................................................... 8,506,597 5,697,240
============== ===============
Diluted.................................................. 10,045,291 6,653,980
============== ===============
Earnings per share:
Basic.................................................... $ 0.07 $ 0.13
============== ===============
Diluted.................................................. $ 0.06 $ 0.11
============== ===============
Goodwill and other intangible assets consist of the following:
AS OF AS OF
MARCH 31, 1998 DECEMBER 31, 1997
---------------------- -----------------
Goodwill.................................................... $47,390,918 $26,669,872
Customer lists.............................................. 8,325,285 4,672,178
Covenants not to compete.................................... 1,923,625 1,204,841
Employee lists.............................................. 341,980 196,479
----------- -------------
Goodwill and other intangible assets 57,981,808 32,743,370
Less accumulated amortization............................... 3,061,954 2,316,639
----------- ------------
Goodwill and other intangible assets, net $54,919,854 $30,426,731
=========== ============
</TABLE>
The acquisitions described below occurred subsequent to March 31, 1998,
and are therefore not included in the unaudited pro forma data presented above.
During the second quarter of 1998 the Company purchased the franchise
rights for three flexible staffing locations from Deb-Lar, Inc. and BLM
Enterprises, Inc., and converted these locations to Company-owned locations. The
total purchase price was $1,204,904, with $700,000 paid at closing and a note
issued for $504,904, payable over two years plus interest at 6.0% per annum.
During the second quarter of 1998 the Company purchased flexible
staffing operations with five locations from Pro Select, Inc., Ready Help, Inc.,
Mid-West Temps, Inc. and Resource Dimensions, Inc. (none previously affiliated
with the Company). The total purchase price was $8,260,000, with $6,150,000 paid
at closing plus notes issued for $2,110,000, payable over an eighteen month
period plus interest at 6.0% per annum. The amount due under the notes may
decrease by up to $200,000, based on the gross profit of the acquired locations
for up to fourteen months after the acquisitions. In addition, the above
purchase price may be increased by up to $1,146,800 ($946,800 of which was
placed in escrow by the Company at closing) based on the gross profit of the
acquired locations for up to fourteen months after the closing date.
8
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OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3. INCOME TAXES
The Company's effective tax rate for the three months ended March 31, 1998
differed from the statutory federal rate of 35%, as follows:
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Statutory rate applied to income before income taxes........ $295,021 35.0%
Increase (decrease) in income taxes resulting from:
State income taxers, net of federal benefit............... 49,514 5.9
Employment tax credits.................................... (203,593) (24.2)
Other..................................................... 28,819 3.5
-------- ----
Total..................................................... $169,761 20.2%
======== ====
</TABLE>
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation with regards to one of the
service marks used in its operations. Although this matter is in very
preliminary stages, the Company believes that an adverse decision in the case
would not have a material adverse effect on its financial condition or results
of operations.
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, some highly compensated employees were 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.
During the first quarter of 1998 and in connection with the Company's
acquisition of certain franchise rights from LM Investors, Inc. (see Note 2),
the Company granted one of the principals of the sellers (and a minority
shareholder in the Company) the exclusive option to purchase franchise rights in
five specifically identified geographic areas. These options expire at various
times from 12 to 42 months after the February 1998 acquisition date.
The Company believes that it has a contingent liability as an actual or
implied guarantor of mortgages having an outstanding principal balance of
approximately $1.6 million at March 31, 1998. These mortgages are secured by a
building and land previously leased by the Company from SMSB Associates
("SMSB"), a Florida limited partnership comprised of company shareholders,
including the Chief Executive Officer ("CEO") for use as the Company's national
office and support center. SMSB has entered into a contract for the sale of this
property to an unrelated third party for a price in excess of these outstanding
mortgages, which SMSB will pay in full upon the closing of the sale.
In February 1998, the Company entered into an interest rate collar
agreement with BankBoston, N.A., which involves the exchange of fixed and
floating rate interest payments periodically over the life of the agreement
without the exchange of the underlying principal amounts. The differential to be
paid or received is accrued as interest rates change and recognized over the
life of the agreement as an adjustment to interest expense. The agreement is a
five year notional $42.5 million interest rate collar, 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 is 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 is not
held or issued for trading purposes. The Company believes that unrealized gains
or losses related to the instrument are immaterial.
9
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OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
During April 1998, the Company entered into an employment agreement
with its new Chief Financial Officer, in addition to the employment agreements
already existing with the CEO and six 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 multiple
of the officer's annual base salary and bonus. In addition, all incentive stock
options become immediately exercisable. Similar severance provisions apply if
any of those officers is terminated within two years (three years for the CEO)
after the occurrence of a "change of control", as defined.
During January 1998, the Company granted options to purchase 259,646
shares of the Company's common stock, with an exercise price of $13.88 per
share, equal to the public market price of the shares at the grant date. 92,448
of those options vested immediately upon grant. During March 1998, the Company
granted options to purchase 84,270 shares of the Company's common stock, with
exercise prices ranging from $18.88 to $21.00 per share, equal to the public
market price of the shares at the grant date. During May 1998, the Company
granted options to purchase 93,375 shares of the Company's common stock, with
the exercise prices ranging from $19.50 to $20.13 per share, equal to the public
market price of the shares at the grant date. All options vest over a four year
period, unless otherwise indicated.
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"). That distribution is subject to adjustment
based upon the final determination of taxable income through February 21, 1997.
NOTE 5. 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Acquisitions:
Tangible and intangible assets
acquired.............................. $28,937,122 $ 24,242,375
Liabilities assumed..................... (1,367,643) (54,455)
Debt issued............................. (8,625,922) (3,627,920)
Common stock issued..................... (775,000) --
----------- -------------
Net cash paid for acquisitions $18,168,557 $ 20,560,000
=========== =============
Debt to shareholders for distributions
and amounts in connection with the
Reorganization.......................... $ -- $ 1,745,000
=========== =============
Shareholders' contribution to
additional paid-in capital in
connection with the Reorganization $ -- $ 4,300,000
=========== =============
</TABLE>
NOTE 6. COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during a period,
except those resulting from investment by owners and distribution to owners.
Comprehensive income totaled $673,156 and $1,606,661 for the three months ended
March 31, 1998 and 1997, respectively, and consists solely of the Company's net
income for the respective periods.
10
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 7. PRO FORMA DATA
Pro forma net income includes adjustments made to historical net income
for pro forma income taxes computed as if the Company had been fully subject to
federal and applicable state income taxes. The Company calculates pro forma
earnings per share in accordance with the requirements of SFAS No. 128,
"Earnings Per Share".
