SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT
OF 1934
For the transition period from _______________ to ___________
Commission File Number 000-23147
OUTSOURCE INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 65-0675628
(State or jurisdiction (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
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par
value $.001 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of voting and non-voting common stock held
by nonaffiliates as of March 16, 1998 was approximately $77.4 million (based
upon the closing sale price of $20.25 per share on the Nasdaq Stock MarketSM on
March 16, 1998).
As of March 16, 1998, 8,506,597 shares of the Registrant's Common stock
were outstanding.
The Registrant's Definitive Proxy Statement for the 1998 Annual Meeting
of Shareholders is incorporated by reference in Part III.
<PAGE>
This is an amendment to Form 10-K previously filed with the Securities
and Exchange Commission on March 31, 1998, which amendment is being filed solely
to correct typographical errors that occurred during the conversion of the
Registrant's internally printed Form 10-K to the EDGAR format by a third party
subcontractor. The corrections are on pages 3, 21, 22, 23, 29, 30, 32 and 55,
although the entire document (excluding exhibits) is being refiled for ease of
use.
OUTSOURCE INTERNATIONAL, INC.
INDEX
PART I
PAGE
Item 1 - Business .................................................. 2
Item 2 - Properties................................................. 10
Item 3 - Legal Proceedings.......................................... 10
Item 4 - Submission of Matters to a Vote of Security Holders........ 11
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder
Matters.................................................... 12
Item 6 - Selected Financial Data.................................... 14
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 16
Item 8 - Financial Statements and Supplementary Data................ 27
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 57
PART III
Item 10 - Directors and Executive Officers of the Registrant........ 57
Item 11 - Executive Compensation.................................... 57
Item 12 - Security Ownership of Certain Beneficial Owners and Management. 57
Item 13 - Certain Relationships and Related Transactions............ 57
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 58
Signatures............................................................ 61
Schedules............................................................. S-1
1
<PAGE>
PART 1
ITEM 1 - BUSINESS
Certain statements included in this and other sections of this Form
10-K are forward looking statements and the Company's actual results may differ
materially from those projected or implied in the forward looking statements.
Further, certain forward looking statements are based upon assumptions of future
events, which may not prove to be accurate. These forward looking statements
involve risks and uncertainties, some of which are further discussed under the
caption "Forward-Looking Statements: Certain Cautionary Statements" of Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
GENERAL
OutSource International, Inc. (the "Company") is a 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. The Tandem division
recruits, trains and deploys temporary industrial personnel and provides payroll
administration, risk management and benefits administration services to its
clients. Tandem's clients include businesses in the manufacturing, distribution,
hospitality and construction industries. Through its Synadyne division, the
Company offers a comprehensive package of PEO services including payroll
administration, risk management, benefits administration and human resource
consultation to companies in a wide range of industries. As of March 18, 1998,
the Company and its franchise associates operated 184 offices, with an estimated
39,000 employees in 41 states and the District of Columbia.
As of March 18, 1998, the Tandem division provided approximately 28,000
flexible industrial staffing personnel daily through a nationwide network of 113
Company-owned and 59 franchised offices. The Tandem division has approximately
17,000 clients and on a daily basis provides services to approximately 3,500 of
such clients. Between 1995 and 1997, Company and franchise flexible industrial
staffing revenues increased from $162.3 million to $357.2 million, a compound
annual growth rate of approximately 48%. The Synadyne division, which began in
1994, has approximately 11,000 employees. Between 1995 and 1997, PEO revenues,
excluding revenues from the provision of PEO services to Tandem franchisees,
increased from $78.1 million to $191.2 million, a compound annual growth rate of
approximately 56%. To implement its expansion strategy, the Company completed 27
acquisitions of industrial staffing companies since January 1, 1995, with 76
offices and approximately $147.0 million in annual historical revenue (See
"Acquisitions" under Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations). During this period, the number of
Company-owned flexible staffing and PEO offices increased from ten to 123, the
number of geographic regions served by the Company increased from one to nine,
and the Company implemented advanced information systems, further developed back
office capabilities and invested in other infrastructure enhancements necessary
to support its future growth.
The Company's operation of both a flexible industrial staffing division
and a PEO division provides it with significant competitive advantages. Both
Tandem and Synadyne offer a number of common services including payroll
administration, risk management and benefits administration. The Company designs
and administers these services through common facilities, personnel and
information systems which give the Company the ability to develop and provide a
wider range of services at lower costs than its primary competitors. In
addition, the Company is able to provide a full spectrum of staffing services to
its industrial clients ranging from a temporary employee for one day to
comprehensive outsourcing of human resource functions through the Company's PEO
division.
See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - for information regarding acquisitions and
other growth, revenues and other operating information for the Company's primary
areas of operations, seasonality, and practices related to working capital
items. See Note 8 to the Company's Consolidated Financial Statements for
information regarding significant customers and geographical concentration.
The Company's objective is to become the leading provider of flexible
industrial staffing and PEO services in select geographic regions. To achieve
this objective, the Company's strategy is to (i) provide a comprehensive package
of single-source human resources services, (ii) continue to focus on
under-served markets which provide high growth opportunities, (iii)
geographically cluster offices to achieve regional market leadership, (iv)
increase market penetration through a multi-faceted growth strategy of internal
growth, acquisitions, franchising and strategic alliances, (v) continue to
maximize operating efficiencies through integrated technology and back office
support and, ultimately, (vi) to become the
2
<PAGE>
"Guardian Employer", whereby the Company will represent a critical mass of jobs
within a defined geographic area enabling it to commit to permanent employment,
over time, for its flexible industrial staffing and PEO employees.
COMPANY SERVICES
The Company offers its clients a full array of staffing services through its
Tandem and Synadyne divisions. Tandem focuses on meeting its clients' flexible
industrial staffing needs, targeting opportunities in that fragmented, rapidly
growing market which has to date been under-served by large full service
staffing companies. Significant benefits of Tandem's service include the
client's ability to outsource the recruiting as well as many logistical aspects
of meeting its flexible industrial staffing needs, as well as the benefits of
converting the fixed cost of employees to the variable cost of outsourced
services. Synadyne focuses on providing professional employer organization
services to small and medium sized businesses (those with less than 500
employees), which achieves cost savings arising from the economies of scale
associated with this outsourcing of human resource administration.
Because the Company serves as the employer of record with respect to
both PEO and flexible staffing services, the Company provides certain common
services to both of these markets, utilizing a common support system. The degree
of utilization of these common services depends upon the needs of the clients
and employees. Common services offered by both Tandem and Synadyne include:
PAYROLL ADMINISTRATION. The Company assumes responsibility for payroll and
attendant record-keeping, payroll tax deposits, payroll tax reporting, and all
federal, state, county and city payroll tax reports (including 941s, 940s, W-2s,
W-3s, W-4s and W-5s), state unemployment taxes, employee file maintenance,
unemployment claims and monitoring and responding to changing regulatory
requirements. The Company develops and administers customized payroll policies
and procedures for each of its clients, which are fully integrated from the
clients' offices to the Company's central processing center.
AGGREGATION OF STATUTORY AND NON-STATUTORY EMPLOYEE BENEFITS. Employee
benefits packages can include health care options, such as preferred provider
organizations ("PPOs") and health maintenance organizations ("HMOs"), and
supplemental benefit programs such as dental care, vision care, prescription
drugs, an employee assistance plan and life and disability insurance options.
The Company offers Multi-Employer Retirement Plans and cafeteria plans to its
eligible employees and provides workers' compensation and unemployment
insurance. Workers' compensation is a state-mandated comprehensive insurance
program that requires employers to fund medical expenses, lost wages and other
costs that result from work-related injuries and illnesses, regardless of fault
and without any co-payment by the employee. Unemployment insurance is an
insurance tax imposed by both federal and state governments.
As part of its service package, the Company administers all employee
benefit plans and is responsible for negotiating the benefits provided by, and
costs of, each such plan. The Company's human resources and claims
administration departments serve as liaisons for the delivery of such services
to the client employee and monitor and review workers' compensation claims for
loss control purposes. The Company believes that its ability to provide and
administer a wide variety of employee benefit plans on behalf of its clients
tends to mitigate the competitive disadvantages small businesses normally face
in the areas of employee benefits cost control and employee recruiting and
retention.
HUMAN RESOURCE COMPLIANCE ADMINISTRATION. Because the Company is the
employer of record with respect to both flexible staffing and PEO services and
assumes responsibility for compliance with many employment related regulations,
it is prepared and trained to address compliance and regulatory issues inherent
in an employment relationship. For example, the Company provides compliance
administration services with respect to unemployment claims, workers
compensation claims, and claims arising under the Fair Labor Standards Act. In
addition, the Company assists its clients in understanding and complying with
other employment-related requirements for which the Company does not assume
responsibility.
Generally, the most significant compliance administration services
provided by the Company are in the area of workers' compensation and state
unemployment laws. With respect to workers' compensation, the Company provides
claims management services which include prompt identification and reporting of
injuries to the insurance carrier and local branch office, use of designated
health care providers, case management, fee audits and aggressive back-to-work
programs. Services provided by the Company in the area of state unemployment
compliance include ensuring that only eligible personnel receive unemployment
benefits, assisting in re-employing personnel and auditing state reporting
records and rate formulas.
3
<PAGE>
PROACTIVE HUMAN RESOURCE MANAGEMENT SERVICES. The basic differences
between the Tandem services and Synadyne services are referred to by the Company
as "Proactive Human Resource Management Services." PEO services are typically
provided for an indefinite time frame, while flexible industrial staffing
assignments are normally contracted for a definite period of time with the
flexibility to meet ongoing business demands. In addition, the flexible
industrial staffing services are often bundled for one base fee, while PEO
services are characterized by a base fee, plus additional fees for added
services.
As part of its base services in both the flexible staffing and PEO
markets, the Company conducts a human resource needs analysis for clients and
client employees. Based on the results of that review, the Company recommends
basic and additional services which the client should implement. Set forth below
are examples of suggested services included within the Company's base service
fee and other services provided on fee-for-service basis in the flexible
industrial staffing and PEO sectors.
<TABLE>
<CAPTION>
FLEXIBLE INDUSTRIAL STAFFING PEO
SERVICE BASE FEE BASE FEE FEE-FOR-SERVICE
<S> <C> <C> <C>
/bullet/ Continuous H/R Review and Analysis X X
/bullet/ Screening X X
/bullet/ Recruiting X X
/bullet/ Training X X
/bullet/ Workforce Deployment X X
/bullet/ Loss Prevention and Safety Training X X
/bullet/ Pre-employment Testing and Assessment X X
/bullet/ Background Searches X X
/bullet/ Compensation Program Design X X
/bullet/ Customized Personnel Management Reports X X
/bullet/ Job Profiling, Description, Application X X
/bullet/ Turnover Tracking and Analysis X X
/bullet/ Customer Service Training X X
</TABLE>
The Company provides certain other services to its PEO clients on a
fee-for-service basis that are also available to its flexible industrial
staffing clients. These services include drug testing policy administration,
outplacement assistance, relocation assistance, executive benefits, affirmative
action plans, opinion surveys and follow-up analysis, exit interviews and
follow-up analysis, management development skills workshops, team building
programs, grammar and business correspondence skills workshops and management
skills assessment.
OPERATIONS
Because of the similarities in the type of services that the Company
offers to its PEO and flexible staffing clients, and due to technological and
communication advances, many of these services are provided from the Company's
national office and support center in Deerfield Beach, Florida.
These services include payroll processing, tax reporting, unemployment
claims, workers' compensation and other insurance claims, insurance procurement,
health and other employee benefits administration, interactive voice mail,
design and production of training programs and materials, accounting, billing
and collections, customized management reporting, employee background checks,
pre-employment testing, affirmative action plans, executive recruiting,
executive benefits, compensation program design, and turnover tracking and
analysis.
TANDEM
Tandem delivers its flexible industrial staffing services through a
nationwide network of 113 Company-owned and 59 franchise recruiting and training
centers. Most Company-owned recruiting and training centers are staffed with a
manager, one or two service and recruiting coordinators, two to four staffing
consultants, an office administrator and one to four clerical assistants. The
number of people in each of the positions will vary by the size of the
recruiting and training centers and degree of penetration of their territory
within the market.
4
<PAGE>
The Company believes that its success is due in part to its close
familiarity with the businesses of its clients. The Company's sales consultants
visit client job sites regularly to become familiar with the skill required by
the client's business, conduct job site safety inspections and to ensure that
employees are appropriately equipped for the job. To ensure customer
satisfaction, Tandem sales consultants and service coordinators play an active
role in daily work assignments. The Company also familiarizes itself with its
pool of industrial employees. Each employee is subject to a two-day screening
process that evaluates skills, abilities and attitudes. This not only permits
the Company to institute appropriate training programs and assign its workers,
but also helps the Company retain desirable employees.
SYNADYNE
Synadyne delivers basic PEO services through client service teams
consisting of human resource professionals and payroll and benefits specialists
located in each of the two Florida markets the Company serves. The client
service team is assigned as soon as the Company's account executive has secured
the client, thus allowing the account executive to concentrate on sales of PEO
services to additional clients. Although the client service teams have primary
responsibility for servicing their assigned clients, they rely on the Company's
national support center staff to provide advice in specialized areas such as
workers' compensation, unemployment insurance and payroll processing. The
client's principal contact within the client service team is the human resource
professional, whose level of expertise is tailored to each client depending upon
the nature and complexity of the client's business. The Company believes that
its team approach ultimately results in maximum client satisfaction.
SALES AND MARKETING
The Company markets its flexible industrial staffing and PEO services
through two primary marketing channels, direct sales and franchising. The
Company believes this dual-channel approach allows the Company to quickly access
a pool of skilled employees, develop regional brand awareness and ultimately
become a market leader. The Company believes its compound annual revenue growth
rate of approximately 73% from 1995 to 1997 demonstrates the success of this
dual-channel approach. Direct sales and franchising are common to both the
flexible industrial staffing and PEO businesses.
DIRECT SALES FORCE. The Company believes there are significant differences
in the initial sales process and sales cycle between flexible industrial
staffing and PEO service sales. As a result, the Company markets these services
through three distinct, highly trained sales forces who share a common profile.
Flexible industrial staffing services are marketed through sales associates
located in Company-owned Tandem offices nationwide. The Company's PEO services
are marketed through sales associates located in three Synadyne offices in
Florida and a telemarketing center located in the Company's national support
center. The Company's PEO sales associates focus on full service PEO clients
while the telemarketing center staff concentrates on the Company's "small
business" PEO clients (those with fewer than five employees).
Although the sales process and sales cycle are different between the
flexible industrial staffing and PEO businesses, the method and philosophy that
the Company employs in the selection, training and compensation of its sales
force is very similar. It is the Company's philosophy to employ the best sales
force available, and all of the Company's sales associates receive a generous
compensation package which includes commissions throughout the life of the
client's relationship with the Company. All sales associates receive two weeks
of initial classroom and on-the-job training and attend additional training
sessions on a regular basis. The additional training is conducted by specialists
and by sales managers of the respective divisions.
FRANCHISING. The Company offers distinct franchising arrangements for the
flexible staffing and PEO businesses. Under staffing franchising agreements, the
Company grants the franchisee the exclusive right to operate under the Tandem or
Office Ours trade name within a select geographic market in return for a royalty
on staffing services rendered. In contrast, under the PEO franchising agreement,
the franchisee merely serves as a sales agent, receiving a commission for those
services rendered and collected by the Company with no guarantee of market
exclusivity. In either case, the franchisee assumes the marketing costs and, as
a result, the Company believes franchising is a cost-effective method of
building regional brand awareness. As of March 18, 1998, there were 59 Tandem
franchise locations. The Company initiated its PEO franchise program in May 1997
and currently has two PEO franchises. The Company has franchised Office Ours
(clerical staffing) on a limited basis in the past, and is still actively
marketing franchises, but had no such franchises active as of March 18, 1998.
5
<PAGE>
CLIENTS
The Tandem division has approximately 17,000 clients and on a daily
basis provides services to approximately 3,500 of such clients. These companies
represent a cross-section of the industrial sector, of which no single client
represents more than 5% of the Company's total revenues. Tandem's clients
include such companies as Michelin Corporation, AT&T Wireless Services, Inc.,
Toys "R" Us, Inc., Hon Industries Inc. and Waste Management, Inc.
Synadyne provides PEO services to approximately 2,900 companies. These
companies represent a diverse range of industries, including insurance and
staffing. The Company's primary insurance PEO clients are Allstate Insurance
agents. The Company provides basic PEO services to approximately 2,500 Allstate
agents, each of whom has selected the Company from among Allstate's approved
providers. The Company's primary staffing PEO clients are its Tandem franchises.
The Company provides basic PEO services to the employees of its franchises. For
the year ended December 31, 1997, approximately 23% and 15% of the Company's
total PEO revenues were attributed to services provided to Allstate agents and
Tandem franchises, respectively.
The Company attempts to maintain diversity within its client base in
order to decrease its exposure to downturns or volatility in any particular
industry. As part of this client selection strategy, the Company currently
offers its services only to those businesses that operate in certain industries,
eliminating industries that it believes present a higher risk of employee injury
(such as roofing, excavation, chemical manufacturing and maritime). All
prospective clients undergo a rigorous underwriting process to evaluate workers'
compensation risk, group medical history, creditworthiness, unemployment history
and operating stability. Generally, flexible industrial staffing clients do not
sign long-term contracts.
COMPETITION
The staffing market is highly fragmented, characterized by many small
providers in addition to several large public companies, with at least one other
public company focused on flexible industrial staffing. There are limited
barriers to entry and new competitors frequently enter the market. Although a
large percentage of flexible staffing providers are locally operated with fewer
than five offices, many of the large public companies have significantly greater
marketing, financial and other resources than the Company. However, unlike the
Company, almost all of these companies do not focus primarily on flexible
industrial staffing. The Company believes that by focusing primarily on flexible
industrial staffing, it enjoys a competitive advantage over many of its
competitors that attempt to provide a broader base of temporary employees. The
Company also believes that by targeting emerging companies, rather than the
larger companies that are generally being pursued by its competitors, it can
also gain certain competitive advantages. The Company believes that there are
several factors that must be met in order to obtain and retain clients in the
flexible staffing market. These factors include an adequate number of well
located offices, an understanding of clients' specific job requirements, the
ability to reliably provide the correct number of employees on time, the ability
to monitor job performance, and the ability to offer competitive prices. To
attract qualified industrial candidates for flexible employment assignments,
companies must offer competitive wages, vacations and holiday pay, positive work
environments, flexibility of work schedules, and an adequate number of available
work hours. The Company believes it is highly competitive in these areas in the
Chicago market and is reasonably competitive in the other markets in which it
competes.
