<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- --------------
Commission file number 000-23147
OUTSOURCE INTERNATIONAL, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0675628
---------------------------- ----------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1690 SOUTH CONGRESS AVE., DELRAY BEACH, FLORIDA 33445
-----------------------------------------------------
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code: (561) 454-3500
Indicate whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT NOVEMBER 10, 2000
----- --------------------------------
Common Stock, par value $.001 per share 8,687,488
<PAGE> 2
OUTSOURCE INTERNATIONAL, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of October 1, 2000
and April 2, 2000........................................................................... 2
Unaudited Condensed Consolidated Statements of Operations for the thirteen weeks
ended October 1, 2000 and three months ended September 30, 1999............................. 3
Unaudited Condensed Consolidated Statements of Operations for the twenty six
weeks ended October 1, 2000 and six months ended September 30, 1999......................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the twenty six
weeks ended October 1, 2000 and six months ended September 30, 1999......................... 5
Notes to Unaudited Condensed Consolidated Financial Statements.............................. 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 17
Item 3 - Quantitative and Qualitative Disclosures about Market Risk......................... 35
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................................................... 36
Item 2 - Changes in Securities and Use of Proceeds............................................ 36
Item 3 - Defaults Upon Senior Securities...................................................... 36
Item 6 - Exhibits and Reports on Form 8-K..................................................... 37
Signatures.................................................................................... 40
</TABLE>
i
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 1, 2000 APRIL 2, 2000
--------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 2,030 $ 1,546
Trade accounts receivable, net of allowance
for doubtful accounts of $1,498 and $1,563 36,837 42,118
Funding advances to franchises 696 206
Assets held for disposition 215 2,409
Income tax receivable and other current assets 6,653 5,043
--------- ---------
Total current assets 46,431 51,322
Property and equipment, net 7,424 9,154
Goodwill and other intangible assets, net 44,316 45,783
Other assets 6,013 2,310
--------- ---------
Total assets $ 104,184 $ 108,569
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,219 $ 8,887
Accrued expenses:
Payroll 4,767 10,518
Payroll taxes 1,912 4,139
Workers' compensation and insurance 5,285 5,210
Other 3,605 4,499
Accrued restructuring charges 1,358 2,255
Other current liabilities 982 506
Current maturities of long-term debt to related parties -- 1,195
Current maturities of long-term debt 1,690 7,635
Revolving credit facility -- 50,746
Current maturities of term loans 500 --
--------- ---------
Total current liabilities 27,318 95,590
Non-Current Liabilities
Senior facilities, net of current maturities 15,321 --
Term loans, net of current maturities 25,425 --
Long term debt, net of current maturities 1,204 --
Other long-term debt, less current maturities 6,636 1,934
--------- ---------
Total liabilities 75,904 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,
8,687,488 shares issued and outstanding 9 9
Additional paid-in-capital 54,170 53,546
Accumulated deficit (25,899) (42,510)
--------- ---------
Total shareholders' equity 28,280 11,045
--------- ---------
Total liabilities and shareholders' equity $ 104,184 $ 108,569
========= =========
</TABLE>
See accompanying notes to the unaudited
condensed consolidated financial statements
2
<PAGE> 4
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED OCTOBER 1, 2000
AND THREE MONTHS ENDED SEPTEMBER 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 1, 2000 SEPTEMBER 30, 1999
--------------- ------------------
<S> <C> <C>
Net revenues $ 78,882 $ 159,124
Cost of revenues 62,590 138,352
------------ ------------
Gross profit 16,292 20,772
------------ ------------
Selling, general and administrative expenses:
Amortization of intangible assets 704 1,013
Other selling, general and administrative expenses 12,550 24,211
------------ ------------
Total selling, general and administrative expenses 13,254 25,224
------------ ------------
Restructuring and impairment charges:
Restructuring charges 940 5,104
Impairment of goodwill and other long-lived assets -- 2,450
------------ ------------
Total restructuring and impairment charges 940 7,554
------------ ------------
Operating income (loss) 2,098 (12,006)
------------ ------------
Other expense (income):
Interest expense, net 2,456 1,852
Gain on the disposition of assets and other income, net (144) (541)
------------ ------------
Total other expense (income): 2,312 1,311
------------ ------------
Loss before benefit for income taxes (214) (13,317)
Income tax benefit (1,283) (4,998)
------------ ------------
Income (loss) before extraordinary item 1,069 (8,319)
Extraordinary item - gain on refinancing of senior debt facilities,
net of provision for income tax of $5,304 8,456 --
------------ ------------
Net income (loss) $ 9,525 $ (8,319)
============ ============
Weighted average common shares outstanding:
Basic 8,687,488 8,657,913
============ ============
Diluted 10,292,236 8,657,913
============ ============
Earnings per share:
Basic
Income (loss) before extraordinary item $ 0.13 $ (0.96)
Extraordinary item, net of provision for income tax 0.97 --
------------ ------------
Net income (loss) $ 1.10 $ (0.96)
============ ============
Diluted
Income (loss) before extraordinary item $ 0.11 $ (0.96)
Extraordinary item, net of provision for income tax 0.82 --
------------ ------------
Net income (loss) $ 0.93 $ (0.96)
============ ============
</TABLE>
See accompanying notes to the unaudited
condensed consolidated financial statements
3
<PAGE> 5
OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWENTY SIX WEEKS ENDED OCTOBER 1, 2000
AND SIX MONTHS ENDED SEPTEMBER 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 1, 2000 SEPTEMBER 30, 1999
--------------- -------------------
<S> <C> <C>
Net revenues $ 160,500 $ 302,578
Cost of revenues 128,021 261,461
------------ ------------
Gross profit 32,479 41,117
------------ ------------
Selling, general and administrative expenses:
Amortization of intangible assets 1,438 1,947
Other selling, general and administrative expenses 26,539 44,126
------------ ------------
Total selling, general and administrative expenses 27,977 46,073
------------ ------------
Restructuring and impairment charges:
Restructuring charges 1,818 5,104
Impairment of goodwill and other long-lived assets -- 2,450
------------ ------------
Total restructuring and impairment charges 1,818 7,554
------------ ------------
Operating income (loss) 2,684 (12,510)
------------ ------------
Other expense (income):
Interest expense, net 4,369 3,554
Gain on disposition of assets and other income, net (867) (562)
------------ ------------
Total other expense (income): 3,502 2,992
------------ ------------
Loss before benefit for income taxes (818) (15,502)
Income tax benefit (8,973) (5,934)
------------ ------------
Income (loss) before extraordinary item 8,155 (9,568)
Extraordinary item - gain on refinancing of senior debt facilities,
net of provision for income tax of $5,304 8,456 --
------------ ------------
Net income (loss) $ 16,611 $ (9,568)
============ ============
Weighted average common shares outstanding:
Basic 8,681,172 8,657,913
============ ============
Diluted 10,086,221 8,657,913
============ ============
Earnings per share:
Basic
Income (loss) before extraordinary item $ 0.94 $ (1.11)
Extraordinary item, net of provision for income tax 0.97 --
------------ ------------
Net income (loss) $ 1.91 $ (1.11)
============ ============
Diluted
Income (loss) before extraordinary item $ 0.81 $ (1.11)
Extraordinary item, net of provision for income tax 0.84 --
------------ ------------
Net income (loss) $ 1.65 $ (1.11)
============ ============
</TABLE>
See accompanying notes to the unaudited
condensed consolidated financial statements
4
<PAGE> 6
OUTSOURCE INTERNATIONAL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY SIX WEEKS ENDED OCTOBER 1, 2000
AND SIX MONTHS ENDED SEPTEMBER 30, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 1, 2000 SEPTEMBER 30, 1999
--------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 16,611 $ (9,568)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,784 3,741
Impairment of goodwill -- 2,450
Write-down and losses from sale of assets held for disposition 579 2,547
Extraordinary gain on refinancing, net of income tax (8,456) --
Deferred income taxes (9,530) (4,940)
Notes received from franchises -- (107)
Gain on the sale of the Company's clerical operations (523)
Gain on the sale of the Company's PEO operations (684) --
Loss on disposal of assets, net 153 50
-------- --------
1,457 (6,350)
Changes in assets and liabilities (excluding effects of acquisitions and
dispositions):
(Increase) decrease in:
Trade accounts receivable 5,839 3,966
Prepaid expenses and other current assets 363 (975)
Other assets (62) 756
Increase (decrease) in:
Accounts payable (100) (1,004)
Accrued expenses:
Payroll (5,778) 5,378
Payroll taxes (2,227) 818
Workers' compensation and insurance 6 (1,393)
Debt service and other accrued expenses (1,846) 934
Accrued restructuring charges (937) 1,227
Other current liabilities (364) 479
-------- --------
Net cash (used in) provided by operating activities (3,649) 3,836
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from asset sales as part of the Restructuring and related matters 880 1,965
Proceeds from the sale of the Company's PEO operations 3,314 --
Funding repayments (advances) from franchises, net (490) 229
Purchases of property and equipment (301) (558)
Proceeds from sale of property and equipment -- 1,600
-------- --------
Net cash provided by investing activities 3,403 3,236
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in excess of outstanding checks over bank balance,
included in accounts payable (2,021) (2,078)
Repayment of lines of credit and revolving credit facilities 3,922 (2,913)
Proceeds from interest collar termination -- 250
Related party debt repayments -- (145)
Repayment of other long-term debt (1,171) (2,378)
-------- --------
Net cash provided by (used in) financing activities 730 (7,264)
-------- --------
Net increase (decrease) in cash 484 (192)
Cash, beginning of period 1,546 1,418
-------- --------
Cash, end of period $ 2,030 $ 1,226
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 4,970 $ 2,432
======== ========
</TABLE>
See accompanying notes to the unaudited
condensed consolidated financial statements
5
<PAGE> 7
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 October 1, 2000 and for the
thirteen week period ("Q2 2001") and twenty six week period ("YTD 2001")
ended October 1, 2000 and the three month period ("Q3 1999") and six month
period ("YTD 1999") ended September 30, 1999 have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion
of management, reflect all adjustments (including normal accruals)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. The results of
operations for the interim periods presented are not necessarily indicative
of the results to be expected for the full year. Certain reclassifications
have been made to the presentation of the financial position and results of
operations for the three months and six months ended September 30, 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 with the Securities and Exchange Commission
("SEC") on October 19, 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
SEC on April 14, 2000, 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, and the financial statements in the Company's Form
10-Q/A for the quarterly period ended July 2, 2000 ("Q1 2001") filed with
the SEC on September 1, 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
Effective August 15, 2000, the Company entered into a three-year agreement
with a syndicate of lenders led by Ableco Finance LLC, as agent (the
"Lenders"), which replaced the Company's previous senior credit facility
(the "Fleet Facility") with a $33.4 million revolving credit facility (the
"Ableco Facility") and two term loans of $17.6 million and $9.0 million,
respectively. In connection with the repayment of the Fleet Facility, the
Company issued a four-year, $5.3 million subordinated term note to the
lenders of the Fleet Facility. Simultaneously with the closing of the
Ableco Facility, the Company cured the defaults under certain of its
outstanding subordinated acquisition notes payable. These notes were
amended to provide for a five year term, interest only for three years and
then two years of equal monthly payments of principal and interest, at the
end of which those notes will be fully paid and then retired (see Note 5).