The pro forma weighted average shares outstanding (8,486,685 for the
three months ended March 31, 1998 and 5,639,431 for the three months ended March
31, 1997) used to calculate pro forma basic earnings per share includes (a) the
5,448,788 shares of common stock issued in connection with the Reorganization,
(b) for the periods prior to the Reorganization, the equivalent number of shares
(-0- for the three months ended March 31, 1998 and 190,643 for the three months
ended March 31, 1997) of common stock represented by the shares of common stock
of nine companies purchased from certain shareholders for cash and notes in
the Reorganization and (c) for the three months ended March 31, 1998, 3,000,000
shares sold by the Company in October 1997 and the weighted portion (37,897)
of shares issued in connection with a February 1998 acquisition (see Note 2).
The pro forma weighted average shares outstanding (10,025,379 for the
three months ended March 31, 1998 and 6,277,718 for the three months ended March
31, 1997) used to calculate pro forma diluted earnings per share includes the
above items plus all outstanding options and warrants to purchase common stock
calculated using the treasury stock method (1,538,694 for the three months ended
March 31, 1998 and 638,287 for the three months ended March 31, 1997).
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a rapidly growing national provider of human resource
services focusing on the flexible industrial staffing market through its Tandem
division and on the professional employer organization ("PEO") market through
its Synadyne division. To implement its strategies, the Company completed 32
acquisitions of industrial staffing companies from January 1, 1995 through May
14, 1998, with 84 offices and approximately $172.0 million in annual historical
revenue, including 30 offices in 1997 (the "1997 Acquisitions") and 28 offices
in 1998 (the "1998 Acquisitions"). See "-Acquisitions". During this period, the
number of Company-owned flexible staffing and PEO offices increased from ten to
125, the number of metropolitan markets (measured by Metropolitan Statistical
Areas, or MSAs) served by Company-owned locations increased from one to 45, and
the Company implemented new information systems, further developed back office
capabilities and invested in other infrastructure enhancements necessary to
support its future growth.
The Company's revenues are based upon the salaries and wages of
worksite employees. Flexible staffing and PEO revenues, and related costs of
wages, salaries, employment taxes and benefits related to worksite employees,
are recognized in the period in which those employees perform the flexible
staffing and PEO services. Because the Company is at risk for all of its direct
costs, independent of whether payment is received from its clients, and
consistent with industry practice, all amounts billed to clients for gross
salaries and wages, related employment taxes, health benefits and workers'
compensation coverage are recognized as revenue by the Company, net of credits
and allowances. 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.
RESULTS OF OPERATIONS
Effective February 21, 1997, the Company acquired all of the
outstanding capital stock of nine companies under common ownership and
management (the "Reorganization"). The historical operating results of the
Company contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" also include the historical operating
results of those acquired companies for the periods noted.
The following tables set forth the amounts and percentage of net
revenues of certain items in the Company's consolidated statements of income for
the indicated periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net revenues:
Flexible industrial staffing.............................................. $ 60,632 $ 32,463
PEO....................................................................... 57,313 49,991
Franchise royalties and other............................................. 3,041 2,920
---------- ----------
Total net revenues........................................................ $ 120,986 $ 85,374
========== ==========
Gross profit.............................................................. $ 18,038 $ 11,135
Selling, general and administrative expenses(1) 16,121 10,560
---------- ----------
Operating income.......................................................... 1,917 575
Net interest and other expense (income) (1) 1,074 (625)
---------- ----------
Income before provision (benefit) for
income taxes.......................................................... 843 1,200
Pro forma income taxes (benefit)(1)....................................... 170 (406)
---------- ----------
Pro forma net income (1).................................................. $ 673 $ 1,606
========= ==========
System Operating Data:
System Revenues(2)........................................................ $ 140,060 $ 110,714
========== ==========
Number of employees (end of period)....................................... 29,800 24,300
========== ==========
Number of offices (end of period)......................................... 182 162
========== ==========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Net revenues:
Flexible industrial staffing.............................................. 50.1% 38.0%
PEO....................................................................... 47.4 58.6
Franchise royalties and other............................................. 2.5 3.4
------ -------
Total net revenues........................................................ 100.0% 100.0%
====== =======
Gross profit.............................................................. 14.9% 13.0%
Selling, general and administrative expenses (1) 13.3 12.3
------ -------
Operating income.......................................................... 1.6 0.7
Net interest and other expense (income) (1) 0.9 (0.7)
------ -------
Income before provision (benefit) for
income taxes.......................................................... 0.7 1.4
Pro forma income taxes (benefit)(1)....................................... 0.1 (0.5)
------ -------
Pro forma net income (1).................................................. 0.6% 1.9%
====== =======
</TABLE>
(1) For the eight week period ended February 21, 1997, the Company elected to be
treated as a subchapter S corporation and, accordingly, the Company's income was
taxed at the shareholder level. In addition, during that period, the Company
paid compensation to the Company's founding shareholders and to the Company's
President, Chief Executive Officer, and Chairman of the Board, who is also a
shareholder of the Company ("Shareholder Compensation"). All of the compensation
for the founding shareholders and a portion of the compensation for the
Company's President was discontinued after the Reorganization. The discontinued
Shareholder Compensation was $262,000 for the three months ended March 31, 1997.
During the three months ended March 31, 1997, the Company recorded non-operating
income of approximately $1.9 million related to a put warrants valuation
adjustment. The following table sets forth the amounts and the percentage of
certain items in the Company's consolidated statements of income, with 1997
amounts and percentages adjusted for the above items as follows: (i) selling,
general and administrative expenses excludes discontinued Shareholder
Compensation; (ii) operating income excludes discontinued Shareholder
Compensation and (iii) net income and earnings per share excludes discontinued
Shareholder Compensation and the put warrants valuation adjustment and is
calculated assuming the Company had been subject to federal and state income
taxes and taxed as a C corporation during the period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
---- ----
(IN THOUSANDS, EXCEPT FOR PERCENTAGES AND PER SHARE DATA)
<S> <C> <C>
Selling, general and administrative expenses, as adjusted.............. $16,121 $10,298
As a percentage of net revenues........................................ 13.3% 12.1%
Operating income, as adjusted.......................................... $ 1,917 $ 837
As a percentage of net revenues........................................ 1.6% 1.0%
Net income (loss), as adjusted......................................... $ 673 $ (271)
As a percentage of net revenues........................................ 0.6% (0.3)%
Earnings (loss) per diluted share, as adjusted $ 0.07 $ (0.04)
EBITDA, as adjusted.................................................... $ 3,340 $ 1,676
</TABLE>
EBITDA is income before the effect of interest income and expense,
income tax benefit and expense, depreciation expense and amortization expense.
