<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 2000
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
-----------------
OUTSOURCE INTERNATIONAL, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA
------------------------------------------------------
(State or other jurisdiction of incorporation)
7363 65-0675628
--------------------------- ----------------------
(Primary Standard Industrial (I.R.S Employer
Classification Code Number) Identification Number)
1690 SOUTH CONGRESS AVENUE, SUITE 210
DELRAY BEACH, FLORIDA 33445
561-454-3500
--------------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area
Code, of Registrant's Principal Executive Offices)
JOSEPH C. WASCH
VICE PRESIDENT AND GENERAL COUNSEL
1690 SOUTH CONGRESS AVENUE, SUITE 210
DELRAY BEACH, FLORIDA 33445
561-454-3500
--------------------------------------------------------------------------------
(Name, Address Including Zip Code, and Telephone Number, Including Area
Code, of Agent for Service)
------------------------
(copies to)
DONN A. BELOFF, ESQ.
AKERMAN, SENTERFITT & EIDSON, P.A.
350 EAST LAS OLAS BOULEVARD, SUITE 1600
FORT LAUDERDALE, FLORIDA 33301
954-463-2700
Approximate date of commencement of proposed sale to the public: FROM TIME TO
TIME AFTER EFFECTIVENESS OF THIS REGISTRATION STATEMENT. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the earlier offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
------------------------------------------------- -------------- -------------------- ------------------- -----------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) UNIT(2) OFFERING PRICE(2) FEE
------------------------------------------------- -------------- -------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Common stock, par value $.001 per share 6,171,771(3)(4) $.6875 $4,243,092.56 $1,120.18
------------------------------------------------- -------------- -------------------- ------------------- -----------------
</TABLE>
(1) In the event of a stock split, stock dividend or similar transaction
involving the common stock of the Registrant, the number of shares
registered hereby shall be automatically increased pursuant to Rule 416 to
cover the additional shares of common stock.
(2) Estimated solely for the purpose of calculating the registration fee under
Rule 457(c) under the Securities Act. The average of the bid and asked
prices of the Registrant's common stock as reported on the OTC Bulletin
Board System on October 24, 2000 was $0.6875.
(3) Represents 2,045,667 shares issuable upon the exercise of warrants and
options and 4,126,104 shares issued in private transactions.
(4) Includes 179,273 shares previously registered on a Registration Statement
on Form S-3 (Regis. No. 333-69125), which are being carried forward and
included in this Registration Statement pursuant to Rule 429 under the
Securities Act. The registrant paid registration fees of $250.00 on
December 17, 1998, in connection with the original registration of the
179,273 shares. Therefore, the registration fee has been calculated on the
registration of 5,992,499 shares.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
PROSPECTUS
6,171,771 SHARES
OUTSOURCE INTERNATIONAL, INC.
COMMON STOCK
This prospectus relates to an aggregate of up to 6,171,771 shares of
common stock of Outsource International, Inc. being offered for sale from time
to time by the selling shareholders named in this prospectus. The shares of
common stock offered by this prospectus include 4,126,104 shares acquired by
some of the selling shareholders in private transactions and 2,045,667 shares
that some of the selling shareholders may acquire upon the exercise of warrants
and options they hold. Registering these shares of common stock will allow the
selling shareholders to sell the shares publicly or otherwise to distribute
these shares.
The selling shareholders may offer these shares of common stock in one
or more transactions on the Over the Counter Bulletin Board (OTCBB) at prices
then prevailing, in negotiated transactions, or otherwise. The selling
shareholders and brokers through whom the sale of the shares of common stock are
made may be deemed to be "underwriters" within the meaning of Section 2(11) of
the Securities Act of 1933. In addition, any profits realized by the selling
shareholders or such brokers on the sale of shares of common stock may be deemed
to be underwriting commissions under the Securities Act. This prospectus also
may be used, with our prior consent, by donees or pledgees of the selling
shareholders, or by other persons acquiring these shares, who wish to offer and
sell the shares under circumstances requiring or making desirable its use. The
price at which any of the shares of common stock may be sold and the commissions
paid in connection with any sale may vary from transaction to transaction.
We are paying all expenses of registration incurred in connection with
this offering, but all brokerage commissions, discounts and other expenses
incurred by individual selling shareholders will be borne by the individual
selling shareholders. We will not receive any of the proceeds from sales by
selling shareholders.
Our common stock is traded on the OTCBB under the symbol "OSIX." On
October 27, 2000, the last reported bid price of the common stock on the OTCBB
was $1.00 per share.
INVESTING IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS THAT WE
DESCRIBE IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 8.
We may amend or supplement this prospectus from time to time by filing
amendments or supplements as required. You should read the entire prospectus and
any amendments or supplements carefully before you make your investment
decision.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SUBJECT TO COMPLETION, DATED OCTOBER 30, 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PROSPECTUS SUMMARY................................................................................................1
RISK FACTORS......................................................................................................8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................15
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................................39
BUSINESS.........................................................................................................41
PROPERTIES.......................................................................................................50
LEGAL PROCEEDINGS................................................................................................50
MARKET PRICE AND DIVIDEND DATA...................................................................................51
MANAGEMENT.......................................................................................................52
RELATED PARTY TRANSACTIONS.......................................................................................60
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS...................................................64
DESCRIPTION OF CAPITAL STOCK.....................................................................................67
DIVIDEND POLICY..................................................................................................70
SELLING SHAREHOLDERS.............................................................................................70
USE OF PROCEEDS..................................................................................................72
PLAN OF DISTRIBUTION.............................................................................................72
EXPERTS..........................................................................................................73
LEGAL MATTERS....................................................................................................73
ADDITIONAL INFORMATION...........................................................................................73
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
</TABLE>
You should rely only on the information contained in this prospectus or
any supplement. We have not authorized anyone to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer of these securities in any
jurisdiction where the offer or sale is not permitted. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the front cover of this prospectus or any supplement.
-ii-
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information that we present more fully in the
rest of this prospectus. This summary is not complete and does not contain all
of the information that you should consider before buying shares of our common
stock. You should read the entire prospectus carefully.
OUTSOURCE INTERNATIONAL, INC.
We are a provider of human resource services focusing on the flexible
industrial staffing market through our Tandem division. Tandem recruits, trains
and deploys temporary industrial personnel and provides payroll administration,
risk management and benefits administration services to our clients. Tandem's
clients include businesses in the manufacturing, distribution, hospitality and
construction industries.
As of October 1, 2000, our Tandem division provided approximately
23,800 flexible staffing personnel daily through a nationwide network of 84
company-owned and 51 franchised recruiting and dispatch branch offices. Our
Tandem division has approximately 5,000 clients and provides services to
approximately 3,000 of these clients each day. We aggregate our company-owned
Tandem branches into 12 geographical districts, which we combine into three
geographic zones: East, Midwest and West.
Staffing companies provide one or more of four basic services to
clients: (i) flexible staffing; (ii) professional employer organization, or PEO,
services; (iii) placement and search; and (iv) outplacement. Based on
information provided by the American Staffing Association (formerly the National
Association of Temporary and Staffing Services), the National Association of
Professional Employer Organizations and Staffing Industry Analysts, Inc., 1999
staffing industry revenues were approximately $117 billion. Over the last five
years, the staffing industry has experienced significant growth, due largely to
the utilization of temporary help across a broader range of industries, as well
as the emergence of the PEO sector. Staffing industry revenues grew from
approximately $102 billion in 1998 to approximately $117 billion in 1999, or
14.7%. During that same period, the industrial staffing sector grew from
approximately $15.6 billion to approximately $16.7 billion, or 7.0%. During
1999, the industrial staffing sector represented 12.6% of the staffing industry,
compared to 13.8% during 1998.
Outsource International, Inc. was incorporated in April 1996. Our
principal executive offices are located at 1690 South Congress Avenue, Suite
210, Delray Beach, Florida 33445. Our telephone number is (561) 454-3500.
<PAGE> 5
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock outstanding as of
October 20, 2000.......................... 8,687,488 shares
Common stock offered by the selling
shareholders.............................. 6,171,771 shares
Use of proceeds............................ We will not receive any proceeds from the sale of
the shares by the selling shareholders.
Trading symbol on the OTCBB ............... OSIX
</TABLE>
RISK FACTORS
You should consider the risks described in the "Risk Factors" section
before investing in our common stock. If any of the risks occur, our business
could be adversely affected and you could lose part or all of your investment.
SUMMARY FINANCIAL DATA
We have derived the consolidated balance sheet data and consolidated
statement of operations data set forth on the following pages as of and for each
of the five years in the period ended December 31, 1999 and the transition
quarter ended April 2, 2000 from our audited consolidated financial statements.
The condensed consolidated financial statements of the Company as of July 2,
2000 and for the quarterly periods ended July 2, 2000 and June 30, 1999 are
derived from unaudited financial statements, but in the opinion of management
include all adjustments necessary, including normal accruals, to present fairly
the results of operations in conformity with generally accepted accounting
principles. We have derived the system operating data and other data from our
books and records, and certain reclassifications have been made to the
presentation of the results of operations for the quarter ended June 30, 1999
and for each of the years ended December 31, 1999, 1998 and 1997, to conform to
current presentation. In addition, we changed our fiscal year end from December
31 to the 52 or 53 week period ending on the Sunday closest to March 31. Our
transition period is January 1, 2000 through April 2, 2000. You should read the
data together with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and related
notes, and the other financial data included in this prospectus.
2
<PAGE> 6
<TABLE>
<CAPTION>
TRANSITION
QUARTER ENDED QUARTER ENDED
--------------------------------- ------------------
JULY 2, 2000 JUNE 30, 1999 APRIL 2, 2000
-------------- --------------- ------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Consolidated Statement of
Operations Data(1):
Net revenues $ 81,618 $ 143,454 $ 126,011
Cost of revenues 65,432 123,110 109,157
--------- --------- ---------
Gross Profit 16,186 20,344 16,854
Shareholders' compensation -- -- --
Provision (reduction) for doubtful
accounts 9 585 (472)
Amortization of intangible assets 734 934 734
Restructuring costs 878 -- 356
Asset impairment charges -- -- --
Other selling, general and
administrative expenses 13,979 19,328 17,143
--------- --------- ---------
Operating income (loss) 586 (503) (907)
Net interest expense 1,913 1,702 2,016
Other (income) expense(2) (724) (20) (259)
--------- --------- ---------
(Loss) income before provision
(benefit) for income taxes and
extraordinary item (3) (603) (2,185) (2,664)
(Benefit) provision for income taxes (7,689) (936) --
--------- --------- ---------
Income (loss) before extraordinary
item $ 7,086 $ (1,249) $ (2,664)
========= ========= =========
Weighted average basic common
shares outstanding(5) 8,658 8,658 8,658
========= ========= =========
Weighted average diluted common
shares outstanding(5) 9,857 8,658 8,658
========= ========= =========
Basic earnings (loss) per share
before extraordinary item $ 0.82 $ (0.14) $ (0.31)
========= ========= =========
Diluted earnings (loss) per share
before extraordinary item $ 0.72 $ (0.14) $ (0.31)
========= ========= =========
Other Data(6):
EBITDA, as adjusted $ 2,918 $ 1,406 $ 970
========= ========= =========
Net (loss) income, as adjusted $ (487) $ (1,249) $ (2,506)
========= ========= =========
Diluted (loss) earnings per share,
as adjusted (0.06) $ (0.14) $ (0.29)
========= ========= =========
System Operating Data:
System Revenues(7) $ 103,070 $ 159,350 $ 145,079
========= ========= =========
Number of employees (end of period) 20,000 35,000 26,000
Number of offices (end of period) 135 172 145
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data(1):
Net revenues $ 594,047 $ 565,394 $ 447,579 $ 280,171 $ 149,825
Cost of revenues 513,266 481,734 382,074 242,102 126,270
--------- --------- --------- --------- ---------
Gross Profit 80,781 83,660 65,505 38,069 23,555
Shareholders' compensation -- -- 292 2,321 2,370
Provision (reduction) for doubtful
accounts 5,505 1,572 1,506 556 321
Amortization of intangible assets 3,702 3,684 1,853 424 41
Restructuring costs 11,220 -- -- -- --
Asset impairment charges 2,603 -- -- -- --
Other selling, general and
administrative expenses 76,382 66,436 51,445 29,285 17,367
--------- --------- --------- --------- ---------
Operating income (loss) (18,631) 11,968 10,409 5,483 3,456
Net interest expense 8,604 5,529 7,877 2,175 1,259
Other (income) expense(2) (479) (53) 1,821 1,448 (11)
--------- --------- --------- --------- ---------
(Loss) income before provision
(benefit) for income taxes and
extraordinary item (3) (26,756) 6,492 711 1,860 2,208
(Benefit) provision for income taxes 4,123 1,611 (69) -- --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
item $ (30,879) $ 4,881 $ 780 $ 1,860 $ 2,208
========= ========= ========= ========= =========
Unaudited pro forma data:
(Loss) income before provision (benefit)
for income taxes and extraordinary
item(3) 711 1,860 2,208
(Benefit) provision for income taxes(4) 296 757 859
--------- --------- ---------
Income (loss) before
extraordinary item (3)(4) $ 415 $ 1,103 $ 1,349
========= ========= =========
Weighted average basic common
shares outstanding(5) 8,658 8,604 6,055 5,785 5,785
========= ========= ========= ========= =========
Weighted average diluted common
shares outstanding(5) 8,658 9,919 7,320 5,844 5,785
========= ========= ========= ========= =========
Basic earnings (loss) per share
before extraordinary item $ (3.57) $ 0.57 $ 0.07 $ 0.19 $ 0.23
========= ========= ========= ========= =========
Diluted earnings (loss) per share
before extraordinary item $ (3.57) $ 0.49 $ 0.06 $ 0.19 $ 0.23
========= ========= ========= ========= =========
Other Data(6):
EBITDA, as adjusted $ 4,949 $ 18,777 $ 14,871 $ 9,027 $ 6,258
========= ========= ========= ========= =========
Net (loss) income, as adjusted $ (6,135) $ 5,022 $ 2,139 $ 3,220 $ 2,586
========= ========= ========= ========= =========
Diluted (loss) earnings per share,
as adjusted $ (0.71) $ 0.51 $ 0.29
========= ========= =========
System Operating Data:
System Revenues(7) $ 654,589 $ 647,301 $ 555,802 $ 389,314 $ 242,681
========= ========= ========= ========= =========
Number of employees (end of period) 35,000 36,000 32,000 23,000 16,200
Number of offices (end of period) 148 165 163 150 109
</TABLE>
3
<PAGE> 7
<TABLE>
<CAPTION>
AS OF TRANSITION
AS OF QUARTER ENDED
---------------------------- ----------------
JULY 2, 2000 JUNE 30, 1999 APRIL 2, 2000
------------ ------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital (deficiency) $ (34,951) $ (29,759) $ (44,268)
Total assets 107,799 112,627 108,569
Revolving Credit Facility and line of credit 50,626 18,216 50,746
Long-term debt to related parties
with current maturities 1,197 1,204 1,195
Other long-term debt, with
current maturities 9,001 16,216 9,569
Other non-current liabilities -- 983 --
Total shareholders' equity 18,130 42,759 11,045
Other Balance Sheet Data(8):
Total assets, as adjusted $ 107,799 $ 155,054 $ 108,569
Revolving Credit Facility and line
of credit, as adjusted 50,626 60,643 50,746
Working capital (deficiency), as adjusted 15,675 (11,543) 6,478
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital (deficiency) $ (42,043) $ (8,699) $ 33,651 $ (3,172) $ 1,540
Total assets 113,681 112,002 105,743 55,877 24,708
Revolving Credit Facility and line of credit 57,067 20,980 33,800 9,889 6,468
Long-term debt to related parties
with current maturities 1,195 1,286 100 11,275 --
Other long-term debt, with
current maturities 9,737 16,039 10,145 12,866 3,254
Other non-current liabilities -- 1,050 -- -- --
Total shareholders' equity 13,709 44,588 40,778 4,494 3,603
Other Balance Sheet Data(8):
Total assets, as adjusted $ 113,681 $ 156,808 $ 105,743 $ 55,877 $ 24,708
Revolving Credit Facility and line
of credit, as adjusted 57,067 65,786 33,800 9,889 6,468
Working capital (deficiency), as adjusted 15,024 (8,699) 33,651 (3,172) 1,540
</TABLE>
<TABLE>
<CAPTION>
TRANSITION
QUARTER ENDED QUARTER ENDED
---------------------------- -------------
JULY 2, 2000 JUNE 30, 1999 APRIL 2, 2000
------------- ------------- -------------
<S> <C> <C> <C>
Consolidated Statement of Cash Flow Data:
Cash flows (used in) provided by:
Operating activities $ (2,202) $ 3,444 $ 6,480
Investing activities 3,782 1,492 (770)
Financing activities (2,083) (3,791) (4,880)
-------- -------- --------
Net increase (decrease) in cash $ (503) $ 1,145 $ 830
======== ======== ========
Other Cash Flow Data (8):
Operating activities, as adjusted $ (2,022) $ (2,836) $ 6,480
Financing activities, as adjusted 2,083 2,489 (4,880)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Cash Flow Data:
Cash flows (used in) provided by:
Operating activities $(43,084) $ 50,761 $(12,910) $ (1,280) $ 2,787
Investing activities 9,049 (31,316) (24,744) (4,834) (2,026)
Financing activities 29,250 (15,629) 39,295 4,647 678
-------- -------- -------- -------- --------
Net increase (decrease) in cash $ (4,785) $ 3,816 $ 1,641 $ (1,467) $ 1,439
======== ======== ======== ======== ========
Other Cash Flow Data (8):
Operating activities, as adjusted $ 1,722 $ 5,955 $(12,910) $ (1,280) $ 2,787
Financing activities, as adjusted (15,556) 29,177 39,295 4,647 678
</TABLE>
---------------
(1) On August 6, 1999, we announced actions to improve our short-term
liquidity, concentrate on our operations within one core segment (Tandem,
our flexible staffing division) and improve our operating performance
within that segment. These actions included (a) the sale of our clerical
division, Office Ours, on August 30, 1999, (b) the sale of our professional
employer division, Synadyne, on April 8, 2000, and (c) the elimination of
47 Tandem branch offices, 41 of which had been sold, franchised, closed, or
consolidated as of July 2, 2000. See "Restructuring" as discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) In 1997, we issued warrants to purchase 1,360,304 shares of our common
stock. The holders of the warrants had a put right, as a result of which we
recorded a put warrants liability. Other (income) expense for the year
ended December 31, 1997 includes non-operating expense of $1.8 million
related to the adjustment of the initial put warrants liability recorded at
the time of the issuance of the warrants on February 21, 1997 based on
their fair value at that time, to the fair value of the warrants at the
time of our initial public offering, when the put right terminated. At the
time of our initial public offering, we reclassified the warrants, with an
adjusted carrying value of $20.4 million, from debt to additional paid-in
capital.
Other expense (income) for the year ended December 31, 1996 includes $1.4
million of unusual charges, primarily professional fees related to a
registration statement filed by us with the Securities and Exchange
Commission that was subsequently withdrawn and costs of an internal
investigation into certain of our transactions.
(3) We used the proceeds of our initial public offering in 1997 to repay the
full balance of outstanding senior notes. As a result we recorded an
extraordinary loss in 1997 of approximately $13.4 million (net of a $6.6
million income tax benefit). This loss consists of the unamortized debt
discount and the unamortized debt issuance costs related to the senior
notes. As a result of the reduction of the income tax benefit included in
the 1997 extraordinary loss and related to the release of certain put
warrants in 1998, we recorded an extraordinary loss of approximately $1.4
million in 1998.
(4) On February 21, 1997, a reorganization was consummated in which nine
companies under common ownership and management became our wholly-owned
subsidiaries. Prior to this reorganization, each of the subsidiaries had
elected to be taxed as a subchapter S corporation and, accordingly, were
not subject to income taxes. Therefore, there is no provision for income
taxes for periods prior to the reorganization. Pro forma income taxes and
net income have been computed as if we had been fully subject to federal
and applicable state income taxes for such periods. We recognized a
one-time tax benefit of $429,000 as a result of the termination, at the
time of the reorganization, of the subsidiaries' elections to be treated as
S corporations. This benefit is reflected in our historical results of
operations for the year ended December 31, 1997, but has been removed from
the pro forma results presented for that period.
4
<PAGE> 8
(5) Basic common shares outstanding includes (a) 5,448,788 shares of our common
stock issued in connection with the reorganization, (b) for the periods
prior to the reorganization, the equivalent number of shares of our common
stock (336,430) represented by the shares of common stock of the
subsidiaries purchased from certain shareholders for cash and notes in the
reorganization, (c) for the periods after our initial public offering, the
sale by us of 3,000,000 shares of our common stock and (d) for 1998,
209,125 shares representing the weighted average of 154,733 shares issued
and warrants exercised during the year. Diluted shares outstanding include
the above plus all outstanding options and warrants to purchase our common
stock calculated using the treasury stock method.
(6) For the eight week period ended February 21, 1997 and the years ended
December 31, 1996 and 1995, we elected to be treated as a subchapter S
corporation and, accordingly, our income was taxed at the shareholder
level. In addition, during this period, we paid compensation to our
founding shareholders and to our former Chairman, President and Chief
Executive Officer, who is also one of our shareholders. All of the
compensation for the founding shareholders and a portion of the
compensation for our former Chairman, President and Chief Executive Officer
was discontinued after February 1997. In 1997, we recorded non-operating
expense related to a valuation adjustment on certain put warrants issued in
1997. In 1999, we recorded (a) restructuring and asset impairment charges,
(b) a non-operating gain from the sale of our clerical division, (c) a loss
recorded as bad debt expense, arising from the sale to third parties of
certain accounts receivable primarily more than 180 days past due, (d) a
deferred tax valuation allowance, (e) interest expense arising from
accelerated amortization of loan fees, and (f) a gain of $0.3 million on
the sale of an interest rate hedge arising from the modification of our
revolving credit facility and the termination of our securitization
facility.
During the quarters ended April 2, 2000 ("Q1 2000") and July 2, 2000 ("Q2
2001"), we recorded charges to our restructuring reserve. During Q1 2000,
we recorded a non-operating gain from the sale of our PEO division, and
during Q1 2001, we recorded a gain on the sale of certain Tandem offices
and decrease to our deferred tax asset valuation allowance.
The following table presents EBITDA, (loss) income and diluted (loss)
earnings per share excluding the aforementioned items:
5
<PAGE> 9
<TABLE>
<CAPTION>
TRANSITION
QUARTER ENDED QUARTER ENDED
----------------------------- ----------------
JULY 2, 2000 JUNE 30, 1999 APRIL 2, 2000
-------------- ------------- ----------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
(Loss) income before provision (benefit)
for income taxes and extraordinary item $ (603) $ (2,185) $ (2,664)
Depreciation and amortization 1,406 1,889 1,461
Interest expense, net 1,913 1,702 2,016
Restructuring and asset impairment 878 -- 356
Shareholder compensation -- -- --
Put warrant valuation adjustment -- -- --
Registration costs -- -- --
Gain on the sale of Synadyne (684) -- --
Gain on the sale of Tandem offices -- -- (198)
Gain on the sale of Office Ours -- -- --
Impairment of accounts receivable to be sold -- -- --
Other 8 -- --
-------- ---------- ----------
Subtotal of adjustments 3,521 3,591 3,635
-------- ---------- ----------
EBITDA, as adjusted $ 2,918 $ 1,406 $ 971
======== ========== ==========
Income (loss) before extraordinary item $ 7,086 $ (1,249) $ (2,664)
Restructuring and asset impairment 878 -- 356
Shareholder compensation -- -- --
Put warrant valuation adjustment -- -- --
Registration costs -- -- --
Gain on the sale of Synadyne (684) -- --
Gain on the sale of Tandem offices -- -- (198)
Gain on the sale of Office Ours -- -- --
Impairment of accounts receivable to be sold -- -- --
Write off of loan fees -- -- --
Other -- -- --
-------- ---------- ----------
Subtotal of adjustments 194 -- 158
Less: Income tax effect (75) -- (61)
Tax asset valuation allowance 75 -- 61
Recovery of tax asset valuation allowance (7,767) -- --
Change in tax status -- -- --
Tax benefit on warrant valuation -- -- --
-------- ---------- ----------
Net (loss) income, as adjusted $ (487) $ (1,249) $ (2,506)
======== ========== ==========
Weighted average diluted common
shares outstanding (5) 8,658 8,658 8,658
======== ========== ==========
Diluted (loss) earnings per share
before extraordinary item $ (0.06) $ (0.14) $ (0.29)
======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
----------- --------- -------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
(Loss) income before provision (benefit)
for income taxes and extraordinary item $ (26,756) $ 6,492 $ 711 $ 1,860 $ 2,208
Depreciation and amortization 7,134 6,756 4,179 1,592 766
Interest expense, net 8,604 5,529 7,877 2,176 1,259
Restructuring and asset impairment 13,823 -- -- -- --
Shareholder compensation -- -- 261 1,951 2,025
Put warrant valuation adjustment -- -- 1,841 -- --
Registration costs -- -- -- 1,448 --
Gain on the sale of Synadyne -- -- -- -- --
Gain on the sale of Tandem offices -- -- -- -- --
Gain on the sale of Office Ours (523) -- -- -- --
Impairment of accounts receivable to be sold 2,667 -- -- -- --
Other -- -- 2 -- --
----------- --------- -------- --------- ---------
Subtotal of adjustments 31,705 12,285 14,160 7,167 4,050
----------- --------- -------- --------- ---------
EBITDA, as adjusted $ 4,949 $ 18,777 $ 14,871 $ 9,027 $ 6,258
=========== ========= ======== ========= =========
Income (loss) before extraordinary item $(30,879) $ 4,881 $ 711 $ 1,860 $ 2,208
Restructuring and asset impairment 13,823 -- -- -- --
Shareholder compensation -- -- 261 1,951 2,025
Put warrant valuation adjustment -- -- 1,841 -- --
Registration costs -- -- -- 1,448 --
Gain on the sale of Synadyne -- -- -- -- --
Gain on the sale of Tandem offices -- -- -- -- --
Gain on the sale of Office Ours (523) -- -- -- --
Impairment of accounts receivable to be sold 2,667 -- -- -- --
Write off of loan fees 1,127
Other -- -- (27) (8) (43)
----------- --------- -------- --------- ---------
Subtotal of adjustments 17,094 -- 2,075 3,391 1,982
Less: Income tax effect (6,422) -- (780) (1,274) (745)
Tax asset valuation allowance 14,072 -- -- -- --
Recovery of tax asset valuation allowance -- -- -- -- --
Change in tax status -- -- 133 (757) (859)
Tax benefit on warrant valuation -- 141 -- -- --
----------- --------- -------- --------- ---------
Net (loss) income, as adjusted $ (6,135) $ 5,022 $ 2,139 $ 3,220 $ 2,586
=========== ========= ======== ========= =========
Weighted average diluted common
shares outstanding (5) 8,658 9,919 7,320 5,844 5,785
=========== ========= ======== ========= =========
Diluted (loss) earnings per share
before extraordinary item $ (0.71) $ 0.51 $ 0.29
=========== ========= ========
</TABLE>
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.
(7) System revenues represent the sum of our 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 our penetration of the market for our
services, as well as the scope and size of our 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 us, are derived from reports that are unaudited. System
revenues for the periods presented consisted of the following:
6
<PAGE> 10
<TABLE>
<CAPTION>
TRANSITION
QUARTER ENDED QUARTER ENDED YEAR ENDED DECEMBER 31,
-------------------------- ----------------- ---------------------------------------------------------
JULY 2, 2000 JUNE 30, 1999 APRIL 2, 2000 1999 1998 1997 1996 1995
------------ ------------- ------------- ----- ------ ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Company's net revenues $ 81,618 $ 143,454 $ 126,011 $ 594,047 $ 565,394 $ 447,579 $ 280,171 $ 149,825
Less Company revenues from:
Franchise royalties (654) (2,469) (763) (7,109) (7,352) (6,997) (5,671) (4,138)
Services to franchises -- (3,979) (11) (18,009) (25,199) (34,642) (35,079) (7,507)
Add: Franchise net revenues 22,106 22,344 19,842 85,660 114,458 149,862 149,893 104,501
--------- --------- --------- --------- --------- --------- --------- ---------
System revenues $ 103,070 $ 159,350 $ 145,079 $ 654,589 $ 647,301 $ 555,802 $ 389,314 $ 242,681
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
(8) As of December 31, 1998 our primary sources of funds for working
capital and other needs were a $34.0 million revolving credit facility
with a syndicate of lenders led by Fleet National Bank (formerly
BankBoston, N.A.) and a $50.0 million accounts receivable
securitization facility with a Fleet National Bank affiliate. Under the
securitization facility, we received cash equivalent to the gross
outstanding balance of the accounts receivable being sold, less
reserves which were adjusted on a periodic basis based on collection
experience and other defined factors. As of October 1, 1999, we entered
into various agreements with our lenders relating to (a) the
replacement of our previously existing securitization facility with a
$50.0 million credit facility based on and secured by our accounts
receivable, and (b) the amendment of our revolving credit facility to
reduce the maximum availability from $34.0 million to $25.5 million
(including letters of credit of $5.0 million). Both facilities were
subsequently modified and ultimately replaced on August 15, 2000. See
"Capital Resources" in "Management's Discussion and Analysis of
Financial Condition and Results of Operations". For comparative
purposes, the amount of total assets and revolving credit facility and
line of credit as of December 31, 1998 have been adjusted to include
the balance of our uncollected accounts receivable of $44.8 million
that had been sold under these agreements. Accordingly, Cash provided
by (used in) operating activities, and Cash provided by (used in)
financing activities for the years ended December 31, 1999 and 1998,
have been adjusted to remove the effect of the sale of our uncollected
accounts receivable in 1998. The debt for those facilities was recorded
as long-term debt prior to 1999 and current debt in 1999 and the
quarters ended June 30, 1999 and July 2, 2000. For comparative
purposes, working capital has also been adjusted to reflect our
borrowing facilities as long-term debt.
7
<PAGE> 11
RISK FACTORS
You should carefully consider the following risk factors, as well as
the other information contained in this prospectus, before purchasing shares of
our common stock. The risks we describe below are not the only ones that we
face. Additional risks about which we do not yet know or that we currently think
are immaterial may also impair our business operations. Our business, operating
results or financial condition could be materially adversely affected by any of
the following risks. The trading price of our common stock could decline if any
of these risks occur, and you may lose part or all of your investment.
This prospectus includes and incorporates "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, including, in particular, statements about our
plans, strategies and prospects. Although we believe that our plans, intentions
and expectations reflected in or suggested by such forward-looking statements
are reasonable, we cannot assure you that we will achieve these plans,
intentions or expectations. Important factors that could cause actual results to
differ materially from our forward-looking statements are set forth below. We
expressly qualify all forward-looking statements attributable to us or any
persons acting on our behalf in their entirety by the cautionary statements set
forth below.
WE HAVE EXPERIENCED RECENT LOSSES AND IF WE ARE NOT PROFITABLE IN THE FUTURE,
OUR FINANCIAL CONDITION AND OUR STOCK PRICE COULD SUFFER.
We experienced a net loss of $2.7 million for the thirteen-week
transition period ended April 2, 2000 and a net loss of $30.9 million for the
fiscal year ended December 31, 1999. We also experienced a loss before benefit
of income taxes of $0.6 million for the thirteen week period ended July 2, 2000.
As of April 2, 2000, our current liabilities exceeded our current assets by
$44.3 million and as of December 31, 1999, our current liabilities exceeded our
current assets by $42.0 million. Due to these factors and our default on our
acquisition notes payable described below, the footnotes to the consolidated
financial statements we filed with the SEC as part of our Form 10-Q for the
transition period ended April 2, 2000 and as part of our Form 10-K for the year
ended December 31, 1999 included language indicating that there was substantial
doubt about our ability to continue as a going concern for a reasonable period
of time. As a result of refinancing our credit facility on August 15, 2000 and
improvement of our financial condition and operating results after December 31,
1999, the financial statements included as part of this prospectus no longer
contain language regarding our ability to continue as a going concern. However,
our ability to continue as a going concern is dependant on:
o generating sufficient cash flow to meet our obligations on a timely
basis;
o complying with the terms and covenants of our financing agreements;
and
o operating our business profitably.
We cannot assure you that in the future we will be able to achieve or
maintain profitability on a quarterly or annual basis or that we will be able to
achieve revenue growth.
8
<PAGE> 12
WE HAVE PREVIOUSLY DEFAULTED ON OUR ACQUISITION NOTES PAYABLE.
We did not make substantially all of the scheduled payments due on our
subordinated acquisition notes payable and, as a result, we were in default on
notes having a total outstanding principal balance of $6.9 million as of July 2,
2000. On August 15, 2000, we amended some of the acquisition notes payable to
provide that we will pay interest only at a rate of 10.0% per year, on the notes
for three years, followed by two years of equal monthly payments of principal
and interest which will retire the debt by August 2005. While we believe that we
will be able to meet our obligations under these notes, we cannot assure you
that we will not default on these notes, or other debt, in the future.
THE RECENT RESTRUCTURING OF OUR BUSINESS MAY NOT IMPROVE OUR RESULTS OF
OPERATIONS AND LIQUIDITY.
To improve our short-term liquidity, concentrate our operations within
one core segment (the flexible industrial staffing division) and improve our
operating performance within that segment, we announced the following actions:
o we sold Office Ours, our clerical staffing division, effective
August 30, 1999;
o we sold Synadyne, our PEO division, effective April 8, 2000; and
o we reduced our flexible industrial staffing and support operations
by reducing our employee workforce by 11% and by implementing the
sale, franchise, closure or consolidation of 47 of our 117 branch
offices, 41 of which have been sold, franchised, closed or
consolidated as of September 15, 2000.
In connection with the restructuring, we incurred a restructuring
charge of $11.2 million for the fiscal year ended December 31, 1999, which had a
material adverse effect on our results of operations for that period. We cannot
assure you that these actions will enable us to generate sufficient cash flow to
meet our obligations on a timely basis or operate our business profitably.
IF WE LOST OUR WORKING CAPITAL FUNDING SOURCE, WE WOULD BE UNABLE TO PAY OUR
EMPLOYEES ON A DAILY BASIS.
We pay our flexible industrial staffing employees on a daily or weekly
basis. However, on average, we receive payment for these services from our
customers 30 to 60 days after the date of invoice. As we establish or acquire
new offices, or as we expand existing offices, we will have increasing
requirements for cash to fund these payroll obligations. Our primary sources of
working capital funds are our $33.4 million revolving facility with a syndicate
of lenders led by Ableco Finance LLC. If this financing source becomes
unavailable and we are unable to secure alternative financing on acceptable
terms, our business, financial condition, results of operations and liquidity
would be materially adversely affected.
ANY SIGNIFICANT WRITE-OFF OF OUR INTANGIBLE ASSETS WOULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our acquisitions of several industrial staffing businesses have
resulted in significant increases in goodwill and other intangible assets.
Unamortized goodwill and other intangible assets, which include territory
rights, customer lists, employee lists and covenants not to compete acquired in
the acquisitions were approximately $45.0 million at July 2, 2000, representing
approximately 42% of our total assets. Net identifiable intangible assets are
recorded at fair value on the date of acquisition and are being amortized over
periods ranging from one to 15 years. Goodwill, which is the excess of cost over
the fair value of net assets of businesses acquired, is amortized on a straight
line basis over periods ranging from 15 to 40 years. The combined weighted
average amortization period of goodwill and other intangible assets is 25.1
9
<PAGE> 13
years. We cannot assure you that we will ever realize the value of the
intangible assets we have acquired. On an ongoing basis, we make an evaluation
based on undiscounted cash flows, whether events and circumstances indicate that
the carrying value of intangible assets may no longer be recoverable, in which
case an additional charge to earnings may be necessary. During 1999, we wrote
down approximately $8.0 million of these intangible assets, $5.4 million related
to assets identified for disposition and expensed as part of the restructuring
charge and another $2.6 million related to assets that we consider impaired
based on our analysis of discounted future cash flows. While we do not consider
the remaining net unamortized balance of intangible assets as of July 2, 2000 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
our financial condition and results of operations. As of the date of this
prospectus, we do not anticipate making any acquisitions in the next twelve
months.
WE ARE SUBJECT TO GOVERNMENT REGULATIONS AND ANY CHANGE IN THESE REGULATIONS, OR
THE POSSIBLE RETROACTIVE APPLICATION OF THESE REGULATIONS, COULD ADVERSELY
AFFECT OUR BUSINESS.
As an employer, we are subject to all federal, state and local statutes
and regulations governing our relationships with our employees and affecting
businesses generally, including our employees assigned to work at client company
locations (sometimes referred to as "worksite employees"). Although we sold our
PEO operations, we may be subject to certain federal and state laws related to
services provided on or before April 8, 2000. Because many of these laws were
enacted before the development of alternative employment arrangements, such as
those provided by PEOs and other staffing businesses, many of these laws do not
specifically address the obligations and responsibilities of non-traditional
employers. Interpretive issues concerning these relationships have arisen and
remain unsettled. Uncertainties arising under the Internal Revenue Code of 1986,
as amended, include, but are not limited to, the qualified tax status and
favorable tax status of certain benefit plans we and other alternative employers
provide. The unfavorable resolution of these unsettled issues could have a
material adverse effect on our results of operations, financial condition and
liquidity. In addition, the Internal Revenue Service has formed an examination
division, market segment specialization program, to examine PEOs throughout the
United States.
OUR EMPLOYEE-RELATED COSTS ARE SIGNIFICANT AND WILL, IF INCREASED, AND WE ARE
UNABLE TO PASS THESE COSTS ON TO OUR CUSTOMERS, ADVERSELY AFFECT OUR
PROFITABILITY.
We are required to pay a number of federal, state and local payroll
taxes and related payroll costs, including unemployment taxes, workers'
compensation insurance premiums and claims, Social Security, and Medicare, among
others, for our employees. We also incur costs related to providing additional
benefits to our employees, such as insurance premiums for health care. Health
insurance premiums, unemployment taxes and workers' compensation insurance
premiums and costs are significant to our operating results, and are determined,
in part, by our claims experience. We attempt to increase fees charged to our
customers to offset any increase in these costs, but we may be unable to do so.
If the federal or state legislatures adopt laws specifying additional benefits
for temporary workers, demand for our services may be adversely affected. In
addition, workers' compensation expenses are based on our actual claims
experiences in each state and our actual aggregate workers' compensation costs
may exceed estimates.
OUR INFORMATION SYSTEMS ARE CRITICAL TO THE OPERATIONS OF OUR BUSINESS AND ANY
FAILURE COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Our business depends, in part, upon our ability to store, retrieve,
process, and manage significant databases, and periodically to expand and
upgrade our information processing capabilities. Our computer equipment and
software systems are maintained at our Delray Beach, Florida headquarters. Our
inability to maintain successfully our field operations software system or the
10
<PAGE> 14
interruption or loss of our information processing capabilities through loss of
stored data, breakdown or malfunction of computer equipment and software
systems, telecommunications failure, conversion difficulties, or damage to our
headquarters and systems, could have a material adverse effect on our ability to
operate our business.
WE MAY BE EXPOSED TO EMPLOYMENT-RELATED CLAIMS AND COSTS THAT COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS.
Temporary staffing companies, such as ours, employ people in the
workplace of their customers. This creates a risk of potential litigation based
on claims by customers of employee misconduct or negligence, claims by employees
of discrimination or harassment, including claims relating to actions of our
customers, claims related to the inadvertent employment of illegal aliens or
unlicensed personnel, payment of workers' compensation claims and other similar
claims. We may be held responsible for the actions at a job site of workers not
under our direct control.
WE EXPERIENCE INTENSE COMPETITION IN OUR INDUSTRY, WHICH COULD LIMIT OUR ABILITY
TO MAINTAIN OR INCREASE OUR MARKET SHARE OR PROFITABILITY.
The flexible staffing market is highly fragmented and highly
competitive, with limited barriers to entry. Several very large full-service and
specialized temporary labor companies, as well as smaller local and regional
operations, compete with us in the flexible staffing industry. Competition in
the industrial staffing market is intense, and both competitors and customers
create price pressure. We expect that the level of competition will remain high
in the future, which could limit our ability to maintain or increase our market
share or profitability.
IF WE ARE UNABLE TO RECRUIT AND RETAIN OUR KEY LOCAL OFFICE MANAGERS AND FIELD
PERSONNEL, OUR RESULTS OF OPERATIONS WOULD BE ADVERSELY AFFECTED.
We rely heavily on the performance and productivity of our local office
managers and field personnel who manage the operation of the recruiting and
dispatch offices, including recruitment and daily dispatch of temporary workers,
marketing and providing quality customer service. The loss of our key local
managers and field personnel may jeopardize existing customer relationships with
businesses that continue to use our staffing services based upon past
relationships with these local managers and field personnel. The loss of our key
local managers and field personnel could adversely affect our operations,
including our ability to establish and maintain customer relationships.
OUR BUSINESS WOULD SUFFER IF WE COULD NOT ATTRACT TEMPORARY WORKERS TO FILL THE
JOBS WE OFFER.
We compete with other temporary personnel companies to meet our
customer's needs. We must continually attract reliable temporary workers to fill
positions and may from time to time experience shortages of available temporary
workers. During periods of increased economic activity and low unemployment, the
competition among temporary staffing firms for qualified personnel increases.
Many regions in which we operate are experiencing historically low rates of
unemployment and we have experienced, and may continue to experience,
significant difficulties in hiring and retaining sufficient number of qualified
personnel to satisfy the needs of our customers. Also, we may face increased
competitive pricing pressures during these periods of low unemployment rates.
DUE TO THE SEASONAL NATURE OF OUR BUSINESS, OPERATING INCOME IN THE FIRST TWO
CALENDAR QUARTERS OF THE YEAR IS LESS THAN OPERATING INCOME EARNED IN THE THIRD
AND FOURTH QUARTERS OF THE YEAR.
Our results of operations reflect the seasonality of higher customer
demand for industrial staffing services in the last two calendar quarters of the
year, as compared to the first two quarters. Even though there is a seasonal
reduction of industrial staffing revenues in the first calendar quarter of a
year as compared to the fourth calendar quarter of the prior year, we do not
reduce the related core personnel and other operating expenses proportionally
11
<PAGE> 15
because most of that infrastructure is needed to support anticipated increased
revenues in subsequent quarters. As a result of these factors, we anticipate
that we will earn a significant portion of our annual operating income in the
third and fourth calendar quarters (the second and third quarters of our fiscal
year), which historically exceeds the operating income earned during the first
two calendar quarters of the year.
IF THE IRS DETERMINES THAT WE ARE NOT ENTITLED TO A TAX DEDUCTION RELATING TO
OUR EMPLOYEE BENEFIT PLANS, WE COULD FACE PENALTIES FROM THE IRS AND POTENTIAL
LITIGATION FROM OUR PRIOR CLIENTS.
If the IRS determines that we were not the employers of our former PEO
worksite employees, we could lose the tax deduction we took for certain of our
employee benefit plans, which would have a material adverse effect on our
results of operations, financial position and liquidity. Before April 8, 2000,
we offered various benefit plans to our PEO worksite employees. For purposes of
these plans and federal employment tax withholding, we treated worksite
employees as our employees. It is possible that in connection with an
examination by the IRS of a client company and/or of us, the IRS may determine
that we were not the employer of the worksite employees. If the IRS concluded
that we were not the employer of the worksite employees and the ruling was
applied retroactively, the qualified tax status of our multi-employer retirement
plans and cafeteria plan may be disallowed.
If a loss of qualified tax status for our multi-employer retirement
plans or cafeteria plan is applied retroactively, employees' account balances
that vested before April 8, 2000 may become taxable immediately to the
employees, we would lose our tax deduction to the extent the contributions were
not vested, the plan trust would become a taxable trust and penalties could be
assessed. A retroactive application by the IRS of an adverse conclusion could
have a material effect on our financial position, results of operations and
liquidity. In this scenario, we would also face the risk of potential
litigation. We are unable to predict the timing or nature of the findings of an
IRS examination.
ANY SIGNIFICANT ECONOMIC DOWNTURN COULD RESULT IN BUSINESSES USING FEWER
TEMPORARY EMPLOYEES, WHICH COULD MATERIALLY ADVERSELY AFFECT US.
Historically, the general level of economic activity has significantly
affected the demand for temporary personnel. When economic activity increases,
temporary employees are often added before full-time employees are hired.
However, as economic activity slows, many companies reduce their use of
temporary employees before laying off full-time employees. In addition, we may
experience more competitive pricing pressure during periods of economic
downturn. Fluctuations and interruptions in the business of our clients may also
reduce demand for temporary employees. Therefore, any significant economic
downturn could have a material adverse impact on our financial condition and
results of operations.
PROVISIONS IN OUR ARTICLES OF INCORPORATION AND BYLAWS COULD PREVENT OR DELAY A
CHANGE IN CONTROL.
Our articles of incorporation, bylaws and Florida law contain
provisions which may prevent or delay a merger, takeover, or other change in
control of us and discourage attempts to acquire us. As a result, shareholders
who might desire to participate in such a transaction may not have the
opportunity to do so. These provisions include:
o blank check preferred stock;
o a classified board of directors with three classes elected to
staggered, three year terms; and
o Florida's Control Share Acquisition Act.
In addition, the board of directors entered into a shareholder
protection rights agreement, and declared a dividend of one right for each
12
<PAGE> 16
outstanding share of common stock. These rights may cause substantial dilution
to a person or group that attempts to acquire us in a manner or on terms not
approved by our board.
A VOTING TRUST AGREEMENT AND SHAREHOLDERS' AGREEMENT ENABLE CERTAIN PERSONS TO
CONTROL ALL MATTERS SUBMITTED TO SHAREHOLDERS FOR APPROVAL WHICH WILL LIMIT OUR
OTHER SHAREHOLDERS' ABILITY TO CONTROL US.
Certain of our shareholders have deposited shares of common stock, now
totaling 4,003,266 shares, into a voting trust, the trustees of which are
Messrs. Garry E. Meier, the Chairman of the Board, Chief Executive Officer,
President and a director, and Jay D. Seid, a director. The voting trust
terminates in February 2007. The trustees have sole and exclusive right to vote
the shares of common stock deposited in the voting trust. The shares of common
stock in the voting trust constitute approximately 46.2% of the issued and
outstanding shares of common stock. Accordingly, the trustees will retain
sufficient voting power to control the election of the board of directors or the
outcome of any extraordinary corporate transaction submitted to the shareholders
for approval for the foreseeable future. We are registering for resale under
this prospectus all of the shares of common stock held in the voting trust.
Effective February 21, 1997, our then existing shareholders agreed for
a period of ten years to vote in favor of electing the following persons to our
board of directors: three persons designated by the Chief Executive Officer, two
persons designated by two investors and two additional persons selected by the
previously elected directors. The investors have the right to designate up to
two additional members of the board. These shareholders further agreed to ratify
any merger, consolidation or sale of us, any acquisitions made by us, and any
amendments to our articles of incorporation or bylaws to the extent the board
approves these actions.
NASDAQ DELISTED OUR COMMON STOCK, WHICH COULD CAUSE OUR STOCK PRICE TO FALL AND
DECREASE THE LIQUIDITY OF OUR COMMON STOCK.
On August 10, 2000, Nasdaq delisted our common stock from trading on
the Nasdaq National Market. Our common stock now trades on the OTC Bulletin
Board. Delisting of our common stock may have an adverse impact on the market
price and liquidity of our common stock. In addition, since the trading price of
our common stock is less than $5.00 per share, our common stock comes within the
definition of a "penny stock." As a result, our common stock is subject to the
penny stock rules and regulations which require additional disclosure by
broker-dealers in connection with any trades involving our common stock. The
additional burdens imposed on broker-dealers may restrict the ability of
broker-dealers to sell our common stock and may affect your ability to resell
our common stock.
OUR STOCK PRICE IS VOLATILE.
The market price of our common stock could be subject to significant
fluctuations in response to our operating results, announcements of new services
or market expansions by us or our competitors, changes in general conditions in
the economy, the financial markets, the employment services industry, or other
developments and activities affecting us, our clients or our competitors, some
of which may be unrelated to our performance. The sale or attempted sale of a
large amount of our common stock into the market may also have a significant
impact on the trading price of our common stock. Our stock price has fluctuated
from a high of $25 in the first quarter of fiscal 1998 to a low of $0.50 in the
fourth quarter of fiscal 1999.
13
<PAGE> 17
WE HAVE OPTIONS AND WARRANTS OUTSTANDING WHICH COULD CAUSE DILUTION OF OUR
SHAREHOLDERS AND ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Sales of substantial amounts of common stock in the public market
following this offering could have an adverse effect on prevailing market prices
of the common stock. After this offering, all of our shares of common stock
other than shares held by our affiliates and certain selling shareholders will
be freely tradable without restriction. In addition, as of October 20, 2000, we
had outstanding 1,974,687 warrants to purchase our common stock with exercise
prices ranging from $.001 to $.01 and 1,704,647, options to purchase our common
stock with exercise prices ranging from $1.25 to $18.875. We have reserved
additional shares for issuance under these warrants and options. If the holders
exercise these stock options and warrants, it will dilute the percentage
ownership interest of our current shareholders.
14
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
include statements regarding future events, our financial performance and
operating results, our business strategy and our financing plans. Known and
unknown risks, uncertainties and other factors could cause actual results to
differ materially from those contemplated by these statements. In evaluating
these statements, you should specifically consider various factors, including
the risks outlined under "Risk Factors." These factors may cause our actual
results to differ materially from any forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We are under no duty to update
any of the forward-looking statements after the date of this prospectus to
conform those statements to actual results or to change in our expectations.