Competition in the highly fragmented PEO sector is generally on a local
or regional basis, and new competitors frequently enter the market. Several
larger PEO competitors have completed initial public offerings during the past
two years. The primary competitive factors in this sector are quality of
service, choice and quality of benefits, reputation and price. The Company
believes that name recognition, regulatory expertise, financial resources, risk
management, and data processing capability distinguish leading PEOs from the
rest of the industry and that the Company is competitive in all of these areas
in the markets in which it competes. The Company's competitors include (i)
in-house human resource departments, (ii) other PEOs and (iii) providers of
discrete employment-related services such as payroll processing firms,
commercial insurance brokers, human resource consultants and temporary help
firms who might enter the PEO market. Some of these companies have greater
financial and other resources than the Company. The Company believes that
barriers to entry are increasing and are greater than those of the flexible
staffing business. Some of the barriers to entry include: (i) the complexity of
the PEO business and the need for expertise in multiple disciplines, (ii) the
number of years of experience required to establish experience ratings in key
cost areas of workers' compensation, health insurance, and unemployment, (iii)
the need for sophisticated management information systems to track all aspects
of business in a high-growth environment and (iv) increased regulations and
licensing requirements in many states.
6
<PAGE>
RISK MANAGEMENT PROGRAM--WORKERS' COMPENSATION
The Company believes that careful client selection, pro-active accident
prevention programs, and aggressive control of claims will result in reduced
workers' compensation costs. The Company seeks to prevent workplace injuries by
implementing a variety of training, safety, and mandatory drug-free workplace
programs (including pre-employment screening, random testing, and post-accident
drug monitoring) to ensure that safety awareness is heightened at the sites to
which the Company sends its workers. Further, the Company insists that clients
adhere to ongoing safety practices at the clients' worksite as a necessary
condition to a continued business relationship.
The Company's workers' compensation insurance coverage for calendar
1997 provided for a $250,000 deductible per accident or industrial illness with
an aggregate annual dollar limit on the Company's potential liability for
deductible payments of 2.2% of aggregate annual payroll. This limit was
increased to 2.4% for calendar 1998, which may be increased to the extent the
risk profile of the Company's client list, as expressed by the weighted average
of the manual workers' compensation premium rates of those clients, changes by
more than 15%. As such, the Company's workers' compensation expense for claims
is effectively capped at a contractually agreed upon percentage of payroll and
cannot exceed these amounts for the respective fiscal years. For claims related
to periods prior to 1997, there was no aggregate maximum dollar limit on the
Company's potential liability for deductible payments. From May 1, 1995 through
December 31, 1996, in exchange for a lower excess insurance premium rate, the
Company accepted the responsibility for losses exceeding the $250,000 policy
deductible per accident or industrial illness on a dollar-for-dollar basis, but
only to the extent such losses cumulatively exceed 85% of the excess insurance
premium (excluding the profit and administration component), subject to a
maximum additional premium of approximately $750,000 in 1995 and $1.2 million in
1996. The Company secures its workers' compensation obligations by the issuance
of bank standby letters of credit to its insurance carriers, minimizing the
required current cash outflow for such items.
Each month, the risk management team, comprised of professionals from a
variety of functional areas, reviews workplace accidents for the relevant period
to determine the appropriate reserves. Each quarter, all cases are reviewed to
reconcile the reserves, payments, and expected future costs for each case. The
Company believes it has maintained adequate reserves for all of its workers'
compensation claims. In addition, the Company has selected Gallagher Bassett
Services for third-party claims administration and CRA Managed Care for medical
case management. Each vendor has established designated regional teams for the
handling of the Company's workers' compensation claims. Each regional team is
managed by a Company in-house claims analyst. All claims arising within a given
region are reported to the claims analyst who verifies the employment of the
claimant and assigns the claim to Gallagher Bassett Services and as needed to
CRA Managed Care, for defense and/or processing. Together, the team of the
in-house analyst, the third-party administrator and medical case manager
aggressively follow each claim from its origin to its conclusion.
INFORMATION TECHNOLOGY
The Company believes that the effective use of technology to increase
operational efficiency and enhance client service is a key factor in remaining
competitive. The Company has developed, and continues to invest in, information
support systems at its franchise, Company-owned and corporate headquarters
locations. At the field level, custom developed systems support the day-to-day
operational needs of both Tandem and Office Ours. At the corporate headquarters,
centralized accounting, billing and reporting applications provide support for
all of the field offices and a specialized package provides support for
Synadyne.
In November 1996, the Company entered into a series of major projects
to expand its information infrastructure and replace, or re-develop, many of its
major operational systems in order to support future growth. The initial phase
of the project was an installation of a Company-wide data base management system
that now provides consistency across all applications and allows information to
move between applications. This allows for consolidated reporting and analysis
across all of the Company's divisions.
The second phase of the project, completed in February 1997,
implemented an integrated financial management system for all accounting
functions to streamline the central processing of billing and financial
reporting. The third phase of the project, completed in November 1997, was the
development of a state-of-the-art system to support Synadyne. Since no
comprehensive, commercially available system exists for the PEO industry, the
Company entered into a developmental agreement with F.W. Davison, a provider of
human resource and benefit systems, to produce a system tailored to the needs of
Synadyne. The final phase of the project, now in progress, is the development of
a new support system for the Tandem and Office Ours offices that will use a
centrally based processing resource. Each field office will be connected to a
central processor, via a FRAME relay network connection.
7
<PAGE>
INDUSTRY REGULATION
OVERVIEW
As an employer, the Company is subject to all federal, state and local
statutes and regulations governing its relationships with its employees and
affecting businesses generally, including its client employees. In addition, as
a result of its PEO operations, the Company is affected by specifically
applicable licensing and other regulatory requirements and by uncertainty in the
application of numerous federal and state laws relating to labor, tax and
employment matters.
UNCERTAINTY AS TO THE EMPLOYER RELATIONSHIP
By entering into a co-employment relationship with client employees,
the Company assumes certain obligations and responsibilities of an employer
under federal and state laws. Many of these federal and state laws were enacted
prior to the development of nontraditional employment relationships, such as
PEOs, temporary employment, and outsourcing arrangements, and do not
specifically address the obligations and responsibilities of PEOs. Whether
certain laws apply to the Company depends in many cases upon whether the Company
is deemed to be an "employer" for purposes of the law. The definition of
"employer" under these laws is not uniform and, therefore, the application of
these laws to the Company's business is not always certain. In many cases, a
person's status as an "employer" is determined by application of a common law
test involving the examination of several factors to determine an
employer/employee relationship. Uncertainty as to the application of certain
laws governing "employer" relationships is particularly important to the Company
in federal tax and employee benefit matters.
FEDERAL AND STATE EMPLOYMENT TAXES. The Company assumes the sole
responsibility and liability for the payment of federal and state employment
taxes with respect to wages and salaries paid to its employees, including client
employees. To date, the IRS has relied extensively on the common law test of
employment in determining employer status and the resulting liability for
failure to withhold. However, the IRS has formed an examination division market
segment specialization program for the purpose of examining selected PEOs, such
as the Company, throughout the United States. Upon examination, the IRS may
determine that a PEO is not the employer of the client employees under the
provisions of the Internal Revenue Code of 1986, as amended (the "Code")
applicable to federal employment taxes and, consequently, that the client
companies are exclusively responsible for payment of employment taxes on wages
and salaries paid to such employees.
A determination by the IRS that the Company is not the employer of the
client employees may impact the Company's ability to report employment taxes on
its own account rather than for the accounts of its clients and would increase
administrative burdens on the Company's payroll service function. In addition,
while the Company believes that it can contractually assume the client company's
withholding obligations, in the event the Company fails to meet these
obligations the client company may be held jointly and severally liable. The
Company's management believes that the financial condition and reputation of the
Company has prevented this potential liability from discouraging prospective
clients.
EMPLOYEE BENEFIT PLANS. The Company offers various benefit plans to its
client employees. These plans include Multi-Employer Retirement Plans, a
cafeteria plan, a group health plan, a group life insurance plan, a group
disability insurance plan and an employee assistance plan. Generally, employee
benefit plans are subject to provisions of both the Code and the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). In order to
qualify for favorable tax treatment under the Code, the plans must be
established and maintained by an employer for the exclusive benefit of the
Company's employees. An IRS examination of the Company and/or a client company
may determine that the Company is not the employer of client employees under
Code provisions applicable to employee benefit plans. Consequently, the Company
may not be able to offer client employees benefit plans that qualify for
favorable tax treatment. If the IRS were to conclude that the Company is not the
employer of its client employees for plan purposes, client employees could not
continue to make tax favored contributions to the Company's Multi-Employer
Retirement Plans or cafeteria plan. The Company believes that, although
unfavorable to the Company, a prospective application by the IRS of an adverse
conclusion would not have a material adverse effect on its financial position
and results of operations. If such conclusion were applied retroactively,
employees' vested account balances may become taxable immediately, the Company
would lose its tax deduction to the extent the contributions were not vested,
the plan trust would become a taxable trust and penalties could be assessed. In
such a scenario, the Company would face the risk of client dissatisfaction, as
well as potential litigation. A retroactive application by the IRS of an adverse
conclusion could have a material adverse effect on the Company's financial
position, results of operations and liquidity. While the Company believes that a
retroactive disqualification is unlikely, there can be no assurance as to the
ultimate resolution of these issues.
8
<PAGE>
Employee pension and welfare benefit plans are also governed by ERISA.
The United States Supreme Court has held that the common law test of employment
must be applied to determine whether an individual is an employee or an
independent contractor under ERISA. A definitive judicial interpretation of
employer in the context of a PEO arrangement has not been established. If the
Company were found not to be an employer for ERISA purposes, its plans would not
be subject to ERISA. As a result of such finding, the Company and its plans
would not enjoy the preemption of state law provided by ERISA and could be
subject to varying state laws and regulations, as well as to claims based upon
state common laws.
WORKERS' COMPENSATION
Workers' compensation is a state mandated, comprehensive insurance
program that requires employers to fund medical expenses, lost wages and other
costs resulting from work-related injuries and illnesses. In exchange for
providing workers' compensation coverage for employees, employers are generally
immune from any liability for benefits in excess of those provided by the
relevant state statutes. In most states, the extensive benefits coverage for
both medical costs and lost wages is provided through the purchase of commercial
insurance from private insurance companies, participation in state-run insurance
funds, self insurance funds or, if permitted by the state, employer
self-insurance. Workers' compensation benefits and arrangements vary on a
state-by-state basis and are often highly complex.
The Company's ability to use comprehensive workers' compensation
managed care techniques in its PEO operations depends in part on its ability to
contract with or create networks of health care providers. The Company requires
that injured workers use the Company's network of providers. Laws regulating the
operation of managed care provider networks have been adopted by a number of
states. These laws may apply to managed care provider networks having contracts
with the Company or to provider networks which the Company may organize. To the
extent the Company is governed by these regulations, it may be subject to
additional licensing requirements, financial oversight and procedural standards
for beneficiaries and providers. See "--Risk Management Program--Workers'
Compensation."
PEO LICENSING REQUIREMENTS
Approximately one-third of the states, including Florida, have passed
laws that have licensing or registration requirements for PEOs and several
additional states are considering such regulation. Such laws vary from state to
state but generally provide for monitoring the fiscal responsibility of PEOs.
State regulation assists in screening insufficiently capitalized PEO operations
and, in the Company's view, has the effect of legitimizing the PEO industry
generally by resolving interpretative issues concerning employee status for
specific purposes under applicable state law. Existing regulations are
relatively new and, therefore, limited interpretive or enforcement guidance is
available. The Company cannot predict with certainty the nature or direction of
the development of federal, state and local regulations.
In Florida, the Company's PEO operations are licensed under the Florida
Employee Leasing Licensing Act of 1991 (the "Florida Licensing Act"). Among
other things, the Florida Licensing Act requires PEOs and their controlling
persons to be licensed, mandates reporting requirements, allocates several
employer responsibilities and requires the payment of an annual licensing fee
based upon gross payroll amounts. The Florida Licensing Act also requires
licensed PEOs to submit annual audited financial statements and to maintain a
tangible accounting net worth and positive working capital. In addition, the
Florida Licensing Act requires PEOs to (i) reserve the right of direction and
control over leased employees, (ii) enter into written agreements with their
clients, (iii) pay wages to leased employees, (iv) pay and collect payroll
taxes, (v) maintain authority to hire, terminate, discipline and reassign
employees and (vi) retain a right of direction and control over management of
safety, risk and hazard control at the worksite or sites affecting its leased
employees, including the responsibility to perform safety inspections, to
promulgate and administer employment and safety policies, and to manage workers'
compensation claims, claim filings, and related procedures.
TRADEMARKS AND SERVICE MARKS
The Company has registered the following marks with the United States
Patent and Trademark Office: LABOR WORLD, LABOR WORLD in conjunction with globe
logo, LABOR TECHNOLOGIES and Labor Technologies logo OFFICE OURS, Office Ours
clock logo, SYNADYNE, OUTSOURCE INTERNATIONAL--THE LEADER IN HUMAN RESOURCES and
design, and SYNADYNE--A PROFESSIONAL EMPLOYER and design. The Company has
applications pending before the United States Patent and Trademark Office for
federal registration of the following marks: OSI, TANDEM and TANDEM logo design.
These marks all expire at various times from 2002 to 2007. In addition, the
Company has registered the mark OUTSOURCE INTERNATIONAL - THE LEADER IN HUMAN
RESOURCES in 28
9
<PAGE>
states, which registrations expire at various times from 2001 to
2007. See Item 3 - Legal Proceedings.
The Company has applications pending with the Office for Harmonization in
the Internal Market (Trademark and Designs) for European Community registration
of the following marks: OFFICE OURS, SYNADYNE and OUTSOURCE INTERNATIONAL. The
Company also has applications pending with the Canadian Trademarks Office for
Canadian registration of the following marks: SYNADYNE, OFFICE OURS and
OUTSOURCE INTERNATIONAL.
The Company believes that the TANDEM, OFFICE OURS and SYNADYNE marks
are important to its sales and marketing operations and the OUTSOURCE
INTERNATIONAL mark is important to its financial operations.
CORPORATE EMPLOYEES
As of December 31, 1997, the Company had 784 corporate employees, of
whom 75 were employed in PEO service operations, 543 were employed in flexible
staffing service operations, and 166 were employed in shared support services
such as human resources, risk management, and information systems. None of the
Company's employees are covered by collective bargaining agreements. The Company
believes that its relationships with its employees are good.
ITEM 2 - PROPERTIES
The Company owns a 50,000 square foot office building in Deerfield
Beach, Florida, which houses its national office and support center. The Company
also owns small office buildings in Chicago, Illinois and Waukegan, Illinois and
a condominium in Boca Raton, Florida. As of December 31, 1997 the Company also
leased 98 flexible industrial staffing office locations and certain other
facilities, with approximately 245,000 total square feet for an annual base rent
of approximately $2.0 million. A portion of a warehouse is leased from TMT
Properties, Inc., a company controlled by Paul Burrell, the Company's President,
Chief Executive Officer, and Chairman of the Board, on a month-to-month basis
for approximately $2,000 per month. The Company believes that its facilities are
generally adequate for its needs and does not anticipate difficulty in replacing
such facilities or locating additional facilities, if needed.
ITEM 3 - LEGAL PROCEEDINGS
On March 21, 1997, Source Services Corporation ("SSC") filed a Petition
to Cancel Registration with the Trademark Trial and Appeal Board in which SSC
seeks cancellation of the Company's service mark "OutSource International - The
Leader in Human Resources". SSC has alleged that it has been using the service
mark "Source" in various forms since 1986 and, in its petition, alleges that the
Company's use of the "OutSource" service mark violates various provisions of the
Lanham Act. On May 28, 1997, the Company filed an answer to the Petition to
Cancel Registration and asserted various affirmative defenses. If the Company
prevails in the administrative proceeding, the "OutSource" mark will retain its
federal registration. If SSC prevails, the "OutSource" registration would be
cancelled. However, even in the event of a cancellation, the Patent and
Trademark Office has no authority to grant injunctive relief or award damages.
Furthermore, the decision as to whether the Company can continue to use the
"OutSource" service mark cannot be decided in the administrative proceeding, but
rather would have to be separately litigated. 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. The Company intends to
vigorously defend this matter. Although this matter is in preliminary stages of
litigation, 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.
On September 26, 1997, Tandem Personnel, Inc. filed a complaint in the
Court of Common Pleas of Montgomery County, Pennsylvania seeking a temporary and
permanent injunction in Pennsylvania against the Company's use of "Tandem",
"Tandem Labor World" and/or "Tandem Staffing for Industry", and damages. The
Company thereafter removed the case to the United States District Court for the
Eastern District of Pennsylvania. On February 19, 1998, the Company and Tandem
Personnel, Inc. agreed to settle this matter, resulting in no material effect to
the Company's financial condition or results of operations.
10
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By unanimous written consent dated October 6, 1997, the shareholders of the
Company approved the following actions by the Company:
1. REVERSE STOCK SPLIT. The shareholders approved a reverse stock split
pursuant to which each issued and outstanding share of common stock would be
automatically converted into approximately 0.65 shares of common stock. On
October 21, 1997, the Company effectuated the reverse stock split in accordance
with the terms approved by the shareholders.
2. RIGHTS PLAN. The shareholders approved the adoption of a Shareholder
Protection Rights Agreement (the "Rights Agreement"). Pursuant to the terms of
the Rights Agreement, preferred stock purchase rights (the "Rights") were
distributed as a dividend to holders of record of shares of Common stock as of
October 6, 1997 (the "Record Date") at a rate of one Right for each share of the
common Stock held on the Record Date. Rights also are attached to all shares of
Common Stock issued on or after the Record Date. For a further discussion of
this item, see Part II, Item 2 of the Company's Form 10-Q for the quarterly
period ended September 30, 1997.