EBITDA as adjusted excludes discontinued shareholder compensation and the put
warrants valuation adjustment. 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.
13
<PAGE>
(2) System revenues represent the sum of the Company's net revenues (excluding
revenues from franchise royalties and services performed for the franchisees)
and the net revenues of the franchisees. System revenues provide information
regarding the Company's penetration of the market for its services, as well as
the scope and size of the Company's operations, but are not an alternative to
revenues determined in accordance with generally accepted accounting principles
as an indicator of operating performance. The net revenues of franchisees, which
are not earned by or available to the Company, are derived from reports that are
unaudited. System revenues consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Company's net revenues............................................. $120,986 $ 85,374
Less Company revenues from:
Franchise royalties............................................ (7,065) (8,957)
Services to franchisees........................................ (1,095) (1,286)
Add franchisees' net revenues...................................... 27,235 35,583
-------- --------
System revenues.................................................... $140,060 $110,714
======== ========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET REVENUES. Net revenues increased $35.6 million, or 41.7%, to $121.0
million in the three months ended March 31, 1998 from $85.4 million in the three
months ended March 31, 1997. This increase resulted from growth in flexible
industrial staffing revenues in the three months ended March 31, 1998 compared
to the three months ended March 31, 1997 of $28.2 million, or 86.8%, and PEO
revenues growth of $7.3 million, or 14.6%. Flexible industrial staffing revenues
increased due to (i) $18.1 million from the 1997 Acquisitions (which were
primarily consummated in late February and March) and the 1998 Acquisitions and
(ii) internal growth of 31% from the comparable 1997 period, which resulted in
an increase of $17.5 million in revenues due to development of existing
Company-owned locations and an increase in the number of Company-owned offices.
The Company-owned flexible industrial staffing offices increased to 108
locations as of March 31, 1998 from 70 locations as of March 31, 1997, with 28
of the 38 additional locations resulting from the 1998 Acquisitions. The
increase in PEO revenues was primarily due to a broadening of the Company's PEO
client base.
System revenues increased $29.4 million, or 26.5%, to $140.1 million in
the three months ended March 31, 1998 from $110.7 million in the three months
ended March 31, 1997. The increase in system revenues was attributable to the
$35.6 million increase in the Company's net revenues discussed above. System
revenues include franchise revenues which are not earned by or available to the
Company. A $4.5 million, or 21.9%, increase in revenues for the three months
ended March 31, 1998 as compared to the three months ended March 31, 1997, of
franchisees operating as of March 31, 1998 was offset by a $12.8 million
decrease in franchise revenues during that period that primarily resulted from
the Company's conversion of thirteen franchise locations to Company-owned
locations during the first quarter of 1997, the Company's conversion of ten
franchise locations to Company-owned locations during the first quarter of 1998
and the Company's termination of franchise agreements (in order to allow the
Company's development of the related territories) related to another twenty-one
locations in 1997, primarily during the second and third quarters. Buyouts are
early terminations of franchise agreements allowed by the Company in order to
allow the Company to develop the related territories. At the time of the buyout,
the Company receives an initial payment from the former franchise. The Company
continues to receive payments from the former franchisees based on 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, are reflected in total
royalties reported by the Company.
GROSS PROFIT. Gross profit increased $6.9 million, or 62.0%, to $18.0
million in the three months ended March 31, 1998, from $11.1 million in the
three months ended March 31, 1997. Gross profit as a percentage of net revenues
increased to 14.9% in the three months ended March 31, 1998 from 13.0% in the
three months ended March 31, 1997. This increase was primarily due to the
significantly higher growth rate for flexible industrial staffing revenues as
compared to the growth rate for PEO revenues, which generate lower gross profit
margins. In the three months ended March 31, 1998, PEO net revenues generated
gross profit margins of 4.0% as compared to gross profit margins of 23.2%
generated by flexible industrial staffing revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.6 million, or 52.7%, to $16.1 million in
the three months ended March 31, 1998 from $10.6 million in the three months
ended March 31, 1997. This increase was primarily a result of operating costs
associated with increased flexible industrial staffing volume at existing
locations, the 1997 Acquisitions and the 1998 Acquisitions. Selling, general and
administrative expenses, expressed as a percentage of gross profit, decreased to
89.4% for the first three months of 1998 from 94.8% for the comparable 1997
period. The Company attributes this decline to increased efficiency of its
operations as well as improved leverage of its existing fixed costs over an
increased revenue and gross profit base arising from internal growth as well as
the 1997 and 1998 Acquisitions. As a percentage of net revenues, selling,
general and administrative expenses increased to 13.3% in
14
<PAGE>
the three months ended March 31, 1998 from 12.3% in the three months ended March
31, 1997. In addition to the items previously discussed, this percentage
increase is also due to the significant increase in 1998 of the flexible
industrial staffing revenues in proportion to total Company revenues. The
flexible industrial staffing operations have higher associated selling, general
and administrative expenses (as a percentage of revenues) than PEO operations.
NET INTEREST AND OTHER EXPENSE (INCOME). Net interest and other expense
(income) increased by $1.7 million, to $1.1 million in the three months ended
March 31, 1998 from $(0.6) million in the three months ended March 31, 1997.
This increase was primarily due to non-operating income in 1997 of $1.9 million
attributable to a put warrants valuation adjustment, with no corresponding item
in 1998.
NET INCOME. Net income decreased by $0.9 million, to $0.7 million in
the three months ended March 31, 1998 from $1.6 million in the three months
ended March 31, 1997. This decrease was primarily due to the $1.9 million
decrease in non-operating income discussed above.
ADDITIONAL OPERATING INFORMATION
The following table sets forth the gross profit margins for the
Company's two primary areas of operations for the indicated periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
<S> <C> <C>
Flexible industrial staffing....................................... 23.2% 23.3%
PEO................................................................ 4.0 3.3
</TABLE>
The Company's flexible industrial staffing division generates
significantly higher gross profit margins than its PEO division. The higher
flexible industrial staffing division margin reflects compensation for
recruiting, training and other services not required as part of many PEO
relationships, where the employees have already been recruited by the client and
are trained and in place at the beginning of the relationship.