6
<PAGE> 8
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. Revenues of Office Ours, for the three months
and six months ended September 30, 1999, were $1.3 million and $3.3
million, respectively, and the loss before taxes for these operations, on a
basis consistent with the segment information presented in Note 9, was
approximately $0.1 million and $0.1 million for those same periods.
(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 net proceeds at closing of $3.3 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 were $59.3 million during Q3 1999, and $114.4 million and $0.1
million during YTD 1999 and YTD 2001, respectively. On a basis consistent
with the segment information presented in Note 9, the Company reported net
loss before taxes for the PEO operations of $0.2 million during YTD 2001
and net income before taxes of $0.8 million during YTD 1999. The Company's
net income before taxes for these operations during Q3 1999 was $0.3
million.
(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 59 employees
through the second fiscal quarter of 2001. As of October 31, 2000, 48
branch offices have been eliminated in connection with our restructuring
plan, 41 of which had been sold, franchised, closed, or consolidated as of
October 1, 2000. During Q2 2001 one office was removed from the held for
disposition classification. Subsequently, during October 2000, seven
offices, two of which were added to this classification during the quarter,
were sold. The 48 offices sold, franchised, closed, or consolidated were
not expected to be adequately profitable or were inconsistent with our
operating strategy of clustering offices within specific geographic
regions. In addition, during Q1 2001, when it became apparent that certain
employees in offices sold and franchised to third parties would continue
employment with such buyers, the expected reduction in staff was modified
from 59 employees to 32 employees. Subsequently, in Q2 2001, in connection
with the Restructuring, the Company reduced its workforce by an additional
16 employees.
7
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OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR DISPOSITION
(CONTINUED)
The restructuring charge accrual and its utilization are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 2001
-------------------------------------------------------
CHARGES TO (REVERSALS
OF) OPERATIONS UTILIZATION
ORIGINAL BALANCE AT ---------------------- ----------------- BALANCE AT
(Amounts in thousands) CHARGE 4/2/00 Q1 2001 Q2 2001 CASH NON-CASH 10/1/00
---------- ------------- ------- ------- ---- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Employee severance and
other termination benefits $ 4,040 $ 2,139 $ (89) $ 152 $ 939 $ -- $ 1,263
Professional fees 1,205 34 369 401 764 -- 40
Lease termination and write-down of
leasehold improvements at closed offices 400 49 (2) 36 28 -- 55
Other restructuring charges 146 33 154 218 405 -- --
------- ------- ------- ------- ------- ------- -------
Accrued restructuring charges 5,791 2,255 432 807 2,136 -- 1,358
Write-down to fair value/loss on sale
of assets identified for disposition 5,429 -- 446 133 -- 579 --
------- ------- ------- ------- ------- ------- -------
Total restructuring and asset
impairment activity $11,220 $ 2,255 $ 878 $ 940 $ 2,136 $ 579 $ 1,358
======= ======= ======= ======= ======= ======= =======
</TABLE>
SEVERANCE AND OTHER RESTRUCTURING CHARGES
The original $11.2 million restructuring charge (the "Restructuring
Charge") included $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 the fact that certain employees of offices sold
and franchised to third parties would continue employment with such buyers
or franchisees and would not be paid the severance amounts that had been
accrued. The Company recorded an additional $0.2 million in severance costs
in Q2 2001 due to a reduction of headcount by 16 employees during the
period whose severance payments were not accrued as part of the Company's
original Restructuring Charge. The remaining liability consisted of $1.3
million for severance and other termination benefits as of October 1, 2000
for ten executive management employees who have been terminated during the
period of August 1999 through August 2000, and will paid over a period
ranging from one week to 18 months from the balance sheet date.
The Company recorded professional fees of $0.4 million and $0.8 million as
restructuring costs incurred during Q2 2001 and YTD 2001, respectively.
These professional fees were comprised primarily of amounts paid to
Crossroads LLC, a consulting firm based in Newport Beach, California
("Crossroads"), for its services related to the Restructuring.
The Company utilized $0.2 million and $0.3 million of the Restructuring
Charge during Q1 2001 and Q2 2001, respectively, for the costs of
terminating real estate leases as well as for writing down the carrying
value of leasehold improvements and other assets not usable in other
Company operations.
ASSETS HELD FOR DISPOSITION
The Restructuring Charge included a $5.4 million write-down of assets,
recorded in the Company's results of operations when 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. Subsequent to December 31, 1999, when actual
sales prices of these assets were negotiated, the charge was increased by
$0.1 million in Q1 2000, and subsequently increased by $0.4 million in Q1
2001. Based on the negotiations of the actual sales prices of certain
assets sold subsequent to October 1, 2000, the Company recorded an
additional charge of $0.1 million during Q2 2001.
During Q1 2001, the Company (i) sold one staffing office and closed
another, in the state of Minnesota, effective
8
<PAGE> 10
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR DISPOSITION
(CONTINUED)
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) effective June 26, 2000, sold its operations
in the 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.
No assets were sold in Q2 2001.
Effective October 29, 2000, the Company sold its operations in the states
of New Hampshire and Massachusetts, comprising five offices and two "vendor
on premises" locations, for $125,000, comprised of cash proceeds of $50,000
at closing and a two year $75,000 promissory note. In addition, the Company
will receive additional amounts equal to 30% of EBITDA of the sold offices
during the next two years. Excluded from the sale were cash, accounts
receivable and deferred income taxes, as well as accrued liabilities and
accounts payable. The Company recorded an additional $133,000 charge to
restructuring as well as accrued liabilities and accounts payable during Q2
2001 to reduce the carrying value of these assets to their net realizable
value.
During Q3 2001, the Company classified two additional offices as held for
sale. All of the Company's offices classified as held for sale were sold or
franchised by October 31, 2000.
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 Q2 2001
and $0.2 million YTD 2001.
The Company's assets held for disposition as of October 1, 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 (amounts are 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 $ 195 $1,045 $1,240 $ 215
====== ====== ====== ======
</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 October 1, 2000, generated revenues and
income before taxes as follows (amounts are in thousands):
<TABLE>
<CAPTION>
THIRTEEN WEEKS THREE MONTHS TWENTY SIX SIX MONTHS
ENDED ENDED WEEKS ENDED ENDED
OCT 1, 2000 SEPT 30, 1999 OCT 1, 2000 SEPT 30, 1999
-------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 2,560 $ 15,183 $ 10,487 $ 28,492
======== ======== ======== ========
Net loss before taxes $ (151) $ (251) $ (6) $ (880)
======== ======== ======== ========
</TABLE>
9
<PAGE> 11
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. INCOME TAXES
The Company's effective tax rate varies from the statutory federal rate of
35% as follows (amounts presented are in thousands, except for
percentages):
<TABLE>
<CAPTION>
THIRTEEN WEEKS THREE MONTHS
ENDED OCT 1, 2000 ENDED SEPT 30, 1999
-------------------- -------------------
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
<S> <C> <C> <C> <C>
Statutory rate applied to income before income taxes
and extraordinary item $ (75) (35.0)% $(4,662) (35.0)%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit 171 79.9 (564) (4.2)
Employment tax credits (139) (65.0) (106) (0.8)
Nondeductible expenses 20 9.3 -- --
Other 493 230.2 334 2.5
------- ------- ------- -------
Total before valuation allowance 470 219.5 (4,998) (37.5)
Change in valuation allowance (1,753) (819.2) -- --
------- ------- ------- -------
Total $(1,283) (599.8)% $(4,998) (37.5)%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
TWENTY SIX WEEKS SIX MONTHS
ENDED OCT 1, 2000 ENDED SEPT 30, 1999
------------------ --------------------
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
<S> <C> <C> <C> <C>
Statutory rate applied to income before income taxes
and extraordinary item $ (286) (35.0)% $(5,427) (35.0)%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit 191 23.4 (644) (4.2)
Employment tax credits (220) (26.9) (270) (1.7)
Nondeductible expenses 49 6.0 -- --
Other 813 99.4 407 2.6
------- ------- ------- -------
Total before valuation allowance 547 66.9 (5,934) (38.3)
Change in valuation allowance (9,520) (1,165.2) -- --
------- ------- ------- -------
Total $(8,973) (1,098.3)% $(5,934) (38.3)%
======= ======= ======= =======
</TABLE>
During Q1 2001, the Company reduced its deferred tax asset valuation
allowance by $7.7 million, which was expected to be realized through
utilization of the existing net operating loss carryforward, relating to
the extinguishment gain that was recorded in Q2 2001 (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.