3. SERIES A PARTICIPATING PREFERRED STOCK. In connection with the
Rights Plan, the shareholders also approved the designation of a series of
preferred stock, par value $.001 per share (the "Series A Participating
Preferred Stock") and the reservation for issuance upon the exercise of the
Rights of 1,000,000 shares of Series A Participating Preferred Stock. The
shareholders also approved the adoption of amended and restated articles of
incorporation which included the designation of the Series A Participating
Preferred Stock.
11
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
On October 24, 1997, the Company sold 3,000,000 shares of its common stock
to the public and shareholders of the Company sold 700,000 shares of the
Company's common stock to the public (the "Offering") and the Company's Common
Stock commenced trading on the Nasdaq Stock MarketSM under the symbol "OSIX."
There were approximately 46 holders of record of Common Stock as of March 16,
1998. This number does not include the number of shareholders whose shares were
held in "nominee" or "street name", which the Company believes to be
approximately 3,000 as of that date. The table below sets forth, for the period
indicated, the high and low bid prices of the Company's Common Stock as reported
by the Nasdaq Stock MarketSM.
BID PRICES
HIGH LOW
FISCAL YEAR 1997
October 24, 1997 to December 31, 1997(1)..........$ 19.75 $ 10.125
- ----------------
(1) Prior to October 24, 1997, there was no public trading market for the Common
Stock.
The Company has never paid dividends on its Common Stock. The Company
intends to retain earnings, if any, to finance future operations and expansion
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. Any future payment of dividends will depend upon the financial
condition, capital requirements and earnings of the Company and compliance with
cash flow and other financial covenants contained in the Company's revolving
credit facility with a syndicate of lenders led by BankBoston, N.A. (the
"Revolving Facility"), as well as upon other factors that the Board of Directors
may deem relevant.
SALES OF UNREGISTERED SECURITIES
During the fiscal year ended December 31, 1997, and prior to the Offering,
the Company issued the following securities without registration under the
Securities Act:
REORGANIZATION. On February 21, 1997, the Company consummated a
reorganization (the "Reorganization") with nine operating companies existing
under the laws of the State of Florida: OutSource International of America,
Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV,
Inc., Synadyne V, Inc., OutSource Franchising, Inc., Capital Staffing Fund,
Inc., and Employees Insurance Services, Inc. (collectively, the "Subsidiaries")
and the shareholders of each of the Subsidiaries (the "Existing Shareholders").
Pursuant to the terms of the Reorganization, the Company acquired all of the
outstanding capital stock of the Subsidiaries from the Existing Shareholders in
exchange for the issuance of 5,448,788 shares of newly issued Common Stock to
the Existing Shareholders, and the payment of approximately $5.7 million in cash
and the issuance of promissory notes in the aggregate principal amount of
approximately $1.4 million to certain of the Existing Shareholders. The Common
Stock was issued pursuant to Section 4(2) under the Securities Act. In
connection with the Reorganization, the Existing Shareholders contributed
approximately $4.3 million in outstanding promissory notes to the capitalization
of the Company. As a result of the Reorganization, the Subsidiaries became
wholly-owned by the Company and the Existing Shareholders own Common Stock in
approximately the same proportion as the capital stock of the Subsidiaries was
owned by them immediately prior to the Reorganization.
SENIOR NOTES. On February 21, 1997, the Company issued senior subordinated
promissory notes (the "Senior Notes") in the principal amounts of $14,000,000
and $11,000,000 to Triumph-Connecticut Limited Partnership and Bachow Investment
Partners III, L.P., respectively (collectively, the "Senior Note Holders"). The
Senior Notes were repaid on October 29, 1997. The securities were issued
pursuant to Section 4(2) of the Securities Act.
12
<PAGE>
WARRANTS. In connection with the issuance of the Senior Notes, the Company
issued 786,517 warrants (the "Initial Warrants") to the Senior Note Holders and
placed 573,787 warrants (the "Additional Warrants") in escrow, pending release
to either the Existing Shareholders or the Senior Note Holders, based upon the
achievement by the Company of certain specified performance criteria. The
Initial Warrants are currently exercisable at an exercise price of $.015 per
share and expire on February 20, 2002. Following the successful consummation of
certain acquisitions by the Company in April 1997, 180,891 Additional Warrants
were released from escrow in April 1997 and distributed to the Existing
Shareholders. The remaining 392,896 Additional Warrants will be released to the
Existing Shareholders or the Senior Note Holders no later than February 1999.
The Additional Warrants are exercisable, upon release from escrow, at an
exercise price of $.015 per share and expire on February 20, 2002. The Company
has agreed to grant the holders of the Initial Warrants and Additional Warrants
demand and piggyback registration rights. The securities were issued pursuant to
Section 4(2) of the Securities Act.
Triumph and Bachow received closing fees of $210,000 and $165,000,
respectively, and Smith Barney Inc. received a placement fee of $1,500,000, in
connection with the issuance of the Senior Notes and the Warrants. The Company
also incurred expenses of $510,016 in connection with this issuance, which
included a reimbursement of $235,356 to Triumph and Bachow for their expenses.
EMPLOYEES INSURANCE SERVICES, INC. On January 14, 1997, Employees Insurance
Services, Inc. issued an aggregate of 315.79 shares of its common stock to
Robert A. Lefcort, Robert A. Lefcort and Nadya I. Schubert as Co-Trustees of the
Robert A. Lefcort Irrevocable Trust dated 2/28/96, Lawrence H. Schubert as
Trustee of the Lawrence H. Schubert Revocable Trust dated 8/25/95, Nadya I.
Schubert as Trustee of the Nadya I. Schubert Revocable Trust dated 8/25/95, Paul
M. Burrell, Alan E. Schubert, Louis A. Morelli as Trustee of the Louis J.
Morelli S Stock Trust dated 1/1/95, Louis J. Morelli, Matthew B. Schubert, Jason
D. Schubert and Alan E. Schubert as Trustees of the Matthew Schubert OutSource
Trust dated 11/24/95, Matthew B. Schubert and Alan E. Schubert as Trustees of
the Jason Schubert OutSource Trust dated 11/24/95, Mindi Wagner, Louis A.
Morelli, Raymond S. Morelli, Louis A. Morelli as Trustee of the Margaret Ann
Janisch S Stock Trust dated 1/1/95 and Margaret Morelli Janisch (the "Subsidiary
Shareholders"). Employees Insurance Services, Inc. received nominal
consideration for the issuance of these shares. 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.
OUTSOURCE INTERNATIONAL OF AMERICA, INC. On February 21, 1997, OutSource
International of America, Inc. ("OIA") issued an aggregate of 1,000 shares of
its common stock to the Subsidiary Shareholders. The shares were issued in
connection with the merger of OI with and into OIA. 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.
OFFERING PROCEEDS
In Part II, Item 2 of the Company's Form 10-Q for the quarterly period
ended September 30, 1997, the Company reported estimated Offering expenses of
$4,490,000, including underwriting discounts and commissions of $3,150,000 and
other expenses of approximately $1,340,000. The Company also reported estimated
net Offering proceeds after deduction of all expenses of approximately
$40,510,000.
The actual Offering expenses were $4,695,312, including underwriting
discounts and commissions of $3,150,000 and other expenses of $1,545,312,
resulting in net Offering proceeds of $40,304,688. The $208,312 reduction in
these proceeds as compared to the estimate reduced the originally estimated
$10.0 million payment against the Company's revolving facility to $9.9 million
and the originally estimated repayment of related party acquisition debt from
$2.6 million to $2.5 million.
13
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
The consolidated balance sheet data and consolidated statement of
income data set forth below as of and for each of the five years in the period
ended December 31, 1997 has been derived from the audited consolidated financial
statements of the Company. The system operating data and other data has been
derived from the Company's records. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's Consolidated Financial Statements and related
notes thereto.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net revenues.................................... $447,579 $280,171 $149,825 $80,647 $43,472
Cost of revenues................................ 381,273 242,102 126,270 65,813 34,367
-------- ------- ------- ------ ------
Gross profit.................................... 66,306 38,069 23,555 14,834 9,105
Shareholders' compensation...................... 292 2,321 2,370 2,245 1,400
Amortization of intangible assets............... 1,853 424 41 - -
Other selling, general and administrative expenses 53,752 29,841 17,688 9,008 6,098
------ ------ ------ ----- ---------
Operating income................................ 10,409 5,483 3,456 3,581 1,607
Net interest expense............................ 7,877 2,175 1,259 820 263
Other expense (income) (1)...................... 1,821 1,448 (11) (51) (237)
-------- ------- -------- -------- --------
Income before provision (benefit)
for income taxes and extraordinary item (2)... 711 1,860 2,208 2,812 1,581
Pro forma income taxes (3)...................... 296 757 859 1,059 595
-------- ------- -------- -------- --------
Pro forma income before
extraordinary item (2)(3)...................... $ 415 $ 1,103 $ 1,349 $ 1,753 $ 986
=========== ========= ========== ========== ========
Pro forma weighted average basic common
shares outstanding (4)........................ 6,055 5,785 5,785 5,785 5,785
======== ======== ======== ======== ========
Pro forma weighted average diluted common
shares outstanding (4)........................ 7,320 5,843 5,785 5,785 5,785
======== ======= ======== ======= =======
Pro forma basic earnings per share before
extraordinary item............................ $ .07 $ .19 $ .23 $ .30 $ .17
============ =========== =========== ========= =========
Pro forma diluted earnings per share before
extraordinary item............................ $ .06 $ .19 $ .23 $ .30 $ .17
============ =========== ============ ========= =========
OTHER DATA (5):
EBITDA, as adjusted............................. $ 14,871 $ 9,027 $ 6,258 $ 5,993 $ 3,618
========= ========= ========= ======== =======
Net income, as adjusted......................... $ 2,139 $ 3,220 $ 2,586 $ 2,947 $ 1,715
========== ========= ========= ======== =======
Pro forma diluted earnings per share, as adjusted $ .29
==========
SYSTEM OPERATING DATA:
System Revenues (6)............................. $555,802 $389,314 $242,681 $151,408 $92,496
======== ======== ======== ======== =======
Number of employees (end of period)............. 32,000 23,000 16,200 12,200 7,300
Number of offices (end of period)............... 163 150 109 67 47
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)....................... $33,651 $(3,172) $1,540 $1,596 $1,313
Total assets.................................... 105,743 55,877 24,708 13,791 5,923
Revolving Facility and line of credit........... 33,800 9,889 6,468 4,827 1,523
Long-term debt to related parties,
less current maturities........................ - 2,403 - - -
Other long-term debt, less current maturities... 7,737 10,874 2,815 2,713 60
Total shareholders' equity...................... 40,778 4,495 3,603 2,701 1,843
</TABLE>
14
<PAGE>
(1) In 1997, the Company issued warrants ("Warrants") to purchase 1,360,304
shares of the Company's common stock. The holders of the Warrants had a
Put Right, as a result of which the Company recorded a Put Warrants
Liability. Other expense (income) for the year ended December 31, 1997
includes non-operating expense of $1.8 million related to the adjustment
of the initial liability recorded at the time of the issuance of the
Warrants on February 21, 1997 and based on their fair value at that
time, to the fair value of the Warrants at the time of the Offering
("Put Warrants Valuation Adjustment"), when the Put Right terminated. At
the time of the Offering, the Warrants, with an adjusted carrying value
of $20.4 million, were reclassified from debt to additional paid-in
capital. See Note 5 to the Company's Consolidated Financial Statements.
Other expense (income) for the year ended December 31, 1996 includes
$1.4 million of unusual charges, primarily professional fees related to
a registration statement filed by the Company with the Securities and
Exchange Commission that was subsequently withdrawn and an internal
investigation into certain Company transactions. See Note 7 to the
Company's Consolidated Financial Statements.
(2) As a result of the use of the proceeds of the Offering to repay the
full balance of the Senior Notes, the Company recorded an extraordinary
loss in 1997 of approximately $13.4 million (net of a $6.6 million
income tax benefit). This loss consists of the unamortized debt discount
and the unamortized debt issuance costs related to the Senior Notes.
(3) Prior to the Reorganization, each of the Subsidiaries elected to be a
subchapter S corporation and, accordingly, were not subject to income
taxes; therefore, there is no provision for income taxes for periods
prior to the Reorganization. Pro forma income taxes and net income have
been computed as if the Company had been fully subject to federal and
applicable state income taxes for such periods. The Company recognized a
one-time tax benefit of $429,000 as a result of the termination, at the
time of the Reorganization, of the Subsidiaries' elections to be treated
as S corporations. This benefit is reflected in the historical results
of operations for the year ended December 31, 1997, but has been removed
from the pro forma results presented for that period.
(4) Basic shares outstanding includes (a) the 5,448,788 shares of Common
Stock issued in connection with the Reorganization, (b) for the periods
prior to the Reorganization, the equivalent number of shares (336,430)
of Common Stock represented by the shares of common stock of the
Subsidiaries purchased from certain shareholders for cash and notes in
the Reorganization and (c) for the periods after the Offering, the sale
by the Company of 3,000,000 shares of Common Stock. Diluted shares
outstanding include the above plus all outstanding options to purchase
Common Stock and Warrants calculated using the treasury stock method.
See Notes 1, 10 and 13 to the Company's Consolidated Financial
Statements.
(5) The other data is presented to reflect the Company's historical results
of operations, adjusted to reflect (a) the elimination of the amount of
compensation expense ($262,000, $2.0 million, $2.0 million, $1.9 million
and $1.2 million for the years ended December 31, 1997, 1996, 1995, 1994
and 1993, respectively) for the Company's founding shareholders and for
the Company's President, Chief Executive Officer, and Chairman of the
Board, who is also a shareholder of the Company, which is in excess of
the compensation for such individuals subsequent to the Reorganization;
(b) the elimination of $1.4 million of unusual charges in the year ended
December 31, 1996 and $1.8 million of non-operating expense arising from
the 1997 Put Warrants Valuation Adjustment, both discussed in Note 1
above; and (c) income taxes computed as if the Company had been subject
to federal and applicable state income taxes for such periods. See
footnote 1 to the table in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations"
for summary operating data reflecting these adjustments.
EBITDA is earnings (net income) before the effect of interest income
and expense, income tax benefit and expense, depreciation expense and
amortization expense. EBITDA is presented because it is a widely
accepted financial indicator used by many investors and analysts to
analyze and compare companies on the basis of operating performance.
EBITDA is not intended to represent cash flows for the period, nor has
it been presented as an alternative to operating income or as an
indicator of operating performance and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
Cash flows for the periods presented were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used in):
Operating activities................ $(10,853) $(1,280) $2,787 $1,267 $ 724
Investing activities................ (24,744) (4,834) (2,026) (2,246) (107)
Financing activities................ 37,238 4,647 678 1,028 (609)
------ -------- ------ ------ ------
Net increase (decrease) in cash..... $ 1,641 $(1,467) $1,439 $ 49 $ 8
========= ======== ====== ======= =======
</TABLE>
(6) System revenues is the sum of the Company's net revenues (excluding
revenues from franchise royalties and services performed for the
Franchisees) and the net revenues of the Franchisees. System revenues
provide information regarding the Company's penetration of the market
for its services, as well as the scope and size of the Company's
operations, but are not an alternative to revenues determined in
accordance with generally accepted accounting principles as an indicator
of operating performance. The net revenues of Franchisees, which are not
earned by or available to the Company, are derived from reports that are
unaudited. System revenues consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Company's net revenues................. $447,579 $280,171 $149,825 $ 80,647 $43,472
Less Company revenues from:
Franchise royalties.................. (6,997) (5,671) (4,138) (2,712) (1,586)
Services to franchisees.............. (34,642) (35,079) (7,507) (4,698) -
Add Franchisees' net revenues.......... 149,862 149,893 104,501 78,171 50,610
------- -------- ------- ------- ------
System revenues........................ $555,802 $389,314 $242,681 $151,408 $92,496
======== ======== ======== ======== =======
</TABLE>
15
<PAGE>
ITEM 7 - 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 PEO market through its Synadyne division. To implement its
expansion strategy, the Company completed 27 acquisitions of industrial staffing
companies from January 1, 1995 through March 18, 1998, with 76 offices and
approximately $147.0 million in annual historical revenue (see "-Acquisitions").
During this period, the number of Company-owned flexible staffing and PEO
offices increased from ten to 123, the number of geographic regions served by
the Company increased from one to nine, 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 (see "Risk Management
Program - Workers' Compensation" under Item 1 - Business).
RESULTS OF OPERATIONS
Effective February 21, 1997, the Company consummated a Reorganization
whereby it acquired all of the outstanding capital stock of its Subsidiaries.
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 the Subsidiaries for the periods
noted.