The gross profit margin from the Company's flexible industrial staffing
operations was essentially unchanged in the first three months of 1998 from the
first three months of 1997. The Company believes that the gross profit margin
from its flexible industrial staffing operations was affected by the impact of
(i) larger contracts obtained by the Company which have lower gross margin
percentages and correspondingly lower selling, general and administrative
expenses from the economies of scale in servicing a larger contract, (ii) the
increased wages necessary to recruit flexible industrial staffing employees in
areas of historically low unemployment, (iii) rate concessions or credits given
by the Company to establish market share in newly entered markets and (iv) an
increase in the minimum wage on September 1, 1997, for which the Company
recovered much of the increased payroll costs via increased billing rates but
without a related profit increase. The Company anticipates these factors will
continue to affect gross margins from flexible industrial staffing operations,
although in many cases the Company expects the impact to be offset by lower
selling, general and administrative expenses (measured as a percentage of gross
profit) as mentioned above.
The increase in the gross profit margin from the Company's PEO
operations in the first three months of 1998 from the first three months of 1997
is primarily due to an increase in the percentage of total PEO revenues
related to PEO services provided to industrial staffing clients. The gross
profit margin percentage for PEO services provided to industrial staffing
clients is higher than the gross profit margin from most other PEO clients
although the gross profit amount per employee is relatively consistent. An
industrial staffing employee generally receives lower wages and benefits than
other PEO employees and the Company receives correspondingly lower revenue. See
"-General" for a discussion of the effect of these costs on the Company's
revenue calculation.
15
<PAGE>
FLEXIBLE INDUSTRIAL STAFFING:
Net revenues from the Company's flexible industrial staffing services
increased $28.2 million, or 86.8%, to $60.6 million for the three months ended
March 31, 1998 from $32.5 million for the three months ended March 31, 1997.
This increase represented an increasing share of the Company's total net
revenues, to 50.1% in the 1998 period from 38.0% in the 1997 period, reflecting
the Company's focus on growth of these flexible industrial staffing operations
through acquisitions as well as new office openings. The Company expects this
focus to continue for the foreseeable future.
Gross profit from the Company's flexible industrial staffing services
increased $6.5 million, or 86.0%, to $14.1 million for the three months ended
March 31, 1998 from $7.6 million for the three months ended March 31, 1997. This
represented an increasing share of the Company's total gross profit, to 78.0%
for the three months ended March 31, 1998, from 67.9% for the three months ended
March 31, 1997.
PEO:
Net revenues from the Company's PEO services increased $7.3 million, or
14.6%, to $57.3 million for the three months ended March 31, 1998 from $50.0
million for the three months ended March 31, 1997. Because of the lower growth
rate in PEO revenues as compared to flexible industrial staffing, this
represented a decreasing share of the Company's total net revenues, to 47.4% in
the 1998 period from 58.6% in the 1997 period, reflecting the Company's greater
focus on growth of its flexible industrial staffing operations during this
period as well as the effect of changes made in the PEO management structure and
marketing approach, particularly during 1997. The Company expects that PEO sales
growth will be modest during 1998 while these two conditions continue.
Gross profit from the Company's PEO services increased $0.6 million, or
39.0%, to $2.3 million for the three months ended March 31, 1998 from $1.7
million for the three months ended March 31, 1997. Because of the lower gross
profit percentage from PEO as compared to flexible industrial staffing, as well
as the lower growth rate in PEO revenues as compared to flexible industrial
staffing, this represented a decreasing share of the Company's total gross
profit, to 12.7% for the three months ended March 31, 1998 from 14.8% for the
three months ended March 31, 1997.
FRANCHISE AND OTHER:
Net revenues from the Company's franchise and other services increased
$0.1 million, or 4.1%, to $3.0 million for the three months ended March 31, 1998
from $2.9 million for the three months ended March 31, 1997. This increase
represented a decreasing share of the Company's total net revenues, to 2.5% in
the 1998 period from 3.4% in the 1997 period, reflecting the Company's greater
focus on growth of its Company-owned flexible industrial staffing operations
during this period, including the Company's conversion of twenty-three franchise
locations to Company-owned locations and the termination of franchise agreements
related to another twenty-one locations. The Company expects this focus to
continue for the foreseeable future.
Gross profit from the Company's franchise and other services decreased
$0.2 million, or 12.6%, to $1.7 million for the three months ended March 31,
1998, from $1.9 million for the three months ended March 31, 1997. This decrease
also represented a decreasing share of the Company's total gross profit, to 7.2%
for the three months ended March 31, 1998 from 17.3% for the three months ended
March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds for working capital and other
needs have been an $85.0 million credit line with a syndicate of lenders led by
BankBoston, N.A. (the "Revolving Facility"), senior notes and borrowings
from related parties. On October 24, 1997, the Company sold 3,000,000 shares of
its common stock in an initial public offering for net proceeds, after deducting
all expenses, of approximately $40.3 million, which was used to repay the senior
notes and borrowings from related parties, as well as a portion of the Revolving
Facility.
On February 21, 1997, the Company issued senior notes in the principal
amount of $25.0 million, which were repaid in full from the proceeds of the
October 1997 public offering. The Company used the proceeds of the senior notes
primarily to fund flexible industrial staffing acquisitions and to pay
shareholder distributions and other amounts in connection with the
Reorganization. In connection with the issuance of the senior notes, the Company
issued 786,517 warrants to the holders of the senior notes and placed an
additional 573,787 warrants in escrow. The warrants are exercisable at a price
of $.015 per share.
16
<PAGE>
The Revolving Facility expires in February 2003. Outstanding amounts
under the Revolving Facility are secured by substantially all of the Company's
assets and the pledge of all of the outstanding shares of common stock of each
of its subsidiaries. Amounts borrowed under the Revolving Facility bear interest
at BankBoston's base rate or Eurodollar rate (at the Company's option) plus a
margin based upon the ratio of the Company's total indebtedness to the Company's
earnings (as defined in the Revolving Facility). As of March 31, 1998, the
Company had outstanding borrowings under the Revolving Facility of $48.3
million, bearing interest at an annualized rate of 7.6%. The Revolving Facility
contains certain affirmative and negative covenants relating to the Company's
operations.
As of March 31, 1998, the Company had (i) bank standby letters of
credit outstanding, in the aggregate amount of $6.7 million under a $15.0
million letter of credit facility (which is part of the Revolving Facility) to
secure certain workers' compensation obligations; (ii) $10.4 million of
promissory notes outstanding in connection with certain acquisitions, bearing
interest at rates ranging from 4.0% to 10.0%, which are payable primarily during
the next two years, and are subordinated to the repayment of the Revolving
Facility; (iii) obligations under capital leases for property and equipment in
the aggregate amount of $2.7 million; and (iv) obligations under mortgages
totalling $4.3 million.