GENERAL
We offer our clients flexible industrial staffing services through our
Tandem division, targeting opportunities in that fragmented, growing market
which we believe has to date been under-served by large full service staffing
companies. Significant benefits of Tandem's services to clients include
providing clients with the ability to outsource their recruiting and hiring
functions and other logistical aspects of their staffing needs, as well as
converting the fixed cost of employees to the variable cost of outsourced
services.
Flexible industrial staffing services include recruiting, hiring,
training and deploying temporary industrial personnel as well as payroll
administration, risk management and benefits administration services. Tandem
delivers its flexible industrial staffing services through a nationwide network
of 84 company-owned branch offices and 51 franchised recruiting and dispatch
branch offices. We aggregate our company-owned branches into 12 geographic
districts, which we combine into three geographic zones: East, Midwest and West.
Until we sold the operations of our Synadyne division in April 2000, we
also provided professional employer organization, or PEO, services to small and
medium-sized businesses (those with less than 500 employees). PEO services
include payroll administration, risk management, benefits administration and
human resource consultation.
Our revenues are based on the salaries and wages of worksite employees.
We recognize revenues, and the associated costs of wages, salaries, employment
taxes and benefits related to worksite employees, in the period during which our
employees perform the services. Since we are at risk for all of our direct
costs, independent of whether we receive payment from our clients, we recognize
as revenue all amounts billed to our clients for gross salaries and wages,
related employment taxes, health benefits and workers' compensation coverage,
net of credits and allowances, which is consistent with industry practice. Our
15
<PAGE> 19
primary direct costs are (1) the salaries and wages of worksite employees (trade
payroll costs), (2) employment-related taxes, (3) health benefits, (4) workers'
compensation benefits and insurance, and (5) worksite employee transportation.
Our Tandem division generates significantly higher gross profit margins
than our former Synadyne division. The higher staffing margins reflect
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 our relationship with
the client.
On February 21, 1997, we completed a reorganization in which nine
companies under common ownership and management became our wholly-owned
subsidiaries. We were incorporated in April 1996 for the purpose of becoming the
parent holding company, but were inactive with no assets, liabilities or
operations before the reorganization.
While implementing our growth strategies, we completed 36 acquisitions,
primarily staffing companies, from January 1995 through October 1998. These
acquisitions included 89 offices and collectively generated approximately $189.0
million in revenue for the twelve months preceding these acquisitions. We
acquired 40 of those offices in 1998 and 30 of those offices in 1997. Due to
these acquisitions, as well as the opening of new offices, the number of
company-owned flexible staffing and PEO offices increased during this period
from ten to 124 and the number of metropolitan markets, as measured using the
United States Census Bureau's Metropolitan Statistical Areas, served by
company-owned locations increased from one to 50. As of December 31, 1999, we
operated 90 offices. In order to support our growth, we made a significant
investment in new information systems, additional back office capabilities and
in other infrastructure enhancements.
We discontinued our acquisition program as of December 31, 1998,
primarily due to a desire to focus on and improve existing operations, coupled
with a lack of capital for new acquisitions. We do not anticipate making any
acquisitions in the next twelve months.
On August 6, 1999, we announced the following actions intended to
improve our short-term liquidity, concentrate our operations within our Tandem
division and improve our operating performance within that division:
o the sale of Office Ours, our clerical staffing division, which was
completed on August 30, 1999;
o the engagement of an investment banking firm to assist in the
evaluation of strategic options for our Synadyne division which
ultimately resulted in the sale of the operations of Synadyne on
April 8, 2000; and
o a reduction of our flexible industrial staffing and support
operations consisting primarily of: the sale, franchise, closure or
consolidation of 47 of the 117 Tandem branch offices existing as of
June 30, 1999; an immediate reduction of the Tandem and corporate
headquarters employee workforce by 110 employees, approximately 11%
of our workforce; and an additional reduction of 32 employees
through the second fiscal quarter of 2001. A total of 47 branch
offices have been or will be eliminated in connection with our
restructuring plan, 41 of which have been sold, franchised, closed,
or consolidated as of September 15, 2000. These offices were not, or
are not expected to be, adequately profitable or are inconsistent
with our operating strategy of clustering offices within specific
geographic regions.
16
<PAGE> 20
On October 13, 1999, our board of directors approved a change in our
fiscal year, effective January 1, 2000, from the calendar year ending December
31 to the 52 or 53 week period ending on the Sunday closest to March 31. Our
transition period is January 1, 2000 through April 2, 2000.
RESULTS OF OPERATIONS
The following table sets forth the amounts and percentages of net
revenues of certain items in our consolidated statements of operations for the
periods indicated. Certain reclassifications have been made to the presentation
of the results of operations for the quarter ended June 30, 1999 and the years
ended December 31, 1999, 1998 and 1997, respectively, to conform to current
presentation. The dollar amounts are presented in thousands:
17
<PAGE> 21
<TABLE>
<CAPTION>
QUARTER ENDED TRANSITION QUARTER ENDED
---------------------------------- -----------------------------------
JULY 2, 2000 JUNE 30, 1999 APRIL 2, 2000 MARCH 31, 1999
--------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net revenues:
Tandem(1) $ 80,859 $ 79,855 $ 80,383 $ 73,096
Synadyne(1) 71 55,079 44,834 53,080
Franchising 654 2,469 763 1,973
Other 34 6,051 31 5,965
--------- --------- --------- ---------
Total net revenues $ 81,618 $ 143,454 $ 126,011 $ 134,114
========= ========= ========= =========
Gross profit $ 16,186 $ 20,344 $ 16,854 $ 19,250
Selling, general and administrative expenses(2)(3) 14,722 20,847 17,405 18,741
Restructuring and asset impairment charges 878 -- 356 --
--------- --------- --------- ---------
Operating income (loss)(3) 586 (503) (907) 509
Net interest and other expenses(2) 1,189 1,682 1,757 1,539
--------- --------- --------- ---------
(Loss) income before provision for
income taxes and extraordinary item (603) (2,185) (2,664) (1,030)
(Benefit) provision for income taxes (pro forma for 1997)(2) (7,689) (936) -- (449)
--------- --------- --------- ---------
Income (loss) before
extraordinary item (pro forma for 1997)(2) $ 7,086 $ (1,249) $ (2,664) $ (581)
========= ========= ========= =========
System Operating Data:
System Revenues(4) $ 103,070 $ 159,350 $ 145,079 $ 147,396
========= ========= ========= =========
System employees (number at end of period) 20,000 35,000 26,000 33,000
System offices (number at end of period) 135 172 145 172
Net revenues:
Tandem(1) 99.1% 55.7% 63.8% 54.5%
Synadyne(1) 0.1 38.4 35.6 39.6
Franchising 0.8 1.7 0.6 1.5
Other 0.0 4.2 0.0 4.4
--------- --------- --------- ---------
Total net revenues 100.0% 100.0% 100.0% 100.0%
Gross profit 19.8% 14.2% 13.4 % 14.4 %
Selling, general and administrative expenses(2)(3) 18.0 14.5 13.8 14.0
Restructuring and asset impairment charges 1.1 -- 0.3 --
--------- --------- --------- ---------
Operating income (loss)(3) 0.7 (0.4) (0.7) 0.4
Net interest and other expenses(2) 1.5 1.2 1.4 1.1
--------- --------- --------- ---------
(Loss) income before provision for
income taxes and extraordinary item (0.7) (1.5) (2.1) (0.8)
(Benefit) provision for income taxes (pro forma for 1997)(2) (9.4) (0.7) -- (0.3)
--------- --------- --------- ---------
Income (loss) before
extraordinary item (pro forma for 1997)(2) 8.7% (0.9)% (2.1)% (0.4)%
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net revenues:
Tandem(1) $ 339,116 $ 321,451 $ 221,461
Synadyne(1) 224,499 202,888 177,045
Franchising 7,109 7,352 7,027
Other 23,323 33,703 42,046
--------- --------- ---------
Total net revenues $ 594,047 $ 565,394 $ 447,579
========= ========= =========
Gross profit $ 80,781 $ 83,660 $ 65,505
Selling, general and administrative expenses(2)(3) 85,589 71,692 55,096
Restructuring and asset impairment charges 13,823 -- --
--------- --------- ---------
Operating income (loss)(3) (18,631) 11,968 10,409
Net interest and other expenses(2) 8,125 5,476 9,698
--------- --------- ---------
(Loss) income before provision for
income taxes and extraordinary item (26,756) 6,492 711
(Benefit) provision for income taxes
(pro forma for 1997)(2) 4,123 1,611 296
--------- --------- ---------
Income (loss) before
extraordinary item (pro forma for 1997)(2) $ (30,879) $ 4,881 $ 415
========= ========= =========
System Operating Data:
System Revenues(4) $ 654,589 $ 647,301 $ 555,802
========= ========= =========
System employees (number at end of period) 35,000 36,000 32,000
System offices (number at end of period) 148 165 163
Net revenues:
Tandem(1) 57.1% 56.9% 49.5 %
Synadyne(1) 37.8 35.9 39.6
Franchising 1.2 1.3 1.6
Other 3.9 6.0 9.4
--------- --------- ---------
Total net revenues 100.0% 100.0% 100.0%
Gross profit 13.6% 14.8% 14.6%
Selling, general and administrative expenses(2)(3) 14.4 12.7 12.3
Restructuring and asset impairment charges 2.3 -- --
--------- --------- ---------
Operating income (loss)(3) (3.1) 2.1 2.3
Net interest and other expenses(2) 1.4 1.0 2.1
--------- --------- ---------
(Loss) income before provision for
income taxes and extraordinary item (4.5) 1.1 0.2
(Benefit) provision for income taxes
(pro forma for 1997)(2) 0.7 0.2 0.1
--------- --------- ---------
Income (loss) before
extraordinary item (pro forma for 1997)(2) (5.2)% 0.9% 0.1%
========= ========= =========
</TABLE>
18
<PAGE> 22
(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. Our reportable operating segments under SFAS No.
131 include the Tandem segment and the Synadyne segment. We sold our
Synadyne operations effective April 8, 2000.
(2) For the eight week period ended February 21, 1997, we elected to be treated
as a subchapter S corporation and, accordingly, our income was taxed at the
shareholder level. In addition, during this period, we paid compensation to
our founding shareholders and to our former Chairman, President, and Chief
Executive Officer, who is also one of our shareholders. All of the
compensation for the founding shareholders and a portion of the
compensation for our former Chairman, President and Chief Executive Officer
was discontinued after February 1997. The discontinued compensation was $0
in 1999, $0 in 1998 and $0.3 million in 1997. In 1997, we recorded
non-operating expense of approximately $1.8 million related to a valuation
adjustment on certain put warrants issued in 1997 and incurred an
extraordinary loss (net of income tax benefit) of approximately $13.4
million. In 1998, as a result of the reduction of the income tax benefit
included in the 1997 extraordinary loss and relating to the release of
certain put warrants in 1998, we recorded an extraordinary loss of
approximately $1.4 million. In 1999, we recorded restructuring charges of
$11.2 million, as well as a non-operating gain of $0.5 million from the
sale of our clerical division. In 1999, we recognized an operating expense
of $2.6 million for the write-down of impaired goodwill and other
long-lived assets, and we recognized a $2.7 million loss, recorded as bad
debt expense, arising from sale to third parties of certain accounts
receivable primarily more than 180 days past due. We also recorded a
deferred tax valuation allowance of $14.1 million in. In addition, in 1999
we recognized interest expense of $1.4 million arising from accelerated
amortization of loan fees and a gain of $0.3 million on the sale of an
interest rate hedge arising from the modification of our revolving credit
facility and the termination of our securitization facility.
During the quarter ended July 2, 2000 ("Q1 2001"), we recorded an increase
to our restructuring reserve of $0.9 million, a non-operating gain of $0.7
million from the sale of our PEO division, and a $7.7 million decrease to
our deferred tax asset valuation allowance. And during the transition
quarter ended April 2, 2000 ("Q1 2000"), we recorded an increase of $0.4
million to our restructuring reserve and a non-operating gain of $0.2
million on the sale of certain industrial staffing offices.
(3) The following table sets forth the amounts and the percentage of certain
items in our consolidated statements of operations, adjusted for the above
items as follows: (i) selling, general and administrative expenses excludes
discontinued compensation in 1997 and the incremental provision for
doubtful accounts in 1999; (ii) operating (loss) income excludes
discontinued compensation in 1997, the 1999 restructuring charges, asset
impairment charges, loss on the sale of certain trade accounts receivable
recorded as bad debt expense, accelerated amortization of loan fees and
gain on the sale of the interest rate hedge, and (iii) net (loss) income
excludes discontinued compensation, the 1997 put warrant valuation
adjustment, 1999 restructuring charges, asset impairment charges, gain from
the sale of our clerical division, accelerated amortization of loan fees,
gain on the sale of the interest rate hedge, loss on the sale of certain
trade accounts receivable recorded as bad debt expense, and the valuation
allowance established for the deferred tax asset. Operating (loss) income
excludes the 1997 and 1998 extraordinary losses and is calculated assuming
we had been subject to federal and state income taxes and was taxed as a C
corporation during 1997. This adjusted computation of income taxes excludes
a $141,000 expense included in our 1998 income tax provision due to the
adjustment for tax return purposes of the 1997 put warrant valuation
adjustment.
In addition, the following table sets forth the amounts and the percentage
of certain items in our consolidated statements of operations, adjusted for
the above items in Q1 2000 and Q1 2001, with amounts and percentages
adjusted for the above items as follows: (i) operating income (loss)
excludes the increase in the restructuring reserve, and (ii) net loss and
loss per share excludes the restructuring reserve, gain from the sale of
our PEO division and certain staffing offices, and the decrease in the
deferred tax valuation allowance.
<TABLE>
<CAPTION>
QUARTER ENDED TRANSITION QUARTER ENDED YEAR ENDED DECEMBER 31,
---------------------------- ------------------------------- --------------------------------
JULY 2, 2000 JUNE 30, 1999 APRIL 2, 2000 MARCH 31, 1999 1999 1998 1997
------------ ------------- ------------- -------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Selling, general and administrative
expenses, as adjusted $14,722 $20,847 $17,405 $ 18,741 $ 84,052 $ 72,852 $ 55,635
As a percentage of net revenues 18.0% 14.5% 13.8% 14.0% 14.1% 12.9% 12.4%
Operating income (loss), as adjusted $ 1,464 $ (503) $ (551) $ 509 $ (2,140) $ 11,968 $ 10,671
As a percentage of net revenues 1.8% (0.4)% (0.4)% 0.4% (0.4)% 2.1% 2.4%
Net loss, as adjusted $ (487) $(1,249) $(2,506) $ (581) $ (6,135) $ 5,022 $ 2,139
As a percentage of net revenues (0.6)% (0.9)% (2.0)% (0.4) % (1.0)% 0.9% 0.5%
Loss per diluted share, as adjusted $ (0.06) $ (0.14) $ (0.29) $ (0.07) (0.71) 0.51 0.29
EBITDA, as adjusted $ 2,918 $ 1,406 $ 970 $ 2,360 $ 4,949 $ 18,777 $ 14,871
</TABLE>
EBITDA is earnings (net income) before the effect of interest income and
expense, income tax benefit and expense, depreciation expense and
amortization expense. EBITDA, as adjusted, excludes the restructuring
reserve, other unusual expenses, and the non-operating gains and losses
described above. 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.
(4) System revenues are the sum of our 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
our penetration of the market for our services, as well as the scope and
size of our operations, but are not an alternative to revenues determined
19
<PAGE> 23
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 us, are derived from reports that are unaudited.
System revenues consist of the following for the periods presented:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED TRANSITION QUARTER ENDED FOR THE YEAR ENDED
----------------------------------------------------------------- ---------------------------------
JULY 2, 2000 JUNE 30, 1999 APRIL 2, 2000 MARCH 31, 1999 1999 1998 1997
------------ ------------- ------------- -------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Company's net revenues $ 81,618 $ 143,454 $ 126,011 $ 134,114 $594,047 $565,394 $447,579
Less Company revenues from:
Franchise royalties (654) (2,469) (763) (1,973) (7,109) (7,352) (6,997)
Services to franchises (3,979) (11) (4,024) (18,009) (25,199) (34,642)
Add: Franchise net revenues 22,106 22,344 19,842 19,279 85,660 114,458 149,862
--------- --------- --------- --------- -------- -------- --------
System revenues $ 103,070 $ 159,350 $ 145,079 $ 147,396 $654,589 $647,301 $555,802
========= ========= ========= ========= ======== ======== ========
</TABLE>
THIRTEEN WEEKS ENDED JULY 2, 2000 AS COMPARED TO THE THREE
MONTHS ENDED JUNE 30, 1999
NET REVENUES. Net revenues decreased $61.9 million, or 43.1%, from
$143.5 million in the three months ended June 30, 1999 ("Q2 1999") to $81.6
million in the thirteen weeks ended July 2, 2000 ("Q1 2001"). This decrease
resulted from (i) the sale of our Synadyne division, which generated revenues of
$55.0 million in Q2 1999, compared to $0.1 million in Q1 2001, (ii) the sale of
our former clerical staffing division, which generated revenues of $2.1 million
in Q2 1999, (iii) the disposition of Tandem branch offices pursuant to our
restructuring plan (excluding offices consolidated into existing offices), which
generated revenues of $13.9 million in Q2 1999, as compared to $8.8 million in
Q1 2001, (iv) the termination of PEO services offered to Tandem franchises as of
December 31, 1999, which generated revenues of $4.0 million in Q2 1999, and (v)
a $1.8 million decrease in revenues derived from franchising activities.
Offsetting these was a $6.1 million increase in revenues derived from Tandem
branches not included in our restructuring plan.
Net revenues from our Tandem division increased $1.0 million, to $80.9
million for Q1 2001 from $79.9 million for Q2 1999, or an increase of 1.3%,
despite the fact that Tandem had 33 fewer operating locations at the end of Q1
2001 compared to Q2 1999. The increase in Tandem revenues was primarily due to
new customers and increased revenues from existing customers in certain
geographic markets that recorded double digit growth. We experienced lower
growth or declining revenues in other geographic markets due to the loss or
cancellation of certain of our large customers. We contracted with 34 new large
clients after Q2 1999 that generated revenues of approximately $9 million in Q1
2001. On a same-store basis, revenue growth for our Tandem division was 9.3%.
Franchise royalty revenues from our franchising operations decreased
from $2.5 million in Q2 1999 to $0.7 million for Q1 2001, primarily due to a
$2.0 million decrease in revenues from buyout payments received in connection
with the early termination of certain franchises. We allowed the early
termination of franchise agreements for 38 locations in 1998 and 1999 to enable
us to develop the related territories. When we agree to terminate a franchise
agreement, we receive an initial buyout payment from the former franchisee. We
continue to receive payments from some former franchisees based on a percentage
of the gross revenues of the formerly franchised locations for up to three years
after the termination dates of the franchise agreement. Although those gross
revenues are not included in our net franchisee or system revenue totals, the
initial buyout payment, as well as subsequent payments from the former
franchisees, are reflected in our total reported royalties.
Net revenues earned by Tandem franchisees, which are included in our
system revenues, but are not available to us, decreased slightly from $22.3
million in Q2 1999 to $22.1 million in Q1 2001. As of July 2, 2000, we had 51
franchised locations, compared to 43 franchised locations as of June 30, 1999,
20
<PAGE> 24
and as part of our growth efforts, we expect to increase franchisee net revenues
by continuing to sell new franchises in secondary U.S. markets, subject to,
among other factors, the success of our marketing efforts in this regard. We
also expect to allow few, if any, remaining franchisees to buy out of their
franchise agreements, since nearly all remaining franchises are in secondary
U.S. markets.
GROSS PROFIT. Gross profit (margin) decreased $4.2 million, from $20.3
million in Q2 1999, to $16.2 million in Q1 2001. Gross profit as a percentage of
net revenues increased to 19.8% in Q1 2001 from 14.2% in Q2 1999. This increase
in margin percent was caused primarily by the sale of our Synadyne division at
the beginning of Q1 2001, partially offset by the effect of the sale of our
clerical staffing division in August 1999 and the decrease in royalties derived
from franchise buyout payments. Synadyne, while generating 38.4% of our revenues
in Q2 1999, produced a gross margin of only 3.6%, or 9.8% of our profit margin.
Gross profit for our Tandem division increased from $15.3 million in Q2
1999 to $15.5 million for Q1 2001. Tandem's gross profit margin percent was
19.2% of revenues in Q1 2001 and Q2 1999. Although price increases that we
instituted in the past two quarters to reflect the value of services provided
have resulted in a reduction of payroll costs as a percentage of net revenues,
the price increases were offset by higher workers' compensation costs due to
increased claim rates in Q1 2001 and greater than anticipated expenses for
claims still open from the calendar year ended December 31, 1999. In addition,
transportation costs increased in Q1 2001, reducing gross profit accordingly.
Tandem's gross profit before transportation costs improved from 20.3% in Q2 1999
to 20.6% in Q1 2001.
Our margins are affected by unemployment, competition for workers, the
size of our customers, workers' compensation costs, transportation costs, and
pricing. We were able to mitigate the effect of low unemployment and competition
for workers by better pricing in Q1 2001. Although the average cost per labor
hour increased by $0.18 during Q1 2001, the average price charged per labor hour
increased by $0.35 in the period. During Q1 2001, Tandem began to reduce the
impact of large, low-margin customers. Over the past three years, large lower
margin customers comprised an increasing part of Tandem's customer portfolio.
Although Tandem's 100 largest customers made up 42% of our revenues in Q1 2001
compared to 39% in Q2 1999, this was lower than the 44% that the largest
customers represented in the quarter ended April 2, 2000 ("Q1 2000"). In
addition, the margins on these large customers increased slightly in Q1 2001
compared to Q2 1999.
Workers' compensation costs will continue to be a significant factor
affecting Tandem margins. As such, we employ safety specialists whose sole
purpose is to increase safety training and awareness, approve job-sites and
duties, and reduce workers' compensation costs. We are continuing to increase
our focus on all margin-related performance criteria by providing rewards to
field personnel commensurate with their accomplishments. Based on these
initiatives, we expect continued improvement in our staffing margins; however,
our actual results during the remaining portion of fiscal 2001 may vary
depending on, among other things, competition, unemployment, and general
business conditions.
We receive royalties from our franchisees and do not incur the expense
for payroll and payroll-related taxes. Accordingly, gross profit equals
royalties and gross margin trends are consistent with the revenue trends in
franchise operations discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $6.1 million, or 29.4%, to $14.7 million in Q1
2001 from $20.8 million in Q2 1999. This decrease was primarily the result of a
$3.7 million decrease in compensation costs due to reduced employee headcount,
21
<PAGE> 25
and a $0.6 million reduction in our bad debt provision in Q1 2001 as compared to
Q2 1999. Other selling, general and administrative costs, including
telecommunications, recruiting, and licensing costs, decreased by an aggregate
$1.3 million, while depreciation and amortization decreased by $0.5 million, due
to the disposition of the assets sold in connection with our restructuring plan,
and the $2.5 million impairment of goodwill during 1999.
As part of our restructuring plan and other initiatives to improve
profitability, we have (i) reduced headcount by over 370 employees due to both
voluntary and involuntary terminations, the sale and franchise of certain Tandem
offices, and the sale of our Synadyne division, (ii) improved our collection
performance of trade accounts receivable, as discussed under "Accounts
Receivable", and (iii) streamlined other support functions, all of which should
continue the trend of decreased selling, general and administrative expenses
during the remainder of fiscal 2001.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. During Q1 2001, we recorded
restructuring charges of $0.9 million. As part of the restructuring charges, we
have (i) adjusted the carrying value of assets held for disposition by
approximately $0.4 million to reflect the estimated fair value of those assets,
(ii) decreased accrued severance costs by approximately $0.1 million and (iii)
incurred $0.4 million in professional fees.
NET INTEREST AND OTHER EXPENSE. Net interest and other expense
decreased from $1.7 million in Q2 1999 to $1.2 million in Q1 2001. This decrease
was due to a $0.7 million gain on the sale of our Synadyne division and $0.1
million of other income for support services provided to the purchaser of our
Synadyne division, offset by a $0.3 million increase in interest expense arising
from higher interest rates paid for our borrowing facilities in Q1 2001 as
compared to Q2 1999.
INCOME TAXES. During Q1 2001, we reduced the deferred tax asset
valuation allowance by $7.3 million, which is expected to be realized through
the utilization of the existing net operating loss carry forwards to offset tax
on the extinguishment gain that will be recorded in the quarter ending October
1, 2000, and tax on income from future operations. The valuation allowance was
established during the year ended December 31, 1999 and was increased by the tax
benefits during the quarter ended April 2, 2000 because it was not clear that
the tax benefits resulting from operating losses and other temporary differences
were "more likely than not" to be realized, as required by SFAS 109, "Accounting
for Income Taxes".
NET INCOME (LOSS). Net income for Q1 2001 was $7.1 million, as compared
to a net loss of $1.2 million in Q2 1999. As discussed above, the change in the
net loss is primarily due to the reduction of the deferred tax asset valuation
allowance, decreased selling, general and administrative costs, and the gain on
the sale of our Synadyne division, partially offset by increased interest costs
and restructuring charges. Adjusted to remove restructuring charges, the
non-operating gain from the sale of our Synadyne division, and the reduction of
the deferred tax valuation allowance, our net loss was $0.5 million in Q1 2001
and $1.2 million in Q2 1999.
THIRTEEN WEEK TRANSITION PERIOD ENDED APRIL 2, 2000 AS COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1999
NET REVENUES. Net revenues decreased $8.1 million, or 6.0%, from $134.1
million in the three months ended March 31, 1999 (Q1 1999) to $126.0 million in
the thirteen weeks ended April 2, 2000 (Q1 2000). This decrease resulted
primarily from (i) the sale of our former clerical division effective August 30,
22
<PAGE> 26
1999 which generated revenues of $1.9 in Q1 1999, (ii) the termination of PEO
services offered to Tandem franchises as of December 31, 1999 which generated
revenues of $2.7 million in Q1 1999, and (iii) an $8.2 million decrease in
Synadyne revenues from Q1 1999 to Q1 2000, partially offset by a $7.3 million
increase in Tandem revenues during the same period.
Net revenues from our Tandem division increased $7.3 million, to $80.4
million for Q1 2000 from $73.1 million for Q1 1999, or an annualized growth rate
of 10.0%. The increase in Tandem revenues was primarily due to new customers and
growth with existing customers in certain geographic markets that recorded
double digit growth, although we also experienced lower growth or declining
revenues in other geographic markets due to the loss or cancellation by us of
some large customers. Despite the sale, franchise, closure or consolidation of
28 Tandem offices in connection with our restructuring activities, Tandem
contracted with twenty five new large clients subsequent to Q1 1999 that
generated revenues of approximately $9.0 million in Q1 2000. Excluding offices
sold, franchised, closed or consolidated during 1999, Tandem revenue growth was
15.6%.
Net revenues from our Synadyne division decreased $8.2 million, to
$44.8 million for Q1 2000 from $53.1 million for Q1 1999. This decrease was due
primarily to the loss of Synadyne's three largest non-insurance customers
because of a lower pricing structure obtained from a competitor and the
uncertainty surrounding the ownership of Synadyne. Synadyne revenues represented
a decreasing share of our total net revenues, to 35.6% for Q1 2000 from 39.6%
for Q1 1999.
Franchise royalty revenues and gross profit from our franchising
operations decreased from $2.0 million in Q1 1999 to $0.8 million for Q1 2000.
Royalties from our franchising operations represented a decreasing share of our
total net revenues, to 0.6% in Q1 2000 from 1.5% for Q1 1999, primarily due to a
$1.0 million decrease in revenues from buyout payments received in connection
with the early termination of certain franchises. We allowed the early
termination of franchise agreements for 38 locations in 1998 and 1999 to enable
us to develop the related territories. When we agree to terminate a franchise
agreement, we receive an initial buyout payment from the former franchisee. We
continue to receive payments from some former franchisees based on a percentage
of the gross revenues of the formerly franchised locations for up to three years
after the termination dates of the franchise agreement. Although those gross
revenues are not included in our net franchisee or system revenue totals, the
initial buyout payment, as well as subsequent payments from the former
franchisees, are reflected in our total reported royalties.
Net revenues earned by Tandem franchisees, which were included in our
system revenues, but were not available to us, increased from $19.3 million in
Q1 1999 to $19.8 million in Q1 2000, due to strong growth from continuing
franchises, which offset the loss of revenues from franchises no longer in the
system.
GROSS PROFIT. Gross profit (margin) decreased $2.4 million, from $19.3
million in Q1 1999, to $16.9 million in Q1 2000. Gross profit as a percentage of
net revenues decreased to 13.4% in Q1 2000 from 14.4% in Q1 1999. This decrease
in gross margin percent was primarily due to the sale of our clerical division
and royalties comprising a lower percentage of our gross margin dollars in Q1
2000 (4.5%) than in Q1 1999 (10.2%).
Gross profit for our Tandem division decreased $0.1 million, to $14.9
million for Q1 2000 from $15.0 million for Q1 1999. Tandem's gross profit margin
percent of our Tandem division decreased to 18.5% of revenue in Q1 2000 from
20.5% in Q1 1999, primarily due to the impact of the increased wages necessary
to recruit staffing employees in periods of historically low unemployment and a
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greater proportion of larger, longer-term service agreements which have higher
per hour billing and pay rates but lower gross profit margin. Gross profit
margin percent also decreased because of higher workers compensation costs that
were due to claim rates in Q1 2000 and greater than anticipated expenses for
claims still open from 1999.
Despite the decline in gross profit margin percent from Q1 1999 to Q1
2000, the decline in gross profit margin percent over the last two fiscal years
stabilized in Q1 2000. The 18.5% margin earned in Q1 2000 is consistent with the
gross profit margin percent from Q4 1999 of 18.3% (adjusted to present a
comparable basis to Q1 2000). Our margin percent, before taxes and workers
compensation costs, improved approximately 1.0%, but that was offset by
increased workers compensation and payroll tax costs, due in part to an increase
to the reserve for 1999 workers' compensation claims as discussed above, and the
change in mix of customers serviced in various states, which have differing
payroll tax structures.
Gross profit from our former Synadyne division decreased $0.4 million,
to $1.2 million for Q1 2000 from $1.6 million for Q1 1999, primarily due to
decreased revenues as discussed above. Gross profit margin as a percent of
revenues was 2.6% in Q1 2000 compared to 3.1% in Q1 1999, primarily due to
increased payroll tax costs which resulted from relative increases in volume in
states with higher tax rates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $1.3 million, or 7.0%, to $17.4 million in Q1
2000 from $18.7 million in Q1 1999. This decrease was primarily the result of a
$0.9 million decrease in compensation costs, of which $1.5 million is due to
reduced employee headcount as discussed below, offset by a $0.8 million increase
in variable pay compensation. We also recorded $0.5 million in credits to our
bad debt provision in Q1 2000 due to improved collections, as compared to
charges to our bad debt provision in Q1 1999 of $0.5 million. As a percentage of
net revenues, our selling, general and administrative expenses decreased to
13.8% in Q1 2000 from 14.0% in Q1 1999.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. During Q1 2000, we recorded
restructuring charges of $0.4 million. As part of the restructuring charges, we
(i) adjusted the carrying value of assets held for disposition by approximately
$67,000 to reflect the estimated fair value of those assets, (ii) reduced
accrued severance costs by approximately $0.2 million to reflect decreased
payments required to be paid to certain severed employees, and (iii) incurred
$0.5 million in professional consulting fees.
NET INTEREST AND OTHER EXPENSE. Net interest and other expense
increased by $0.3 million, to $1.8 million in Q1 2000 from $1.5 million in Q1
1999. This increase was primarily due to a $0.4 million increase in interest
expense arising from higher interest rates paid for our borrowing facilities in
Q1 2000 as compared to Q1 1999 offset by a $0.2 million gain on the sale of one
of our Tandem branch offices.
INCOME TAXES. The provision for income taxes in Q1 2000 consisted of
potential tax benefits of $0.9 million resulting from losses incurred in that
period offset by a deferred tax asset valuation allowance of $0.9 million. The
valuation allowance was established in 1999 and increased by the tax benefits in
Q1 2000 because it was not clear that the tax benefits resulting from operating
losses and other temporary differences were "more likely than not" to be
realized, as required by SFAS 109.
NET (LOSS) INCOME. The net loss in Q1 2000 was $2.7 million, as
compared to a net loss in Q1 1999 of $0.6 million. As discussed above, the
change in the net loss is primarily due to (i) decreased gross profit margin,
(ii) increased interest costs, (iii) restructuring costs, and (iv) recognition
of the deferred tax valuation allowance of $0.9 million in Q1 2000, as compared
to an income tax benefit recorded in our Q1 1999 of $0.4 million. Adjusted to
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remove restructuring costs and the non-operating gain from the sale of our
Tandem office in the state of Washington, our net loss in Q1 2000 was $2.5
million.
YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET REVENUES. Net revenues increased $28.6 million, or 5.1%, to $594.0
million in fiscal 1999 from $565.4 million in fiscal 1998. This increase
resulted from growth in Tandem revenues of $17.7 million or 5.5%, to $339.1
million, and Synadyne revenue growth of $21.6 million, or 10.7%; offset by a
decrease in revenues of $2.9 million generated from our former clerical staffing
division, sold on August 30, 1999, and a decrease of $7.8 million in revenues
derived from franchise royalties, PEO services provided to franchisees, and
other revenues. Tandem revenues increased due to a full year of revenues
generated in fiscal 1999 by acquisitions, which were primarily consummated
between February and October 1998, and internal growth. The increase in Synadyne
revenues was primarily due to new Synadyne clients, as well as an increase in
the number of worksite employees at certain existing Synadyne clients.
The number of company-owned Tandem offices decreased by 26 locations to
89 locations as of December 31, 1999. This decrease is primarily the result of
the sale, franchise, closure or consolidation of offices in connection with our
restructuring plan implemented during the third quarter of fiscal 1999.
Revenue growth from our Tandem division varied among geographic
regions. For the year ended December 31, 1999 as compared to the year ended
December 31, 1998; Tandem revenues generated by the West and Midwest zones grew
by 1.9% and 16.5%, respectively, whereas revenues generated from the East
decreased 2.4%, which was primarily due to an 8.7% decrease in revenues
generated in the mid-Atlantic states.
System revenues increased $7.3 million, or 1.1%, to $654.6 million in
fiscal 1999 from $647.3 million in fiscal 1998. The increase in system revenues
was attributable to the $28.6 million increase in our net revenues discussed
above. Revenues from franchises operating in fiscal 1998, but not on December
31, 1999, decreased by $41.9 million in fiscal 1999. That decrease was partly
offset by a $13.1 million increase in revenues from franchisees operating as of
December 31, 1999. The net result was a decrease in franchise revenues of $28.8
million. We allowed the early termination of franchise agreements of 38
locations in 1998 and 1999 to enable us to develop the related territories.
GROSS PROFIT. Gross profit (margin) decreased $2.9 million, or 3.4%, to
$80.8 million in fiscal 1999, from $83.7 million in fiscal 1998 primarily due to
the sale of our clerical staffing division and lower margins in our Tandem
division. Gross profit as a percentage of net revenues decreased from 14.8% in
fiscal 1998 to 13.6% in fiscal 1999. This decrease in margin percent was
primarily due to the significantly higher growth rate for Synadyne revenues as
compared to the growth rate for revenues in our Tandem division, which generate
higher gross profit margins than the revenues in our Synadyne division, as well
as the sale of our clerical division and higher payroll costs in the Tandem
market due to competitive labor markets. In fiscal 1999, our Synadyne division
generated gross profit margins of 3.1% as compared to gross profit margins of
19.2% generated by our Tandem division. Tandem gross profit decreased by 2.7%,
from $66.9 million in fiscal 1998, to $65.1 million in fiscal 1999. Synadyne
gross profit increased 8.1% from $6.5 million in fiscal 1998 to $7.1 million in
fiscal 1999.
Gross profit margin percent for our Tandem division decreased to 19.2%
in fiscal 1999 from 22.2% in fiscal 1998, primarily due to the impact of (i) the
increased wages necessary to recruit staffing employees in periods of
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historically low unemployment and (ii) a greater proportion of larger,
longer-term service agreements which have higher per hour billing and pay rates
but lower gross profit margin.
Synadyne's gross profit margin decreased from 3.2% in fiscal 1998 to
3.1% in fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $13.9 million, or 19.4%, to $85.6 million in
fiscal 1999 from $71.7 million in fiscal 1998. This increase was primarily the
result of a $2.7 million increase in bad debt expense which resulted from the
sale of certain accounts receivable, a $1.2 million increase in the provision
for doubtful accounts, a $3.2 million increase in selling, general and
administrative costs related to acquisitions consummated during 1998 (for the
portion of 1999 for which there was no corresponding 1998 activity), a $2.2
million increase in professional fees, due in part to our turnaround efforts,
and $4.0 million in additional core employee compensation, including $2.7
million in variable pay and commissions related to our performance-based
compensation plan. As a percentage of net revenues, selling, general and
administrative costs increased to 14.4% in fiscal 1999 from 12.7% in fiscal
1998.
As part of our restructuring plan and other initiatives to improve
profitability as of December 31, 1999 we had (i) reduced headcount by over 170
employees due to both voluntary and involuntary terminations and the sale of
certain branches, (ii) improved our collection performance of trade accounts
receivable, and (iii) streamlined other support functions.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. During fiscal 1999, we
recorded restructuring charges of $11.2 million and $2.6 million in write-downs
of impaired goodwill and other long-lived assets. As part of the restructuring
charges, as of December 31, 1999 we had (i) written down assets held for
disposition by $5.4 million to reflect the estimated fair value of those assets,
(ii) recorded $4.0 million in severance and retention costs, and (iii) incurred
$1.2 million in professional and consulting fees.
NET INTEREST AND OTHER EXPENSES. Net interest and other expense
increased by $2.6 million, to $8.1 million in fiscal 1999 from $5.5 million in
fiscal 1998. This increase was primarily due to a $3.1 million increase in
interest expense arising from (i) an increase in total debt outstanding related
to acquisitions consummated in fiscal 1998, (ii) higher interest rates paid on
our revolving credit facility in fiscal 1999 as compared to fiscal 1998 and
(iii) interest expense of $1.4 million arising from the accelerated amortization
of loan fees offset by a $0.3 million gain on the sale of an interest rate
hedge. The increase in interest expense was partially offset by a non-operating
gain of $0.5 million from the sale of our clerical staffing division.
INCOME TAXES. The provision for income taxes in fiscal 1999 consists of
a deferred tax asset valuation allowance of $14.1 million offset by potential
tax benefits of $9.9 million resulting from losses incurred in that period. The
valuation allowance was recorded because it was not clear that the tax benefits
resulting from operating losses and other temporary differences was "more likely
than not" to be realized, as required by SFAS 109.
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. The loss before extraordinary
item in fiscal 1999 was $30.9 million, as compared to fiscal 1998 income before
extraordinary item of $4.9 million. As discussed above, the change in income
(loss) before extraordinary item is primarily due to (i) decreased gross profit
margin, (ii) increased selling, general and administrative costs, (iii)
increased interest costs, (iv) restructuring and asset impairment costs, and (v)
recognition of the deferred tax valuation allowance.
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EXTRAORDINARY ITEM. As a result of a reduction of the income tax
benefit included in the fiscal 1997 extraordinary loss and release of certain
put warrants in 1998, we recorded an extraordinary loss of approximately $1.4
million in fiscal 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Net revenues increased $117.8 million, or 26.3%, to
$565.4 million in fiscal 1998 from $447.6 million in fiscal 1997. This increase
resulted from growth in Tandem revenues in fiscal 1998 of $100.0 million, or
45.2%, and Synadyne revenue growth of $25.8 million, or 14.6%, compared to
fiscal 1997. Tandem revenues increased due to (i) the 1998 acquisitions, (ii)
the 1997 acquisitions (which were primarily consummated in late February and
March) and (iii) internal growth. Company-owned Tandem branch offices increased
by 24 locations to 111 locations as of December 31, 1998. This increase was the
result of the 40 additional Tandem locations acquired in the 1998 acquisitions,
partially offset by offices closed and consolidated into other company-owned
locations. The increase in Synadyne revenues was primarily due to new Synadyne
clients, as well as an increase in the number of worksite employees at certain
existing Synadyne clients.
System revenues increased $91.5 million, or 16.5%, to $647.3 million in
fiscal 1998 from $555.8 million in fiscal 1997. The increase in system revenues
was attributable to the $117.8 million increase in our net revenues discussed
above. Franchise revenues of franchisees operating as of December 31, 1998
increased $14.6 million, or 22.3%, in 1998 as compared to 1997, offset by a
$50.0 million decrease in revenues for the same period resulting from other
franchisees no longer operating at the end of 1998. The result is a net decrease
of franchise revenues of $35.4 million. We acquired and converted 30 franchise
locations to company-owned locations during 1997 and 1998 and also allowed the
early termination of franchise agreements in 1997 and 1998 attributable to
another 38 locations to enable us to develop the related territories.
GROSS PROFIT. Gross profit (margin) increased $18.2 million, or 27.7%,
to $83.7 million in fiscal 1998, from $65.5 million in fiscal 1997. Gross profit
as a percentage of net revenues increased to 14.8% in fiscal 1998 from 14.6% in
fiscal 1997. This increase was primarily due to the significantly higher growth
rate for Tandem revenues as compared to the growth rate for Synadyne revenues,
which generate lower gross profit margins. In 1998, our Synadyne division
generated gross profit margins of 3.2% as compared to gross profit margins of
20.8% generated by our Tandem division.
Gross profit margin percent for our Tandem division decreased to 20.8%
of revenues in fiscal 1998 from 22.1% in fiscal 1997, primarily due to the
impact of (i) the increased wages necessary to recruit staffing employees in
periods of historically low unemployment, (ii) 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 (iii) an increase in the minimum wage
on September 1, 1997, for which we increased billing rates without a related
profit increase.
Synadyne gross profit margin percent decreased from 3.7% in fiscal 1997
to 3.2% in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $16.6 million, or 30.1%, to $71.7 million in
fiscal 1998 from $55.1 million in fiscal 1997. This increase was primarily a
result of operating costs related to the 1998 acquisitions and the 1997
acquisitions and sales costs associated with increased staffing volume at
existing locations. Total direct operating costs associated with the 1998
acquisition locations and the 1997 acquisition locations (for the portion of
1998 for which there was no corresponding 1997 activity) were $9.4 million in
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1998. In addition, we incurred indirect infrastructure costs to evaluate,
acquire and integrate these operations, as well as to support the larger
customer base.
As a percentage of net revenues, selling, general and administrative
costs increased to 12.7% in fiscal 1998 from 12.3% in fiscal 1997. In addition
to the items previously discussed, this percentage increase was also due to the
significant increase in 1998 of Tandem revenues in proportion to total revenues.
Our Tandem division has higher associated selling, general and administrative
(as a percentage of revenues) costs than our Synadyne division.
NET INTEREST AND OTHER EXPENSE. Net interest and other expense
decreased by $4.2 million, to $5.5 million in fiscal 1998 from $9.7 million in
fiscal 1997. This decrease was primarily due to a $2.4 million reduction in
interest expense arising from a decrease in total debt outstanding as well as a
decrease in the average interest rate which resulted from our initial public
offering in October 1997, plus non-operating expense in fiscal 1997 of $1.8
million attributable to a valuation adjustment in put warrants issued in 1997,
with no corresponding item in fiscal 1998.
PRO FORMA INCOME BEFORE EXTRAORDINARY ITEM. Income before extraordinary
items increased by $4.5 million, to $4.9 million in fiscal 1998 from a pro forma
amount of $0.4 million in fiscal 1997. This increase was primarily due to the
$4.2 million decrease in interest and other expense discussed above and an
increase of $1.6 million in operating income as a result of increases in sales
and gross profit discussed above, partially offset by the related income taxes.
EXTRAORDINARY ITEM. As a result of the reduction of the income tax
benefit included in the 1997 extraordinary loss and relating to the release of
certain put warrants in 1998, we recorded an extraordinary loss of approximately
$1.4 million in fiscal 1998.
CAPITAL RESOURCES
SENIOR DEBT
Effective August 15, 2000, we entered into a three-year agreement with
a syndicate of lenders led by Ableco Finance LLC, an affiliate of Cerberus
Capital Management, L.P., as agent, which replaced our existing credit facility
with a $33.4 million revolving credit facility, which includes a subfacility for
the issuance of standby letters of credit, and a $17.6 million Term Loan A and a
$9.0 million Term Loan B. Both the revolving credit facility and the term loans
are secured by all of our assets. The revolving credit facility bears interest
at prime or 9.0%, whichever is greater, plus 2% per annum. Term Loan A and Term
Loan B bear interest at prime or 9.0%, whichever is greater, plus 3.5% and 5.0%
per annum, respectively. In connection with the refinancing, we issued warrants
to our new lenders to purchase up to a maximum of 200,000 shares of common
stock, exercisable for a term of five years, at $0.01 per share. The warrants
are only exercisable if any letter of credit issued by the new lenders on our
behalf is drawn, in which event, the number of warrants the lenders will receive
will be based on the amount drawn under the letter of credit.
We used a portion of our new credit facility to satisfy our prior
credit facility with Fleet National Bank, for itself and as agent for three
other banks. Prior to the closing of the refinancing, the outstanding balance of
our prior credit facility was approximately $52.0 million. We repaid the balance
in full with a cash payment of approximately $32.3 million and the issuance of a
four-year, $5.3 million subordinated term note. The term note is subordinated to
the new revolving credit facility and term loans and includes interest only for
four years, followed by a balloon payment for the entire principal amount. In
addition, we are entitled to a 60% discount on the term note if it is satisfied
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within 18 months. This obligation bears interest at Fleet's prime rate plus 3.5%
per annum. In connection with the refinancing and in satisfaction of our
obligation to our old lenders, we issued 524,265 warrants to our old lenders to
purchase that number of shares of our common stock which equals 5.0% of our
common stock on a fully diluted basis. The warrants are exercisable for a term
of 10 years at $0.001 per share. In connection with the refinancing and the
termination of our prior credit facility, we will record an extraordinary gain,
net of tax, of approximately $8.5 million in the quarter ending October 1, 2000.
Before August 15, 2000, our primary sources of funds for working
capital and other needs were a $26.1 million credit line, including existing
letters of credit of $4.8 million and a $33.0 million credit facility, based on
and secured by our accounts receivable.
Before its expiration, the receivable facility bore interest at Fleet's
prime rate plus 2.0% per annum, which was 11.5% as of July 2, 2000, while the
revolving credit facility bore interest at Fleet's prime plus 5.0% per annum,
which was 14.5% as of July 2, 2000. The weighted average interest rate payable
on the outstanding balances under both the receivable facility and the revolving
credit facility during Q1 2001, exclusive of related fees and expenses, was
approximately 13.2% per annum, compared to approximately 6.7% per annum in Q2
1999. As of July 2, 2000, we had outstanding borrowings of $19.4 million and
$31.3 million under the revolving credit facility and the receivable facility,
respectively.
The prior credit facility, which was entered into on October 5, 1999,
to be effective as of October 1, 1999 (a) replaced the previously existing $50.0
million securitization facility and (b) amended the previously existing $29.9
million revolving credit facility (which included letters of credit of $8.4
million) to (i) reduce the maximum availability to $25.5 million, including
existing letters of credit of $5.0 million, (ii) eliminate certain financial
covenants and (iii) add events of default, including a provision enabling the
lenders to accelerate the maturity date of the credit facility if, in their sole
discretion, the lenders were not satisfied with our business operations or
prospects.
The prior securitization facility, which was terminated as of October
1, 1999, was a financing arrangement under which we could sell up to a $50.0
million secured interest in our eligible accounts receivable to Eagle Funding
Capital Corporation, which used the receivables to secure A-1 rated commercial
paper. Our costs for this arrangement was classified as interest expense and was
based on the interest paid by Eagle on the balance of the outstanding commercial
paper, which in turn was determined by prevailing interest rates in the
commercial paper market and was approximately 5.45% as of September 30, 1999.
In addition to the revolving credit facility indebtedness discussed
above, we had bank standby letters of credit outstanding in the aggregate amount
of $4.8 million as of July 2, 2000, of which $4.2 million secured the pre-1999
portion of our workers' compensation obligations recorded as a current liability
on our consolidated balance sheet for the quarter ended July 2, 2000. The
remaining $0.6 million, which is supported by a $0.7 million cash escrow
balance, is to secure future payments on a capital lease for furniture that we
sold as part of our corporate headquarters building.
OTHER DEBT
In order to remain in compliance with certain covenants in our prior
revolving credit facility, and to reduce the cash impact of scheduled payments
under our subordinated acquisition debt, we negotiated extensions of the payment
dates and modified the interest rates and other terms of certain of our
acquisition notes payable in 1999. We had not made substantially all of the
scheduled payments due and, as a result, we were in default on acquisition notes
payable having a total outstanding principal balance of $6.9 million as of July
2, 2000. The terms of the acquisition notes payable, which were subordinated to
the revolving credit facility and the receivable facility, allowed the payees to
accelerate terms of payment upon default. Acceleration of this debt required
prior written notice by the various payees, which we received from three payees
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as of July 2, 2000. Effective as of August 15, 2000, in connection with the
refinancing, we amended certain acquisition notes payable to provide that we
will pay interest only, at a rate of 10.0% per annum, on the notes for three
years following the closing of the refinancing, followed by two years of equal
monthly payments of principal and interest which will retire the debt by August
2005. In connection with the amendments to the acquisition notes payable, we
paid $0.8 million of accrued interest to the relevant noteholders at the closing
of the refinancing.