During Q2 2001, the Company reduced the deferred tax valuation allowance by
an additional $1.8 million based on improvements in the Company's operating
results. 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". As of October 1,
2000, the deferred tax asset of $10.8 million, offset by a valuation
allowance of $6.5 million, was reflected in the Company's Consolidated
Balance Sheets as follows: income tax receivable and other current assets
includes $4.6 million of the deferred tax asset offset by a valuation
allowance of $2.8 million. The other assets classification on the balance
sheet includes $6.2 million of the deferred tax asset offset by a valuation
allowance of $3.7 million.
The employment tax credit carryforward of $3.7 million as of October 1,
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.
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. These subsidiaries were "S" corporations
for the periods under examination. Since that time, and as a result of
analysis and discussions among the IRS, the original shareholders of the
subsidiaries and the Company, the proposed adjustments have been modified.
The Company is currently evaluating the merits of these proposed
adjustments with the original shareholders. 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.
NOTE 5. DEBT
SENIOR DEBT FACILITIES
Effective August 15, 2000, the Company entered into the Ableco Facility, a
three-year financing agreement
10
<PAGE> 12
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DEBT (CONTINUED)
which replaced the Fleet Facility with a $33.4 million revolving credit
facility (the "Revolving Credit Facility"), which includes a subfacility
for the issuance of standby letters of credit, 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 Revolving Credit Facility and
the Term Loans are secured by all the assets of the Company and its
subsidiaries. The Revolving Credit Facility bears interest at prime or
9.0%, whichever is greater, plus 2%. The Term Loans 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, but
only if any letter of credit issued by the Lenders on behalf of the Company
is drawn upon.
A portion of the Ableco Facility was used to satisfy the Fleet Facility
with FleetNational 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 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,
the Company is entitled to a 60% discount on the Fleet Term 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 recorded
an extraordinary gain of approximately $8.5 million, net of tax, in the
quarter ending October 1, 2000.
As of October 1, 2000, the Company had gross outstanding borrowings $18.8
million under its Revolving Credit Facility, $26.0 million under the
provisions of the Term Loans, and $5.3 million under the provisions of the
Fleet Term Note. As of the end of the quarter, the Revolving Credit
Facility bore interest at 11.5%. Term Loan A and Term Loan B bore interest
at 13.0% and 14.5%, respectively, and the Fleet Term Note bore interest at
13.0%. The weighted average interest rate payable on the outstanding
balances during the period, exclusive of related fees and expenses, was
approximately 12.7% per annum, compared to approximately 10.8% per annum in
Q3 1999. In connection with the Refinancing on August 15, 2000, the Company
recorded a debt discount of $9.0 million, which is being amortized as
interest expense over the three year life of the borrowing agreements. The
weighted average interest rate during the period, including the debt
discount was 20.9%.
In addition to the Revolving Credit Facility indebtedness discussed above,
the Company had bank standby letters of credit outstanding in the aggregate
amount of $2.3 million as of October 1, 2000, of which $1.7 million secured
the pre-1999 portion of the workers' compensation obligations that are
recorded as a current liability on the Company's Consolidated Balance
Sheets. The remaining $0.6 million, which is supported by a $0.6 million
cash escrow balance, is to secure future payments on a capital lease for
furniture that was sold along with 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 subordinated 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 August 15, 2000. On August 15,
2000, in connection with the Refinancing, the acquisition notes payable
were
11
<PAGE> 13
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DEBT (CONTINUED)
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 subordinated 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, may be
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 negotiate a settlement
with the Company's original shareholders of at least $2.0 million, in
satisfaction of the Company's outstanding obligations to such original
shareholders.
LITIGATION: On September 13, 2000, a default final judgment in the amount
of $0.8 million 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 violatoin 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 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 ultimate resolution of this
matter will not have a material adverse effect on its financial position or
future operating results. Accordingly, the Company has not made any
adjustments to the financial statements for this matter.
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.
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 October 1, 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
12
<PAGE> 14
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. During Q2 2001, the Company paid $33,000 in
settlement of this liability
WORKERS' COMPENSATION: Since 1997, the Company's workers' compensation
expense 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 fiscal year 2001 is consistent with that used
for calendar year 1999 and YTD 2001 workers' compensation expense has been
less than the cap.
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 October 1, 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.
Between February 1999 and August 2000, eleven 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 six 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 $3.1 million, of which $1.8 million has been
paid as of October 1, 2000, and $1.3 million is accrued in the Company's
October 1, 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 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 Fleet 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
13
<PAGE> 15
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
services provided by Crossroads to assist in the Restructuring, the Company
has incurred costs of $2.3 million through October 1, 2000, of which $0.4
million and $0.8 million was for services provided during Q2 2001 and YTD
2001. These amounts were included in the restructuring charge recorded by
the Company in its results of operations.
In connection with the Refinancing, the Company paid Crossroads $0.9
million for its assistance in securing the new credit facility. This
charge, along with other costs relating to the Refinancing, is being
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 $2.25 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 122,277 shares were cancelled due
to employee terminations, and 350,761 shares remain outstanding as of
October 1, 2000. The Company also granted options to purchase 60,000 shares
of the Company's common stock, at $1.25 per share, in August 2000. This
grant vests over a four-year period from the grant date. As of October 1,
2000, the Company had in aggregate, 1,716,754 stock options and 1,974,687
warrants to purchase shares of the Company's common stock outstanding. On
October 31, 2000, the Company completed a tender offer to cancel certain of
its outstanding options to purchase the Company's common stock, resulting
in the cancellation of 337,766 options at a cost to the Company of $103,842
(see Note 10).
The total number of shares of common stock reserved for issuance under the
stock option plan as of October 1, 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.
DELISTING FROM THE NASDAQ NATIONAL MARKET: On August 9, 2000, the Company
was notified by Nasdaq-Amex that the Company was not in compliance with the
minimum $4 million net tangible assets for continued listing on the Nasdaq
National Market, and that 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 traded on the OTC Bulletin Board. As a result of
completing the Refinancing (see Note 5), the Company believes it has taken
the steps necessary to cure the net tangible asset deficiency and has
appealed the delisting decision to the Nasdaq Listing and Review Council.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company recognized revenue, which includes royalties and payments under
buyout agreements, of $0.2 million in Q3 1999 and $0.5 million during YTD
1999, respectively, from all franchises owned by significant shareholders
of the Company. The Company recognized no revenue in YTD 2001 from these
franchises. 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 franchisee based on the gross revenues of the
formerly franchised locations for two years after the termination date.
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.
14
<PAGE> 16
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. RELATED PARTY TRANSACTIONS
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 principal
balance of the note, for three years, followed by two years of equal
monthly payments of principal and interest, which will retire the note.
NOTE 8. COMPUTATION OF 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 Q3 1999 and YTD 1999, respectively, 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. The Company recognized net income in Q2 2001
and YTD 2001; therefore, the Company included the equivalent of 1,604,747
and 1,405,048 shares, respectively, in its calculation of fully diluted
earnings per share.
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
effective April 8, 2000.
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 Q3 1999 and YTD 1999 to be
consistent with current period presentation.
15
<PAGE> 17
OUTSOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. OPERATING SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS THREE MONTHS TWENTY SIX SIX MONTHS
ENDED ENDED WEEKS ENDED ENDED
OCT 1, 2000 SEPT 30, 1999 OCT 1, 2000 SEPT 30, 1999
----------- ------------- ----------- -------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
REVENUES
Tandem $ 78,055 $ 93,010 $ 158,914 $ 172,865
Synadyne -- 59,325 71 114,404
Franchising 727 1,036 1,381 3,505
Other Company revenues 100 5,753 134 11,804
--------- --------- --------- ---------
Total Company revenues $ 78,882 $ 159,124 $ 160,500 $ 302,578
========= ========= ========= =========
INCOME (LOSS) BEFORE TAXES
Tandem $ 5,824 $ 1,900 $ 10,439 $ 2,387
Synadyne -- 284 (198) 807
Franchising 602 882 1,098 3,073
Other Company income (loss), net (1) (6,640) (16,383) (12,157) (21,769)
--------- --------- --------- ---------
The Company's loss before taxes $ (214) $ (13,317) $ (818) $ (15,502)
========= ========= ========= =========
</TABLE>
---------------
(1) During Q2 2001 and FYTD 2001, the Company recognized restructuring charges
of $0.9 million and $1.8 million, respectively, and a $0.7 million gain on
the sale of the Company's PEO operations during YTD 2001
NOTE 10. SUBSEQUENT EVENTS
On October 31, 2000, the Company agreed to purchase for cancellation
certain of its outstanding incentive stock options with an exercise price
ranging from $10.38 to $18.88, for proceeds of $0.1 million.
On November 10, 2000, the Company authorized the issuance of options to
purchase 162,503 shares of the Company's common stock at $1.01 per share.
16
<PAGE> 18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH
"FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS".
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
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 included 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 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 August 6, 1999, we announced the following actions intended to improve
our short-term liquidity, focus our efforts on flexible industrial staffing
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
(the "Restructuring") consisting primarily of: the sale, franchise,
closure or consolidation of 47 of the 117 Tandem branch offices that
existed 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 48
employees through the second fiscal quarter of 2001. As of October 31,
2000, 48 branch offices have been eliminated in connection with our
restructuring plan, 41 of which had been sold, franchised, closed, or
consolidated as of October 1, 2000. During Q2 2001 one office was
17
<PAGE> 19
removed from the assets held for sale classification. Subsequently,
during October 2000, seven offices, two of which were added to this
classification during the quarter, were sold. The 48 offices sold,
franchised, closed, or consolidated were not expected to be adequately
profitable or were inconsistent with our operating strategy of
clustering offices within specific geographic regions.