One of the key elements of the Company's multi-faceted strategy is
expansion through acquisitions, which will require significant sources of
financing. These financing sources include cash from operations, seller
financing, bank financing and issuances of the Company's common stock. The
Company's previous acquisitions have been primarily in the flexible industrial
staffing area, and the Company expects this trend to continue due to the more
favorable pricing for those businesses (expressed primarily as a multiple of
EBITDA) as compared to PEO businesses. See Note 2 to the Company's Consolidated
Financial Statements.
The Company is a service business and therefore a majority of its
tangible assets are customer accounts receivable. Flexible industrial staffing
employees are paid by the Company on a daily or weekly basis. The Company,
however, receives payment from customers for these services, on average, 45 to
50 days from the presentation date of the invoice. As new flexible staffing
offices are established or acquired, or as existing offices expand, there will
be increasing requirements for cash to fund operations. The Company pays its PEO
employees on a weekly, bi-weekly, semi-monthly or monthly basis for their
services, and currently receives payments on a simultaneous basis from
approximately 90% of its existing customers.
The Company's principal uses of cash are for wages and related payments
to temporary and PEO employees, operating costs, acquisitions, capital
expenditures, advances made to certain Tandem franchise associates to fund their
payroll obligations and repayment of debt and interest thereon.
During the three months ended March 31, 1998, cash provided by
operations was approximately $5.4 million, compared with $1.8 million used in
the first three months of 1997. Cash used in investing activities during the
three months ended March 31, 1998 was approximately $18.5 million, principally
expenditures of $18.2 million for acquisitions (primarily intangible assets),
compared with $19.8 million in the first three months of 1997 (which included
expenditures of $20.6 million for acquisitions). Cash provided by financing
activities during the three months ended March 31, 1998 was approximately $14.3
million, primarily $14.5 million from borrowings under the Revolving Facility.
Cash provided by financing activities during the three months ended March 31,
1997 was approximately $21.6 million, primarily $22.6 million net proceeds from
senior notes and warrants and $14.8 million from borrowings under the Revolving
Facility, offset by payments of $14.4 million in connection with the
Reorganization and $0.9 million of repayments of long-term debt (net of note
repayments from related parties).
The Company anticipates spending up to approximately $6.0 million
during the next twelve months for new flexible staffing locations, improvements
to its management information and operating systems, upgrades of existing and
acquired locations, and other capital expenditures. This amount does not include
expenditures for industrial staffing and PEO acquisitions, which the Company
believes will be at a minimum equivalent to the recent historical rate over the
next twelve months and will primarily be for goodwill and other intangible
assets.
The Company believes that funds provided by operations, borrowings
under the Revolving Facility and current cash balances will be sufficient to
meet its presently anticipated needs for working capital and capital
expenditures, not including acquisitions for the next twelve months. Depending
on the amount and timing of future acquisitions and their financial structure,
the Company also believes that sufficient liquidity for such acquisitions as
well as its long-term operating requirements will be provided by funds from
operations, expanded or new borrowing facilities, issuance of common stock
and/or additional debt or equity offerings. However, the ability of the Company
to make acquisitions consistent with the recent historical rate is subject to
the Company's ability to successfully negotiate more flexible leverage and
collateral covenants than those presently contained in the Revolving Facility
and/or the Company's ability to finance future acquisitions by issuance of its
common stock rather than the debt financing primarily used by the Company for
previous acquisitions.
17
<PAGE>
ACQUISITIONS
During 1995, the Company made four flexible industrial staffing
acquisitions with five offices and approximately $7.0 million in annual
historical revenue. During 1996, the Company made five flexible industrial
staffing acquisitions with 13 offices and approximately $16.0 million in annual
historical revenue. During 1997, the Company made eight flexible industrial
staffing acquisitions with 30 offices and approximately $61.0 million in annual
historical revenue. From January 1, 1998 through March 31, 1998, the Company
made nine flexible industrial staffing acquisitions with 28 offices and
approximately $63.0 million in annual historical revenue. These acquisitions
have resulted in a significant increase in goodwill and other intangible assets
which has 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
and while the net unamortized balance of intangible assets as of March 31, 1998
is not considered to be impaired, any future determination requiring the write
off of a significant portion of unamortized intangible assets could have a
material adverse effect on the Company's financial condition and results of
operations. See Note 2 to the Company's Consolidated Financial Statements.
SEASONALITY
The Company's quarterly results of operations reflect the seasonality
of higher customer demand for flexible industrial staffing services in the last
two quarters of the year, as compared to the first two quarters. Even though
there is a seasonal reduction of flexible industrial staffing revenues in the
first quarter of a year as compared to the fourth quarter of the prior year, the
Company does not reduce the related core personnel and other operating expenses
since that infrastructure is needed to support anticipated increased revenues in
subsequent quarters. PEO revenues are generally not subject to seasonality to
the same degree as flexible industrial staffing revenues although the net income
contribution of PEO revenues expressed as a percentage of sales is significantly
lower than for flexible industrial staffing revenues. As a result of the above
factors, the Company traditionally experiences operating income in the first
quarter of a year that is significantly less than (i) the fourth quarter of the
preceding year and (ii) the subsequent three quarters of the same year.
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.
YEAR 2000 ISSUE
Many computer programs ("software") now being used in business were
written using two digits rather than four to define the applicable year. Such
software may be unable to properly interpret dates beyond the year 1999, which
could lead to business disruptions including but not limited to an inability to
process payroll, cash and invoicing transactions using that software (the "Year
2000" issue). The Year 2000 issue concerns not only software used solely within
a company but also concerns third parties, such as customers, vendors and
creditors, using software that may interact with or affect a company's
operations.
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 purposes of achieving a common data structure for all
significant Company applications as well as enhancing processing capacity and
efficiency, it also will result in software that properly interprets dates
beyond the year 1999 ("Year 2000 Compliant"). As of March 31, 1998, this
conversion had been completed, except for (i) the installation of currently
existing and Year 2000 Compliant software in Company-owned and franchised
flexible staffing locations, which the Company will initiate in the second
quarter of 1998 and expects to complete within one year from that date, but no
later than December 31, 1999 and (ii) programming modifications to its corporate
accounting and billing software, which the Company expects to complete by
December 31, 1998, but no later than December 31, 1999.