16
<PAGE>
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>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues:
Flexible industrial staffing...................... $207,312 $ 97,397 $ 57,791
PEO............................................... 225,836 172,069 85,557
Franchise royalties and other..................... 14,431 10,705 6,477
---------- ---------- ----------
Total net revenues................................ $447,579 $280,171 $149,825
======== ======== ========
Gross profit...................................... $ 66,306 $ 38,069 $ 23,555
Selling, general and administrative expenses (1) 55,897 32,586 20,099
--------- ---------- -----------
Operating income.................................. 10,409 5,483 3,456
Net interest and other expense (1)................ 9,698 3,623 1,248
--------- ---------- ------------
Income before provision (benefit) for
income taxes and extraordinary item........... 711 1,860 2,208
Pro forma income taxes (benefit) (1).............. 296 757 859
--------- ---------- -------------
Pro forma income before
extraordinary item (1)........................ $ 415 $ 1,103 $ 1,349
========= ========== ==========
System Revenues (2)............................... $ 555,802 $389,314 $242,681
========= ======== ========
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
--------- -------- ------
Net revenues:
Flexible industrial staffing....................... 46.3% 34.8% 38.6%
PEO................................................ 50.5 61.4 57.1
Franchise royalties and other...................... 3.2 3.8 4.3
--------- -------- ------
Total net revenues................................. 100.0% 100.0% 100.0%
========== ======== =======
Gross profit....................................... 14.8% 13.6% 15.7%
Selling, general and administrative expenses (1)... 12.5 11.6 13.4
-------- -------- -------
Operating income................................... 2.3 2.0 2.3
Net interest and other expense (1)................. 2.1 1.3 0.8
-------- -------- ------
Income before provision (benefit) for
income taxes and extraordinary item............ 0.2 0.7 1.5
Pro forma income taxes (benefit) (1)............... 0.1 0.3 0.6
-------- ------- -------
Pro forma income before
extraordinary item (1)......................... 0.1% 0.4% 0.9%
========= ======== =========
</TABLE>
- -----------------------
(1) For the years ended December 31, 1995 and 1996, and 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 those periods, 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 in 1997 and $2.0 million in 1996 and in
1995. In 1996, the Company incurred unusual expenses of approximately $1.4
million in relation to a registration statement filed by the Company with the
Securities and Exchange Commission that was subsequently withdrawn and an
internal investigation into certain Company transactions
17
<PAGE>
(See note 7 to the Company's Consolidated Financial Statements). In 1997, the
Company recorded non-operating expense of approximately $1.8 million related to
the Put Warrants Valuation Adjustment and incurred an extraordinary loss (net of
income tax benefit) of approximately $13.4 million (See note 5 to the Company's
Consolidated Financial Statements). The following table sets forth the amounts
and the percentage of certain items in the Company's consolidated statements of
income, 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,
the unusual expenses in 1996 and the 1997 Put Warrants Valuation Adjustment and
the 1997 extraordinary loss and is calculated assuming the Company had been
subject to federal and state income taxes and taxed as a C corporation during
each of these periods.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C>
Selling, general and administrative expenses,
as adjusted................................... $55,635 $30,635 $18,074
As a percentage of net revenues................. 12.4% 10.9% 12.1%
Operating income, as adjusted................... $10,671 $ 7,434 $ 5,481
As a percentage of net revenues................. 2.4% 2.7% 3.7%
Net income, as adjusted......................... $ 2,139 $ 3,220 $ 2,586
As a percentage of net revenues................. 0.5% 1.1% 1.7%
</TABLE>
- ----------------------
(2) System revenues is the sum of the Company's net revenues (excluding revenues
from franchise royalties and services performed for the Franchisees) and the net
revenues of the Franchisees. System revenues provide information regarding the
Company's penetration of the market for its services, as well as the scope and
size of the Company's operations, but are not an alternative to revenues
determined in accordance with generally accepted accounting principles as an
indicator of operating performance. The net revenues of Franchisees, which are
not earned by or available to the Company, are derived from reports that are
unaudited. System revenues consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Company's net revenues....................... $447,579 $280,171 $149,825
Less Company revenues from:
Franchise royalties...................... (6,997) (5,671) (4,138)
Services to franchisees................... (34,642) (35,079) (7,507)
Add Franchisees' net revenues................ 149,862 149,893 104,501
--------- --------- ---------
System revenues.............................. $555,802 $389,314 $242,681
======== ======== ========
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUES. Net revenues increased $167.4 million, or 59.8%, to
$447.6 million in 1997 from $280.2 million in 1996. This increase resulted from
growth in PEO revenues of $53.8 million, or 31.2%, and flexible industrial
staffing revenues growth of $109.9 million, or 112.9%. The increase in PEO
revenues was primarily due to a broadening of the Company's targeted PEO client
base. Flexible industrial staffing revenues increased due to: (i) the 1996
Acquisitions and the 1997 Acquisitions, which resulted in an increase of $64.0
million in revenues; and (ii) internal growth of 47.1% from the comparable 1996
period, which resulted in an increase of $45.9 million 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 87
locations as of December 31, 1997 from 46 locations as of December 31, 1996,
with 29 of the 41 additional locations arising from the 1997 Acquisitions.
System revenues increased $166.5 million, or 42.8%, to $555.8 million
in 1997 from $389.3 million in 1996. The increase in system revenues was
attributable to the $167.4 million increase in the Company's net revenues
discussed above, of which $0.9 million related to services provided to
franchises. System revenues include franchise revenues which are not earned by
or available to the Company. A $22.7 million, or 22.0%, increase in revenues
from 1996 to 1997 of franchisees operating as of December 31, 1997 was offset by
an equivalent decrease in franchise revenues from 1996 to 1997 as a result of
the Company's conversion of 13 franchise locations to Company-owned locations,
as well as franchisee buyouts of franchise agreements related to another 23
locations in 1997. 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
18
<PAGE>
franchisees based onthe 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 $28.2 million, or 74.2%, to $66.3
million in 1997 from $38.1 million in 1996. Gross profit as a percentage of net
revenues increased to 14.8% in 1997 from 13.6% in 1996. 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 1997, PEO net revenues generated gross
profit margins of 3.6% as compared to gross profit margins of 23.5% generated
from flexible industrial staffing revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $23.3 million, or 71.5%, to $55.9 million in
1997 from $32.6 million in 1996. This increase was primarily a result of
operating costs associated with increased flexible industrial staffing volume at
existing locations, the 1996 and 1997 Acquisitions (including the related
amortization of intangible assets), and pre-opening and operating expenses
associated with new office locations in existing flexible industrial staffing
regions. The number of Company-owned flexible industrial staffing offices opened
for less than one year, excluding acquired offices, increased to 18 locations as
of December 31, 1997 from 12 locations as of December 31, 1996. Also, the
Company increased its corporate financial, legal, human resource, information
systems and other staff (and related expenses) in anticipation of operating as a
public company and in order to properly manage expected future growth. These
increases were partially offset by a decrease of $2.0 million in shareholders'
compensation from 1996 to 1997. As a percentage of net revenues, selling,
general and administrative expenses increased to 12.5% in 1997 from 11.6% in
1996. In addition to the items previously discussed, this percentage increase is
also due to the significant increase in 1997 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. Net interest and other expense
increased by $6.1 million, to $9.7 million in 1997 from $3.6 million in 1996.
This increase included $1.8 million attributable to the Put Warrants Valuation
Adjustment. The remaining net increase is comprised of (i) a $5.7 million
increase in interest expense, including amortization of debt discount and
issuance costs, of which approximately $2.8 million was associated with the
Senior Notes which were issued in the first quarter of 1997, with the remainder
primarily being associated with net additional borrowings of $23.9 million in
1997 under the Revolving Facility to finance working capital requirements and
the 1997 Acquisitions and (ii) a $1.4 million decrease in other charges,
primarily professional fees, related to a registration statement filed by the
Company with the Securities and Exchange Commission that was subsequently
withdrawn and an internal investigation into certain Company transactions, both
events occurring in 1996.
INCOME BEFORE EXTRAORDINARY ITEM. Income before extraordinary item
decreased by $0.7 million, to $0.4 million in 1997 from $1.1 million in 1996.
This decrease was primarily due to the $5.7 million increase in interest expense
and a $1.8 million Put Warrants Valuation Adjustment, as discussed above.
EXTRAORDINARY ITEM. As a result of the use of the proceeds of the
Offering to repay the full balance of the Senior Notes, the Company recorded an
extraordinary loss in the fourth quarter of 1997 of approximately $13.4 million
(net of a $6.6 million income tax benefit). This loss consists of the
unamortized debt discount and the unamortized debt issuance costs related to the
Senior Notes.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET REVENUES. Net revenues increased $130.3 million, or 87.0%, to
$280.2 million in 1996 from $149.8 million in 1995. This increase resulted
primarily from the increase in PEO revenues of $86.5 million, or 101.1%. The
increase in PEO revenues was primarily due to a broadening of the Company's
targeted PEO client base. Flexible industrial staffing revenues grew by $39.6
million, 68.5%, with $13.3 million of the increase resulting from the 1996
Acquisitions and the remainder due to development of existing Company-owned
locations and an increase in the number of Company-owned offices. Company-owned
flexible industrial staffing offices increased from 21 locations as of December
31, 1995 to 46 locations as of December 31, 1996.
System revenues increased $146.6 million, or 60.4%, to $389.3 million
in 1996 from $242.7 million in 1995. The increase in system revenues was
attributable to the $130.3 million increase in the Company's net revenues
discussed above,
19
<PAGE>
of which $29.1 million related to services provided to franchises, and a $45.4
million increase in franchise industrial staffing revenues. System revenues
include franchise revenues which are not earned by or available to the Company.
GROSS PROFIT. Gross profit increased $14.5 million, or 61.6%, to $38.1
million in 1996 from $23.6 million in 1995. Gross profit as a percentage of net
revenues decreased to 13.6% in 1996 from 15.7% in 1995. The Company's gross
profit as a percentage of net revenues decreased from 1995 to 1996 since PEO
revenues, which generate lower gross profit margins than flexible industrial
staffing revenues, increased at a higher rate than the flexible industrial
staffing revenues. In 1996, PEO net revenues generated gross profit margins of
3.7% as compared to gross profit margins of 24.5% generated from flexible
industrial staffing revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $12.5 million, or 62.1%, to $32.6 million in
1996 from $20.1 million in 1995. The increase in selling, general and
administrative expenses in 1996 was primarily a result of an incremental $6.4
million for salaries and other operating costs incurred in continuing the
establishment of flexible industrial staffing offices in seven new geographic
regions. The remainder of the increase was primarily due to marketing and
support costs related to the broadening of the PEO client base, operating costs
associated with increased flexible industrial staffing volume at existing
locations and buildup of corporate infrastructure in contemplation of the 1997
Acquisitions. As a percentage of net revenues, selling, general and
administrative expenses decreased to 11.6% in 1996 from 13.4% in 1995, primarily
due to the significant increase in 1996 of the PEO operations in proportion to
total Company revenues. The PEO operations have lower associated selling,
general and administrative expenses (as a percentage of revenues) than flexible
industrial staffing revenues.
NET INTEREST AND OTHER EXPENSE. Net interest and other expense
increased by $2.4 million, to $3.6 million in 1996 from $1.2 million in 1995.
This increase included $1.4 million attributable to unusual expenses related to
the Company's withdrawal of a registration statement and an internal
investigation into certain Company transactions. The remaining increase of $1.0
million in net interest expense was principally due to interest associated with
net additional borrowings of $3.6 million in 1996 under the Company's line of
credit to finance working capital requirements as well as interest arising from
$4.4 million of indebtedness incurred in connection with the 1996 Acquisitions.
NET INCOME. Net income decreased by $0.2 million, to $1.1 million in
1996 from $1.3 million in 1995. This decrease was primarily due to $1.4 million
of unusual expenses related to the Company's withdrawal of a registration
statement and an internal investigation into certain Company transactions, as
well as an incremental $0.5 million of operating losses incurred in continuing
the establishment of flexible industrial staffing offices in seven new
geographic regions.
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.
YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Flexible industrial staffing.................. 23.5% 24.5% 25.2%
PEO........................................... 3.6 3.7 3.9
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 decrease in the gross profit margin from the Company's flexible
industrial staffing operations in 1997 as compared to 1996 and in 1996 as
compared to 1995 is primarily due to (i) larger contracts obtained by the
Company which have lower gross margin percentages based on correspondingly lower
selling, general and administrative expenses from the economies of scale in
servicing a larger contract and (ii) the impact of two increases in the minimum
wage during the period from October 1, 1996 through December 31, 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
20
<PAGE>
gross margins from flexible industrial staffing operations, which the Company
expects to be generally offset by lower selling, general and administrative
expenses (measured as a percentage of gross profit) as mentioned above.
The decrease in the gross profit margin from the Company's PEO
operations in 1997 as compared to 1996 and in 1996 as compared to 1995 is
primarily due to (i) a higher average wage and benefit cost per PEO employee,
while the gross profit amount per employee is relatively consistent (See
"-General" for a discussion of the effect of these costs on the Company's
revenue calculation), (ii) lower prices that reflect lower interest costs
incurred by the Company due to a decline in the relative proportion of total PEO
customers receiving credit terms, and (iii) larger contracts obtained by the
Company which have lower gross margin percentages based on correspondingly lower
selling, general and administrative expenses from the economies of scale in
servicing a larger contract. The Company anticipates that these factors will
continue to affect gross margins from PEO operations, which the Company expects
to be generally offset by lower selling, general and administrative expenses
(measured as a percentage of gross profit), as mentioned above.
FLEXIBLE INDUSTRIAL STAFFING:
Net revenues from the Company's flexible industrial staffing services
increased $149.5 million, to $207.3 million in 1997 from $57.8 million in 1995,
or a compound annual growth rate of 89.4%. This increase represented an
increasing share of the Company's total net revenues, to 46.3% in 1997 from
38.6% in 1995, 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 $34.1 million, to $48.7 million in 1997 from $14.6 million in 1995, or
a compound annual growth rate of 82.9%. This represented an increasing share of
the Company's total gross profit, to 73.5% in 1997 from 61.9% in 1995.
PEO:
Net revenues from the Company's PEO services increased $140.2 million
to $225.8 million in 1997 from $85.6 million in 1995, or a compound annual
growth rate of 62.5%. However, 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 50.5% in 1997 from 57.1% in 1995,
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 $4.7 million to
$8.0 million in 1997 from $3.3 million in 1995, or a compound annual growth rate
of 56.1%. However, 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 12.1% in 1997 from
14.2% in 1996.
FRANCHISE AND OTHER:
Net revenues from the Company's franchise and other services increased
$7.9 million, to $14.4 million in 1997 from $6.5 million in 1995, or a compound
annual growth rate of 49.0%. This increase represented a decreasing share of the
Company's total net revenues, to 3.2% in 1997 from 4.3% in 1995, reflecting the
Company's greater focus on growth of its Company-owned flexible industrial
staffing operations during this period. The Company expects this focus to
continue for the foreseeable future.
Gross profit from the Company's franchise and other services increased
$4.0 million to $9.6 million in 1997, from $5.6 million in 1995, or a compound
annual growth rate of 30.7%. However, primarily because of the lower growth rate
in franchise and other revenues as compared to flexible industrial staffing,
this increase represented a decreasing share of the Company's total gross
profit, to 14.4% in 1997 from 23.9% in 1995.
21
<PAGE>
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"), the 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. The Senior Notes were subordinate to borrowings under
the Revolving Facility, but were repaid in full from the proceeds of the
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 Senior
Note Holders and placed an additional 573,787 warrants in escrow. The warrants
are exercisable at a price of $.015 per share.
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 the 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 December 31, 1997, the
Company had outstanding borrowings under the Revolving Facility of $33.8
million, bearing interest at an effective annual rate of 8.3%. The Revolving
Facility contains certain affirmative and negative covenants relating to the
Company's operations. See Note 5 to the Company's Consolidated Financial
Statements.
As of December 31, 1997, 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) $2.9 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 $2.8 million; and (iv) obligations under mortgages
totalling $4.3 million. See Note 5 to the Company's Consolidated Financial
Statements.
One of the key elements of the Company's multi-faceted growth 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 year ended December 31, 1997, cash used in operations was
approximately $10.9 million, compared with $1.3 million in 1996. Cash used in
investing activities during the year ended December 31, 1997 was approximately
$24.7 million, primarily expenditures of $21.9 million for acquisitions
(primarily intangible assets), compared with $4.8 million in 1996 (which
included expenditures of $1.9 million for acquisitions). Cash provided by
financing activities during the year ended December 31, 1997 was approximately
$37.2 million, including $40.3 million net proceeds from the Offering and $23.9
million from borrowings under the Revolving Facility, substantially offset by
payments of $16.1 million for shareholder distributions and other amounts in
connection with the Reorganization and $7.8 million of repayments of long-
22
<PAGE>
term debt (net of note repayments from related parties). Cash provided by
financing activities during the year ended December 31, 1996 was approximately
$4.6 million, primarily $3.6 million from borrowings under a bank line of
credit.
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.
ACQUISITIONS
During 1995, the Company made four flexible industrial staffing
acquisitions (the "1995 Acquisitions") with five offices and approximately $7.0
million in annual historical revenue. During 1996, the Company made five
flexible industrial staffing acquisitions (the "1996 Acquisitions") with 13
offices and approximately $16.0 million in annual historical revenue. During
1997, the Company made eight flexible industrial staffing acquisitions (the
"1997 Acquisitions") with 30 offices and approximately $61.0 million in annual
historical revenue. From January 1, 1998 through March 18, 1998, the Company
made ten flexible industrial staffing acquisitions (the "1998 Acquisitions")
with 28 offices and approximately $63.0 million in annual historical revenue.
The 1995 Acquisitions, the 1996 Acquisitions, the 1997 Acquisitions and the 1998
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
December 31, 1997 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. However, 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. See Note 14 to the Company's Consolidated Financial Statements.
INFLATION
The effects of inflation on the Company's operations were not
significant during the periods presented in the financial statements. Throughout
the periods discussed above, the increases in revenues have resulted primarily
from higher volumes, rather than price increases.
23
<PAGE>
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 intends to first implement SFAS No. 130 in its
Consolidated Financial Statements as of and for the three months ended March 31,
1998, and will provide any required disclosures at that time.
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 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 that
implementation will have.
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 December 31, 1997, 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 December 31, 1997, 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
24
<PAGE>
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.
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Form 10-K are forward looking statements, including but not limited to,
statements regarding the Company's expectations or beliefs concerning the
Company's strategy and objectives, expected sales and other operating results,
the effect of changes in the Company's gross margin, the Company's liquidity,
anticipated capital spending, the availability of financing, equity and working
capital to meet the Company's future needs, economic conditions in the Company's
market areas, the potential for and effect of future acquisitions, the adequacy
of the Company's workers' compensation and other insurance coverages, 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.
25
<PAGE>
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for management to predict all of such factors. Further, management
cannot assess the impact of each such factor on the business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
Subsequent written and oral forward looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by cautionary statements in this paragraph and elsewhere in this Form
10-K, and in other reports filed by the Company with the Securities and Exchange
Commission, and in 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.