In addition to the debt previously discussed, we had, as of July 2,
2000, (i) obligations under capital leases for property and equipment in the
aggregate of $2.4 million; (ii) obligations under mortgages totaling $0.6
million and (iii) obligations for annual insurance premiums and other matters
totaling $0.3 million, of which a portion represents prepayment for future
benefits and would be refundable to us should the policy be cancelled.
FUTURE LIQUIDITY
As shown in the 1999 Financials, we incurred a net loss of $30.9
million during fiscal year 1999, our current liabilities exceeded our current
assets by $42.0 million as of December 31, 1999, and we were in default in
repayment of certain acquisition debt subordinated to our bank financing. Our
bank facilities and financial covenants were modified effective October 1, 1999,
accelerating the date of maturity, which was subsequently extended by the
syndicate of lenders on a monthly basis through August 15, 2000.
Effective August 15, 2000, as previously discussed, we entered into a
three year agreement with a syndicate of lenders led by Ableco Finance LLC
whereby our previous credit facility was replaced by a $33.4 million revolving
credit facility and a $17.6 million Term Loan A and a $9.0 Term Loan B. We
believe that funds provided by operations and borrowings under our new credit
facilities will be sufficient to meet our needs for working capital, capital
expenditures, and debt service for the foreseeable future.
SUMMARY OF CASH FLOWS
THIRTEEN WEEKS ENDED JULY 2, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
In Q1 2001 cash used in operating activities was $2.2 million, as
compared with $3.4 million provided by operating activities in Q2 1999. Cash
provided by (i) a decrease in accounts receivable related to the sale of our
Synadyne division and Tandem offices in connection with the restructuring, (ii)
improved collections of our accounts receivable in Q1 2001, and (iii) an
increase in our workers' compensation reserve, was more than offset by the
decrease in current liabilities due to the sale of our Synadyne division.
Adjusted to remove the effects of the securitization agreement, cash used in
operating activities was $2.8 million in Q2 1999 compared to $2.2 million in Q1
2001.
We anticipate that accounts receivable will decrease by an additional
$2.3 million in Q2 2001 as we collect the outstanding accounts receivable from
the Tandem offices sold in Pennsylvania and New Jersey on June 25, 2000, offset
partially by the increase in accounts receivable from the seasonal increase in
sales volume experienced by staffing companies that support the manufacturing
sector.
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Cash provided by investing activities during Q1 2001 was $3.8 million,
consisting of $4.2 million from the sale of our Synadyne division and certain
Tandem branches, offset by cash outlays of $0.4 million for capital expenditures
and funding advances to franchises. Cash provided by investing activities during
Q2 1999 was $1.5 million, consisting primarily of $1.6 million received in
conjunction with a sale-leaseback transaction and funding repayments of $0.3
million, offset by capital expenditures of $0.4 million.
Cash used in financing activities during Q1 2001 was $2.1 million, as
compared to $3.8 million used in financing activities in Q2 1999. Adjusted to
remove the effects of the securitization facility in Q2 1999, cash provided by
financing activities was $2.5 million, which was due to increased borrowings in
1999 to fund increased payroll costs arising from seasonal volume increases. In
Q1 2001, the seasonal volume increase was offset by a decrease in our
outstanding payroll obligation at the end of the quarter due the sale of our
Synadyne division and the sale, franchise, closure, and consolidation of Tandem
offices in connection with our restructuring plan.
The table below sets forth our cash flows as presented in our
consolidated financial statements for Q1 2001 and Q2 1999 and as adjusted to
remove the effect of the sale of our uncollected accounts receivable under the
securitization facility during Q2 1999, in thousands:
FOR THE QUARTER ENDED
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JULY 2, 2000 JUNE 30, 1999
------------ -------------
Cash flows (used in) provided by:
HISTORICAL CASH FLOW
Operating activities $(2,202) $ 3,444
Investing activities 3,782 1,492
Financing activities (2,083) (3,791)
------- -------
Net decrease (increase) in cash $ (503) $ 1,145
======= =======
CASH FLOW - WITHOUT SECURITIZATION FACILITY (1)
Operating activities $(2,202) $(2,836)
Investing activities 3,782 1,492
Financing activities (2,083) 2,489
------- -------
Net decrease (increase) in cash $ (503) $ 1,145
======= =======
(1) As part of our borrowing facilities, in Q2 1999, we sold certain trade
accounts receivable to obtain working capital for our operations. Under
this agreement we had sold $42.4 million of trade accounts receivable
as of June 30, 1999, which was excluded from the uncollected accounts
receivable balance presented in our consolidated financial statements
for Q1 2001. This agreement was subsequently terminated as of October
1, 1999 and replaced by the receivable facility, under which we
currently obtain working capital.
THIRTEEN WEEKS ENDED APRIL 2, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
In Q1 2000 cash provided by operating activities was $6.5 million, as compared
with $3.8 million used in operating activities in Q1 1999. The significant
increase in cash from operations is due to the effect of the termination of our
securitization facility in 1999, as previously discussed, and improved
collections of our accounts receivable in Q1 2000 - see "Accounts Receivable."
Adjusted to remove the effects of the securitization agreement in 1999, cash
provided by operating activities increased from $4.8 million in Q1 1999 to $6.5
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<PAGE> 35
million in Q1 2000, primarily due to improved collections of accounts
receivable.
Cash used in investing activities during Q1 2000 was $0.8 million, as compared
to $0.8 million used in investing activities in Q1 1999, primarily due, in both
periods, to expenditures for property, plant and equipment.
Cash used in financing activities during Q1 2000 was $4.9 million, as compared
to $0.5 million provided by financing activities in Q1 1999. The significant
decrease in cash from financing activities was primarily due to the termination
of our securitization facility, which was replaced by the receivable facility,
the paydown of our borrowing facilities due to improved collections of our
accounts receivable; the sale, franchise, closure or consolidation of offices in
connection with our restructuring efforts see "Restructuring" and decreased
outstanding accounts receivable due to seasonal fluctuations in revenue
generation - see "Seasonality." However, the seasonal decrease in revenue
generation in Q1 2000 was not as significant as the first quarters of past
years, such as 1999. Adjusted to remove the effects of the securitization
facility in Q1 1999, cash used in financing activities in Q1 1999 was $8.1
million, which was due primarily to the reduction of borrowings from our bank
facilities.
The table below sets forth our cash flows, (i) as presented in our
Consolidated Financial Statements for Q1 2000 and Q1 1999 and (ii) adjusted to
remove the effect of the sale of our uncollected accounts receivable under the
securitization facility during Q1 1999, in thousands:
FOR THE QUARTER ENDED
-------------------------------
APRIL 2, 2000 MARCH 31, 1999
------------- --------------
Cash flows (used in) provided by:
HISTORICAL CASH FLOW
Operating activities $ 6,480 $(3,823)
Investing activities (770) (784)
Financing activities (4,880) 524
------- -------
Net increase (decrease) in cash $ 830 $(4,083)
======= =======
CASH FLOW - WITHOUT SECURITIZATION FACILITY (1)
Operating activities $ 6,480 $ 4,835
Investing activities (770) (784)
Financing activities (4,880) (8,134)
------- -------
Net increase (decrease) in cash $ 830 $(4,083)
======= =======
(1) As part of our borrowing facilities, in Q1 1999, we sold certain trade
accounts receivable to obtain working capital for our operations. Under
this agreement we had sold $36.1 million of trade accounts receivable as of
March 31, 1999, which was excluded from the uncollected accounts receivable
balance presented in our consolidated financial statements at that date.
This agreement was subsequently terminated as of October 1, 1999 and
replaced by the receivable facility, under which we currently obtain
working capital. See Note 5 to our Q1 2000 consolidated financial
statements.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Our principal uses of cash are for wages and related payments to
job-site employees, operating costs, capital expenditures and repayment of debt
and interest thereon. In fiscal 1999, cash used in operating activities was
$43.1 million, as compared with $50.8 million provided by operating activities
in fiscal 1998. The significant decrease in cash from operations was due to the
effect of the termination of our securitization facility. As discussed below,
under our securitization facility, we sold certain trade accounts receivable to
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<PAGE> 36
obtain working capital for our operations. We had sold $44.8 million of trade
accounts receivable at December 31, 1998 under this agreement, which was
subsequently terminated as of October 1, 1999 and replaced by the receivable
facility. Adjusted to remove the effects of the securitization agreement, cash
provided by operating activities decreased from $6.0 million in fiscal 1998 to
$1.8 million in fiscal 1999, primarily due to the additional cash needed to
convert to a pre-funded workers' compensation program.
Cash provided by investing activities during fiscal 1999 was $9.0
million, as compared to $31.3 million used in investing activities in fiscal
1998. Of the $9.0 million provided by investing activities in fiscal 1999, $8.9
million represented proceeds from sales of assets held for disposition and the
sale of the corporate support center. During fiscal 1998, we paid $27.8 million
for acquisitions (primarily intangible assets).
Cash provided by financing activities during fiscal 1999 was $29.3
million, as compared to $15.7 million used in financing activities in fiscal
1998. The significant increase in cash from financing activities was primarily
due to the termination of the securitization facility, which was replaced by the
receivable facility. Adjusted to remove the effects of the securitization
facility in 1998 and 1999, cash used in financing activities was $15.6 million
in 1999, compared to cash provided by financing activities of $29.2 million in
fiscal 1998. During fiscal 1998, we increased borrowings by $32.0 million,
primarily to fund additional trade payroll of acquisitions made in fiscal 1998.
This is in contrast to fiscal 1999, during which we repaid $8.7 million in
excess of proceeds from our borrowing facilities, primarily from the sale of the
corporate support center building and other assets as part of our restructuring
efforts.
The table below sets forth our cash flows as presented in the 1999
Financials and as adjusted to remove the effect of the sale of our uncollected
accounts receivable under the securitization facility during 1998, in thousands:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
---------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Cash flows (used in) provided by:
HISTORICAL CASH FLOW
Operating activities $(43,084) $ 50,761
Investing activities 9,049 (31,316)
Financing activities 29,250 (15,629)
-------- --------
Net (decrease) increase in cash $ (4,785) $ 3,816
======== ========
CASH FLOW - WITHOUT SECURITIZATION FACILITY (1)
Operating activities $ 1,722 $ 5,955
Investing activities 9,049 (31,316)
Financing activities (15,556) 29,177
-------- --------
Net (decrease) increase in cash $ (4,785) $ 3,816
======== ========
</TABLE>
(1) As part of our borrowing facilities during the year ended December 31,
1998, we sold certain trade accounts receivable to obtain working capital
for our operations. Under this agreement we had sold $44.8 million of trade
accounts receivable as of December 31, 1998, which was excluded from the
uncollected accounts receivable balance presented in our consolidated
financial statements as of that date. This agreement was subsequently
terminated as of October 1, 1999 and replaced by the receivable facility,
under which we currently obtain working capital.
WORKERS' COMPENSATION COLLATERAL
Before 1999, we secured our workers' compensation obligations by the
issuance of bank standby letters of credit to our insurance carriers, minimizing
the required current cash outflow for such items. In 1999, we selected a
pre-funded deductible program whereby expected claims expenses are funded in
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<PAGE> 37
advance in exchange for reductions in administrative costs. The required advance
funding is provided through either cash flows from operations or additional
borrowings under our revolving credit facility.
In January 2000, we renewed our pre-funded deductible program for one
year. Under the new agreement, we will fund $10.1 million in 12 installments for
projected calendar year 2000 claims expenses. This claim fund requirement will
be adjusted upward or downward periodically based on the projected cost of the
actual claims incurred during calendar year 2000, up to a maximum liability of
$19.0 million. In addition, we have agreed to establish a $3.0 million trust
account naming Hartford Insurance Company as beneficiary to secure any liability
for claim funding for 1999 and 2000 that might exceed the pre-funded amounts up
to the aggregate maximum cap for each year of $13.6 million and $19.0 million,
respectively. We are funding this trust account in 11 installments through
December 2000 and as of October, 2000, we had funded $2.1 million into the trust
account.
ACCOUNTS RECEIVABLE
A majority of our tangible assets are customer accounts receivable.
Tandem employees are paid on a daily or weekly basis. We receive payment from
customers for these services, on average, 30 to 60 days from the date of the
invoice. Beginning in the fourth quarter of 1998, we experienced an increase in
the percentage of our Tandem accounts receivable that were past due. During
calendar 1999 and the first two quarters of calendar 2000, we increased our
focus on our accounts receivable collection process. As a result, the average
number of days to collect Tandem accounts receivable from invoice presentation
has decreased from 53 days at December 31, 1998 to 42 days at July 2, 2000.
Since we announced our restructuring plan in August 1999, accounts receivable
decreased by approximately $9 million due to the sale of Tandem offices, our PEO
division and our clerical division to third parties; although the working
capital benefit was substantially less due to the corresponding reduction in
liabilities such as accrued payroll, payroll taxes and workers' compensation. In
addition, during the fourth quarter of 1999, we sold certain trade accounts
receivable, with a face value of approximately $4.3 million, most of which were
more than 180 days past due, to unrelated third parties for approximately
$220,000. We anticipate that our accounts receivable will decrease by an
additional $2 million as we collect the outstanding receivables for the branches
sold in the states of New Jersey and Pennsylvania on June 25, 2000, and by
approximately $1 million when we dispose of the remaining assets held for
disposition as of July 2, 2000.
CAPITAL EXPENDITURES
We anticipate spending up to $2 million during the next twelve months
to improve our management information and operating systems, upgrade existing
locations and other capital expenditures including, but not limited to, opening
new Tandem locations.
ACQUISITIONS
During 1997, we made eight staffing acquisitions including 30 offices
and approximately $61.0 million in annual historical revenue. During 1998, we
made 17 staffing acquisitions including 40 offices and approximately $96.0
million in annual historical revenue. These acquisitions resulted in a
significant increase in goodwill and other intangible assets and correspondingly
resulted in increased amortization expense. In addition, the amount of these
intangible assets as a percentage of our total assets and shareholders' equity
increased significantly in those periods.
During 1999, we wrote down approximately $8.0 million of these
intangible assets, $5.4 million representing the excess of the book value over
the expected net realizable value of assets identified for disposition and
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<PAGE> 38
expensed as part of the restructuring charge and another $2.6 million related to
assets to be retained by us that were considered impaired based on our analysis
of anticipated discounted future cash flows at that time. While we do not
consider the remaining net unamortized balance of intangible assets as of
December 31, 1999 to be impaired, any future determination requiring the
write-down of a significant portion of unamortized intangible assets could have
a material adverse effect on our results of operations. As of the date of this
filing, we have not made further acquisitions and we do not have current plans
to make any acquisitions in the next twelve months.
RESTRUCTURING
On August 6, 1999, we announced actions to improve our short-term
liquidity, concentrate our operations within our Tandem division, and improve
our operating performance. In connection with these actions, we sold our
Synadyne and clerical staffing divisions. In addition, we announced a specific
plan to sell, franchise, close, or consolidate 47 Tandem offices and reduce
headcount at 70 Tandem locations and corporate headquarters. The restructuring
charge accrual and its utilization are as follows:
<TABLE>
<CAPTION>
CHARGES TO UTILIZATION
ORIGINAL BALANCE AT (REVERSALS OF) ----------------- BALANCE AT
(AMOUNTS IN THOUSANDS) CHARGE 4/2/00 OPERATIONS CASH NON-CASH 7/2/00
-------- ---------- -------------- ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Employee severance and
other termination benefits $ 4,040 $ 2,139 $ (89) $ 483 $ -- $ 1,567
Professional fees 1,205 34 369 362 -- 41
Lease termination and write-down of
leasehold improvements at closed offices 400 49 (2) 21 -- 26
Other restructuring charges 146 33 154 128 -- 59
------- ------- ------- ------- ------- -------
Accrued restructuring charges 5,791 2,255 432 994 -- 1,693
Write-down to fair value/loss on sale
of assets identified for disposition 5,429 -- 446 -- 446 --
------- ------- ------- ------- ------- -------
Total restructuring and asset
impairment activity $11,220 $ 2,255 $ 878 $ 994 $ 446 $ 1,693
======= ======= ======= ======= ======= =======
</TABLE>
The original $11.2 million restructuring charge includes $4.0 million
for severance and other termination benefits, $1.2 million for professional
fees, and $0.6 million in lease termination and other charges. Severance and
other termination benefits were decreased by $0.2 million and $0.1 million
during Q1 2000 and Q1 2001, respectively, to reflect a reduction of amounts to
be paid in connection with certain severance packages accrued in 1999 as it
became apparent that certain employees of offices sold and franchised to third
parties would not receive severance packages, but would continue employment with
the respective buyers or franchisees. The remaining liability of $1.6 million
for severance and other termination benefits as of July 2, 2000 consists of $1.4
million, which we will pay over a period ranging from one week to 21 months from
July 2, 2000 for 23 employees who have been or will be terminated during the
period of August 1999 through August 2000.
We recorded professional fees of $0.5 million and $0.4 million as
restructuring costs incurred during Q1 2000 and Q1 2001, respectively. These
professional fees were comprised primarily of amounts paid to Crossroads LLC for
its services related to the restructuring. We expect to complete these
restructuring activities during the quarter ended October 1, 2000.
35
<PAGE> 39
We utilized $0.1 million of the restructuring charge during Q1 2000 and
$0.1 million of the restructuring charge during Q1 2001 for the costs of
terminating leases as well as writing down the carrying value of leasehold
improvements and other assets not usable in our other operations.
The restructuring charge includes a $5.4 million write-down to
estimated net realizable value of assets, recorded in our results of operations
at such time as we classified these assets as held for disposition, based on
management's estimate of the ultimate sales prices that would be negotiated for
these assets. We increased the charge by $0.1 million in Q1 2000 and $0.4
million during Q1 2001, and it is subject to future adjustments as we negotiate
the actual sales prices of the assets that remain to be sold.
During Q1 2001 we (i) sold one Tandem office and closed another, in the
state of Minnesota, effective April 10, 2000, generating cash proceeds of
$60,000, (ii) franchised a Tandem office in the state of Ohio, effective April
10, 2000, for cash proceeds of $20,000, and (iii) sold our operations in the
states of New Jersey and Pennsylvania, comprising six Tandem offices and two
"vendor on premises" locations, for $1.3 million (comprised of cash proceeds of
$0.8 million and two promissory notes totaling $0.5 million). In connection with
the sale of our Tandem offices in New Jersey and Pennsylvania, we recorded a
$0.4 million loss on the sale, in addition to the original $2.1 million
write-down of these assets to their estimated net realizable value upon their
classification as assets held for disposition.
As of July 2, 2000 there were six Tandem offices that remained to be
sold as part of the restructuring. After July 2, 2000, one of the six offices,
with a carrying value of approximately $60,000, was removed from the assets for
sale classification. We expect to sell the remaining five offices before October
31, 2000. We had classified the related tangible and intangible assets as assets
held for disposition, excluding cash, accounts receivable and deferred income
taxes. Upon classification as assets held for disposition, we discontinued the
related depreciation and amortization for these assets, which reduced operating
expenses by approximately $0.1 million in Q1 2001. We based the estimated fair
market value of these assets held for disposition on management's judgment and
as such, actual results could vary significantly from such estimates.
Our assets held for disposition as of July 2, 2000, stated at the lower
of original cost (net of accumulated depreciation or amortization) or fair value
(net of selling and disposition costs), are as follows (in thousands):
<TABLE>
<CAPTION>
NET ORIGINAL COST
-------------------------------------------------------------
PROPERTY GOODWILL AND LOWER OF
AND OTHER COST OR
EQUIPMENT INTANGIBLE ASSETS TOTAL FAIR VALUE
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Tandem branch offices $ 313 $ 1,005 $ 1,318 $ 426
===== ======= ======= =====
</TABLE>
The following table reflects our net revenues and gross profit margin
segregating ongoing operations and operations from assets held for disposition
or sold as part of our restructuring efforts and other disposed operations.
Those operations include: (i) the Synadyne division, sold as of April 8, 2000,
(ii) the clerical division, sold during the third quarter of calendar 1999,
(iii) franchise PEO operations, which ceased operations after December 31, 1999,
and (iv) Tandem branch offices disposed or held for sale as of July 2, 2000.
Ongoing operations include (i) the Tandem division, which provides flexible
industrial staffing and (ii) franchising. Dollar amounts are in thousands:
36
<PAGE> 40
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED TRANSITION QUARTER ENDED
----------------------------- -----------------------------
JULY 2, 2000 JUNE 30, 1999 APRIL 2, 2000 MARCH 31, 1999
-------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net revenues:
Total Revenues $ 81,618 $ 143,454 $ 126,011 $ 134,114
--------- --------- --------- ---------
Less revenues from assets held for sale and
disposed/ceased operations
Synadyne (71) (55,079) (44,834) (53,080)
Clerical, franchise PEO and other (8,755) (19,932) (8,278) (17,911)
--------- --------- --------- ---------
Subtotal - revenues from assets held for sale
and disposed/ceased operations (8,826) (75,011) (53,112) (70,991)
--------- --------- --------- ---------
Net revenues from ongoing operations $ 72,792 $ 68,443 $ 72,899 $ 63,123
========= ========= ========= =========
Gross profit margin:
Total Gross Profit $ 16,186 $ 20,344 $ 16,854 $ 19,250
--------- --------- --------- ---------
Less gross profit from assets held for sale
and disposed/ceased operations
Synadyne 12 (1,993) (1,160) (1,625)
Clerical, franchise PEO and other (1,334) (2,965) (1,420) (2,857)
--------- --------- --------- ---------
Subtotal - gross profit from assets held for
sale and disposed/ceased operations (1,322) (4,958) (2,580) (4,482)
--------- --------- --------- ---------
Gross Profit from ongoing operations $ 14,864 $ 15,386 $ 14,274 $ 14,768
========= ========= ========= =========
Gross profit margin as a percentage of net
revenues:
Ongoing operations - Tandem 19.7% 19.6% 18.7% 20.9%
Ongoing operations - franchising and other 100.0% 100.0% 100.0% 100.0%
Operations from assets held for sale and
diposed/ceased operations 15.0% 6.6% 4.9% 6.3%
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
---------- ----------- ------------
<S> <C> <C> <C>
Net revenues:
Total Revenues $ 594,047 $ 565,394 $ 447,579
--------- --------- ---------
Less revenues from assets held for sale and
disposed/ceased operations
Synadyne (224,499) (202,889) (177,046)
Clerical, franchise PEO and other (82,218) (92,192) (80,445)
--------- --------- ---------
Subtotal - revenues from assets held for sale
and disposed/ceased operations (306,717) (295,081) (257,491)
--------- --------- ---------
Net revenues from ongoing operations $ 287,330 $ 270,313 $ 190,088
========= ========= =========
Gross profit margin:
Total Gross Profit $ 80,781 $ 83,660 $ 65,505
--------- --------- ---------
Less gross profit from assets held for sale
and disposed/ceased operations
Synadyne (6,923) (6,524) (6,496)
Clerical, franchise PEO and other (11,968) (13,370) (9,386)
--------- --------- ---------
Subtotal - gross profit from assets held for
sale and disposed/ceased operations (18,891) (19,894) (15,882)
--------- --------- ---------
Gross Profit from ongoing operations $ 61,890 $ 63,766 $ 49,623
========= ========= =========
Gross profit margin as a percentage of net
revenues:
Ongoing operations - Tandem 19.5% 21.4% 23.0%
Ongoing operations - franchising and other 100.0% 100.0% 100.0%
Operations from assets held for sale and
diposed/ceased operations 6.2% 6.7% 6.2%
</TABLE>
Certain reclassifications have been made to previously reported results
of operations for the years ended December 31, 1999, 1998 and 1997 and the
quarter ended June 30, 1999 in the table above to conform to current period
presentation.
Tandem branches that were sold, franchised or held for sale as of July
2, 2000 generated revenues of $8.8 million, $8.3 million, $13.9 million and
$12.0 million during Q1 2001, Q1 2000, Q2 1999, and Q1 1999, respectively. Those
same branch offices earned gross profit of $1.3 million, $1.4 million, $2.4
million and $2.2 million during those periods and incurred selling, general and
administrative expenses of $1.0 million, $1.4 million, $2.7 million and $2.1
million, excluding depreciation and amortization costs, during those same
periods, respectively.
For the years ended December 31, 1999, 1998 and 1997, these Tandem
branch offices generated revenues of $54.9 million, $58.8 million and $39.1
million, respectively; earned gross profit margin of $9.8 million, $10.7 million
and $7.1 million; and incurred selling, general and administrative expense of
$9.1 million, $7.1 million and $5.3 million, excluding depreciation and
amortization costs.
Our former clerical division which was sold on August 30, 1999,
generated revenues of $2.1 million and $1.9 million, earned gross profit of $0.6
million and $0.5 million, and incurred $0.5 million and $0.5 million in selling,
general and administrative expense, excluding depreciation and amortization,
during Q2 1999 and Q1 1999, respectively. For the years ended December 31, 1999,
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<PAGE> 41
1998, and 1997, Office Ours generated revenues of $5.3 million, $8.1 million and
$6.7 million; earned gross profit of $1.4 million, $2.2 million and $1.8
million; and incurred $1.4 million, $2.2 million and $1.6 million in selling,
general and administrative expense, excluding depreciation and amortization
expense.
Selling, general and administrative expense for the Synadyne division,
excluding depreciation and amortization, was $0.2 million, $1.3 million, $1.3
million and $1.2 million during Q1 2001, Q1 2000, Q2 1999 and Q1 1999,
respectively. For the years ended December 31, 1999, 1998 and 1997, selling,
general and administrative expense for the Synadyne division, excluding
depreciation and amortization expense, was $4.9 million, $5.3 million and $5.3
million, respectively.
Results of Tandem offices that were consolidated in 1999 with existing
offices as part of our restructuring efforts, are included in ongoing
operations.
SEASONALITY
Our results of operations reflect the seasonality of higher customer
demand for industrial staffing services in the last two calendar quarters of the
year, as compared to the first two quarters. Even though there is a seasonal
reduction of industrial staffing revenues in the first calendar quarter of a
year as compared to the fourth calendar quarter of the prior year, we do 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. As a result of these factors, we anticipate
that we will earn a significant portion of our annual operating income in the
third and fourth calendar quarter (fiscal quarters Q2 2001 and Q3 2001), which
historically exceeds the operating income earned during the first two calendar
quarters of the year (fiscal quarters Q1 2000 and Q1 2001).
INFLATION
The effects of inflation on our operations were not significant during
the periods presented in the 1999 Financials or the Q1 2001 Financials.
Generally, throughout the periods discussed above, the increases in revenues and
expenses have resulted from a combination of volume increases, price increases,
and changes in the customer mix.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards "SFAS" No.
133, "Accounting for Derivative Instruments and Hedging Activities" was issued.
SFAS No. 133 defines derivatives and establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133, as modified by SFAS
No. 137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000, and cannot be applied retroactively. We intend to implement SFAS
No. 133 in our consolidated financial statements on the first day of fiscal year
2001. Management does not believe that we are a party to any transactions
involving derivatives as defined by SFAS No. 133. SFAS No. 133 could increase
volatility in earnings and other comprehensive income if we enter into any such
transactions in the future.
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<PAGE> 42
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of borrowings associated with our operating and investing
activities, we are exposed to changes in interest rates that may adversely
affect our results of operations and financial position. Of the $60.8 million of
short-term and long-term borrowings on our balance sheet as of July 2, 2000,
approximately 16.8% represented fixed rate instruments. Effective August 15,
2000, we entered into a three-year agreement with a syndicate of lenders led by
Ableco Finance LLC, an affiliate of Cerberus Capital Management, L.P., as agent,
which replaced our existing credit facility with a $33.4 million revolving
credit facility and a $17.6 million Term Loan A and a $9.0 million Term Loan B.
Both the revolving credit facility and the term loans are secured by all of our
assets. The revolving credit facility bears interest at prime or 9.0%, whichever
is greater, plus 2% per annum. Term Loan A and Term Loan B bear interest at
prime or 9.0%, whichever is greater, plus 3.5% and 5.0% per annum, respectively.
In addition, effective August 15, 2000, we renegotiated our
subordinated acquisition debt whereby we will pay interest only, at a rate of
10% per annum, on the debt for three years followed by two years of equal
monthly payments of interest and principal, which will retire the debt by August
2005. Our acquisition debt, prior to its renegotiation on August 15, 2000, had
effective interest rates varying between 8.75% and 12.0%.
A hypothetical 10% (about 123 basis points) adverse move in interest
rates along the entire interest rate yield curve would increase our interest
expense over the next twelve months by approximately $0.7 million, and would
decrease net income after taxes for the same period by $0.5 million, or $0.05
per diluted share. This volatility was calculated assuming that the refinancing
agreement with Ableco and the agreements to renegotiate our subordinated debt
were effective as of July 2, 2000. In addition, the hypothetical 10% adverse
move in interest rates would have an immaterial impact on the fair market value
of our fixed-rate debt.
As of December 31, 1999, our primary sources of funds for working
capital and other needs was a $25.5 million revolving credit line and a $50.0
million credit facility, based on and secured by our accounts receivable. These
borrowings were secured by all of our assets.
Of the $68.0 million of short-term and long-term borrowings on our
balance sheet as of December 31, 1999, approximately 16.1% represented fixed
rate instruments. Our revolving credit facility bore interest at prime plus 5%
per annum, and the receivable facility bore interest at prime plus 2% per annum.
There is inherent rollover risk for borrowings as they mature and are
renewed at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements. We do not utilize financial instruments for trading or
other speculative purposes.
To fund most of our working capital needs in 1998, and through
September 30, 1999, we utilized proceeds from the sale of our accounts
receivable to a third party, who in turn used the receivables to secure U.S.
dollar-denominated short-term commercial paper. Our cost for this funding was
based on the interest paid by the third party on the outstanding commercial
paper. Long-term debt was generally used to finance long-term investments.
Approximately 45% of the $38.3 million of long-term borrowings on our balance
sheet as of December 31, 1998 represented fixed rate instruments. Approximately
20% of the $83.1 million arrived at by including the outstanding commercial
paper from the securitization that was not on our balance sheet as of December
31, 1998 represented fixed rate instruments.
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In seeking to minimize the risks and/or costs associated with our
borrowing activities, we entered into a derivative financial instrument
transaction to limit exposure to the risk of interest rate fluctuations and to
minimize interest expense (See Note 7 to the 1999 Financials for additional
information). We did not utilize financial instruments for trading or other
speculative purposes. Our financial instrument counterparty was a high quality
commercial bank with significant experience with such instruments. We managed
exposure to counterparty credit risk through specific minimum credit standards.
The above discussion and the estimated amounts generated from the
analyses referred to above include forward-looking statements of market risk
which assume for analytical purposes that certain adverse market conditions may
occur. Actual future market conditions may differ materially from such
assumptions because the amounts noted previously are the result of analyses used
for the purpose of assessing possible risks and the mitigation thereof. The SEC
disclosures on market risk require that we include all financial instruments, as
defined by Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures about Fair Value of Financial Instruments", in the quantitative
disclosure calculation. SFAS No. 107 does not require disclosure of operating
leases, and we have not included them as part of the above analysis. This is a
significant limitation to the analysis presented. As a result, the overall
impact to our operating results from a hypothetical change in interest rates may
be overstated. There are certain other shortcomings inherent to the analyses
presented. The model assumes interest rate changes are instantaneous parallel
shifts in the yield curve. In reality, changes are rarely instantaneous.
Although certain liabilities may have similar maturities or periods to
repricing, they may not react correspondingly to changes in market interest
rates. The effect of the hypothetical change in interest rates ignores the
effect this movement may have on other variables including changes in actual
sales volumes that could be indirectly attributed to changes in interest rates.
The actions that management would take in response to such a change are also
ignored. Accordingly, the forward-looking statements should not be considered
projections by us of future events or losses and are subject to the factors
discussed under the caption "Special Note Regarding Forward-Looking Statements."
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BUSINESS
Certain statements included below are forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Our actual results may differ materially from those projected or implied in
these forward-looking statements. Furthermore, some of the forward-looking
statements are based upon assumptions of future events that may not prove to be
accurate.
GENERAL
We are a national provider of human resource services focusing on the
flexible industrial staffing market through our Tandem division. Tandem
recruits, trains and deploys temporary industrial personnel and provides payroll
administration, risk management and benefits administration services to its
clients. Tandem's clients include businesses in the manufacturing, distribution,
hospitality and construction industries. Through our Synadyne division, which we
sold effective April 8, 2000, we offered a comprehensive package of professional
employer organization, or PEO, services including payroll administration, risk
management, benefits administration and human resources consultation to
companies in a wide range of industries. We sold our former office clerical
staffing division, Office Ours, which we had operated since 1995, in August
1999.
As of October 1, 2000, the Tandem division provided approximately
23,800 flexible industrial staffing personnel daily through a nationwide network
of 84 company-owned locations and 51 franchised locations. The Tandem division
has approximately 5,000 clients and provides services to approximately 3,000 of
its clients each day. Between 1995 and 1999, Tandem revenues increased from
$68.6 million to $339.1 million, a compound annual growth rate of approximately
49.1%. Our Synadyne division, which began operating in 1994, had approximately
9,000 employees at March 31, 2000. Between 1995 and 1999, Synadyne revenues
increased from $67.9 million to $224.5 million, a compound annual growth rate of
approximately 31.3%.
Between January 1995 and October 1998, we completed 36 acquisitions,
primarily of staffing companies. These acquisitions included 89 offices and
collectively generated approximately $189.0 million in revenue for the twelve
months preceding such acquisitions. Due to these acquisitions, as well as new
offices, the number of company-owned staffing and PEO offices increased during
this period from ten to 124 and the number of metropolitan markets, as measured
by the Metropolitan Statistical Areas as determined by the United States Census
Bureau, served by company-owned locations increased from one to 50. Since
October 1998, we have made no acquisitions, however, we may resume a more
focused acquisition strategy emphasizing our industrial staffing services.
Staffing companies provide one or more of four basic services to
clients: (i) flexible staffing; (ii) PEO services; (iii) placement and search;
and (iv) outplacement. Based on information provided by the American Staffing
Association, formerly the National Association of Temporary and Staffing
Services, the National Association of Professional Employer Organizations and
Staffing Industry Analysts, Inc., 1999 staffing industry revenues were
approximately $117 billion. Over the last five years, the staffing industry has
experienced significant growth, due largely to the utilization of temporary help
across a broader range of industries, as well as the emergence of the PEO
sector. Staffing industry revenues grew from approximately $102 billion in 1998
to approximately $117 billion in 1999, or 14.7%. During that same period, the
industrial staffing sector grew from approximately $14.1 billion to
approximately $14.8 billion, or 5.0%. During 1999, the industrial staffing
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sector represented 12.6% of the staffing industry, compared to 13.8% during
1998. We believe that the industrial staffing market is highly fragmented and
that in excess of 75% of industrial staffing revenues are generated by small
local and regional companies.
COMPANY SERVICES
Our Tandem division focuses on meeting our clients' flexible industrial
staffing needs, targeting opportunities in that fragmented, growing market which
we believe has been under-served by large full service staffing companies.
Significant benefits of Tandem's services to clients include providing the
ability to outsource the recruiting and many logistical aspects of their
staffing needs, as well as converting the fixed cost of employees to the
variable cost of outsourced services. Before the sale of our Synadyne division,
we provided PEO services to small and medium sized businesses (those with less
than 500 employees), which services were intended to provide cost savings
arising from the economies of scale associated with this outsourcing of human
resources administration. In connection with these human resource administration
services, we assumed responsibility for compliance with many employment-related
regulations and assisted our clients in understanding and complying with
employment-related requirements for which we did not assume responsibility.
o PAYROLL ADMINISTRATION. We assume responsibility for payroll and
attendant record-keeping, payroll tax deposits, payroll tax reporting, and all
federal, state, county and city payroll tax reports (including 941s, 940s, W-2s,
W-3s, W-4s and W-5s), state unemployment taxes, employee file maintenance,
unemployment claims and monitoring and responding to changing regulatory
requirements. Until the sale of our Synadyne division, we developed and
administered customized payroll policies and procedures for each of our clients,
which were fully integrated from the clients' offices to our central processing
center.
o AGGREGATION OF STATUTORY AND NON-STATUTORY EMPLOYEE BENEFITS. We
provide workers' compensation and unemployment insurance to our service
employees. Workers' compensation is a state-mandated comprehensive insurance
program that requires employers to fund medical expenses, lost wages, and other
costs that result from work related injuries and illnesses, regardless of fault
and without any co-payment by the employee. Unemployment insurance is an
insurance tax imposed by both federal and state governments. Our human resources
and claims administration departments monitor and review workers' compensation
for loss control purposes.
We are the employer of record with respect to flexible industrial
staffing services and assume responsibility for most employment regulations,
including compliance with workers' compensation and state unemployment laws. As
part of our base services in the flexible staffing market, we conduct a human
resources needs analysis for clients and client employees. Based on the results
of that review, we recommend basic and additional services that the client
should implement.
We provide certain other services to our flexible industrial staffing
clients on a fee-for-service basis. These services include screening,
recruiting, training, workforce deployment, loss prevention and safety training,
pre-employment testing and assessment, background searches, compensation program
design, customized personnel management reports, job profiling, description,
application, turnover tracking and analysis, drug testing policy administration,
affirmative action plans, opinion surveys and follow-up analysis, exit
interviews and follow-up analysis, and management development skills workshops.
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OPERATIONS
TANDEM OPERATIONS
Tandem delivers its flexible industrial staffing services through a
nationwide network of 84 company-owned and 51 franchise recruiting and dispatch
branches. We aggregate our company-owned branches into 12 districts, which we
combine into three geographic zones: East, Midwest and West. We staff our
company-owned recruiting and dispatch branches with a branch manager, one or two
service and recruiting coordinators, one or more staffing consultants and, in
some cases, an office assistant. Some of the centers identified above as
company-owned are "vendor on premises" locations, where we have a permanent
administrative presence at a client's worksite. The number of people in each of
the positions vary by the size of the recruiting and dispatch centers and the
degree of penetration of their territory within the market.
We believe that Tandem's growth is due in part to its familiarity with
the businesses of its clients. Tandem's sales consultants visit client job sites
regularly to learn what skills the client's business requires. The branch
managers conduct job site safety inspections to ensure that employees are
appropriately skilled and equipped for the job. To ensure customer satisfaction,
Tandem staffing consultants and service coordinators play an active role in
daily work assignments. Tandem personnel also familiarize themselves with the
pool of industrial employees. Each employee is subject to a three-phase process
that evaluates their skills, abilities and attitudes. This not only permits
Tandem personnel to institute appropriate training programs and assign its
workers, but also helps them retain desirable employees.
SYNADYNE OPERATIONS
Until we sold the operations of our Synadyne division in April 2000, we
offered basic PEO services through Synadyne client service teams consisting of
human resource professionals and payroll and benefits specialists located in
each of the two Florida markets Synadyne serviced. Although the client service
teams had primary responsibility for servicing their assigned clients, they
relied on our corporate support center staff to provide advice in specialized
areas such as workers' compensation, unemployment insurance benefits and payroll
processing. In connection with the sale of Synadyne, we were obligated to
provide certain support services to the buyer, including accounting and
information systems services.
SALES AND MARKETING
We market our flexible industrial staffing services through two primary
marketing channels, direct sales and franchising. We believe this dual-channel
approach allows us to quickly access a pool of skilled employees, develop
regional brand awareness and ultimately become a market leader.
o DIRECT SALES FORCE. It is our strategy to employ the best sales force
available, and all of our sales associates receive a competitive compensation
package that includes commissions. All sales associates receive two weeks of
initial classroom and on-the-job training and attend additional training
sessions on a regular basis. Specialists and sales managers of the respective
divisions conduct the additional training. Our direct sales force is subdivided
into two categories: "hunters" who focus solely on new business and "farmers"
who focus solely on servicing existing customers.
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o FRANCHISING. We offer franchising arrangements for our flexible
industrial staffing business. Under these franchising agreements, we grant the
franchisee the exclusive right to operate under the Tandem trade name within a
select geographic market in return for a royalty on staffing services rendered.
The franchisee assumes the marketing costs and, as a result, we believe
franchising is a cost-effective method of building regional brand awareness in
secondary and tertiary markets. As of September 15, 2000, there were 51 Tandem
franchise locations.
CLIENTS
Our Tandem division has approximately 5,000 clients and provides
services to approximately 3,000 of such clients each day. These clients
represent a cross-section of the industrial sector, of which no single client
represents more than 5% of our total revenues. Tandem's clients include national
companies such as Browning-Ferris Industries, Inc., Michelin Corporation, Toys
"R" Us, Inc. and Waste Management, Inc., plus a large number of local and
regional companies.
Before its sale, our Synadyne division provided PEO services to
approximately 2,800 companies. These companies represented a diverse range of
industries, including the insurance industry. Synadyne's primary PEO client in
the insurance industry was Allstate Insurance Company. Synadyne provided basic
PEO services for approximately 2,100 Allstate agents. Synadyne also provided PEO
services to certain of the Tandem franchises. For the year ended December 31,
1999, approximately 9% and 3% of our total PEO revenues were attributed to
services provided to Allstate Insurance agents and to Tandem franchises,
respectively. Synadyne discontinued offering PEO services to the Tandem
franchises as of December 31, 1999.
We attempt to maintain diversity within our client base in order to
decrease our exposure to downturns or volatility in any particular industry, but
we cannot assure you that we will be able to maintain such diversity or decrease
our exposure to such volatility. As part of this client selection strategy, we
currently offer our services only to those businesses that operate in certain
industries, eliminating industries that we believe present a higher risk of
employee injury (such as roofing, excavation, chemical manufacturing and
maritime activities). All prospective clients undergo a rigorous underwriting
process to evaluate workers' compensation risk, creditworthiness, unemployment
history and operating stability. Generally, flexible industrial staffing clients
do not sign long-term contracts.
Many of our clients are concentrated geographically in Chicago,
Illinois or South Florida, however we are not dependent on any one customer or
small group of a few customers.
COMPETITION
The flexible industrial staffing market is highly fragmented and
characterized by many small providers in addition to several large public
companies, with at least one other public company focused primarily on
industrial staffing. There are limited barriers to entry and new competitors
frequently enter the market. Although a large percentage of flexible staffing
providers are locally operated with fewer than five offices, many of the large
public companies have significantly greater marketing, financial and other
resources than us. Unlike our company, almost none of our competitors
concentrate primarily on industrial staffing. We believe that by focusing
primarily on industrial staffing, we enjoy a competitive advantage over many of
our competitors that attempt to provide a broader range of staffing services. We
also believe that by targeting regional and emerging companies, rather than the
national companies that are generally being pursued by our competitors, we can
gain certain competitive advantages.
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We believe that several factors contribute to obtaining and retaining
clients in the industrial staffing market. These factors include an adequate
number of well-located offices, an understanding of clients' specific job
requirements, the ability to reliably provide the correct number of employees on
time, the ability to monitor job performance, and the ability to offer
competitive prices. To attract qualified industrial candidates for flexible
employment assignments, companies must offer competitive wages, positive work
environments, flexibility of work schedules, an adequate number of available
work hours and, in some cases, vacation and holiday pay. We believe we are
reasonably competitive in these areas in the markets in which we compete,
although we cannot assure you that we will maintain a competitive standing in
the future.
RISK MANAGEMENT PROGRAM--WORKERS' COMPENSATION
We believe that careful client selection, pro-active accident
prevention programs, and aggressive control of claims will result in reduced
workers' compensation costs. We seek to prevent workplace injuries by
implementing a variety of training, safety, and mandatory drug-free workplace
programs (including pre-employment screening, random testing, and post-accident
drug monitoring) to ensure that safety awareness is heightened at the sites to
which we send our workers. Further, we insist that clients adhere to ongoing
safety practices at the client worksites as a necessary condition to a continued
business relationship.
Each month, our risk management team reviews workplace accidents for
the relevant period to determine the appropriate reserves. Each quarter, we
review all cases to reconcile the reserves, payments, and expected future costs
for each case. We believe we have maintained adequate reserves for all of our
workers' compensation claims. In addition, we have selected Specialty Risk
Services to act as our third-party claims administrator and Novaeon Care
Management to provide us with medical case management services. Each vendor has
established designated regional teams for the handling of our workers'
compensation claims. We employ an in-house claims analyst who manages each
regional team. All claims arising within a given region are reported to the
claims analyst who verifies the employment of the claimant and assigns the claim
to Specialty Risk Services or Novaeon for defense and/or processing. Together, a
team consisting of the in-house analyst, the third-party administrator and the
medical case manager aggressively follows each claim from its origin to its
conclusion.
INFORMATION TECHNOLOGY
We believe that the effective use of technology to increase operational
efficiency and enhance client service is a key factor in remaining competitive.
We have developed and continue to invest in information support systems at our
company-owned and franchise locations, as well as at our corporate support
center. At the field level, custom developed systems support the day-to-day
operational needs of our Tandem division. At the corporate support center,
centralized accounting, billing and reporting applications provide support for
our Tandem field offices.
In November 1996, we entered into a series of major projects to expand
our information systems infrastructure and replace or redevelop many of our
major operational systems in order to support future growth. The initial phase
of the project was an installation of a company-wide database management system
that now provides consistency across all applications and allows information to
move between applications, allowing for consolidated reporting and analysis.
In the second phase of the project, completed in February 1997, we
implemented an integrated financial management system for all accounting
functions to streamline the central processing of billing and financial
reporting. The third phase of the project, completed in November 1997, was the
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development of a state-of-the-art system to support Synadyne. Since no
comprehensive, commercially available system existed for the PEO industry, we
entered into a developmental agreement with F.W. Davison, a provider of human
resource and benefit systems, to produce a system tailored to the needs of
Synadyne. That system was updated with a new release in November 1999. The final
phase of the project was the development of a new support system for the Tandem
offices that uses a centrally based processing resource. Each field office is
connected to a central processor via a frame relay network connection. This new
system was fully implemented in all company-owned offices during 1999.
INDUSTRY REGULATION
OVERVIEW
As an employer, we are subject to federal, state and local statutes and
regulations governing our relationships with our employees and affecting
businesses generally, including employees at client worksites. In addition, we
had been subject to applicable licensing and other regulatory requirements and
uncertainty in the application of numerous federal and state laws regarding
labor, tax and employment matters relating to our PEO operations, which were
discontinued as of April 8, 2000.
UNCERTAINTY AS TO THE EMPLOYER RELATIONSHIP
Although we sold our Synadyne operations, we continue to be subject to
certain federal and state laws related to PEO services provided on or before
April 8, 2000. Changes in those laws and possible retroactive application of
those laws could continue to affect us.
By entering into a co-employment relationship with PEO worksite
employees through our Synadyne division, we assumed certain obligations and
responsibilities of an employer under federal and state laws. Many of these
federal and state laws were enacted before the development of non-traditional
employment relationships, such as PEOs, temporary employment, and outsourcing
arrangements, and do not specifically address the obligations and
responsibilities of PEOs. Whether certain laws apply to us depends in many cases
upon whether we are deemed to be an "employer" for purposes of the law. The
definition of "employer" under these laws is not uniform and, therefore, the
application of these laws to our business is not always certain. In many cases,
a person's status as an "employee" is determined by application of a common law
test involving the examination of several factors to determine whether an
employer/employee relationship exists. Uncertainty as to the application of
certain laws governing "employer" relationships is particularly important to us
in federal tax and employee benefit matters.
FEDERAL AND STATE EMPLOYMENT TAXES. We assume the sole responsibility
and liability for the payment of federal and state employment taxes with respect
to wages and salaries paid to our employees, including, through April 8, 2000,
some of our PEO worksite employees. To date, the IRS has relied extensively on
the common law test of employment in determining employer status and the
resulting liability for failure to withhold; however, the IRS has formed an
examination division market segment specialization program for the purpose of
examining selected PEOs throughout the United States. Upon examination, the IRS
may determine that a PEO is not the employer of the worksite employees under the
provisions of the Internal Revenue Code of 1986, as amended, applicable to
federal employment taxes and, consequently, that the client companies are
exclusively responsible for payment of employment taxes on wages and salaries
paid to such employees. We believe that since we have paid all employment taxes
and are no longer in the PEO business, any such ruling would not have a material
effect on our financial position.
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EMPLOYEE BENEFIT PLANS. We offered various benefit plans to our PEO
worksite employees. These plans included a multiple-employer retirement plan, a
cafeteria plan, a group health plan, a group life insurance plan, a group
disability insurance plan and an employee assistance plan. Generally, employee
benefit plans are subject to provisions of both the Internal Revenue Code and
the Employee Retirement Income Security Act of 1974, as amended. In order to
qualify for favorable tax treatment under the Code, the benefit plans must be
established and maintained by an employer for the exclusive benefit of the
employer's employees. An IRS examination may determine that we were not the
employer of our PEO worksite employees under Internal Revenue Code provisions
applicable to employee benefit plans. If the IRS were to conclude that we were
not the employer of our PEO worksite employees for employee benefit plan
purposes, those employees would not have qualified to make tax favored
contributions to our multiple-employer retirement plans or cafeteria plan. If
such conclusion were applied retroactively, employees' vested account balances,
before April 8, 2000, could become taxable immediately, we could lose our tax
deduction to the extent the contributions were not vested, the plan trust could
become a taxable trust and penalties could be assessed. In such a scenario, we
could face the risk of potential litigation by some of our former PEO clients.