The Company has capitalized and will continue to capitalize the costs
of purchasing and developing new Year 2000 Compliant software, most of which had
been incurred as of March 31, 1998, but will expense the costs of the
modifications to existing software made solely for purposes of Year 2000
compliance, most of which will be incurred during 1998. Any remaining
capitalized balance for software no longer utilized because of replacement by
Year 2000 Compliant software will be expensed at the time such software is
replaced.
The Company is in the process of initiating formal communications with
all of its significant customers, vendors and creditors to determine the extent
to which the Company's interface with software provided by or utilized by those
third parties could be adversely affected by the Year 2000 issue and what
actions those third parties are taking to address that issue on a timely basis.
The Company will take appropriate action based on those responses, but there can
be no assurance that the software provided by or utilized by other companies
which affect the Company's operations will be timely converted and would not
have an adverse effect on the Company.
The Company has already begun internal testing of the adequacy of its
Year 2000 compliance activities to date, and will utilize both internal and
external resources to further test the adequacy of those activities during 1998.
The Company expects to complete the majority of its effort in this area by early
1999 leaving adequate time to assess and correct any significant issues that may
materialize.
The total cost to the Company of these Year 2000 compliance activities
has not been and is not anticipated to be material to the Company's business,
results of operations or financial condition. The costs and time necessary to
complete the Year 2000 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that a company (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. The Company first implemented SFAS No. 130 as of and for the three
months ended March 31, 1998, and has provided the required disclosures in Note 6
of its Consolidated Financial Statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued. SFAS No. 131 establishes
standards for the way that public companies report selected information about
operating segments in annual financial statements and requires that those
companies report selected information about segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131, which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise", but retains the requirement to report information about
major customers, requires that a public company report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. However, SFAS No. 131 does not require the reporting of
information that is not prepared for internal use if reporting it would be
impracticable. SFAS No. 131 also requires that a public company report
descriptive
18
<PAGE>
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company intends to first implement SFAS No. 131 in its Consolidated Financial
Statements as of and for the year ended December 31, 1998, although it has not
determined the effects, if any, that implementation will have.
19
<PAGE>
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Form 10-Q are forward looking statements, including but not limited to,
statements regarding the Company's expectations or beliefs concerning the
Company's strategy and objectives, expected sales and other operating results,
the effect of changes in the Company's gross margin, the Company's liquidity,
anticipated capital spending, the availability of financing, equity and working
capital to meet the Company's future needs, economic conditions in the Company's
market areas, 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. Actual results
may differ materially from those projected or implied in the forward looking
statements. Further, certain forward looking statements are based upon
assumptions of future events, which may not prove to be accurate. These forward
looking statements involve risks and uncertainties, including but not limited to
the Company's dependence on regulatory approvals, its future cash flows, sales,
gross margins and operating costs, the effect of conditions in the staffing
industry, legal proceedings, including those related to the actions of the
Company's temporary or leased employees, the cost and availability of credit,
the Company's ability to raise capital in the public equity markets, the
Company's ability to successfully identify suitable acquisition candidates and
to 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 and 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 collection of accounts
receivable, the Company's ability to retain large clients, the Company's ability
to recruit, motivate and retain key management personnel, the costs of complying
with government regulations (including occupational safety and health
provisions, wage and hour requirements - including minimum wage laws, workers'
compensation and unemployment insurance) and the ability of the Company to
increase fees charged to its clients to offset increased costs relating to these
laws and regulations, inclement weather, interruption, impairment or loss of
data integrity or malfunction of information processing systems, uncertainties
regarding government regulation of 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 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 (i) the Company's Registration Statement on Form S-1 (File
No. 333-33443) filed with the Securities and Exchange Commission on August 12,
1997, as amended by Amendments No. 1 through 3 thereto, and declared effective
on October 23, 1997 and (ii) the Company's Form 10-K/A filed with the Securities
and Exchange Commission on April 2, 1998.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On September 23, 1997, Source Services Corporation filed an action in
federal court seeking to enjoin the Company's use of the name "OUTSOURCE",
cancellation by the court of the Company's "OutSource" service mark and damages.
For a discussion of earlier proceedings with respect to this matter, see the
Company's Form 10-K/A, under the heading "Legal Proceedings".
The Company intends to vigorously defend this matter. Although this
matter is in very preliminary stages of litigation, the Company believes that an
adverse decision in this case would not have a material adverse effect on its
financial condition or results of operations.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 1998, the Company issued the
following securities without registration under the Securities Act:
On February 2, 1998, the Company issued an aggregate of 57,809 shares
of its common stock to Mr. Mark Gigot as partial consideration for the Company's
acquisition of 100% of the common stock of Employment Consultants, Inc. The
securities were issued pursuant to Section 4(2) of the Securities Act. No
underwriting commissions were recorded in connection with the foregoing
issuances of stock.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company(2)
3.2 Amended and Restated Bylaws of the Company(3)
4.3 Shareholder Protection Rights Agreement(3)
4.6 Warrant Dated February 21, 1997 Issued to Triumph-Connecticut Limited Partnership(1)
4.7 Warrant Dated February 21, 1997 Issued to Bachow Investment Partners III, L.P.(1)
4.8 Warrant Dated February 21, 1997 Issued to State Street Bank and Trust Company of Connecticut, N.A., as Escrow Agent(1)
10.1 Securities Purchase Agreement among Triumph-Connecticut Limited Partnership, Bachow Investment Partners III, L.P., OutSource
International, Inc., Capital Staffing Fund, Inc., OutSource Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne
III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance Services, Inc. and OutSource International of America,
Inc. dated as of February 21, 1997(1)
10.2 Escrow Agreement Among State Street Bank and Trust Company of Connecticut, N.A., certain shareholders of OutSource
International, Inc., and OutSource International, Inc. dated as of February 21, 1997(1)
10.3 Registration Rights Agreement among OutSource International, Inc., Triumph-Connecticut Limited Partnership, Bachow
Investment Partners III, L.P., and shareholders of OutSource International, Inc. dated as of February 21, 1997(1)
10.4 Agreement among Shareholders and Investors in OutSource International, Inc. dated as of February 21, 1997(1)
10.6 Asset Purchase Agreement among CST Services, Inc., Claire Schmidt and OutSource International, Inc. dated as of May 6,
1996(1)
10.7 Asset Purchase Agreement among Standby Personnel of Colorado Springs, Inc., Adrian Walker and OutSource International, Inc.