RESULTS OF OPERATIONS
The following tables set 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 and six
months ended September 30, 1999 to conform to current presentation. The
dollar amounts are presented in thousands:
<TABLE>
<CAPTION>
THIRTEEN WEEKS THREE MONTHS TWENTY SIX WEEKS SIX MONTHS
ENDED ENDED ENDED ENDED
OCT 1, 2000 SEPT 30,1999 OCT 1, 2000 SEPT 30,1999
--------------- ------------- ----------------- --------------
<S> <C> <C> <C> <C>
Net revenues:
Tandem $ 78,055 $ 93,010 $ 158,914 $ 172,865
Synadyne -- 59,325 71 114,404
Franchising 727 1,036 1,381 3,505
Other 100 5,753 134 11,804
--------- --------- --------- ---------
Total net revenues $ 78,882 $ 159,124 $ 160,500 $ 302,578
========= ========= ========= =========
Gross profit $ 16,292 $ 20,772 $ 32,479 $ 41,117
Selling, general and adminstrative expenses (1) 13,254 25,224 27,977 46,073
Restructuring and asset impairment charges 940 7,554 1,818 7,554
--------- --------- --------- ---------
Operating income (loss) (1) 2,098 (12,006) 2,684 (12,510)
Net interest and other expense 2,312 1,311 3,502 2,992
--------- --------- --------- ---------
Loss before benefit for income taxes (1) (214) (13,317) (818) (15,502)
Benefit for income taxes (1,283) (4,998) (8,973) (5,934)
--------- --------- --------- ---------
Net income (loss) before extraordinary item (1) $ 1,069 $ (8,319) $ 8,155 $ (9,568)
========= ========= ========= =========
Net revenues:
Tandem 99.0% 58.5% 99.0% 57.1%
Synadyne 0.0 37.3 0.0 37.8
Franchising 0.9 0.7 0.9 1.2
Other 0.1 3.6 0.1 3.9
--------- --------- --------- ---------
Total net revenues 100.0% 100.0% 100.0% 100.0%
========= ========= ========= =========
Gross profit 20.7% 13.1% 20.2% 13.6%
Selling, general and adminstrative expenses (1) 16.8 15.9 17.4 15.2
Restructuring and asset impairment charges 1.2 4.7 1.1 2.5
--------- --------- --------- ---------
Operating income (loss) (1) 2.7 (7.5) 1.7 (4.1)
Net interest and other expense 2.9 0.8 2.2 1.0
--------- --------- --------- ---------
Loss before benefit for income taxes (1) (0.3) (8.4) (0.5) (5.1)
Benefit for income taxes (1.6) (3.1) (5.6) (2.0)
--------- --------- --------- ---------
Net income (loss) (1) 1.4% (5.2)% 5.1% (3.2)
========= ========= ========= =========
SYSTEM OPERATING DATA:
System Revenues (2) $ 102,854 $ 176,143 $ 205,924 $ 335,494
========= ========= ========= =========
System employees (number at the end of period) 23,800 38,200 23,800 38,200
========= ========= ========= =========
System offices (number at the end of period) 135 161 135 161
========= ========= ========= =========
</TABLE>
18
<PAGE> 20
--------------------
(1) During the twenty six weeks ended October 1, 2000, we recorded an
increase to our restructuring reserve of $1.8 million (of which $0.9
million was recorded in the quarter), a non-operating gain of $0.7
million from the sale of the our PEO operations, a $9.5 million
decrease to our deferred tax asset valuation allowance (of which $1.8
million was recorded during Q2 2001) and an extraordinary gain from
refinancing of $8.5 million (net of $5.3 million of income tax). During
Q3 1999, we recorded restructuring and asset impairment charges of $7.6
million and a $2.7 million loss on certain accounts receivable that
were subsequently sold in Q4 1999. The following table sets forth the
amounts (in thousands, except for per share data) and the percentage of
certain items in the our consolidated statements of operations adjusted
to exclude these items:
<TABLE>
<CAPTION>
THIRTEEN WEEKS THREE MONTHS TWENTY SIX SIX MONTHS
ENDED ENDED WEEKS ENDED ENDED
OCT 1, 2000 SEPT 30, 1999 OCT 1, 2000 SEPT 30, 1999
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Operating income (loss), as adjusted $ 3,038 $ (1,786) $ 4,501 $ (2,289)
As a percentage of net revenues 3.9% (1.1)% 2.8% (0.8)%
Net income (loss), as adjusted $ 256 $ (2,195) $ (231) $ (3,444)
As a percentage of net revenues 0.3% (1.4)% (0.1)% (1.1)%
Earnings (loss) per diluted share, as adjusted $ 0.02 $ (0.25) $ (0.03) $ (0.40)
EBITDA, as adjusted 4,567 84 7,485 1,491
</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.
(2) 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 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>
THIRTEEN WEEKS THREE MONTHS TWENTY SIX SIX MONTHS
ENDED ENDED WEEKS ENDED ENDED
OCT 1, 2000 SEPT 30, 1999 OCT 1, 2000 SEPT 30, 1999
----------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C>
Company's net revenues $ 78,882 $ 159,124 $ 160,500 $ 302,578
Less Company revenues from:
Franchise royalties (727) (1,036) (1,381) (3,505)
Services to franchises (4,468) (8,446)
Add: Franchise net revenues 24,699 22,523 46,805 44,867
--------- --------- --------- ---------
System revenues $ 102,854 $ 176,143 $ 205,924 $ 335,494
========= ========= ========= =========
</TABLE>
19
<PAGE> 21
THIRTEEN WEEKS ENDED OCTOBER 1, 2000 AS COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
NET REVENUES AND GROSS MARGIN:
Revenues were $78.9 million for the quarter ended October 1, 2000 ("Q2
2001"), a decrease of $80.2 million, or 50.4%, from $159.1 million for the
quarter ended September 30, 1999 ("Q3 1999"). This decrease in revenues
resulted primarily from our restructuring efforts during the last 12 months
to focus on industrial staffing and to improve profitability. The
restructuring included the disposition of Synadyne (our former professional
employer organization, or PEO), Office Ours (our former clerical division)
and certain under-performing Tandem industrial staffing offices, plus the
termination of PEO services to certain of our franchisees.
Our gross profit (margin) decreased by 21.6%, to $16.3 million in Q2 2001,
from $20.8 million for Q3 1999 due primarily to sold or terminated
operations. Gross profit as a percentage of net revenues increased to 20.7%
in Q2 2001 from 13.1% in Q3 1999.
The following table summarizes the change in our net revenues and gross
margin during Q3 1999, as compared to Q2 2001:
<TABLE>
<CAPTION>
GROSS MARGIN AS
NET GROSS A PERCENTAGE OF
REVENUES MARGIN NET REVENUES
--------------- -------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Q3 1999 $ 159,124 $ 20,772 13.1%
Increase (decrease)
Tandem - ongoing offices (2,215) 39 (2)
Tandem - sold, franchised and closed offices (1) (12,740) (2,310) 18.1%
Synadyne (59,325) (1,645) 2.8%
Office Ours (1,269) (313) 24.7%
PEO services (4,468) 11 (2)
Franchise royalties (308) (308) 100.0%
Other 83 46 56.1%
--------- ---------
Subtotal (80,242) (4,480) 5.6%
--------- ---------
Q2 2001 $ 78,882 $ 16,292 20.7%
========= =========
</TABLE>
----------------
(1) Includes offices sold, franchised and closed as part of our restructuring
efforts as of October 1, 2000.
(2) Not meaningful as presented.
The gross profit percentage increase to 20.7% in Q2 2001 from 13.1% in Q3
1999 is the result of the sale of our Synadyne division at the beginning of
Q1 2001 and price increases implemented over the last three quarters in our
Tandem division, 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 37.3% of our revenues
in Q3 1999, produced a gross margin of only 2.8% of revenue, or 7.9% of our
consolidated gross profit margin. Office Ours, our clerical division sold
in Q3 1999, produced a gross margin of 24.7%, or 1.5% of our consolidated
gross profit margin.
TANDEM OPERATIONS
Net revenues from our Tandem division decreased from $93.0 million in Q3
1999 to $78.1 million in Q2 2001. The decrease in Tandem revenues was
primarily due to the sale, franchise, closure, and consolidation of 41
offices through October 1, 2000. On a same store basis, Tandem revenues
decreased by $2.2 million due to cancellation of certain of our large
customers that generated $4.8 million in Q3 1999 revenue and the lack of
a ramp-up in revenues traditionally experienced by the staffing industry
during the third calendar quarter of the year. One customer, which provided
20
<PAGE> 22
welfare to work services, made up $3.0 million of this decrease due to
non-renewal of this customer's contracts with the federal and state
governments. The lack of a sales ramp up was most evident with from our
manufacturing and distribution customers. Partially offsetting these was
revenue growth from new and existing customers in the construction and
retail industries. We do not expect our revenues from manufacturing and
distribution to improve in Q3 2001.
Gross profit from our Tandem division declined from $17.8 million in Q3
1999 to $15.5 million during Q2 2001, primarily due to offices restructured
through October 1, 2000, which generated a gross margin of $2.3 million in
Q3 1999. While gross profit dollars declined, Tandem's gross profit margin
percent improved from 19.1% in Q3 1999 to 19.8% in Q2 2001. This increase
in gross margin percent is due to price increases that we instituted in the
past three quarters to reflect the value of services provided. These price
increases have been partially offset by higher workers' compensation costs
resulting from an increased average cost per claim in YTD 2001. This is in
contrast to 1999, when we experienced low average cost per claim and better
than anticipated development of open 1998 claims resulting in a reduction
of workers' compensation costs.
Although revenues generated by Tandem offices decreased by $2.3 million
from Q3 1999 to Q2 2001 on a same store basis, gross margin generated by
these offices remained steady at $15.5 million. Gross margin, as a percent
of revenue, increased from 19.2% to 19.8%. This improvement in gross margin
percent is primarily due to the price increases instituted over the last
three quarters, partially offset by the higher workers' compensation costs,
as previously discussed.
Tandem's 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 Q2 2001 as compared to Q3
1999. Although the average cost per labor hour increased by $0.09 during Q2
2001 as compared to Q3 1999, the average price charged per labor hour
increased by $0.35 compared to this period last year. In addition,
beginning in Q1 2001 and continuing into Q2 2001, Tandem began to improve
the margins of its large, lower-margin customers. Although Tandem's 100
largest customers made up 45% of our revenues in Q2 2001 compared to 40% in
Q3 1999, the average price charged per labor hour to these customers has
increased by $0.28 while the average cost per labor hour increased by only
$0.10.
