SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 000-23147
OUTSOURCE INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
FLORIDA 65-0675628
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<S> <C>
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
</TABLE>
1144 East Newport Center Drive, Deerfield Beach, Florida 33442
--------------------------------------------------------------
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code: (954) 418-6200
Indicate whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at May 7, 1999
----- --------------------------
Common Stock, par value $.001 per share 8,657,913
<PAGE>
OUTSOURCE INTERNATIONAL, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998................................................... 2
Consolidated Statements of Income for the three months
ended March 31, 1999 and 1998....................................... 3
Consolidated Statements of Shareholders' Equity for
the three months ended March 31, 1999 and 1998...................... 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998....................................... 5
Notes to Consolidated Financial Statements.......................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 13
Item 3 - Quantitative and Qualitative Disclosures about Market Risk................. 22
PART II - OTHER INFORMATION
Item 3 - Defaults Upon Senior Securities............................................ 23
Item 5 - Other Information.......................................................... 23
Item 6 - Exhibits and Reports on Form 8-K........................................... 24
Signatures.......................................................................... 25
</TABLE>
TANDEM (R), SYNADYNE (R) and OFFICE OURS (R) are registered trademarks of
OutSource International, Inc. and its subsidiaries.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
ASSETS (Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash .................................................................. $ 1,418 $ 5,501
Trade accounts receivable, net of allowance for doubtful accounts of
$2,216 and $1,924 ................................................... 18,287 12,946
Funding advances to franchises ........................................ 376 441
Deferred income taxes and other current assets ........................ 8,343 7,795
---------- ----------
Total current assets ................................................ 28,424 26,683
PROPERTY AND EQUIPMENT, net ........................................... 17,569 17,628
GOODWILL AND OTHER INTANGIBLE ASSETS, net ............................. 63,377 64,262
OTHER ASSETS .......................................................... 3,548 3,429
---------- ----------
Total assets ........................................................ $ 112,918 $ 112,002
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...................................................... $ 8,681 $ 5,217
Accrued expenses:
Payroll ............................................................. 5,646 4,322
Payroll taxes ....................................................... 3,934 4,067
Workers' compensation and insurance ................................. 8,854 10,659
Other ............................................................... 2,680 2,482
Other current liabilities ............................................. 885 1,312
Current maturities of long-term debt to related parties ............... 367 541
Current maturities of other long-term debt ............................ 7,290 6,782
---------- ----------
Total current liabilities ........................................... 38,337 35,382
NON-CURRENT LIABILITIES:
Revolving credit facility ............................................. 20,728 20,980
Long-term debt to related parties, less current maturities ............ 933 745
Other long-term debt, less current maturities ......................... 8,109 9,257
Other non-current liabilities ......................................... 804 1,050
---------- ----------
Total liabilities ................................................... 68,911 67,414
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 3 and 5)
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 10,000,000 shares authorized, none
issued .............................................................. -- --
Common stock, $.001 par value; 100,000,000 shares authorized; 8,657,913
issued and outstanding .............................................. 9 9
Additional paid-in capital ............................................ 53,546 53,546
Accumulated deficit ................................................... (9,548) (8,967)
---------- ----------
Total shareholders' equity .......................................... 44,007 44,588
---------- ----------
Total liabilities and shareholders' equity .......................... $ 112,918 $ 112,002
========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(Dollars in thousands, except per share data)
<S> <C> <C>
Net revenues ................................. $ 134,114 $ 120,986
Cost of revenues ............................. 114,651 102,948
------------ ------------
Gross profit ................................. 19,463 18,038
------------ ------------
Selling, general and administrative expenses:
Amortization of intangible assets .......... 924 745
Other selling, general and administrative... 18,030 15,376
------------ ------------
Total selling, general and
administrative expenses ................ 18,954 16,121
------------ ------------
Operating income ............................. 509 1,917
------------ ------------
Other expense (income):
Interest expense (net) ..................... 1,582 1,080
Other income (net) ......................... (43) (6)
------------ ------------
Total other expense (income) ............... 1,539 1,074
------------ ------------
Income (loss) before provision (benefit) for
income taxes ............................... (1,030) 843
Provision (benefit) for income taxes ......... (449) 170
------------ ------------
Net income (loss) ............................ $ (581) $ 673
============ ============
Weighted average common shares outstanding:
Basic ...................................... 8,657,913 8,486,685
============ ============
Diluted .................................... 8,657,913 10,025,379
============ ============
Earnings (loss) per share:
Basic ...................................... $ (0.07) $ 0.08
============ ============
Diluted .................................... $ (0.07) $ 0.07
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital (Deficit) Total
----- ------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance, December 31, 1998.......... $ 9 $ 53,546 $ (8,967) $ 44,588
Net loss ........................... -- -- (581) (581)
------ -------- ---------- ---------
Balance, March 31, 1999 ............ $ 9 $ 53,546 $ (9,548) $ 44,007
====== ======== ========== =========
Balance, December 31, 1997 ......... $ 8 $ 53,201 $ (12,431) $ 40,778
Issuance of common stock ........... -- 775 -- 775
Net income ......................... -- -- 673 673
------ -------- ---------- ---------
Balance, March 31, 1998 ............ $ 8 $ 53,976 $ (11,758) $ 42,226
====== ======== ========== =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ (581) $ 673
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................................ 1,807 1,419
Deferred income taxes ................................................ (77) 293
Changes in assets and liabilities (excluding effects of acquisitions):
(Increase) decrease in:
Trade accounts receivable ........................................ (5,341) 520
Prepaid expenses and other current assets ........................ (123) (326)
Other assets ..................................................... (414) 199
Increase (decrease) in:
Accounts payable ................................................. 1,749 (63)
Accrued expenses:
Payroll ........................................................ 1,324 1,923
Payroll taxes .................................................. (133) (200)
Workers' compensation and insurance ............................ (1,805) 1,068
Other .......................................................... 198 (625)
Other current liabilities .......................................... (427) 481
--------- ----------
Net cash provided by (used in) operating activities ............... (3,823) 5,362
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Funding repayments from franchises, net ................................ 66 955
Property and equipment expenditures .................................... (811) (1,263)
Expenditures for acquisitions .......................................... (39) (18,168)
--------- ----------
Net cash used in investing activities ............................. (784) (18,476)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in excess of outstanding checks over
bank balance, included in accounts payable ........................... 1,715 1,229
Net proceeds from (repayment of) revolving credit facility ............. (252) 14,521
Related party borrowings (repayments) .................................. 14 (100)
Repayment of other long-term debt ...................................... (953) (1,385)
--------- ----------
Net cash provided by financing activities ......................... 524 14,265
--------- ----------
Net increase (decrease) in cash ........................................ (4,083) 1,151
Cash, beginning of period .............................................. 5,501 1,685
--------- ----------
Cash, end of period .................................................... $ 1,418 $ 2,836
========= ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid .......................................................... $ 1,292 $ 1,267
========= ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements and the related
information in these notes as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 are unaudited. Such interim consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, reflect all adjustments
(including normal accruals) necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year. The
interim financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1998, included in the
Company's Form 10-K filed with the Securities and Exchange Commission on March
31, 1999.
In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" was issued.
SFAS No. 133 defines derivatives and establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999, and cannot be
applied retroactively. The Company intends to first implement SFAS No. 133 in
its consolidated financial statements as of and for the three months ended March
31, 2000, although it has not determined the effects, if any, that
implementation will have. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was
issued and established standards for reporting comprehensive income and its
components in a full set of general-purpose financial statements. SFAS No. 130
does not apply to the Company since the Company has no items of other
comprehensive income in any of the periods presented.
NOTE 2. ACQUISITIONS
As of May 7, 1999 the Company had made no acquisitions during 1999. The
following pro forma results of operations for the three months ended March 31,
1998 have been prepared assuming the acquisitions completed by the Company
during 1998 (and described in the Company's audited consolidated financial
statements for that year) had occurred as of the beginning of the periods
presented, including adjustments to the historical financial statements for
additional amortization of intangible assets, increased interest on borrowings
to finance the acquisitions and discontinuance of certain compensation
previously paid by the acquired businesses to their shareholders, as well as the
related income tax effects. The pro forma operating results are not necessarily
indicative of what would have occurred had these acquisitions been consummated
as of the beginning of the periods presented, or of future operating results. In
certain cases, the operating results for periods prior to the acquisition are
based on (a) unaudited financial statements provided by the seller or (b) an
estimate of revenues, cost of revenues and/or selling, general and
administrative expenses based on information provided by the seller or otherwise
available to the Company. In these cases, the Company has made a reasonable
attempt to obtain the most complete and reliable financial information and
believes that the financial information it used is reasonably accurate, although
the Company has not independently verified such information.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 (Historical) 1998 (Pro Forma)
----------------- ----------------
(Dollars in thousands)
<S> <C> <C>
Net revenues ................................ $ 134,114 $ 135,627
Operating income ............................ 509 2,598
Net income (loss) ........................... (581) 741
Weighted average common shares outstanding:
Basic ..................................... 8,657,913 8,506,597
=========== ===========
Diluted ................................... 8,657,913 10,048,542
=========== ===========
Earnings (loss) per share:
Basic ..................................... $ (0.07) $ 0.09
=========== ===========
Diluted ................................... $ (0.07) $ 0.07
=========== ===========
</TABLE>
6
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. ACQUISITIONS (CONTINUED)
Earnings (loss) per share included in the above information has been
prepared on the same basis as discussed in Note 8, except for an increase by
19,912 basic and 23,163 diluted shares for the three months ended March 31, 1998
in order to reflect adjustments for the timing of the issuance of common stock
and options in connection with the acquisitions.
Goodwill and other intangible assets consist of the following:
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Goodwill ...................................... $32,845 $32,806
Territory rights .............................. 24,743 24,743
Customer lists ................................ 10,105 10,105
Covenants not to compete ...................... 2,191 2,191
Employee lists ................................ 417 417
-------- ----------
Goodwill and other intangible assets .......... 70,301 70,262
Less accumulated amortization ................. 6,924 6,000
-------- ----------
Goodwill and other intangible assets, net...... $63,377 $64,242
======== ==========
</TABLE>
NOTE 3. INCOME TAXES
The Company's effective tax rate differed from the statutory federal
rate of 35%, as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---- ----
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Statutory rate applied to income (loss), before
income taxes .................................... $(360) (35.0)% $ 295 35.0%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit ...... (30) (2.9) 50 5.9
Employment tax credits .......................... (126) (12.2) (204) (24.2)
Nondeductible expenses .......................... 56 5.5 35 4.2
Other ........................................... 11 1.0 (6) (0.7)
------- ------- -------- -------
Total ........................................... $(449) (43.6)% $ 170 20.2%
======= ======= ======== =======
</TABLE>
The employment tax credit carryforward of $1.4 million as of March 31,
1999 will expire in 2012 through 2019. The employment tax credits recorded by
the Company from February 21, 1997 through March 31, 1999 include Federal
Empowerment Zone ("FEZ") credits which represent a net tax benefit of
approximately $0.6 million. Although the Company believes that these FEZ credits
have been reasonably determined, the income tax law addressing how FEZ credits
are determined for staffing companies is evolving and as a result the Company's
positions with regards to its calculation of FEZ credits has been challenged by
the Internal Revenue Service ("IRS"), as discussed below.
In April 1999, the Company received a report from an IRS agent
proposing adjustments to the previously reported taxable income and tax credits
for certain of the Company's subsidiaries for the years ended December 31, 1994,
1995 and 1996. The Company has disagreed with these proposed adjustments and as
a result, the IRS agent's supervisor has agreed to meet with the Company's
management to discuss these adjustments before the IRS makes a final
determination and assessment, if any, with respect to these matters. Since the
subsidiaries were S corporations for the periods under examination, the proposed
adjustments would not result in a materially unfavorable effect on the Company's
results of operations although shareholder distributions of up to approximately
$5.0 million would result as discussed in Note 5.
7
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. DEBT
The Company's primary sources of funds for working capital and other
needs are a $34.0 million credit line with a syndicate of lenders led by
BankBoston, N.A. (the "Revolving Credit Facility") and a $50.0 million accounts
receivable securitization facility with a BankBoston affiliate.
Effective July 27, 1998, the Company entered into a five year financing
arrangement under which it can sell up to a $50.0 million secured interest in
its eligible accounts receivable to EagleFunding Capital Corporation ("Eagle"),
which uses the receivables to secure A-1 rated commercial paper (the
"Securitization Facility"). The Company's cost for this arrangement is
classified as interest expense and is based on the interest paid by Eagle on the
balance of the outstanding commercial paper, which in turn is determined by
prevailing interest rates in the commercial paper market and was approximately
4.95% as of March 31, 1999. As of March 31, 1999, a $36.1 million interest in
the Company's uncollected accounts receivable had been sold under this
agreement, which amount is excluded from the accounts receivable balance
presented in the Company's consolidated financial statements.
The Securitization Facility requires bank liquidity commitments
("Liquidity Facility") totaling no less than $51.0 million. The Liquidity
Facility has been provided by the syndicate of commercial banks that participate
in the Revolving Credit Facility for a one year term expiring July 26, 1999 at
0.375% per annum. The Company is currently discussing renewal of the Liquidity
Facility, as well as other financing options, with the syndicate and other
banks.
The Revolving Credit Facility contains certain affirmative and negative
covenants relating to the Company's operations, certain of which were amended in
February 1999 in order to provide additional flexibility to the Company as well
as enabling it to be in compliance as of December 31, 1998. These covenant
modifications also resulted in a 0.5% per annum increase in the bank margin
component of the interest rate charged thereunder, which was offset by a 0.6%
per annum decrease in the Eurodollar base rate during the first quarter of 1999,
resulting in an annualized total interest rate of approximately 7.7% at March
31, 1999. See Note 5.
As of March 31, 1999, the Company had bank standby letters of credit
outstanding, in the aggregate amount of $10.4 million under a $15.0 million
letter of credit facility (which is part of the Revolving Credit Facility) to
secure certain workers' compensation obligations already recorded as a liability
on the Company's balance sheet. In April 1999, the Company negotiated a $2.0
million reduction in the outstanding letters of credit.
In order to remain in compliance with certain covenants in its
Revolving Credit Facility, and to reduce the cash impact of scheduled payments
under its subordinated acquisition debt, the Company, commencing in February and
continuing through May 1999, has negotiated extensions of the payment dates and
modified the interest rates and other terms of certain of its subordinated
acquisition notes payable. See Note 6.
During April 1999, the Company received approximately $1.6 million from
a financial institution in connection with a sale/leaseback transaction, which
amount was approximately equal to the net book value of property and equipment
previously purchased by the Company. These proceeds were used to reduce
outstanding borrowings under the Revolving Credit Facility and are repayable
over three years at an interest rate of approximately 10% per annum.
NOTE 5. COMMITMENTS AND CONTINGENCIES
Shareholder distribution: Effective February 21, 1997, the Company
acquired all of the outstanding capital stock of nine companies under common
ownership and management, in exchange for shares of the Company's common stock
and distribution of previously undistributed taxable earnings of those nine
companies (the "Reorganization"). That distribution, supplemented by another
distribution made in September 1998, is subject to adjustment based upon the
final determination of taxable income through February 21, 1997. Although the
Company has completed and filed its Federal and state tax returns for all
periods through February 21, 1997, further distributions may be required in the
event the Company's taxable income for any period through February 21, 1997 is
adjusted due to audits or any other reason. See Note 3.
Stock options: As of March 31, 1999, options issued prior to 1999 to
purchase 1,188,052 shares of the Company's common stock were still outstanding.
During January 1999, the Company granted options to purchase 72,500 shares of
the Company's common stock, vesting over a 4 year period from the grant date and
with an exercise price of $6.00 per share
8
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
based on the market price of the shares at the grant date. During March 1999,
the Company granted options to purchase 95,675 shares of the Company's common
stock, vesting immediately upon grant and with an exercise price of $4.125 per
share based on the market price of the shares at the grant date.
The total number of shares of common stock reserved for issuance under
the stock option plan as of March 31, 1999 was 1,040,000. The Company's Board of
Directors has agreed to increase the number of reserved shares to 2,000,000, and
that increase was approved by the Company's shareholders at their May 1999
annual meeting.
Revolving Credit Facility Covenants: The Company regularly evaluates
its compliance with the financial covenants included in the Revolving Credit
Facility, and was in compliance with the covenants in effect as of March 31,
1999. The Company believes that it will be in compliance with those covenants
until the expiration of the Liquidity Facility in July 1999 and it expects to be
in compliance subject to appropriately restructured debt and/or convenants after
that date; however, there can be no assurance that the Company will be in
compliance with those covenants at June 30, 1999 or that it will not require
waivers from the syndicate of lenders led by BankBoston, N.A., regarding
compliance with those covenants as of that date, or at subsequent dates. In the
event waivers are required, but are not granted, the Company could experience
liquidity problems depending on the ability and willingness of the syndicate of
lenders to continue lending to the Company, and the availability and cost of
financing from other sources.
Interest Rate Collar Agreement: In February 1998, the Company entered
into an interest rate collar agreement with BankBoston, N.A., which involves the
exchange of 30 day 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 is
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 its Securitization Facility, and is not held or issued for
trading purposes.
On July 27, 1998, the Company redesignated a portion of this hedge, no
longer applicable to its Revolving Credit Facility, to anticipated transactions
under the Securitization Facility. The Company adjusted the carrying value of
the redesignated portion of the hedge from zero to its fair value based
primarily on information from BankBoston, resulting in a $0.1 million liability
as of March 31, 1999 which is included in Other Non-current Liabilities on the
Company's balance sheet. The associated loss, which may never be realized due to
the volatility of interest rates and the Company's intention not to terminate
the interest rate collar agreement, has been deferred and is included in Other
Assets. The unrealized loss related to the portion of the hedge designated to
the Revolving Credit Facility and not reflected on the Company's balance sheet
as of December 31, 1998 was approximately $0.1 million. The Company reevaluates
the portion of the hedge designated to the Revolving Credit Facility and the
Securitization Facility on a monthly basis.
Employment Agreements: As of March 31, 1999, the Company had certain
obligations under employment agreements it entered into in 1998 and 1997 with
its Chief Executive Officer ("CEO") and six other officers. Under the terms of
those agreements, in the event that the Company terminates any of those officers
without cause or the officer resigns for good reason, the terminated officer
will receive, among other things, severance compensation, including a multiple
of the officer's annual base salary and bonus. In addition, all incentive stock
options become immediately exercisable. Similar severance provisions apply if
any of those officers is terminated within two years (three years for the CEO)
after the occurrence of a "change of control", as defined in the employment
agreements. In February 1999, one of those officers resigned his position, which
resulted in the Company's agreement to pay that officer's salary for the
subsequent year, in exchange for the former employee's agreement, among other
things, to not compete with the Company during that period.
Significant Customer: For the three months ended March 31, 1999,
approximately nine percent of the Company's revenues were from professional
employer organization ("PEO") services performed for individual insurance agent
offices under a preferred provider designation previously granted to the Company
on a regional basis by the agents' common corporate employer. The corporate
employer recently began granting that designation on a national basis only and
the Company has been granted that designation for 1999.
9
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition, the Company is aware of pending litigation against that
corporate employer regarding its use of PEO services. The Company has not
determined what impact, if any, that the ultimate result of these developments
will have on its financial position or results of operations.
Litigation: On September 24, 1998, an action was commenced against the
Company for breach of contract in connection with a purported services
arrangement, seeking damages of approximately $0.6 million. The Company filed an
answer denying any breach of contract and moved to transfer the action to
Florida. The motion for removal was granted and the case has been transferred
to, and is now pending in, the Southern District of Florida, Fort Lauderdale
division. The action is presently in discovery and no trial date has been set.
The Company believes that the claim is without merit and the resolution of this
lawsuit will not have a material adverse effect on its financial position or
future operating results; however, no assurance can be given as to the ultimate
outcome of this lawsuit.
On November 12, 1997, an action was commenced against the Company,
alleging state law claims of pregnancy/maternity discrimination and violations
of the Family and Medical Leave Act as a result of an alleged demotion following
the plaintiff's return from maternity leave. The complaint also asserts a claim
for unpaid overtime based on both state law and the Fair Labor Standards Act.
The case is presently in discovery and no trial date has been set. The Company
believes the claims are without merit and is vigorously defending this action.
Employee Benefit Plan: Pursuant to the terms of a now inactive 401(k)
plan (containing previous contributions still managed by the Company), highly
compensated employees were not eligible to participate. However, as a result of
administrative errors in 1996 and prior years, some highly compensated employees
were inadvertently permitted to make elective salary deferral contributions. The
Company has sought IRS approval regarding the proposed correction under the
Voluntary Closing Agreement Program ("VCAP"). There will be a penalty payable by
the Company, associated with a correction under the VCAP, although the Company
believes this penalty will be insignificant.
Unemployment Taxes: Federal and state unemployment taxes represent a
significant component of the Company's cost of revenues. State unemployment
taxes are determined as a percentage of covered wages, such percentage
determined in accordance with the laws of each state and usually taking into
account specific work and employment history of the Company's employees in that
state. The Company has realized reductions in its state unemployment tax expense
as a result of changes in its organizational structure from time to time.
Although the Company believes that these expense reductions were achieved in
compliance with applicable laws, taxing authorities of a particular state have
recently indicated that they may challenge these reductions. The Company is
unable at this time to reasonably estimate the effect of such a challenge by
this state or by other states.
NOTE 6. RELATED PARTY TRANSACTIONS
Effective August 31, 1998, certain Company shareholders owning
franchises entered into a buyout agreement with the Company. Buyouts are early
terminations of franchise agreements entered into by the Company in order to
allow the Company to develop the related territories. At the time of the buyout,
the Company received an initial payment from the former franchisee and was to
have continued to receive quarterly payments from the former franchisee based on
the gross revenues of the formerly franchised locations for two years after the
termination date, which was generally consistent with the terms of buyout
agreements between the Company and unrelated third parties. Effective March 31,
1999, the Company received another payment from the former franchisee in
consideration of the elimination of the equivalent of the last five months of
payments under the initial agreement. The amount of this payment was generally
consistent with the terms of similar agreements between the Company and
unrelated third parties. During the three months ended March 31, 1999, the
Company recognized revenue of $0.6 million from all franchises owned by
shareholders of the Company, which includes royalties and payments under the
buyout agreement.
10
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. RELATED PARTY TRANSACTIONS (CONTINUED)
Effective February 16, 1998, the Company purchased certain staffing
locations and the related franchise rights from certain Company shareholders.
The $6.9 million purchase price included the issuance of a $1.7 million note
bearing interest at 7.25% per annum and payable quarterly over three years.
Effective February 1, 1999, the note was renegotiated so that the remaining
principal balance of $1.3 million would bear interest at 8.50% per annum and
would be payable in monthly payments totaling $0.3 million in the first year and
$0.6 million in the second year, plus a $0.4 million payment at the end of the
two year term.
NOTE 7. SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
The consolidated statements of cash flows do not include the following
noncash investing and financing transactions, except for the net cash paid for
acquisitions:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Acquisitions:
Tangible and intangible assets acquired........ $ 39 $ 28,937
Liabilities assumed ........................... -- (1,368)
Debt issued ................................... -- (8,626)
Common stock issued ........................... -- (775)
-------- ----------
Net cash paid for acquisitions .................. $ 39 $ 18,168
======== ==========
Reduction of deferred loss
on interest rate collar agreement ............. $ 281 $ --
======== ==========
Increase in other current assets and notes
payable, due to insurance financing ........... $ 348 $ --
======== ==========
</TABLE>
NOTE 8. EARNINGS (LOSS) PER SHARE
The Company calculates earnings (loss) per share in accordance with the
requirements of SFAS No. 128, "Earnings Per Share". The weighted average shares
outstanding used to calculate basic and diluted earnings (loss) per share were
calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Shares issued in connection with the Reorganization ................. 5,448,788 5,448,788
Shares sold by the Company in October 1997 .......................... 3,000,000 3,000,000
Shares issued in connection with a February 1998
acquisition ....................................................... 57,809 37,897
Warrants exercised in May 1998 ...................................... 151,316 --
---------- ----------
Weighted average common shares - basic .............................. 8,657,913 8,486,685
Outstanding options and warrants to purchase common
stock - remaining shares after assumed repurchase
using proceeds from exercise ...................................... -- 1,538,694
---------- ----------
Weighted average common shares - diluted ............................ 8,657,913 10,025,379
========== ==========
</TABLE>
11
<PAGE>
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8. EARNINGS (LOSS) PER SHARE (CONTINUED)
Certain of the outstanding options and warrants to purchase common
stock were anti-dilutive for certain of the periods presented above and
accordingly were excluded from the calculation of diluted weighted average
common shares for those periods, including the equivalent of 826,142 shares
excluded for the three months ended March 31, 1999 solely because the result of
operations was a net loss instead of net income.
NOTE 9. OPERATING SEGMENT INFORMATION
The Company's reportable operating segments are (i) the Industrial
Staffing segment, which derives revenues from recruiting, training and
deployment of temporary industrial personnel and provides payroll
administration, risk management and benefits administration services to its
clients, (ii) the PEO segment, which derives revenues from providing a
comprehensive package of PEO services to its clients including payroll
administration, risk management, benefits administration and human resource
consultation and (iii) the Franchising segment, which derives revenues under
agreements with industrial staffing franchisees that provide those franchises
with, among other things, exclusive geographical areas of operations, continuing
advisory and support services and access to the Company's confidential operating
manuals.
Transactions between segments affecting their reported income are
immaterial. Differences between the reportable segments' operating results and
the Company's consolidated financial statements relate primarily to other
operating divisions of the Company and items excluded from segment operating
measurements, such as corporate support center expenses and interest expense in
excess of interest charged to the segments based on their outstanding
receivables (before deducting amounts sold under the Securitization Facility).
See Note 5 for information regarding a significant customer. Financial
information for the Company's operating segments, reconciled to Company totals,
is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(Dollars in thousands)
REVENUES
<S> <C> <C>
Industrial Staffing .................................................... $ 73,096 $ 66,138
PEO .................................................................... 53,080 44,742
Franchising ............................................................ 1,973 1,095
Other Company revenues ........................................... 5,965 9,011
-------------- -------------
Total Company revenues ........................................... $ 134,114 $ 120,986
============== =============
INCOME (LOSS)
Industrial Staffing ..................................................... $ 583 $ 2,466
PEO ..................................................................... 255 372
Franchising ............................................................ 1,797 825
Other Company income (expenses) ................................ (3,665) (2,820)
-------------- -------------
Total Company income (loss) before taxes ....................... $ (1,030) $ 843
============== =============
</TABLE>
12
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a national provider of human resource services focusing
on the staffing market through its Tandem division and on the PEO market through
its Synadyne division. While implementing its growth strategies, the Company
completed 36 acquisitions, primarily staffing companies, from January 1, 1995
through May 7, 1999 - the last acquisition closed in October 1998. These
acquisitions included 89 offices and collectively generated approximately $189.0
million in revenue for the twelve months preceding each acquisition. The Company
acquired 41 of those offices in 1998 (the "1998 Acquisitions"). See
"-Acquisitions" below. Due to these acquisitions as well as new offices opened
by the Company, during this period the number of Company-owned staffing and PEO
offices increased from 10 to 128 and the number of metropolitan markets
(measured by Metropolitan Statistical Areas, or MSAs) served by Company-owned
locations increased from one to 50. In order to support its growth, the Company
implemented new information systems, further developed back office capabilities
and invested in other infrastructure enhancements.
The Company's revenues are based on the salaries and wages of worksite
employees. Staffing and PEO revenues, and related costs of wages, salaries,
employment taxes and benefits related to worksite employees, are recognized in
the period in which those employees perform the staffing and PEO services.
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.
The Company's staffing operations generate significantly higher gross
profit margins than its PEO operations. The higher staffing margin reflects
compensation for recruiting, training and other services not required as part of
many PEO relationships, where the employees have already been recruited by the
client and are trained and in place at the beginning of the relationship.
RESULTS OF OPERATIONS
The following tables set forth, on an unaudited basis, the amounts and
percentage of net revenues of certain items in the Company's consolidated
statements of income for the indicated periods.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Net revenues:
Flexible industrial staffing (1) ................ $ 64,799 $ 60,632
PEO (1) ......................................... 65,401 57,313
Franchising ..................................... 1,973 1,095
Other ........................................... 1,941 1,946
-------- ---------
Total net revenues .............................. $134,114 $120,986
======== =========
Gross profit .................................... $ 19,463 $ 18,038
Selling, general and administrative expenses..... 18,954 16,121
-------- ---------
Operating income ................................ 509 1,917
Net interest and other expense .................. 1,539 1,074
-------- ---------
Income (loss) before provision (benefit) for
income taxes .................................. (1,030) 843
Income taxes (benefit) .......................... (449) 170
-------- ---------
Net income (loss) ............................... $ (581) $ 673
======== =========
Other Data:
EBITDA (2) ...................................... $ 2,360 $ 3,340
======== =========
System Revenues (3) ............................. $147,396 $140,060
======== =========
System employees (number at end of period) ...... 33,000 29,800
======== =========
System offices (number at end of period) ........ 172 182
======== =========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1999 1998
---- ----
<S> <C> <C>
Net revenues:
Flexible industrial staffing (1) .............. 48.3% 50.1%
PEO (1) ....................................... 48.8 47.4
Franchising ................................... 1.5 0.9
Other ......................................... 1.4 1.6
------ --------
Total net revenues ............................ 100.0% 100.0%
====== ========
Gross profit .................................. 14.5% 14.9%
Selling, general and administrative expenses... 14.1 13.3
------ --------
Operating income .............................. 0.4 1.6
Net interest and other expense ................ 1.1 0.9
------ --------
Income (loss) before provision (benefit) for
income taxes ................................ (0.7) 0.7
Income taxes (benefit) ........................ (0.3) 0.1
------ --------
Net income (loss) ............................. (0.4)% 0.6%
====== ========
</TABLE>
- ---------------
(1) SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. The
Company's reportable operating segments under SFAS No. 131 include the
Industrial Staffing segment and the PEO segment. PEO revenues, as reported
above, include certain industrial revenues that the Company believes are
operationally consistent with the PEO business and operational model, but are
not includable in the PEO segment due to the way the Company is organized.
Following is a reconciliation of Flexible Industrial Staffing net revenues and
the PEO net revenues, as shown above, to the revenues reported by the Company in
accordance with the requirements of SFAS No. 131 - see Note 9 to the Company's
Consolidated Financial Statements.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Flexible Industrial Staffing revenues ................... $ 64,799 $ 60,632
Add: industrial staffing client payrolling .............. 8,297 5,506
-------- ---------
Industrial Staffing operating segment revenues .......... $ 73,096 $ 66,138
======== =========
PEO revenues ............................................ $ 65,401 $ 57,313
Less: industrial staffing client payrolling ............. (8,297) (5,506)
Less: PEO services to industrial staffing franchises..... (4,024) (7,065)
-------- ---------
PEO operating segment revenues .......................... $ 53,080 $ 44,742
======== =========
</TABLE>
Gross profit amounts and percentages discussed herein are calculated on a
consistent basis with the revenues reported herein.
- ---------------
(2) EBITDA is earnings (net income) before the effect of interest income and
expense, income tax benefit and expense, depreciation expense and amortization
expense. EBITDA is presented because it is a widely accepted financial indicator
used by many investors and analysts to analyze and compare companies on the
basis of operating performance. EBITDA is not intended to represent cash flows
for the period, nor has it been presented as an alternative to operating income
or as an indicator of operating performance and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles.
- ---------------
(3) System revenues 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>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Company's net revenues ................ $ 134,114 $ 120,986
Less Company revenues from:
Franchise royalties ................. (1,973)
Services to franchisees ............. (4,024) (7,065)
Add franchisees' net revenues.......... 19,279 27,234
--------- ----------
System revenues ....................... $ 147,396 $ 140,060
========= ==========
</TABLE>
14
<PAGE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO MARCH 31, 1998
Net Revenues. Net revenues increased $13.1 million, or 10.9%, to $134.1
million in the three months ended March 31, 1999 ("Q1 1999") from $121.0 million
in the three months ended March 31, 1998 ("Q1 1998"). This increase resulted
from growth in staffing revenues in Q1 1999 of $4.2 million, or 6.9%, and PEO
revenues growth of $8.1 million, or 14.1%, compared to Q1 1998. Staffing
revenues increased primarily due to the 1998 Acquisitions. The Company-owned
staffing offices increased by seven locations to 115 locations as of March 31,
1999. This increase was the result of 13 additional staffing locations
attributable to the 1998 Acquisitions consummated after Q1 1998, offset by
offices closed and consolidated into other Company-owned locations. The increase
in PEO revenues was primarily due to new PEO clients, as well as an increase in
the number of worksite employees at certain existing PEO clients.
System revenues, which include franchise revenues not earned by or
available to the Company, increased $7.3 million, or 5.2%, to $147.4 million in
Q1 1999 from $140.1 million in Q1 1998. The increase in system revenues was
attributable to the $13.1 million increase in the Company's net revenues
discussed above. Franchise revenues of franchisees operating as of March 31,
1999 increased $4.1 million, or 27.2%, in Q1 1999 as compared to Q1 1998, offset
by a $12.1 million decrease in revenues for the same period resulting from other
franchisees no longer operating. The result is a net decrease of franchise
revenues of $8.0 million. The Company acquired and converted 17 franchise
locations to Company-owned locations during 1998 and also allowed the early
termination of franchise agreements in 1998 attributable to another 15 locations
to enable the Company to develop the related territories. At the time the
Company agrees to terminate a franchise agreement, it receives an initial buyout
payment from the former franchisee. The Company continues to receive payments
from the former franchisees based on a percentage of the gross revenues of the
formerly franchised locations for up to three years after the termination dates.
Although those gross revenues are not included in the Company's franchisee or
system revenues totals, the initial buyout payment, as well as subsequent
payments from the former franchisees, are reflected in total royalties reported
by the Company.
Gross Profit. Gross profit (margin) increased $1.5 million, or 7.9%, to
$19.5 million in Q1 1999, from $18.0 million in Q1 1998. Gross profit as a
percentage of net revenues decreased to 14.5% in Q1 1999 from 14.9% in Q1 1998.
This decrease was primarily due to (i) decreased gross profit margin percent for
the Company's staffing operations and (ii) the lower growth rate for staffing
revenues as compared to the growth rate for PEO revenues, which generate lower
gross profit margins. In Q1 1999, PEO operations generated gross profit margins
of 4.1% as compared to gross profit margins of 22.0% generated by staffing
operations.
Gross profit margin percent for the Company's staffing operations
decreased to 22.0% in Q1 1999 from 23.2% in Q1 1998, primarily due to the impact
of (i) the continued execution of a strategy to obtain larger contracts which
have higher per hour billing and pay rates but lower gross profit margin
percentages and (ii) the increased wages necessary to recruit staffing employees
in areas of historically low unemployment. The Company anticipates these factors
will continue to affect margins from staffing operations, although in many cases
the Company expects the impact to be offset by lower selling, general and
administrative expenses (measured as a percentage of gross profit) due to the
economies of scale in servicing larger contracts.
PEO gross profit margin percent increased slightly to 4.1% in Q1 1999
from 4.0% in Q1 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased $2.9 million, or 17.6%, to $19.0
million in Q1 1999 from $16.1 million in Q1 1998. This increase was primarily a
result of operating costs related to the 1998 Acquisitions and sales costs
associated with increased staffing volume at existing locations. Total direct
operating costs associated with the 1998 Acquisition locations (for the portion
of Q1 1999 for which there was no corresponding Q1 1998 activity) were $0.8
million in Q1 1999. In addition, starting in Q1 1998 and increasing during the
two subsequent quarters, the Company incurred indirect infrastructure costs to
evaluate, acquire and integrate these operations, as well as to support the
larger customer base.
Net Interest and Other Expense. Net interest and other expense
increased by $0.4 million, to $1.5 million in Q1 1999 from $1.1 million in Q1
1998. This increase was primarily due to a $0.5 million increase in interest
expense, arising from (i) an increase in total debt outstanding related to the
purchases of the 1998 Acquisitions and (ii) financing increased accounts
receivable arising from increased staffing revenues as discussed above,
partially offset by a decrease in the average interest rate as a result of the
Securitization Facility.
Net Income (Loss). Net income (loss) decreased by $1.3 million, to a
$0.6 million loss in Q1 1999 from $0.7 million net income in Q1 1998. This
decrease was primarily due to a $1.4 million reduction in operating income
(resulting from the $2.9 million increase in SG&A, partially offset by the $1.5
million increase in gross profit) and a $0.5 million increase in interest
expense, both discussed above, partially offset by the related income tax
benefit.
15
<PAGE>
ADDITIONAL OPERATING AND SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. The
Company's reportable operating segments under SFAS No. 131 differ from the
operating information presented below, as explained in footnote 1 to the table
in "---Results of Operations" above. Gross profit amounts and percentages
discussed below are also calculated on a consistent basis with the revenues
reported below. See Note 9 to the Company's Consolidated Financial Statements.
Flexible Industrial Staffing:
Net revenues from the Company's staffing services increased $4.2
million, to $64.8 million for Q1 1999 from $60.6 million for Q1 1998, or an
annualized growth rate of 6.9%. Staffing comprised a decreasing share of the
Company's total net revenues, to 48.3% for Q1 1999 from 50.1% for Q1 1998,
reflecting a lower internal growth rate for staffing services as well as the
Company's discontinuance of staffing acquisitions since October 1998. The
Company expects this lower internal growth rate and the absence of acquisition
activity to continue for the remainder of 1999. As a result, the Company expects
staffing's share of the Company's total net revenues to continue to decline.
Gross profit from the Company's staffing services increased $0.2
million, to $14.3 million for Q1 1999 from $14.1 million for Q1 1998, or an
annualized growth rate of 1.9%. However, consistent with the revenue trend
discussed above, this represented a decreasing share of the Company's total
gross profit, to 73.4% for Q1 1999 from 78.0% for Q1 1998.
PEO:
Net revenues from the Company's PEO services increased $8.1 million, to
$65.4 million for Q1 1999 from $57.3 million for Q1 1998, or an annualized
growth rate of 14.1%. Due to a higher internal growth rate for PEO services as
well as the Company's discontinuance of staffing acquisitions since October
1998, PEO revenues represented an increasing share of the Company's total net
revenues, to 48.8% for Q1 1999 from 47.4% for Q1 1998. The Company expects that
PEO sales growth will continue at its present rate during most of 1999.
Approximately 20% of the Company's Q1 1999 PEO revenues were from
services performed for individual insurance agent offices under a preferred
provider designation previously granted to the Company on a regional basis by
the agents' common corporate employer. The corporate employer recently began
granting that designation on a national basis only and the Company has been
granted that designation for 1999. In addition, the Company is aware of pending
litigation against that corporate employer regarding its use of PEO services.
The Company has not determined what impact, if any, that the ultimate result of
these developments will have on its financial position or results of operations.
Gross profit from the Company's PEO services increased $0.4 million, to
$2.7 million for Q1 1999 from $2.3 million for Q1 1998, or an annualized growth
rate of 14.5%. This also represented an increasing share of the Company's total
gross profit, to 13.7% for Q1 1999 from 12.7% for Q1 1998.
Franchising:
Net revenues from the Company's franchising operations increased $0.9
million, to $2.0 million for Q1 1999 from $1.1 million for Q1 1998, or an
annualized growth rate of 80.2%. Franchising operations represented an
increasing share of the Company's total net revenues, to 1.5% in Q1 1999 from
0.9% for Q1 1998, reflecting buyout payments received in 1999 from former
franchisees. The Company allowed the early termination (buyout) of certain
franchise agreements in 1998, attributable to 15 locations, to enable the
Company to develop the related territories. Due to the reduced number of
remaining franchises, the Company does not anticipate buyout payments in the
future to be of the magnitude recorded in Q1 1999, although the Company expects
to continue to convert franchise locations to Company-owned locations and to
allow terminations of franchise agreements in key markets that the Company
believes it can develop further. Such acquisitions and terminations will be
subject to the Company's ability to negotiate them on acceptable terms. The
Company also expects to continue to sell new franchises in smaller, less
populated geographic areas, subject to, among other factors, the success of the
Company's marketing efforts in this regard.
16
<PAGE>
Gross profit from the Company's franchising operations increased $0.9
million, to $2.0 million for Q1 1999 from $1.1 million for Q1 1998, or an
annualized growth rate of 80.2%. Consistent with the revenue trend discussed
above, this area represented an increasing share of the Company's total gross
profit, to 10.1% for Q1 1999 from 6.1% for Q1 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds for working capital and other
needs are a $34.0 million credit line with a syndicate of lenders led by
BankBoston, N.A. (the "Revolving Credit Facility") and a $50.0 million accounts
receivable securitization facility with a BankBoston affiliate.
Effective July 27, 1998, the Company entered into a five year financing
arrangement under which it can sell up to a $50.0 million secured interest in
its eligible accounts receivable to EagleFunding Capital Corporation ("Eagle"),
which uses the receivables to secure A-1 rated commercial paper (the
"Securitization Facility"). Under this arrangement, the Company receives cash
equivalent to the gross outstanding balance of the accounts receivable being
sold, less reserves which are adjusted on a monthly basis based on collection
experience and other defined factors. There is no recourse to the Company for
the initial funds received. Amounts collected in excess of the reserves are
retained by the Company. The Company's cost for this arrangement is classified
as interest expense and is based on the interest paid by Eagle on the balance of
the outstanding commercial paper, which in turn is determined by prevailing
interest rates in the commercial paper market and was approximately 4.95% as of
March 31, 1999. As of March 31, 1999, a $36.1 million interest in the Company's
uncollected accounts receivable had been sold under this agreement, which amount
is excluded from the accounts receivable balance presented in the Company's
consolidated financial statements.
The Securitization Facility contains certain minimum default,
delinquency and dilution ratios with respect to the Company's receivables and
requires bank liquidity commitments ("Liquidity Facility") totaling no less than
$51.0 million. A default under the Securitization Facility constitutes a default
under the Revolving Credit Facility. The Liquidity Facility has been provided by
the syndicate of commercial banks that participate in the Revolving Credit
Facility for a one year term expiring July 26, 1999 at 0.375% per annum. Eagle
may draw against the Liquidity Facility to fund cash shortfalls caused by an
inability for any reason to issue commercial paper based on the Company's
receivables. There is no recourse to the Company for amounts drawn under the
Liquidity Facility, although such amounts would be repaid from and to the extent
receivables sold by the Company were collected. Amounts drawn under the
Liquidity Facility bear interest at the same rates incurred under the Revolving
Credit Facility. The Company is currently discussing renewal of the Liquidity
Facility, as well as other financing options, with the syndicate and other
banks.
Concurrent with the Securitization Facility, the Revolving Credit
Facility was amended, primarily to reduce the maximum amount available for
borrowing from $85.0 million to $34.0 million and to extend the remaining term
of the Revolving Credit Facility to five years from the date of that amendment.
Outstanding amounts under the Revolving Credit Facility are secured by
substantially all of the Company's assets and the pledge of all of the
outstanding shares of Common Stock of each of its subsidiaries. Amounts borrowed
under the Revolving Credit Facility bear interest at 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 Credit Facility). As of March 31, 1999, the Company had outstanding
borrowings under the Revolving Credit Facility of $20.7 million, bearing
interest at an annualized rate of 7.7%. The Revolving Credit Facility contains
certain affirmative and negative covenants relating to the Company's operations,
certain of which were amended in February 1999 in order to provide additional
flexibility to the Company as well as enabling it to be in compliance as of
December 31, 1998. These covenant modifications also resulted in a 0.5% per
annum increase in the bank margin component of the interest rate charged
thereunder, which was offset by a 0.6% per annum decrease in the Eurodollar base
rate during the first quarter of 1999.
The Company regularly evaluates its compliance with the financial
covenants included in the Revolving Credit Facility, and was in compliance with
the covenants in effect as of March 31, 1999. The Company believes that it will
be in compliance with those covenants until the expiration of the Liquidity
Facility in July 1999 and it expects to be in compliance subject to
appropriately restructured debt and/or convenants after that date; however,
there can be no assurance that the Company will be in compliance with those
covenants at June 30, 1999 or that it will not require waivers from the
syndicate of lenders led by BankBoston, N.A., regarding compliance with those
covenants as of that date, or at subsequent dates. In the event waivers are
required, but are not granted, the Company could experience liquidity problems
depending on the ability and willingness of the syndicate of lenders to continue
lending to the Company, and the availability and cost of financing from other
sources.
17
<PAGE>
In February 1998, the Company entered into a five year notional $42.5
million interest rate collar agreement with Bank Boston, N.A., whereby the
Company receives interest on that notional amount to the extent 30 day LIBOR
exceeds 6.25% per annum, and pays interest on that amount to the extent 30 day
LIBOR is less than 5.43% per annum. This derivative financial instrument 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 its Securitization Facility, and is not held or issued for trading purposes.
Unrealized losses arising from this agreement are not required to be and have
not been recognized in the Company's results of operations - see Note 5 to the
Company's Consolidated Financial Statements.
As of March 31, 1999, the Company had (i) bank standby letters of
credit outstanding, in the aggregate amount of $10.4 million under a $15.0
million letter of credit facility (which is part of the Revolving Credit
Facility) to secure certain workers' compensation obligations already recorded
as a liability on the Company's balance sheet; (ii) $9.9 million of promissory
notes outstanding in connection with certain acquisitions, primarily bearing
interest at imputed rates from 8.75% to 12.0% per annum and payable during the
next two years, and subordinated to the repayment of the Revolving Credit
Facility; (iii) obligations under capital leases for property and equipment in
the aggregate amount of $2.0 million; and (iv) obligations under mortgages
totaling $4.2 million.
The Company's principal uses of cash are for wages and related payments
to temporary and PEO employees, operating costs, acquisitions, capital
expenditures and repayment of debt and interest thereon. For Q1 1999, cash used
by operations was approximately $3.8 million, compared with $5.4 million
provided in Q1 1998. Cash used in investing activities during Q1 1999 was
approximately $0.8 million, compared with $18.5 million in Q1 1998, primarily
expenditures of $18.2 million for acquisitions (primarily intangible assets).
Cash provided by financing activities during Q1 1999 was approximately $0.5
million, comprised primarily of a $1.7 million increase in the Company's
liability for outstanding checks (in excess of the funded bank balances), offset
by $1.0 million of repayments of long term debt. Cash provided by financing
activities during Q1 1998 was approximately $14.3 million, primarily $14.5
million from borrowings under the Revolving Credit Facility.
Prior to 1999, the Company secured its workers' compensation
obligations by the issuance of bank standby letters of credit to its insurance
carriers, minimizing the required current cash outflow for such items. In 1999,
the Company selected a prefunded deductible program whereby expected claims
expenses are funded in advance in exchange for reductions in administrative
costs. The required advance funding will be provided through either cash flows
from operations or additional borrowings under the Revolving Credit Facility.
This new arrangement could adversely affect the Company's ability to meet
certain financial covenants, although the Company was successful in reducing the
outstanding letter of credit by $2.0 million in April 1999. Although 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, this limit was increased to approximately 2.7%
for calendar 1999, from approximately 2.4% in 1998, reflecting the inclusion of
general and automobile liability coverage as well as an adjustment based on the
changing business mix of the Company.
One of the key elements of the Company's growth strategy in 1997 and
1998 has been expansion through acquisitions, which require significant sources
of financing; however, the Company does not expect to complete further
acquisitions until its internal revenue growth rate and the resulting operating
performance of its existing locations improve. The financing sources for
acquisitions 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 industrial staffing area, and when it resumes
acquisition activity, the Company expects this trend to continue due to the more
favorable pricing for those businesses (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. Staffing employees are paid by
the Company on a daily or weekly basis. The Company, however, receives payment
from customers for these services, on average, 45 to 60 days from the
presentation date of the invoice. Beginning in the fourth quarter of 1998, the
Company experienced an increase in the percentage of its staffing accounts
receivable that are past due. As a result, the Company has taken several
actions, including among other things increasing the number of employees
focusing on accounts receivable issues and establishing employee compensation
plans based on satisfactory collections, which it believes will satisfactorily
address this issue so that there is no adverse long-term impact to the Company.
As new staffing offices are established or acquired, or as existing offices
expand, there will be increasing requirements for cash to fund operations. The
Company pays its PEO employees on a weekly, bi-weekly, semi-monthly or monthly
basis for their services, and currently receives payments on a simultaneous
basis from approximately 80% (based on revenues) of its existing customers, with
the remainder paying on average 30 to 45 days from the presentation date of the
invoice.
The Company anticipates spending up to $4.0 million during the next
twelve months to open new staffing locations, improve its management information
and operating systems, upgrade existing and acquired locations and other capital
18
<PAGE>
expenditures. This amount does not include expenditures for goodwill or other
intangible assets arising from acquisitions, which the Company does not expect
to be significant in 1999.
During February through May 1999, in order to remain in compliance with
certain covenants in its Revolving Credit Facility, and to reduce the cash
impact of scheduled payments under its subordinated acquisition debt, the
Company has negotiated extensions of the payment dates and modified the interest
rates and other terms of certain of its subordinated acquisition notes payable.
During April 1999, the Company received approximately $1.6 million from
a financial institution in connection with a sale/leaseback transaction, which
amount was approximately equal to the net book value of property and equipment
previously purchased by the Company. The proceeds were used to reduce
outstanding borrowings under the Revolving Credit Facility, creating additional
availability thereunder, and are repayable over three years at an interest rate
of approximately 10% per annum.
The Company believes that funds provided by operations, including sales
of accounts receivable under the Securitization Facility, plus borrowings under
the Revolving Credit Facility and current cash balances will be sufficient to
meet its presently anticipated needs for working capital and capital
expenditures, not including new acquisitions, for the next twelve months.
Significant new acquisitions, which the Company does not expect to pursue during
1999, will require expanded or new borrowing facilities, issuance of Common
Stock and/or additional debt or equity offerings. The ability of the Company to
make significant future acquisitions is also subject to the Company's ability to
successfully negotiate more flexible leverage (e.g., debt to EBITDA) covenants
compared to those presently contained in the Revolving Credit 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. There can be no assurance that additional capital will be
available to the Company on acceptable terms.
Acquisitions
During 1995, the Company made four staffing acquisitions including five
offices and approximately $7.0 million in revenues for the twelve months
preceding each acquisition ("annual historical revenue"). During 1996, the
Company made five staffing acquisitions including 13 offices and approximately
$16.0 million in annual historical revenue. During 1997, the Company made eight
staffing acquisitions including 30 offices and approximately $61.0 million in
annual historical revenue. During 1998, the Company made 17 staffing
acquisitions including 40 offices and approximately $96.0 million in annual
historical revenue. These acquisitions have resulted in a significant increase
in goodwill and other intangible assets and correspondingly have resulted and
will continue to result in increased amortization expense. In addition, the
amount of these intangible assets as a percentage of the Company's total assets
and shareholders' equity has increased significantly and while the net
unamortized balance of intangible assets as of March 31, 1999 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 industrial staffing services in the last two
quarters of the year, as compared to the first two quarters. In 1998, the
seasonal increase in industrial staffing revenue was lower than that experienced
in prior years, which the Company attributes to slower economic activity in U.S.
manufacturing and distribution; however, the Company believes there is evidence
that this sector has begun to improve in 1999 although there can be no assurance
that this trend exists or will continue. Even though there is a seasonal
reduction of 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 proportionally because
most of that infrastructure is needed to support anticipated increased revenues
in subsequent quarters. PEO revenues are generally not subject to seasonality to
the same degree as industrial staffing revenues although the net income
contribution of PEO revenues expressed as a percentage of sales is significantly
lower than the net income contribution of industrial staffing revenues. As a
result of the above factors, the Company historically experiences operating
income in the first quarter of a year that is significantly less than (i) the
fourth quarter of the preceding year and (ii) the subsequent three quarters of
the same year.
Inflation
The effects of inflation on the Company's operations were not
significant during the periods presented in the financial statements. Throughout
the periods discussed above, the increases in revenues have resulted primarily
from higher volumes, rather than price increases.
19
<PAGE>
New Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 defines derivatives and establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 also requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999, and cannot be applied retroactively. The
Company intends to first implement SFAS No. 133 in its consolidated financial
statements as of and for the three months ended March 31, 2000, although it has
not determined the effects, if any, that implementation will have. However, SFAS
No. 133 could increase volatility in earnings and other comprehensive income.
Year 2000 Issue
As many computer systems, software programs and other equipment with
embedded chips or processors (collectively, "Information Systems") use only two
digits rather than four to define the applicable year, they may be unable to
process accurately certain data, during or after the year 2000. As a result,
business and governmental entities are at risk for possible miscalculations or
systems failures causing disruptions in their business operations. This is
commonly known as the Year 2000 ("Y2K") issue. The Y2K issue concerns not only
Information Systems used solely within a company but also concerns third
parties, such as customers, vendors and creditors, using Information Systems
that may interact with or affect a company's operations.
The Y2K issue can affect the Company's flexible staffing and PEO
operations, including, but not limited to, payroll processing, cash and
invoicing transactions, and financial reporting and wire transfers from and to
the Company's banking institutions. In 1996, the Company initiated a conversion
of the primary software being used in its flexible staffing and PEO operations,
as well as its corporate-wide accounting and billing software. Although this
conversion was undertaken for the primary purpose of achieving a common data
structure for all significant Company applications as well as enhancing
processing capacity and efficiency, the Company believes that it also will
result in software that properly interprets dates beyond the year 1999 ("Year
2000 Compliant").
The Company's State of Readiness:
The Company has implemented a Y2K readiness program with the objective
of having all of the Company's significant Information Systems functioning
properly with respect to Y2K before January 1, 2000. The first component of the
Company's readiness program was to identify the internal Information Systems of
the Company that are susceptible to system failures or processing errors as a
result of the Y2K issue. This effort is substantially complete. All operating
divisions have identified the Information Systems that may require remediation
or replacement and have established priorities for repair or replacement. Those
Information Systems considered most critical to continuing operations have been
given the highest priority. The second component of the Y2K readiness program
involves the actual remediation and replacement of Information Systems. The
Company is using both internal and external resources to complete this process.
Information Systems ranked highest in priority, such as the corporate accounting
and billing software, have either been remediated or replaced or scheduled for
remediation or replacement. The remediation and replacement of internal
Information Systems is substantially complete, with the final testing and
certification for Y2K readiness anticipated by June 1999. This does not include
the Information Systems utilized in franchise locations, which the Company
anticipates will be Year 2000 Compliant no later than September 30, 1999.
As to the third component of the Y2K readiness program, the Company has
identified its significant customers, vendors and creditors that are believed,
at this time, to be critical to business operations subsequent to January 1,
2000, and steps are underway to reasonably ascertain their respective stages of
Y2K readiness through the use of questionnaires, interviews, on-site visits and
other available means. The Company will take appropriate action based on those
responses, but there can be no assurance that the Information Systems provided
by or utilized by other companies which affect the Company's operations will be
timely converted in such a way as to allow them to continue normal business
operations or furnish products, services or data to the Company without
disruption.
20
<PAGE>
Risks:
If needed remediations and conversions to the Information Systems are
not made on a timely basis by the Company or its materially-significant
customers or vendors, the Company could be affected by business disruption,
operational problems, financial loss, legal liability to third parties and
similar risks, any of which could have a material adverse effect on the
Company's operations, liquidity or financial condition. Although not
anticipated, the most reasonably likely worst case scenario in the event the
Company or its key customers or vendors fail to resolve the Y2K issue would be
an inability on the part of the Company to perform its core functions of payroll
administration, tax reporting, unemployment and insurance claims filings,
billing and collections, and health benefits administration. Factors which could
cause material differences in results, many of which are outside the control of
the Company, include, but are not limited to, the Company's ability to identify
and correct all relevant computer software, the accuracy of representations by
manufacturers of the Company's Information Systems that their products are Y2K
compliant, the ability of the Company's customers and vendors to identify and
resolve their own Y2K issues and the Company's ability to respond to unforeseen
Y2K complications.
Contingency Plans:
While the Company continues to focus on solutions for Y2K issues, and
expects to be Y2K compliant in a timely manner, the Company, concurrently with
the Y2K readiness measures described above, has established a Y2K project team
whose mission is to develop contingency plans intended to mitigate the possible
disruption in business operations that may result from the Y2K issue. The
Company's Y2K project team, consisting of personnel from management, information
systems/technology and legal areas, is in the process of developing such plans
and the cost estimates to implement them. Contingency plans may include
purchasing or developing alternative software programs, the purchase of computer
hardware and peripheral equipment, and other appropriate measures. Once
developed, contingency plans and related cost estimates will be continually
refined as additional information becomes available. The Y2K project team
expects to conclude the development of these contingency plans by June 30, 1999.
Y2K Costs:
The Company's management estimates that the total cost to the Company
of its Y2K compliance activities will not exceed $150,000, which is not
considered material to the Company's business, results of operations or
financial condition. The costs and time necessary to complete the Y2K
modification and testing processes are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors; however, there can be no assurance that these estimates will be
achieved and actual results could differ from the estimates.
The Company has capitalized and will continue to capitalize the costs
of purchasing and developing new Y2K compliant Information Systems, but will
expense the costs of the modifications to existing hardware and software made
solely for purposes of Y2K compliance. Most of the cost of purchasing or
modifying software in this regard had been incurred as of March 31, 1999. Any
remaining capitalized balance for Information Systems no longer utilized because
of replacement by Y2K compliant Information Systems will be expensed at the time
such hardware and software is replaced. The Company's Y2K readiness program is
an ongoing process and the estimates of costs and completion dates for various
components of the Y2K readiness program described above are subject to change.
Forward-Looking Information: Certain Cautionary Statements
Certain statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Form 10-Q are forward looking statements, including but not limited to,
statements regarding the Company's expectations or beliefs concerning the
Company's strategy and objectives, expected sales and other operating results,
the effect of changes in the Company's gross margin, the Company's liquidity,
anticipated capital spending, the availability of financing, equity and working
capital to meet the Company's future needs, economic conditions in the Company's
market areas, the potential for and effect of future acquisitions, the Company's
ability to resolve the Year 2000 issue and the related costs and the
tax-qualified status of the Company's 401(k) and 413(c) plans. The words "aim,"
"believe," "expect," "anticipate," "intend," "estimate," "will," "should,"
21
<PAGE>
"could" and other expressions which indicate future events and trends identify
forward looking statements. Such forward looking statements involve known and
unknown risks and are also based upon assumptions of future events, which may
not prove to be accurate. Therefore, actual results may differ materially from
any future results expressed or implied in the forward looking statements. These
known and unknown risks and uncertainties, include, but are not limited to
changes in U.S. economic conditions, particularly in the manufacturing sector;
the Company's dependence on regulatory approvals; its future cash flows, sales,
gross margins and operating costs; the effect of changing market and other
conditions in the staffing industry; the ability of the Company to continue to
grow; legal proceedings, including those related to the actions of the Company's
temporary or leased employees; the availability and cost of credit; the ability
to maintain existing banking relationships; the Company's ability to raise
capital in the public equity markets; the availability of capital for additional
acquisitions and the Company's ability to identify suitable acquisition
candidates and to successfully negotiate and complete those acquisitions on
favorable terms; the ability to successfully integrate past and future
acquisitions into the Company's operations; the recoverability of the recorded
value of goodwill and other intangible assets arising from past and future
acquisitions; the general level of economic activity and unemployment in the
Company's markets, specifically within the construction, manufacturing,
distribution and other light industrial trades; increased price competition;
changes in government regulations or interpretations thereof, particularly those
related to employment; the continued availability of qualified temporary
personnel; the financial condition of the Company's clients and their demand for
the Company's services (which in turn may be affected by the effects of, and
changes in, U.S. and worldwide economic conditions); collection of accounts
receivable; the Company's ability to retain large clients; the Company's ability
to recruit, motivate and retain key management personnel; the costs of complying
with government regulations (including occupational safety and health
provisions, wage and hour and minimum wage laws and workers' compensation and
unemployment insurance laws) and the ability of the Company to increase fees
charged to its clients to offset increased costs relating to these laws and
regulations; volatility in the workers' compensation, liability and other
insurance markets; inclement weather; interruption, impairment or loss of data
integrity or malfunction of information processing systems; changes in
government regulations or interpretations thereof, particularly those related to
PEOs, including the possible adoption by the IRS of an unfavorable position as
to the tax-qualified status of employee benefit plans maintained by PEOs, and
other risks detailed from time to time by the Company or in its press releases
or in its filings with the Securities and Exchange Commission.
In addition, the market price of the Company's stock may from time to
time be significantly volatile as a result of, among other things, the Company's
operating results, the operating results of other temporary staffing and PEO
companies, economic conditions, the proportion of the Company's stock available
for active trading and the performance of the stock market in general.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for management to predict all of such factors. Further, management
cannot assess the impact of each such factor on the business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
Subsequent written and oral forward looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by cautionary statements in this paragraph and elsewhere in this Form
10-Q, and in other reports filed by the Company with the Securities and Exchange
Commission, including, but not limited to the Company's Registration Statement
on Form S-3 (File No. 333-69125), including the "Risk Factors" section thereof,
filed with the Securities and Exchange Commission on December 17, 1998, and
declared effective on January 6, 1999.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's assessment of its
sensitivity to market risk as of March 31, 1999, as compared to the information
included in Part II, Item 7A, "Quantitative and Qualitative Disclosures About
Market Risk", of the Company's Form 10-K for the year ended December 31, 1998,
as filed with the Securities and Exchange Commission on March 31, 1999.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
The Revolving Credit Facility contains certain affirmative and negative
covenants relating to the Company's operations, certain of which were amended in
February 1999 in order to provide additional flexibility to the Company as well
as enabling it to be in compliance as of December 31, 1998. These covenant
modifications also resulted in a 0.5% per annum increase in the bank margin
component of the interest rate charged thereunder, which was offset by a 0.6%
per annum decrease in the Eurodollar base rate during the first quarter of 1999.
The Company regularly evaluates its compliance with the financial
covenants included in the Revolving Credit Facility, and was in compliance with
the covenants in effect as of March 31, 1999. The Company believes that it will
be in compliance with those covenants until the expiration of the Liquidity
Facility in July 1999 and it expects to be in compliance subject to
appropriately restructured debt and/or convenants after that date; however,
there can be no assurance that the Company will be in compliance with those
covenants at June 30, 1999 or that it will not require waivers from the
syndicate of lenders led by BankBoston, N.A., regarding compliance with those
covenants as of that date, or at subsequent dates. In the event waivers are
required, but are not granted, the Company could experience liquidity problems
depending on the ability and willingness of the syndicate of lenders to continue
lending to the Company, and the availability and cost of financing from other
sources.
ITEM 5 - OTHER INFORMATION
Effective February 22, 1999, James E. Money resigned his position as
President of the Company's Tandem division. The Tandem division is currently
headed by Paul Burrell, the Company's CEO, and Ronald Blain, Tandem's chief
operating officer.
23
<PAGE>
Effective March 15, 1999, Jay D. Seid, a Managing Director of Bachow
and Associates, Inc., replaced Samuel H. Schwartz as Bachow's designated member
on the Company's Board of Directors. Mr. Schwartz resigned from the Board of
Directors following his resignation as a Vice President of Bachow. Mr. Seid, an
attorney, joined Bachow, a Bala Cynwyd, PA based investment firm, in December
1992. Mr. Seid will be a candidate for reelection to the Board at the Company's
May 1999 annual meeting of shareholders.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
NUMBER DESCRIPTION
3.1 Amended and Restated Articles of Incorporation of the Company(1)
3.2 Amended and Restated Bylaws of the Company(2)
4.3 Shareholder Protection Rights Agreement(2)
4.6 Warrant Dated February 21, 1997 Issued to Triumph-Connecticut
Limited Partnership(3)
4.7 Warrant Dated February 21, 1997 Issued to Bachow Investment Partners
III, L.P.(3)
4.8 Warrant Dated February 21, 1997 Issued to State Street Bank and Trust
Company of Connecticut, N.A., as Escrow Agent(3)
10.19 Third Amended and Restated Credit Agreement among OutSource
International, Inc., the banks from time to time parties hereto and
BankBoston, N.A., successor by merger to Bank of Boston, Connecticut,
as agent - Revolving Credit Facility dated as of July 27, 1998.(4)
10.34 Receivables Purchase and Sale Agreement dated July 27, 1998 among
OutSource International, Inc., OutSource Franchising, Inc., Capital
Staffing Fund, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
Inc., Synadyne IV, Inc., Synadyne V, Inc., and OutSource International
of America, Inc., each as an originator, and OutSource Funding
Corporation, as the buyer, and OutSource International, Inc., as the
servicer.(4)
10.35 Receivables Purchase Agreement dated July 27, 1998 among OutSource
Funding Corporation, as the seller, and EagleFunding Capital
Corporation, as the purchaser, and BancBoston Securities, Inc., as the
deal agent and OutSource International, Inc., as the servicer.(4)
10.36 Intercreditor Agreement dated July 27, 1998 by and among BankBoston,
N.A., as lender agent; OutSource Funding Corporation, OutSource
International, Inc., OutSource Franchising, Inc., Capital Staffing
Fund, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc.,
Synadyne IV, Inc., Synadyne V, Inc. and OutSource International of
America, Inc., as originators; OutSource International, in its separate
capacity as servicer; EagleFunding Capital Corporation, as purchaser;
and BancBoston Securities Inc., individually and as purchaser agent.(4)
10.50 First Amendment to Third Amended and Restated Credit Agreement among
OutSource International, Inc., each of the banks party to the Credit
Agreement and BankBoston, N.A., as agent for the banks, dated as of
February 22, 1999.(5)
27 Financial Data Schedule
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the Exhibits to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration Statement
No. 333-33443) as filed with the Securities and Exchange Commission on
October 21, 1997.
(2) Incorporated by reference to the Exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Registration Statement
No. 333-33443) as filed with the Securities and Exchange Commission on
September 23, 1997.
(3) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-1 (Registration Statement No. 333-33443) as filed
with the Securities and Exchange Commission on August 12, 1997.
(4) Incorporated by reference to the exhibits to the Company's Form 10-Q
for the quarterly period ended June 30, 1998, as filed with the
Securities and Exchange Commission on August 14, 1998.
(5) Incorporated by reference to the exhibits to the Company's Form 10-K
for the year ended December 31, 1998, as filed with the Securities and
Exchange Commission on March 31, 1999.
- --------------------------------------------------------------------------------
(b) Reports on Form 8 - K:
No reports were filed on Form 8-K during the quarter ended March 31, 1999.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OUTSOURCE INTERNATIONAL, INC.
Date: May 17, 1999 By: /s/ Paul M. Burrell
------------------------------------------
Paul M. Burrell
President, Chief Executive Officer
and Chairman of the Board of Directors
Date: May 17, 1999 By: /s/ Scott R. Francis
------------------------------------------
Scott R. Francis
Chief Financial Officer
(Principal Financial Officer)
Date: May 17, 1999 By: /s/ Robert E. Tomlinson
------------------------------------------
Robert E. Tomlinson
Chief Accounting Officer
(Principal Accounting Officer)
25
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
MULTIPLIER DOES NOT APPLY TO PER SHARE AMOUNTS. THIS SCHEDULE CONTAINS
SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE
REGISTRANT FOR THE PERIODS NOTED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1999 DEC-31-1998 MAR-31-1998
<CASH> 1,418 5,501 0
<SECURITIES> 0 0 0
<RECEIVABLES> 20,503 14,870 0
<ALLOWANCES> (2,216) (1,924) 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 28,424 26,683 0
<PP&E> 25,713 24,903 0
<DEPRECIATION> (8,144) (7,275) 0
<TOTAL-ASSETS> 112,918 112,002 0
<CURRENT-LIABILITIES> 38,337 35,382 0
<BONDS> 37,427 38,305 0
0 0 0
0 0 0
<COMMON> 9 9 0
<OTHER-SE> 43,998 44,579 0
<TOTAL-LIABILITY-AND-EQUITY> 112,918 112,002 0
<SALES> 0 0 0
<TOTAL-REVENUES> 134,114 0 120,986
<CGS> 0 0 0
<TOTAL-COSTS> 114,651 0 102,948
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,582 0 1,080
<INCOME-PRETAX> (1,030) 0 843
<INCOME-TAX> (449) 0 170
<INCOME-CONTINUING> (581) 0 673
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (581) 0 673
<EPS-PRIMARY> (0.07) 0 0.08
<EPS-DILUTED> (0.07) 0 0.07
</TABLE>