As such, we believe that a retroactive application by the IRS of an adverse
conclusion could have a material adverse effect on our financial position,
results of operations and liquidity. While we believe that a retroactive
disqualification is unlikely, we cannot assure you as to the ultimate resolution
of these issues.
ERISA also governs employee pension and welfare benefit plans. The
United States Supreme Court has held that the common law test of employment must
be applied to determine whether an individual is an employee or an independent
contractor under ERISA. A definitive judicial interpretation of the employer
designation in the context of a PEO arrangement has not been established. If we
were found not to be an employer for ERISA purposes, our employee benefit plans
would not be subject to ERISA. As a result of such finding, we and our employee
benefit plans would not enjoy the preemption of state law provided by ERISA and
could be subject to varying state laws and regulations, as well as to claims
based upon state common law.
WORKERS' COMPENSATION
Workers' compensation is a state mandated comprehensive insurance
program that requires employers to fund medical expenses, lost wages and other
costs resulting from work-related injuries and illnesses. In exchange for
providing workers' compensation coverage for employees, employers are generally
immune from any liability for benefits in excess of those provided by the
relevant state statutes. In most states, the extensive benefits coverage for
both medical costs and lost wages is provided through the purchase of commercial
insurance from private insurance companies, participation in state-run insurance
funds, self-insurance funds or, if permitted by the state, employer self
insurance. Workers' compensation benefits and arrangements vary on a
state-by-state basis and are often highly complex.
TRADEMARKS AND SERVICE MARKS
We have registered the following marks with the United States Patent
and Trademark Office: TANDEM and double oval design, LABOR WORLD, LABOR
TECHNOLOGIES and Labor Technologies logo, OFFICE OURS and clock logo, OUTSOURCE
INTERNATIONAL THE LEADER IN HUMAN RESOURCES and design and FIGURE OF A MAN IN
BOX DESIGN. These marks all expire at various times from 2002 to 2007, but are
renewable thereafter for one 10-year term. In addition, we have registered the
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mark OUTSOURCE INTERNATIONAL - THE LEADER IN HUMAN RESOURCES in 26 states, which
registrations expire at various times from 2002 to 2007, but are NOT renewable.
We have registered with the Office for Harmonization in the
International Market (Trademark and Designs) for the European Community the mark
OFFICE OURS. We have also registered with the Canadian Trademarks Office the
mark OFFICE OURS. We have one application pending with the Canadian Trademarks
Office for registration of the mark OUTSOURCE INTERNATIONAL.
We believe that all of our trademarks and service marks are important
to our sales, marketing and financial operations.
CORPORATE EMPLOYEES
As of September 15, 2000, we had 576 corporate employees, of whom 460
were employed in our Tandem division and 116 were employed in shared support
services such as human resources, risk management, and information systems. As
set forth below, we sold our Synadyne division, effective April 8, 2000. This
sale resulted in a reduction of 63 employees, who became employees of the buyer
at the time of purchase. In addition, we contracted with the buyer of Synadyne
to purchase PEO services for our administrative personnel, in the same manner
that Synadyne provided such services prior to the sale. None of our employees
are covered by collective bargaining agreements. We believe that our
relationships with our employees are good.
RESTRUCTURING
On August 6, 1999, we announced the following actions intended to
improve our short-term liquidity, concentrate our operations within our Tandem
division, and improve our operating performance within that division:
o the sale of Office Ours, our clerical staffing division, which was
consummated effective August 30, 1999;
o the engagement of an investment banking firm to assist in the
evaluation of strategic options for Synadyne, which ultimately
resulted in the sale of the operations of Synadyne effective April
8, 2000; and
o a reduction of our flexible industrial staffing and support
operations consisting primarily of: the sale, franchise, closure or
consolidation of 47 of the 117 Tandem branch offices existing as of
June 30, 1999; an immediate reduction of the Tandem and corporate
headquarters employee workforce by 110 employees (approximately 11%
of our workforce); and an additional reduction of 32 employees
through August 2000. A total of 47 branch offices have been or will
be eliminated in connection with the restructuring, 41 of which had
been sold, franchised, closed, or consolidated as of September 15,
2000. These offices were not or are not expected to be adequately
profitable or are inconsistent with our operating strategy of
clustering offices within specific geographic regions.
The original restructuring charges of $11.2 million, included in our
results of operations for the year ended December 31, 1999, included $4.0
million for severance and other termination benefits, $1.2 million for
professional fees, and a $5.4 million write-down of assets related to 27 of the
47 Tandem offices identified for disposition.
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During the two quarters ended July 2, 2000, we increased the
restructuring charge by $1.2 million, of which (1) $0.5 million was to reflect
an additional write-down of assets, as we have negotiated the actual sales
prices of certain assets held for sale and (2) $1.0 million was to reflect
professional fees, expenses associated with lease terminations, and other
charges associated with the restructuring, which was offset by a decrease of
$0.3 million in the severance liability.
As of September 15, 2000, 21 offices, representing $5.0 million of this
write-down, had been sold for proceeds of $3.6 million, of which $1.3 million
represented cash proceeds, $1.3 million represented cancellation of our
subordinated indebtedness and $0.9 million represented notes payable issued by
us in connection with the sale of certain assets. We also sold a branch office,
not included in the restructuring, for proceeds of $2.3 million, which included
the forgiveness of our subordinated debt of $0.9 million, and a note receivable
for $1.0 million. The note receivable was satisfied in September 2000. The
remaining $0.9 million write-down relates to the offices not sold as of
September 15, 2000, and is based on management's estimate of the ultimate sales
prices that will be negotiated for these assets. We expect to sell the remainder
of the assets held for disposition before October 31, 2000.
As a result of the corporate headquarters workforce reductions and the
disposition of our Synadyne division, our corporate headquarters building was
sold in an arms-length transaction to an unaffiliated third party, effective
December 29, 1999. The buyer agreed to lease the building back to us for four
months, ending May 6, 2000. In February 2000, we leased a total of 32,553 square
feet as our new corporate headquarters in an office building in Delray Beach,
Florida. We moved into the new facilities in May 2000.
Effective April 8, 2000, we sold the operations of our Synadyne
division in an arms-length transaction, for proceeds of $3.5 million. In
addition, we may receive additional sale proceeds of $1.25 million, which is
dependent on the attainment of certain performance criteria for the one year
period after the sale. In connection with the sale of our Synadyne division, we
are obligated to provide certain support services to the buyer, including
accounting and information systems services. In addition, we have contracted
with the buyer to purchase PEO services for our administrative employees in the
same manner that Synadyne provided services before the sale.
To assist us during the restructuring process, we retained the services
of Crossroads Capital Partners, LLC, in May 1999. From August 1999 through
August 2000, Mr. J. G. (Pete) Ball, a principal of Crossroads, served in the
newly created position of interim chief operating officer of our Tandem
division. Mr. Ball worked with our board of directors and senior management to
help ensure our restructuring plan was implemented.
Following the restructuring, our objective is to concentrate our
activities on becoming the leading provider of industrial staffing services in
select geographic regions. To achieve this objective, our strategy is to:
o focus on under-served industrial staffinG markets which provide high
growth opportunities;
o geographically cluster offices to leverage economic efficiencies and
maintain a stable employment base;
o increase market penetration through a combination of internal
growth, acquisitions, franchising and strategic alliances;
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o continue to maximize operating efficiencies through integrated
technology and back office support; and
o become the "Guardian Employer," whereby we will represent a critical
mass of jobs within a defined geographic area enabling us to commit
to permanent employment, over time, for our staffing employees.
PROPERTIES
We currently lease 32,553 square feet of office space for our principal
executive offices in an office building complex located in Delray Beach, Palm
Beach County, Florida. The lease began on May 1, 2000, has a term of 64 months
and requires a monthly rental payment of $59,360. We have subleased
approximately 10,300 square feet of our office space to the buyer of our
Synadyne division for up to 64 months. We own two small staffing office
locations in Chicago, Illinois and Waukegan, Illinois and a residential
condominium in Boca Raton, Florida. As of October 1, 2000, we also leased 82
facilities, primarily for Tandem office locations, with approximately 193,770
total square feet for an annual base rent of approximately $1.9 million.
We believe that our facilities are generally adequate for our needs and
we do not anticipate difficulty in replacing these facilities or locating
additional facilities, if needed.
LEGAL PROCEEDINGS
In September 1998, Sonia Hill, an employee of an independent agency of
Allstate Insurance Company, brought a discrimination lawsuit under the Texas
Commission of Human Rights Act of 1983, naming Synadyne III, Inc., our wholly
owned subsidiary, Allstate Insurance, the independent agency and the agent as
defendants. Although the other defendants were served with a summons and
complaint, Synadyne III was never served. At the time of the alleged incident,
Synadyne III was under contract with the independent insurance agency to provide
PEO services. The suit was brought in the County Court, Dallas County, Texas. On
September 13, 2000, a final default judgment in the amount of $807,245 was
entered against Synadyne III. We were first informed of the existence of this
judgment when we received notice of the entry of default judgment on September
18, 2000. We are currently attempting to vacate this default judgment on the
grounds that it was obtained without according due process to Synadyne III. We
believe that we will be successful in vacating the judgment. We have not made
any adjustments to the financial statements for this matter.
Otherwise, we are only involved in routine litigation arising in the
ordinary course of our business that we believe will not have a material adverse
effect on our financial position or results of operation.
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<PAGE> 54
MARKET PRICE AND DIVIDEND DATA
Before August 10, 2000 our common stock was traded on the Nasdaq
National Market under the symbol "OSIX." On August 10, 2000 our common stock was
delisted from the Nasdaq National Market and began trading on the Over the
Counter Bulletin Board Market (OTCBB) under the symbol OSIX. The table below
sets forth, for the periods indicated, the high and low bid prices of our common
stock as reported by the Nasdaq Stock Market for the fiscal quarters beginning
in fiscal year 1998 through the first quarter of fiscal year 2001, and as
reported by the OTCBB for the second and third quarter of fiscal year 2001
(through October 27, 2000):
HIGH LOW
---- ---
FISCAL YEAR 1998
First Quarter 1998.............................. $ 25.00 $ 10.63
Second Quarter 1998............................. 24.25 7.75
Third Quarter 1998.............................. 11.13 3.50
Fourth Quarter 1998............................. 5.69 3.25
FISCAL YEAR 1999
First Quarter 1999.............................. $ 7.00 $ 3.25
Second Quarter 1999............................. 4.88 3.06
Third Quarter 1999.............................. 3.81 0.63
Fourth Quarter 1999............................. 2.06 0.50
TRANSITION PERIOD ENDED APRIL 2, 2000.............. $ 3.63 $ 1.25
FISCAL YEAR 2001
First Quarter 2001.............................. $ 2.00 $ 0.78
Second Quarter 2001............................. $ 1.56 $ 0.63
Third Quarter 2001 (through October 27, 2000)... $ 1.19 $ 0.69
On October 27, 2000, the closing bid price of our common stock on the
OTCBB was $1.00 per share. This price reflects inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
There were approximately 130 holders of record of our common stock as
of October 11, 2000. This number does not include the number of shareholders
whose shares were held in "nominee" or "street name," which we believe to be
approximately 1400 as of that date.
We have never paid cash dividends on our common stock. We intend to
retain earnings, if any, to finance future operations and expansion and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future. Any future payment of dividends will depend upon our financial
condition, capital requirements and earnings and compliance with cash flow and
other financial covenants contained in our revolving credit facility, as well as
upon other factors that our board of directors may deem relevant.
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<PAGE> 55
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<S> <C> <C>
GARRY E. MEIER 47 Chairman of the Board of Directors, President and Chief Executive Officer
SCOTT R. FRANCIS 43 Vice President, Chief Financial Officer and Director
RICHARD A. MAZELSKY 39 Executive Vice President and Chief Operating Officer
GLENN E. ENRIQUEZ 52 Vice President and Chief Information Officer
JOSEPH C. WASCH 56 Vice President, General Counsel and Secretary
CAROLYN H. NOONAN 35 Vice President, Controller and Assistant Secretary
DAVID S. HERSHBERG 58 Director
JAY D. SEID 39 Director
DR. LAWRENCE CHIMERINE 60 Director
MICHAEL S. FAWCETT 56 Director
</TABLE>
GARRY E. MEIER has been Chairman of the Board of Directors, President
and Chief Executive Officer since March 2000. From February 1999 to February
2000, Mr. Meier served in various capacities, most recently as President/Interim
CEO, with Global Integrity, an e-commerce security company located in Reston,
Virginia that provides technology staffing augmentation. Before that, Mr. Meier
served in various capacities with Medaphis Physicians Services Corporation, a
healthcare financial administration physician services and practice management
company, from March 1997 to September 1998 and Technology Service Solutions, a
provider of PC LAN based technical support, from July 1994 to March 1997. Mr.
Meier has been a member of our Nominating Committee since March 2000.
SCOTT R. FRANCIS has been Vice President, Chief Financial Officer and
Director since March 2000 and was Chief Financial Officer, Treasurer and
Director from May 1998 to March 2000. Previously, Mr. Francis served for fifteen
years in various capacities with Ryder System, Inc., a provider of integrated
logistics and transportation solutions, most recently as Vice President and
Chief Financial Officer of Ryder's automotive carrier division. He was a member
of our Audit Committee in 1998 and 1999.
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<PAGE> 56
RICHARD A. MAZELSKY has been Executive Vice President and Chief
Operating Officer since August 2000. From February 1999 to July 2000, Mr.
Mazelsky was Senior Vice President of AHL Services, Inc., a provider of
outsourced business services. Before that, from March 1996 to February 1999, he
was Vice President and Regional Manager for Kelly Services, Inc., a provider of
staffing services to a diversified group of customers.
GLENN E. ENRIQUEZ has been a Vice President since March 2000 and Chief
Information Officer since October 1998. Previously, from February 1995 to
October 1998, Mr. Enriquez was our Director of Application Development. Before
that, Mr. Enriquez was President of Medical Statistical Research, Inc. from 1991
to 1995, a software company that provides auditing tools to medical auditing and
insurance companies.
JOSEPH C. WASCH has been Vice President, General Counsel and Secretary
since March 2000 and was our Associate General Counsel from July 1998 to March
2000. Before that, Mr. Wasch was General Counsel to Rx Medical Services Corp.,
an owner and operator of clinical laboratories and rural hospitals, from 1993 to
1998.
CAROLYN H. NOONAN has been Vice President, Controller and Assistant
Secretary since March 2000. Before that, Ms. Noonan was our Vice President and
Controller since August of 1999. Previously, Ms. Noonan was Controller to Milgo
Solutions, Inc, (f/k/a RACAL-DATACOM), an international solutions and services
provider, from 1997 to 1999 and Director of Finance of First Data Merchant
Services (f/k/a NaBANCO), a provider of electronic payment solutions, from 1994
to 1997.
DAVID S. HERSHBERG has been a Director since October 1997. Mr.
Hershberg is Vice President and Assistant General Counsel of the IBM
Corporation. Before joining IBM in October 1995, Mr. Hershberg was Executive
Vice President and director of Viatel, Inc., an international long-distance
telephone company, with responsibility for legal, administrative and certain
financial matters. Mr. Hershberg is an advisory director of Bank Julius Baer,
New York branch, a Swiss private bank. He is a member of our Compensation
Committee, Audit Committee and Nominating Committee.
JAY D. SEID has been a Director since March 1999. Since September 1997,
Mr. Seid has been a Managing Director of Bachow & Associates, Inc., an
investment firm based in Bala Cynwyd, Pennsylvania. Previously, he was a Vice
President of Bachow & Associates, Inc. Before joining Bachow & Associates, Inc.
in December 1992, Mr. Seid was President and General Counsel to Judicate, Inc.,
and before that, he was an attorney at the law firm of Wolf, Block, Schorr and
Solis-Cohen in Philadelphia, Pennsylvania. Mr. Seid is Chairman of the Board of
Vista Information Solutions, Inc. and is a member of the board of directors of
Berger Holdings, Ltd. He is a member of our Compensation Committee, Audit
Committee and Nominating Committee.
DR. LAWRENCE CHIMERINE has been a Director since November 1998. Dr.
Chimerine has been the managing director and chief economist of the Economic
Strategy Institute in Washington, DC since September 1993, and serves as a
senior economic advisor to the WEFA Group and as president of Radnor
International Consulting Services. Dr. Chimerine also serves as a Director of
Bank United, Eastbrokers International and Sanchez Computer Associates. Dr.
Chimerine is a member of our Audit Committee.
MICHAEL S. FAWCETT has been a Director since April of 2000. Mr. Fawcett
has been a Managing Director of Triumph Capital Group, Inc. since 1998 and,
before that, Mr. Fawcett was a Principal Partner in Dorman & Fawcett from 1991
to 1998.
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<PAGE> 57
Our board of directors consists of six members. Messrs. Francis and
Hershberg are Class I directors, Messrs. Seid and Fawcett are Class II
directors, and Messrs. Meier and Chimerine are Class III directors. The terms of
the Class I directors expire in 2001, the terms of the Class II directors expire
in 2002, and the terms of the Class III directors expire in 2003.
On April 7, 2000, Richard J. Williams resigned as a Director. Mr.
Williams was a designee of Triumph Capital Group, Inc. pursuant to an agreement
effective February 21, 1997 by and among our original shareholders. Triumph
Capital Group, Inc. designated Mr. Fawcett to replace Mr. Williams as a director
for the unexpired portion of Mr. Williams' term as a Class II Director.
VOTING TRUST AND SHAREHOLDERS AGREEMENT
Certain of our shareholders have deposited shares of common stock, now
totaling 4,003,266 shares, into a voting trust, the trustees of which are
Messrs. Garry E. Meier, Chairman of the Board, Chief Executive Officer,
President and a director, and Jay D. Seid, a director. The voting trust
terminates in February 2007. The trustees have sole and exclusive right to vote
the shares of common stock deposited in the voting trust. The shares of common
stock in the voting trust constitute approximately 46.1% of the issued and
outstanding shares of our common stock. We are registering for resale under this
prospectus all of the shares of our common stock held in the voting trust.
Effective February 21, 1997, our then existing shareholders agreed for
a period of ten years to vote in favor of electing the following persons to our
board of directors: three persons designated by the Chief Executive Officer, one
person designated by Triumph Capital Group, Inc., one person designated by
Bachow & Associates, Inc., and two additional persons selected by the previously
elected directors. Triumph Capital's designee on the board is Michael S. Fawcett
and Bachow & Associates' designee on the board is Jay D. Seid. Mr. Meier, the
current Chief Executive Officer, has not designated anyone to the board and the
remaining directors have been designated by the previously elected directors.
Triumph Capital and Bachow & Associates have the right to designate up to two
additional members to the board of directors, but have not exercised this right.
Triumph and Bachow further agreed to ratify any merger, consolidation or sale of
us, any acquisitions made by us, and any amendments to our articles of
incorporation or bylaws to the extent the board of directors approve such
actions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, Paul M. Burrell, our former President and Chief Executive
Officer, and Mr. Francis, both of whom were executive officers in 1999,
participated in deliberations of the board of directors concerning executive
officer compensation. For a description of certain transactions between us and
our executive officers, directors and principal shareholders, see "Related-Party
Transactions" below.
DIRECTOR COMPENSATION
Each of our non-employee directors receives a $1,000 quarterly retainer
and a $1,500 fee for attendance in person at each meeting of the board of
directors. Each of our non-employee directors receives a $500 fee for his
attendance by telephone conference call at each meeting of our board of
directors that does not exceed three hours in length and a $1,500 fee for his
attendance by telephone conference call at each meeting of the board of
directors that does exceed three hours in length. In addition, directors receive
$500 for attendance at committee meetings of the board of directors.
Employee-directors are not compensated for their service as directors. All
directors are reimbursed for travel expenses.
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<PAGE> 58
Pursuant to our Stock Option Plan, each of our non-employee directors,
upon being elected as a director, receives an option to purchase 9,818 shares of
our common stock at an exercise price equal to the fair market value of our
common stock on the date of grant. Effective on each of the first three
anniversaries of the initial grant, if the non-employee director owns
approximately 3,270 shares of common stock on the anniversary dates, we
automatically grant an option to such director to purchase a like amount of
shares at an exercise price equal to the fair market value on the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation paid or accrued during the years ended December 31, 1999, December
31, 1998 and December 31, 1997 and the 13-week period ended April 2, 2000, to
(1) all persons serving as Chief Executive Officer during the year ended
December 31, 1999 or the 13-week period ended April 2, 2000 and (2) the four
next highest paid executive officers whose annual salary and bonus exceeded
$100,000 during the year ended December 31, 1999. We refer to these individuals,
collectively, as the "Named Executive Officers".
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
-------------------------- ----------------------
SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR(2) SALARY($) BONUS ($) OPTIONS/SARS(#)
--------------------------- -------------- --------- --------- ----------------------
<S> <C> <C> <C> <C>
Garry E. Meier, (3) 2000T $63,308 $ -- 400,000
President and Chief 1999 -- -- --
Executive Officer 1998 -- -- --
1997 -- -- --
Paul M. Burrell, (4) 2000T $ 88,851 $ -- --
Former President and Chief 1999 260,913 -- 50,000
Executive Officer 1998 259,615 -- 102,500
1997 259,038 -- 8,746
Scott R. Francis, (5) 2000T $ 61,527 $79,631 40,000
Vice President and Chief 1999 203,125 -- 25,000
Financial Officer 1998 134,615 -- 110,000
1997 -- -- --
Robert A. Lefcort (6) 2000T $ 50,358 $ -- --
President-Synadyne 1999 154,596 -- 20,000
1998 156,346 16,154 50,980
1997 139,377 -- --
William R. Britton, (7) 2000T $ 41,117 $59,926 --
Vice President 1999 140,000 67,500 --
1998 138,182 -- 13,000
1997 42,900 -- 16,250
Brian M. Nugent, (8) 2000T $ 47,728 $ 4,038 --
Vice President, Secretary 1999 151,375 16,154 5,000
and General Counsel 1998 183,346 -- 44,390
1997 105,915 -- 16,250
</TABLE>
(1) Excludes any perquisites and other personal benefits received, the total
value of which did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus for such Named Executive Officer.
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<PAGE> 59
(2) Due to a change in our fiscal year end from December 31 to the 52 or
53-week period ending on the Sunday nearest to March 31, we present the
transition period representing the 13 weeks ended April 2, 2000. We refer
to this transition period in the table as 2000T. Amounts shown in the 2000T
rows include compensation paid during January 1, 2000 through April 2,
2000.
(3) Mr. Meier began his employment with us in March 2000.
(4) Mr. Burrell resigned as Chairman of the Board, President and Chief
Executive Officer as of February 14, 2000.
(5) Mr. Francis began his employment with us in May 1998.
(6) Mr. Lefcort resigned as President of Synadyne as of April 6, 2000.
(7) Mr. Britton began his employment with us in August 1997 and resigned as
Vice President as of April 30, 2000.
(8) Mr. Nugent began his employment with us in March 1997 and resigned as Vice
President, Secretary and General Counsel as of April 21, 2000.
OPTION GRANTS IN 1999
The following table shows all grants of stock options to the Named
Executive Officers during the 13-week period ended April 2, 2000 and the year
ended December 31, 1999:
<TABLE>
<CAPTION>
PERCENT POTENTIAL REALIZABLE
OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SHARES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(2)
FISCAL OPTIONS IN FISCAL BASE PRICE EXPIRATION -----------------------
NAME YEAR(1) GRANTED YEAR ($/SH) DATE 5%($) 10%($)
--------------------------- ---------- ------------ ----------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Garry E. Meier 2000T 400,000 45.80% $2.25 2/14/10 $566,005 $1,434,368
1999 -- -- -- -- -- --
Paul M. Burrell 2000T -- -- -- -- -- --
1999 50,000 15.99% $6.00 1/8/09 $188,668 $478,123
Scott R. Francis 2000T 40,000 4.58% $2.125 3/6/10 $53,456 $135,468
1999 25,000 8.00% $4.125 3/5/09 $64,855 $164,355
Robert A. Lefcort 2000T -- -- -- -- -- --
1999 10,000 3.20% $6.00 1/8/09 $37,734 $95,625
William R. Britton 2000T -- -- -- -- -- --
1999 10,000 3.20% $4.125 3/5/09 $25,942 $65,742
Brian M. Nugent 2000T -- -- -- -- -- --
1999 5,000 1.60% $4.125 3/5/09 $12,971 $32,871
</TABLE>
(1) Due to the change in our fiscal year end, the 2000T rows include options
granted during the 13-week period ended April 2, 2000.
(2) The potential realizable values are based upon assumed 5% and 10%
annualized stock price growth rates and are not intended to forecast future
price appreciation of our common stock. Actual gains, if any, on stock
option exercises will depend on the amount, if any, by which the fair
market value exceeds the option exercise price on the date the option is
exercised. There is no assurance that the amounts reflected in this table
will be achieved.
All options are issued at or above the market price of our common stock
on the date of grant.
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<PAGE> 60
OPTION EXERCISES AND PERIOD-END VALUES
The following table provides information with respect to the number of
unexercised options held by the Named Executive Officers at December 31, 1999
and April 2, 2000 and the value of the unexercised "in the money" options held
by each of the Named Executive Officers as of those dates. None of the Named
Executive Officers exercised any options to purchase our common stock during the
year ended December 31, 1999 or the 13-week period ended April 2, 2000:
<TABLE>
<CAPTION>
NUMBER OF
SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)
EXERCISABLE(E)/ EXERCISABLE/
NAME FISCAL YEAR(1) UNEXERCISABLE(U) UNEXERCISABLE
-------------------------------- ------------------------ ------------------------- ---------------------------
<S> <C> <C> <C>
Garry E. Meier 2000T --(E) --(E)
400,000(U) $ -0-(U)
1999 --(E) --(E)
--(U) --(U)
Paul M. Burrell 2000T 130,764(E) $ -0-(E)
65,936(U) $ -0-(U)
1999 112,213(E) $ -0-(E)
84,487(U) $ -0-(U)
Robert A. Lefcort 2000T 23,688(E) $ -0-(E)
47,292(U) $ -0-(U)
1999 15,355(E) $ -0-(E)
55,625(U) $ -0-(U)
Scott R. Francis 2000T 52,500(E) $ -0-(E)
122,500(U) $ -0-(U)
1999 52,500(E) $ -0-(E)
82,500(U) $ -0-(U)
William R. Britton 2000T 13,375 E) $ -0-(E)
15,875(U) $ -0-(U)
1999 11,375(E) $ -0-(E)
17,875(U) $ -0-(U)
Brian M. Nugent 2000T 28,244(E) $ -0-(E)
37,396(U) $ -0-(U)
1999 20,639(E) $ -0-(E)
45,001(U) $ -0-(U)
</TABLE>
(1) Due to the change in our fiscal year end, the 2000T rows present the
required information at April 2, 2000.
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<PAGE> 61
EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
The Outsource International, Inc. Stock Option Plan provides for the
grant of options to purchase up to 2,000,000 shares of our common stock to
certain of our eligible employees and non-employee directors who have
contributed and will continue to contribute to our success. The plan provides
for the grant of both non-statutory stock options and stock options intended to
be treated as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code.
The Compensation Committee is authorized to administer the plan,
including to whom options may be granted and the terms of each option grant. The
duration of an option granted under the plan is ten years from the date of
grant, or such shorter period as may be determined by the Compensation Committee
at the time of grant, or as may result from the death, disability, or
termination of the employment of the employee to whom the option is granted.
Incentive stock options granted under the plan are non-transferable
other than by will or by the laws of descent and distribution. The plan may be
amended at any time by our board of directors, although the board may condition
any amendment on the approval of our shareholders if such approval is necessary
or advisable with respect to tax, securities or other applicable laws. The plan
terminates in 2007. As of October 20, 2000, there are 1,704,647 options
currently outstanding under the plan.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
EMPLOYMENT AGREEMENTS
We entered into employment agreements, respectively, with Mr. Meier on
February 14, 2000 and Mr. Francis on April 8, 1998. The board of directors
approved these employment agreements. Except as described below, these
agreements generally contain the same terms.
The employment agreements provide that Mr. Meier will receive annual
base salary for his first year of employment of $300,000 and $325,000 per year
for the following three years. Mr. Francis's annual base salary for his first
year of employment is $200,000. Thereafter, the board will determine Messrs.
Meier's and Francis' annual base salary. Messrs. Meier and Francis will also
receive annual performance bonuses based on our achievement of performance goals
and objectives. Mr. Meier will be entitled to a minimum performance bonus of
$150,000 on the first anniversary of his employment and $81,250 on the second
anniversary of his employment irrespective of our financial performance during
those two fiscal years. Mr. Francis will receive annual performance bonuses
based on our achievement of performance goals and objectives.
We or the executives may terminate the employment agreements at any
time. The employment agreements continue in effect until terminated by either
party in accordance with the terms thereof. If an executive officer resigns
without "good reason" or we terminate him for "cause," compensation under the
employment agreement will end. If we terminate an executive officer without
cause or the officer resigns for good reason, the terminated officer will
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<PAGE> 62
receive, among other things, severance compensation, including a multiple of the
officer's annual base salary and bonus (one and one-half times salary for Mr.
Meier and two times salary for Mr. Francis). In addition, all options and stock
appreciation rights become immediately exercisable upon termination of
employment and certain other unpaid awards made previously under any of our
compensation plans or programs immediately vest on the date of such termination.
Severance provisions also apply upon the effective date of a "change of
control" (or up to three years after the occurrence of a change of control for
Mr. Francis).
If we terminate Mr. Francis for any reason or if Mr. Francis resigns
for good reason upon a change of control, or for up to three years after the
occurrence of a change of control, Mr. Francis is entitled to receive on the
date of the termination an amount equal to two times his base salary as in
effect at the date of termination and two times ninety percent of the amount of
his estimated target bonus for the fiscal year in which the date of termination
occurs.
In addition, the employment agreements contain confidentiality
covenants during the term of employment and noncompetition and nonsolicitation
covenants which continue for one year following termination of employment.
SEPARATION AGREEMENT AND RELEASE
We entered into a Separation Agreement and Release with Mr. Burrell on
February 21, 2000, Mr. Lefcort on April 6, 2000 and Mr. Nugent on April 21,
2000. These agreements were approved by our board of directors.
Under the terms of the agreement with Mr. Burrell, Mr. Burrell resigned
as President, Chief Executive Officer and Chairman of the Board and as an
officer, director and/or manager of all of our affiliates. We agreed with Mr.
Burrell that he is entitled to total severance compensation of $750,000 under
the relevant provisions of his employment agreement. The severance compensation
will generally be paid in 48 equal bi-weekly installments. We amended Mr.
Burrell's employment agreement to provide that he has the right to exercise any
stock option previously granted to him during the three year period beginning on
February 21, 2000. Certain restrictions were placed on the amount of profit Mr.
Burrell can realize on the exercise of the options and the sale of the
underlying shares of our common stock. We will continue to provide employee
benefits to Mr. Burrell pursuant to the terms of his employment agreement.
Under the terms of the agreement with Mr. Lefcort, Mr. Lefcort resigned
as President of our Synadyne division. We agreed with Mr. Lefcort that he is
entitled to total severance compensation of $395,286, payable in equal bi-weekly
installments and a retention bonus in the amount of $80,000 which we paid to him
on April 15, 2000. We agreed to provide an advance on severance to Mr. Lefcort
of $200,000 on June 1, 2000. We amended Mr. Lefcort's employment agreement to
provide that he has the right to exercise any stock option previously granted to
him during the three year period beginning on April 6, 2000. We have agreed to
forgive two loans totaling $27,000 plus accrued interest owed to us by Mr.
Lefcort. We will continue to provide employee benefits to Mr. Lefcort under the
terms of his employment agreement.
Under the terms of the agreement with Mr. Nugent, Mr. Nugent resigned
as our Vice President, General Counsel and Secretary. We agreed with Mr. Nugent
that he is entitled to total severance compensation of $229,500 payable in 18
equal bi-weekly installments. We amended Mr. Nugent's employment agreement to
provide that he has the right to exercise any stock option previously granted to
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<PAGE> 63
him during the two year period beginning on April 21, 2000. Certain restrictions
were placed on the amount of profit Mr. Nugent can realize on the exercise of
the options and the sale of the underlying shares of our common stock.
RELATED PARTY TRANSACTIONS
SENIOR NOTES AND WARRANTS
On February 21, 1997, we issued senior subordinated promissory notes in
the principal amounts of $14,000,000 and $11,000,000 to Triumph Capital Group,
Inc. and Bachow & Associates, Inc. The notes were repaid in October 1997. At
that time Mr. Williams, a Managing Director of Triumph and Mr. Schwartz, Vice
President of Bachow, were serving as members of our board of directors.
In connection with the issuance of the notes, we issued 786,517
warrants to Triumph and Bachow and placed 573,787 warrants in escrow, pending
release to either our original shareholders or Triumph and Bachow, based upon
our achievement of certain specified performance criteria. Of the 573,787
warrants, 180,891 warrants were released from escrow and distributed to our
original shareholders in April 1997. The balance of the warrants, totaling
392,896, were released from escrow as of March 1, 2000. The warrants are
exercisable at an exercise price of $.01 per share and expire on February 20,
2002.
Triumph and Bachow received closing fees of $210,000 and $165,000,
respectively, plus a reimbursement of $235,356 to them for their combined
expenses, in connection with the issuance of the notes and the warrants.
Mr. Fawcett, one of our directors, serves as a Managing Director of
Triumph and Mr. Seid, another of our directors, serves as a Managing Director of
Bachow. Mr. Fawcett recently replaced Richard J. Williams on our board of
directors following Mr. Williams' resignation as a director and as a Managing
Director of Triumph.
REORGANIZATION
On February 21, 1997, we consummated a reorganization among nine
operating companies and the shareholders of such companies that resulted in us
becoming the parent company of the nine operating companies. In connection with
the reorganization and in exchange for all of the common shares of the
companies, we issued 5,448,788 shares of our common stock and paid approximately
$5.7 million to the shareholders of the companies. In addition, we issued
promissory notes in the aggregate principal amount of $1.7 million to the
following shareholders: (i) Mr. Lawrence H. Schubert, in the principal amount of
$407,000; (ii) Mrs. Nadya I. Schubert, the wife of Lawrence H. Schubert, in the
principal amount of $408,000; (iii) Mr. Alan E. Schubert, in the principal
amount of $605,000; and (iv) Mr. Burrell, in the principal amount of $325,000.
This indebtedness bore interest at an annual rate of 10%, and was paid in full
from the proceeds of our initial public offering in October 1997.
As part of the reorganization, the shareholders of the subsidiaries
contributed approximately $4.3 million in outstanding promissory notes issued on
December 31, 1996. In addition, certain of the subsidiaries declared a dividend
to the shareholders of the subsidiaries of previously taxed, but undistributed S
corporation earnings, in the aggregate amount of approximately $9.1 million,
subject to adjustment based upon the final determination of taxable income.
Substantially all of this distribution was paid in cash immediately following
the reorganization. The shareholders of the subsidiaries used a portion of the
distribution to repay approximately $4.3 million in outstanding debt owed to us
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for promissory notes issued on December 31, 1996. Included in such indebtedness
were promissory notes issued on December 31, 1996 by the following officers and
directors: (i) Mr. Burrell, in the principal amount of approximately $417,000
and (ii) Mr. Lefcort, in the principal amount of approximately $130,000. This
indebtedness bore interest at the annual rate of 10% and was paid at the time of
the reorganization.
ACQUISITIONS
As of January 1, 1997, we were indebted to WAD, Inc., a company owned
by Mr. Burrell and Mr. Lefcort, in the amount of $731,982 under a promissory
note issued in connection with our acquisition of certain franchise rights owned
by WAD, Inc. This note, which bore interest at 10% per annum, was satisfied by
payments of $331,982 plus interest on February 24, 1997 and $400,000 plus
interest on October 31, 1997.
As of January 1, 1997, we were indebted to All Temps, Inc., a company
whose principal shareholders are our founding shareholders, in the amount of
$799,000 under a promissory note issued in connection with our acquisition in
1995 of certain franchise rights owned by All Temps, Inc. This note, which bore
interest at 10% per annum, was paid on February 24, 1997.
As of January 1, 1997, we owed Payray, Inc., Tri-Temps, Inc., Employees
Unlimited, Inc. (entities principally owned by Raymond S. Morelli, the son of
the late Louis A. Morelli) and Raymond S. Morelli, $3,995,000 under a promissory
note issued in connection with our acquisition in 1996 of certain franchise
rights owned by those parties. This note, which bore interest at 14% per annum,
was satisfied on October 31, 1997. In connection with the acquisition, Mr.
Raymond S. Morelli received rental payments of $49,200 for four Chicago area
flexible industrial staffing offices leased by him to us during 1997. We made an
additional payment of $71,300 to Mr. Morelli in 1997 in order to terminate the
leases and satisfy our remaining liability.
INTEREST INCOME AND EXPENSE
Total interest income from notes receivable due from related parties as
described above was $65,694 in 1997. Total interest expense for long-term debt
to related parties as described above was $546,786 in 1997.
Certain entities owned by significant shareholders entered into
franchise agreements with us. During 1997, we were paid an aggregate of $195,273
in franchise royalties from the following franchise associates pursuant to these
agreements: LM Investors, Inc., an entity owned by Messrs. Matthew Schubert, the
son of Lawrence H. Schubert and Louis J. Morelli, the son of the late Louis A.
Morelli; Temp Aid, Inc., an entity owned by Matthew Schubert and Louis J.
Morelli, and All Staff Temps, Inc., an entity whose principal shareholder is
Raymond S. Morelli.
During 1997, we accrued revenues of $349,326 for the provision of PEO
services to franchises owned by significant shareholders. These revenues
consisted of payroll, statutory employee benefits plus an administrative fee,
and resulted in gross profit of less than $10,000 in 1997. These franchises owed
us $92,431 at December 31, 1997, primarily related to these services.
FRANCHISE PURCHASES AND TERMINATIONS
In February 1998, we purchased the franchise rights of LM Investors,
Inc., an entity owned by Messrs. Matthew Schubert, the son of Lawrence H.
Schubert, and Louis J. Morelli, the son of the late Louis A. Morelli. The
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purchase consisted of four flexible staffing locations in the Chicago, Illinois
area, which offices were converted into company-owned locations. The total
purchase price of $6.9 million was paid as follows: $5.0 million paid in cash at
closing, the issuance of a note for $1.7 million bearing interest at 7.25% per
annum and payable quarterly over three years, with the remaining $0.2 million of
purchase price consisting of our assumption of approximately $0.1 million of the
seller's liabilities under certain employment contracts and our agreement to
reduce by approximately $0.1 million the seller's obligation to us in connection
with the termination of existing franchise agreements. In connection with this
purchase, we granted to Louis J. Morelli the exclusive option to purchase
franchise rights in five specifically identified geographic areas. These options
expire at various times from 12 to 42 months after the February 1998 acquisition
date. Effective February 1, 1999, the note was renegotiated so that the
remaining principal balance of the note, totaling $1.3 million, would bear
interest at 8.5% per annum and would be payable in monthly installments 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. In connection with the
refinancing, on August 15, 2000, the note was amended to provide that we will
pay interest only, at a rate of 10.0% per annum, on the note for three years
following the Closing of the refinancing, followed by two years of equal monthly
payments of interest and principal, which will retire the debt by August 2005.
In addition, we agreed to pay Mr. Schubert's attorney's fees, up to $7,500.00,
relating to claims filed by Mr. Schubert against us to collect the amounts owed
to him under the note.
Effective August 31, 1998, we entered into a franchise buyout agreement
with Temp Aid, Inc., an entity substantially owned by Matthew Schubert and Louis
J. Morelli. This early termination of the franchise relationship with Temp Aid,
Inc. and the payment terms negotiated by the parties, comprising an initial
payment at closing of $587,000 and monthly payments over two years based on a
percentage of gross revenues generated by the business of the former franchisee,
are generally consistent with the terms of previous buyout agreements between us
and unrelated third parties. In addition to the termination amount of $587,000,
we accrued approximately $702,000 in franchise royalties and post-termination
payments during 1998, of which $0.1 million was due and owing as of December 31,
1998. Effective March 31, 1999, Temp-Aid, Inc. paid us $275,000 in consideration
of the elimination of the last five months of post-termination payments.
FOUNDER SALARIES
Each of our founding shareholders received compensation during 1997.
Mr. Alan E. Schubert received $86,000, the late Mr. Louis A. Morelli received
$86,000, and Mr. Lawrence H. Schubert received $89,184. Following the
reorganization on February 21, 1997, we discontinued payment of compensation to
our founding shareholders.
LEGAL FEES
Louis J. Morelli, Esq. received legal fees for services rendered to us
during 1997 of approximately $148,000.
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REAL ESTATE
At the time of the reorganization, we also decided to purchase certain
real property used in our operations from certain related parties who had
previously leased such property to us. On June 13, 1997, one of our subsidiaries
purchased certain commercial property in Chicago, Illinois, from Mr. Burrell,
our former Chairman, Chief Executive Officer and President which had previously
been leased by us. Mr. Burrell held title to such property as an accommodation
to SMSB Associates Limited Partnership, a Florida limited partnership (SMSB).
The limited partners of SMSB were our founding shareholders and Mr. Burrell. Our
founding shareholders were also the shareholders of SMSB Incorporated, SMSB's
corporate general partner. The purchase price of $430,000 was negotiated between
us and Mr. Burrell and was less than the $460,000 independent appraisal which we
obtained from Norbert L. Gold, Real Estate Appraiser.
On July 31, 1997, one of our subsidiaries purchased certain commercial
property in Waukegan, Illinois, from an unrelated third party, which had
previously been leased by us from SMSB. SMSB had an interest in the property by
virtue of an installment agreement for warranty deed between SMSB and the
unrelated third party, which interest was assigned to us as part of the July
1997 transaction. The purchase price of $310,000 ($102,968 of which was paid to
SMSB) was negotiated between us and SMSB. Although the property was appraised at
$240,000, we believe that the purchase price more accurately reflects the fair
value of the property to us.
During 1997, we paid SMSB $73,450 in rent related to the buildings
purchased by it, $17,034 in rent for storage space in a warehouse owned by SMSB
and $284,170 related to our former national office and support center. Although
we vacated our former national office and support center in 1996, we continued
to pay rent to SMSB through September 30, 1997 as final installments under that
lease.
On August 14, 1997, one of our subsidiaries purchased a residential
condominium in Boca Raton, Florida from Mr. Burrell for $100,000. That
condominium is used to house visiting company employees and clients and was
previously leased from Mr. Burrell.
We lease a portion of a warehouse and a staffing office location
occupied by us from TMT Properties, Inc., a company controlled by Mr. Burrell.
The warehouse lease, which is on a month-to-month basis, and the staffing office
lease, which expires in February 2002, each have rental obligations of
approximately $2,000 per month.
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SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of August 31, 2000 (unless otherwise
noted in the footnotes to the following table), information regarding the
beneficial ownership of our common stock by: (i) each of our directors; (ii)
each of our executive officers INCLUDING THOSE NAMED IN THE EXECUTIVE
COMPENSATION TABLE; (iii) each person known by us to beneficially own more than
5% of the outstanding shares of our common stock; and (iv) all of our directors
and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
NAME/ADDRESS (1) TOTAL SHARES BENEFICIALLY OWNED OWNED
---------------- ------------------------------- --------------------
<S> <C> <C>
Garry E. Meier 4,003,266(2) 46.1
Jay D. Seid(1) 4,013,084(3) 46.1
Alan E. Schubert 1,801,803(4) 20.8
Triumph-Connecticut, Ltd., a Limited Partnership(5) 1,001,236(6) 10.7
Lawrence H. Schubert 817,240(7) 9.4
Nadya I. Schubert 817,240(8) 9.4
Bachow Investment Partners III, L.P. (9) 749,186(10) 8.1
Estate of Louis A. Morelli 616,675(11) 7.1
Paul M. Burrell 660,341(12) 7.4
Susan Burrell 463,641(13) 5.3
Robert A. Lefcort(14) 253,569(15) 2.8
Scott R. Francis 129,800(16) 1.5
Brian M. Nugent(17) 73,840(18) *
Richard Mazelsky 9,100 *
Joseph C. Wasch 22,300(19) *
Glenn C. Enriquez 13,630(20) *
William R. Britton(21) 29,250(22) *
Lawrence Chimerine, Ph.D.(1) 20,568(23) *
</TABLE>
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<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
NAME/ADDRESS (1) TOTAL SHARES BENEFICIALLY OWNED OWNED
---------------- ------------------------------- --------------------
<S> <C> <C>
Carolyn H. Noonan 5,000(24) *
David S. Hershberg(1) 16,118(25) *
Michael S. Fawcett(1) 9,818(26) *
All directors and executive officers 4,239,418 48%
as a group (10 persons)
</TABLE>
---------------
* Less than 1%
(1) Unless otherwise noted, the business address for all directors,
executive officers and 5% shareholders listed above is 1690 South
Congress Avenue, Suite 210, Delray Beach, Florida 33445. The address of
Mr. Seid is Bachow & Associates, Inc., 3 Bala Plaza East, Fifth Floor,
Bala Cynwyd, Pennsylvania 19004. The address for Dr. Chimerine is
Economic Strategy Institute, 1401 H Street N.W., Suite 760, Washington,
DC 20005. The address of Mr. Fawcett is Triumph Capital Group, Inc., 251
Royal Palm Way, Suite 303, Palm Beach, Florida 33480. The address of Mr.
Hershberg is IBM Corporation, New Orchard Road, Mail Drop 301, Armonk,
New York 10504.
(2) Mr. Meier shares voting and investment power with respect to 4,003,266
shares held of record by Messrs. Meier and Seid as Trustees under a
voting trust agreement dated as of February 21, 1997 (the "Voting
Trust").
(3) Mr. Seid shares voting and investment power with respect to 4,003,266
shares held of record by Messrs. Meier and Seid as Trustees under the
Voting Trust. Includes currently exercisable options to purchase 9,818
shares. Does not include 199,000 shares, plus immediately exercisable
warrants to purchase 550,186 shares, held of record by Bachow Investment
Partners III, L.P., of which Mr. Seid is a limited partner of the
general partner (Bala Equity Partners, L.P.) of Bachow Investment
Partners III, L.P., and as to which shares and warrants Mr. Seid
disclaims beneficial ownership.
(4) Mr. Alan Schubert shares investment power, but has no voting power, over
the following: (a) 1,320,298 shares held of record by Messrs. Meier and
Seid as Trustees under the Voting Trust for Alan E. Schubert; (b)
281,503 shares held of record by Messrs. Meier and Seid as Trustees
under the Voting Trust for Alan E. Schubert and Matthew B. Schubert as
Trustees of the Jason Schubert Outsource Trust; and (c) 201,847 shares
held of record by Messrs. Meier and Seid as Trustees under the Voting
Trust for Alan E. Schubert and Jason Schubert as Trustees of the Matthew
Schubert Outsource Trust.
(5) An affiliate of Triumph Capital Group, Inc. Mr. Fawcett is a general
partner of Triumph-Connecticut Advisors, L.P., the general partner of
Triumph-Connecticut Ltd., a Limited Partnership.
(6) Represents 301,000 shares held of record and immediately exercisable
warrants to purchase 700,236 shares.
(7) Mr. Lawrence H. Schubert shares investment power, but has no voting
power, over the following: (a) 284,857 shares held of record by Messrs.
Meier and Seid as Trustees under the Voting Trust for Lawrence H.
Schubert as Trustee of the Lawrence H. Schubert Revocable Trust; (b)
375,132 shares held of record by Messrs. Meier and Seid as Trustees
under the Voting Trust for Nadya I. Schubert, Mr. Schubert's wife, as
Trustee of the Nadya I. Schubert Revocable Trust; (c) 32,500 shares held
of record by Messrs. Meier and Seid as Trustees for Lawrence H.
Schubert, Trustee of the Nadya I. Schubert GRAT-1997, under a trust
agreement dated May 16, 1997; (d) 59,751 shares held of record by Nadya
I. Schubert and Robert A. Lefcort as Co-trustees of the Robert A.
Lefcort Irrevocable Trust; (e) 32,500 shares held of record by Messrs.
Meier and Seid as Trustees under the Voting Trust for Lawrence H.
Schubert as Trustee of the Rachel Schubert Trust; and (f) 32,500 shares
held of record by Messrs. Meier and Seid as Trustees under the Voting
Trust for Lawrence H. Schubert as Trustee of the Adam Pugh Trust.
(8) Mrs. Schubert shares investment power, but has no voting power, over the
following: (a) 375,132 shares held of record by Messrs. Meier and Seid
as Trustees under the Voting Trust for Nadya I. Schubert as Trustee of
the Nadya I. Schubert Revocable Trust; (b) 284,857 shares held of record
by Messrs. Meier and Seid as Trustees under the Voting Trust for
Lawrence H. Schubert, Mrs. Schubert's husband, as Trustee of the
Lawrence H. Schubert Revocable Trust; (c) 32,500 shares held of record
by Messrs. Meier and Seid as Trustees under the Voting Trust for
Lawrence H. Schubert, Trustee of the Nadya I. Schubert GRAT-1997, under
a trust agreement dated May 16, 997; (d) 59,751 shares held of record by
Nadya I. Schubert and Robert A. Lefcort as Co-trustees of the Robert A.