Workers' compensation costs will continue to be a significant factor
affecting Tandem margins. Therefore, we are increasing the number of safety
specialists we employ whose sole purpose is to promote 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 hope to
experience modest 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.
FRANCHISE OPERATIONS
Franchise royalty revenues from our franchising operations decreased from
$1.0 million in Q3 1999 to $0.7 million for Q2 2001, due to a decrease in
revenues from buyout payments received in connection with the early
termination of certain franchises and to the same lack of a seasonal
ramp-up that corporate owned stores experienced this year. 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 date of the
franchise agreement. Although these 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.
21
<PAGE> 23
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.
Net revenues earned by Tandem franchisees, which are included in our system
revenues, but are not available to us, increased slightly from $22.5
million in Q3 1999 to $24.7 million in Q2 2001. As of October 1, 2000, we
had 51 franchised locations, compared to 50 franchised locations as of
September 30, 1999, and as part of our growth efforts, we expect to
increase franchise 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $12.0 million, or 47.5%, to $13.3 million
in Q2 2001 from $25.2 million in Q3 1999 primarily due to our restructuring
efforts and reduced bad debt expense. Compensation costs decreased $5.8
million due to a reduction of 420 employees, plus we experienced a $3.0
million reduction in our bad debt provision in Q2 2001 as compared to Q3
1999. In Q3 1999, we recorded a $2.7 million bad debt provision related
specifically to $4.3 million of receivables which were sold to a third
party during the fourth quarter of 1999. Other selling, general and
administrative costs, including telecommunications, professional fees,
recruiting, and licensing costs, decreased by an aggregate of $2.8 million.
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 on-going efforts to improve the support of our customers,
branch offices and service employees, we are currently analyzing the
potential of decentralizing some of our support functions. We expect to
complete the testing of our pilot concept in the next 120 days, after which
we may decide to decentralize our branch support services.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. During Q2 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 $0.1 million to reflect the estimated fair
value of those assets, (ii) increased accrued severance costs by
approximately $0.2 million, and (iii) incurred professional fees and other
costs of $0.7 million. During Q3 1999, we recorded restructuring costs of
$5.1 million and asset impairment charges of $2.5 million, writing down the
carrying value of our goodwill. As part of the Q3 1999 restructuring
charges we (i) wrote down the carrying value of certain assets held for
sale by $2.5 million to their then estimated net realizable value, (ii)
recorded accrued severance costs of $1.4 million, (iii) incurred
professional fees of $0.7 million, and (iv) wrote down the carrying value
of certain leasehold improvements and other lease obligations by $0.5
million.
NET INTEREST AND OTHER EXPENSE. Net interest and other expense increased
from $1.3 million in Q3 1999 to $2.3 million in Q2 2001. Interest expense
increased by $0.7 million due to (i) higher interest rates paid for our
borrowing facilities in Q2 2001 as compared to Q3 1999, and (ii) increased
amortization of loan fees in Q2 2001, offset by decreased interest accrued
on certain subordinated debt and interest earned on a workers' compensation
trust fund. In addition, net interest and other expense in Q3 1999 included
a $0.5 million gain on the sale of our clerical division in Q3 1999. We
have also earned approximately $0.1 million in other income from providing
support services to the purchaser of our PEO division.
INCOME TAXES. During Q1 2001, we reduced the deferred tax asset valuation
allowance by $7.7 million, which was expected to be realized through
utilization of net operating loss carryforwards, relating to the
extinguishment gain that was recorded in Q2 2001 as well as taxable income
from future operations. During Q2 2001, we reduced the deferred tax
valuation allowance by an additional $1.8 million that we also expect to be
able to utilize against tax on income in the future. 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 (LOSS) BEFORE EXTRAORDINARY ITEM. Income before extraordinary item
for Q2 2001 was $1.1 million, as compared to a net loss of $8.3 million in
Q3 1999. As discussed above, the change in the net loss is primarily due to
decreased selling, general and administrative costs, reduced restructuring
and asset impairment charges, and the recovery of the deferred tax asset
valuation allowance, partially offset by reduced gross profit and increased
interest costs. Adjusted to remove restructuring charges, the non-operating
gain from the sale of our clerical division in Q3 1999, the bad debt
provision for certain accounts receivable which were sold in Q4 1999, and
the recovery of the deferred tax valuation allowance, our net income was
$0.3 million in Q2 2001 compared to a net loss of $2.2 million in Q3 1999.
22
<PAGE> 24
TWENTY SIX WEEKS ENDED OCTOBER 1, 2000 AS COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 1999
NET REVENUES AND GROSS MARGIN:
Revenues were $160.5 million for the twenty six weeks ended October 1, 2000
("YTD 2001"), a decrease of $142.1 million, or 47.0%, from $302.6 million
for the six months ended September 30, 1999 ("YTD 1999"). This decrease in
revenues resulted primarily from our restructuring efforts during the last
12 months to focus on industrial staffing and to improve profitability. The
restructuring included the disposition of Synadyne (our former professional
employer organization, or PEO), Office Ours (our former clerical division)
and certain under-performing Tandem industrial staffing offices, plus the
termination of PEO services to certain of our franchisees.
Our gross profit (margin) decreased by 21.0%, to $32.5 million in YTD 2001,
from $41.1 million in YTD 1999 due primarily to sold or terminated
operations. Gross profit as a percentage of net revenues increased to 20.2%
in YTD 2001 from 13.6% in YTD 1999.
The following table summarizes the change in our net revenues and gross
margin during YTD 1999, as compared to YTD 2001:
<TABLE>
<CAPTION>
GROSS MARGIN AS
NET GROSS A PERCENTAGE OF
REVENUES MARGIN NET REVENUES
--------------- --------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Q3 1999 $ 302,578 $ 41,117 13.6%
Increase (decrease)
Tandem - ongoing offices 4,331 1,300 30.0%
Tandem - sold, franchised and closed offices (1) (18,282) (3,389) 18.5%
Synadyne (114,334) (3,651) 3.2%
Office Ours (3,323) (865) 26.0%
PEO services (8,446) 69 (2)
Franchise royalties (2,123) (2,123) 100.0%
Other 99 21 21.2%
--------------- ---------------
Subtotal (142,078) (8,638) 6.1%
--------------- ---------------
Q2 2001 $ 160,500 $ 32,479 20.2%
=============== ===============
</TABLE>
--------------
(1) Includes offices sold, franchised and closed as part of our restructuring
efforts as of October 1, 2000.
(2) Not meaningful as presented.
The gross profit percentage increase to 20.2% in YTD 2001 from 13.6% in YTD
1999 is the result of the sale of our Synadyne division at the beginning of
Q1 2001 and price increases implemented over the last three quarters in our
Tandem division, 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 37.8% of our revenues
in YTD 1999, produced a gross margin of only 3.2% of revenue, or 8.9% of
our consolidated gross profit margin. Office Ours, our clerical division
sold in Q3 1999, produced a gross margin of 26.0%, or 2.1% of our
consolidated gross profit margin.
23
<PAGE> 25
TANDEM OPERATIONS
Net revenues from our Tandem division decreased from $172.9 million during
YTD 1999 to $158.9 million during YTD 2001 primarily because of our
restructuring and the resulting reduction of 41 offices through October 1,
2000. On a same store basis, Tandem revenues increased by $4.3 million,
primarily due to strong revenue growth from new customers in certain
geographical markets in Q1 2001, offset by the cancellation or decline in
revenues of certain of our large customers and the lack of the ramp-up in
revenues traditionally experienced by the staffing industry during the
third calendar quarter. The lack of a sales ramp-up was most evident with
our manufacturing and distribution customers. Partially offsetting these
was revenue growth from new and existing customers in the construction and
retail industries. We do not expect our revenues from manufacturing and
distribution to improve in Q3 2001.
Gross profit for our Tandem division declined to $31.0 million during YTD
2001 from $33.1 million during YTD 1999 primarily due to the offices sold,
franchised, or consolidated through October 1, 2000, which generated gross
margin of $4.4 million in YTD 1999 compared to $1.0 million prior to their
disposition in YTD 2001. While gross profit dollars declined, Tandem's
gross profit margin percent improved from 19.4% last year to 19.5% in YTD
2001. This increase in gross margin percent is due to price increases that
we instituted in the past three quarters to reflect the value of services
provided. These price increases have been partially offset by higher
workers' compensation costs resulting from an increased average cost per
claim in YTD 2001. This is in contrast to 1999, when we experienced low
average cost per claim and better than anticipated development of open 1998
claims resulting in a reduction of workers' compensation costs.
On a same store basis, Tandem's gross margin increased from $28.7 million
in YTD 1999 to $30.0 million during YTD 2001, while gross margin, as a
percent of revenue, increased from 19.3% to 19.6%. This improvement in
gross margin percent is primarily due to the price increases instituted
over the last three quarters, partially offset by the higher workers'
compensation costs, as previously discussed. The $1.3 million improvement
in gross profit margin is due to the increase in same-store revenues in YTD
2001, as compared to the same period last year, and the aforementioned
improvement in gross profit as a percentage of revenues.
Tandem's 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 YTD 2001 as compared to last
year. Although the average cost per labor hour increased by $0.13 during
YTD 2001 as compared to last year, the average price charged per labor hour
increased by $0.35 compared to this period last year. In addition,
beginning in Q1 2001 and continuing throughout Q2 2001, Tandem began to
reduce the impact of large, low-margin customers which typically produce
raw margin results (revenues less direct payroll costs) several hundred
basis points below Tandem's average gross margin percent. Although Tandem's
100 largest customers made up 43.1% of our revenues in YTD 2001 compared to
39.6% during YTD 1999, the average price charged per labor hour has
increased by $0.28 while the average cost per labor hour by only $0.14.