26
<PAGE>
<TABLE>
<CAPTION>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
<S> <C>
Independent Auditors' Report........................................................................ 28
Consolidated Balance Sheets as of December 31, 1997 and 1996........................................ 29
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995.............. 30
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1996, and 1995................................................... 31
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.......... 32
Notes to Consolidated Financial Statements.......................................................... 33
</TABLE>
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
OutSource International, Inc. And Subsidiaries:
We have audited the consolidated balance sheets of OutSource
International, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. Our audits also included the financial statement schedule listed in the
index at Item 14 (a)2. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of OutSource International,
Inc. and Subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 18, 1998
28
<PAGE>
<TABLE>
<CAPTION>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ............................................................... $ 1,685,474 $ 44,790
Trade accounts receivable, net of allowance for doubtful accounts of
$1,639,767 and $978,250 ....................................... 47,297,608 26,349,648
Funding advances to franchises ..................................... 2,186,150 3,231,839
Notes receivable and other amounts due from related parties ........ -- 4,887,604
Deferred income taxes and other current assets ..................... 5,909,960 420,021
------------- -------------
Total current assets .......................................... 57,079,192 34,933,902
PROPERTY AND EQUIPMENT, net ........................................ 14,953,118 13,127,107
GOODWILL AND OTHER INTANGIBLE ASSETS, net .......................... 30,426,731 7,454,806
OTHER ASSETS ....................................................... 3,283,817 361,333
------------- -------------
Total assets .................................................. $ 105,742,858 $ 55,877,148
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................... $ 1,498,275 $ 2,676,093
Accrued expenses:
Payroll ........................................................ 5,382,295 4,213,723
Payroll taxes .................................................. 2,181,722 2,180,130
Workers' compensation and insurance ............................ 9,086,007 5,463,845
Other .......................................................... 1,863,666 1,401,100
Other current liabilities .......................................... 907,975 1,416,577
Line of credit ..................................................... -- 9,888,507
Current maturities of long-term debt to related parties ............ 100,000 8,872,497
Current maturities of other long-term debt ......................... 2,408,060 1,992,962
------------- -------------
Total current liabilities ..................................... 23,428,000 38,105,434
NON-CURRENT LIABILITIES:
Revolving credit facility .......................................... 33,800,000 --
Long-term debt to related parties, less current maturities ......... -- 2,402,661
Other long-term debt, less current maturities ...................... 7,736,981 10,873,828
------------- -------------
Total liabilities ............................................. 64,964,981 51,381,923
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTES 1, 2, 6 and 9)
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 10,000,000 shares authorized, none
issued .......................................................... -- --
Common stock, $.001 par value; 100,000,000 shares authorized;
8,448,788 issued and outstanding at December 31, 1997 ........... 8,449 5,785
Additional paid-in capital ......................................... 53,200,988 95,315
Retained earnings (deficit) ........................................ (12,431,560) 4,394,125
------------- -------------
Total shareholders' equity .................................... 40,777,877 4,495,225
------------- -------------
Total liabilities and shareholders' equity ......................... $ 105,742,858 $ 55,877,148
============= =============
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
<TABLE>
<CAPTION>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Net revenues..................................... $447,579,152 $280,171,104 $149,825,165
Cost of revenues................................. 381,273,162 242,102,390 126,270,322
-------------- ------------- -------------
Gross profit..................................... 66,305,990 38,068,714 23,554,843
-------------- ------------- -------------
Selling, general and administrative expenses:
Shareholders' compensation.................. 292,001 2,321,201 2,370,350
Amortization of intangible assets........... 1,852,518 423,550 40,565
Other selling, general and administrative... 53,752,256 29,840,722 17,687,765
-------------- ------------- ------------
Total selling, general and
administrative expenses................. 55,896,775 32,585,743 20,098,680
-------------- ------------- ------------
Operating income................................. 10,409,215 5,483,241 3,456,163
-------------- ------------- ------------
Other expense (income):
Interest expense (net)....................... 7,876,853 2,175,849 1,258,739
Put warrants valuation adjustment............ 1,841,625 -- --
Other expense (income)....................... (20,539) -- (10,995)
Other charges................................ -- 1,447,555 --
-------------- ------------- ------------
Total other expense (income)............... 9,697,939 3,623,404 1,247,744
-------------- ------------- ------------
Income before provision (benefit) for
income taxes and extraordinary item.......... 711,276 1,859,837 2,208,419
Provision (benefit) for income taxes............. (69,083) --
-------------- ------------ ------------
Income before extraordinary item................. 780,359 1,859,837 2,208,419
Extraordinary item - loss on early retirement
of debt, net of income tax benefit (Note 5).. (13,384,416) -- --
--------------- ------------- ------------
Net income (loss)................................ $(12,604,057) $ 1,859,837 $ 2,208,419
============== ============ ============
UNAUDITED PRO FORMA DATA:
Income before provision (benefit) for
income taxes and extraordinary item.......... $ 711,276 $ 1,859,837 $ 2,208,419
Provision for income taxes....................... 296,000 757,000 859,000
-------------- ------------ ------------
Income before extraordinary item................. 415,276 1,102,837 1,349,419
Extraordinary item, net of income tax benefit.... (13,384,416) -- --
--------------- ------------ ------------
Net income (loss)................................ $(12,969,140) $ 1,102,837 $ 1,349,419
============== ============ ============
Weighted average common shares outstanding:
Basic........................................ 6,055,439 5,785,218 5,785,218
============== ============ =============
Diluted...................................... 7,320,362 5,843,618 5,785,218
============== ============ ============
Earnings (loss) per share:
Basic
Income before extraordinary item......... $ 0.07 $ 0.19 0.23
Extraordinary item, net of
income tax benefit..................... (2.21) -- --
-------------- ------------- ------------
Net income (loss)........................ $ (2.14) $ 0.19 $0.23
============== ============= ============
Diluted
Income before extraordinary item......... $ 0.06 $ 0.19 $ 0.23
Extraordinary item, net of
income tax benefit..................... (1.83) -- --
---------------- ------------ ------------
Net income (loss)........................ $ (1.77) $ 0.19 $ 0.23
=============== ============ ============
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
-------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ................... $ 5,785 $ 95,315 $ 2,600,241 $ 2,701,341
Distributions to shareholders ................ -- -- (1,307,223) (1,307,223)
Net income ................................... -- -- 2,208,419 2,208,419
------- ------------ ------------ ------------
Balance, December 31, 1995 ................... 5,785 95,315 3,501,437 3,602,537
Distributions to shareholders ................ -- -- (967,149) (967,149)
Net income ................................... -- -- 1,859,837 1,859,837
------- ------------ ------------ ------------
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 loss for the period from February 22, 1997
through December 31, 1997 ................ -- -- (12,431,560) (12,431,560)
Termination of Put Warrants Liability ........ -- 20,383,621 -- 20,383,621
Sale of common stock ......................... 3,000 40,301,688 -- 40,304,688
------- ------------ ------------ ------------
Balance, December 31, 1997 ................... $ 8,449 $ 53,200,988 $(12,431,560) $ 40,777,877
======= ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
<TABLE>
<CAPTION>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $(12,604,057) $ 1,859,837 $ 2,208,419
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ..................................... 4,179,224 1,592,166 765,580
Amortization of debt discount and issuance costs .................. 937,878 -- --
Put warrants valuation adjustment ................................. 1,841,625 -- --
Loss on early retirement of debt .................................. 20,031,515 -- --
Deferred income tax provision (benefit) ........................... (6,716,182) -- --
Gain (loss) on disposal of property and equipment.................. (18,711) 23,032 --
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable ................................ (20,947,960) (11,353,115) (7,292,532)
Prepaid expenses and other current assets ................ (378,645) 94,297 (301,784)
Other assets ............................................. (1,404,867) (112,674) 153,093
Increase (decrease) in:
Accounts payable ......................................... (519,198) 315,061 644,458
Accrued expenses:
Payroll .............................................. 1,168,572 2,234,500 1,311,169
Payroll taxes ........................................ 1,592 (1,224,960) 2,757,651
Workers' compensation and insurance .................. 3,622,162 3,608,345 1,628,127
Other ................................................ 462,566 778,335 618,304
Other current liabilities ................................ (508,603) 905,105 294,644
----------- ------------ -----------
Net cash provided by (used in) operating activities .. (10,853,089) (1,280,071) 2,787,129
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Funding (advances) repayments to franchises, net ..................... 1,045,689 (805,124) (651,700)
Property and equipment expenditures .................................. (4,104,980) (2,128,826) (1,283,975)
Expenditures for acquisitions ........................................ (21,947,956) (1,949,595) (120,374)
Proceeds from disposal of property and equipment ..................... 262,700 50,093 30,318
----------- ------------ -----------
Net cash used in investing activities ....................... (24,744,547) (4,833,452) (2,025,731)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in excess of outstanding checks over
bank balance, included in accounts payable ....................... (658,620) 278,106 956,171
Net proceeds from line of credit and
revolving credit facility ........................................ 23,911,493 3,620,180 1,641,660
Related party borrowings (repayments) ................................ (1,987,554) 576,503 (475,172)
Proceeds of senior notes and put warrants, net of
issuance costs ................................................... 22,614,984 -- --
Repayment of senior notes ............................................ (25,000,000) -- --
Proceeds of other long-term debt ..................................... -- 1,500,000 510,000
Repayment of other long-term debt .................................... (5,845,071) (1,327,875) (647,704)
Proceeds from sale of common stock, net of offering costs ............ 40,304,688 -- --
Distributions and other payments in connection with the Reorganization (16,101,600) -- --
Distributions paid to shareholders ................................... -- -- (1,307,223)
----------- ------------ -----------
Net cash provided by financing activities .......... 37,238,320 4,646,914 677,732
----------- ------------ -----------
Net increase (decrease) in cash ...................................... 1,640,684 (1,466,609) 1,439,130
Cash, beginning of period ............................................ 44,790 1,511,399 72,269
----------- ------------ -----------
Cash, end of period .................................................. $ 1,685,474 $ 44,790 $ 1,511,399
=========== ============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ........................................................ $ 7,090,797 $ 1,841,624 $ 976,295
=========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: OutSource International, Inc. and Subsidiaries (the
"Company") provide emerging businesses with a single source of customized,
flexible human resource solutions principally through its professional employer
organization ("PEO") services under the tradename Synadyne and its flexible
industrial staffing services under the tradenames Labor World and Tandem. The
Company provides these services through company-owned and franchise locations.
PEO services include payroll administration, workers' compensation
insurance, health, life and disability insurance, retirement plans, and human
resource compliance, administration and management. Flexible industrial staffing
services include certain PEO services, as well as recruiting, training and
workforce re-deployment services.
PUBLIC OFFERING: The Company sold 3,000,000 shares of its common stock
to the public (the "Offering") at $15.00 per share on October 24, 1997, and
received proceeds of $40,304,688, net of offering costs and expenses of
$4,695,312.
REORGANIZATION: On February 21, 1997, a Reorganization was consummated
in which nine companies under common ownership and management became
wholly-owned subsidiaries of OutSource International, Inc. (the
"Reorganization"). OutSource International, Inc. was incorporated in April 1996
for the purpose of becoming the parent holding company, but was inactive with no
assets, liabilities or operations prior to the Reorganization.
The nine companies which became subsidiaries of OutSource
International, Inc. are OutSource International of America, Inc., OutSource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc.,
Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance Services, Inc. and
Capital Staffing Fund, Inc. (the "Initial Subsidiaries"). Except for Capital
Staffing Fund, Inc., the outstanding common stock of each of the Initial
Subsidiaries was owned prior to the Reorganization by the same shareholders with
identical ownership percentages. The shareholders and their ownership
percentages were: (a) a control group consisting of two brothers, who were
founders, their immediate families and four family trusts (the "S
Group")--58.2%; (b) a control group consisting of an individual, who was a
founder, his immediate family and two family trusts (the "M Group")--29.1%; (c)
the chief executive officer of the Initial Subsidiaries (the "CEO")--9.7%; and
(d) the executive vice president of the Initial Subsidiaries and a family trust
(the "EVP")--3.0%. The shareholders and their ownership percentages of Capital
Staffing Fund, Inc. prior to the Reorganization were: S Group--48.5%; M
Group--24.25 %; CEO--24.25% and EVP--3.0%.
In 1974, the three founders began the flexible industrial staffing
services business which became the operations of the Initial Subsidiaries, and
these operations expanded to also include franchising of flexible industrial
staffing services, PEO services, and funding services to certain franchises. The
operations of the Initial Subsidiaries historically have been integrated to
provide a single source of human resource services for customers under the
direction of a single executive management group and with a centralized
administrative and business support center.
33
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Reorganization consisted of (a) the distribution by the Initial
Subsidiaries, which were S corporations, of previously undistributed accumulated
taxable earnings to all shareholders, in proportion to their ownership
interests, a portion of which was used to repay $4,300,000 in notes receivable
of OutSource Franchising, Inc. from its shareholders, in proportion to their
ownership interests; (b) the contribution to paid-in capital of Synadyne II,
Inc. and Synadyne III, Inc. of $4,300,000 in notes payable by such Initial
Subsidiaries to their shareholders, in proportion to their ownership interests;
and (c) the exchange by all of the shareholders of all of their shares of common
stock in the Initial Subsidiaries for shares of common stock in OutSource
International, Inc., except that the founders in the S Group and M Group
received cash and notes for a portion of their common stock, aggregating 5.8% of
the total ownership interests in the Initial Subsidiaries (the equivalent of
336,430 shares of common stock of OutSource International, Inc.). The following
is a summary of the cash paid, notes issued (which were paid in full at the time
of the Offering), cash paid and immediately returned to the Company by the
Shareholders for repayment of OutSource Franchising, Inc. notes receivable,
contribution to additional paid-in capital, and common stock of OutSource
International, Inc. issued in the Reorganization:
<TABLE>
<CAPTION>
CASH PAID NOTES (PAID TOTAL ISSUANCE OF
(RETURNED TO REPAY AT TIME OF SHAREHOLDER COMMON STOCK
CASH NOTES RECEIVABLE) THE OFFERING) DISTRIBUTIONS SHARES PERCENTAGE
------------ ----------------- ------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
S Group............ $ 5,840,800 $2,502,000 $1,420,000 $ 9,762,800 3,131,667 57.5%
M Group............ 3,849,900 1,251,000 -- 5,100,900 1,552,315 28.5%
CEO................ 225,760 417,000 325,000 967,760 591,249 10.8%
EVP................ 140,140 130,000 -- 270,140 173,557 3.2%
----------- -------------- ------------ ------------- ---------- -------
$10,056,600 $4,300,000 $1,745,000 16,101,600 5,448,788 100.0%
=========== ========== ========== ========= ======
Less contribution to additional paid-in capital of notes
payable to Synadyne II, Inc. and Synadyne III, Inc................ (4,300,000)
------------
Net charge to shareholders' equity................................ $ 11,801,600
============
</TABLE>
All shareholders of the Initial Subsidiaries owned virtually the same
proportion of the common stock of OutSource International, Inc. after the
Reorganization as they owned of the Initial Subsidiaries prior to the
Reorganization. Additionally, all of the Subsidiaries were historically an
integrated operation under the direction of a single executive management group
and with a centralized administrative and business support center, which
continued after the Reorganization. Accordingly, the Reorganization was
accounted for as a combination of companies at historical cost. The effects of
the Reorganization on common stock have been reflected retroactively in the
financial statements of prior years.
Subsequent to the Reorganization, all compensation for the three
founders (principal shareholders) was discontinued, and the Initial Subsidiaries
terminated their elections to be treated as S corporations. The distribution by
the Initial Subsidiaries to all shareholders at the time of the Reorganization
is subject to adjustment based upon the final determination of taxable income
through February 21, 1997.
A summary of the Company's significant accounting policies follows:
BASIS OF PRESENTATION: The accompanying consolidated financial
statements present the financial position, results of operations and cash flows
of OutSource International, Inc. and the Subsidiaries, (consisting of the
Initial Subsidiaries plus three subsidiaries incorporated subsequent to the
Reorganization- Staff All, Inc., Mass Staff, Inc., and OutSource of Nevada,
Inc.) as well as SMSB Associates ("SMSB"), a Florida limited partnership
comprised of the Company's three principal shareholders and the CEO. SMSB, a
special purpose entity which leases certain properties to the Company, is
consolidated in these financial statements from January 1, 1995 to September 30,
1997, based on the criteria for a non-substantive lessor in Emerging Issues Task
Force No. 90-15, due to the control exercised by the Company over the assets of
SMSB during that period. Effective October 1, 1997 the Company discontinued the
consolidation of SMSB's assets and liabilities in these financial statements,
based on the Company's determination that SMSB was no longer a non-substantive
lessor as defined by EITF No. 90-15. All significant intercompany balances and
transactions are eliminated in consolidation.
34
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PERVASIVENESS OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION: All flexible staffing and PEO revenues are based
upon the gross payroll of the Company's flexible staffing and PEO employees plus
a corresponding fee. The Company's fee structure is based upon the estimated
costs of employment related taxes, health benefits, workers' compensation
benefits, insurance and other services offered by the Company plus a negotiated
mark-up. All flexible staffing and PEO customers are invoiced on a weekly to
monthly billing cycle. The 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.
Initial franchise fees are generally recognized when substantially all
services or conditions relating to the franchise sale have been performed or
satisfied by the Company. Costs relating to such fees are charged to selling,
general and administrative expenses when incurred. When the fees are collected
over an extended period of time and no reasonable basis for estimating
collections exists, the fees are recognized as income when received through the
use of the installment method. Royalties, which are based on gross sales and
gross profit of the related franchisees, are recognized as revenue when earned
and become receivable from the franchisees.
FUNDING ADVANCES: The Company makes advances on behalf of certain of
its franchises to fund the payroll and other related costs for industrial
personnel provided by those franchises to their clients. The advances are
secured by the franchises' accounts receivable from these clients. The Company
invoices the clients and receives payment directly from the clients as part of
this arrangement. These payments are applied to reimburse outstanding advances,
and to pay franchise royalties and the fee charged for these funding and billing
services, with any remaining amounts remitted to the franchise. The funding fee
is charged and recognized as revenue by the Company as the weekly invoices are
produced.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost and
depreciated or amortized on accelerated and straight-line bases over the
estimated useful service lives of the respective assets. Leasehold improvements
are stated at cost and amortized over the shorter of the term of the lease or
estimated useful life of the improvement. Amortization of property under capital
leases, leasehold improvements and computer software is included in depreciation
expense. The estimated useful lives of buildings range from 15 to 32 years,
while the estimated useful lives of other items range from 5 to 7 years.
LONG-LIVED ASSETS: In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", impairments, measured using fair
value, are recognized whenever events or changes in circumstances indicate that
the carrying amount of long-lived assets may not be recoverable and the
projected future undiscounted cash flows attributed to the assets are less than
their carrying values.
35
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS: Identifiable intangible assets include customer
lists, employee lists and covenants not to compete acquired in connection with
acquisitions. Such assets are recorded at fair value on the date of acquisition
as determined by management with assistance by an independent valuation
consultant and are being amortized over the estimated periods to be benefitted,
ranging from 1 to 15 years.