Lefcort Irrevocable Trust; (e) 32,500 shares held of record by Messrs.
Meier and Seid as Trustees under the Voting Trust for Lawrence H.
Schubert as Trustee of the Rachel Schubert Trust; and (f) 32,500 shares
held of record by Messrs. Meier and Seid as Trustees under the Voting
Trust for Lawrence H. Schubert as Trustee of the Adam Pugh Trust.
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(9) An affiliate of Bachow & Associates, Inc. Mr. Seid is a limited partner
of Bala Equity Partners, L.P., the general partner of Bachow Investment
Partners III, L.P.
(10) Represents 199,000 shares held of record and immediately exercisable
warrants to purchase 550,186 shares.
(11) The Estate of Louis A. Morelli shares investment power, but has no
voting power, over the following: (a) 500,221 shares held of record by
Messrs. Meier and Seid as Trustees under the Voting Trust for Louis A.
Morelli; (b) 58,075 shares held of record by Messrs. Meier and Seid as
Trustees under the Voting Trust for Louis A. Morelli as Trustee of the
Louis J. Morelli S-Stock Trust; and (c) 58,379 shares held of record by
Messrs. Meier and Seid as Trustees under the Voting Trust for Louis A.
Morelli as Trustee of the Margaret Ann Janisch S-Stock Trust.
(12) Mr. Burrell shares voting and investment power with respect to 463,641
shares held of record by Mr. Burrell and his wife Susan Burrell,
individually, and as tenants by the entirety. Includes currently
exercisable options to purchase 196,700 shares. The table above does not
include 98,437 shares held of record by Scott T. Burrell as Trustee of
the Paul and Susan Burrell Family Trust.
(13) Mrs. Burrell shares voting and investment power with respect to 463,641
shares held of record by Mrs. Burrell and her husband Paul Burrell,
individually, and as tenants by the entirety. The table does not include
98,437 shares held of record by Scott T. Burrell as Trustee of the Paul
and Susan Burrell Family Trust.
(14) Mr. Lefcort resigned as President of our Synadyne division as of April
6, 2000.
(15) Includes (a) currently exercisable options to purchase 70,980 shares;
(b) 1,658 shares held of record by Mr. Lefcort's spouse; and (c) 59,751
shares held of record by Robert A. Lefcort and Nadya I. Schubert,
co-trustees of the Robert A. Lefcort Irrevocable Trust. The information
relating to Mr. Lefcort's stock ownership is as of April 21, 2000, the
date on which his employment terminated
(16) Includes currently exercisable options to purchase 71,250 shares and
options to purchase 8,750 shares which will become exercisable within 60
days.
(17) Mr. Nugent resigned as Vice President, General Counsel and Secretary as
of April 21, 2000.
(18) Includes (a) currently exercisable options to purchase 65,640 shares;
(b) 1,700 shares held by Mr. Nugent's spouse; and (c) 400 shares held by
Mr. Nugent's minor children. The information relating to Mr. Nugent's
stock ownership is as of April 21, 2000, the date on which his
employment terminated.
(19) Includes currently exercisable options to purchase 5,800 shares and
options to purchase 1,500 shares which will become exercisable within 60
days.
(20) Consists of currently exercisable options to purchase 11,630 shares and
options to purchase 2,000 shares which will become exercisable within 60
days.
(21) Mr. Britton resigned as Vice President as of April 30, 2000.
(22) Consists of currently exercisable options to purchase shares. We have no
current information relating to Mr. Britton's stock ownership other than
currently exercisable stock options granted to Mr. Britton during his
employment.
(23) Includes currently exercisable options to purchase 9,818 shares.
(24) Consists of options to purchase shares which will become exercisable
within 60 days.
(25) Includes currently exercisable options to purchase 12,818 shares.
(26) Consists of currently exercisable options to purchase 9,818 shares. Does
not include 301,000 shares, plus immediately exercisable warrants to
purchase 700,236 shares, held of record by Triumph-Connecticut Ltd., a
Limited Partnership. Mr. Fawcett is a general partner of
Triumph-Connecticut Advisors, L.P., the general partner of
Triumph-Connecticut Ltd., a Limited Partnership. Mr. Fawcett disclaims
beneficial ownership of the shares and warrants held of record by
Triumph-Connecticut Ltd.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock having a par value of $.001 per share and 10,000,000 shares of preferred
stock having a par value of $.001 per share, of which 1,000,000 shares are
designated as Series A Participating Preferred Stock. The following description
of our capital stock does not purport to be complete and is subject to and
qualified in its entirety by our articles of incorporation and bylaws, which are
included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Florida law.
COMMON STOCK
The holders of common stock are entitled to one vote for each share
held on all matters voted upon by shareholders, including the election of
directors. Such holders are not entitled to vote cumulatively for the election
of directors. Accordingly, subject to the provisions of the voting trust and the
shareholders' agreement, holders of a majority of our issued and outstanding
common stock will have the right to elect all of our directors and otherwise
control our operations. See "Management - Voting Trust and Shareholders'
Agreement." Holders of common stock are entitled to dividends on a pro rata
basis upon declaration of dividends by our board of directors.
Dividends are payable only out of funds legally available for the
payment of dividends. Our board of directors is not required to declare
dividends, and it currently expects to retain earnings to finance the
development of our business. See "Dividend Policy."
Upon a liquidation of our company, holders of the common stock will be
entitled to a pro rata distribution of our assets, after payment of all amounts
owed to our creditors, and subject to any preferential amount payable to holders
of our preferred stock, if any. Holders of common stock have no preemptive,
subscription, conversion, redemption or sinking fund rights.
Pursuant to the terms of the shareholders' agreement, certain of our
shareholders have pre-emptive rights to purchase a pro rata portion of
securities issued and sold by us from time to time excluding: (i) common stock
issued in an underwritten public offering; (ii) securities issued in connection
with a business acquisition; (iii) common stock issued upon the exercise of
outstanding warrants; and (iv) certain options to purchase common stock. See
"Management--Voting Trust and Shareholders' Agreement."
PREFERRED STOCK
Our articles of incorporation permit our board of directors to issue
shares of preferred stock in one or more series and to fix the relative rights,
preferences and limitations of each series. Among such rights, preferences and
limitations are dividend rates, provisions of redemption, rights upon
liquidation, conversion privileges and voting powers. The issuance of preferred
stock could have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from acquiring, a majority of our
outstanding voting stock.
We have designated 1,000,000 shares of Series A Participating Preferred
Stock in connection with our shareholder rights plan described below. There are
currently no shares of preferred stock outstanding.
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ANTI-TAKEOVER EFFECTS OF OUR ARTICLES OF INCORPORATION AND BYLAWS AND
FLORIDA LAW
Certain provisions of our articles of incorporation, our bylaws and
Florida law summarized below may be deemed to have an anti-takeover effect and
may discourage, delay, defer or prevent a tender offer or takeover attempt that
a shareholder might consider in its best interest, including those attempts that
might result in a premium over the market price for shares held by our
shareholders.
OUR ARTICLES OF INCORPORATION AND BYLAWS
Our articles and bylaws provide for a classified board. Our directors
are divided into three classes, as nearly equal in number as possible. The
directors are elected for three-year terms, which are staggered so that the
terms of approximately one-third of the directors expire each year. Our articles
permit removal of directors only for cause by our shareholders at a meeting by
the affirmative vote of at least 60% of the outstanding shares entitled to vote
for the election of directors and provide that any vacancy on the board may be
filled only by the remaining directors then in office. Our articles contain
provisions which require: (i) the affirmative vote of 60% of the voting stock to
amend the articles or bylaws; and (ii) the demand of not less than 50% of all
votes entitled to be cast on any issue to be considered at a proposed special
meeting is required to call a special meeting of shareholders. Our bylaws
establish advance notice procedures for the nomination of candidates for
election as directors by shareholders as well as for shareholder proposals to be
considered at shareholder meetings.
The above-described provisions may have certain anti-takeover effects.
Such provisions, in addition to the provision described below, may make it more
difficult for persons, without the approval of our board, to make a tender offer
to acquire substantial amounts of our common stock or launch other takeover
attempts that a shareholder might consider in such shareholder's best interests,
including attempts that might result in the payment of a premium over the market
price for our common stock held by such shareholder.
PROVISIONS OF FLORIDA LAW
ANTI-TAKEOVER PROVISIONS OF FLORIDA LAW. We are subject to several
anti-takeover provisions under Florida law that apply to public corporations
organized under Florida law unless the corporation has elected to opt out of
those provisions in its articles of incorporation or bylaws. We have elected to
opt-out of provisions of the Florida Business Corporation Act (FBCA) concerning
affiliated transactions but have elected to be subject to the provisions of the
FBCA concerning control share acquisitions.
The FBCA prohibits the voting of shares in a publicly held Florida
corporation that are acquired in a "control share acquisition" unless the board
of directors approves the control share acquisition or the holders of a majority
of the corporation's voting shares approve the granting of voting rights to the
acquiring party. A "control share acquisition" is defined as an acquisition that
immediately thereafter entitles the acquiring party, directly or indirectly, to
vote in the election of directors within any of the following ranges of voting
power:
o 1/5 or more but less than 1/3
o 1/3 or more but less than a majority
o a majority or more
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There are some exceptions to the "control share acquisition" rules. In
addition, our articles expressly authorize us to redeem control shares acquired
in a control share acquisition at the fair market value of the shares to the
fullest extend permitted by the statute.
AUTHORIZED BUT UNISSUED SHARES. Subject to requirements of the exchange
or automated quotation service on which our shares are listed or traded, our
board of directors may issue shares of our authorized but unissued common stock
and preferred stock without shareholder approval. These additional shares may be
utilized for a variety of corporate purposes, including future public or private
offerings to raise additional capital, corporate acquisitions or employee
benefit plans. The existence of authorized but unissued and unreserved common
stock and preferred stock may enable our board of directors to issue shares to
persons friendly to current management which could render more difficult or
discourage an attempt to obtain control of our company by means of a proxy
contest, tender offer, merger or otherwise, and thereby protect the continuity
of our management.
SHAREHOLDER RIGHTS PLAN
We adopted a Shareholder Protection Rights Agreement. Under the terms
of the rights agreement, we distributed preferred stock purchase rights, as a
dividend, to holders of record of shares of our common stock on October 29,
1997, at a rate of one right for each share of our common stock held on October
29, 1997. Rights will also be attached to all shares of our common stock issued
on or after October 29, 1997. Each right will entitle its holder to purchase,
after the Separation Time (as defined below), one one-hundredth of a share of
our Series A Participating Preferred Stock, for a price to be determined by the
board at a later date, subject to adjustment. The rights will expire on the
close of business on the tenth anniversary of October 29, 1997 unless earlier
terminated by us.
Initially, the rights are attached to all common stock certificates,
and the rights automatically trade with the shares of common stock. However, ten
business days after a person or group announces an offer the consummation of
which would result in such person or group owning 15% or more of our common
stock, or the first date of a public announcement that a person or group has
acquired 15% or more of our common stock (the "Separation Time"), the rights
will become exercisable, and separate certificates representing the rights will
be issued.
In the event that any person becomes an acquiring person (as defined in
the rights agreement), each holder of a right, other than rights beneficially
owned by the acquiring person and its affiliates and associates (which will
thereafter be void), will have the right to receive, upon exercise of each
right, that number of shares of our common stock having an aggregate market
price, on the date of the public announcement of a person becoming an acquiring
person, equal to twice the exercise price for an amount in cash equal to the
then current exercise price.
At any time after an acquiring person crosses the 15% threshold and
prior to the acquisition by such person of 50 percent or more of the outstanding
shares of our common stock, our board may exchange the rights (other than rights
owned by the acquiring person), in whole or in part, at an exchange ratio of one
share of our common stock per right.
The rights have certain anti-takeover effects. The rights may cause
substantial dilution to a person or group that attempts to acquire us in a
manner or on terms not approved by our board. The rights, however, should not
69
<PAGE> 73
deter any prospective offeror willing to negotiate in good faith with the board,
nor should the rights interfere with any merger or other business combination
approved by the board.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock and we do
not anticipate paying any cash dividends in the near future. We currently intend
to retain future earnings, if any, to finance operations and the expansion of
our business. Any future determination to pay cash dividends will be at the
discretion of our board of directors and will be dependent upon our financial
condition, operating results, capital requirements and such other factors as our
board of directors deems relevant.
SELLING SHAREHOLDERS
The following table sets forth the name of each selling shareholder,
the aggregate number of shares of common stock beneficially owned by each
selling shareholder as of the date of this prospectus and the aggregate number
of shares of common stock registered by this prospectus that each selling
shareholder may offer and sell pursuant to this prospectus. Because the selling
shareholders may offer all or a portion of the shares offered under this
prospectus at any time and from time to time after the date of this prospectus,
no estimate can be made of this offering. However, unless otherwise noted in the
footnotes to the following table, if all of the shares offered under this
prospectus are sold by the selling shareholders, then unless otherwise noted,
after completion of this offering, none of the selling shareholders will own any
shares of common stock outstanding. Of the 6,171,771 shares offered by this
prospectus, 4,126,104 shares are issued and outstanding as of the date of this
prospectus and 2,045,667 shares have been reserved for issuance by us to certain
selling shareholders upon the exercise of outstanding warrants and options as
set forth in the footnotes to the following table. To our knowledge, none of the
selling shareholders has had within the past three years any material
relationship with us or any of our predecessors or affiliates except as set
forth in the footnotes to the following table or under "Related Party
Transactions" or "Management's Discussion and Analysis - Capital Resources
Senior Debt".
<TABLE>
<CAPTION>
NUMBER OF SHARES HELD PRIOR
NAME TO THE OFFERING NUMBER OF SHARES OFFERED
------ ---------------------------- -------------------------
<S> <C> <C>
Fleet National Bank 215,874(1) 215,874
Comerica Bank 123,356(1) 123,356
LaSalle Bank National 123,356(1) 123,356
Association
SunTrust Bank 61,679(1) 61,679
Ableco Holding LLC 200,000(2) 200,000
Robert A. Lefcort(3) 253,569(4) 253,569
Alan E. Schubert 1,801,803(5)(6) 1,801,803
Jason Schubert, Co-trustee 201,847(5) 201,847
with Alan E. Schubert of the
Matthew Schubert Outsource
Trust
</TABLE>
70
<PAGE> 74
<TABLE>
<CAPTION>
NUMBER OF SHARES HELD PRIOR
NAME TO THE OFFERING NUMBER OF SHARES OFFERED
------- ----------------------------- ---------------------------------
<S> <C> <C>
Matthew Schubert 281,503(5) (7) 281,503
Lawrence H. Schubert 817,240(5) (8) 817,240
Nadya I. Schubert 817,240(5) (9) 817,240
Estate of Louis A. Morelli 616,675(5) (10) 616,675
Raymond S. Morelli 270,076(5) 270,076
Louis J. Morelli 212,002(5) 212,002
Margaret Ann Morelli Janisch 271,448(5) 271,448
Mindi Wagner 1,863(5) 1,863
Triumph-Connecticut, Ltd., a
Limited Partnership 1,001,236(11) 700,236
Bachow Investment Partners 749,186(12) 550,186
III, L.P.
</TABLE>
----------------
(1) Represents shares issuable upon the exercise of warrants to purchase
our common stock that we issued in exchange for forgiveness of
indebtedness in connection with our refinancing.
(2) An affiliate of Ableco Finance LLC, the lead lender of a syndicate of
lenders providing our $33.4 million revolving credit facility.
Represents shares issuable upon the exercise of warrants to purchase
our common stock that we issued to the selling shareholder in
connection with our refinancing. These warrants are only exercisable if
certain letters of credit are drawn upon.
(3) Mr. Lefcort served as Assistant Secretary and Director and President of
our Synadyne division until April 2000.
(4) Includes (a) currently exercisable options to purchase 70,980 shares;
(b) 1,658 shares held of record by Mr. Lefcort's spouse; and (c) 59,751
shares held by Robert A. Lefcort and Nadya I. Schubert, Co-trustees of
the Robert A. Lefcort Irrevocable Trust. The information relating to
Mr. Lefcort's stock ownership is as of April 21, 2000, the date on
which his employment terminated.
(5) Shares are held of record by Messrs. Meier and Seid as Trustees under
the Voting Trust dated February 27, 1997. Messrs. Meier and Seid have
exclusive voting power over such shares. The selling shareholder has
exclusive investment power over such shares. Until February 2002, the
selling shareholder cannot sell during a three-month period the greater
of: (1) 1% of our outstanding shares; or (2) the average weekly volume
of trading in our common stock during the four weeks before the sale.
(6) Includes (a) 281,503 shares held as Co-trustee with Matthew Schubert of
the Jason Schubert Outsource Trust and (b) 201,847 shares held as
Co-trustee with Jason Schubert of the Matthew Schubert Outsource Trust.
(7) Includes 281,503 shares held as Co-trustee with Alan E. Schubert of the
Jason Schubert Outsource Trust.
(8) Consists of (a) 284,857 shares held as Trustee of the Lawrence H.
Schubert Revocable Trust; (b) 375,132 shares held by Nadya I. Schubert,
Mr. Schubert's wife, as Trustee of the Nadya I. Schubert Revocable
Trust; (c) 32,500 shares held as Trustee of the Nadya I. Schubert
GRAT-1997, under a trust agreement dated May 16, 1997; (d) 59,751
shares held by Nadya I. Schubert and Robert A. Lefcort, as Co-trustees
of the Robert A. Lefcort Irrevocable Trust; (e) 32,500 shares held as
the Trustee of the Rachel Schubert Trust; and (f) 32,500 shares held as
Trustee of the Adam Pugh Trust.
(9) Includes: (a) 375,132 shares held as Trustee of the Nadya I. Schubert
Revocable Trust; (b) 284,857 shares held by Lawrence H. Schubert, Mrs.
Schubert's husband, as Trustee of the Lawrence H. Schubert Revocable
Trust; (c) 32,500 shares held by Lawrence H. Schubert, Trustee of the
Nadya I. Schubert GRAT-1997, under a trust agreement dated May 16, 997;
71
<PAGE> 75
(d) 59,751 shares held by Nadya I. Schubert and Robert A. Lefcort as
Co-trustees of the Robert A. Lefcort Irrevocable Trust; (e) 32,500
shares held by Lawrence H. Schubert as Trustee of the Rachel Schubert
Trust; and (f) 32,500 shares held by Lawrence H. Schubert as Trustee of
the Adam Pugh Trust.
(10) Includes (a) 58,075 shares held as Trustee of the Louis J. Morelli
S-Stock Trust; and (b) 58,379 shares held as Trustee of the Margaret
Ann Janisch S-Stock Trust.
(11) An affiliate of Triumph Capital Group, Inc. Mr. Fawcett, one of our
directors is a general partner of Triumph-Connecticut Advisors, L.P.,
the general partner of Triumph-Connecticut, Ltd., a Limited
Partnership. Includes immediately exercisable warrants to purchase
700,236 shares. After completion of this offering, Triumph will
continue to own 301,000 shares which it purchased on the open market.
(12) Mr. Seid, one of our directors, is a limited partner of Bala Equity
Partners, L.P., the general partner of Bachow Investment Partners III,
L.P. Includes immediately exercisable warrants to purchase 550,186
shares. After completion of this offering, Bachow will continue to own
199,000 shares which it purchased on the open market.
This prospectus will also cover any additional shares of common stock
which become issuable in connection with the shares registered for sale hereby
by reason of any stock dividend, stock split, merger, consolidation,
recapitalization or other similar transaction effected without the receipt of
consideration that results in an increase in the number of outstanding shares of
our common stock.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the
selling shareholders.
PLAN OF DISTRIBUTION
We are registering this offering of shares on behalf of the selling
shareholders, and we will pay all costs, expenses and fees related to such
registration, including all registration and filing fees, printing expenses,
fees and disbursements of our counsel, fees and disbursements of counsel to
certain of the selling shareholders, the fees and disbursements of underwriters
(excluding underwriting discounts and selling commissions), blue sky fees and
expenses and the expenses of any special audits or "cold comfort" letters. The
selling shareholders will pay all underwriting discounts and selling
commissions.
The selling shareholders may sell their shares from time to time in one
or more transactions on the OTCBB or in private, negotiated transactions. The
selling shareholders will determine the prices at which they will sell those
shares. Such transactions may or may not involve brokers or dealers.
If the selling shareholders use a broker-dealer to complete their sale
of the shares, such broker-dealer may receive compensation in the form of
discounts, concessions or commissions from the selling shareholders or from you,
as purchaser, which compensation might exceed customary commissions.
The selling shareholders and any such brokers, dealers or other agents
that participate in such distribution may be deemed to be "underwriters" within
the meaning of the Securities Act, and any discounts, commissions or concessions
received by any such brokers, dealers or other agents might be deemed to be
underwriting discounts and commissions under the Securities Act. Neither we nor
the selling shareholders can presently estimate the amount of such compensation.
We know of no existing arrangements between any selling shareholder and any
other selling shareholder, broker, dealer or other agent relating to the sale or
distribution of the shares offered by this prospectus.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of any of the shares offered by this prospectus
may not simultaneously engage in market activities with respect to the common
stock for the applicable period under Regulation M prior to the commencement of
such distribution. In addition and without limiting the foregoing, the selling
72
<PAGE> 76
shareholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including without limitation Rule 10b-5
and Regulation M, which provisions may limit the timing of purchases and sales
of any of the shares by the selling shareholders. All of the foregoing may
affect the marketability of the common stock.
In order to comply with certain states' securities laws, if applicable,
the shares will be sold in such jurisdictions only through registered or
licensed brokers or dealers.
We have agreed to indemnify the selling shareholders, and the selling
shareholders have agreed to indemnify us, against certain liabilities arising
under the Securities Act of 1933. The selling shareholders may indemnify any
agent, dealer or broker-dealer that participates in sales of shares against
similar liabilities.
Any securities covered by this prospectus that qualify for sale under
Rule 144 under the Securities Act may be sold under that Rule rather than under
this prospectus.
EXPERTS
The consolidated financial statements as of April 2, 2000 and December
31, 1999 and 1998, and for the thirteen week period ended April 2, 2000 and for
each of the three years in the period ended December 31, 1999, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
LEGAL MATTERS
Akerman, Senterfitt & Eidson, P.A., Fort Lauderdale, Florida will pass
upon the validity of the common stock offered by this prospectus.
ADDITIONAL INFORMATION
We file annual, quarterly, and special reports, proxy statements, and
other information with the Securities and Exchange Commission. Such reports,
proxy and other information can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its regional offices located at 7
World Trade Center, New York, New York 10048 and Northwest Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, at prescribed
rates. The Commission maintains a website that contains all information filed
electronically by us. The address of the Commission's website is
http://www.sec.gov.
This prospectus constitutes a part of a registration statement on Form
S-1 filed by us with the Commission under the Securities Act, with respect to
the securities offered in this prospectus. This prospectus does not contain all
the information that is in the registration statement. Certain parts of the
registration statement are omitted as allowed by the rules and regulations of
the Commission. We refer to the registration statement and to the exhibits to
73
<PAGE> 77
such registration statement for further information with respect to us and the
securities offered in this prospectus. Copies of the registration statement and
the exhibits to such registration statement are on file at the offices of the
Commission and may be obtained upon payment of the prescribed fee or may be
examined without charge at the public reference facilities of the Commission
described above.
Statements contained in this prospectus concerning the provisions of
documents are necessarily summaries of the material provisions of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission.
74
<PAGE> 78
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Audited Consolidated Financial Statements:
Independent Auditors' Report .................................................................. F - 2
Consolidated Balance Sheets as of April 2, 2000, December 31, 1999 and 1998 ................... F - 3
Consolidated Statements of Operations for the thirteen week period ended April 2, 2000
and for the years ended December 31, 1999, 1998 and 1997................................... F - 4
Consolidated Statements of Shareholders' Equity for the thirteen week period
ended April 2, 2000 and for the years ended December 31, 1999, 1998, and 1997.............. F - 5
Consolidated Statements of Cash Flows for the thirteen week period ended April 2, 2000
and for the years December 31, 1999, 1998 and 1997........................................ F - 6
Notes to Consolidated Financial Statements..................................................... F - 7
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of July 2, 2000 and April 2, 2000 .................... F -45
Condensed Consolidated Statements of Operations for the thirteen weeks
ended July 2, 2000 and three months ended June 30, 1999..................................... F -46
Condensed Consolidated Statements of Cash Flows for the thirteen weeks
ended July 2, 2000 and three months ended June 30, 1999..................................... F -47
Notes to Condensed Consolidated Financial Statements........................................... F -48
</TABLE>
F-1
<PAGE> 79
INDEPENDENT AUDITORS' REPORT
Outsource International, Inc. and Subsidiaries:
We have audited the consolidated balance sheets of Outsource International, Inc.
and Subsidiaries (the "Company") as of April 2, 2000, December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the thirteen week period ended April 2, 2000 and for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the index as Financial
Statement Schedule II at Item 16(b). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Outsource International, Inc. and
Subsidiaries as of April 2, 2000, December 31, 1999 and 1998 and the results of
their operations and their cash flows for the thirteen week period ended April
2, 2000 and for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the Financial Statement Schedule II, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
May 17, 2000, except for paragraphs one
through five of Note 17,
as to which the date is August 15, 2000
and paragraph six of Note 17,
as to which the date is September 13, 2000
F-2
<PAGE> 80
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
April 2, December 31,
--------- -------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 1,546 $ 716 $ 5,501
Trade accounts receivable, net of allowance
for doubtful accounts of $1,563, $2,830 and $1,924 42,118 49,709 12,946
Funding advances to franchises 206 157 441
Assets held for disposition 2,409 2,439 --
Income tax receivable and other current assets 5,043 2,608 7,795
--------- --------- ---------
Total current assets 51,322 55,629 26,683
Property and equipment, net 9,154 9,231 17,628
Goodwill, net 45,783 46,517 64,262
Other assets 2,310 2,304 3,429
--------- --------- ---------
Total assets $ 108,569 $ 113,681 $ 112,002
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,887 $ 6,186 $ 5,217
Accrued expenses:
Payroll 10,518 8,706 4,322
Payroll taxes 4,139 3,842 4,067
Workers' compensation and insurance 5,210 5,342 10,659
Other 4,499 4,331 2,482
Accrued restructuring charges 2,255 2,905 --
Other current liabilities 506 661 1,312
Related party debt 1,195 1,195 541
Current maturities of long-term debt 7,635 7,437 6,782
Revolving credit facility 50,746 57,067 --
--------- --------- ---------
Total current liabilities 95,590 97,672 35,382
Non-Current Liabilities
Revolving credit facility -- -- 20,980
Long-term debt to related parties, less current maturities -- -- 745
Other long-term debt, less current maturities 1,934 2,300 9,257
Other non-current liabilities -- -- 1,050
--------- --------- ---------
Total liabilities 97,524 99,972 67,414
--------- --------- ---------
Commitments and Contingencies (Notes 1,2,3,4,6,7,8,9,10 and 11)
Shareholders' Equity:
Preferred stock, $.001 par value: 10,000,000 shares authorized,
no shares issued and outstanding -- -- --
Common stock, $.001 par value: 100,000,000 shares authorized,
8,657,913 shares issued and outstanding at April 2, 2000,
December 31, 1999 and 1998 9 9 9
Additional paid-in-capital 53,546 53,546 53,546
Accumulated deficit (42,510) (39,846) (8,967)
--------- --------- ---------
Total shareholders' equity 11,045 13,709 44,588
--------- --------- ---------
Total liabilities and shareholders' equity $ 108,569 $ 113,681 $ 112,002
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements
F-3
<PAGE> 81
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Thirteen Weeks
Ended Year Ended December 31,
------------- -------------------------------------------
April 2, 2000 1999 1998 1997
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 126,011 $ 594,047 $ 565,394 $ 447,579
Cost of revenues 109,157 513,266 481,734 382,074
----------- ----------- ----------- -----------
Gross profit 16,854 80,781 83,660 65,505
----------- ----------- ----------- -----------
Selling, general and administrative expenses:
Shareholders' compensation -- -- -- 292
Provision (reduction) for doubtful accounts (472) 5,505 1,572 1,506
Amortization of intangible assets 734 3,702 3,684 1,853
Other selling, general and administrative expenses 17,143 76,382 66,436 51,445
----------- ----------- ----------- -----------
Total selling, general and administrative expenses 17,405 85,589 71,692 55,096
----------- ----------- ----------- -----------
Restructuring costs 356 11,220 -- --
Impairment of goodwill and other long-lived assets -- 2,603 -- --
----------- ----------- ----------- -----------
Total restructuring and impairment charges 356 13,823 -- --
----------- ----------- ----------- -----------
Operating (loss) income (907) (18,631) 11,968 10,409
----------- ----------- ----------- -----------
Other expense, net:
Interest expense 2,016 8,604 5,529 7,877
Put warrant valuation adjustment -- -- -- 1,842
Other income (259) (479) (53) (21)
----------- ----------- ----------- -----------
Total other expense, net: 1,757 8,125 5,476 9,698
----------- ----------- ----------- -----------
(Loss) income before provision (benefit) for income
taxes and extraordinary item (2,664) (26,756) 6,492 711
Provision (benefit) for income taxes -- 4,123 1,611 (69)
----------- ----------- ----------- -----------
(Loss) before extraordinary item (2,664) (30,879) 4,881 780
Extraordinary item - loss on early retirement of debt,
net of income tax benefit (Notes 6 and 7) -- -- (1,417) (13,384)
----------- ----------- ----------- -----------
Net (loss) income $ (2,664) $ (30,879) $ 3,464 $ (12,604)
=========== =========== =========== ===========
Unaudited pro forma data: (Notes 1 and 14)
Income before provision for income taxes and
extraordinary item $ 711
Provision for income taxes 296
-----------
Income before extraordinary item 415
Extraordinary item, net of income tax benefit (13,384)
-----------
Net loss $ (12,969)
===========
Weighted average common shares outstanding:
Basic 8,657,913 8,657,913 8,603,521 6,055,439
=========== =========== =========== ===========
Diluted 8,657,913 8,657,913 9,919,492 7,320,362
=========== =========== =========== ===========
(Loss) earnings per share:
Basic
(Loss) income before extraordinary item $ (0.31) $ (3.57) $ 0.57 $ 0.07
Extraordinary item, net of income tax benefit -- -- (0.17) (2.21)
----------- ----------- ----------- -----------
Net (loss) income $ (0.31) $ (3.57) $ 0.40 $ (2.14)
=========== =========== =========== ===========
Diluted
(Loss) income before extraordinary item $ (0.31) $ (3.57) $ 0.49 $ 0.06
Extraordinary item, net of income tax benefit -- -- (0.14) (1.83)
----------- ----------- ----------- -----------
Net (loss) income $ (0.31) $ (3.57) $ 0.35 $ (1.77)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
F-4
<PAGE> 82
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THIRTEEN WEEK PERIOD ENDED APRIL 2, 2000 AND
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Retained
Additional Earnings/
Common Paid in Accumulated
Stock Capital Deficit Total
--------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 5 $ 95 $ 4,394 $ 4,494
Net loss for the period from January 1, 1997
though February 21, 1997 -- -- (172) (172)
Distributions and other payments in
connection with the Reorganization -- (11,880) (4,222) (16,102)
Contribution of notes payable by shareholders -- 4,300 -- 4,300
Net loss for the period from February 22, 1997
though December 31, 1997 -- -- (12,431) (12,431)
Termination of put warrants liability -- 20,384 -- 20,384
Sale of common stock, net of offering costs 3 40,302 -- 40,305
-------- -------- -------- --------
Balance, December 31, 1997 8 53,201 (12,431) 40,778
Issuance of common stock -- 775 -- 775
Exercise of warrants 1 2 -- 3
Distributions and other payments in
connection with the Reorganization -- (432) -- (432)
Net income -- -- 3,464 3,464
-------- -------- -------- --------
Balance, December 31, 1998 9 53,546 (8,967) 44,588
Net loss -- -- (30,879) (30,879)
-------- -------- -------- --------
Balance, December 31, 1999 9 53,546 (39,846) 13,709
Net loss -- -- (2,664) (2,664)
-------- -------- -------- --------
Balance, April 2, 2000 $ 9 $ 53,546 $(42,510) $ 11,045
======== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
F-5
<PAGE> 83
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirteen Weeks
Ended Year Ended December 31,
------------- ---------------------------------------
April 2, 2000 1999 1998 1997
------------- --------- --------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,664) $(30,879) $ 3,464 $(12,604)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,461 7,134 6,756 4,179
Impairment of goodwill and other long-lived assets -- 2,603 -- --
Provision for losses on assets held for disposition 67 5,429 -- --
Loss on sale of accounts receivable -- 2,667 -- --
Deferred income tax provision (benefit) -- 5,732 1,106 (6,716)
Write-off of debt discount and issuance costs -- 1,377 -- 938
Put warrant valuation adjustment -- -- -- 1,842
Loss on early retirement of debt -- -- -- 20,031
(Gain) loss on disposal of assets, net (91) (303) 61 (19)
-------- -------- -------- --------
(1,227) (6,240) 11,387 7,651
Changes in assets and liabilities (excluding effects of
acquisitions and dispositions):
(Increase) decrease in:
Trade accounts receivable 7,155 (39,596) 36,744 (20,948)
Prepaid expenses and other current assets (1,014) 293 (326) (379)
Other assets 133 (1,542) (419) (1,405)
Increase (decrease) in:
Accounts payable 785 867 (443) (519)
Accrued expenses:
Payroll 1,812 4,384 749 (888)
Payroll taxes 298 (225) 1,685 2
Workers' compensation and insurance (826) (5,317) 1,494 3,622
Reserve for restructuring charges (650) 2,905 -- --
Other 168 2,038 287 463
Other current liabilities (154) (651) (397) (509)
-------- -------- -------- --------
Net cash provided by (used in) operating activities 6,480 (43,084) 50,761 (12,910)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from asset sales as part of the Restructuring
and related matters 40 2,740 -- --
Proceeds from sale of the building -- 6,207 -- --
Funding repayments (advances) from franchises, net (49) 284 1,745 1,046
Expenditures for acquisitions and related matters -- (213) (27,769) (21,948)
Purchases of property and equipment (761) (1,569) (5,296) (4,105)
Proceeds from property and equipment sale leaseback -- 1,600 -- --
Proceeds from disposal of property and equipment -- -- 4 263
-------- -------- -------- --------
Net cash (used in) provided by investing activities (770) 9,049 (31,316) (24,744)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in excess of outstanding checks over bank balance,
included in accounts payable 1,917 102 2,066 1,398
(Repayment of) net proceeds from revolving credit facility (6,321) 36,088 (12,820) 23,912
Proceeds from sale of interest rate hedge -- 250 -- --
Related party debt repayments -- (127) (483) (1,988)
Repayment of senior notes and put warrants, net of issuance costs -- -- -- 22,615
Repayment of senior notes -- -- -- (25,000)
Repayment of other long-term debt (476) (7,283) (3,963) (5,845)
Proceeds from sale of accounts receivable -- 220 -- --
Proceeds from sale of common stock, net of offering costs -- -- 3 40,305
Distributions and other payments in connection with the
Reorganization -- -- (432) (16,102)
-------- -------- -------- --------
Net cash used (provided by) in financing activities (4,880) 29,250 (15,629) 39,295
-------- -------- -------- --------
Net increase (decrease) in cash 830 (4,785) 3,816 1,641
Cash, beginning of period 716 5,501 1,685 44
-------- -------- -------- --------
Cash, end of period $ 1,546 $ 716 $ 5,501 $ 1,685
======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,823 $ 6,030 $ 4,960 $ 7,091
======== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
F-6
<PAGE> 84
OUTSOURCE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Outsource International, Inc. and Subsidiaries (the
"Company") is a national provider of human resource services focusing on the
flexible industrial staffing ("staffing") market through its Tandem division and
on the professional employer organization ("PEO") market through its Synadyne
division. The Company also operated a small office clerical staffing business
through its Office Ours division. As discussed further in Note 3, the Company
sold its Synadyne division effective April 8, 2000, and the Office Ours division
effective August 30, 1999. The Company provides its industrial staffing services
through locations owned or leased by the Company (collectively identified as
"Company-owned") and franchise locations and provided, until their sale, PEO and
clerical staffing services through Company-owned locations.
Industrial staffing services include recruiting, training and workforce
re-deployment, as well as certain PEO services. PEO services include payroll
administration, workers' compensation insurance, health, life and disability
insurance, retirement plans, and human resource compliance, administration and
management.
PUBLIC OFFERING: The Company sold 3 million shares of its common stock to the
public (the "Offering") at $15.00 per share on October 24, 1997, and received
proceeds of $40.3 million, net of offering costs and expenses of $4.7 million.
REORGANIZATION: On February 21, 1997, a Reorganization was consummated in which
nine companies under common ownership and management became wholly owned
subsidiaries of Outsource International, Inc. (the "Reorganization"). Outsource
International, Inc. was incorporated in April 1996 for the purpose of becoming
the parent holding company, but was inactive with no assets, liabilities or
operations prior to the Reorganization.
The nine companies which became subsidiaries of Outsource International, Inc.
are Outsource International of America, Inc., Outsource Franchising, Inc.,
Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc.,
Synadyne V, Inc., Employees Insurance Services, Inc. and Capital Staffing Fund,
Inc. (the "Initial Subsidiaries"). Except for Capital Staffing Fund, Inc., the
outstanding common stock of each of the Initial Subsidiaries was owned prior to
the Reorganization by the same shareholders with identical ownership
percentages. The shareholders and their ownership percentages were: (a) a
control group consisting of two brothers, who were founders, their immediate
families and four family trusts (the "S Group")--58.2%; (b) a control group
consisting of an individual, who was a founder, his immediate family and two
family trusts (the "M Group")--29.1%; (c) the chief executive officer of the
Initial Subsidiaries (the "CEO")--9.7%; and (d) the executive vice president of
the Initial Subsidiaries and a family trust (the "EVP")--3.0%. The shareholders
and their ownership percentages of Capital Staffing Fund, Inc. prior to the
Reorganization were: S Group--48.5%; M Group--24.25 %; CEO--24.25% and
EVP--3.0%.
In 1974, the three founders began the industrial staffing services business
which became the operations of the Initial Subsidiaries, and these operations
expanded to also include franchising of staffing services, PEO services, and
funding services to certain franchises. The operations of the Initial
Subsidiaries historically have been integrated to provide a single source of
human resource services for customers under the direction of a single executive
management group and with a centralized administrative and business support
center.
The Reorganization consisted of (a) the distribution by the Initial
Subsidiaries, which were S corporations, of previously undistributed accumulated
taxable earnings to all shareholders, in proportion to their ownership
interests, a portion of which was used to repay $4.3 million in notes receivable
of Outsource Franchising, Inc.
F-7
<PAGE> 85
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from its shareholders, in proportion to their ownership interests; (b) the
contribution to paid-in capital of Synadyne II, Inc. and Synadyne III, Inc. of
$4.3 million in notes payable by such Initial Subsidiaries to their
shareholders, in proportion to their ownership interests; and (c) the exchange
by all of the shareholders of all of their shares of common stock in the Initial
Subsidiaries for shares of common stock in Outsource International, Inc., except
that the founders in the S Group and M Group received cash and notes for a
portion of their common stock, aggregating 5.8% of the total ownership interests
in the Initial Subsidiaries (the equivalent of 336,430 shares of common stock of
Outsource International, Inc.). The following is a summary of the cash paid,
notes issued (which were paid in full at the time of the Offering), cash paid
and immediately returned to the Company by the Shareholders for repayment of
Outsource Franchising, Inc. notes receivable, contribution to additional paid-in
capital, and common stock of Outsource International, Inc. issued in the
Reorganization (all dollars in thousands):
<TABLE>
<CAPTION>
Cash Paid Issuance
(Returned to Notes (Paid Total of Common Stock
Repay Notes At Time of Shareholder ------------------------
Cash Receivable the Offering) Distribution Shares Percentage
---------- ---------- ------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
S Group $ 5,841 $ 2,502 $ 1,420 $ 9,763 3,131,667 57.5%
M Group 3,850 1,251 -- 5,101 1,552,315 28.5%
CEO 226 417 325 968 591,249 10.8%
EVP 140 130 -- 270 173,557 3.2%
---------- ---------- ---------- ---------- ---------- -----
$ 10,057 $ 4,300 $ 1,745 16,102 5,448,788 100.0%
========== ========== ========== ========== =====
Less contribution to additional paid-in capital of notes
Synadyne II, Inc. and Synadyne III, Inc. (4,300)
----------
Net charge to shareholders' equity $ 11,802
==========
</TABLE>
All shareholders of the Initial Subsidiaries owned virtually the same proportion
of the common stock of Outsource International, Inc. after the Reorganization as
they owned of the Initial Subsidiaries prior to the Reorganization.
Additionally, all of the Subsidiaries were historically an integrated operation
under the direction of a single executive management group and with a
centralized administrative and business support center, which continued after
the Reorganization. Accordingly, the Reorganization was accounted for as a
combination of companies at historical cost. The effects of the Reorganization
on common stock have been reflected retroactively in the financial statements of
prior years.
Subsequent to the Reorganization, all compensation for the three founders
(principal shareholders) was discontinued, and the Initial Subsidiaries
terminated their elections to be treated as S corporations. The distribution by
the Initial Subsidiaries to all shareholders at the time of the Reorganization
is subject to adjustment based upon the final determination of taxable income
through February 21, 1997. In September 1998, the Company completed and filed
its Federal and state tax returns for the period from January 1, 1997 through
February 21, 1997. Based on that filing, the Company made an additional
distribution of $432,000 to the shareholders at the time of the Reorganization.
The distribution was recorded as a reduction of the Company's paid-in capital.
Further distributions may be required in the event the taxable income for any
period through February 21, 1997 is adjusted due to audits or any other reason
(see Notes 6 and 8).
INTERNAL REORGANIZATION: On, January 1, 1999 an internal reorganization was
consummated to better align the legal entities on a geographic basis. This
internal reorganization had no effect on the consolidated financial position or
results of operations of the Company. Outsource International, Inc. retained
100% direct or indirect ownership of all Subsidiaries after this reorganization.
F-8
<PAGE> 86
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A summary of the Company's significant accounting policies follows:
BASIS OF PRESENTATION: The accompanying consolidated financial statements
present the financial position, results of operations and cash flows of
Outsource International, Inc. and the Subsidiaries, as well as SMSB Associates
("SMSB"), a Florida limited partnership comprised of the Company's three
principal shareholders and the CEO. SMSB, a special purpose entity which leases
certain properties to the Company, is consolidated in these financial statements
through September 30, 1997, based on the criteria for a non-substantive lessor
in Emerging Issues Task Force No. 90-15, due to the control exercised by the
Company over the assets of SMSB during that period. Effective October 1, 1997
the Company discontinued the consolidation of SMSB's assets and liabilities in
these financial statements, based on the Company's determination that SMSB was
no longer a non-substantive lessor as defined by EITF No. 90-15. Intercompany
balances and transactions are eliminated in consolidation.
The Company's reportable operating segments are the Tandem division, which
provides industrial staffing services, the Synadyne division, which provides PEO
services, and the Franchising segment - see Note 15. The accounting policies of
the operating segments are the same as those described in the summary of
significant accounting policies except that the disaggregated financial results
have been prepared using a management approach, which is consistent with the
basis and manner in which the Company internally disaggregates financial
information for the purposes of assisting in making internal operating
decisions.
CHANGE OF FISCAL YEAR-END: The Company filed a Form 8-K during the fourth
calendar quarter of 1999 indicating, among other things, its change for
financial reporting purposes, effective January 1, 2000, from a fiscal year
ended December 31 to a fiscal year ending the 52 or 53 week period ending the
Sunday closest to March 31. The Company's transition period (the "Transition
Period") is January 1, 2000 though April 2, 2000.
F-9
<PAGE> 87
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PERVASIVENESS OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The primary estimates underlying the Company's financial statements include the
reserve for accounts receivable, the useful lives of goodwill, and accrued
liabilities.
REVENUE RECOGNITION: All staffing and PEO revenues are based upon the gross
payroll of the Company's staffing and PEO employees plus a corresponding fee.
The Company's fee structure is based upon the estimated costs of employment
related taxes, health benefits, workers' compensation benefits, insurance and
other services offered by the Company plus a negotiated mark-up. All staffing
and PEO customers are invoiced on a periodic basis ranging from weekly to
monthly. The 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.
Initial franchise fees are generally recognized when substantially all services
or conditions relating to the franchise sale have been performed or satisfied by
the Company. Costs relating to such fees are charged to selling, general and
administrative expenses when incurred. When the fees are collected over an
extended period of time and no reasonable basis for estimating collections
exists, the fees are recognized as income when received through the use of the
installment method. Royalties, which are based on gross sales and gross profit
of the related franchisees, are recognized as revenue when earned and become
receivable from the franchisees.
FUNDING ADVANCES: The Company makes advances on behalf of certain of its
franchises to fund the payroll and other related costs for industrial personnel
provided by those franchises to their clients. The advances are secured by the
franchises' accounts receivable from these clients. The Company invoices the
clients and receives payment directly from the clients as part of this
arrangement. These payments are applied to reimburse outstanding advances, and
to pay franchise royalties and the fee charged for these funding and billing
services, with any remaining amounts remitted to the franchise. The funding fee
is charged and recognized as revenue by the Company as the weekly invoices are
produced.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost and depreciated
or amortized on straight-line bases over the estimated useful service lives of
the respective assets. Leasehold improvements are stated at cost and amortized
over the shorter of the term of the lease or estimated useful life of the
improvement. Amortization of property under capital leases, leasehold
improvements and computer software is included in depreciation expense. The
estimated useful life of buildings is 39 years, while the estimated useful lives
of other items range from five to seven years.
LONG-LIVED ASSETS: In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", impairments, measured using fair
value, are recognized whenever events or changes in circumstances indicate
F-10
<PAGE> 88
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
that the carrying amount of long-lived assets may not be recoverable and the
projected future undiscounted cash flows attributed to the assets are less than
their carrying values - see Note 4.
INTANGIBLE ASSETS: Identifiable intangible assets include territory rights,
customer lists, employee lists and covenants not to compete acquired in
connection with acquisitions. Such assets are recorded at fair value on the date
of acquisition as determined by management with assistance by an independent
valuation consultant and are being amortized over the estimated periods to be
benefited, ranging from less than one year to 15 years, except territory rights
which are being amortized over periods ranging from 15 to 40 years. Goodwill
relates to the excess of cost over the fair value of net assets of the
businesses acquired. Amortization is calculated on a straight-line basis over
periods ranging from 15 to 40 years. The overall business strategy of the
Company included the acquisition and integration of independent and franchise
staffing and PEO operations through 1998. The Company believes that this
strategy creates synergies, achieves operating efficiencies and allows the
Company to be more competitive in its pricing, all of which will provide
benefits for the foreseeable future. During 1999, the Company ceased acquiring
industrial staffing operations and focused on improving operational
efficiencies.
Management assesses on an ongoing basis if there has been an impairment in the
carrying value of its intangible assets. If the undiscounted future cash flows
over the remaining amortization period of the respective intangible asset
indicates that the value assigned to the intangible asset may not be
recoverable, the carrying value of the respective intangible asset will be
reduced. The amount of any such impairment would be determined by comparing
anticipated discounted future cash flows from acquired businesses with the
carrying value of the related assets. In performing this analysis, management
considers such factors as current results, trends and future prospects, in
addition to other relevant factors - see Notes 3 and 4.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value.
CASH, RECEIVABLES, FUNDING ADVANCES TO FRANCHISES, ACCOUNTS PAYABLE,
ACCRUED EXPENSES EXCEPT WORKERS' COMPENSATION AND INSURANCE, OTHER
CURRENT LIABILITIES AND OTHER AMOUNTS DUE FROM AND TO RELATED PARTIES:
The carrying amounts approximate fair value because of the short
maturity of those instruments. Although the accrued workers'
compensation and insurance liability is anticipated to be paid over a
number of years, due to the lack of a defined payment schedule and the
estimates inherent in establishing the recorded liability amount,
management believes that it is not practical to estimate the fair value
of this financial instrument.
REVOLVING CREDIT FACILITY AND LONG-TERM DEBT: The carrying amounts
approximate the fair value at April 2, 2000, December 31, 1998 and
1999, respectively, because the interest rates on these instruments
approximate interest rates currently available for similar borrowings.
The carrying amount of the unrealized hedge loss (included in other
non-current liabilities) as of December 31, 1998 was based on its fair
value determined primarily from information provided by Fleet National
Bank, formerly BankBoston, N.A. - see Note 7.
INCOME TAXES: Effective February 21, 1997, the Initial Subsidiaries terminated
their elections to be treated as S corporations under applicable provisions of
the Internal Revenue Code. Prior to the date such election was terminated, items
of income, loss, credits, and deductions were not taxed within the Company but
were reported on the income tax returns of the Initial Subsidiaries'
shareholders. Accordingly, no provision for income taxes was recorded. The
Company has presented the pro forma provision for income taxes and pro forma net
loss in its results of operations, calculated as if the Company was treated as a
C corporation, for the year ended December 31, 1997 - see Note 14.
F-11
<PAGE> 89
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Since the Reorganization on February 21, 1997, the Company provides for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for (a) the differences between financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income and (b) net operating loss
and tax credit carryforwards. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to be
realized. Income tax expense equals the taxes payable or refundable for the
period plus or minus the change in the period of deferred tax assets and
liabilities.