As previously discussed, workers' compensation costs will continue to be a
significant factor affecting Tandem margins. Therefore, we are increasing
the number of safety specialists we employ 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 hope to experience modest 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.
24
<PAGE> 26
FRANCHISE OPERATIONS
Franchise royalty revenues from our franchising operations decreased from
$3.5 million last year to $1.4 million for YTD 2001, primarily due to a
$2.4 million decrease in revenues from buyout payments received in
connection with the early termination of certain franchises.
Net revenues earned by Tandem franchisees, which are included in our system
revenues, but are not available to us, increased slightly from $44.9
million in YTD 1999 to $46.8 million in YTD 2001. As of October 1, 2000, we
had 51 franchised locations, compared to 50 franchised locations as of
September 30, 1999, 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $18.1 million, or 39.3%, to $28.0 million
in YTD 2001 from $46.1 million during the same period last year. This
decrease was primarily the result of the restructuring we described earlier
and reduced bad debt expenses. Compensation costs decreased $9.3 million
due to a reduction of 420 employees, and we experienced a $3.6 million
reduction in our bad debt provision in YTD 2001 as compared to YTD 1999. In
Q3 1999, we recorded a $2.7 million bad debt provision related specifically
to $4.3 million of receivables which were sold to a third party during the
fourth quarter of 1999. Other selling, general and administrative costs,
including telecommunications, professional fees, recruiting, and licensing
costs, decreased by an aggregate of $4.1 million. Depreciation and
amortization decreased by $1.0 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 on-going efforts to improve the support of our customers,
branch offices and service employees, we are currently analyzing the
potential of decentralizing some of our support functions. We expect to
complete the testing of our pilot concept in the next 120 days, after which
we may decide to decentralize our branch support services.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. During YTD 2001, we recorded
restructuring charges of $1.8 million. As part of the restructuring
charges, we have (i) adjusted the carrying value of assets held for
disposition by approximately $0.6 million to reflect the estimated fair
value of those assets, (ii) increased accrued severance costs by
approximately $0.1 million and (iii) incurred $1.1 million in professional
fees. During Q3 1999, when we announced our restructuring plan, we recorded
restructuring costs of $5.1 million and asset impairment charges of $2.5
million. As part of the YTD 1999 restructuring charges we (i) wrote down
the carrying value of certain assets held for sale by $2.5 million to their
then estimated net realizable value, (ii) recorded accrued severance costs
of $1.4 million, (iii) incurred professional fees of $0.7 million, and (iv)
wrote down the carrying value of certain leasehold improvements and other
lease obligations by $0.5 million
NET INTEREST AND OTHER EXPENSE. Net interest and other expense increased
from $3.0 million in YTD 1999 to $3.5 million in YTD 2001. This increase
was due to a $0.8 million increase in interest expense arising from higher
interest rates paid for our borrowing facilities in YTD 2001 as compared to
last year, offset by a $0.7 million gain from the sale of our PEO
operations in Q1 2000, compared to a gain of only $0.5 million from the
sale of our clerical division in Q3 1999.
INCOME TAXES. During Q1 2001, we reduced the deferred tax asset valuation
allowance by $7.7 million, which was expected to be realized through
utilization of net operating loss carryforwards, relating to the
extinguishment gain that was recorded in Q2 2001 as well as taxable income
from future operations. During Q2 2001, we reduced the deferred tax
valuation allowance by an additional $1.8 million that we also expect to be
able to utilize against tax on income in the future. 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".
25
<PAGE> 27
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. Income before extraordinary item
for YTD 2001 was $8.2 million, as compared to a net loss of $9.6 million in
YTD 1999. As discussed above, the change in the net loss is primarily due
to decreased selling, general and administrative costs, reduced
restructuring and asset impairment charges, and the recovery of the
deferred tax asset valuation allowance, partially offset by reduced gross
profit and increased interest costs. Adjusted to remove (i) restructuring
charges, (ii) the non-operating gain from the sale of our clerical division
in Q3 1999 and our PEO division in Q1 2001, (iii) the bad debt provision
for certain accounts receivable which were sold in Q4 1999, and (iv) the
recovery of the deferred tax valuation allowance, we incurred a net loss of
$0.2 million during YTD 2001 compared to a net loss of $3.4 million in
during the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
SENIOR DEBT
Effective August 15, 2000, we entered into a three-year financing agreement
with a syndicate of lenders led by Ableco Finance LLC, as agent. The
financing 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 it
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 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 recorded 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 plus a $33.0 million credit facility,
based on and secured by our accounts receivable. 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 August 15, 2000 while the Revolving Credit
Facility bore interest at prime plus 5.0% per annum, which was 14.5% as of
August 15, 2000.
As of October 1, 2000, we had outstanding borrowings of $18.8 million under
our Revolving Credit Facility, $26.0 million under the provisions of our
Term Loans, and $5.3 million under the provisions of the Fleet Term Note.
As of the end of the quarter, the Revolving Credit Facility bore interest
at 11.5%. Term Loan A and Term Loan B bore interest at 13.0% and 14.5%,
respectively, and the Fleet Term Note bore interest at 13.0%. The weighted
average interest rate payable on the outstanding balances during the
period, exclusive of related fees and expenses, was approximately 12.7% per
annum, compared to approximately 10.8% per annum in Q3 1999. In connection
with the Refinancing on August 15, 2000, we recorded a debt discount of
$9.0 million, which is being amortized as interest expense over the three
year life of the borrowing agreements with the Lenders. The weighted
average interest rate during the period, including the debt discount was
20.9%.
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<PAGE> 28
In addition to the revolving credit facility indebtedness discussed above,
we had bank standby letters of credit outstanding in the aggregate amount
of $2.3 million as of October 1, 2000, of which $1.7 million secured the
pre-1999 portion of our workers' compensation obligations that are recorded
as a current liability on our consolidated balance sheet as of October 1,
2000. The remaining $0.6 million, which is supported by a $0.6 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.
We are currently exploring alternatives to the $3.0 million trust fund
intended to secure any liability for workers' compensation claims funding
for 1999 and 2000. We expect to replace the trust fund with letters of
credit prior to December 31, 2000. Should we finalize this alternative, the
$2.1 million funded to the trust account as of October 1, 2000 would be
used to pay down our senior facilities. See "Workers' Compensation
Collateral".
OTHER DEBT
In order to remain in compliance with certain covenants in our prior
financing facilities, 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 August 15, 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 October 1,
2000, (i) obligations under capital leases for property and equipment in
the aggregate of $2.1 million; (ii) obligations under mortgages totaling
$0.4 million and (iii) obligations for annual insurance premiums and other
matters totaling $0.2 million, of which a portion represents prepayment for
future benefits and would be refundable to us should the policy be
cancelled.
SUMMARY OF CASH FLOWS
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.
Cash used in operating activities in YTD 2001 was $3.6 million, as compared
with $3.8 million provided by operating activities in YTD 1999. The
collection of our accounts receivable related to the sale of Tandem offices
in connection with the restructuring and improved collections of our
accounts receivable in this year generated $5.8 million in operating cash
in YTD 2001. This operating cash was more than offset by the pay down of
current liabilities due to (i) the sale of Tandem offices (ii) funding of
our workers'compensation liability, (iii) payment of accrued interest on
our subordinated debt in connection with our Refinancing on August 15,
2000, and (iv) utilization of our restructuring reserve. Adjusted to remove
the effects of the securitization agreement, cash used in operating
activities was $3.6 million in YTD 2001 compared to $6.9 million in the
same period last year. Cash used in operating activities in YTD 1999
included increased accounts receivable associated with the volume increases
traditionally experienced in the third calendar quarter of the year by our
Tandem offices plus funding of our pre-funded workers' compensation
program.
We anticipate that accounts receivable will decrease by an additional $1.0
million in Q3 2001 as we collect the outstanding accounts receivable from
the Tandem offices sold in New Hampshire and Massachusetts on October 29,
2000.
Cash provided by investing activities during YTD 2001 was $3.4 million
compared to $3.2 million during YTD 1999. Cash provided by investing
activities in 2001 consisted of primarily of $4.2 million received in
conjunction with a sale of our Synadyne division and Tandem offices, offset
27
<PAGE> 29
by expenditures for property, plant, and equipment, and funding to our
franchisees. Cash provided by investing activities in 1999 included (i)
$2.0 million from the sale of our clerical division and certain Tandem
offices associated with the Restructuring, (ii) $1.6 million from a
sale-leaseback transaction during the period, and (iii) a net decrease in
funding provided to our franchisees, partially offset by (iv) expenditures
for property, plant, and equipment.
Cash provided by financing activities during YTD 2001 was $0.7 million, as
compared to $7.3 million used in financing activities in the same period
last year. Adjusted to remove the effects of the securitization facility in
1999, cash provided by financing activities was $3.5 million, which was due
to increased borrowings in 1999 to fund increased payroll costs arising
from seasonal volume increases and the workers' compensation funding. Cash
provided by financing activities in YTD 2001 of $0.7 million includes $3.9
million in funds borrowed from our line of credit partially offset by a
$2.0 million decrease in check float and a $1.2 million pay down of other
debt.
The table below sets forth our cash flows as presented in our consolidated
financial statements for YTD 2001 and YTD 1999 and as adjusted to remove
the effect of the sale of our uncollected accounts receivable under the
securitization facility during YTD 1999, in thousands:
<TABLE>
<CAPTION>
TWENTY SIX WEEKS SIX MONTHS
ENDED ENDED
OCT 1, 2000 SEPT 30, 1999
---------------- -------------
<S> <C> <C>
Cash flows (used in) provided by:
HISTORICAL CASH FLOW
Operating activities $(3,649) $ 3,836
Investing activities 3,403 3,236
Financing activities 730 (7,264)
------- -------
Net decrease (increase) in cash $ 484 $ (192)
======= =======
CASH FLOW - WITHOUT SECURITIZATION FACILITY (1)
Operating activities $(3,649) $(6,923)
Investing activities 3,403 3,236
Financing activities 730 3,495
------- -------
Net decrease (increase) in cash $ 484 $ (192)
======= =======
</TABLE>
------------
(1) As part of our borrowing facilities, in YTD 1999, we sold certain trade
accounts receivable to obtain working capital for our operations. Under
this agreement we had sold $46.9 million of trade accounts receivable as of
September 30, 1999, which was excluded from the uncollected accounts
receivable balance presented in our consolidated financial statements for
Q2 2001. This agreement was subsequently terminated as of October 1, 1999.