Goodwill relates to the excess of cost over the fair value of net
assets of the businesses acquired. Amortization is calculated on a straight-line
basis over periods ranging from 15 to 40 years. The overall business strategy of
the Company includes the acquisition and integration of independent and
franchise flexible staffing and PEO operations. The Company believes that this
strategy creates synergies, achieves operating efficiencies and allows the
Company to be more competitive in its pricing, all of which will provide
benefits for the foreseeable future.
Management assesses on an ongoing basis if there has been an impairment
in the carrying value of its intangible assets. If the undiscounted future cash
flows over the remaining amortization period of the respective intangible asset
indicates that the value assigned to the intangible asset may not be
recoverable, the carrying value of the respective intangible asset will be
reduced. The amount of any such impairment would be determined by comparing
anticipated discounted future cash flows from acquired businesses with the
carrying value of the related assets. In performing this analysis, management
considers such factors as current results, trends and future prospects, in
addition to other relevant factors.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value.
CASH, RECEIVABLES, FUNDING ADVANCES TO FRANCHISES, ACCOUNTS PAYABLE,
ACCRUED EXPENSES, EXCEPT WORKERS' COMPENSATION AND INSURANCE, OTHER CURRENT
LIABILITIES AND OTHER AMOUNTS DUE FROM AND TO RELATED PARTIES: The carrying
amounts approximate fair value because of the short maturity of those
instruments. Although the accrued workers' compensation and insurance liability
is anticipated to be paid over a number of years, due to the lack of a defined
payment schedule and the estimates inherent in establishing the recorded
liability amount, management believes that it is not practical to estimate the
fair value of this financial instrument.
NOTES RECEIVABLE, LINE OF CREDIT, REVOLVING CREDIT FACILITY AND
LONG-TERM DEBT: The carrying amounts approximate the fair value at December 31,
1996 and 1997, because the interest rates on these instruments approximate
interest rates currently available for similar borrowings.
INCOME TAXES: Effective February 21, 1997, the Initial Subsidiaries
terminated their elections to be treated as S corporations under applicable
provisions of the Internal Revenue Code. Prior to the date such election was
terminated, items of income, loss, credits, and deductions were not taxed within
the Company but were reported on the income tax returns of the Initial
Subsidiaries' shareholders. Accordingly, no provision for income taxes was
recorded.
Since the Reorganization on February 21, 1997, the Company provides for
income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes",
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for (a) the differences between financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income and (b)
net operating loss and tax credit carryforwards. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense equals the taxes payable or refundable for
the period plus or minus the change in the period of deferred tax assets and
liabilities.
36
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
WORKERS' COMPENSATION: Effective January 1, 1997 through December 31,
1997, the Company's workers' compensation insurance coverage provided for a
$250,000 deductible per accident or industrial illness with an aggregate maximum
dollar limit based on 2.2% of covered payroll. For claims related to periods
prior to 1997, there was no aggregate maximum dollar limit on the Company's
liability for deductible payments. From May 1, 1995 through December 31, 1996,
in exchange for a lower excess insurance premium rate, the Company accepted the
responsibility for certain losses exceeding the $250,000 policy deductible per
accident or industrial illness on a dollar-for-dollar basis, but only to the
extent such losses cumulatively exceed 85% of the excess insurance premiums
(excluding the profit and administration component) and subject to a maximum
additional premium (approximately $750,000 in 1995 and $1,200,000 in 1996). The
Company employs an independent third-party administrator to assist management in
establishing an appropriate accrual for the uninsured portion of workers'
compensation claims, including claims incurred but not reported, based on prior
experience and other relevant data. However, the Company is only required to pay
such claims as they actually arise, which may be over a period extending up to 5
years after the related incident occurred.
AMORTIZATION OF DEBT DISCOUNT AND ISSUANCE COSTS: The Company records
debt discount as a contra-liability and debt issuance costs as a non-current
asset. Both are amortized to interest expense using the interest method.
STOCK BASED COMPENSATION: The Company uses the accounting methods
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and provides the pro forma disclosures required by SFAS
No. 123, "Stock Based Compensation".
ADVERTISING: The Company expenses advertising and promotional
expenditures as incurred. Total advertising and promotional expenses were
approximately $1,807,000, $726,000 and $651,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
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 intends to first
implement SFAS No. 130 in its Consolidated Financial Statements as of and for
the three months ended March 31, 1998, and will provide any required disclosures
at that time.
37
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 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 that
implementation will have.
RECLASSIFICATIONS: Certain reclassifications have been made in amounts for prior
periods to conform to current period presentation.
38
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS
Goodwill and other intangible assets consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------
WEIGHTED AVERAGE
1997 1996 AMORTIZATION PERIODS
------------- ----------- --------------------
<S> <C> <C> <C>
Goodwill............................. $ 26,669,872 $7,072,872 32.7 years
Customer lists....................... 4,672,178 658,015 5.5 years
Covenants not to compete............. 1,204,841 110,644 9.4 years
Employee lists....................... 196,479 77,390 .2 year
------------- -----------
Goodwill and other intangible
assets............................ 32,743,370 7,918,921 27.7 years
Less accumulated amortization........ 2,316,639 464,115
------------- -----------
Goodwill and other intangible
assets, net....................... $ 30,426,731 $7,454,806
============ ==========
</TABLE>
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 1997 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 the consolidated financial
statements.
Effective January 1, 1995, the Company purchased the franchise rights
for two flexible staffing locations from All Temps, Inc. and converted these
locations to Company-owned locations. The terms of the purchase, as set forth in
an asset purchase agreement, required the Company to pay a purchase price based
on a percentage of gross profits for five years. At the time of the transaction,
three of the four shareholders of the franchise were shareholders with a
cumulative controlling interest in the Company. Therefore, the acquisition was
accounted for as a business combination of entities under common control and the
purchase of the remaining minority interest in the franchise. No material
tangible assets were acquired. Effective October 1, 1996 the purchase price was
renegotiated and the remaining portion of the five year earnout due to the
shareholders of the Company was settled in exchange for a promissory note of
$799,000 bearing interest at 10.0% per annum, due on demand. This note,
including accrued interest, was paid on February 24, 1997. This purchase price
renegotiation did not affect the payment of the remaining portion of the five
year earnout due to the minority interest, except that the Company agreed that
the remaining payments to the minority interest would be no less than $40,000
per year from 1997 through 1999 and no less than $150,000 on a cumulative basis
for that three year period. In December 1997, the Company paid $141,000 to the
minority interest, which is expected to be the final amount due under the
renegotiated terms although the Company is still subject to making further
payments based on gross profits through 1999. During 1995 and 1996, $250,907 and
$1,128,136, respectively, of the purchase price was accrued, with $219,543 and
$967,151 payable to shareholders of the Company in 1995 and 1996, respectively,
recorded as a distribution and the remainder as goodwill.
Effective June 4, 1995, the Company purchased the franchise rights for
one flexible staffing location from WAD, Inc. and converted this location to a
Company-owned location. The terms of the purchase, as set forth in an asset
purchase agreement, require the Company to pay a purchase price based on a
percentage of gross profits for five years. Both shareholders of the franchise
are shareholders and officers of the Company but do not hold a controlling
interest. Effective October 1, 1996 the purchase price was renegotiated and the
remaining portion of the five year earnout was settled in exchange for a
promissory note of $731,982 bearing interest at 10.0% per annum, with the
portion in excess of $400,000 due on demand. The demand portion of $331,982 plus
accrued interest was paid on February 24, 1997 and the remaining balance of
$400,000, initially payable in equal quarterly installments of principal and
interest over two years, was repaid on October 31, 1997. During 1995 and 1996,
$79,693 and $887,383, respectively, of the purchase price was accrued.
39
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS (CONTINUED)
During 1995, the Company purchased the franchise rights for two
flexible staffing locations from Komco Inc. and Demark, Inc. and converted them
to Company-owned locations. The terms of the purchases, as set forth in asset
purchase agreements, required the Company to pay $178,292 plus a percentage of
revenues for a period ranging up to two years. The total purchase price recorded
as of December 31, 1997 was $284,481.
Effective April 1, 1996, the Company purchased the franchise rights for
eight flexible staffing locations from Payray, Inc. and Tri-Temps, Inc. and
converted these locations to Company-owned locations. Some shareholders of the
franchises are shareholders of the Company but do not hold a controlling
interest in the Company. The terms of the purchase, as set forth in an asset
purchase agreement, required the Company to pay $4,922,745 with $750,000 due at
closing and a note for the remainder to be paid in 60 monthly installments plus
10.0% per annum interest through July 1, 1996 and 14.0% per annum interest
thereafter. On February 21, 1997, these payment terms were renegotiated. The
renegotiated terms called for a payment of $1,250,000 against the outstanding
balance and a note for the remainder of $2,573,703 to be paid in 48 equal
monthly installments including interest of 14.0% per annum, commencing April 1,
1997, but fully payable at the time of an initial public offering. The remaining
outstanding balance was accordingly paid at the time of the Offering.
Effective May 4, 1996, the Company purchased certain assets and the
business of CST Services Inc., a flexible staffing operation not previously
affiliated with the Company. The terms of the purchase, as set forth in an asset
purchase agreement, required the Company to pay up to $1,780,000 with $1,200,000
due at closing, a $200,000 note to be paid in two annual installments plus
interest at 7.0% per annum and annual contingent payments, not to exceed an
aggregate of $380,000, based upon income before taxes of the acquired operation
for the two years following the acquisition. The total purchase price recorded
was $1,400,000 and $1,726,490 as of December 31, 1996 and December 31, 1997,
respectively.
During 1996, the Company purchased the franchise rights for four
flexible staffing locations from Temp Aid, Inc., LL Corps, Inc. and Kesi, Inc.
and converted them to Company-owned locations. The terms of the purchases, as
set forth in asset purchase agreements, required the Company to pay $250,912
plus a percentage of revenues for a period ranging up to two years. The total
purchase price recorded as of December 31, 1997 was $291,190.
Primarily during the first three months of 1997, the Company purchased
the franchise rights for 13 flexible staffing locations from LaPorte, Inc.,
Superior Temporaries, Inc. and Labor World of Minneapolis, Inc., and converted
these locations to Company-owned locations. The total purchase price was
$11,125,000 (of which $9,000,000 related to Superior Temporaries, Inc.), with
$10,475,000 paid at closing and notes issued for $650,000.
During the first three months of 1997, the Company purchased flexible
staffing operations with 17 locations from Apex, Inc., Standby Personnel of
Colorado Springs, Inc., Staff Net, Inc., Staff Management, Inc. and Stand-By,
Inc. (none previously affiliated with the Company). The total purchase price was
$14,070,000, with $10,910,000 paid at closing and notes issued for $3,160,000.
Certain sellers received options to purchase a total of 8,126 shares of the
Company's common stock at their fair market value at the date of issuance. Such
options were issued March 12, 1997 and were still outstanding at December 31,
1997 - See Note 10. The contractual purchase price of Standby Personnel of
Colorado Springs, Inc. was $3,100,000, which may increase or decrease by an
amount not to exceed $500,000, based on the gross profit from the acquired
locations for the two years following the acquisition. The contractual purchase
price of Stand-By, Inc. was $5,500,000, which may increase by an amount not to
exceed $60,000 or decrease by an amount not to exceed $500,000, based on the
gross profit from the acquired locations for the two years following the
acquisition.
The above acquisitions, except All Temps, Inc., 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 revenues, gross margin or
income before income taxes 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.
40
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS (CONTINUED)
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.
YEARS ENDED DECEMBER 31,
1997 1996
------------ ------------
UNAUDITED PRO FORMA:
Net revenues.................................. $458,828,299 $346,752,517
Operating income.............................. 10,569,920 8,182,631
Income before provision for income
taxes and extraordinary item................. 209,221 1,184,014
Income before extraordinary item.............. 278,304 1,184,014
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 13, except that the number of diluted shares attributable to outstanding
options and warrants has been increased by 85,892 shares for the year ended
December 31, 1997, and 625,248 shares for the year ended December 31, 1996, in
order to reflect an adjustment in the calculation of proceeds from the exercise
of warrants associated with the portion of the Senior Notes utilized to finance
the above acquisitions:
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
---------- ----------
UNAUDITED PRO FORMA, AS ADJUSTED:
Income before provision for income taxes
and extraordinary item...................... $209,221 $1,184,014
Pro forma provision for income taxes.............. 209,000 530,930
---------- ----------
Pro forma income before extraordinary item........$ 221 $ 653,084
========== =========
Weighted average common shares outstanding:
Basic.......................................... 6,055,439 5,785,218
========== =========
Diluted........................................ 7,406,254 6,468,866
========== =========
Earnings per share, before extraordinary item:
Basic..........................................$ .00 $ .11
========== ==========
Diluted........................................$ .00 $ .10
========== ==========
41
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS (CONTINUED)
During the first quarter of 1998 through March 2, 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 $5,425,000, with $3,300,000 paid at closing and notes issued
for $2,125,000, payable over two years plus interest at 6.0% per annum. 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 through February 16, the Company
purchased flexible staffing operations with 18 locations from Tempus, Inc. and
Grafton, Inc. (none previously affiliated with the Company). The total purchase
price was $4,835,000, with $3,335,000 paid at closing plus a $1,500,000 note
payable over two years plus interest at 6.5% per annum. The amount due under the
note may decrease by up to $300,000, based on the 1997 gross profit of the
acquired locations. 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 through March 18, 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 $10,659,500, with
$6,909,500 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. 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.
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 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 6
regarding options for certain franchise territories granted in connection with
this transaction.
42
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
AS OF DECEMBER 31,
-------------------------
1997 1996
----------- -----------
Buildings and land ........................... $ 6,209,537 $ 6,459,439
Furniture, fixtures and equipment ............ 6,935,642 4,108,625
Computer software ............................ 4,061,103 2,321,094
Leasehold improvements ....................... 2,034,319 1,031,106
Vehicles ..................................... 499,769 132,703
Assets held for disposal ..................... -- 2,090,000
----------- -----------
Property and equipment ....................... 19,740,370 16,142,967
Less accumulated depreciation and amortization 4,787,252 3,015,860
----------- -----------
Property and equipment, net .................. $14,953,118 $13,127,107
=========== ===========
Depreciation and amortization expense for property and equipment for
the years ended December 31, 1997, 1996 and 1995 amounted to $2,326,706,
$1,168,616 and $725,016, respectively.
Assets held for disposal are a building and land owned by SMSB and
formerly utilized by the Company as its national office and support center. See
Notes 1 and 6.
43
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. INCOME TAXES
The net deferred tax asset as of December 31, 1997 includes deferred
tax assets and liabilities attributable to the following items, including
amounts recorded as a result of the February 21, 1997 termination of the
elections by the Initial Subsidiaries to be treated as S corporations:
<TABLE>
<CAPTION>
TOTAL CURRENT NON-CURRENT
----------- ----------- -----------
<S> <C> <C> <C>
Workers' compensation accrual ............................ $ 2,692,586 $ 2,692,586 $ --
Debt discount related to warrants ........................ 1,933,622 -- 1,933,622
Allowance for doubtful accounts .......................... 617,044 617,044 --
Change from cash to accrual tax basis .................... (1,148,948) (362,826) (786,122)
Net operating loss carryforward .......................... 1,330,393 1,330,393 --
Employment tax credit carryforward ....................... 834,097 834,097 --
Other .................................................... 457,388 -- 457,388
----------- ----------- -----------
Net deferred tax asset, included in prepaid expenses and
other current assets and in other assets, respectively $ 6,716,182 $ 5,111,294 $ 1,604,888
=========== =========== ===========
</TABLE>
Management has determined, based on the Company's history of prior
taxable earnings and its expectations for the future, that taxable income will
more likely than not be sufficient to fully realize deferred tax assets and
accordingly, has not reduced deferred tax assets by a valuation allowance. The
net operating loss carryforward of $3,535,459, as well as the employment tax
credit carryforward of $834, 097, expire in 2012.
The components of the income tax benefit for the year ended December
31, 1997 are as follows:
Federal - Current............................ $ 2,054,000
State - Current.............................. 494,383
Federal - Deferred........................... (2,234,897)
State - Deferred............................. (382,569)
------------
Income tax benefit...........................$ (69,083)
=============
The Company also recorded a $6,647,099 income tax benefit as a direct
reduction of the extraordinary loss arising from early debt retirement (see Note
5). This benefit eliminated the liability arising from the current portion of
the $69,083 tax benefit shown above.
The Company's effective tax rate for the year ended December 31, 1997
differed from the statutory federal rate
of 35%, as follows:
<TABLE>
<CAPTION>
AMOUNT RATE
-------- ------
<S> <C> <C>
Statutory rate applied to income before income taxes
and extraordinary item................................... $248,947 35.0%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit................ 73,797 10.4%
Effect of termination of S corporation status............. (423,897) (59.6%)
Loss prior to termination of S corporation status......... 58,652 8.2%
Put warrants valuation adjustment......................... 445,320 62.6%
Employment tax credits.................................... (550,504) (77.4%)
Nondeductible expenses.................................... 56,546 8.0%
Other..................................................... 22,056 3.1%
--------- ------
Total..................................................... $(69,083) (9.7%)
======== ======
</TABLE>
The tax benefit of $6,647,099 related to the 1997 extraordinary loss
was 33.2% of that loss, which differed from the statutory federal rate of 35%
due to a portion of the debt discount that was included in the extraordinary
loss being non-deductible for tax purposes.