WORKERS' COMPENSATION: Effective January 1, 1997 through December 31, 1999, the
Company's workers' compensation insurance coverage provided for a $250,000
deductible per accident or industrial illness with an aggregate maximum dollar
limit based on 3.5%, 3.5%, 2.4% and 2.2% of covered payroll for Q1 2000 and the
years ended December 31, 1999 ("FY 1999"), 1998 ("FY 1998") and 1997 ("FY
1997"), respectively. The Company employs an independent third-party
administrator to assist it in establishing an appropriate accrual for the
uninsured portion of workers' compensation claims arising in those years,
including claims incurred but not reported, based on prior experience and other
relevant data. The Company's policy is to accrue worker's compensation expense
equal to the fully developed cost of claims incurred up to those maximum dollar
limits, using internally generated rates that reflect the specific risk profile
of each Company segment in order to allocate the maximum dollar limit between
segments. For claims related to periods prior to 1997, there was no aggregate
maximum dollar limit on the Company's liability for deductible payments. From
May 1, 1995 through December 31, 1996, in exchange for a lower excess insurance
premium rate, the Company accepted the responsibility for certain losses
exceeding the $250,000 policy deductible per accident or industrial illness on a
dollar-for-dollar basis, but only to the extent such losses cumulatively exceed
85% of the excess insurance premiums (excluding the profit and administration
component) and subject to a maximum additional premium (approximately $0.8
million in 1995 and $1.2 million in 1996).
For claims arising through December 31, 1998, the Company is only required to
pay such claims as they actually arise, which may be over a period extending up
to 5 years after the related incident occurred. In 1999, the Company selected a
prefunded deductible program whereby expected 1999 claims expenses were funded
in advance in exchange for reductions in administrative costs. The required
advance funding was provided through either cash flows from operations or
additional borrowings under the Revolving Credit Facility. This new arrangement
adversely affected the Company's ability to meet certain financial covenants in
1999 - see Note 7.
In January 2000, the Company renewed its pre-funded deductible program for a
one-year period. Under the new agreement, the Company will fund $10.1 million in
12 installments for projected 2000 claims expenses. This claim fund requirement
will be adjusted upward or downward in subsequent quarters based on the
projected costs of actual claims incurred during calendar 2000, up to a maximum
liability of $19.0 million. In addition, the Company agreed to establish a $3.0
million trust account naming Hartford Insurance Company as beneficiary to secure
any liability for claim funding for 1999 and/or 2000 that exceed the pre-funded
amounts up to the aggregate maximum cap for each year of $13.6 million and $19.6
million, respectively. This trust is being funded in 11 installments through
December 2000, and as of April 2, 2000, the Company had funded $1.0 million into
this trust account.
AMORTIZATION OF DEBT DISCOUNT AND ISSUANCE COSTS: The Company records debt
discount as a contra-liability and debt issuance costs as a non-current asset.
Both are amortized to interest expense using the interest method.
F-12
<PAGE> 90
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION: The Company uses the accounting methods prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and provides the
pro forma disclosures required by SFAS No. 123, "Accounting for Stock-based
Compensation" - see Note 11.
ADVERTISING: The Company expenses advertising and promotional expenditures as
incurred. Total advertising and promotional expenses were approximately $0.2
million, $1.1 million, $1.5 million, and $1.8 million for Q1 2000 and FY 1999,
FY 1998 and FY 1997, respectively.
NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. SFAS No. 133 defines derivatives and establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 also requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133, as modified by SFAS No. 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000, and cannot be applied retroactively. The
Company intends to implement SFAS No. 133 in its consolidated financial
statements as of the first day of fiscal year 2001. Management does not believe
that the Company is a party to any transactions involving derivatives as defined
by SFAS No. 133. SFAS No. 133 could increase volatility in earnings and other
comprehensive income if the Company enters into any such transactions in the
future.
RECLASSIFICATIONS: Certain reclassifications have been made in amounts for prior
periods to conform to current period presentation.
NOTE 2: FUTURE LIQUIDITY
As discussed in Notes 7 and 17 to the Company's Consolidated Financial
Statements, the Company's bank financing expired on August 15, 2000 and the
Company was, until August 15, 2000, in default of certain acquisition debt
subordinated to its bank financing. The Company's borrowing facilities and
financial covenants were modified effective October 1, 1999, with a maturity of
December 31, 1999, to enable the Company to continue to meet certain financial
covenants during 1999. Prior to December 31, 1999, the Company's bank group
extended financing through March 31, 2000, and subsequently through August 15,
2000, when these facilities were replaced.
Effective August 15, 2000, the Company entered into a three-year agreement with
a syndicate of lenders led by Ableco Finance, LLC, as agent, which replaced the
Company's previous senior credit facility with a $33.4 million Revolving Credit
Facility and two term loans of $17.6 million and $9.0 million, respectively. In
connection with the repayment of the previous credit facility, the Company
issued a four-year, $5.3 million subordinated term note to the lenders under the
previous credit facility.
Simultaneously with the closing of the new credit facility, the Company amended
certain of its outstanding acquisition notes payable to provide for the payment
of interest only for a period of three years followed by two years of equal
monthly installments of principal and interest. As a result of the amendments to
the acquisition notes payable the Company is no longer in default under those
notes - see Note 17.
F-13
<PAGE> 91
NOTE 3. RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR DISPOSITION
On August 6, 1999, the Company announced the following actions to improve its
short-term liquidity, concentrate its operations within one core segment
(Tandem, its flexible staffing division) and improve its operating performance
within that segment:
(i) the sale of Office Ours, the Company's clerical staffing division, effective
August 30, 1999. The Company received proceeds at closing of $1.9 million, not
including $0.1 million, which was held in escrow until January 24, 2000, subject
to verification of sold accounts receivable, and another $0.1 million held in
escrow subject to compliance with warranties and representations. Approximately
$0.5 million of the proceeds was used to satisfy obligations under the
Securitization Facility and the remainder was applied to the Revolving Credit
Facility - see Note 7. A gain of $0.5 million has been included as a component
of other income in the Company's consolidated statement of operations for the
year ended December 31, 1999. Revenues of Office Ours, prior to the sale, were
$5.3 million, $8.1 million and $6.7 million for FY 1999, FY 1998 and FY 1997,
respectively. The loss before taxes for these operations, on a basis consistent
with the segment information presented in Note 15, was $0.3 million, $0.4
million and $0.2 million for the FY 1999, FY 1998 and FY 1997, respectively.
(ii) the engagement of an investment banking firm to assist in the evaluation of
the possible sale, or other strategic options, of Synadyne, the Company's PEO
division. Effective April 8, 2000, the Company sold the operations of Synadyne,
for which the Company received proceeds of $3.5 million at closing. In addition,
the Company could receive additional proceeds of $1.25 million, which is
dependent on certain performance criteria for the one year period subsequent to
the sale. Revenues of Synadyne, prior to the sale, were $44.8 million, $224.5
million, $202.9 million and $177.0 million for Q1 2000, FY 1999, FY 1998 and FY
1997, respectively. The (loss) income before taxes for these operations, on a
basis consistent with the segment information presented in Note 15, was ($0.3)
million, $1.4 million, $1.1 million and $1.1 million for Q1 2000, FY 1999, FY
1998 and FY 1997, respectively; and
(iii) a reduction of the Company's flexible staffing and support operations (the
"Restructuring") consisting primarily of: the sale, franchise, closure or
consolidation, as of April 2, 2000, of 28 of the 117 Tandem branch offices
existing as of June 30, 1999; a reduction of the Tandem and corporate support
center employee workforce by 110 employees (approximately 11% of the Company's
workforce) as of April 2, 2000, and a then anticipated additional reduction of
59 employees by June 30, 2000. A total of 47 branch offices have been or will be
eliminated in connection with the restructuring, 28 of which have been sold,
franchised, closed, or consolidated as of April 2, 2000. These offices were not
or are not expected to be adequately profitable in the near future or are
inconsistent with the Company's operating strategy of clustering offices within
specific geographic regions. The restructuring charge accrual and its
utilization are as follows:
F-14
<PAGE> 92
NOTE 3. RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR
DISPOSITION (CONTINUED)
<TABLE>
<CAPTION>
Utilization Balance Charges to Utilization
Original ----------------- At (Reversals of) ---------------- Balance At
(Amounts in Thousands) Charge Cash Non-cash 12/31/99 Operations Cash Non-cash 4/2/00
------- ------- ------- --------- -------------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Employee severance and
other termination benefits $ 4,040 $ 1,318 $ -- $ 2,722 $ (204) $ 379 $ -- $ 2,139
Professional fees 1,205 1,171 -- 34 459 459 -- 34
Lease termination and write-down of
leasehold improvements at closed
offices 400 295 -- 105 1 57 -- 49
Other restructuring charges 146 102 -- 44 33 44 -- 33
------- ------- ------- ------- ------- ------- ------- -------
Accrued restructuring charges 5,791 2,886 -- 2,905 289 939 -- 2,255
Write-down to fair value/loss
on sale of assets identified
for disposition 5,429 -- 5,429 -- 67 -- 67 --
------- ------- ------- ------- ------- ------- ------- -------
Total restructuring and asset
impairment activity $11,220 $ 2,886 $ 5,429 $ 2,905 $ 356 $ 939 $ 67 $ 2,255
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The original $11.2 million restructuring charge includes $4.0 million for
severance and other termination benefits, $1.2 million for professional fees,
and $0.6 million in lease termination and other charges. Severance and other
termination benefits were decreased by $0.2 million in Q1 2000 to reflect a
reduction of amounts to be paid in connection with certain severance packages
accrued in 1999 since certain employees of offices sold and franchised to third
parties would continue employment with such buyers or franchisees. Severance and
other termination benefits includes retention bonuses paid to certain employees
that remained with the Company through December 31, 1999.
The remaining liability of $2.1 million for severance and other termination
benefits as of April 2, 2000 consists of (i) $1.1 million for six employees
terminated in 1999 and in Q1 2000 and (ii) $1.0 million for 56 employees that
were scheduled to be terminated by June 30, 2000.
Professional fees of $1.2 million included in the original restructuring charge
were primarily amounts paid to Crossroads Capital Partners, LLC for its services
related to the Restructuring during the third and fourth quarters of 1999 - see
Note 8. During Q1 2000 the Company recorded additional restructuring charges for
professional fees of $0.5 million. The Company expects to complete these
restructuring activities during the quarter ending October 1, 2000.
The Company utilized $0.1 million and $0.4 million of the restructuring charge
during Q1 2000 and FY 1999, for the costs of terminating leases as well as
writing down the carrying value of leasehold improvements and other assets not
usable in other Company operations.
The $5.4 million write-down of assets identified for disposition, recognized in
the Company's results of operations for the year ended December 31, 1999,
relates to 27 Tandem offices, as follows: (i) a $0.4 million loss related to two
staffing offices in Nevada purchased by the Company in 1998 - one office closed
by the Company and one office sold on September 6, 1999 to an unaffiliated
party, which paid a nominal amount
F-15
<PAGE> 93
NOTE 3. RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR
DISPOSITION (CONTINUED)
and entered into a standard franchise agreement with the Company for the
territory; (ii) a $1.5 million loss related to four staffing offices in North
Carolina and South Carolina, purchased by the Company in 1998 - one office
closed by the Company and three offices sold on October 18, 1999 to the former
franchisee for $1.8 million (comprised of $0.2 million in cash, two promissory
notes totaling $0.3 million, and cancellation of the Company's remaining
indebtedness from the original acquisition of $1.3 million). As part of this
transaction, the Company cancelled covenants not to compete previously given to
it by the buyers and certain affiliates and agreed not to compete for 39 months
(27 months in the case of franchising) in the counties where the assets are
located. This transaction also included an option, which was exercised on
November 8, 1999, to purchase, for nominal consideration, one staffing office in
Virginia, which had been purchased by the Company from a related party in 1996;
and (iii) a $3.5 million write-down related to 20 additional staffing offices
based on management's estimate of the ultimate sales prices that will be
negotiated for these assets. Effective February 28, 2000, the Company sold its
staffing office in the state of Washington for $0.3 million. The sales price was
comprised primarily of a promissory note of $0.2 million.
Based on changes of the estimated fair value of certain assets held for
disposition as of April 2, 2000, the Company recorded an additional $0.1 million
write-down of assets to fair value, which was charged to restructuring costs in
Q1 2000. The charge for the write-down of assets held for disposition was
increased by $0.1 million in Q1 2000 and is subject to future adjustments as the
Company negotiates the actual sales prices of the assets that remain to be sold.
As of April 2, 2000, 19 Tandem offices remained to be sold as part of the
Restructuring, and the Company had classified the related tangible and
intangible assets, excluding cash, accounts receivable and deferred income
taxes, as assets held for disposition. As of September 30, 1999, the Company had
also classified the assets of the Synadyne division as assets held for
disposition; however, when it became apparent that certain assets would not be
sold in connection with the disposition of Synadyne, those assets were removed
from such classification. Upon classification as assets held for disposition,
the Company discontinued the related depreciation and amortization for these
assets, which reduced operating expenses by approximately $0.4 million and $0.4
million during Q1 2000 and FY 1999, respectively. The estimated fair value of
these assets held for disposition was based, in some cases, on management's
judgment. Accordingly, actual results could vary significantly from such
estimates.
In connection with the corporate support center workforce reductions and the
anticipated disposition of Synadyne, the corporate support center building was
sold on December 29, 1999. The Company received $6.1 million in net proceeds
from the sale of the support center building and certain assets, of which $3.8
million was used to extinguish the mortgage obligations, $1.4 million was used
to reduce the Company's bank debt and $0.9 million was put in escrow, and will
be released in installments through October 1, 2002. In connection with the
sale, the Company recorded a gain of approximately $50,000 in its FY 1999
results of operations.
F-16
<PAGE> 94
NOTE 3: RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR DISPOSITION
(CONTINUED)
The Company's assets held for disposition as of April 2, 2000 and December 31,
1999 are stated at the lower of original cost (net of accumulated depreciation
or amortization) or fair value (net of selling and disposition costs) and
presented in thousands, as follows:
<TABLE>
<CAPTION>
Net Original Cost
----------------------------------------
Property Goodwill and Lower of
and Other Cost or
Equipment Intangible Assets Total Fair Value
--------- ----------------- ------- -----------
<S> <C> <C> <C> <C>
AS OF APRIL 2, 2000
Tandem branch offices $ 619 $5,284 $5,903 $2,167
Synadyne division -- 242 242 242
------ ------ ------ ------
$ 619 $5,526 $6,145 $2,409
====== ====== ====== ======
AS OF DECEMBER 31, 1999
Tandem branch offices $ 640 $5,279 $5,919 $2,250
Synadyne division -- 189 189 189
------ ------ ------ ------
$ 640 $5,468 $6,108 $2,439
====== ====== ====== ======
</TABLE>
As part of the Restructuring efforts, the Company classified assets with a
carrying value of $11.8 million as assets held for disposition. As described
above, the Company sold Tandem branch offices and the corporate support center
building, with a combined carrying value of $8.1 million during the third and
fourth quarters of FY 1999 and Q1 2000. Certain Synadyne assets, with a carrying
value of $1.3 million, were removed from such classification as of December 31,
1999 when it became apparent that they would not be sold in connection with the
sale of the Synadyne operations on April 8, 2000. The Company expects to sell or
abandon the remainder of the assets held for disposition before October 31,
2000.
The Tandem operations held for sale as of April 2, 2000, as well as those sold,
franchised, closed or consolidated as part of the Restructuring prior to that
date, recorded revenues of $10.6 million, $63.1 million, $67.2 million and $42.3
million for Q1 2000, FY 1999, FY 1998 and FY 1997. The income (loss) before
taxes for these operations, on a basis consistent with the segment information
presented in Note 15, was a ($0.3) million net loss, ($1.8) million net loss,
($0.3) million net loss and net income of $1.3 million for Q1 2000, FY 1999, FY
1998 and FY 1997, respectively. See Note 15 for Synadyne segment information.
NOTE 4. ACQUISITIONS
Goodwill and other intangible assets consist of the following amounts, which are
presented in thousands and, with respect to the December 31, 1999 balances, are
after the effect of (i) the impairment reduction discussed later in this note,
(ii) the reclassification of assets identified for disposition, including the
sale of a former Tandem office in Nevada, North Carolina and South Carolina -
see Note 3 and (iii) the sale of the Office Ours division - see Note 3:
F-17
<PAGE> 95
NOTE 4. ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
December 31,
April 2, ---------------------- Weighted Average
2000 1999 1998 Amortization Periods
------- ------- ------- --------------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Goodwill $23,809 $23,809 $32,806 30.2
Territory rights 20,398 20,398 24,743 34.3
Customer lists 7,720 7,720 10,105 6.5
Covenants not to compete 1,561 1,561 2,191 9.0
Employee lists 291 291 417 0.1
------- ------- -------
Goodwill and other intangible assets 53,779 53,779 70,262 27.6
Less accumulated amortization 7,996 7,262 6,000
------- ------- -------
Goodwill and other intangible assets, net $45,783 $46,517 $64,262 25.1
======= ======= ======= ====
</TABLE>
The costs of each acquisition have been allocated to the assets acquired and
liabilities assumed based on their fair values at the date of acquisition as
determined by management with the assistance of an independent valuation
consultant.
The following acquisitions have been accounted for as purchases. The results of
operations of the acquired businesses are included in the Company's consolidated
statements of operations from the effective date of acquisition. The additional
payments based on future gross profit of certain acquired businesses are not
contingent on the continued employment of the sellers. Such additional amounts,
if paid, will be recorded as additional purchase price and increase goodwill.
The purchase prices are stated before adjustments to reflect imputed interest on
acquisition financing and do not include acquisition related professional fees
and other costs capitalized as additional purchase price.
In addition, effective August 15, 2000, the Company, as part of its refinancing
efforts, renegotiated its unpaid acquisition notes payable, which are
subordinated to the Company's bank financing. The Company's outstanding
obligation for these acquisition notes payable was $6.9 million as of April 2,
2000 - see Note 17. The financing arrangements discussed below reflect the
original contractual provisions at the time of acquisition.
In January 1995, the Company purchased the franchise rights for two staffing
locations and converted these locations to Company-owned locations. At the time
of the transaction, three of the four shareholders of the franchise were
shareholders with a cumulative controlling interest in the Company. Therefore,
the acquisition was accounted for as a business combination of entities under
common control and treated as the purchase of the remaining minority interest in
the franchise. No material tangible assets were acquired. During 1995 and 1996,
$0.3 million and $1.1 million, respectively, of the purchase price was accrued,
with $0.2 million and $1.0 million payable to shareholders of the Company in
1995 and 1996, respectively, recorded as a distribution and the remainder as
goodwill. The Company agreed that the remaining payments to the minority
interest would be no less than $40,000 per year from 1997 through 1999 and no
less than $150,000 on a cumulative basis for that three year period. In December
1997, the Company paid $141,000 to the minority interest, which was the final
amount due under the renegotiated terms of the purchase agreement.
In April 1996, the Company purchased the franchise rights for eight flexible
staffing locations and converted these locations to Company-owned locations.
Some shareholders of the two franchises were shareholders of the Company but did
not hold a controlling interest in the Company. The terms of the purchase, as
set forth in
F-18
<PAGE> 96
NOTE 4. ACQUISITIONS (CONTINUED)
an asset purchase agreement, required the Company to pay $4.9 million with $0.8
million due at closing and a note for the remainder to be paid in 60 monthly
installments plus 10.0% per annum interest through July 1, 1996 and 14.0% per
annum interest thereafter. On February 21, 1997, these payment terms were
renegotiated. The renegotiated terms called for a payment of $1.3 million
against the outstanding balance and a note for the remainder of $2.6 million to
be paid in 48 equal monthly installments including interest of 14.0% per annum,
commencing April 1, 1997, but fully payable at the time of an initial public
offering. The remaining outstanding balance was accordingly paid at the time of
the Offering, except for $0.1 million repaid in March 1998.
During 1997, the Company purchased the franchise rights from three franchisees
for 13 flexible staffing locations and converted these locations to
Company-owned locations. The total purchase price was $11.1 million in cash and
notes. During 1997, the Company also purchased five flexible staffing
operations, none previously affiliated with the Company, with 17 locations. The
total initial purchase price was $14.2 million in cash and notes, plus certain
sellers received options to purchase a total of 8,126 shares of the Company's
common stock at their fair market value at the date of issuance. Such options
were issued March 12, 1997 and were still outstanding at April 2, 2000 - see
Note 11. During 1997 and 1998, the initial contractual purchase prices of the
two of the aforementioned acquisitions were reduced by a total of $0.6 million,
based on the gross profit from the acquired locations for the two years
following the acquisition.
During the first quarter of 1998, the Company purchased the franchise rights
from four franchisees for six flexible staffing locations and converted these
locations to Company-owned locations. The total purchase price was $5.5 million
in cash and notes. During the first quarter of 1998, the Company also purchased
two flexible staffing operations, none previously affiliated with the Company,
with 18 locations. The total purchase price was $4.8 million in cash and notes.
Immediately following one of the acquisitions, the Company sold four of the
acquired locations to a franchisee of the Company in exchange for the issuance
of a $0.8 million note, payable over five years plus interest at 8.0% per annum.
During the first quarter of 1998, the Company purchased 100% of the common stock
of Employment Consultants, Inc., X-tra Help, Inc. and Co-Staff, Inc. (none
previously affiliated with the Company), which were flexible staffing operations
with four locations. The total purchase price (which includes $2.5 million for
the excess of net tangible assets over liabilities assumed) was $11.7 million,
paid in cash, notes and $0.8 million in the Company's common stock (57,809
shares) delivered at closing. One of the notes may increase without limit or
decrease by up to $875,000 based on the gross profit from the acquired locations
for the two years following the acquisition. For example, in the event gross
profit for those two years was equal to 1997 gross profit, the note would
decrease by approximately $125,000 or, in the event gross profit increased by
25% in each of those two years as compared to the prior year, the note would
increase by approximately $150,000. Based on performance stipulations, the note
to the seller was increased by $0.1 million in FY 1999. Certain sellers received
options to purchase a total of 6,000 shares of the Company's common stock at
fair market value on the date of issuance. Such options were issued January 31,
1998 and were still outstanding at April 2, 2000.
Effective February 16, 1998, the Company purchased the franchise rights from one
franchise group for four flexible staffing locations and converted these
locations to Company-owned locations. The shareholders of the franchise group
are shareholders of the Company but do not hold a controlling interest in the
Company. The purchase price was $6.9 million, with $5.0 million paid in cash at
closing plus the issuance of a note for $1.7 million bearing interest at 7.25%
per annum (imputed at 8.75% for financial statement purposes) and payable
quarterly over three years. The remaining $0.2 million of purchase price
represents the Company's assumption of approximately $0.1 million of the
seller's liabilities under certain employment contracts and the Company's
agreement to reduce by approximately $0.1 million the sellers' obligation to the
Company in
F-19
<PAGE> 97
NOTE 4. ACQUISITIONS (CONTINUED)
connection with the termination of their remaining franchise agreements with the
Company - see Note 11. See Note 8 regarding options for certain franchise
territories also granted in connection with this transaction. During the second
quarter of 1998, the Company also purchased the franchise rights from three
franchisees for five flexible staffing locations and converted these locations
to Company-owned locations. The total purchase price was $1.6 million in cash
and notes.
During the second quarter of 1998, the Company purchased four flexible staffing
operations, none previously affiliated with the Company, with a total of five
locations. The total purchase price was $9.2 million, with $7.1 million paid in
cash at closing (which included $0.9 million placed in escrow) plus notes issued
for $2.1 million. The escrowed portion was payable to one of the sellers
approximately fourteen months after closing, less any portion paid to the
Company as compensation for any losses resulting from certain breaches of one of
the asset purchase agreements. The Company was obligated for (i) an additional
payment to one of the sellers equivalent to any increase in the amount of gross
profit of the locations acquired from such seller for the twelve months ending
May 31, 1999, as compared to the greater of a contractually defined amount or
the gross profit of those locations for the twelve months ended March 31, 1998
and (ii) an additional payment up to $0.2 million, of which the Company paid
$0.2 million to the seller in FY 1999, contingent primarily upon the gross
profit of one of the acquired locations for the twelve months following the
acquisition.
During the third and fourth quarters of 1998, the Company (i) purchased the
franchise rights from two franchisees for three flexible staffing operations and
converted these locations to Company-owned locations and (ii) purchased certain
PEO operations from an unaffiliated party which were immediately transferred to
existing Company locations. The total purchase price was $1.2 million in cash
and the Company's assumption of liabilities. Approximately $0.1 million of this
purchase price is contingent upon the gross profit of certain of the acquired
locations for the three years following the acquisition, and this amount may
increase to $0.5 million. The Company was obligated for additional payments to
another of the sellers of up to $125,000 based on the gross profit of the
location acquired from such seller for the twelve months ended December 31, 1998
and the workers' compensation premium related to that location for the six
months ended December 31, 1998. As of April 2, 2000, no additional payments had
been made by the Company based on the aforementioned contractual stipulations.
PRO FORMA RESULTS OF OPERATIONS: The following unaudited pro forma results of
operations have been prepared assuming the 1998 acquisitions described above had
occurred as of the beginning of the periods presented, including adjustments to
the historical financial statements for additional amortization of intangible
assets, increased interest on borrowings to finance the acquisitions and
discontinuance of certain compensation previously paid by the acquired
businesses to their shareholders. The unaudited pro forma operating results are
not necessarily indicative of operating results that would have occurred had
these acquisitions been consummated as of the beginning of the period 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 an attempt to obtain the most complete and reliable financial
information and believes that the financial information it used is materially
accurate, although the Company has not independently verified such information.
F-20
<PAGE> 98
NOTE 4. ACQUISITIONS (CONTINUED)
The pro forma operating results include 1998 acquisitions which have been
disposed of or identified as subject to disposition as part of the Restructuring
- see Note 3. These 1998 acquisitions, as well as the Wisconsin operations
discussed below, recorded historical revenues for the year ended December 31,
1999 and Q1 2000 of $15.3 million and $0.0 million, respectively, and the pro
forma results include revenues for these operations for FY 1998 of $21.3
million. The Company sold the operating assets of its 1998 Tandem staffing
office acquisition in Wisconsin to an affiliate of the former owner on October
25, 1999 for $2.4 million, comprised of $0.4 million in cash, a promissory note
of $1.1 million and cancellation of the Company's remaining indebtedness to the
buyer of $0.9 million arising from the original acquisition. As part of this
transaction, the Company cancelled covenants not to compete previously given to
it by the buyers and certain affiliates and agreed not to compete for 60 months
in certain Wisconsin counties. In addition, the buyer agreed not to compete in
certain other Wisconsin counties for 60 months and granted the Company a seven
year, first right-of-refusal on any subsequent sale by the buyer of the acquired
business.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997
-------- ---------
(Amounts in Thousands, Except Per Share Data)
<S> <C> <C>
Unaudited Pro Forma:
Net revenues $584,991 $551,301
Operating (loss) income 13,108 15,839
Income before provision for income taxes and extraordinary item 6,934 1,700
Income before extraordinary item 5,124 1,188
</TABLE>
The following unaudited pro forma information, as adjusted, has been prepared on
the same basis as the preceding data and also reflects the pro forma adjustment
for income taxes and weighted average shares outstanding as disclosed in the
Company's consolidated balance sheets, except that the number of weighted
average shares has been increased by 57,809 basic and 143,701 diluted shares for
the year ended December 31, 1997 and 4,923 basic and diluted shares for the year
ended December 31, 1998, in order to reflect adjustments for (i) the calculation
of proceeds from the exercise of warrants associated with certain debt utilized
to finance the above acquisitions and (ii) the timing of the issuance of common
stock and options in connection with those acquisitions.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997
-------- ---------
(Amounts in Thousands, Except Per Share Data)
<S> <C> <C>
Unaudited Pro Forma as Adjusted:
Income before provision for income taxes
and extraordinary item $ 6,934 $ 1,700
Pro forma provision for income taxes 1,810 877
---------- ----------
Pro forma income before extraordinary item $ 5,124 $ 823
========== ==========
Weighted average common shares outstanding:
Basic 8,608,444 6,113,248
========== ==========
Diluted 9,924,415 7,464,063
========== ==========
Earnings per share, before extraordinary item:
Basic $ .60 $ .13
========== ==========
Diluted $ .52 $ .11
========== ==========
</TABLE>
In accordance with SFAS No. 121, management assesses on an ongoing basis if
there has been an impairment in the carrying value of its long-lived assets.
During the third and fourth quarters of 1999, it was determined that the
undiscounted future cash flows over the remaining amortization period of certain
intangible assets indicated that the value assigned to the intangible asset
might not be recoverable, and as such, the carrying value of the respective
intangible asset was reduced. The operating results of these acquired offices
had declined over time, primarily due to the attrition of customers existing as
of the respective acquisition dates. The amount of the impairment ($2.6 million
included in operating expenses for FY 1999) was primarily determined by
comparing anticipated discounted future cash flows from the acquired businesses
with the carrying value of the related assets. In performing this analysis,
management considered such factors as current results, trends and future
prospects, in addition to other relevant factors.
The original carrying value of the goodwill and other intangible assets exceeded
the discounted projected cash flow by approximately $2.1 million for five 1997
and 1998 Tandem acquisitions. The Company also recorded an impairment as of
September 30, 1999 of $0.4 million based on the October 1999 sale of its 1998
Tandem acquisition in Wisconsin, as discussed above. In addition, the Company
recognized an impairment of $0.1 million arising from doubt concerning the
Company's ability to enforce a non-compete agreement with the former owner of an
acquisition in Illinois.
F-21
<PAGE> 99
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
April 2, December 31,
--------- --------------------------
2000 1999 1998
-------- --------- ---------
(Amounts in Thousands)
<S> <C> <C> <C>
Buildings and land $ 816 $ 816 $ 6,210
Furniture, fixtures and equipment 8,303 7,766 9,158
Computer software 6,421 6,364 6,187
Leasehold improvements 2,111 2,059 2,756
Vehicles 497 516 592
-------- -------- --------
Property and equipment 18,148 17,521 24,903
Less accumulated depreciation and amortization (8,994) (8,290) (7,275)
-------- -------- --------
Property and equipment, net $ 9,154 $ 9,231 $ 17,628
======== ======== ========
</TABLE>
Depreciation and amortization expense for property and equipment for Q1 2000, FY
1999, FY 1998 and FY 1997 was $0.7 million, $3.4 million, $3.1 million, and $2.3
million, respectively.
As part of the Restructuring, during FY 1999 the Company classified certain
assets previously recorded as property and equipment to assets held for
disposition. The carrying value of those assets transferred was comprised of (i)
the corporate support center building, (ii) furniture, fixtures and equipment,
(iii) software, and (iv) leasehold improvements, was $6.7 million. In addition,
assets with a carrying value of $0.4 million were sold as part of the
disposition of Office Ours - see Note 3.
NOTE 6. INCOME TAXES
The net deferred tax asset as of April 2, 2000, December 31, 1999 and 1998
includes deferred tax assets and liabilities attributable to the items in the
table below, including amounts recorded as a result of the February 21, 1997
termination of the elections by the Initial Subsidiaries to be treated as S
corporations, in thousands:
F-22
<PAGE> 100
NOTE 6. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
April 2, December 31,
-------- -------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CURRENT:
Workers' compensation accrual $ 4,511 $ 4,766 $ 4,048
Debt discount and valuation adjustment related to warrants -- -- 678
Allowance for doubtful accounts 536 935 741
Change from cash to accrual tax basis (386) (499) (483)
Net operating loss carryforward -- 2,899 --
Employment tax credit carryforward -- 2,179 1,476
Restructuring costs 868 1,168 --
Other 74 320 (91)
-------- -------- --------
Net current deferred tax asset, included in prepaid
expenses and other current assets 5,603 11,768 6,369
-------- -------- --------
NON CURRENT:
Fixed assets and intangible assets basis differences 2,404 2,030 (646)
Net operating loss carryforward 4,420 -- --
Employment tax credit carryforward 2,327 (11) (540)
Other 148 285 549
-------- -------- --------
Net non-current deferred tax asset (liability) 9,299 2,304 (637)
-------- -------- --------
Net deferred tax asset before valuation allowance 14,902 14,072 5,732
Less: Valuation allowance (14,902) (14,072) --
-------- -------- --------
Net deferred tax asset $ -- $ -- $ 5,732
======== ======== ========
</TABLE>
In FY 1998, the net current deferred tax asset of $6.4 million is included in
other current assets and the net non-current deferred tax liability of $0.6
million is included in other non-current liabilities.
The provision for income taxes in FY 1999 consists of the valuation allowance of
$14.1 million offset by potential tax benefits of $9.9 million resulting from
losses incurred in that period, and was increased by the $0.9 million tax
benefit resulting from losses during Q1 2000. The valuation allowance was
established by the Company in FY 1999, and increased in Q1 2000, because it was
not clear that utilization of the tax benefits resulting from operating losses
and other temporary differences were "more likely than not" to be realized, as
required by SFAS 109.
During the quarter ended July 2, 2000, the Company reduced the deferred tax
asset valuation allowance by $7.7 million, which is expected to be realized
through utilization of the existing net operating loss carryforward, relating to
the extinguishment gain to be recorded in the quarter ending October 1, 2000
(see Note 7), and through taxable income from future operations. The Company's
expectations of future taxable income are consistent with past operating history
and do not incorporate operating improvements to achieve such income. The
Company's provision for income taxes may be impacted by adjustments to the
valuation allowance that may be required if management's assessment changes
regarding the realizability of the deferred tax assets in future periods.
The employment tax credit carryforward of $2.3 million as of April 2, 2000 will
expire during the years 2012 through 2020. The employment tax credits recorded
by the Company from February 21, 1997 through December 31, 1999 include Federal
Empowerment Zone ("FEZ") credits which represent a net tax benefit of $0.6
million. Although the Company believes that these FEZ credits have been
reasonably determined, the
F-23
<PAGE> 101
NOTE 6. INCOME TAXES (CONTINUED)
income tax law addressing how FEZ credits are determined for staffing companies
is evolving and the Company's position with regard to the calculation of the FEZ
credit has been challenged by the Internal Revenue Service.
During FY 1999, the Company received a preliminary report from the IRS 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. Since that time, and as a result of analysis and discussions with
the Company, the proposed adjustments have been modified. The Company is
currently evaluating the merits of these proposed adjustments with the original
shareholders. Since the subsidiaries were "S" corporations for the periods under
examination, the proposed adjustments, if ultimately accepted or proven to be
appropriate, would not result in a materially unfavorable effect on the
Company's results of operations, although additional shareholder distributions,
of at least $2.0 million, could result as discussed in Note 8.
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
Quarter Ended Year Ended December 31,
-------------- ----------------------------------------------
April 2, 2000 1999 1998 1997
------------- -------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Federal - Current $ -- $ (1,816) 1,682 $ 2,054
State - Current -- 208 362 494
Federal - Deferred (766) (6,637) (357) (2,235)
State - Deferred (132) (1,704) (76) (382)
-------- -------- -------- --------
Income tax provision (benefit) (898) (9,949) 1,611 (69)
Change in valuation allowance 898 14,072 -- --
-------- -------- -------- --------
Income tax provision (benefit) $ -- $ 4,123 $ 1,611 $ (69)
======== ======== ======== ========
</TABLE>
During FY 1997, the Company recorded a $6.6 million income tax benefit as a
direct reduction of the extraordinary loss arising from early debt retirement -
see Note 7. The extraordinary expense of $1.4 million recognized by the Company
in FY 1998 represents a reduction of the FY 1997 tax benefit, arising from the
final valuation for income tax purposes of the deduction allowable to the
Company related to warrants to purchase 392,896 shares of the Company's common
stock. The warrants were issued by the Company and placed into escrow in FY 1997
but the ultimate recipient was not determined until February 21, 1999 - see Note
7. Although the Company recognized a tax benefit in FY 1997 associated with the
debt discount amortization expense for these warrants, the benefits were
initially recorded as a deferred tax asset since these expenses would be tax
deductible by the Company as interest expense only if and when the warrants were
released to the Senior Note Holders and only to the extent of the fair value of
the warrants upon release. As the public market price of the Company's shares on
February 21, 1999 was less than the public market price on the Offering
valuation date, the estimated tax benefit initially recorded was adjusted to the
tax benefit as finally determined. In addition to the $1.4 million extraordinary
item, another $141,000 expense was included in the Company's FY 1998 income tax
provision due to the adjustment for tax return purposes of the FY 1997 put
warrants valuation adjustment - see Note 7 associated with these warrants.
F-24
<PAGE> 102
NOTE 6. INCOME TAXES (CONTINUED)
The Company's effective tax rate differed from the statutory federal rate of
35%, as follows:
<TABLE>
<CAPTION>
Quarter Ended For the Year Ended December 31,
------------- --------------------------------------------------------
April 2, 2000 1999 1998 1997
--------------- ----------------- --------------- -------------
(Amounts in Thousands): Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- -------- ---- -------- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statutory rate applied to income before
income taxes and extraordinary item $(932) (35.0)% $ (9,364) (35.0)% $ 2,272 35.0% $ 249 35.0%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit (88) (3.3) (987) (3.7) 189 2.9 74 10.4
Effect of termination of S corporation status -- -- -- -- -- -- (424) (59.6)
Loss prior to termination of S corporation status -- -- -- -- -- -- 59 8.2
Put warrants valuation adjustment -- -- -- -- 141 2.2 445 62.6
Employment tax credits (97) (3.6) (285) (1.1) (975) (15.0) (551) (77.4)
Nondeductible expenses 29 1.1 299 1.1 215 3.3 57 8.0
Other 189 7.1 388 1.5 (231) (3.6) 22 3.1
----- ----- -------- ----- -------- ----- ----- -----
Total before change in valuation allowance (899) (33.7) (9,949) (37.2) 1,611 24.8 (69) (9.7)
Change in valuation allowance 899 33.7 14,072 52.6 -- -- -- --
----- ----- -------- ----- -------- ----- ----- ----
Total -- -- % $ 4,123 15.4 % $ 1,611 24.8 % $ (69) (9.7)%
===== ===== ======== ===== ======== ===== ===== ====
</TABLE>
NOTE 7. DEBT
SENIOR DEBT FACILITIES
For a discussion of refinancing of debt facilities subsequent to April 2, 2000,
see Note 17.
F-25
<PAGE> 103
NOTE 7. DEBT (CONTINUED)
As of April 2, 2000, the Company's primary sources of funds for working capital
and other needs were (i) a $25.5 million credit line (the "Revolving Credit
Facility"), including existing letters of credit of $5.0 million and (ii) a
$50.0 million credit facility, based on and secured by the Company's accounts
receivable (the "Receivable Facility"), with the Fleet Group. Effective April
13, 2000, due in part to the sale of the Company's Synadyne operation, the
maximum availability under the Receivable Facility was reduced from $50.0
million to $33.0 million. Effective May 1, 2000, the maximum availability under
the Revolving Credit Facility was reduced from $25.5 million to $25.3 million
(including existing letters of credit of $4.8 million), and effective in June
2000, the maximum availability under the Revolving Credit Facility was increased
to $26.1 million to provide for the Company's seasonal increase in working
capital requirements.
Prior to their expiration, the Receivable Facility bore interest at Fleet's
prime rate plus 2.0% per annum, which was 11.0% and 10.5% as of April 2, 2000
and December 31, 1999, respectively, while the Revolving Credit Facility bore
interest at prime plus 5.0% per annum, which was 14.0% and 13.5% as of April 2,
2000 and December 31, 1999, respectively. The weighted average interest rate
payable on the outstanding balances during the period, exclusive of related fees
and expenses, was approximately 12.0% per annum in Q1 2000, compared to
approximately 7.1% per annum under the previous agreements. As of April 2, 2000
and December 31, 1999, the Company had outstanding borrowings of $16.2 million
and $14.9 million under the Revolving Credit Facility and $34.6 million and
$42.2 million under the Receivable Facility, respectively.
The above agreements with the Fleet Group, which were effective October 1, 1999
replaced the previously existing $50.0 million securitization facility (the
"Securitization Facility") and amended the previously existing $29.9 million
revolving credit facility (which included letters of credit of $8.4 million) (i)
reducing the maximum availability to $25.5 million, including existing letters
of credit of $5.0 million, (ii) eliminating certain financial covenants and
(iii) adding events of default, including a provision enabling the lenders'
syndicate to increase the stated interest rate and/or accelerate the maturity
date of the facility if, in their sole discretion, the lenders were not
satisfied with the Company's business operations or prospects. Outstanding
amounts under the Revolving Credit Facility were 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. The agreements also contained terms that
increased the weighted average interest rate payable on the outstanding balances
during the period, exclusive of related fees and expenses and not including a
higher default rate, to approximately 11.2% per annum as of December 31, 1999,
and subsequently 12.0% per annum as of April 2, 2000, compared to approximately
7.1% per annum under the old agreements.
Due to the modification of terms discussed above, the Company recorded a $1.4
million expense in the fourth quarter of 1999 from the acceleration of the
amortization of certain loan fees, offset by a gain of $0.3 million from the
sale of the interest rate hedge. In addition, the Company paid an initial fee
related to the Receivable Facility in the fourth quarter of 1999 that was
approximately equal to another 1.0% per annum for the three-month term of that
loan plus legal fees and other expenses related to both facilities totaling
approximately $0.3 million.
The previously existing Securitization Facility, which was terminated October 1,
1999, was a financing arrangement under which the Company could sell up to a
$50.0 million secured interest in its eligible accounts receivable to
EagleFunding Capital Corporation ("Eagle"), which used the receivables to secure
A-1 rated commercial paper. The Company's cost for this arrangement was
classified as interest expense and was based on the interest paid by Eagle on
the balance of the outstanding commercial paper, which in turn was determined by
prevailing interest rates in the commercial paper market and was approximately
5.65% as of
F-26
<PAGE> 104
NOTE 7. DEBT (CONTINUED)
December 31, 1998. As of December 31, 1998, a $44.8 million interest in the
Company's uncollected accounts receivable had been sold under this agreement and
was excluded from the accounts receivable balance presented in the Company's
Consolidated Financial Statements.
In addition to the Revolving Credit Facility indebtedness discussed above, the
Company had bank standby letters of credit outstanding in the aggregate amount
of $5.0 million as of April 2, 2000, of which $4.3 million secured the pre-FY
1999 portion of the workers' compensation obligations recorded as a current
liability on the Company's Consolidated Balance Sheet. The remaining $0.7
million, which is supported by a $0.8 million cash escrow balance, is to secure
future payments on a capital lease for furniture that was sold as part of the
Company's corporate headquarters building.
During April 1999 the Company received $1.6 million from a financial institution
in connection with a sales/leaseback transaction, which amount exceeded, at the
time of the transaction, the net book value of the property and equipment
previously purchased by the Company. The unrealized gain is being deferred and
amortized over the life of the assets. The capital lease obligation is repayable
over three years at an imputed interest rate of approximately 10.0%.
SUBORDINATED DEBT
In order to remain in compliance with certain covenants in the Revolving Credit
Facility, and to reduce the cash impact of scheduled payments under its
subordinated acquisition debt, the Company negotiated extensions of the payment
dates and modified the interest rates and other terms of certain of its
acquisition notes payable in 1999. The Company had not made substantially all of
the scheduled payments due and, as a result, was in default on acquisition notes
payable having a total outstanding principal balance of $6.9 million as of April
2, 2000. The terms of the acquisition notes payable, which were subordinated to
the Revolving Credit Facility and the Receivable Facility, allowed the payees to
accelerate terms of payment upon default. Acceleration of this debt required
prior written notice to the Company by the various payees, which was received
from three payees as of April 2, 2000 -- see Note 17.
SENIOR NOTES
On February 21, 1997, following the Reorganization, the Company entered into
senior subordinated note agreements ("Senior Notes") with two investors (the
"Senior Note Holders") for borrowings totaling $25 million, with payments of $10
million in March 2001 and $15 million in February 2002, and quarterly interest
payments at 11% per annum through February 1999 and 12.5% thereafter. The Senior
Notes were repaid in full from the proceeds of the Offering. The Company also
issued to the Senior Note Holders warrants to purchase 786,517 shares of common
stock at $0.01 per share to be exercised at the discretion of the Senior Note
Holders and expiring five years from issuance (the "A warrants"). These warrants
had not been exercised as of April 2, 2000.
In connection with the Senior Notes, warrants to purchase 573,787 shares of the
Company's common stock at $0.01 per share were issued by the Company and placed
into escrow. In April 1997, warrants to purchase 180,891 shares (the "B
warrants") were released from escrow to the Company's shareholders as of
February 21, 1997, as a result of the Company's consummation of the last of
certain acquisitions in accordance with
F-27
<PAGE> 105
NOTE 7. DEBT (CONTINUED)
conditions of the agreements related to the Senior Notes. As of April 2, 2000,
29,575 of the B warrants had not been exercised and expire in February 2002. The
terms for the release of the remaining warrants to purchase 392,896 shares (the
"C warrants") provided for their release to either (i) 100% to the Senior Note
Holders, (ii) 100% to the then existing Company shareholders or (iii) 50% to
each group, depending on certain conditions including the market valuation, over
the two year period ended February 21, 1999, of the A warrants. One hundred
percent of the C warrants were released to the Senior Note Holders. The warrants
in escrow are exercisable any time after being released from escrow and expire
in February 2002.
The A, B and C warrants all contained a put right, whereby the Company would be
required at the holder's option to purchase the warrants for the "publicly
traded" fair value of those warrants should the Company not consummate a
qualified initial public offering, as defined in the warrant agreement, by
February 2001. This put right was terminated as a result of the Company's
October 1997 Offering.
The proceeds of the Senior Notes were recorded as a liability. The fair value of
the A, B and C warrants was recorded as debt discount, which was a
contra-account to the Senior Notes liability and was periodically amortized
using the interest method, resulting in a level effective rate of 55.7% per
annum applied to the sum of the face amount of the debt less the unamortized
discount. Interest expense (including discount amortization of $0.7 million) of
$2.6 million was recorded related to these Senior Notes for the year ended
December 31, 1997.
The B and C warrants were designed to provide the Senior Note Holders with
additional consideration for their $25 million investment if certain performance
criteria (in the case of the B warrants) were not met or if certain triggering
events (in the case of the C warrants) did not occur. Therefore, the value of
the B and C warrants was, in substance, embedded within the $25 million
subordinated debt proceeds and, as such, was accounted for in the same manner as
the A warrants. Accordingly, the amount allocated from the $25 million
subordinated debt proceeds to the detachable stock purchase warrants included
the fair value of the B and C warrants. The original debt discount was $18.5
million, based on the fair value of the A, B and C warrants as determined by an
independent appraiser as of the date of their issuance.
Due to the put option included in all of the warrants, their fair value of $18.5
million at the date of issuance was classified as a liability which was adjusted
to fair value at each reporting date until the put option terminated. This
liability was adjusted to a fair value of $20.4 million as of October 24, 1997,
with the cumulative adjustment of $1.8 million included in non-operating expense
for the year ended December 31, 1997. The fair value of the warrants recorded as
of October 24, 1997 was equal to the price of the Company's shares sold to the
public at that time (see Note 1), less the warrant exercise price. As a result
of the termination of the put right at the time of the Company's October 1997
Offering, the final put warrants liability was reclassified from debt to
additional paid-in capital at that time.
The Company incurred $2.4 million of costs related to the issuance of the Senior
Notes, which were recorded in other non-current assets and amortized to interest
expense using the interest method. Amortization of $0.2 million was recorded for
the year ended December 31, 1997.
As a result of the early repayment of the Senior Notes in October 1997, the
Company recorded an extraordinary loss of $13.4 million (net of a $6.6 million
income tax benefit). This loss consists of the unamortized debt discount and the
unamortized debt issuance costs related to the Senior Notes. See Note 6
regarding the 1998 extraordinary expense of $1.4 million recognized by the
Company which represents the reduction of the 1997 income tax benefit, arising
from the final valuation for income tax purposes of the deduction allowable to
the Company related to the unamortized debt discount.
F-28
<PAGE> 106
NOTE 7. DEBT (CONTINUED)
LONG-TERM DEBT :
<TABLE>
<CAPTION>
December 31,
April 2, ----------------------
2000 1999 1998
-------- -------- -------
(Amounts in Thousands)
<S> <C> <C> <C>
Obligations under capital leases. See discussion below $ 2,754 $ 3,068 $ 2,217
Acquisition notes payable, subordinated to the Revolving Credit
Facility and payable over three years at imputed interest rates
from 8.75% to 12.5% per annum. See Note 4 5,753 5,723 9,156
Mortgage notes payable in monthly installments and collateralized
by buildings and land. The interest rates range from 8.0% to
9.5% per annum 565 570 4,229
Notes payable in monthly installments and collateralized
by property and equipment. The interest rates range from 8.25% to
13.7% per annum 142 160 119
Insurance premium notes payable 355 216 318
------- ------- -------
Long-term debt 9,569 9,737 16,039
Less current maturities of long-term debt 7,635 7,437 6,782
------- ------- -------
Long-term debt, less current maturities $ 1,934 $ 2,300 $ 9,257
======= ======= =======
</TABLE>
The Company had an acquisition note payable, subordinated to the Revolving
Credit Facility, due to a shareholder of the Company, which is not included in
the table above, with an outstanding balance of $1.2 million, $1.2 million and
$1.3 million as of April 2, 2000, December 31, 1999 and 1998, respectively. See
Note 12 to the Company's Consolidated Financial Statements. As discussed above
and in Note 2 to the Company's Consolidated Financial Statements, certain of the
Company's acquisition notes payable, subordinated to the Company's bank
financing, were in default until August 15, 2000, at which time these notes were
renegotiated.