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 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 $10.5 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 $18.0 million. In addition, we agreed to provide extra
28
<PAGE> 30
collateral by establishing 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 $18.0 million,
respectively. We had planned to fund this trust account in 11 installments
through December 2000; and as of October 1, 2000, we had funded $2.1
million into the trust account. However, we are exploring alternatives to
the trust fund discussed above, and we expect to replace the trust fund
with letters of credit. Should we finalize this alternative, the $2.1
million funded to the trust account would be used to pay down our senior
borrowing facilities.
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 45 days at October 1, 2000. Since we announced our restructuring plan in
August 1999, accounts receivable decreased by approximately $5 million due
to the sale of Tandem offices, the PEO division and the 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. As part of the sale of
our PEO operations, accounts receivable decreased by approximately $6
million. In addition, during the fourth quarter of 1999, we sold certain
trade accounts receivable, with a face value of approximately $4.3 million
and a carrying value of $2.9 million, to unrelated third parties for
approximately $220,000. During Q3 1999, we wrote down these receivables,
most of which were outstanding for more than 180 days, by $2.7 million. We
anticipate that our accounts receivable will decrease by an additional $1.0
million as we collect the outstanding receivables for the branches sold in
the states of New Hampshire and Massachusetts in October 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.
FUTURE LIQUIDITY
Effective August 15, 2000, as previously discussed, we entered into a three
year financing agreement with a syndicate of lenders led by Ableco Finance
LLC, as agent, whereby our existing credit facility was replaced by a $33.4
million Senior Facility and a $17.6 million Term Loan A and a $9.0 Term
Loan B. We believe that the funds provided by operations and borrowings
under the new credit facilities will be sufficient to meet our needs for
working capital, capital expenditures, and debt service for the foreseeable
future.
29
<PAGE> 31
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 PEO 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. As
previously discussed, one office was removed during Q2 2001, and two
offices were added during Q3 2001. As of October 31, 2000, our
Restructuring plan was substantially complete. The restructuring charge
accrual and its utilization are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 2001
-----------------------------------------------------------
CHARGES TO (REVERSALS
OF) OPERATIONS UTILIZATION
ORIGINAL BALANCE AT ---------------------- --------------------- BALANCE At
(Amounts in thousands) CHARGE 4/2/00 Q1 2001 Q2 2001 CASH NON-CASH 10/2/00
------ ---------- ------- ------- ---- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Employee severance and
other termination benefits $ 4,040 $ 2,139 $ (89) $ 152 $ 939 $ -- $ 1,263
Professional fees 1,205 34 369 401 764 -- 40
Lease termination and write-down of
leasehold improvements at closed offices 400 49 (2) 36 28 -- 55
Other restructuring charges 146 33 154 218 405 -- --
------- ------- ------- ------- ------- ------- -------
Accrued restructuring charges 5,791 2,255 432 807 2,136 -- 1,358
Write-down to fair value/loss on sale
of assets identified for disposition 5,429 -- 446 133 -- 579 --
------- ------- ------- ------- ------- ------- -------
Total restructuring and asset
impairment activity $11,220 $ 2,255 $ 878 $ 940 $ 2,136 $ 579 $ 1,358
======= ======= ======= ======= ======= ======= =======
</TABLE>
SEVERANCE AND OTHER RESTRUCTURING CHARGES
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 the fact that
certain employees of offices sold and franchised to third parties would
continue employment with such buyers or franchisees and would not be paid
the severance that had been accrued. The Company recorded an additional
$0.2 million in severance costs in Q2 2001 due to the additional 16
employees terminated during the period whose severance payments were not
accrued as part of the our original Restructuring plan. The remaining
liability consisted of $1.3 million for severance and other termination
benefits as of October 1, 2000 for ten employees who have been terminated
during the period of August 1999 through August 2000, and will paid over a
period ranging from one week to 18 months from the balance sheet date.
Professional fees of $0.4 million and $0.8 million, recorded as
restructuring costs, were incurred during Q2 2001 and YTD 2001,
respectively. These professional fees were comprised primarily of amounts
paid to Crossroads LLC, for its services related to the Restructuring.
We utilized $0.2 million and $0.3 million of the restructuring charge
during Q2 2000 and Q2 2001, respectively, for the costs of terminating
leases as well as for writing down the carrying value of leasehold
improvements and other assets not usable in other Company operations.
ASSETS HELD FOR DISPOSITION
The restructuring charge included a $5.4 million write-down of assets,
recorded in our 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. Subsequent to December 31, 1999, when actual
sales prices of these assets were negotiated, the charge was increased by
$0.1 million in Q1 2000, and subsequently increased by $0.4 million in Q1
2001. Based on the negotiations of the actual sales price of certain assets
sold subsequent to October 1, 2000, we recorded an additional charge of
$0.1 million during Q2 2001.
30
<PAGE> 32
During Q1 2001, we (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 our staffing offices in the state of Ohio, effective
April 10, 2000, for cash proceeds of $20,000, and (iii) effective June 26,
2000, sold our operations in the 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 our staffing
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.
No assets were sold during Q2 2001.
Effective October 29, 2000, we sold our Tandem operations in the states of
New Hampshire and Massachusetts, comprising five offices and two "vendor on
premise" locations, for $125,000, comprised of cash proceeds of $50,000 at
closing and a two year $75,0000 promissory note. In addition, we will
receive additional payments equal to 30% of EBITDA of the sold offices
during the next two years. As previously discussed, we recorded an
additional $133,000 charge to restructuring during Q3 2001 to reduce the
carrying value of these assets to their net realizable value.
We classified two additional offices as held for sale in Q3 2001. All of
the assets held for sale were sold or franchised by October 31, 2000.
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 Q2 2001 and $0.2
million in YTD 2001.
Our assets held for disposition as of October 1, 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 (amounts are
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 $ 195 $ 1,045 $ 1,240 $ 215
====== ======== ======== =====
</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) Office Ours, our 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 October 1, 2000. Ongoing operations include
(i) the Tandem division, which provides flexible industrial staffing and
(ii) franchising. Dollar amounts are in thousands, except for percentages:
31
<PAGE> 33
<TABLE>
<CAPTION>
THIRTEEN WEEKS THREE MONTHS TWENTY SIX SIX MONTHS
ENDED ENDED WEEKS ENDED ENDED
OCT 1, 2000 SEPT 30, 1999 OCT 1, 2000 SEPT 30, 1999
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net revenues:
Total Company $ 78,882 $ 159,124 $ 160,500 $ 302,578
Less revenues from assets held for sale and
disposed/ceased operations:
Synadyne -- (59,325) (71) (114,404)
Clerical, franchise PEO and other (2,560) (20,920) (10,487) (40,262)
-------- --------- --------- ---------
Subtotal - revenues from assets held for sale
and disposed/ceased operations (2,560) (80,245) (10,558) (154,666)
-------- --------- --------- ---------
Net revenues from ongoing operations $ 76,322 $ 78,879 $ 149,942 $ 147,912
======== ========= ========= =========
Gross profit margin:
Total Company $ 16,292 $ 20,772 $ 32,479 $ 41,117
Less gross profit from assets held for sale and
disposed/ceased operations:
Synadyne -- (1,645) 12 (3,638)
Clerical, franchise PEO and other (281) (3,045) (1,486) (5,949)
-------- --------- --------- ---------
Subtotal - gross profit from assets held for
sale and disposed/ceased operations (281) (4,690) (1,474) (9,587)
-------- --------- --------- ---------
Gross profit margin from ongoing operations $ 16,011 $ 16,082 $ 31,005 $ 31,530
======== ========= ========= =========
Gross profit margin as a percentage of net revenues:
Ongoing operations - Tandem 20.1% 19.3% 19.9% 19.4%
Ongoing operations - franchising and other 100.0% 100.0% 100.0% 100.0%
Operations from assets held for sale and
disposed/ceased operations 11.0% 5.8% 14.0% 6.2%
</TABLE>
Tandem branches sold, franchised or held for sale as of October 1, 2000
generated revenues of $2.6 million, and $15.2 million during Q2 2001 and Q3
1999, respectively, and earned gross profit of $0.3 million and $2.7
million for those periods. Those same branches incurred SG&A expenses of
$0.3 million and $2.7 million, excluding depreciation and amortization
costs, during Q2 2001 and Q3 1999, respectively, generated revenues of
$10.5 million and $28.5 million during YTD 2001 and YTD 1999, respectively,
earned gross profit of $1.5 million and $5.0 million, and incurred SG&A
expenses of $1.4 million and $5.1 million, excluding depreciation and
amortization costs. Results of flexible industrial staffing offices that
were consolidated into existing offices, as part of our Restructuring
efforts, are included in ongoing operations.
Office Ours, our former clerical division which was sold on August 30,
1999, generated revenues of $1.3 million and $3.3 million, gross profit of
$0.3 million and $0.9 million, and incurred $0.4 million and $1.0 million
in SG&A expense, excluding depreciation and amortization, during Q3 1999
and YTD 1999, respectively. SG&A for the Synadyne division, excluding
depreciation and amortization, was $1.3 million during Q3 1999 and $0.2
million and $2.7 million during YTD 2001 and YTD 1999, respectively.
SEASONALITY
Traditionally our results of operations have reflected higher customer
demand for industrial staffing services in the last two calendar quarters
of the year, as compared to the first two quarters, and 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 our infrastructure is needed to support
anticipated increased revenues in subsequent quarters. As a result of these
factors, we historically have earned a significant portion of our annual
operating income in the third and fourth calendar quarter. However, as
previously discussed, we have experienced a slowdown in demand from our
manufacturing and other services customers which may reduce the normal ramp
up of sales volume that we had anticipated in the fourth calendar quarter
of 2001 (Q3 2001).