44
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DEBT
BANK FINANCING: On February 21, 1997, following the Reorganization, the
Company entered into a revolving credit facility ("Revolving Credit Facility"),
which was amended on November 24, 1997, to allow for a remaining term of
approximately five years and to increase the maximum amount available for
borrowing to $85,000,000, which includes a letter of credit facility of
$15,000,000. The interest rate on the Revolving Credit Facility is based on: 1)
the bank's prime rate (8.5% at December 31, 1997) plus a margin of up to 0.25%
according to the Company's consolidated debt to earnings ratio (as defined by
the terms of the Revolving Credit Facility) or 2) the Eurodollar base rate
(5.9688% at December 31, 1997) plus a margin from 1.25% to 2.25% according to
the Company's consolidated debt to earnings ratio. The effective interest rate
at December 31, 1997 was 8.3%. The letter of credit fee at December 31, 1997 was
1.50% per annum, but may reduce to as low as 0.75% per annum according to the
Company's consolidated debt to earnings ratio. Revolving Credit Facility
borrowings are collateralized by all tangible and intangible assets of the
Company and are governed by certain covenants, which include an interest
coverage ratio, a cash flow coverage ratio, an indebtedness to EBITDA (earnings
before interest, taxes, depreciation and amortization) ratio and the current
ratio. The terms of the Revolving Credit Facility also require prior bank
approval of most acquisitions and borrowings from third parties. In February
1998 the Company entered into an interest rate collar agreement, as required by
the terms of the Revolving Credit Facility (see Note 6).
The Company secures its liability for the deductible portion of its
workers' compensation coverage by the issuance of Letters of Credit to its
insurance carriers, which amounted to $6,676,382 at December 31, 1997.
Prior to February 21, 1997, the Company had a line of credit facility
("Line of Credit") dated July 20, 1995 with two commercial lending institutions
which was amended on November 21, 1995, May 8, 1996 and June 28, 1996. The Line
of Credit, which included a letter of credit facility ("Letter of Credit"), was
for a term of three years with an expiration date of June 30, 1998. The maximum
amount available for Line of Credit borrowings and Letter of Credit issuances
was $14,900,000. These Line of Credit borrowings and Letter of Credit issuances
were permitted based upon certain formulas outlined in the Line of Credit
Agreement and were collateralized by the accounts receivable of the Company and
the personal guarantees of the Company's principal shareholders. At December 31,
1996 the Line of Credit borrowing interest rate was at prime plus 2% (10.25% per
annum) and the Letter of Credit fee was 1% per annum.
Prior to July 20, 1995, the Company had a line of credit agreement with
terms requiring the shareholders' personal guarantees, allowing for borrowings
up to $5,300,000 limited by eligible receivables and collateralized by
substantially all of the assets of the Subsidiaries. These borrowings incurred
interest at prime plus 2% per annum.
SENIOR NOTES: On February 21, 1997, following the Reorganization, the
Company entered into senior subordinated note agreements ("Senior Notes") with
two investors (the "Senior Note Holders") for borrowings totaling $25,000,000,
with payments of $10,000,000 in March 2001 and $15,000,000 in February 2002, and
quarterly interest payments at 11% per annum through February 1999 and 12.5%
thereafter. The Senior Notes were repaid in full from the proceeds of the
Offering. The Company also issued to the Senior Note Holders warrants to
purchase 786,517 shares of common stock at $.015 per share to be exercised at
the discretion of the Senior Note Holders and expiring five years from issuance
(the "A warrants"). These warrants had not been exercised as of December 31,
1997.
In connection with the Senior Notes, warrants to purchase 573,787
shares of the Company's common stock at $.015 per share were issued by the
Company into escrow. In April 1997, warrants to purchase 180,891 shares (the "B
warrants") were released from escrow to the Company's shareholders as of
February 21, 1997, as a result of the Company's consummation of the last of
certain acquisitions in accordance with conditions of the agreements related to
the Senior Notes. These warrants had not been exercised as of December 31, 1997.
The remaining warrants to purchase 392,896 shares (the "C warrants") will be
released from escrow on or before February 1999. The C warrants will be released
to the same Company shareholders that received the B warrants, if by that date
the Company has fully repaid the Senior Notes and has had a qualified public
offering or qualified sale that results in a specified market valuation of the A
warrants. In the event that all conditions have been met at that time except
that the market valuation of the A warrants meets a specified lower threshold,
50% of the C warrants will be released to the Senior Note Holders and 50% will
be released to the now existing Company shareholders. If the Senior Notes have
not been repaid or such lower market valuation threshold for the A warrants is
not achieved by February 1999, all of the C warrants will be released to the
Senior Note Holders. The warrants in escrow are exercisable any time after being
released from escrow and expire in February 2002.
45
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DEBT (CONTINUED)
The A warrants issued to the Senior Note Holders, as well as the B and
C warrants placed in escrow, all contained a put right, whereby the Company
would be required at the holder's option to purchase the warrants for the
"publicly traded" fair value of those warrants should the Company not consummate
a qualified initial public offering, as defined in the warrant agreement, by
February 2001. This put right was terminated as a result of the Company's
October 1997 Offering.
The proceeds of the Senior Notes were recorded as a liability. The fair
value of the A warrants issued to the Investors, plus the fair value of the B
and C warrants, was recorded as debt discount, which is a contra-account to the
Senior Notes liability and is periodically amortized using the interest method,
resulting in a level effective rate of 55.7% per annum applied to the sum of the
face amount of the debt less the unamortized discount. Interest expense
(including discount amortization of $745,636) of $2,655,358 was recorded related
to these Senior Notes for the year ended December 31, 1997.
The B and C warrants were designed to provide the Senior Note Holders
with additional consideration for their $25 million investment if certain
performance criteria (in the case of the B warrants) are not met or if certain
triggering events (in the case of the C warrants) do not occur. Therefore, the
value of the B and C warrants is, in substance, embedded within the $25 million
subordinated debt proceeds and, as such, was accounted for in the same manner as
the A warrants. Accordingly, the amount allocated from the $25 million
subordinated debt proceeds to the detachable stock purchase warrants includes
the fair value of the B and C warrants. The original debt discount, based on the
fair value of the A warrants issued to the Senior Note Holders plus the fair
value of B and C warrants, was $18,541,996. The fair value of the warrants was
determined by an independent appraiser as of the date of their issuance.
Due to the put option included in all of the warrants, their fair value
of $18,541,996 at the date of issuance was classified as a liability which was
adjusted to fair value at each reporting date until the put option terminated.
This liability was adjusted to a fair value of $20,383,621 as of October 24,
1997, with the cumulative adjustment of $1,841,625 included in non-operating
expense for the year ended December 31, 1997. The fair value of the warrants
recorded as of October 24, 1997 was equal to the price of the Company's shares
sold to the public at that time (see Note 10), less the warrant exercise price.
As a result of the termination of the put right at the time of the Company's
October 1997 Offering, the final put warrants liability was reclassified from
debt to additional paid-in capital at that time.
The Company incurred $2,385,016 of costs related to the issuance of the
Senior Notes, which were recorded in other non-current assets and amortized to
interest expense using the interest method. Amortization of $149,861 was
recorded for the year ended December 31, 1997.
As a result of the early repayment of the Senior Notes in October 1997,
the Company recorded an extraordinary loss of $13,384,416 (net of a $6,647,099
income tax benefit). This loss consists of the unamortized debt discount and the
unamortized debt issuance costs related to the Senior Notes.
46
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DEBT (CONTINUED)
LONG-TERM DEBT:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------
1997 1996
----------- ------------
<S> <C> <C>
Obligations under capital leases. See
discussion below.............................................. $2,818,210 $ 7,801,224
Acquisition notes payable, subordinated to the
Revolving Credit Facility and payable over two years at imputed interest
rates ranging from 7.0% to
12.0% per annum. See Note 2................................... 2,876,696 200,689
Mortgage notes payable in monthly installments and
collateralized by buildings and land. The interest
rates range from 8.5% to prime plus 2.0% per
annum (10.5% at December 31, 1997)............................ 4,332,760 2,472,063
Notes payable in monthly installments and
collateralized by property and equipment. The
interest rates range from 5.9% to 13.0% per annum............. 117,375 126,147
Term and equipment notes payable in quarterly
installments, with an interest rate of
prime plus 2.0%............................................... -- 2,266,667
----------- ------------
Long-term debt................................................. 10,145,041 12,866,790
Less current maturities of long-term debt...................... 2,408,060 1,992,962
----------- ------------
Long-term debt, less current maturities........................ $7,736,981 $10,873,828
========== ===========
</TABLE>
The aggregate annual principal payments on long-term debt (including
obligations under capital leases) are as follows as of December 31, 1997:
<TABLE>
<CAPTION>
YEAR
----
<S> <C> <C>
1998...................................................... $ 2,408,060
1999...................................................... 2,103,411
2000...................................................... 1,020,015
2001...................................................... 803,050
2002...................................................... 513,651
Thereafter................................................ 3,296,854
-----------
$10,145,041
===========
</TABLE>
CAPITAL LEASES: Since December 1996, the Company has occupied an office
building for its national office and support center under a 15 year capital
lease agreement with an unrelated party, having annual lease payments of
approximately $610,000. The Company had an option to buy the building during the
first two years of the lease term and in December 1997 it exercised that option.
Prior to that purchase, the capitalized costs relating to this lease were equal
to the purchase option price.
As of December 31, 1997, furniture, fixtures, equipment and computer
software held under capital leases and included in property and equipment were
$2,789,943, net of accumulated depreciation of approximately $398,344. As of
December 31, 1996, buildings and other assets held under capital leases and
included in property and equipment were $7,818,393, net of accumulated
depreciation of approximately $57,000.
47
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DEBT (CONTINUED)
The following is a summary of future minimum lease payments, and their
present value, required under all capital leases for the years ended after
December 31, 1997:
YEAR
----
1998................................................ $ 830,715
1999................................................ 815,052
2000................................................ 811,117
2001................................................ 715,461
2002................................................ 120,397
Thereafter.......................................... --
-----------
Total future minimum lease payments................. 3,292,742
Less amount representing interest................... (474,532)
-----------
Present value of net minimum lease payments......... $2,818,210
==========
NOTE 6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS: The Company conducts its operations in various
leased facilities under leases that are classified as operating leases for
financial reporting purposes. The leases provide for the Company to pay real
estate taxes, common area maintenance and certain other expenses. Lease terms,
excluding renewal option periods exercisable by the Company at escalated rents,
expire between 1998 and 2002. Also, certain equipment used in the Company's
operations are leased under operating leases. The following is a summary of
fixed minimum lease commitments required under all operating leases for the
years ended after December 31, 1997:
YEAR RENTAL AMOUNT
---- -------------
1998................................................... $1,963,503
1999................................................... 1,436,327
2000................................................... 1,132,228
2001................................................... 1,089,730
2002................................................... 232,485
----------
Total.................................................. $5,854,273
==========
Rent expense, including equipment rental, was $2,198,014, $878,300 and
$373,090 for the years ended December 31, 1997, 1996 and 1995, respectively.
FRANCHISE AGREEMENTS: The Company has granted 55, 75 and 67 Tandem
franchises (some covering multiple locations) as of December 31, 1997, 1996 and
1995, respectively. In consideration for royalties paid by the franchise
holders, the agreements provide, among other things, that the Company will
provide the franchise holder with the following for terms ranging from 10 to 15
years with varying renewal options: exclusive geographical areas of operations,
continuing advisory and support services and access to the Company's
confidential operating manuals.
Subsequent to December 31, 1997 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.
48
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
The following tables set forth various revenues from industrial
staffing franchises as well as a schedule showing industrial staffing franchise
offices opened and purchased by the Company, as well as the number of Company
owned industrial staffing locations. The Company's franchising activities in its
other divisions is not significant.
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
PEO services....................................... $34,641,670 $35,078,655 $ 7,507,774
Royalties.......................................... 6,996,670 5,670,458 4,137,150
Payroll funding services........................... 713,690 1,288,205 718,807
Initial franchise fees............................. 15,000 84,000 446,000
Other.............................................. 15,330 41,000 70,000
----------- ------------ ------------
Total revenues.................................. $42,382,360 $42,162,318 $12,879,731
=========== =========== ===========
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
Number of franchise locations, beginning................. 95 83 57
New franchises sold...................................... 6 24 31
Franchises closed/Buyouts................................ (23) -- --
Franchises converted to
Company - owned locations.............................. (13) (12) (5)
--- --- --
Number of franchise locations, ending.................... 65 95 83
Number of Company owned locations........................ 87 46 21
-- -- --
Total locations........................................ 152 141 104
=== === ===
</TABLE>
PEO services revenues are based on the payroll and other related costs
for industrial personnel provided by the franchises to their clients, under a
relationship whereby the Company is the employer of those industrial personnel.
The Company's gross profit margin on these services is approximately 1.5% of the
related revenues. See Note 1 for a discussion of initial franchise fees,
royalties, and payroll funding services (funding advances). The Company's gross
profit margin on these services is 100% of the related revenues.
Buyouts are early terminations of franchise agreements allowed by the
Company in order to allow the Company to develop the related territories. At the
time of the buyout, the Company receives an initial payment from the former
franchisee. 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. The initial buyout payment, as
well as subsequent payments from the former franchisees, are included in total
royalties shown above.
GUARANTEES: The Company believes that it has a contingent liability as
an actual or implied guarantor of mortgages having an outstanding principal
balance of approximately $1.7 million at December 31, 1997. These mortgages are
secured by a building and land previously leased by the Company from SMSB 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.
LITIGATION: The Company is involved in litigation with regard to one of
the service marks used in its operations. Although this matter is in 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.
49
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
INTEREST RATE COLLAR AGREEMENT: In February 1998, the Company entered
into an interest rate collar agreement 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.
EMPLOYMENT AGREEMENTS: During 1997, the Company entered into employment
agreements with the CEO and six other officers. Under the terms of those
agreements, in the event that the Company terminates any of those executives
without cause or the executive resigns for good reason, the terminated executive
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 executives is terminated within two years (three years for the CEO)
after the occurrence of a "change of control", as defined.
NOTE 7. OTHER CHARGES
In 1996, the Company incurred $1,447,555 of expenses, primarily
professional fees, related to (a) a Form S-1 Registration Statement filed by the
Company with the Securities and Exchange Commission that the Company withdrew
and (b) subsequent due diligence, which included an internal investigation of
allegations regarding payments by the Company to a management employee of a
customer of the Company. Based on the findings of the investigation, the Company
paid restitution to the customer, is continuing to transact business with the
customer and believes that further expenses or liabilities, if any, related to
this matter will not be material to its financial position or results of
operations. These expenses have been separately disclosed as other charges in
the consolidated statement of income due to their unusual nature.
NOTE 8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
For the years ended December 31, 1997, 1996 and 1995, approximately
12%, 16% and 21%, respectively, of the Company's revenues were from PEO services
performed for individual insurance agent offices under a preferred provider
designation granted to the Company on a regional basis by the agents' common
corporate employer. The Company had received this designation in 31, 31 and 22
states as of December 31, 1997, 1996 and 1995, respectively. The following is a
summary of net revenues, cost of revenues and gross profits related to all PEO
services, including the above:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenues.......................... $225,836,000 $172,069,000 $85,557,000
Cost of revenues...................... 217,810,000 165,702,000 82,220,000
Gross profit.......................... 8,026,000 6,367,000 3,337,000
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, approximately
19%, 27% and 39%, respectively, of the Company's revenues were from the
provision of services to customers in the Chicago, Illinois area. For each of
the years ended December 31, 1997, 1996 and 1995, approximately 29% of the
Company's revenues were from the provision of services to customers in the South
Florida area.
50
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK (CONTINUED)
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash, trade accounts receivable and funding
advances to franchises. The Company places its cash with what it believes to be
high credit quality institutions. At times cash deposits may be in excess of the
FDIC insurance limit. The Company grants credit to its customers generally
without collateral and regularly assesses their financial strength. Funding
advances to franchises are collateralized by the franchises' accounts receivable
from their clients. The Company believes that credit risk related to its trade
accounts receivable and funding advances is limited due to diversification of
the accounts based on geography and industry as well as the lack of material
concentration of balances due from any one customer.
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company had a 401(k) single-employer retirement plan and two 413(c)
multi-employer retirement plan covering all employees except for (a) employees
under the age of 21 for all plans, (b) employees with less than one year of
service for all plans, (c) certain temporary employees for the 413(c) plan and
(d) all highly compensated employees as defined by the Internal Revenue Code for
the 401(k) plan and certain highly compensated employees for the 413(c) plans.
One of the 413(c) plans was established for use by not-for-profit
employers only, effective January 1, 1996.
On February 28, 1997, the 401(k) plan and the 413 (c) plan established
for use by not-for-profit employers were made inactive by the Company. All
participating employees were enrolled in the currently active 413(c) plan for
future contributions and all previously contributed net assets remained in the
inactive plans for eventual distribution to the employees upon retirement or
other qualifying event. .
Eligible employees who participate elect to contribute to the plan an
amount up to 15% of their salary. Each year, the Company's Board of Directors
determines a matching percentage to contribute to each participant's account; if
a determination is not made, the matching percentage is 50% of the participant's
contributions, limited to the first 6% of each participant's salary contributed
by the participants. This matching policy may vary in the case of PEO employees,
although all matching amounts related to PEO employees are recovered by the
Company in its charges to the respective PEO customers. Matching contributions
by the Company for its employees, which includes PEO employees, were $485,326,
$309,222 and $39,070 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Pursuant to the terms of the previous 401(k) plan, highly compensated
employees were not eligible to participate. However, as a result of
administrative errors, some highly compensated employees have been 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.
NOTE 10. SHAREHOLDERS' EQUITY
VOTING TRUST: The Company's three principal shareholders resigned from
the Company's Board of Directors in November 1996. On February 21, 1997, in
connection with the issuance of the Senior Notes and the closing of the
Revolving Credit Facility, 4,683,982 shares of the common stock of the Company,
owned by those shareholders and their families, were placed in a voting trust,
with a term of ten years. On October 24, 1997, at the time of the Offering,
700,000 shares were released from the voting trust and sold to the public. Under
the terms of the voting trust and agreement among the Company, the Company's
shareholders at that time and the Senior Note Holders, the shares of common
stock in the voting trust, which represent approximately 47% of the common stock
of the Company as of December 31, 1997, will be voted in favor of the election
of a Board of Directors having seven members and comprised of three directors
nominated by the CEO of the Company, two directors nominated by the Senior Note
Holders, and two independent directors nominated by the vote of both directors
nominated by the Senior Note Holders and at least two of the directors nominated
by the CEO of the Company.
51
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
Should the warrants to purchase 392,896 shares, as discussed in Note 5, be
released from escrow to the Senior Note Holders, the number of directors would
be increased by two, with the additional directors nominated by the Senior Note
Holders. Further, the shares in the voting trust will be voted as recommended by
the Board of Directors for any merger, acquisition or sale of the Company, or
any changes to the Articles of Incorporation or Bylaws of the Company. On any
other matter requiring a vote by the shareholders, the shares in the voting
trust will be voted as directed by the current CEO of the Company.