dated as of February 24, 1997(1)
10.10 Asset Purchase Agreement among Stand-By, Inc., Carlene Walker and OutSource International of America, Inc. dated as of
March 31, 1997(1)
10.11 Employment Agreement between Paul M. Burrell and the Company dated as of February 21, 1997(1)*
10.12 Employment Agreement between Robert A. Lefcort and the Company dated as of March 3, 1997(1)*
10.13 Employment Agreement between Robert E. Tomlinson and the Company dated as of March 3, 1997(1)*
10.14 Employment Agreement between James E. Money and the Company dated as of March 3, 1997(1)*
10.15 Employment Agreement between Robert J. Mitchell and the Company dated as of March 3, 1997(1)*
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
<S> <C>
10.16 Employment Agreement between Benjamin J. Cueto and the Company dated as of September 2, 1997(4)*
10.18 Stock Option Plan, As Amended and Restated Effective February 1, 1997 and as Amended EffectiveSeptember 2, 1997(4)*
10.19 Second Amended and Restated Credit Agreement dated as of November 26, 1997(4)
10.20 OI Pledge Agreement made by OutSource International, Inc. in favor of Bank of Boston Connecticut, as Agent, dated as of
February 21, 1997(1)
10.21 OI Security Agreement made by OutSource International, Inc. in favor of Bank of Boston Connecticut, as Agent, dated as of
February 21, 1997(1)
10.22 Subsidiary Security Agreement made by Capital Staffing Fund, Inc., OutSource Franchising, Inc., Synadyne I, Inc., Synadyne
II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance Services, Inc. and OutSource
International of America, Inc. in favor of Bank of Boston Connecticut, As Agent, dated as of February 21, 1997(1)
10.23 Subsidiary Guarantee by Capital Staffing Fund, Inc., OutSource Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc.,
Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance Services, Inc. and OutSource International of
America, Inc. in favor of Bank of Boston Connecticut, As Agent, dated as of February 21, 1997(1)
10.24 Trademark Security Agreement made by OutSource International, Inc. and OutSource Franchising, Inc. in favor of Bank of
Boston Connecticut dated as of February 21, 1997(1)
10.25 Interest Rate Collar Transaction between BankBoston, N.A. and OutSource International, Inc. dated as of February 20, 1998.
10.33 Form of Accumulated Adjustments Account Promissory Note dated February 20, 1997 issued by Capital Staffing Fund, Inc.,
OutSource Franchising, Inc. and OutSource International of America, Inc. to the following shareholders of the Company and
Schedule of Allocation of AAA Distribution to such shareholders: Lawrence H. Schubert Revocable Trust; Robert A. Lefcort
Irrevocable Trust; Nadya I. Schubert Revocable Trust; Louis J. Morelli S Stock Trust; Margaret Ann Janisch S Stock Trust;
Matthew Schubert OutSource Trust; Jason Schubert OutSource Trust; Alan E. Schubert; Louis A. Morelli; Louis J. Morelli;
Raymond S. Morelli; Matthew B. Schubert; Mindi Wagner; Margaret Morelli Janisch; Robert A. Lefcort; and Paul M. Burrell(1)
10.50 Asset Purchase Agreement, dated February 18, 1998, by and among OutSource International of America, Inc.,
LM Investors, Inc., Louis J. Morelli and Matthew Schubert.(5)
27 Financial Data Schedule
</TABLE>
- ------------------------
* Compensatory plan or arrangement.
(1) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-1 (Registration Statement No. 333-33443) as filed
with the Securities and Exchange Commission on August 12, 1997
(2) Incorporated by reference to the Exhibits to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration Statement
No. 333-33443) as filed with the Securities and Exchange Commission on
October 21, 1997
(3) Incorporated by reference to the Exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Registration Statement
No. 333-33443) as filed with the Securities and Exchange Commission on
September 23, 1997
(4) Incorporated by reference to the Exhibits to the Company's Form 10-K as
filed with the Securities and Exchange Commission on March 31, 1998.
(5) Incorporated by reference to Exhibit 2.1 to the Company's Form 8-K as
filed with the Securities and Exchange Commission on March 5, 1998.
(b) Reports on Form 8 - K:
The following reports were filed on Form 8-K during the quarter ended
March 31, 1998:
A Form 8-K dated February 2, 1998 related to the Company's acquisition
of Tempus, Inc. The related Form 8-K/A was filed on April 3, 1998.
A Form 8-K dated March 5, 1998 related to the Company's acquisition of
LM Investors, Inc. The related Form 8-K/A was filed on May 4, 1998.
22
<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.
Date: May 15, 1998 By: /S/ PAUL M. BURRELL
--------------------
Paul M. Burrell
President, Chief Executive Officer
and Chairman of the Board of Directors
Date: May 15, 1998 By: /S/ SCOTT R. FRANCIS
---------------------
Scott R. Francis
Chief Financial Officer
(Principal Financial Officer)
Date: May 15, 1998 By: /S/ ROBERT E. TOMLINSON
------------------------
Robert E. Tomlinson
Chief Accounting Officer
(Principal Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.25 Interest Rate Collar Transaction between BankBoston, N.A. and
OutSource International, Inc. dated as of February 20, 1998.
27 Financial Data Schedule
24
DATE: FEBRUARY 20, 1998
TO: OUTSOURCE INTERNATIONAL
ATTN: ROBERT TOMLINSON, CFO
FAX: 954-418-3365
PHONE: 954-418-6426
FROM: BANKBOSTON, N.A. ("BBNA")
ATTN: MARY M. SCHERR, DERIVATIVE OPERATIONS, CONFIRMATION UNIT
FAX: 617-434-4284
PHONE: 617-434-4405
RE: INTEREST RATE COLLAR TRANSACTION
[OUR REF: CP56289US/FL56290US]
The purpose of this letter agreement is to set forth the terms and conditions of
the Collar Interest Rate Transaction entered into between BankBoston, N.A.
("BBNA") and Outsource International on the Trade Date specified below (the
"Transaction"). This letter constitutes a "Confirmation" as referred to in the
Master Agreement specified below.
The definitions and provisions contained in the 1991 ISDA (the "Definitions"),
each as published by the International Swaps and Derivatives Association, Inc.
("ISDA"), are incorporated into this Confirmation. In the event of any
inconsistency between the Definitions and provisions in this Confirmation, this
Confirmation will govern.