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<PAGE> 34
INFLATION
The effects of inflation on our operations were not significant during the
periods presented. 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> 35
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS
FORM 10-Q ARE FORWARD-LOOKING STATEMENTS INCLUDING, BUT NOT LIMITED TO,
STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS OR BELIEFS CONCERNING THE
COMPANY'S STRATEGY AND OBJECTIVES, EXPECTED SALES AND OTHER OPERATING
RESULTS, THE EFFECT OF CHANGES IN THE COMPANY'S GROSS MARGIN, THE COMPANY'S
LIQUIDITY, ANTICIPATED CAPITAL SPENDING, THE AVAILABILITY OF FINANCING,
EQUITY AND WORKING CAPITAL TO MEET THE COMPANY'S FUTURE NEEDS, ECONOMIC
CONDITIONS IN THE COMPANY'S MARKET AREAS AND COSTS. THE WORDS "AIM,"
"BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "ESTIMATE," "WILL," "SHOULD,"
"COULD" AND OTHER EXPRESSIONS WHICH INDICATE FUTURE EVENTS AND TRENDS
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS AND ARE ALSO BASED UPON ASSUMPTIONS OF
FUTURE EVENTS, WHICH MAY NOT PROVE TO BE ACCURATE. THEREFORE, ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED
IN THE FORWARD-LOOKING STATEMENTS. THESE KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, CHANGES IN U.S. ECONOMIC
CONDITIONS, PARTICULARLY IN THE MANUFACTURING SECTOR; THE COMPANY'S FUTURE
CASH FLOWS, SALES, GROSS MARGINS AND OPERATING COSTS, INCLUDING THE
COMPANY'S ABILITY TO IMPLEMENT AND MAINTAIN COST REDUCTIONS IN CONNECTION
WITH THE RESTRUCTURING; THE EFFECT OF CHANGING MARKET AND OTHER CONDITIONS
IN THE STAFFING INDUSTRY; THE ABILITY OF THE COMPANY TO CONTINUE TO GROW;
LEGAL PROCEEDINGS, INCLUDING THOSE RELATED TO THE ACTIONS OF THE COMPANY'S
TEMPORARY EMPLOYEES; THE AVAILABILITY AND COST OF FINANCING; THE ABILITY TO
MAINTAIN EXISTING BANKING RELATIONSHIPS; THE ABILITY TO REMAIN IN
COMPLIANCE WITH THE TERMS AND COVENANTS OF THE COMPANY'S FINANCING
AGREEMENTS; THE RECOVERABILITY OF THE RECORDED VALUE OF GOODWILL AND OTHER
INTANGIBLE ASSETS ARISING FROM PAST ACQUISITIONS; THE GENERAL LEVEL OF
ECONOMIC ACTIVITY AND UNEMPLOYMENT IN THE COMPANY'S MARKETS, SPECIFICALLY
WITHIN THE CONSTRUCTION, MANUFACTURING, DISTRIBUTION AND OTHER LIGHT
INDUSTRIAL TRADES; PRICE COMPETITION; CHANGES IN AND THE COMPANY'S ABILITY
TO COMPLY WITH GOVERNMENT REGULATIONS OR INTERPRETATIONS THEREOF,
PARTICULARLY THOSE RELATED TO EMPLOYMENT; THE CONTINUED AVAILABILITY OF
QUALIFIED TEMPORARY PERSONNEL; THE FINANCIAL CONDITION OF THE COMPANY'S
CLIENTS AND THEIR DEMAND FOR THE COMPANY'S SERVICES (WHICH IN TURN MAY BE
AFFECTED BY THE EFFECTS OF, AND CHANGES IN, U.S. AND WORLDWIDE ECONOMIC
CONDITIONS); COLLECTION OF ACCOUNTS RECEIVABLE; THE COMPANY'S ABILITY TO
RETAIN LARGE CLIENTS; THE COMPANY'S ABILITY TO RECRUIT, MOTIVATE AND RETAIN
KEY MANAGEMENT PERSONNEL; THE COSTS OF COMPLYING WITH GOVERNMENT
REGULATIONS (INCLUDING OCCUPATIONAL SAFETY AND HEALTH PROVISIONS, WAGE AND
HOUR AND MINIMUM WAGE LAWS AND WORKERS' COMPENSATION AND UNEMPLOYMENT
INSURANCE LAWS) AND THE ABILITY OF THE COMPANY TO INCREASE FEES CHARGED TO
ITS CLIENTS TO OFFSET INCREASED COSTS RELATING TO THESE LAWS AND
REGULATIONS; VOLATILITY IN THE WORKERS' COMPENSATION, LIABILITY AND OTHER
INSURANCE MARKETS; INCLEMENT WEATHER; INTERRUPTION, IMPAIRMENT OR LOSS OF
DATA INTEGRITY OR MALFUNCTION OF INFORMATION PROCESSING SYSTEMS; CHANGES IN
GOVERNMENT REGULATIONS OR INTERPRETATIONS THEREOF, AND OTHER RISKS DETAILED
FROM TIME TO TIME BY THE COMPANY OR IN ITS PRESS RELEASES OR IN ITS FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION.
IN ADDITION, THE MARKET PRICE OF THE COMPANY'S STOCK MAY FROM TIME TO TIME
BE VOLATILE AS A RESULT OF, AMONG OTHER THINGS, THE COMPANY'S OPERATING
RESULTS, THE OPERATING RESULTS OF OTHER TEMPORARY STAFFING COMPANIES,
ECONOMIC CONDITIONS, THE PROPORTION OF THE COMPANY'S STOCK AVAILABLE FOR
ACTIVE TRADING AND THE PERFORMANCE OF THE STOCK MARKET IN GENERAL.
ANY FORWARD-LOOKING STATEMENT SPEAKS ONLY AS OF THE DATE ON WHICH SUCH
STATEMENT IS MADE, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENT OR STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE ON WHICH SUCH STATEMENT IS MADE OR TO REFLECT THE OCCURRENCE
OF UNANTICIPATED EVENTS. NEW FACTORS EMERGE FROM TIME TO TIME, AND IT IS
NOT POSSIBLE FOR MANAGEMENT TO PREDICT ALL OF SUCH FACTORS. FURTHER,
MANAGEMENT CANNOT ASSESS THE IMPACT OF EACH SUCH FACTOR ON THE BUSINESS OR
THE EXTENT TO WHICH ANY FACTOR, OR COMBINATION OF FACTORS, MAY CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING
STATEMENTS.
SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY CAUTIONARY STATEMENTS IN THIS PARAGRAPH AND ELSEWHERE IN THIS
FORM 10-Q, AND IN OTHER REPORTS FILED BY THE COMPANY WITH THE SECURITIES
AND EXCHANGE COMMISSION INCLUDING, BUT NOT LIMITED TO, THE COMPANY'S FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1999, THE FORM 10-Q FOR THE TRANSITION
PERIOD ENDED APRIL 2, 2000, AND THE FORM 10-Q/A FOR THE QUARTERLY PERIOD
ENDED JULY 2, 2000.
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ITEM 3 - 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 $50.8
million of short-term and long-term borrowings on our balance sheet as of
October 1, 2000, approximately 19.8% represented fixed rate instruments.
Effective August 15, 2000, we entered into a three-year financing agreement
with a syndicate of lenders led by Ableco Finance LLC, as agent. The
financing 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 certain
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. 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.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On September 13, 2000, a default final judgment in the amount of $0.8
million 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 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 ultimate resolution of this
matter will not have a material adverse effect on its financial position or
future operating results. Accordingly, the Company has not made any
adjustments to the financial statements for this matter.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 15, 2000, in connection with the refinancing, the Company issued
warrants to purchase an aggregate of 524,265 shares of its common stock to
the lenders under the Company's previous credit facility, which constitutes
5% of the Company's outstanding common stock on a fully-diluted basis. The
warrants were issued in exchange for forgiveness of $14.4 million which the
Company 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, the Company issued
warrants to purchase up to 200,000 shares of its common stock to Ableco
Holding LLC. The warrants are only exercisable if any letter of credit
issued by the new lenders on the Company's 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.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
In order to remain in compliance with certain covenants in the Fleet
Facility, and to reduce the cash impact of scheduled payments under its
subordinated acquisition debt, the Company had 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 these debts having total principal outstanding of $6.9 million
as of August 15, 2000. The terms of these acquisition notes payable, which
were subordinated to the Fleet 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 August 15,
2000. On August 15, 2000, in connection with the Refinancing, certain of
the subordinated acquisition notes payable were amended to provide for a
five year term, interest only, at a rate of 10.0% per annum, for three
years, followed by two years of equal monthly payments of interest and
principal, which will retire the notes. In connection with the amendments
to these subordinated acquisition notes payable, the Company paid $0.8
million of accrued interest to the relevant noteholders at the closing.
36
<PAGE> 38
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
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)
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)
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<PAGE> 39
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)
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)
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)
27 Financial Data Schedule**
38
<PAGE> 40
------------------------
** 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-Qfor
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-Kfor
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-Qfor
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/Afor
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-Qfor
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-Qfor
the quarterly period ended July 2, 2000, as filed with the Securities and
Exchange Commission on August 21, 2000
(b) REPORTS ON FORM 8-K:
No reports were filed on Form 8-K during the fiscal quarter ended October 1,
2000.
39
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OUTSOURCE INTERNATIONAL, INC.
Date: November 15, 2000 BY: /s/ GARRY E. MEIER
----------------------------------
Garry E. Meier
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: November 15, 2000 BY: /s/ SCOTT R. FRANCIS
----------------------------------
Scott R. Francis
Vice President and Chief Financial Officer
(Principal Financial Officer)
40
<PAGE> 42
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule
41