REVERSE STOCK SPLIT: On October 21, 1997, the Company effectuated a
reverse stock split pursuant to which each then issued and outstanding share of
common stock was converted into approximately 0.65 shares of common stock. The
effect of this reverse split has been retroactively applied to all share, option
and warrant amounts, including the related option and warrant exercise prices.
INCENTIVE STOCK OPTION PLAN: During 1995, a Subsidiary of the Company
established an incentive stock option plan ("Stock Option Plan") for that
Subsidiary only, whereby incentive stock options could be granted to employees
to purchase a specified number of shares of common stock at a price not less
than fair market value on the date of the grant and for a term not to exceed 10
years. Once awarded, these options become vested and exercisable at 25% per
year, unless special terms are established at the time the option is granted.
On January 1, 1996, the Subsidiary granted options to purchase 815,860
shares of common stock at an exercise price of $4.77 per share, which an
independent appraiser determined to be the fair market value of that
Subsidiary's common stock on the date of grant. On February 18, 1997, the
Company adopted the Stock Option Plan and, pursuant to the terms of the Stock
Option Plan, adjusted the number of shares of common stock subject to then
outstanding options to 318,568, and the exercise price of such options to $10.38
per share, such conversion determined by an independent appraiser as of the date
of grant. On March 12, 1997, the Company granted options to purchase 221,473
shares of the Company's common stock, with the exercise price of $11.42 per
share based on the fair market value of the Company's common stock, as
determined by an independent appraiser as of the date of the grant. The March
12, 1997 grant included 8,126 options issued in connection with acquisitions
(See Note 2). All options granted subsequent to the Offering have an exercise
price equal to the public market price of the shares at the grant date.
The total number of shares of common stock reserved for issuance under
the stock option plan is 1,040,000. As of December 31, 1997, the status of all
outstanding option grants was as follows:
<TABLE>
<CAPTION>
GRANT DATE OPTIONS GRANTED OPTIONS OUTSTANDING EXERCISABLE OPTIONS EXERCISE PRICE
---------- --------------- ------------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
January 1, 1996............. 318,568 278,180 77,268 $10.38
March 12, 1997.............. 221,473 182,243 - 11.42
September 2, 1997........... 116,933 103,055 - 15.00
October 30, 1997............ 1,625 1,625 - 14.75
December 23, 1997........... 2,238 2,238 - 11.75
--------- -----
567,341 77,268
========= ======
</TABLE>
The weighted average remaining contractual life of the above options
was 9.0 years as of December 31, 1996 and 8.7 years as of December 31, 1997. The
weighted average exercise price was $11.57 per share as of December 31, 1997.
No options had been exercised as of December 31, 1997.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options. Under APB 25, because the
exercise price of the Company's employee stock option equals the fair value of
the underlying stock on the grant date, no compensation is recognized. However
SFAS 123, "Accounting for Stock-Based Compensation", requires presentation of
pro forma net income as if the Company had accounted for its employee stock
options granted subsequent to December 31, 1994, under the fair value method.
The Company has estimated the fair value of stock options granted to employees
on January 1, 1996, March 12, 1997 and September 2, 1997 to be $2.20, $2.59 and
$3.41 per option as of the respective grant dates, using the Black-Scholes
option pricing model with the following assumptions: risk free interest rate of
6.12% for the 1996 grant,
52
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
6.65% for the March 1997 grant and 6.65% for the September 1997 grant; no
volatility factor because the Company was not a public entity when the options
were granted; no expected dividends; and expected option life of 4 years.
Options granted subsequent to the Offering are not material for this
calculation. For purposes of pro forma disclosure, the estimated fair value of
the options is amortized to expense over the vesting period. Under the fair
value method, the Company's unaudited pro forma income (before extraordinary
item) would have been $240,928 ($0.04 basic earnings per share and $0.03 diluted
earnings per share) for the year ended December 31, 1997 and $992,765 for the
year ended December 31, 1996 ($0.17 basic and diluted earnings per share).
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. See Note 2 regarding 1998 option
grants in connection with acquisitions.
NOTE 11. RELATED PARTY TRANSACTIONS
REVENUES: Certain shareholders of the Company owned franchises from
which the Company received the following revenues in the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
PEO services....................... $349,326 $13,505,481 $4,466,241
Royalties.......................... 194,273 684,122 547,477
-------- ----------- ----------
Included in net revenues........... $543,599 $14,189,603 $5,013,718
======== =========== ==========
These franchises owed the Company $92,431, $150,763 and $251,912 at
December 31, 1997, 1996 and 1995 respectively, primarily related to the above
items.
RECEIVABLES: The Company had the following notes and advances
receivable due on demand from shareholders and affiliates. The notes had an
interest rate of 10% per annum and the advances were non-interest bearing.
</TABLE>
AS OF DECEMBER 31,
---------------------------
1997 1996
---- ----
Notes receivable from shareholders............ $ -- $4,300,000
Advances due from:
Shareholders................................ -- 477,417
Affiliates.................................. -- 110,187
--------- ----------
Notes receivable and other amounts
due from related parties................... $ -- $4,887,604
========== ==========
Total interest income from notes receivable and other amounts due from
related parties was $65,694, $29,233 and $-0- for the years ended December 31,
1997, 1996 and 1995, respectively.
53
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. RELATED PARTY TRANSACTIONS--(CONTINUED)
LONG-TERM DEBT:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1997 1996
---- ----
<S> <C> <C>
Acquisition notes payable, subordinated to the Revolving
Credit Facility and Senior Notes. The interest rates range
from 7% to 14% per annum. These notes were repaid from the
proceeds of the Senior Notes and the Offering, except for
$100,000 repaid in March 1998. See Note 2...................... $ 100,000 $5,573,966
Demand notes payable due to shareholders of the Company
with an interest rate of 10% per annum. These notes were
contributed to the additional paid-in capital of Synadyne II,
Inc. and Synadyne III, Inc. in connection with the
Reorganization. See Note 1...................................... -- 4,300,000
Notes payable in quarterly installments beginning in February
1999, subordinated to the Revolving Credit Facility and
Senior Notes. The interest rate was 21% per annum. These
Notes were repaid from the proceeds of the Offering............. -- 1,401,192
---------- -----------
Long-term debt to related parties................................ 100,000 11,275,158
Less current maturities of long-term debt to related parties..... 100,000 8,872,497
---------- -----------
Long-term debt to related parties, less current maturities....... $ -- $2,402,661
========== ==========
</TABLE>
Total interest expense for long-term debt to related parties was
$546,786, $667,265 and $136,326 for the years ended December 31, 1997, 1996 and
1995, respectively.
OTHER TRANSACTIONS:
During 1997, the Company purchased certain real estate from SMSB for
$840,000, such assets having a net book value as reflected on SMSB's financial
statements of $608,126 at the time of purchase. See Note 6 regarding the
Company's guarantee of mortgages on other SMSB owned real estate.
A law firm owned by a shareholder of the Company received legal fees
for services rendered to the Company during 1997, 1996, and 1995 in the
approximate amounts of $148,000, $97,000, and $80,000 respectively.
The Company employed one of its minority shareholders (a member of the
S group) in a non-management position at an annual salary of approximately
$40,000 during 1997, 1996 and 1995. This arrangement was discontinued in March
1998.
Since July 1997, the Company has leased on a month to month basis a
portion of a warehouse controlled by the Company's President and CEO, for
approximately $2,000 per month. As a result of the Company's 1996 acquisition of
franchise rights from Payray, Inc. and Tri-Temps, Inc. (see Note 2), the Company
subsequently leased from one of the sellers, a minority shareholder of the
Company, four flexible industrial staffing offices, for rental payments of
$49,200 and $32,800 in 1997 and 1996, respectively. The Company made an
additional payment of $71,300 to that seller shareholder in 1997 in order to
terminate the leases and satisfy the Company's remaining liability.
54
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
The consolidated statements of cash flows do not include the following
noncash investing and financing activities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Acquisitions:
Tangible and intangible assets
acquired.......................... $25,650,688 $8,497,841 $248,666
Liabilities assumed................. (186,319) (146,991) (4,885)
Debt issued......................... (3,516,413) (6,401,255) (123,407)
---------- ---------- ---------
Cash paid............................... $21,947,956 $1,949,595 $120,374
=========== ========== ========
Increase in property and equipment
and long-term debt, primarily
capitalized leases....... $ 812,596 $7,370,322 $ 55,926
============ ========== =========
Refinancing of capitalized leases
and mortgages on buildings
and land...................... $ 4,338,650 $ -- $ --
============ =========== =========
Reclassification of Put Warrants
Liability to additional paid-in
capital...................... $ 20,383,621 $ -- $ --
=========== =========== =========
Shareholders' contribution to
additional paid-in capital in
connection with the Reorganization $ 4,300,000 $ -- $ --
============ =========== =========
Discontinuance of consolidation of
SMSB-owned building and related
mortgage debt................ $ 1,665,015 $ -- $ --
============= =========== =========
Debt to shareholders for distributions $ -- $ 967,150 $ --
============= =========== =========
</TABLE>
NOTE 13. UNAUDITED 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 (6,055,439 for the
year ended December 31, 1997 and 5,785,218 for the years ended December 31, 1996
and 1995) 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
(46,211 for the year ended December 31, 1997 and 336,430 for the years ended
December 31, 1996 and 1995) of common stock represented by the shares of common
stock of the Initial Subsidiaries purchased from certain shareholders for cash
and notes in the Reorganization (see Note 1) and (c) for the year ended December
31, 1997, 560,440 shares representing the pro-rata portion of 3,000,000 shares
sold in the Company's October 1997 Offering.
The pro forma weighted average shares outstanding (7,320,362 for the
year ended December 31, 1997, 5,843,618 for the year ended December 31, 1996 and
5,785,218 for the year ended December 31, 1995) 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
(1,264,923 for the year ended December 31, 1997 and 58,618 for the year ended
December 31, 1996). However, options to purchase 104,680 shares of common stock
with a weighted average exercise price of $15.00 per share which were
outstanding at December 31, 1997 were not included in the calculation of pro
forma diluted earnings per share because their effect would be antidilutive.
55
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth the amounts of certain items in the
Company's consolidated statements of income for the four quarters of 1997 and
1996:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------
QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues......................... $85,374 $107,823 $121,976 $132,406
Gross profit......................... 11,135 16,224 19,052 19,895
Operating income..................... 575 2,223 3,311 4,078
Pro forma income (loss) before
extraordinary item................. 1,233 (2,700) 93 1,789
Earnings (loss) per share (basic) before
extraordinary item................. .22 (.50) .02 .23
Earnings (loss) per share (diluted)
before extraordinary item.......... .20 (.39) .01 .20
Pro forma net income (loss).......... 1,233 (2,700) 93 (11,595)
1996
--------------------------------------------------------------------
QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues......................... $51,169 $64,953 $77,680 $86,369
Gross profit......................... 6,690 9,062 10,982 11,335
Operating income..................... 483 1,474 2,345 1,181
Pro forma income (loss) before
extraordinary item................. 71 598 447 (13)
Earnings per share (basic) before
extraordinary item................. .01 .10 .08 .00
Earnings per share (diluted)
before extraordinary item.......... .01 .10 .08 .00
Pro forma net income (loss).......... 71 598 447 (13)
</TABLE>
See Note 5 for an explanation of the extraordinary loss of $13,384,416
recorded by the Company in the fourth quarter of 1997. See Note 13 for an
explanation of the adjustments made to arrive at pro forma net income.
56
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
This item is not applicable.
PART III
All of the information required by Part III is omitted from this report
in that the Registrant will file a Definitive Proxy Statement pursuant to
Regulation 14A ("the Definitive Proxy Statement") not later than 120 days after
the end of the last financial year covered by this report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the Company's Definitive Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Company's Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Company's Definitive Proxy Statement.
57
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following Financial Statements (with accompanying notes) have
been included in Part II, Item 8 of this 10-K:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996, and 1995 Consolidated Statements of Shareholders'
Equity for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996, and 1995 Notes to Consolidated Financial
Statements
2. The following schedules are filed herewith:
Schedule
Number Schedule Description
II Valuation and Qualifying Accounts - Years Ended December
31, 1997, 1996 and 1995.
(B) No reports were filed on Form 8-K during the quarter ended December 31,
1997.
(C) The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
2.1 Amended and Restated Agreement Among Shareholders dated February 21,
1997(1)
2.2 Articles of Share Exchange among OutSource International, Inc., Capital
Staffing Fund, Inc., OutSource Franchising, Inc., Synadyne I, Inc.,
Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V,
Inc., Employees Insurance Services, Inc. and OutSource International of
America, Inc. dated February 21, 1997(1)
3.1 Amended and Restated Articles of Incorporation of the Company(2)
3.2 Amended and Restated Bylaws of the Company(3)
4.3 Shareholder Protection Rights Agreement(3)
4.6 Warrant Dated February 21, 1997 Issued to Triumph-Connecticut Limited
Partnership(1)
4.7 Warrant Dated February 21, 1997 Issued to Bachow Investment Partners
III, L.P.(1)
4.8 Warrant Dated February 21, 1997 Issued to State Street Bank and Trust
Company of Connecticut, N.A., as Escrow Agent(1)
9 Voting Trust Agreement among OutSource International, Inc., Richard J.
Williams and Paul M. Burrell, as Trustees, and certain shareholders of
Outsource International, Inc. dated as of February 21, 1997(1)
10.1 Securities Purchase Agreement among Triumph-Connecticut Limited
Partnership, Bachow Investment Partners III, L.P., OutSource
International, Inc., Capital Staffing Fund, Inc., OutSource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc. and OutSource International of America, Inc. dated as of
February 21, 1997(1)
10.2 Escrow Agreement Among State Street Bank and Trust Company of
Connecticut, N.A., certain shareholders of OutSource International,
Inc., and OutSource International, Inc. dated as of February 21,
1997(1)
58
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
10.3 Registration Rights Agreement among OutSource International, Inc.,
Triumph-Connecticut Limited Partnership, Bachow Investment Partners
III, L.P., and shareholders of OutSource International, Inc. dated as
of February 21, 1997(1)
10.4 Agreement among Shareholders and Investors in OutSource International,
Inc. dated as of February 21, 1997(1)
10.5 Asset Purchase Agreement among Pay-Ray, Inc., Tri-Temps, Inc.,
Employees Unlimited, Inc. and OutSource International, Inc. dated as of
April 1, 1996, as amended on 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)
10.8 Asset Purchase Agreement between Staff Management Services, Inc. and
OutSource International, Inc. dated as of March 3, 1997(1)
10.9 Asset Purchase Agreement between Superior Temporaries, Inc. and
OutSource International, Inc. dated as of March 3, 1997(1)
10.10 Asset Purchase Agreement among Stand-By, Inc., Carlene Walker and
OutSource International of America, Inc. dated as of March 31, 1997(1)
10.11 Employment Agreement between Paul M. Burrell and the Company dated as
of February 21, 1997(1)*
10.12 Employment Agreement between Robert A. Lefcort and the Company dated as
of March 3, 1997(1)*
10.13 Employment Agreement between Robert E. Tomlinson and the Company dated
as of March 3, 1997(1)*
10.14 Employment Agreement between 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)*
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 Effective September 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)
10.33 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)
59
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
10.34 Workers' Compensation and Employees Liability Insurance Policy from
January 1, 1997 to January 1, 1998 Policy Period(1)
10.35 Standby Letter of Credit issued by The First National Bank of Boston in
favor of National Union Fire Insurance Company(1)
10.36 Form of Standard Franchise Agreement(1)
10.37 Form of Standard PEO Services Agreement(1)
21 Subsidiaries of the Company(4)
27.1 Financial Data Schedule(4)
27.2 Financial Data Schedule(4)
- ------------------------
* 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.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf of the undersigned, thereunto duly authorized.
OUTSOURCE INTERNATIONAL, INC.
By: /s/ PAUL M. BURRELL
-------------------------------
Paul M. Burrell
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: April 1, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ PAUL M. BURRELL President, Chief Executive April 1, 1998
- ------------------------------------ Officer and Chairman of the Board
Paul M. Burrell of Directors
(Principal Executive Officer)
/s/ ROBERT E. TOMLINSON Chief Financial Officer, April 1, 1998
- ------------------------------------ Treasurer and Director
Robert E. Tomlinson (Principal Financial
and Accounting Officer)
/s/ ROBERT A. LEFCORT Executive Vice President, April 1, 1998
- ------------------------------------ Secretary and Director
Robert A. Lefcort
Director
- ------------------------------------
Richard J. Williams
/s/ SAMUEL H. SCHWARTZ Director April 1, 1998
- ------------------------------------
Samuel Schwartz
/s/ DAVID S. HERSHBERG Director April 1, 1998
- ------------------------------------
David S. Hershberg
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
OUTSOURCE INTERNATIONAL, INC. AND AFFILIATES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
CHARGED TO CREDITS
BALANCE, COSTS AND ISSUED AND BALANCE
DESCRIPTION JANUARY 1, 1997 EXPENSES OTHER CHARGE OFFS DECEMBER 31, 1997
----------- ---------------- --------- ------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and credit memos..... $978,250 $3,123,861 $ - $(2,462,344) $ 1,639,767
CHARGED TO CREDITS
BALANCE, COSTS AND ISSUED AND BALANCE
DESCRIPTION JANUARY 1, 1996 EXPENSES OTHER CHARGE OFFS DECEMBER 31, 1996
----------- ---------------- --------- ------ ------------ ------------------
Allowance for doubtful
accounts and credit memos..... $375,243 $1,442,370 $ - $ (839,363) $ 978,250
CHARGED TO CREDITS
BALANCE, COSTS AND ISSUED AND BALANCE
DESCRIPTION JANUARY 1, 1995 EXPENSES OTHER CHARGE OFFS DECEMBER 31, 1995
----------- ---------------- --------- ------ ------------ ------------------
Allowance for doubtful
accounts and credit memos..... $123,836 $ 867,953 $ - $ (616,546) $ 375,243
</TABLE>
The amounts shown above include credits issued and charge offs for
uncollectible amounts as well as customer credits issued for early payment
discounts, pricing adjustments, customer service concessions, billing
corrections, and other matters.
S-1