The aggregate annual principal payments on long-term debt (including obligations
under capital leases) were as follows as of April 2, 2000, in thousands:
2001 $ 7,635
2002 1,362
2003 452
2004 42
2005 14
Thereafter 64
-------
$ 9,569
=======
CAPITAL LEASES: From December 1996 to December 1997, the Company occupied an
office building as its corporate office and support center under a 15-year
capital lease agreement with an unrelated party, having annual lease payments of
approximately $0.6 million. The Company had an option to buy the building during
the first two years of the lease term and in December 1997 it exercised that
option. Prior to that purchase, the capitalized costs relating to this lease
were equal to the purchase option price. The building was subsequently sold on
December 29, 1999 (see Note 3).
F-29
<PAGE> 107
NOTE 7. DEBT (CONTINUED)
Furniture, fixtures, equipment and computer software held under capital leases
and included in property and equipment were $2.1 million, $2.3 million and $2.2
million, net of accumulated depreciation of $1.9 million, $1.7 million and $0.9
million, as of April 2, 2000, December 31, 1999 and 1998, respectively.
The following is a summary of future minimum lease payments, and their present
value, required under all capital leases for the fiscal years ended after April
2, 2000, in thousands:
2001 $ 1,580
2002 1,351
2003 141
2004 8
Thereafter --
-------
Total future minimum lease payments 3,080
Less amount representing interest 326
-------
Present value of net minimum lease payments $ 2,754
=======
NOTE 8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS: The Company conducts its operations in various leased
facilities under leases that are classified as operating leases for financial
reporting purposes. The leases provide for the Company to pay real estate taxes,
common area maintenance and certain other expenses. Lease terms, excluding
renewal option periods exercisable by the Company at escalated rents, expire
between 2000 and 2005. Also, certain equipment used in the Company's operations
is leased under operating leases. The following is a summary of fixed minimum
lease commitments required under all noncancellable operating leases for the
fiscal years ended after April 2, 2000, in thousands.:
2001 $ 3,391
2002 2,708
2003 1,325
2004 840
2005 620
Thereafter 303
-------
$ 9,187
=======
Rent expense, including equipment rental, was $0.3 million, $3.4 million, $3.4
million, and $2.2 million during Q1 2000, FY 1999, FY 1998, and FY 1997,
respectively.
As a result of the corporate support center workforce reductions and the
anticipated disposition of Synadyne, the corporate support center building was
put on the market for sale in September 1999 and was sold in an arms-length
transaction to an unaffiliated third party, effective December 29, 1999. The
buyer agreed to lease the building back to the Company for a term ending May 6,
2000. In February 2000, the Company leased a total of 32,553 square feet as its
new corporate support center in an office building in Delray Beach,
F-30
<PAGE> 108
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Florida, with move-in date of May 1, 2000. The total obligation for the
Company's 64-month lease commitment is $2.2 million.
FRANCHISE AGREEMENTS: The Company had granted 29, 27, 24 and 55 Tandem
franchises (some covering multiple locations) which remained outstanding as of
April 2, 2000, December 31, 1999, 1998 and 1997, respectively. In consideration
for royalties paid by the franchise holders, the agreements provide, among other
things, that the Company will provide the franchise holder with the following
for terms ranging from 10 to 15 years with varying renewal options: exclusive
geographical areas of operations, continuing advisory and support services and
access to the Company's confidential operating manuals.
During February 1998 and in connection with the Company's acquisition of certain
franchise rights (see Note 4), the Company granted one of the principals of the
sellers (and a minority shareholder in the Company) the exclusive option to
purchase franchise rights in five specifically identified geographic areas.
These options expire at various times from 12 to 42 months after the February
1998 acquisition date; however, as of April 2, 2000, none of these options had
been exercised.
The following tables set forth various revenues from staffing franchises, as
well as staffing franchise offices opened and purchased by the Company, and the
number of Company owned staffing locations. There are no other franchising
activities.
<TABLE>
<CAPTION>
Quarter Ended Year Ended December 31,
------------- --------------------------------------
April 2, 2000 1999 1998 1997
------------- ------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Royalties $ 763 $ 7,109 $ 7,352 $ 6,997
PEO services -- 18,009 25,199 34,642
Payroll funding services 11 70 327 713
Initial franchise fees -- -- -- 15
Other -- -- -- 15
------- ------- ------- -------
Total revenues $ 774 $25,188 $32,878 $42,382
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended Year Ended December 31,
------------- -----------------------------
April 2, 2000 1999 1998 1997
------------- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C>
Number of franchise locations, beginning 50 43 65 95
New franchise locations -- 14 10 6
Franchises closed/bought out -- (7) (15) (23)
Franchises converted to Company-owned locations -- -- (17) (13)
---- ---- ---- ----
Number of franchise locations, ending 50 50 43 65
Number of Company-owned locations 87 98 111 87
---- ---- ---- ----
Total locations 137 148 154 152
==== ==== ==== ====
</TABLE>
F-31
<PAGE> 109
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
PEO services revenues were based on the payroll and other related costs for
industrial personnel provided by the franchises to their clients, under a
relationship whereby the Company is the employer of those industrial personnel.
The Company's gross profit margin on these services is approximately 0.3% of the
related revenues. See Note 1 for a discussion of initial franchise fees,
royalties, and payroll funding services (funding advances). The Company's gross
profit margin on these services is 100% of the related revenues.
Buyouts are early terminations of franchise agreements allowed by the Company in
order to 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.
The initial buyout payment, as well as subsequent payments from the former
franchisees, are included in total royalties shown above.
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"). This distribution, supplemented by an
additional distribution made in September 1998, is subject to adjustment based
upon the final determination of taxable income through February 21, 1997.
Although the Company has completed and filed its Federal and state tax returns
for all periods through February 21, 1997, further cash 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. As a result of
the IRS audit of the years 1994 through 1996 (see Note 6), the Company expects
to make a distribution to the Company's original shareholders of at least $2.0
million.
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 was transferred to the United States
District Court, Southern District of Florida, Fort Lauderdale division. In
November, 1999, the court entered an order granting the Company's motion to
dismiss the complaint and the plaintiff has not appealed that order and the time
to appeal has expired.
On November 12, 1997, an action was commenced against the Company, alleging
state law claims of pregnancy/maternity discrimination and violations of the
Family and Medical Leave Act as a result of an alleged demotion following the
plaintiff's return from maternity leave. The complaint also asserted a claim for
unpaid overtime based on both state law and the Fair Labor Standards Act. The
plaintiff and the Company settled this case in the third quarter of 1999, with
no material impact on the Company's past or future financial condition or
results of operations.
UNEMPLOYMENT TAXES: Federal and state unemployment taxes represent a significant
component of the Company's cost of revenues. State unemployment taxes are
determined as a percentage of covered wages. Such percentages are determined in
accordance with the laws of each state and usually take into account the
unemployment history of the Company's employees in that state. The Company has
realized reductions in its state unemployment tax expense as a result of changes
in its organizational structure from time to time. Although the Company believes
that these expense reductions were achieved in compliance with applicable laws,
taxing authorities of certain states may elect to challenge these reductions.
F-32
<PAGE> 110
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company had made arrangements with several states to pay quarterly
unemployment tax payments originally due in July and October 1999 in monthly
installments over one year, bearing interest at rates ranging from 12.0% to
24.0% per annum. The unpaid balance, included in accrued payroll taxes on the
Company's April 2, 2000 consolidated balance sheet was approximately $28,000. In
addition, the Company contacted the taxing agencies of certain states to arrange
payment of payroll taxes owed, primarily for the quarter ended April 2, 2000, of
approximately $0.5 million.
FEDERAL EMPLOYMENT TAX REPORTING PENALTIES: During September 1999, the Company
was notified by the IRS of its intent to assess penalties of $500,000 related to
W-2s filed by the Company for 1997 for employees with invalid Social Security
numbers. The Company has requested an abatement of the penalty and expects that
the penalty ultimately charged will amount to approximately $300,000, which
amount was included in selling, general and administrative expenses in 1999, and
is reflected as a current liability on the Company's April 2, 2000 Consolidated
Balance Sheet. However, there can be no assurance that the Company will not be
required to ultimately pay a higher penalty in connection with this matter.
UNCLAIMED PROPERTY AUDIT: A state in which the Company conducts a significant
portion of its operations has begun and substantially completed an audit of the
Company's compliance with escheat (unclaimed property) statutes. The applicable
state escheat laws cover a wide range of situations and property types and have
a ten-year statute of limitations. In addition, it is common for states to share
information in this area. As of April 2, 2000, the Company believes, based on
preliminary discussions with the examiner, that the outcome of this audit will
be immaterial to the Company's results of operations.
INS AUDITS: The United States Immigration and Naturalization Service ("INS") had
begun audits at several of the Company's locations as to the Company's
compliance in obtaining the necessary documentation before employing certain
individuals. The Company paid a $150,000 penalty, which was charged to selling,
general and administrative expenses during 1999.
WORKERS' COMPENSATION: During FY 1997, and through FY 1999, the Company's
workers' compensation expense for claims was effectively capped at a
contractually-agreed percentage of payroll. In FY 1997 and FY 1998, the
Company's expense was limited to the cap even though the estimated ultimate cost
of the actual claims experience was greater than the cap. In FY 1999, the
estimated ultimate cost of the actual claims experience was used as the basis of
the Company's workers' compensation expense since it was approximately $1.7
million less than the cap (3.5% of payroll). The estimated ultimate cost of the
FY 1999 claims experience was determined based on information from an
independent third-party administrator employed by the Company plus an allowance
for claims incurred but not reported, based on prior experience and other
relevant data. The Company's methodology for determining workers' compensation
expense in Q1 2000 is consistent with that for calendar year 1999.
The Company routinely adjusts the accruals made in prior years for workers'
compensation claims and expenses, based on updated information from its
insurance carriers, its independent third-party administrator and its own
analysis. These adjustments are included as a component of cost of sales in the
period in which they are made. During Q1 2000, the Company increased the reserve
for FY 1999 claims by $0.2 million due to increased estimates by the third party
administrator of the processing expense from FY 1999 claims.
EMPLOYMENT AGREEMENTS: As of April 2, 2000, the Company had certain obligations
under employment agreements it had entered into with its Chief Executive Officer
("CEO"), its former CEO and thirteen other officers. Under the terms of those
agreements, in the event that the Company terminates the employment of any of
those officers without cause or the officer resigns for good reason, the
terminated officer will receive,
F-33
<PAGE> 111
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
among other things, severance compensation, including a portion (ranging from
three months to two years) of the officer's annual base salary and bonus. In
addition, all incentive stock options held by such employees would become
immediately exercisable. More substantial severance provisions apply if any of
those officers are terminated within two years (three years for the CEO) after
the occurrence of a "change of control", as defined in the employment
agreements.
Between February 1999 and May 2000 ten of the fifteen officers referred to above
resigned their positions, which resulted in the Company's agreement to pay two
of those officers' salary for two years, three of those officers' salaries for
one year and five of those officers' salaries for six months, in exchange for
their agreement, among other things, not to compete with the Company during that
period. The aggregate costs of these severance agreements total $3.0 million, of
which $0.7 million has been paid as of April 2, 2000; $1.6 million has been
accrued in the Company's April 2, 2000 Consolidated Balance Sheet for those
officers which resigned prior to April 2, 2000; and $0.7 million will be accrued
in the first quarter of fiscal year 2001.
EMPLOYEE RETENTION: The Company had entered into agreements obligating it to pay
retention bonuses to employees of the Synadyne division on April 15, 2000 if
they remained employed with the Company and Synadyne was not sold by March 31,
2000. The Company recorded its $0.3 million liability under these agreements in
the quarter ending April 2, 2000.
CONSULTING CONTRACT: In May 1999, the Company engaged Crossroads, LLC, a
consulting firm based in Newport Beach, California, to review the Company's
existing business plan and make recommendations for adjustments to strategy as
well as financial and operational improvements. In July 1999, the engagement was
modified to add additional services, including working with management to
develop the Restructuring plan and a revised business plan based on the
restructured company (see Note 3), assisting in extending the existing Revolving
Credit Facility and Securitization Facility, arranging for new financing, and
periodically reporting to the Company's Board of Directors and lenders'
syndicate. In August 1999, a representative of Crossroads was appointed as the
Company's interim chief operating officer and the interim president of the
Tandem division. In connection with services provided by Crossroads to assist in
the Restructuring, the Company incurred costs of $1.5 million through April 2,
2000, of which $0.4 million was for services provided during Q1 2000. These
amounts were included in the restructuring charge recorded by the Company in its
results of operations. The Company anticipates that it will record charges of
$0.5 million in Q1 2001 for services to be rendered by Crossroads during that
period.
INTEREST RATE COLLAR AGREEMENT: In February 1998, the Company entered into an
interest rate collar agreement with Fleet National Bank, formerly BankBoston,
N.A., which involved 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 was
accrued as interest rates changed and was recognized over the life of the
agreement as an adjustment to interest expense. This derivative financial
instrument was being used by the Company to reduce interest rate volatility and
the associated risks arising from the floating rate structure of its Revolving
Credit Facility and its Securitization Facility, which was terminated in 1999,
and was not held or issued for trading purposes.
F-34
<PAGE> 112
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
redesigned portion of the hedge from zero to its fair value based primarily on
information from Fleet National Bank resulting in a $0.4 million liability as of
December 31, 1998 which was included in other non-current liabilities on the
Company's balance sheet. The associated loss was deferred and included in other
assets. During the second quarter of 1999, the hedge agreement was sold for gain
of $250,000, which gain was deferred over the remaining life of the designated
loans. As part of the modification of the Revolving Credit Facility and the
termination of the Securitization Facility on October 1, 1999, the Company
recognized the unamortized portion of the deferred $250,000 gain, which
represented the amount of the remaining deferred gain at the date of the
modification - see Note 7.
In accordance with the guidance of SFAS No. 80, "Accounting for Futures
Contracts", the Company had identified net proceeds from the Company's weekly
sale of receivables under the Securitization Facility as anticipated
transactions which would vary with high correlation to changes in the 30 day
LIBOR interest rates that were the subject of the Company's interest rate collar
agreement. Accordingly, the collar fixed within a certain range the variability
in those net proceeds and was accounted for as a hedge in accordance with SFAS
No. 80.
SYNADYNE OPERATIONS. In connection with the sale of Synadyne, the Company is
obligated to provide certain support services to the buyer, including accounting
and information systems services. In addition, the Company has contracted with
the buyer to provide PEO services to the Company and its employees.
NOTE 9. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
During Q1 2000, FY 1999, FY 1998 and FY 1997, approximately 20%, 21%, 20% and
19%, respectively, of the Company's revenues were from the provision of services
to customers in the Chicago, Illinois area. In addition, during the same periods
approximately 23%, 28%, 27% and 29%, respectively, of the Company's revenues
were from the provision of services to customers in the South Florida area.
As discussed in Note 3 to the Company's Consolidated Financial Statements,
effective April 8, 2000, the Company sold its Synadyne operations, which
represented 35.6% of the Company's revenues, and 7.0% of gross margin dollars
earned during Q1 2000.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash, trade accounts receivable and funding advances
to franchises. The Company places its cash with what it believes to be high
credit quality institutions. At times cash deposits may be in excess of the FDIC
insurance limit. The Company grants credit to its customers generally without
collateral and regularly assesses their financial strength. Funding advances to
franchises are collateralized by the franchises' accounts receivable from their
clients. The Company believes that credit risk related to its trade accounts
receivable and funding advances is limited due to diversification of the
accounts based on geography and industry as well as the lack of material
concentration of balances due from any one customer.
NOTE 10. EMPLOYEE BENEFIT PLANS
The Company had a 401(k) single-employer retirement plan and two 413(c)
multiple-employer retirement plans covering all employees except for (a)
employees under the age of 21 for all plans, (b) employees with less than one
year of service for all plans, (c) certain temporary employees for the 413(c)
plans and (d) all
F-35
<PAGE> 113
NOTE 10. EMPLOYEE BENEFIT PLANS (CONTINUED)
highly compensated employees as defined by the Internal Revenue Code for the
401(k) plan and certain highly compensated employees for the 413(c) plans. One
of the 413(c) plans was established for use by not-for-profit employers only,
effective January 1, 1996. On February 28, 1997, the 401(k) plan and the 413(c)
plan established for use by not-for-profit employers were made inactive by the
Company. All participating employees were enrolled in the currently active
413(c) plan for future contributions and all previously contributed net assets
remained in the inactive plans for eventual distribution to the employees upon
retirement or other qualifying event.
Eligible employees who participate contribute to the plan an amount up to 15% of
their salary. Each year, the Company's Board of Directors determines a matching
percentage to contribute to each participant's account; if a determination is
not made, the matching percentage is 50% of the participant's contributions,
limited to the first 6% of each participant's salary contributed by the
participants. This matching policy may vary in the case of PEO employees,
although all matching amounts related to PEO employees are recovered by the
Company in its charges to the respective PEO customers. Matching contributions
by the Company for its employees, which includes PEO employees, were $0.1
million, $0.6 million, $0.5 million and $0.5 million for Q1 2000, FY 1999, FY
1998 and FY 1997, respectively. Effective April 8, 2000, the active 413(c) plan
was assumed by a third party in connection with the sale of the Company's
professional employer organization business.
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 obtained
IRS approval regarding the proposed correction under the Voluntary Closing
Agreement Program ("VCAP"). The Company paid an insignificant penalty associated
with this VCAP correction, and believes that this matter will have no future
material impact on its financial condition or results of operations.
NOTE 11. SHAREHOLDERS' EQUITY
VOTING TRUST: The Company's three principal shareholders resigned from the
Company's Board of Directors in November 1996. On February 21, 1997, in
connection with the issuance of the Senior Notes and the closing of the
Revolving Credit Facility, 4,683,982 shares of the common stock of the Company,
owned by those shareholders and their families, were placed in a voting trust,
with a term of ten years. On October 24, 1997, at the time of the Offering,
700,000 shares were released from the voting trust and sold to the public. On
May 12, 1998, as the result of their exercise of certain warrants (see Note 7)
the Company issued 124,671 shares to certain of those shareholders and their
families, which were immediately deposited into the voting trust. These
shareholders and their families (a) purchased an additional 50,000 shares during
FY 1999 in open market transactions, which were deposited into the voting trust,
and (b) sold an aggregate of 51,500 shares and 237,327 shares during Q1 2000 and
FY 1999, respectively, in open market transactions.
Under the terms of the voting trust and agreements among the Company, the
Company's shareholders at the time the trust was established and the Senior Note
Holders, the 4,003,266 shares of common stock currently in the voting trust,
which represent approximately 46.2% of the common stock of the Company as of
April 2, 2000, will be voted in favor of the election of a Board of Directors
having seven members and comprised of three directors nominated by the CEO of
the Company, two directors nominated by the Senior Note Holders, and two
independent directors nominated by the vote of both directors nominated by the
Senior Note Holders and at least two of the directors nominated by the CEO of
the Company. As a result of the warrants to purchase 392,896 shares, as
discussed in Note 7, being released from escrow to the Senior Note Holders, the
number of directors may be increased by two, with the additional directors
nominated by the Senior Note
F-36
<PAGE> 114
NOTE 11. SHAREHOLDERS' EQUITY (CONTINUED)
Holders. Further, the shares in the voting trust will be voted as recommended by
the Board of Directors for any merger, acquisition or sale of the Company, or
any changes to the Articles of Incorporation or Bylaws of the Company. On any
other matter requiring a vote by the shareholders, the shares in the voting
trust will be voted as directed by the Company's current CEO.
INCENTIVE STOCK OPTION PLAN: During 1995, a Subsidiary of the Company
established an incentive stock option plan ("Stock Option Plan") for that
Subsidiary only, whereby incentive stock options could be granted to employees
to purchase a specified number of shares of common stock at a price not less
than fair market value on the date of the grant and for a term not to exceed 10
years. Once awarded, these options become vested and exercisable at 25% per
year, unless special terms are established at the time the option is granted. On
January 1, 1996, the Subsidiary granted options to purchase 815,860 shares of
its common stock at an exercise price of $4.77 per share, which an independent
appraiser determined to be the fair market value of that Subsidiary's common
stock on the date of grant. On February 18, 1997, the Company adopted the Stock
Option Plan and, pursuant to the terms of the Stock Option Plan, adjusted (i)
the number of outstanding options to 318,568, corresponding to shares of its
common stock, and (ii) the exercise price of such options to $10.38 per share.
The ratios utilized in such conversion were determined by an independent
appraiser as of the date of the Subsidiary's initial grant.
The total number of shares of common stock reserved for issuance under the stock
option plan is 2,000,000, as agreed to by the Company's Board of Directors in
April 1999 and approved by the Company's shareholders at their May 1999 annual
meeting. As of April 2, 2000, the status of all outstanding option grants was as
follows:
<TABLE>
<CAPTION>
Exercise Price Range
--------------------
Options Granted Outstanding Options Exercisable Options From To
--------------- ------------------- ------------------- ------ ------
<S> <C> <C> <C> <C> <C>
Grant Date
-----------
January 1996 318,568 138,602 138,602 $10.38 $10.38
March 1997 221,473 58,608 43,956 $11.42 $11.42
September 1997 116,933 56,795 28,398 $15.00 $15.00
October 1997 1,625 1,625 813 $14.75 $14.75
December 1997 2,238 2,238 1,119 $11.75 $11.75
January 1998 265,646 126,471 89,624 $13.88 $13.88
March 1998 71,700 21,204 10,602 $18.88 $18.88
May 1998 18,375 5,000 1,250 $19.50 $20.13
June 1998 4,432 4,432 1,108 $16.75 $16.75
August 1998 75,000 75,000 18,750 $10.38 $13.88
August 1998 52,500 39,000 9,750 $6.00 $7.25
November 1998 386,318 284,731 71,183 $6.00 $6.00
January 1999 72,500 72,500 18,125 $6.00 $6.00
March 1999 121,825 83,525 70,078 $4.13 $4.13
May 1999 98,343 57,848 -- $4.56 $4.56
November 1999 20,000 20,000 -- $1.00 $1.00
February 2000 400,000 400,000 -- $2.25 $2.25
March 2000 473,038 473,038 -- $2.13 $2.13
--------- --------
1,920,617 503,358
========= ========
</TABLE>
The above exercise prices were equal to or greater than the market price of the
shares at the grant date. The exercise price of options granted prior to the
Offering are based on the fair market value of the Company's common stock, as
determined by an independent appraiser as of the date of the grant. The above
options vest over a four year period from the date of issuance, except 77,221
and 95,675 options issued in January
F-37
<PAGE> 115
NOTE 11. SHAREHOLDERS' EQUITY (CONTINUED)
1998 and March 1999, respectively, which vested immediately upon grant.
The weighted average remaining contractual life of the above options was 8.3,
7.2, 8.9 and 8.7 years as of April 2, 2000, December 31, 1999, 1998 and 1997,
respectively. The weighted average exercise price was $5.77, $8.70 and $10.59
per share as of April 2, 2000, December 31, 1999 and 1998, respectively. No
options had been exercised as of April 2, 2000.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") in accounting for its stock options. Under APB
25, because the exercise price of the Company's employee stock options equals
the fair value of the underlying stock on the grant date, no compensation is
recognized. However SFAS No. 123, "Accounting for Stock-based Compensation",
requires presentation of pro forma net income (loss) as if the Company had
accounted for its employee stock options under the fair value method. The
Company has estimated the fair value of stock options granted to employees prior
to the Offering to be from $2.20 to $3.41 per option as of the respective grant
dates, using the Black-Scholes option pricing model with the following
assumptions: risk free interest rate from 6.12% to 6.65%; no volatility factor
because the Company was not a public entity when the options were granted; no
expected dividends; and expected option life of 4 years. For options granted
subsequent to the Offering through April 2, 2000, the Company has estimated the
fair value of stock options granted to employees to be from $0.55-$0.59,
$0.31-$1.88, $1.66-$5.56, and $3.20-$4.02 per option for Q1 2000, FY 1999, FY
1998, and FY 1997 subsequent to the offering, respectively, as of the respective
grant dates, using the Black-Scholes option pricing model with the following
assumptions: risk free interest rate from 5.22% to 6.74%; an anticipated
volatility factor of 93.9% to 101.2%; no expected dividends; and expected option
life of 4 years. For purposes of pro forma disclosure, the estimated fair value
of the options is amortized to expense over the vesting period. Under the fair
value method, the Company's unaudited pro forma loss would have been $2.7
million ($0.32 per basic and diluted loss per share) and $31.3 million ($3.62
basic and diluted loss per share) for Q1 2000 and FY 1999. The Company's
proforma income before extraordinary item would have been $4.3 million ($0.50
basic and $0.44 diluted earnings per share) in FY 1998, and $0.2 million ($0.04
basic and $0.03 diluted earnings per share) in FY 1997.
The March 1997 and January 1998 grants include 8,126 and 6,000 options,
respectively, issued in connection with acquisitions - see Note 4.
During February and March 2000, the Company granted options to purchase 873,038
shares of the Company's common stock, vesting over a 4 year period from the
grant date and with an exercise price of $2.00 to $2.13 per share based on the
market price of the shares at the grant date.
REVERSE STOCK SPLIT: On October 21, 1997, the Company effectuated a reverse
stock split pursuant to which each then issued and outstanding share of common
stock was converted into approximately 0.65 shares of common stock. The effect
of this reverse split has been retroactively applied to all share, option and
warrant amounts, including the related option and warrant exercise prices.
NOTE 12. RELATED PARTY TRANSACTIONS
REVENUES: Certain shareholders of the Company owned franchises from which the
Company received the following revenues in the periods indicated:
F-38
<PAGE> 116
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
Quarter Ended Year Ended December 31,
------------- ---------------------------------------
April 2, 2000 1999 1998 1997
------------- ------- ------- -----
(Amounts in thousands)
<S> <C> <C> <C> <C>
Royalties $ 295 $ 1,235 $ 1,289 $ 194
PEO services -- -- -- 349
----- ------- ------- -----
Included in net revenues $ 295 $ 1,235 $ 1,289 $ 543
===== ======= ======= =====
</TABLE>
These franchises owed the Company $0, $368,000, $100,000 and $92,000 at April 2,
2000 and December 31, 1999, 1998 and 1997 respectively, primarily related to the
above items.
Effective August 31, 1998, certain Company shareholders owning franchises with a
total of four locations 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 continue 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 final payment from the former
franchisee in consideration of the elimination of the equivalent of the last
five months of payments due under the initial agreement, generally consistent
with the terms of similar agreements between the Company and unrelated third
parties. The initial buyout payment, as well as subsequent payments under the
buyout agreement, are included in total royalties included in the table above.
RECEIVABLES AND INTEREST INCOME: During 1997 the Company had notes and advances
receivable due on demand from shareholders and affiliates, although there were
no outstanding balances due as of December 31, 1997. The notes had an interest
rate of 10% per annum and the advances were non-interest bearing. Total interest
income from notes receivable and other amounts due from related parties was
$66,000 for the year ended December 31, 1997. There were no amounts due from
those related parties as of April 2, 2000, December 31, 1999 or 1998.
LONG-TERM DEBT AND INTEREST EXPENSE: Effective February 16, 1998, the Company
purchased certain staffing locations and the related franchise rights from
certain shareholders for $6.9 million which included the issuance of a $1.7
million note bearing interest at 7.25% per annum 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 installments totaling $0.3 million in the
first year and $0.6 million in the second year, with a $0.4 million balloon
payment due at the end of the two year term. As discussed in Note 7 to the
Company's Consolidated Financial Statements, the Company had not made the
renegotiated payments on this subordinated acquisition note, and, as a result,
was in default under this note. Effective August 15, 2000 this note was amended
to provide that the Company will pay interest only, at a rate of 10.0% per
annum, on the debt for three years, followed by two years at equal monthly
installments of principal and interest, which will retire the debt -- see
Note 17.
See Note 4 for the details of acquisition notes payable to related parties as of
April 2, 2000, December 31, 1999 and 1998, respectively. Total interest expense
for long-term debt to related parties was $48,000, $196,000, $113,000 and
$547,000 for Q1 2000 and FY 1999, 1998 and 1997, respectively.
OTHER TRANSACTIONS: During 1997, the Company purchased certain real estate from
SMSB for $840,000, such assets having a net book value as reflected on SMSB's
financial statements of $608,000 at the time of
F-39
<PAGE> 117
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
purchase. A law firm owned by a shareholder of the Company received legal fees
for services rendered to the Company during Q1 2000, FY 1999, FY 1998 and FY1997
in the approximate amounts of $4,000, $24,000, $38,000 and $148,000,
respectively. The Company employed one of its minority shareholders (a member of
the S group) in a non-management position at an annual salary of approximately
$40,000 during FY 1998 and FY 1997. This arrangement was discontinued in March
1998. Since July 1997, the Company has leased on a month-to-month basis a
portion of a warehouse controlled by the Company's former CEO for approximately
$2,000 per month. Effective February 1999, the Company entered into a three year
staffing office lease with a company controlled by the former CEO, with rental
payments of approximately $2,000 per month.
As a result of the Company's 1996 acquisition of certain franchise rights (see
Note 4), the Company subsequently leased from one of the sellers, a minority
shareholder of the Company, four industrial staffing offices, for rental
payments of $49,000 in FY 1997. The Company made an additional payment of
$71,000 to that seller shareholder in FY 1997 in order to terminate the leases
and satisfy the Company's remaining liability.
NOTE 13. SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
The consolidated statements of cash flows do not include the following noncash
investing and financing activities, except for the net cash paid for
acquisitions, in thousands:
<TABLE>
<CAPTION>
Quarter Ended Year Ended December 31,
-------------- ----------------------------------------
April 2, 2000 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C> <C>
Acquisitions
Tangible and intangible assets acquired $ -- $ 290 $ 41,913 $ 25,651
Liabilities assumed -- -- (1,794) (186)
Debt issued -- (77) (11,575) (3,517)
Common stock issued -- -- (775) --
----- -------- -------- --------
Net cash paid for acquisition related matters $ -- $ 213 $ 27,769 $ 21,948
===== ======== ======== ========
Decrease in goodwill and long-term debt
due to earnout adjustments $ -- $ -- $ 539 $ --
===== ======== ======== ========
(Decrease) increase of deferred loss on
interest rate collar agreement $ -- $ (413) $ 413 $ --
===== ======== ======== ========
Decrease in accrued interest due to inclusion
in renegotiated long-term debt $ -- $ 448 $ -- $ --
===== ======== ======== ========
Debt forgiven in conection with sale of
assets to noteholder $ -- $ 2,132 $ -- $ --
===== ======== ======== ========
Increase in other current assets and notes
payable, due to insurance financing $ 307 $ 503 $ 356 $ --
===== ======== ======== ========
Increase in long-term debt, primarily due to
sale/leaseback and capital leases $ -- $ 2,017 $ 38 $ 813
===== ======== ======== ========
Refinancing of capitalized leases and mortgages on
buildings and land $ -- $ -- $ -- $ 4,339
===== ======== ======== ========
Reclassification of put warrants liability to
additional paid-in capital $ -- $ -- $ -- $ 20,384
===== ======== ======== ========
Shareholders' contribution to additional paid-in
capital in connection with the Reorganization $ -- $ -- $ -- $ 4,300
===== ======== ======== ========
Discontinuance of consolidation of SMSB-owned
building and related mortgage debt $ -- $ -- $ -- $ 1,665
===== ======== ======== ========
</TABLE>
F-40
<PAGE> 118
NOTE 14. COMMON SHARES USED IN COMPUTING EARNINGS (LOSS) PER SHARE
Pro forma net loss for FY 1997 includes adjustments made to historical net loss
for pro forma income taxes computed as if the Company had been fully subject to
federal and applicable state income taxes. The Company calculates pro forma
earnings per share in accordance with the requirements of SFAS No. 128,
"Earnings Per Share". The pro forma FY 1997 weighted average shares outstanding
used to calculate pro forma basic and diluted earnings (loss) per share were
calculated as follows:
Year Ended
December 31, 1997
-----------------
Shares issued in connection with the Reorganization 5,448,788
Equivalent shares represented by shares of common
stock of certain Subsidiaries purchased in the
Reorganization 46,211
Shares sold by the Company in the October 1997
Offering (see Note 1) 560,440
---------
Weighted average common shares - basic 6,055,439
Outstanding options and warrants to purchase
common stock - remaining shares after assumed
repurchase using proceeds from exercise 1,264,923
---------
Weighted average common shares - diluted 7,320,362
=========
Certain of the outstanding options and warrants to purchase common stock were
anti-dilutive for certain of the periods presented in the Company's results of
operations and accordingly were excluded from the calculation of diluted
weighted average common shares for those periods, including the equivalent of
1,218,801 and 1,205,091 shares excluded for the Q1 2000 and FY 1999.
NOTE 15. OPERATING 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 chief operating decision maker is its CEO. The Company evaluates
performance based on stand-alone operating segment income, which does not
include any allocation of corporate support center costs or income taxes (other
than employment tax credits).
The Company's reportable operating segments are (i) the Tandem 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 Synadyne segment,
which until April 8, 2000, derived revenues from providing a comprehensive
package of PEO services to its clients
F-41
<PAGE> 119
NOTE 15. OPERATING SEGMENT INFORMATION (CONTINUED)
including payroll administration, risk management, benefits administration and
human resource consultation and (iii) the Franchising segment, which derives
revenues from 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 - see Note 8.
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
any amounts sold under the Company's former Securitization Facility). The
Company does not regularly provide information regarding the reportable
segments' net assets to the chief operating decision maker. In addition, certain
reclassifications have been made between segments to Income (Loss) Before Taxes
to be consistent with current presentation.
The Company does not derive any of its revenue from markets outside of the
United States. See Note 9 for information regarding significant customers and
geographic concentration. Financial information for the Company's operating
segments, reconciled to Company totals, is as follows, in thousands:
<TABLE>
<CAPTION>
Quarter Ended Year Ended December 31,
------------- ---------------------------------------------
April 2, 2000 1999 1998 1997
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Tandem $ 80,383 $ 339,116 $ 321,451 $ 221,461
Synadyne 44,834 224,499 202,888 177,045
Franchising 763 7,109 7,352 7,027
Other Company revenues 31 23,323 33,703 42,046
--------- --------- --------- ---------
Total Company revenues $ 126,011 $ 594,047 $ 565,394 $ 447,579
========= ========= ========= =========
(LOSS) INCOME BEFORE TAXES
Tandem (1) $ 3,327 $ 5,389 $ 15,549 $ 10,015
Synadyne (1) (332) 1,394 733 496
Franchising (1) 609 6,353 5,943 5,764
Restructuring and asset impairment charges (356) (13,823) -- --
Other Company (loss) income, net (5,912) (26,069) (15,733) (15,564)
--------- --------- --------- ---------
Total Company (loss) income before taxes $ (2,664) $ (26,756) $ 6,492 $ 711
========= ========= ========= =========
</TABLE>
(1) Excluding any allocation of common services provided by the corporate
support headquarters
DEPRECIATION AND AMORTIZATION OF
TANGIBLE AND INTANGIBLE ASSETS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Tandem $ 992 $ 4,952 $ 4,991 $ 2,668
Synadyne 83 260 363 163
Franchising 5 83 41 23
Other Company depreciation and amortization 381 1,839 1,361 1,325
--------- --------- --------- ---------
Total Company depreciation and amortization $ 1,461 $ 7,134 $ 6,756 $ 4,179
========= ========= ========= =========
</TABLE>
F-42
<PAGE> 120
NOTE 15. OPERATING SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Quarter Ended Year Ended December 31,
------------- -----------------------------------
April 2, 2000 1999 1998 1997
------------- ------ ------- -------
<S> <C> <C> <C> <C>
INTEREST EXPENSE, NET
Tandem $1,083 $4,273 $3,407 $2,402
Synadyne 68 364 321 361
Franchising 13 40 43 69
Other Company interest expense, net 852 3,927 1,758 5,045
------ ------ ------ ------
Total Company interest expense, net $2,016 $8,604 $5,529 $7,877
====== ====== ====== ======
</TABLE>
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth the amounts of certain items in the Company's
consolidated statements of income for the four quarters of 1999 and 1998.
Amounts are in thousands, except per share data:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------
Quarters Ended
March 31 June 30 September 30 December 31
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 134,114 $ 143,454 $ 159,124 $ 157,355
Gross profit 19,194 20,299 20,765 20,523
Charges for restructuring and impairment of assets (1) - - (7,554) (6,269)
Operating income (loss) (2) 509 (503) (12,007) (6,630)
Deferred tax valuation allowance - - - (14,072)
Net loss (581) (1,249) (8,320) (20,729)
Loss per share (basic) (0.07) (0.14) (0.96) (2.40)
Loss per share (diluted) (0.07) (0.14) (0.96) (2.40)
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------------------
Quarters Ended
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues $ 120,986 $ 134,796 $ 153,416 $ 156,196
Gross profit 17,791 20,985 22,456 22,428
Operating income 1,917 2,911 3,613 3,527
Income before extraordinary item 673 1,095 1,512 1,601
Net income 673 1,095 1,512 184
Earnings per share (basic) before extraordinary item 0.08 0.13 0.17 0.19
Earnings per share (diluted) before extraordinary item 0.07 0.11 0.15 0.16
Earnings per share (basic) 0.08 0.13 0.17 0.02
Earnings per share (diluted) 0.07 0.11 0.15 0.02
</TABLE>
------------------------
1. As of August 6, 1999, the Company announced a restructuring plan intended
to improve profitability and liquidity. The Company recognized $5.1 million
and $6.1 million in restructuring charges during the third and fourth
quarters of 1999, respectively. In addition, the Company recognized
impairment charges of $2.4 million and $0.2 million during the third and
fourth quarters of 1999, respectively in compliance with SFAS 121. See
Notes 3 and 4 to the Company's Consolidated Financial Statements.
2. During the third quarter of 1999, the Company recognized (i) $5.1 million
of restructuring charges, (ii) $2.4 million impairment charge in compliance
with SFAS 121, and (iii) a $2.7 million loss, recognized as bad debt
expense, on the then anticipated sale of certain of the Company's trade
accounts receivable, which were primarily over 180 days. During the fourth
quarter of 1999, the Company recognized $6.1 million in restructuring
charges and $0.2 million in asset impairment charges, in compliance with
SFAS 121.
F-43
<PAGE> 121
NOTE 17. SUBSEQUENT EVENTS
NASDAQ AMEX LISTING
On August 9, 2000, the Company was notified by Nasdaq-Amex that, because the
Company was not in compliance with the minimum $4 million net tangible assets
for continued listing on the Nasdaq National Market, the Company's common stock
would be delisted effective August 10, 2000. Pursuant to the notification
received from Nasdaq-Amex, the Company's common stock was delisted from the
Nasdaq National Market and is now being traded on the OTC Bulletin Board.
As a result of completing the Refinancing, the Company believes it has taken the
steps necessary to cure the net tangible asset deficiency and intends to appeal
the delisting decision.
SENIOR DEBT FACILITIES
Effective August 15, 2000, the Company entered into a three-year agreement with
a syndicate of lenders led by Ableco Finance, LLC, as agent, an affiliate of
Cerberus Capital Management, L.P. (the "Lenders"), which replaced the Company's
existing credit facility with a $33.4 million Revolving Credit Facility, which
includes a subfacility for the issuance of standby letters of credit ("Senior
Facility"), and two term loans, Term Loan A and Term Loan B ("Term Loans"), of
$17.6 million and $9.0 million, respectively (the "Refinancing"). Both the
Senior Facility and the Term Loans are secured by all the assets of the Company
and its subsidiaries. The Senior Facility bears interest at prime or 9.0%,
whichever is greater, plus 2%. Term Loan A and Term Loan B bear interest at
prime or 9.0%, whichever is greater, plus 3.5% and 5.0% per annum, respectively.
In connection with the Refinancing, the Company issued warrants to the Lenders
to purchase up to a maximum of 200,000 common shares of the Company, exercisable
for a term of five years, at $0.01 per warrant. The warrants are only
exercisable if any letter of credit issued by the Lenders on behalf of the
Company is drawn in proportion to the amount drawn under the letter of credit.
A portion of the new credit facility was used to satisfy the credit facility
(the "Fleet Facility") with Fleet National Bank, for itself and as agent for
three other banks (the "Fleet Group"). Prior to the closing of the Refinancing,
the outstanding balance of the Fleet Facility was approximately $52.0 million.
The balance was repaid in full with a cash payment of approximately $32.3
million and the issuance of a four-year, $5.3 million subordinated term note
(the "Fleet Term Note"). The Fleet Term Note is subordinated to the Senior
Facility and Term Loans issued by the Lenders on behalf of the Company and
includes interest only for four years, followed by a balloon payment for the
entire principal amount. In addition, the Company is entitled to a 60% discount
on this note if it is satisfied within 18 months. This obligation bears interest
at Fleet's Alternative Prime Rate ("APR") plus 3.5% per annum. In connection
with the Refinancing and in satisfaction of the Company's obligation to the
Fleet Group, the Company has issued 524,265 warrants to the Fleet Group to
purchase common shares of the Company, which constitutes 5.0% of the common
stock of the Company on a fully diluted basis. The warrants are exercisable for
a term of 10 years at $0.001 per warrant. In connection with the Refinancing and
the termination of the Fleet Facility, the Company will record an extraordinary
gain net of tax, of approximately $8.5 million, ($13.8 million, less $5.3
million of income tax) in the quarter ending October 1, 2000.
SUBORDINATED DEBT
On August 15, 2000, in connection with the Refinancing, the acquisition notes
payable were amended to provide that the Company will pay interest only, at a
rate of 10.0% per annum, on the debt for three years following the closing of
the Refinancing, followed by two years of equal monthly payments of interest and
principal, which will retire the debt. In connection with the amendments to the
acquisition notes payable, the Company paid $0.8 million of accrued interest to
the relevant noteholders at the closing of the Refinancing.
LEGAL PROCEEDINGS
On September 13, 2000, a final default judgment in the amount of $807,245 was
entered against Synadyne III, Inc. a wholly-owned subsidiary of the Company
("Synadyne III") in the County Court, Dallas County, Texas. The action was
brought by an employee of an independent agency of the Allstate Insurance
Company claiming that the owner of that agency discriminated against her in
violation of the Texas Commission of Human Rights Act of 1983. Synadyne III was
under contract with this insurance agency to provide PEO services. It is the
Company's contention that the complaint in this action was never properly served
on Synadyne III and therefore, the Company has filed a motion to vacate this
judgment on the grounds that it was obtained without according due process to
Synadyne III. The Company believes, based on the advice of counsel, that it will
be successful in vacating the judgment and the resolution of this matter will
not have a material adverse effect on its financial position or future operating
results. The Company has not made any adjustments to the financial statements
for this matter.
* * * * *
F-44
<PAGE> 122
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
July 2, 2000 April 2, 2000
------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 1,043 $ 1,546
Trade accounts receivable, net of allowance
for doubtful accounts of $1,498 and $1,563 38,314 42,118
Funding advances to franchises 427 206
Assets held for disposition 426 2,409
Income tax receivable and other current assets 12,502 5,043
--------- ---------
Total current assets 52,712 51,322
Property and equipment, net 7,890 9,154
Goodwill and other intangible assets, net 45,049 45,783
Other assets 2,148 2,310
--------- ---------
Total assets $ 107,799 $ 108,569
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,898 $ 8,887
Accrued expenses:
Payroll 5,297 10,518
Payroll taxes 1,831 4,139
Workers' compensation and insurance 6,386 5,210
Other 5,935 4,499
Accrued restructuring charges 1,693 2,255
Other current liabilities 805 506
Related party debt 1,197 1,195
Current maturities of long-term debt 6,995 7,635
Revolving credit facility 50,626 50,746
--------- ---------
Total current liabilities 87,663 95,590
Non-Current Liabilities
Long-term debt, net of current maturities 454 --
Other long-term debt, less current maturities 1,552 1,934
--------- ---------
Total liabilities 89,669 97,524
--------- ---------
Commitments and Contingencies (Notes 5, 6 and 7)
Shareholders' Equity:
Preferred stock, $.001 par value: 10,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $.001 par value: 100,000,000 shares authorized,
8,657,913 shares issued and outstanding 9 9
Additional paid-in-capital 53,546 53,546
Accumulated deficit (35,425) (42,510)
--------- ---------
Total shareholders' equity 18,130 11,045
--------- ---------
Total liabilities and shareholders' equity $ 107,799 $ 108,569
========= =========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
F-45
<PAGE> 123
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED JULY 2, 2000 AND THREE MONTHS ENDED JUNE 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
July 2, 2000 June 30, 1999
------------ -------------
<S> <C> <C>
Net revenues $ 81,618 $ 143,454
Cost of revenues 65,432 123,110
----------- -----------
Gross profit 16,186 20,344
----------- -----------
Selling, general and administrative expenses:
Amortization of intangible assets 734 934
Other selling, general and administrative expenses 13,988 19,913
----------- -----------
Total selling, general and administrative expenses 14,722 20,847
----------- -----------
Restructuring costs 878 --
----------- -----------
Operating income (loss) 586 (503)
----------- -----------
Other expense (income):
Interest expense (net) 1,913 1,702
Disposition of assets and other income (net) (724) (20)
----------- -----------
Total other expense (income): 1,189 1,682
----------- -----------
Loss before benefit for income taxes (603) (2,185)
Income tax benefit (7,689) (936)
----------- -----------
Net income (loss) $ 7,086 $ (1,249)
=========== ===========
Weighted average common shares outstanding:
Basic 8,657,913 8,657,913
=========== ===========
Diluted 9,857,385 8,657,913
=========== ===========
Income (loss) per share:
Basic $ 0.82 $ (0.14)
=========== ===========
Diluted $ 0.72 $ (0.14)
=========== ===========
</TABLE>
See accompanying notes to the unaudited condensed
consolidated financial statements
F-46
<PAGE> 124
OUTSOURCE INTERNATIONAL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED JULY 2, 2000 AND THREE MONTHS ENDED JUNE 30, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
July 2, 2000 June 30, 1999
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,086 $(1,249)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,406 1,889
Loss on sale of assets held for disposition 446 --
Deferred income taxes (7,767) (1,470)
Notes received from franchises -- (796)
Gain on the sale of the Company's PEO operations (684) --
Loss on disposal of assets, net 92 --
------- -------
579 (1,626)
Changes in assets and liabilities (excluding effects of acquisitions
and dispositions):
(Increase) decrease in:
Trade accounts receivable 4,387 1,594
Prepaid expenses and other current assets 943 239
Other assets (59) 324
Increase (decrease) in:
Accounts payable (994) 24
Accrued expenses:
Payroll (5,248) 2,201
Payroll taxes (2,309) 1,443
Workers' compensation and insurance 1,120 (993)
Other 53 101
Reserve for restructuring charges (562) --
Other current liabilities (112) 137
------- -------
Net cash (used in) provided by operating activities (2,202) 3,444
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from asset sales as part of the Restructuring and related matters 880 --
Proceeds from the sale of the Company's PEO operations 3,314 --
Funding repayments (advances) from franchises, net (220) 300
Purchases of property and equipment (192) (408)
Proceeds from sale of property and equipment -- 1,600
------- -------
Net cash provided by investing activities 3,782 1,492
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in excess of outstanding checks over bank balance,
included in accounts payable (1,454) 102
Repayment of lines of credit and revolving credit facilities (120) (2,512)
Proceeds from interest collar termination -- 250
Related party debt repayments -- (142)
Repayment of other long-term debt (509) (1,489)
------- -------
Net cash used in financing activities (2,083) (3,791)
------- -------
Net (decrease) increase in cash (503) 1,145
Cash, beginning of period 1,546 1,418
------- -------
Cash, end of period $ 1,043 $ 2,563
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,699 $ 1,823
======= =======
</TABLE>
See accompanying notes to the unaudited condensed
consolidated financial statements
F-47
<PAGE> 125
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The interim unaudited condensed consolidated financial statements and the
related information in these notes as of July 2, 2000 and for the thirteen weeks
ended July 2, 2000 ("Q1 2001") and the three months ended June 30, 1999 ("Q2
1999") have been prepared without audit and 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. Certain
reclassifications have been made to the presentation of the financial position
and results of operations for Q2 1999 to conform to current presentation. These
reclassifications had no effect on previously reported results of operations or
retained earnings.
The Company filed a Form 8-K during the fourth calendar quarter of 1999
indicating, among other things, its change for financial reporting purposes,
effective January 1, 2000, from a fiscal year ended December 31 to a fiscal year
ending the 52 or 53 week period ending the Sunday closest to March 31. These
interim financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1999, included in the
Company's Form 10-K filed with the Securities and Exchange Commission ("SEC") on
April 14, 2000 and the financial statements in the Company's Form 10-Q for the
Transition Period ended April 2, 2000 ("Q1 2000") filed with the SEC on May 17,
2000.
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
No. 133 defines derivatives and establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 also
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133, as modified by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
and cannot be applied retroactively. The Company intends to implement SFAS No.
133 in its consolidated financial statements as of and for the fiscal quarter
ending July 2, 2001. Although it has not determined the effects, if any, that
implementation will have, management does not believe that the Company is a
party to any transactions involving derivatives as defined by SFAS No. 133. SFAS
No. 133 could increase volatility in earnings and other comprehensive income if
the Company enters into any such transactions in the future.
NOTE 2: FUTURE LIQUIDITY
The Company's bank financing expired on August 15, 2000 and the Company was,
until August 15, 2000, in default of certain acquisition debt subordinated to
its bank financing.