1. This Confirmation evidences a complete binding agreement between you
and us as to the terms of the Transaction to which this Confirmation relates. In
addition, you and we agree to use our best efforts promptly to negotiate,
execute and deliver an agreement in the form of the ISDA Master Agreement
(Multicurrency-Cross Border) (the "ISDA Form") published by ISDA, with such
modifications as you and we shall in good faith agree (such agreement, the "ISDA
Agreement"). Upon the execution by you and us of the ISDA Agreement, this
Confirmation will supplement, form a part of, and be subject to the ISDA
Agreement. All provisions contained or incorporated by reference in the
Agreement, upon its execution, shall govern this Confirmation except as
expressly modified below. Until we execute and deliver the Agreement, this
Confirmation shall supplement, form a part of, and be subject to an agreement in
the form of the ISDA Form as if we had executed an agreement in such form (with
a Schedule thereto which provides that Market Quotation and the Second Method
apply for purposes of Section 6(e) of such agreement) on the Trade Date hereof.
In the event of any inconsistency between this Confirmation and either the ISDA
Form or the Agreement, this Confirmation will govern.
It is agreed that the Credit Support provisions in the ISDA Agreement
are not applicable to this Transaction.
2. The terms of the particular Transaction to which this Confirmation
relates are as follows:-
Trade Date: February 20, 1998
1
<PAGE>
Effective Date: February 24, 1998
Termination Date: February 24, 2003
Notional Amount USD 42,500,000.
Premium Payer: Not applicable
Premium Amount: Not applicable
Premium Payment Date: Not applicable
FLOATING RATE PAYER A: BBNA
Cap Rate: 6.25%
Floating Rate Option: USD-LIBOR-BBA
Designated Maturity: One month
Floating Rate for
Initial Calculation Period: 5.625%
Method of Averaging: Inapplicable
Spread: Inapplicable
Day Count Fraction: Actual/360
Reset Dates: The first day of
each Calculation
Period
Floating Rate Payment Dates: The 24th of each
calendar month,
beginning
March 24, 1998,
and ending on the
Termination Date,
subject to
adjustment in
accordance with
the Modified
Following Business
Day convention.
FLOATING RATE PAYER B: OUTSOURCE INTERNATIONAL
Floor Rate: 5.43%
Floating Rate Option: USD-LIBOR-BBA
Designated Maturity: One month
Floating Rate for
Initial Calculation Period: 5.625%
Method of Averaging: Inapplicable
Spread: Inapplicable
2
<PAGE>
Day Count Fraction: Actual/360
Reset Dates: The first day of each
Calculation Period
Floating Rate
Payment Dates: The 24th of each calendar
month, beginning March 24,
1998, and ending on the
Termination Date, subject to
adjustment in accordance with
the Modified Following Business
Day convention.
Payments of Net Amounts: With respect to the Floating
Amount (defined as the product
of the (i) Notional Amount,
(ii) the Floating Rate Option,
and (iii) the number of actual
days in the Calculation Period
divided by 360), and calculated
in respect of a Calculation
Period if (a) USD-LIBOR-BBA is
greater than the Cap Rate,
Floating Rate Payer A agrees to
pay to Floating Rate Payer B on
the Payment Date in respect of
such Calculation Period the
Floating Amount where the
Floating Rate is the amount by
which USD-LIBOR-BBA exceeds the
Cap Rate; (b) if USD-LIBOR-BBA
is less than the Floor Rate,
Floating Rate Payer B agrees to
pay to Floating Rate Payer A on
the Payment Date in respect of
such Calculation Period the
Floating Amount where the
Floating Rate is the amount by
which the Floor Rate exceeds
the USD-LIBOR-BBA; and (c) if
USD-LIBOR-BBA is greater than
or equal to the Floor Rate but
less than or equal to the Cap
Rate, no payment will be made.
Calculation Agent: BBNA
Business Days: New York and London
Governing Law: New York law.
Documentation: ISDA Master Agreement to be
provided by BBNA.
3. ACCOUNT DETAILS:
PAYMENT INSTRUCTIONS FOR
BBNA: BankBoston, N.A., (formerly
known as The First National
Bank of Boston) Routing No.
ABA 011000390, for Arbitrage
Settlement Account #295032,
Attn: Cap Desk, 01-13-08.
3
<PAGE>
PAYMENT INSTRUCTIONS FOR
OUTSOURCE INTERNATIONAL: BankBoston, N.A.,
Routing number: ABA 011100805
For credit to Outsource
International, Inc.
Account number: 51002998
4. CONTACT INSTRUCTIONS: Outsource International, Inc.
Robert Tomlinson, CFO
Tel.: 954-418-6426
Fax: 954-418-3365
BBNA: Cap Desk (Resets/Payments): Tel: 617-434-7264
FAX: 617- 434-0505
Confirmations: Tel: 617- 434-4405
FAX: 617- 434-4284
OUTSOURCE INTERNATIONAL: PLEASE ADVISE
Very truly yours, BANKBOSTON, N.A.
By: /S/ JAIME BUENAVENTURA By: /S/ JAMES MATHER
------------------------------ --------------------------------
Name: Jaime Buenaventura Name: James Mather
Title: Director Title: Managing Director
Agreed and accepted as of the date first above written:
OUTSOURCE INTERNATIONAL
By: /S/ ROBERT E. TOMLINSON
------------------------------
Name: Robert E. Tomlinson
Title: Chief Financial Officer
PLEASE COUNTERSIGN AND FAX TO:
(617) 434-4284
ATTN: MARY SCHERR
REQUEST CORRECTIONS AT (617) 434-4405
4
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1998 DEC-31-1997 MAR-31-1997
<CASH> 2,835,992 1,685,474 0
<SECURITIES> 0 0 0
<RECEIVABLES> 50,868,035 48,937,375 0
<ALLOWANCES> (1,698,632) (1,639,767) 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 59,351,928 57,079,192 0
<PP&E> 21,418,687 19,740,370 0
<DEPRECIATION> (5,585,238) (4,787,252) 0
<TOTAL-ASSETS> 134,032,903 105,742,858 0
<CURRENT-LIABILITIES> 29,959,483 23,428,000 0
<BONDS> 65,706,472 44,045,041 0
0 0 0
0 0 0
<COMMON> 8,507 8,449 0
<OTHER-SE> 42,217,526 40,769,428 0
<TOTAL-LIABILITY-AND-EQUITY> 134,032,903 105,742,858 0
<SALES> 0 0 0
<TOTAL-REVENUES> 120,986,387 0 85,374,194
<CGS> 0 0 0
<TOTAL-COSTS> 102,948,247 0 74,239,209
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,079,518 0 1,326,830
<INCOME-PRETAX> 842,917 0 1,200,452
<INCOME-TAX> 169,761 0 (406,209)
<INCOME-CONTINUING> 673,156 0 1,606,661
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 673,156 0 1,606,661
<EPS-PRIMARY> 0.08 0 0.22
<EPS-DILUTED> 0.07 0 0.20
</TABLE>