Effective August 15, 2000, the Company entered into a three-year agreement with
a syndicate of lenders led by Ableco Finance, LLC, as agent, which replaced the
Company's previous senior credit facility with a $33.4 million Revolving Credit
Facility and two term loans of $17.6 million and $9.0 million, respectively. In
connection with the repayment of the previous credit facility, the Company
issued a four-year, $5.3 million subordinated term note to the lenders under the
previous credit facility.
F-48
<PAGE> 126
NOTE 2: FUTURE LIQUIDITY (CONTINUED)
Simultaneously with the closing of the new credit facility, the Company amended
certain of its outstanding acquisition notes payable to provide for the payment
of interest only for a period of three years followed by two years of equal
monthly installments of principal and interest. As a result of the amendments to
the acquisition notes payable, the Company is no longer in default under those
notes (see Note 5).
NOTE 3: RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR DISPOSITION
On August 6, 1999, the Company announced the following actions to improve its
short-term liquidity, concentrate its operations within one core segment
(Tandem, its flexible industrial staffing division) and improve its operating
performance within that segment:
(i) the sale of Office Ours, the Company's clerical staffing division, effective
August 30, 1999. The Company received proceeds at closing of $1.9 million, not
including $0.1 million, which was held in escrow until January 24, 2000, subject
to verification of sold accounts receivable, and another $0.1 million held in
escrow subject to compliance with warranties and representations. Revenues of
Office Ours, for the three months ended June 30, 1999, were $2.1 million, and
the loss before taxes for these operations, on a basis consistent with the
segment information presented in Note 9, was approximately $19,000;
(ii) the engagement of an investment banking firm to assist in the evaluation of
strategic options, including the possible sale, of Synadyne, the Company's PEO
division. Effective April 8, 2000, the Company sold the operations of Synadyne
for proceeds at closing of $3.5 million. In addition, if the Company meets
certain performance criteria for the one-year period subsequent to the sale, it
will receive additional proceeds of $1.25 million. In connection with the sale
of its PEO operations, the Company recorded a pre-tax non-operating gain of $0.7
million in its results of operations for the quarter ended July 2, 2000.
Revenues of Synadyne, prior to the sale effective April 8, 2000, were
approximately $71,000 and $55.1 million for Q1 2001 and Q2 1999, respectively.
On a basis consistent with the segment information presented in Note 9, the
Company reported a net loss before taxes for the PEO operations of $0.2 million
and income before taxes for the PEO operations of $0.5 million for Q1 2001 and
Q2 1999, respectively; and
(iii) a reduction of the Company's flexible industrial staffing and support
operations (the "Restructuring") consisting primarily of: the sale, franchise,
closure or consolidation of 47 of the 117 Tandem branch offices existing as of
June 30, 1999; an immediate reduction of the Tandem and corporate headquarters
employee workforce by 110 employees (approximately 11% of the Company's
workforce); and an additional reduction of 32 employees through June 30, 2000.
During the quarter ended July 2, 2000, as it became apparent that certain
employees in offices sold and franchised to third parties would continue
employment with such buyers or franchisees, the additional reduction in staff
included in the Restructuring plan was reduced from 59 employees to 32 employees
through August 15, 2000. A total of 47 branch offices have been or will be
eliminated in connection with the Restructuring, 41 of which have been sold,
franchised, closed, or consolidated as of August 15, 2000. These offices were
not or are not expected to be adequately profitable in the near future or are
inconsistent with the Company's operating strategy of clustering offices within
specific geographic regions. The restructuring charge accrual and its
utilization are as follows:
F-49
<PAGE> 127
NOTE 3: RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR DISPOSITION
(CONTINUED)
<TABLE>
<CAPTION>
Charges to Utilization
Original Balance At (Reversals of) ---------------------- Balance At
(Amounts in thousands) Charge 4/2/00 Operations Cash Non-cash 7/2/00
-------- ---------- -------------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Employee severance and
other termination benefits $ 4,040 $ 2,139 $ (89) $ 483 $ -- $ 1,567
Professional fees 1,205 34 369 362 -- 41
Lease termination and write-down of
leasehold improvements at closed offices 400 49 (2) 21 -- 26
Other restructuring charges 146 33 154 128 -- 59
------- ------- ------- ------- ------- -------
Accrued restructuring charges 5,791 2,255 432 994 -- 1,693
Write-down to fair value/loss on sale
of assets identified for disposition 5,429 -- 446 -- 446 --
------- ------- ------- ------- ------- -------
Total restructuring and asset
impairment activity $11,220 $ 2,255 $ 878 $ 994 $ 446 $ 1,693
======= ======= ======= ======= ======= =======
</TABLE>
The original $11.2 million restructuring charge includes $4.0 million for
severance and other termination benefits, $1.2 million for professional fees,
and $0.6 million in lease termination and other charges. Severance and other
termination benefits were decreased by $0.2 million and $0.1 million during Q1
2000 and Q1 2001, respectively, to reflect a reduction of amounts to be paid in
connection with certain severance packages accrued in 1999 since certain
employees of offices sold and franchised to third parties would continue
employment with such buyers or franchisees. The remaining liability of $1.6
million for severance and other termination benefits as of July 2, 2000 consists
of $1.4 million for 23 employees who have been or will be terminated during the
period of August 1999 through September 2000, and paid over a period ranging
from one week to 21 months from the balance sheet date.
Professional fees of $0.5 million and $0.4 million were recorded as
restructuring costs incurred during Q1 2000 and Q1 2001, respectively. These
professional fees were comprised primarily of amounts paid to Crossroads LLC,
formerly Crossroads Capital Partners, LLC ("Crossroads"), for its services
related to the Restructuring. The Company expects to complete these
restructuring activities during the quarter ending October 1, 2000.
The Company utilized $0.1 million and $0.1 million of the restructuring charge
during Q1 2000 and Q1 2001, respectively, for the costs of terminating leases as
well as writing down the carrying value of leasehold improvements and other
assets not usable in other Company operations.
The restructuring charge includes a $5.4 million write-down of assets, recorded
in the Company's results of operations at such time as these assets were
classified as held for disposition, to their estimated net realizable value
based on management's estimate of the ultimate sales prices that would be
negotiated for these assets. The charge was increased by $0.1 million in Q1 2000
and $0.4 million during Q1 2001, and is subject to future adjustments as the
Company negotiates the actual sales prices of the assets that remain to be sold
as of July 2, 2000.
During Q1 2001, the Company (i) sold one staffing office and closed another, in
the state of Minnesota, effective April 10, 2000, for cash proceeds of $60,000,
(ii) franchised one of its staffing offices in the state of Ohio, effective
April 10, 2000, for cash proceeds of $20,000, and (iii) sold its operations in
the
F-50
<PAGE> 128
NOTE 3: RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR DISPOSITION
(CONTINUED)
states of New Jersey and Pennsylvania, comprising six staffing offices and two
"vendor on premises" locations, for $1.3 million (comprised of cash proceeds of
$0.8 million and two promissory notes totaling $0.5 million). In connection with
the sale of its staffing offices in New Jersey and Pennsylvania, the Company
recorded a $0.4 million loss on the sale, in addition to the original $2.1
million write-down of these assets to their estimated net realizable value upon
their classification as assets held for disposition.
As of July 2, 2000 there were six Tandem offices that remained to be sold as
part of the Restructuring, and the Company had classified the related assets as
assets held for disposition, excluding cash, accounts receivable and deferred
income taxes. Upon classification as assets held for disposition, the Company
discontinued the related depreciation and amortization for these assets, which
reduced operating expenses by approximately $0.1 million in Q1 2001. The
estimated fair market value of these assets held for disposition was based on
management's judgment and as such, actual results could vary significantly from
such estimates.
The Company's assets held for disposition as of July 2, 2000, stated at the
lower of original cost (net of accumulated depreciation or amortization) or fair
value (net of selling and disposition costs), were as follows (presented in
thousands):
<TABLE>
<CAPTION>
Net Original Cost
-----------------------------------------
Property Goodwill and Lower of
and Other Cost or
Equipment Intangible Assets Total Fair Value
--------- ----------------- -------- -----------
<S> <C> <C> <C> <C>
Tandem branch offices $ 313 $ 1,005 $ 1,318 $ 426
====== ======== ======== =====
</TABLE>
The Tandem operations held for disposition, as well as those sold, franchised or
closed (excluding offices consolidated into existing offices) as part of the
Restructuring as of July 2, 2000, had revenues of $8.8 million and $13.9 million
in Q1 2001 and Q2 1999, respectively. On a basis consistent with the segment
information presented in Note 9, the Company reported a $0.2 million net income
and a ($0.7) million net loss for Q1 2001 and Q2 1999, respectively, for these
operations.
NOTE 4. INCOME TAXES
The Company's effective tax rate differed from the statutory federal rate of 35%
as follows (amounts presented in thousands, except for percentages):
F-51
<PAGE> 129
NOTE 4. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
For the Quarter Ended
--------------------------------------------------------
July 2, 2000 June 30, 1999
------------------------- ----------------------
Amount Rate Amount Rate
------- -------- ------- -----
<S> <C> <C> <C> <C>
Statutory rate applied to income before income taxes
and extraordinary item $ (211) (35.0)% $ (765) (35.0)%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit 20 3.3 (80) (3.7)
Employment tax credits (81) (13.4) (165) (7.5)
Nondeductible expenses 29 4.9 -- --
Other (101) (16.7) 74 3.4
------- -------- ------- -----
Total before valuation allowance (344) (56.9) (936) (42.8)
Change in valuation allowance (7,345) (1,218.1) -- --
------- -------- ------- -----
Total $(7,689) (1,275.0)% $ (936) (42.8)%
======= ======== ======= =====
</TABLE>
During Q1 2001, the Company reduced the deferred tax asset valuation allowance
by $7.3 million, which is expected to be realized through utilization of the
existing net operating loss carryforward, relating to the extinguishment gain to
be recorded in the quarter ending October 1, 2000 (see Note 5), and through
taxable income from future operations. The Company's expectations of future
taxable income are consistent with past operating history and do not incorporate
operating improvements to achieve such income. The Company's provision for
income taxes may be impacted by adjustments to the valuation allowance that may
be required if management's assessment changes regarding the realizability of
the deferred tax assets in future periods. The valuation allowance was
established in 1999 and was increased by the tax benefits in the quarter ended
April 2, 2000 because it was not clear that the tax benefits resulting from
operating losses and other temporary differences were "more likely than not" to
be realized, as required by SFAS No. 109, "Accounting for Income Taxes". Income
tax receivable and other current assets at July 2, 2000 includes a $15.4 million
deferred tax asset offset by a valuation allowance of $7.7 million, representing
the amount of the deferred tax assets that may not be realizable.
The employment tax credit carryforward of $2.5 million as of July 2, 2000 will
expire during the years 2012 through 2020. The employment tax credits recorded
by the Company from February 21, 1997 through December 31, 1999 include Federal
Empowerment Zone ("FEZ") credits which represent a net tax benefit of $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, the Company's position with
regard to the calculation of the FEZ credit has been challenged by the Internal
Revenue Service.
During 1999, the Company received a preliminary report from the IRS 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. Since that time, and as a result of analysis and discussions with
the Company, the proposed adjustments have been modified. The Company is
currently evaluating the merits of these proposed adjustments with the original
shareholders. Since the subsidiaries were "S" corporations for the periods under
examination, the proposed adjustments, if ultimately accepted or proven to be
appropriate, would not result in a materially unfavorable effect on the
Company's results of operations, although additional shareholder distributions
could result as discussed in Note 6.
F-52
<PAGE> 130
NOTE 5. DEBT
SENIOR DEBT FACILITIES
Effective August 15, 2000, the Company entered into a three-year agreement with
a syndicate of lenders led by Ableco Finance, LLC, as agent, an affiliate of
Cerberus Capital Management, L.P. (the "Lenders"), which replaced the Company's
existing credit facility with a $33.4 million Revolving Credit Facility, which
includes a subfacility for the issuance of standby letters of credit ("Senior
Facility"), and two term loans, Term Loan A and Term Loan B ("Term Loans"), of
$17.6 million and $9.0 million, respectively (the "Refinancing"). Both the
Senior Facility and the Term Loans are secured by all the assets of the Company
and its subsidiaries. The Senior Facility bears interest at prime or 9.0%,
whichever is greater, plus 2%. Term Loan A and Term Loan B bear interest at
prime or 9.0%, whichever is greater, plus 3.5% and 5.0% per annum, respectively.
In connection with the Refinancing, the Company issued warrants to the Lenders
to purchase up to a maximum of 200,000 common shares of the Company, exercisable
for a term of five years, at $0.01 per warrant. The warrants are only
exercisable if any letter of credit issued by the Lenders on behalf of the
Company is drawn in proportion to the amount drawn under the letter of credit.
A portion of the new credit facility was used to satisfy the credit facility
(the "Fleet Facility") with Fleet National Bank, for itself and as agent for
three other banks (the "Fleet Group"). Prior to the closing of the Refinancing,
the outstanding balance of the Fleet Facility was approximately $52.0 million.
The balance was repaid in full with a cash payment of approximately $32.3
million and the issuance of a four-year, $5.3 million subordinated term note
(the "Fleet Term Note"). The Fleet Term Note is subordinated to the Senior
Facility and Term Loans issued by the Lenders on behalf of the Company and
includes interest only for four years, followed by a balloon payment for the
entire principal amount. In addition, the Company is entitled to a 60% discount
on this note if it is satisfied within 18 months. This obligation bears interest
at Fleet's Alternative Prime Rate ("APR") plus 3.5% per annum. In connection
with the Refinancing and in satisfaction of the Company's obligation to the
Fleet Group, the Company has issued 524,265 warrants to the Fleet Group to
purchase common shares of the Company, which constitutes 5.0% of the common
stock of the Company on a fully diluted basis. The warrants are exercisable for
a term of 10 years at $0.001 per warrant. In connection with the Refinancing and
the termination of the Fleet Facility, the Company will record an extraordinary
gain, net of tax, of approximately $8.5 million in the quarter ending October 1,
2000.
As of July 2, 2000, the Company's primary sources of funds for working capital
and other needs were (i) a $26.1 million credit line (the "Revolving Credit
Facility"), including existing letters of credit of $4.8 million and (ii) a
$33.0 million credit facility, based on and secured by the Company's accounts
receivable (the "Receivable Facility"), with the Fleet Group. Effective April
13, 2000, due in part to the sale of the Company's Synadyne operation, the
maximum availability under the Receivable Facility was reduced from $50.0
million to $33.0 million. Effective May 1, 2000, the maximum availability under
the Revolving Credit Facility was reduced from $25.5 million to $25.3 million
(including existing letters of credit of $4.8 million), and effective in June
2000, the maximum availability under the Revolving Credit Facility was increased
to $26.1 million to provide for the Company's seasonal increase in working
capital requirements.
Prior to their expiration, the Receivable Facility, bore interest at Fleet's
prime rate plus 2.0% per annum, which was 11.5% as of July 2, 2000, while the
Revolving Credit Facility bore interest at prime plus 5.0% per annum, which was
14.5% as of July 2, 2000. The weighted average interest rate payable on the
outstanding balances during the period, exclusive of related fees and expenses,
was approximately 13.2% per annum, compared to approximately 6.7% per annum in
Q2 1999. As of July 2, 2000, the Company had outstanding borrowings of $19.4
million and $31.3 million under the Revolving Credit Facility and the Receivable
Facility, respectively.
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NOTE 5. DEBT (CONTINUED)
In addition to the Revolving Credit Facility indebtedness discussed above, the
Company had bank standby letters of credit outstanding in the aggregate amount
of $4.8 million as of July 2, 2000, of which $4.2 million secured the pre-1999
portion of the workers' compensation obligations recorded as a current liability
on the Company's Consolidated Balance Sheet. The remaining $0.6 million, which
is supported by a $0.7 million cash escrow balance, is to secure future payments
on a capital lease for furniture that was sold as part of the Company's
corporate headquarters building.
SUBORDINATED DEBT
In order to remain in compliance with certain covenants in the Revolving Credit
Facility, and to reduce the cash impact of scheduled payments under its
subordinated acquisition debt, the Company negotiated extensions of the payment
dates and modified the interest rates and other terms of certain of its
acquisition notes payable in 1999. The Company had not made substantially all of
the scheduled payments due and, as a result, was in default on acquisition notes
payable having a total outstanding principal balance of $6.9 million as of July
2, 2000. The terms of the acquisition notes payable, which were subordinated to
the Revolving Credit Facility and the Receivable Facility, allowed the payees to
accelerate terms of payment upon default. Acceleration of this debt required
prior written notice to the Company by the various payees, which was received
from three payees as of July 2, 2000. On August 15, 2000, in connection with the
Refinancing, the acquisition notes payable were amended to provide that the
Company will pay interest only, at a rate of 10.0% per annum, on the debt for
three years following the closing of the Refinancing, followed by two years of
equal monthly payments of interest and principal, which will retire the debt. In
connection with the amendments to the acquisition notes payable, the Company
paid $0.8 million of accrued interest to the relevant noteholders at the closing
of the Refinancing.
NOTE 6. 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"). This distribution, supplemented by an
additional distribution made in September 1998, is subject to adjustment based
upon the final determination of taxable income through February 21, 1997.
Although the Company has completed and filed its Federal and state tax returns
for all periods through February 21, 1997, further cash 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. As a result of
the IRS audit of the years 1994 through 1996 (see Note 4), the Company expects
to make a distribution to the Company's original shareholders of at least $2.0
million.
UNEMPLOYMENT TAXES: Federal and state unemployment taxes represent a significant
component of the Company's cost of revenues. State unemployment taxes are
determined as a percentage of covered wages. Such percentages are determined in
accordance with the laws of each state and usually take into account the
unemployment history of the Company's employees in that state. The Company has
realized reductions in its state unemployment tax expense as a result of changes
in its organizational structure from time to time. Although the Company believes
that these expense reductions were achieved in compliance with applicable laws,
taxing authorities of certain states may elect to challenge these reductions.
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NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company had made arrangements with several states to pay quarterly
unemployment tax payments originally due in July and October 1999 in monthly
installments over one year, bearing interest at rates ranging from 12.0% to
24.0% per annum. In addition, the Company contacted the taxing agencies of
certain states to arrange payment of payroll taxes owed, primarily for the
quarter ended April 2, 2000, of approximately $0.5 million. As of July 2, 2000,
all of these accumulated tax obligations had been remitted to the appropriate
taxing authorities.
FEDERAL EMPLOYMENT TAX REPORTING PENALTIES: During September 1999, the Company
was notified by the IRS of its intent to assess penalties of $500,000 related to
W-2s filed by the Company for 1997 for employees with invalid Social Security
numbers. The Company has requested an abatement of the penalty and does not
currently expect that the penalty ultimately charged will exceed $300,000, which
amount was included in selling, general and administrative expenses in 1999, and
is reflected as a current liability on the Company's July 2, 2000 Consolidated
Balance Sheet. However, there can be no assurance that the Company will not be
required to ultimately pay a higher penalty in connection with this matter.
UNCLAIMED PROPERTY AUDIT: A state in which the Company conducts a significant
portion of its operations has begun and substantially completed an audit of the
Company's compliance with escheat (unclaimed property) statutes. The applicable
state escheat laws cover a wide range of situations and property types and have
a ten-year statute of limitations. In addition, it is common for states to share
information in this area. As of July 2, 2000, the Company believes, based on
preliminary discussions with the examiner, that the outcome of this audit will
be immaterial to its results of operations.
WORKERS' COMPENSATION: During 1997, and through 1999, the Company's workers'
compensation expense for claims was effectively capped at a contractually-agreed
percentage of payroll. In 1997 and 1998, the Company's expense was limited to
the cap even though the estimated ultimate cost of the actual claims experience
was greater than the cap. In 1999, the estimated ultimate cost of the actual
claims experience was used as the basis of the Company's workers' compensation
expense since it was approximately $1.7 million less than the cap (3.5% of
payroll). The estimated ultimate cost of the 1999 claims experience was
determined based on information from an independent third-party administrator
employed by the Company plus an allowance for claims incurred but not reported,
based on prior experience and other relevant data. The Company's methodology for
determining workers' compensation expense in the quarter ended July 2, 2000 is
consistent with that for calendar year 1999.
The Company routinely adjusts the accruals made in prior years for workers'
compensation claims and expenses, based on updated information from its
insurance carriers, its independent third-party administrator and its own
analysis. These adjustments are included as a component of cost of sales in the
period in which it becomes apparent that an adjustment is required.
EMPLOYMENT AGREEMENTS: As of July 2, 2000, the Company had certain obligations
under employment agreements it had entered into with its Chief Executive Officer
("CEO"), its former CEO and thirteen other officers. Under the terms of those
agreements, in the event that the Company terminates the employment of any of
those officers without cause or the officer resigns for good reason, the
terminated officer will receive, among other things, severance compensation,
including a portion (ranging from three months to two years) of the officer's
annual base salary and bonus prior to termination. In addition, all incentive
stock options held by such employees would become immediately exercisable. More
substantial severance provisions apply if any of those officers are terminated
within two years (three years for the CEO) after the occurrence of a "change of
control", as defined in the employment agreements.
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NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Between February 1999 and May 2000, ten of the fifteen officers referred to
above separated from the Company, resulting in the Company's obligation to pay
two of those officers' salary for two years, three of those officers' salaries
for one year and five of those officers' salaries for six months, in exchange
for their agreement to, among other things, not compete with the Company during
that period. The aggregate costs of these severance agreements total $3.0
million, of which $1.5 million has been paid as of July 2, 2000, and $1.5
million is accrued in the Company's July 2, 2000 Consolidated Balance Sheet.
On June 1, 2000, pursuant to the terms of one of the severance agreements
described in the preceding paragraph, the Company provided a $0.2 million
advance on severance, which is being deducted by the Company in bi-monthly
installments payable over two years to a former officer of the Company.
CONSULTING CONTRACT: In May 1999, the Company engaged Crossroads, LLC, a
consulting firm based in Newport Beach, California, to review the Company's
existing business plan and make recommendations for adjustments to strategy as
well as financial and operational improvements. In July 1999, the engagement was
modified to add additional services, including working with management to
develop the Restructuring plan and a revised business plan based on the
restructured company (see Note 3), assisting in extending the existing Revolving
Credit Facility and Securitization Facility, arranging for new financing, and
periodically reporting to the Company's Board of Directors and lenders'
syndicate. In August 1999, a representative of Crossroads was appointed as the
Company's interim chief operating officer and the interim president of the
Tandem division. In connection with services provided by Crossroads to assist in
the Restructuring, the Company has incurred costs of $1.9 million through July
2, 2000, of which $0.4 million was for services provided during Q1 2001. These
amounts were included in the restructuring charge recorded by the Company in its
results of operations. The Company anticipates that it will record restructuring
charges of approximately $0.5 million in Q2 2001 for services to be rendered by
Crossroads during that period.
In connection with the Refinancing, the Company will pay Crossroads $0.9 million
for their assistance in securing the new credit facility. This charge, along
with other costs relating to the Refinancing, will be amortized in the Company's
results of operations over the three-year term of the Refinancing agreements.
STOCK OPTIONS AND WARRANTS: During February 2000, the Company granted options to
purchase 400,000 shares of the Company's common stock to the Company's new CEO
at $2.00 per share. In March 2000, the Company granted options to purchase
473,038 shares of the Company's common stock to various employees at $2.125 per
share, of which 428,736 shares remain outstanding as of July 2, 2000. Both
grants vest over a four-year period from the grant date. As of July 2, 2000, the
Company had in aggregate, 1,856,277 stock options and 1,208,988 warrants to
purchase shares of the Company's common stock outstanding.
The total number of shares of common stock reserved for issuance under the stock
option plan as of July 2, 2000 was 2,000,000, as agreed to by the Company's
Board of Directors in April 1999 and approved by the Company's shareholders at
their May 1999 annual meeting.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company recognized revenue of $0.3 million in Q2 1999 from all franchises
owned by significant shareholders of the Company, which included royalties and
payments under buyout agreements. 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 buyouts, the Company receives an
initial payment from the former franchisee and continues to receive quarterly
payments from the former
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NOTE 7. RELATED PARTY TRANSACTIONS (CONTINUED)
franchisee based on the gross revenues of the formerly franchised locations for
two years after the termination date. These buyout terms are generally
consistent with the terms of buyout agreements between the Company and unrelated
third parties.
Effective February 16, 1998, the Company purchased certain staffing locations
and the related franchise rights from certain shareholders for $6.9 million
which included the issuance of a $1.7 million note bearing interest at 7.25% per
annum 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 installments
totaling $0.3 million in the first year and $0.6 million in the second year,
with a $0.4 million balloon payment due at the end of the two year term. As
discussed in Note 5, the Company had not made the renegotiated payments on this
subordinated acquisition note, and, as a result, was in default under this note.
Effective August 15, 2000 this note was amended to provide that the Company will
pay interest only, at a rate of 10.0% per annum, on the debt for three years,
followed by two years at equal monthly installments of principal and interest,
which will retire the debt.
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". Certain of the outstanding
options and warrants to purchase common stock of the Company were anti-dilutive
for Q2 1999 and accordingly were excluded from the calculation of diluted
weighted average common shares for that period, 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 as follows:
TANDEM: This segment derives revenues from recruiting, training and deploying
temporary industrial personnel and from providing payroll administration, risk
management and benefits administration services.
SYNADYNE: This segment derived revenues from providing a comprehensive package
of PEO services to its clients including payroll administration, risk
management, benefits administration and human resource consultation. See Note 3
relating to the Company's disposition of these operations.
FRANCHISING: This segment derives revenues under agreements with industrial
staffing franchisees that provide those franchises with, among other things,
exclusive geographic areas of operations, continuing advisory and support
services and access to the Company's confidential operating manuals. Franchising
revenues also include revenues from early terminations of franchise agreements,
called "buyouts".
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. The Company does
not regularly provide information regarding the reportable segments' net assets
to the chief operating decision-maker. Certain reclassifications have been made
between segments to Income (Loss) Before Taxes in Q2 1999 to be consistent with
current period presentation.
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NOTE 9. OPERATING SEGMENT INFORMATION (CONTINUED)
For the Quarter Ended
------------------------------
July 2, 2000 June 30, 1999
------------ -------------
(Amounts in thousands)
REVENUES
Tandem $ 80,859 $ 79,855
Synadyne 71 55,079
Franchising 654 2,469
Other Company revenues 34 6,051
--------- ---------
Total Company revenues $ 81,618 $ 143,454
========= =========
INCOME (LOSS) BEFORE TAXES
Tandem $ 4,608 $ 435
Synadyne (198) 523
Franchising 495 2,191
Other Company income (loss), net (1) (5,508) (5,334)
--------- ---------
The Company's loss before taxes $ (603) $ (2,185)
========= =========
(1) During Q1 2001, the Company recognized restructuring charges of $0.9
million and a $0.7 million net gain on the sale of the Company's PEO
operations.
NOTE 10. SUBSEQUENT EVENTS
On August 9, 2000, the Company was notified by Nasdaq-Amex that, because the
Company was not in compliance with the minimum $4 million net tangible assets
for continued listing on the Nasdaq National Market, the Company's common stock
would be delisted effective August 10, 2000. Pursuant to the notification
received from Nasdaq-Amex, the Company's common stock was delisted from the
Nasdaq National Market and is now being traded on the OTC Bulletin Board.
As a result of completing the Refinancing, the Company believes it has taken the
steps necessary to cure the net tangible asset deficiency and intends to appeal
the delisting decision.
On September 13, 2000, a final default judgment in the amount of $807,245 was
entered against Synadyne III, Inc. a wholly-owned subsidiary of the Company
("Synadyne III") in the County Court, Dallas County, Texas. The action was
brought by an employee of an independent agency of the Allstate Insurance
Company claiming that the owner of that agency discriminated against her in
violation of the Texas Commission of Human Rights Act of 1983. Synadyne III was
under contract with this insurance agency to provide PEO services. It is the
Company's contention that the complaint in this action was never properly served
on Synadyne III and therefore, the Company has filed a motion to vacate this
judgment on the grounds that it was obtained without according due process to
Synadyne III. The Company believes, based on the advice of counsel, that it will
be successful in vacating the judgment and the resolution of this matter will
not have a material adverse effect on its financial position or future operating
results. The Company has not made any adjustments to the financial statements
for this matter.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with
the issuance and distribution of the securities being registered hereunder (to
be provided by amendment).
SEC Registration Fee................................ $1,185
Printing and Engraving Costs........................ $25,000
Accounting Fees and Expenses........................ $50,000
Legal Fees and Expenses............................. $50,000
Miscellaneous....................................... $10,000
-------
Total...................................... $136,185
=======
All amounts are estimated except for the SEC registration fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation and Bylaws provide that the
Company shall indemnify any director or officer, any former director or officer,
and any person exercising any duties of a director or officer, to the fullest
extent permitted under Florida law.
The Company has acquired insurance with respect to, among other things,
certain liabilities that may arise under the statutory provisions referred to
above. The directors and officers of the Company are insured against certain
liabilities, including certain liabilities arising under the Securities Act of
1933, which might be incurred by them in such capacities and against which they
are not indemnified by the Company.
Section 607.0850(1) of the Florida Business Corporation Act (the
?FBCA?) provides that a Florida corporation, such as the Company, shall have the
power to indemnify any person who was or is a party to any proceeding (other
than an action by, or in the right of, the corporation), by reason of the fact
that he is or was a director, officer, employee, or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee, or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise against liability
incurred in connection with such proceeding, including any appeal thereof, if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
Section 607.0850(2) of the FBCA provides that a Florida corporation
shall have the power to indemnify any person, who was or is a party to any
proceeding by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that he is or was a director, officer, employee, or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses and amounts paid in
settlement not exceeding, in the judgment of the board of directors, the
estimated expense of litigating the proceeding to conclusion, actually and
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reasonably incurred in connection with the defense or settlement of such
proceeding, including any appeal thereof. Such indemnification shall be
authorized if such person acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the corporation,
except that no indemnification shall be made under this subsection in respect of
any claim, issue, or matter as to which such person shall have been adjudged to
be liable unless, and only to the extent that, the court in which such
proceeding was brought, or any other court of competent jurisdiction, shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
Section 607.0850 of the FBCA further provides that: (i) to the extent
that a director, officer, employee or agent of a corporation has been successful
on the merits or otherwise in defense of any proceeding referred to in
subsection (1) or subsection (2), or in defense of any proceeding referred to in
subsection (1) of subsection (2), or in defense of any claim, issue, or matter
therein, he shall be indemnified against expense actually and reasonably
incurred by him in connection therewith; (ii) indemnification provided pursuant
to Section 607.0850 is not exclusive; and (iii) the corporation may purchase and
maintain insurance on behalf of a director or officer of the corporation against
any liability asserted against him or incurred by him in any such capacity or
arising out of his status as such whether or not the corporation would have the
power to indemnify him against such liabilities under Section 607.0850.
Notwithstanding the foregoing, Section 607.0850 of the FBCA provides
that indemnification or advancement of expenses shall not be made to or on
behalf of any director, officer, employee or agent if a judgment or other final
adjudication establishes that his actions, or omissions to act, were material to
the cause of action so adjudicated and constitute: (i) a violation of the
criminal law, unless the director, officer, employee or agent had reasonable
cause to believe his conduct was lawful or had no reasonable cause to believe
his conduct was unlawful; (ii) a transaction from which the director, officer,
employee or agent derived an improper personal benefit; (iii) voting for or
assenting to an unlawful distribution; or (iv) willful misconduct or a conscious
disregard for the best interests of the corporation in a proceeding by or in the
right of the corporation to procure a judgment in its favor or in a proceeding
by or in the right of a shareholder.
Section 607.0831 of the FBCA provides that a director of a Florida
corporation is not personally liable for monetary damages to the corporation or
any other person for any statement, vote, decision, or failure to act, regarding
corporate management or policy, by a director, unless: (i) the director breached
or failed to perform his duties as a director; and (ii) the director?s breach
of, or failure to perform, those duties constitutes: (A) a violation of criminal
law, unless the director had reasonable cause to believe his conduct was lawful
or had no reasonable cause to believe his conduct was unlawful; (B) a
transaction from which the director derived an improper personal benefit, either
directly or indirectly; (C) a circumstance under which the liability provisions
regarding unlawful distributions are applicable; (D) in a proceeding by or in
the right of the corporation to procure a judgment in its favor or by or in the
right of a shareholder, conscious disregard for the best interest of the
corporation, or willful misconduct; of (E) in a proceeding by or in the right of
someone other than the corporation or a shareholder, recklessness or an act or
omission which was committed in bad faith or with malicious purpose or in a
manner exhibiting wanton and willful disregard of human rights, safety, or
property.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
CALENDAR YEAR 2000
On August 15, 2000, in connection with the refinancing, we issued
warrants to purchase an aggregate of 524,265 shares of our common stock to the
lenders under our previous credit facility, which constitutes 5% of our
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outstanding common stock on a fully-diluted basis. The warrants were issued in
exchange for forgiveness of $14.4 million which we owed to the lenders. The
warrants were issued in reliance on Section 4(2) of the Securities Act.
On August 15, 2000, in connection with the refinancing, we issued
warrants to purchase up to 200,000 shares of our common stock to Ableco Holding
LLC. The warrants are only exercisable if any letter of credit issued by the new
lenders on our behalf is drawn, in which event, the number of warrants the
lenders will receive will be based on the amount drawn under the letter of
credit. The warrants were issued in reliance on Section 4(2) of the Securities
Act.
CALENDAR YEAR 1998
On April 15, 1998, we issued an aggregate of 5,716 shares of our common
stock to Mr. Robert A. Lefcort and the Robert A. Lefcort Trust in connection
with the exercise of warrants entitling those parties to purchase shares of our
common stock at $0.01 per share. The aggregate exercise price of $87.94 was
received by us in cash at the time of exercise. The securities were issued
pursuant to Section 4(2) of the Securities Act. No underwriting commissions were
paid in connection with this issuance of stock.
On May 12, 1998, we issued 20,929 shares of our common stock to Paul M.
Burrell in connection with the exercise of warrants entitling him to purchase
shares of our common stock at $0.01 per share. The exercise price of $321.99 was
received by us in cash at the time of exercise. The securities were issued
pursuant to Section 4(2) of the Securities Act. No underwriting commissions were
paid in connection with this issuance of stock.
On May 12, 1998, we issued an aggregate of 124,671 shares of our common
stock to the Lawrence H. Schubert Trust, the Nadya Schubert Trust, Alan E.
Schubert, Mindi Wagner, the Matthew Schubert Trust, the Jason D. Schubert Trust
and Louis A. Morelli, in connection with the exercise of warrants entitling
those parties to purchase shares of our common stock at $0.01 per share. The
aggregate exercise price of $1,918.01 was received by us in cash at the time of
exercise. The securities were issued pursuant to section 4(2) of the Securities
Act. No underwriting commissions were paid in connection with these issuances of
stock.
On February 2, 1998, we issued an aggregate of 57,809 shares of our
common stock to Mr. Mark Gigot as partial consideration for the acquisition of
100% of the common stock of Employment Consultants, Inc. The securities were
issued pursuant to Section 4(2) of the Securities Act. No underwriting
commissions were recorded in connection with this issuance of stock.
CALENDAR YEAR 1997
On February 21, 1997, we consummated a reorganization with the
following nine operating companies: OutSource International of America, Inc.,
Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc.,
Synadyne V, Inc., OutSource Franchising, Inc., Capital Staffing Fund, Inc., and
Employees Insurance Services, Inc. and the shareholders of each of these
entities. Pursuant to the terms of the reorganization, we acquired all of the
outstanding capital stock of the subsidiaries from their existing shareholders
in exchange for the issuance of 5,448,788 shares of newly issued shares of our
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common stock, the payment of approximately $5.7 million in cash and the issuance
of promissory notes in the aggregate principal amount of approximately $1.7
million to certain of the existing shareholders. The securities were issued
pursuant to Section 4(2) under the Securities Act. In connection with the
reorganization, the existing shareholders contributed approximately $4.3 million
in outstanding promissory notes.
On February 21, 1997, we issued senior subordinated promissory notes in
the principal amounts of $14,000,000 and $11,000,000 to Triumph-Connecticut
Limited Partnership and Bachow Investment Partners III, L.P., respectively. The
notes were repaid on October 29, 1997. The securities were issued pursuant to
Section 4(2) of the Securities Act.
In connection with the issuance of the notes, we issued 786,517
warrants to Triumph and Bachow and placed 573,787 warrants in escrow, pending
release to either the existing shareholders of the purchased subsidiaries or the
note holders, based upon our achievement of certain specified performance
criteria. The warrants are currently exercisable at an exercise price of $.01
per share and expire on February 20, 2002. Following the successful consummation
of certain acquisitions in April 1997, 180,891 additional warrants were released
from escrow in April 1997 and distributed to the existing shareholders. The
remaining 392,896 additional warrants were released to Triumph and Bachow as of
March 1, 2000. The additional warrants are exercisable at an exercise price of
$.01 per share and expire on February 20, 2002. The securities were issued
pursuant to Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
The following exhibits are filed as part of this registration
statement:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Amended and Restated Agreement Among Shareholders dated February
21, 1997(1)
2.2 Articles of Share Exchange among Outsource International, Inc.,
Capital Staffing Fund, Inc., Outsource Franchising, Inc.,
Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc.,
Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
Services, Inc. and Outsource International of America, Inc.
dated February 21, 1997(1)
3.1 Amended and Restated Articles of Incorporation of the Company(2)
3.2 Amended and Restated Bylaws of the Company(3)
4.3 Shareholder Protection Rights Agreement(3)
4.6 Warrant Dated February 21, 1997 Issued to Triumph-Connecticut
Limited Partnership(1)
4.7 Warrant Dated February 21, 1997 Issued to Bachow Investment
Partners III, L.P.(1)
4.8 Warrant Dated February 21, 1997 Issued to State Street Bank and
Trust Company of Connecticut, N.A., as Escrow Agent(1)
5.1 Opinion of Akerman, Senterfitt & Eidson, P.A. regarding the
validity of the securities offered*
II-4
<PAGE> 140
10.1 Securities Purchase Agreement among Triumph-Connecticut Limited
Partnership, Bachow Investment Partners III, L.P., Outsource
International, Inc., Capital Staffing Fund, Inc., Outsource
Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne
III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees
Insurance Services, Inc. and Outsource International of America,
Inc. dated as of February 21, 1997(1)
10.3 Registration Rights Agreement among Outsource International,
Inc., Triumph-Connecticut Limited Partnership, Bachow Investment
Partners III, L.P., and shareholders of Outsource International,
Inc. dated as of February 21, 1997(1)
10.4 Agreement among Shareholders and Investors in Outsource
International, Inc. dated as of February 21, 1997(1)
10.11 Employment Agreement between Paul M. Burrell and the Company
dated as of February 21, 1997(1)
10.12 Employment Agreement between Robert A. Lefcort and the Company
dated as of March 3, 1997(1)
10.13 Employment Agreement between Robert E. Tomlinson and the Company
dated as of March 3, 1997(1)
10.15 Employment Agreement between Brian Nugent and the Company dated
as of March 11, 1997(5)
10.16 Employment Agreement between Carolyn Noonan and the Company
dated as of July 22, 1999(6)
10.17 Employment Agreement between Scott R. Francis and the Company
dated as of April 1, 1998(4)
10.18 Stock Option Plan, As Amended Effective May 8, 1998(4)
10.33 Form of Accumulated Adjustments Account Promissory Note dated
February 20, 1997 issued by Capital Staffing Fund, Inc.,
Outsource Franchising, Inc. and Outsource International of
America, Inc. to the following shareholders of the Company and
Schedule of Allocation of AAA Distribution to such shareholders:
Lawrence H. Schubert Revocable Trust; Robert A. Lefcort
Irrevocable Trust; Nadya I. Schubert Revocable Trust; Louis J.
Morelli S Stock Trust; Margaret Ann Janisch S Stock Trust;
Matthew Schubert Outsource Trust; Jason Schubert Outsource
Trust; Alan E. Schubert; Louis A. Morelli; Louis J. Morelli;
Raymond S. Morelli; Matthew B. Schubert; Mindi Wagner; Margaret
Morelli Janisch; Robert A. Lefcort; and Paul M. Burrell(1)
10.80 Employment agreement between Jon Peterson and the Company dated
as of February 14, 2000(7)
10.81 Employment agreement between Garry E. Meier and the Company
dated as of February 7, 2000(7)
10.82 Separation Agreement and Release between Paul Burrell and the
Company effective February 14, 2000(8)
10.83 Separation Agreement and Release between Robert Lefcort and the
Company effective April 6, 2000(8)
II-5
<PAGE> 141
10.84 Separation Agreement and Release between Brian Nugent and the
Company effective April 21, 2000(8)
10.85 Asset Purchase Agreement by and between Team Staff, Inc.,
Teamstaff V, Inc. and Outsource International, Inc., Synadyne I,
Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc.,
Synadyne V, Inc., Guardian Employer East LLC and Guardian
Employer West LLC, dated as of April 7, 2000(7)
10.86 Shared Services Agreement by and between Team Staff, Inc. and
Outsource International, Inc., dated as of April 7, 2000(7)
10.90 Engagement Letter between Outsource International, Inc. and
Crossroads Capital Partners LLC, dated as of May 7, 1999 and
three addenda dated June 18, July 1 and August 2, 1999(6)
10.91 Finder Services Agreement between Outsource International, Inc.
and Crossroads Capital Partners LLC, dated as of June 30,
1999(6)
10.92(a) Financing Agreement, dated as of August 15, 2000, among
Outsource International, Inc., Outsource International of
America, Inc., Outsource Franchising, Inc., Guardian Employer
East, LLC and Guardian Employer West, LLC, as Borrowers, the
other subsidiaries of Outsource International, Inc., as
Guarantors, Ableco Finance LLC, as agent for certain Lenders,
and The CIT Group/Business Credit, Inc(9)
10.92(b) Term A Note, dated August 15, 2000, in the amount of $8,800,000,
made by Outsource International, Inc., Outsource International
of America, Inc., Outsource Franchising, Inc., Guardian Employer
East, LLC and Guardian Employer West, LLC, as Borrowers, to the
order of Ableco Finance LLC(9)
10.92(c) Term A Note, dated August 15, 2000, in the amount of $8,800,000,
made by Outsource International, Inc., Outsource International
of America, Inc., Outsource Franchising, Inc., Guardian Employer
East, LLC and Guardian Employer West, LLC, as Borrowers, to the
order of A2 Funding LP(9)
10.92(d) Term B Note, dated August 15, 2000, in the amount of $9,000,000,
made by Outsource International, Inc., Outsource International
of America, Inc., Outsource Franchising, Inc., Guardian Employer
East, LLC and Guardian Employer West, LLC, as Borrowers, to the
order of Ableco Holding LLC(9)
10.92(e) Revolving Credit Note, dated August 15, 2000, in the amount of
$33,400,000, made by Outsource International, Inc., Outsource
International of America, Inc., Outsource Franchising, Inc.,
Guardian Employer East, LLC and Guardian Employer West, LLC, as
Borrowers, to the order of The CIT Group/Business Credit,
Inc.(9)
10.92(f) Warrant, dated August 15, 2000, issued to Ableco Holding LLC(10)
10.92(g) Registration Rights Agreement, dated as of August 15,
2000, between Outsource International, Inc. and Ableco Holding
LLC(9)
10.93(a) Restructuring Agreement, dated as of August 15, 2000, among
Outsource International, Inc., Fleet National Bank, as agent,
and each of the banks party thereto(9)
II-6
<PAGE> 142
10.93(b) Notes, each dated August 15, 2000, totaling $5,343,262, made by
Outsource International, Inc., as Borrower, to the order of
Fleet National Bank ($2,200,168.28); LaSalle Bank National
Association ($1,257,237.49); Comerica Bank ($1,257,237.49), and
SunTrust Bank ($628,618.74)(9)
10.93(c) Warrant Purchase Agreement, dated as of August 15, 2000, among
Outsource International, Inc., Fleet National Bank, Comerica
Bank, LaSalle Bank National Association and SunTrust Bank(9)
10.93(d) Form of Warrant, dated August 15, 2000, issued to Fleet National
Bank (215,874 shares), Comerica Bank (123,356), LaSalle Bank
National Association (123,356) and SunTrust Bank (61,679)(9)
23.1 Consent of Akerman, Senterfitt & Eidson, P.A.*
23.2 Consent of Deloitte & Touche LLP**
24.1 Power of Attorney (included on the signature page of this
Registration Statement)
27.1 Financial Data Schedule**
27.2 Financial Data Schedule**
------------------------
* To be filed by amendment
** Filed herewith
(1) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-1 (Registration Statement No. 333-33443), as filed
with the Securities and Exchange Commission on August 12, 1997
(2) Incorporated by reference to the Exhibits to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration Statement
No. 333-33443), as filed with the Securities and Exchange Commission on
October 21, 1997
(3) Incorporated by reference to the Exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Registration Statement
No. 333-33443), as filed with the Securities and Exchange Commission on
September 23, 1997
(4) Incorporated by reference to the Exhibits to the Company's Form 10-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 30, 1999
(6) Incorporated by reference to the Exhibits to the Company's Form 10-Q
for the quarterly period ended June 30, 1999, as filed with the
Securities and Exchange Commission on August 16, 1999
(7) Incorporated by reference to the exhibits to the Company's Form 10-K/A
for the year ended December 31, 1999, as filed with the Securities and
Exchange Commission on April 20, 2000
(8) Incorporated by reference to the exhibits to the Company's Form 10-Q
for the transition period ended April 2, 2000, as filed with the
Securities and Exchange Commission on May 17, 2000
(9) Incorporated by reference to the exhibits to the Company's Form 10-Q
for the quarterly period ended July 2, 2000, as filed with the
Securities and Exchange Commission on August 21, 2000
II-7
<PAGE> 143
(b) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule is filed as part of this
Registration Statement:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable or not material, or
the information called for thereby is otherwise included in the financial
statements and therefore has been omitted.
ITEM 17. UNDERTAKINGS.
A. Rule 415 Offering
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
B. Request for Acceleration of Effective Date
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-8
<PAGE> 144
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Outsource
International, Inc. has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Delray
Beach, State of Florida, on the 30th day of October, 2000.
OUTSOURCE INTERNATIONAL, INC.
/s/ Garry E. Meier
------------------------------------------
By: Garry E. Meier
Its: President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Garry E. Meier and Scott R. Francis and
each of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and revocation, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any Registration
Statement (and any and all amendments thereto) related to this Registration
Statement and filed pursuant to Rule 462(b) promulgated by the Securities and
Exchange Commission, and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Garry E. Meier
---------------------------------------- Chairman of the Board, Chief Executive Officer
Garry E. Meier and President (Principal Executive Officer)
and Director October 30, 2000
/s/ Scott R. Francis
---------------------------------------- Chief Financial Officer, Vice President and
Scott R. Francis Director (Principal Financial Officer) October 30, 2000
/s/ Carolyn H. Noonan
----------------------------------------- Vice President and Controller (Principal
Carolyn H. Noonan Accounting Officer) October 30, 2000
/s/ Jay D. Seid
----------------------------------------- Director October 30, 2000
Jay D. Seid
/s/ David S. Hershberg
----------------------------------------- Director October 30, 2000
David S. Hershberg
/s/ Dr. Lawrence Chimerine
----------------------------------------- Director October 30, 2000
Dr. Lawrence Chimerine
/s/ Michael S. Fawcett
----------------------------------------- Director October 30, 2000
Michael S. Fawcett
</TABLE>
II-9
<PAGE> 145
SCHEDULE II
OUTSOURCE INTERNATIONAL, INC. AND AFFILIATES
VALUATION AND QUALIFYING ACCOUNTS
TRANSITION QUARTER ENDED APRIL 2, 2000 AND
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
CHARGED TO CREDITS
BALANCE COSTS AND ISSUED AND BALANCE
JANUARY 1, 2000 EXPENSES OTHER CHARGE-OFFS APRIL 2, 2000
--------------- -------- ----- ----------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and credit memos $ 2,829,646 $ (659,118) $ -- $ (606,554) $ 1,563,974
Tax asset valuation allowance 14,071,996 829,280 -- -- 14,901,276
</TABLE>
<TABLE>
<CAPTION>
CHARGED TO CREDITS
BALANCE COSTS AND ISSUED AND BALANCE
JANUARY 1, 1999 EXPENSES OTHER CHARGE-OFFS DECEMBER 31, 1999
--------------- -------- ----- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and credit memos $ 1,924,146 6,070,768 -- (5,165,268) $ 2,829,646
Tax asset valuation allowance -- 14,071,996 -- -- 14,071,996
</TABLE>
<TABLE>
<CAPTION>
CHARGED TO CREDITS
BALANCE COSTS AND ISSUED AND BALANCE
JANUARY 1, 1998 EXPENSES OTHER CHARGE-OFFS DECEMBER 31, 1998
--------------- -------- ----- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and credit memos $ 1,639,767 $3,355,571 $ -- $ (3,071,192) $ 1,924,146
</TABLE>
<TABLE>
<CAPTION>
CHARGED TO CREDITS
BALANCE COSTS AND ISSUED AND BALANCE
JANUARY 1, 1997 EXPENSES OTHER CHARGE-OFFS DECEMBER 31, 1997
--------------- -------- ----- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and credit memos $ 978,250 $3,123,861 $ -- $ (2,462,344) $ 1,639,767
</TABLE>
S-1
<PAGE> 146
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
23.2 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule
