-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WsyKBk3Sxfudplko00I1e0UZvq6VTgN50zKLTqQdLI0DokUfa0XPYaS5ppM3U4Ed d3vOm4zHWV5uIsaIVsJPXg== 0000950170-97-001157.txt : 19970924 0000950170-97-001157.hdr.sgml : 19970924 ACCESSION NUMBER: 0000950170-97-001157 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19970923 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OUTSOURCE INTERNATIONAL INC CENTRAL INDEX KEY: 0001013316 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 650675628 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-33443 FILM NUMBER: 97684378 BUSINESS ADDRESS: STREET 1: 1144 E NEWPORT CENTER CITY: DEERFIELD BEACH STATE: FL ZIP: 33442 BUSINESS PHONE: 9544186200 MAIL ADDRESS: STREET 1: 1144 E NEWPORT CENTER CITY: DEERFIELD BEACH STATE: FL ZIP: 33442 S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1997 REGISTRATION NO. 333-33443 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- OUTSOURCE INTERNATIONAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- FLORIDA 7363 65-0675628 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
1144 EAST NEWPORT CENTER DRIVE, DEERFIELD BEACH, FL 33442 (954) 418-6200 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ROBERT A. LEFCORT 1144 EAST NEWPORT CENTER DRIVE, DEERFIELD BEACH, FL 33442 (954) 418-6200 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: DONN A. BELOFF, ESQ. HARVEY GOLDMAN, ESQ. HOLLAND & KNIGHT LLP STEEL HECTOR & DAVIS LLP ONE EAST BROWARD BOULEVARD, SUITE 1300 200 SOUTH BISCAYNE BOULEVARD, SUITE 4000 FORT LAUDERDALE, FL 33301 MIAMI, FL 33131 (954) 525-1000 (305) 577-7000 TELECOPIER NO. (954) 463-2030 TELECOPIER NO. (305) 577-7001
--------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [x] --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 1997 P R O S P E C T U S 3,700,000 SHARES [GRAPHIC OMITTED] [OUTSOURCE/registered trademark/] [INTERNATIONAL] [THE LEADER IN HUMAN RESOURCES] Common Stock ---------------- Of the 3,700,000 shares of Common Stock being offered hereby (the "Offering"), 3,000,000 shares are being offered by OutSource International, Inc. (the "Company") and 700,000 shares are being offered by certain shareholders of the Company (the "Selling Shareholders"). The Company will not receive any proceeds from the sale of shares of Common Stock by the Selling Shareholders. See "Principal and Selling Shareholders" and "Underwriting." Prior to this Offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $14.00 and $16.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. Application has been made to have the Common Stock listed on The Nasdaq National Market under the symbol "OSIX." ---------------- SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS Per Share $ $ $ $ Total(3) $ $ $ $
- -------------------------------------------------------------------------------- (1) The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses of the Offering estimated at $1,340,000. (3) The Selling Shareholders and certain other shareholders of the Company have granted to the Underwriters a 30-day option to purchase up to 555,000 additional shares of Common Stock on the same terms as set forth above solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Selling Shareholders will be $ , $ , and $ , respectively. ---------------- The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them, and subject to certain conditions. It is expected that certificates for the shares of Common Stock offered hereby will be available for delivery on or about October , 1997 at the offices of Smith Barney Inc., 14 Wall Street, New York, New York 10005. ---------------- Smith Barney Inc. Robert W. Baird & Co. Incorporated Donaldson, Lufkin & Jenrette Securities Corporation , 1997 [INSIDE FRONT COVER] DESCRIPTION OF GRAPHIC: An illustration depicting two sources of light, one representing flexible staffing benefits and services, and one representing PEO benefits and services, merging into a prism that represents the aggregation of OutSource benefits and services. The light from the prism then reflects the spectrum of benefits and services offered to OutSource clients and employees represented in silhouette at the bottom of the graphic. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING". PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE INFORMATION IN THIS PROSPECTUS REFLECTS THE CONSUMMATION ON FEBRUARY 21, 1997 OF A REORGANIZATION (THE "REORGANIZATION") AMONG NINE OPERATING CORPORATIONS EXISTING UNDER THE LAWS OF THE STATE OF FLORIDA (COLLECTIVELY, THE "SUBSIDIARIES") AND THE SHAREHOLDERS OF EACH OF THE SUBSIDIARIES, WHICH RESULTED IN THE COMPANY BECOMING THE PARENT COMPANY OF THE SUBSIDIARIES. AS USED IN THIS PROSPECTUS, UNLESS OTHERWISE INDICATED: (I) THE TERMS "COMPANY" AND "OUTSOURCE" REFER COLLECTIVELY TO THE COMPANY AND THE SUBSIDIARIES SUBSEQUENT TO THE REORGANIZATION AND TO THE SUBSIDIARIES ON A CONSOLIDATED BASIS PRIOR TO THE REORGANIZATION; (II) THE TERM "COMMON STOCK" REFERS TO THE COMPANY'S COMMON STOCK PAR VALUE $.001 PER SHARE, AND THE RIGHTS TO PURCHASE SHARES OF PREFERRED STOCK ATTACHED THERETO; (III) ALL SHARE AND PER SHARE DATA HAS BEEN RETROACTIVELY ADJUSTED TO GIVE EFFECT TO A REVERSE STOCK SPLIT TO BECOME EFFECTIVE IMMEDIATELY PRIOR TO THIS OFFERING. SEE "THE COMPANY," "DESCRIPTION OF SECURITIES--COMMON STOCK," "DESCRIPTION OF SECURITIES--REORGANIZATION" AND "DESCRIPTION OF SECURITIES--SHAREHOLDER RIGHTS PLAN." THE COMPANY The Company is a rapidly growing national provider of human resource services focusing on the flexible industrial staffing market through its Tandem division and on the professional employer organization ("PEO") market through its Synadyne division. The Tandem division recruits, trains and deploys temporary industrial personnel and provides payroll administration, risk management and benefits administration services to its clients. Tandem's clients include businesses in the manufacturing, distribution, hospitality and construction industries. Through its Synadyne division, the Company offers a comprehensive package of PEO services including payroll administration, risk management, benefits administration and human resource consultation to companies in a wide range of industries. The Company's operations began in Chicago, Illinois in 1974. As of June 30, 1997, the Company and its franchise associates operated 163 offices, with an estimated 28,000 employees, in 38 states and the District of Columbia. The Tandem division provides approximately 17,000 flexible industrial staffing personnel daily through a nationwide network of 80 Company-owned and 74 franchised offices. The Tandem division has approximately 14,000 clients and on a daily basis provides services to approximately 3,000 of such clients. Between 1994 and 1996, Company and franchise flexible industrial staffing revenues increased from $119.8 million to $247.3 million, a compound annual growth rate of approximately 44%. The Synadyne division, which began in 1994, has approximately 11,000 employees. Between 1994 and 1996, PEO revenues increased from $35.6 million to $172.1 million, a compound annual growth rate of approximately 120%. To implement its expansion strategy, the Company completed 17 acquisitions of industrial staffing companies since January 1, 1995, with 48 offices and approximately $84 million in annual revenue. During this period, the number of Company-owned flexible staffing and PEO offices increased from ten to 89, the number of geographic regions served by the Company increased from one to nine, and the Company implemented advanced information systems, further developed back office capabilities and invested in other infrastructure enhancements necessary to support its future growth. The Company's operation of both a flexible industrial staffing division and a PEO division provides it with significant competitive advantages. Both Tandem and Synadyne offer a number of common services including payroll administration, risk management and benefits administration. The Company designs and administers these services through common facilities, personnel and information systems which give the Company the ability to develop and provide a wider range of services at lower costs than its primary competitors. In addition, the Company is able to provide a full spectrum of staffing services to its industrial clients ranging from a temporary employee for one day to comprehensive outsourcing of human resource functions through the Company's PEO division. The Company expects Tandem's national network of locations to facilitate the rapid expansion of the Synadyne division, and, over time, increase the Company's penetration of local markets. The staffing industry consists of companies which provide four basic services to clients: flexible staffing, PEO services, placement and search, and outplacement. Based on information provided by the National Association of Temporary and Staffing Services ("NATSS"), the National Association of 3 Professional Employer Organizations ("NAPEO") and Staffing Industry Analysts, Inc. ("SIAI"), 1996 staffing industry revenues were approximately $74.4 billion. According to industry sources, approximately 7,000 flexible staffing firms and 2,000 PEO firms employed approximately 5.2 million people per day, or approximately 4% of the entire United States workforce, in 1996. Over the last five years, the staffing industry has experienced significant growth, due largely to the utilization of temporary help across a broader range of industries as well as the emergence of the PEO sector. According to NATSS, flexible industrial staffing currently represents 31.8% of the estimated $43.6 billion in 1996 flexible staffing revenues. The Company believes that the flexible industrial staffing market is highly fragmented and that in excess of 75% of flexible industrial staffing industry revenues are generated by small local and regional companies. According to NATSS, the flexible industrial staffing sector grew from $5.6 billion in 1991 to $13.9 billion in 1996, representing a compound annual growth rate of approximately 20%. The Company's goal is to target opportunities in this fragmented, rapidly growing, market which has to date been under-served by large full service staffing companies. The PEO sector, the fastest growing sector within the staffing industry, comprised an estimated $17.3 billion, or approximately 23%, of estimated 1996 staffing industry revenues. This sector has grown at an estimated annual rate of 29% over the last five years as small and medium size businesses (businesses with less than 500 employees) continued to realize time and cost savings associated with outsourcing human resource administration to PEOs. According to industry sources, less than 2% of small and medium size businesses in the United States utilize PEO services. As a result, the Company believes there are significant opportunities for continued growth of its PEO business. The Company's objective is to become the dominant provider of industrial flexible staffing and PEO services in select geographic areas. To achieve this objective, the Company intends to: (i) provide a comprehensive package of single-source human resource services; (ii) continue to focus on under-served markets which provide high growth opportunities; (iii) geographically cluster offices to achieve regional market leadership; (iv) increase market penetration through a multi-faceted growth strategy which includes internal growth, acquisitions, franchising and strategic alliances; (v) continue to maximize operating efficiencies through integrated technology and back office support; and (vi) commit to the permanent employment, over time, of its flexible industrial staffing and PEO employees, so as to become their "guardian employer." THE OFFERING Common Stock offered by: The Company .............................. 3,000,000 shares The Selling Shareholders .................. 700,000 shares Total .................................... 3,700,000 shares Common Stock outstanding after the Offering ........................ 8,448,788 shares(1) Use of Proceeds .............................. To (i) reduce indebtedness under certain credit obligations; (ii) repay related party notes and indebtedness incurred in connection with certain acquisitions. Proposed Nasdaq National Market Symbol ...... OSIX
- ---------------- (1) Excludes an aggregate of 1,972,096 shares of Common Stock issuable upon exercise of currently outstanding options and warrants. See "Management--Stock Option Plan", "Management--Warrants" and Notes 5 and 10 to the Company's Consolidated Financial Statements. ---------------- PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE STATEMENTS IN THIS PROSPECTUS THAT ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS, INCLUDING THOSE IDENTIFIED UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS. 4 SUMMARY CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- SUPPLEMENTAL PRO FORMA 1992 1993 1994 1995 1996 1996(1) ---------- ---------- ----------- ----------- ---------- -------------- CONSOLIDATED STATEMENT OF (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME DATA: Net revenues .............................. $39,737 $43,472 $ 80,647 $149,825 $280,171 $346,753 ======= ======= ======== ======== ========= ========= Gross profit .............................. $ 7,771 $ 9,105 $ 14,834 $ 23,555 $ 38,069 $ 54,718 ======= ======= ======== ======== ========= ========= Operating income ........................ $ 1,568 $ 1,607 $ 3,581 $ 3,456 $ 5,483 $ 10,134 Net interest expense ..................... 328 263 820 1,259 2,175 2,390 Other expense (income)(2) ............... (59) (237) (51) (11) 1,448 943 ------- ------- -------- -------- --------- --------- Income (loss) before provision (benefit) for income taxes ........................ 1,299 1,581 2,812 2,208 1,860 6,801 Pro forma income taxes (benefit)(3) ...... 486 595 1,059 859 757 2,620 ------- ------- -------- -------- --------- --------- Pro forma net income (loss)(3) ............ $ 813 $ 986 $ 1,753 $ 1,349 $ 1,103 $ 4,181 ======= ======= ======== ======== ========= ========= Pro forma weighted average common shares outstanding(4) .................. 6,050 6,050 6,050 6,050 6,050 9,950 ======= ======= ======== ======== ========= ========= Pro forma earnings (loss) per share ...... $ .13 $ .16 $ .29 $ .22 $ .18 $ .42 ======= ======= ======== ======== ========= ========= OTHER DATA(5): EBITDA, as adjusted ........................ $ 2,792 $ 3,618 $ 5,993 $ 6,276 $ 9,005 $ 14,481 ======= ======= ======== ======== ========= ========= Net income (loss), as adjusted ............ $ 1,382 $ 1,715 $ 2,947 $ 2,586 $ 3,220 $ 5,081 ======= ======= ======== ======== ========= ========= Pro forma earnings (loss) per share, as adjusted .............................. $ .53 $ .51 ========= ========= SYSTEM OPERATING DATA: System Revenues(6) ........................ $76,467 $92,496 $151,408 $242,681 $389,314 $433,966 ======= ======= ======== ======== ========= ========= Number of employees (end of period) ...... 7,100 7,300 12,200 16,200 23,000 Number of offices (end of period) ......... 26 30 62 101 139 SIX MONTHS ENDED JUNE 30, ------------------------------------ SUPPLEMENTAL PRO FORMA 1996 1997 1997(1) ---------- ----------- ------------- CONSOLIDATED STATEMENT OF INCOME DATA: Net revenues .............................. $116,122 $193,197 $204,447 ========= ======== ======== Gross profit .............................. $ 15,752 $ 27,359 $ 30,020 ========= ======== ======== Operating income ........................ $ 1,957 $ 2,798 $ 3,219 Net interest expense ..................... 774 3,513 1,669 Other expense (income)(2) ............... 55 1,219 (59) --------- -------- -------- Income (loss) before provision (benefit) for income taxes ........................ 1,128 (1,934) 1,609 Pro forma income taxes (benefit)(3) ...... 459 (467) 612 --------- -------- -------- Pro forma net income (loss)(3) ............ $ 669 $ (1,467) $ 997 ========= ======== ======== Pro forma weighted average common shares outstanding(4) .................. 6,050 6,690 9,950 ========= ======== ======== Pro forma earnings (loss) per share ...... $ .11 $ (.22) $ .10 ========= ======== ======== OTHER DATA(5): EBITDA, as adjusted ........................ $ 3,208 $ 5,007 $ 6,783 ========= ======== ======== Net income (loss), as adjusted ............ $ 1,178 $ (276) $ 997 ========= ======== ======== Pro forma earnings (loss) per share, as adjusted .............................. $ (.04) $ .10 ======== ======== SYSTEM OPERATING DATA: System Revenues(6) ........................ $164,463 $248,572 $256,095 ========= ======== ======== Number of employees (end of period) ...... 21,000 28,000 Number of offices (end of period) ......... 126 163
JUNE 30, 1997 ---------------------------- ACTUAL AS ADJUSTED(7) ---------- --------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital .................................... $17,894 $ 18,626 Total assets ....................................... 96,754 101,330 Total long-term debt, less current maturities ...... 78,007 36,648 Total shareholders' equity (deficit) ............... (8,447) 38,219
- ---------------- (1) The supplemental pro forma financial information reflects the Company's historical results of operations, adjusted for (a) the 1996 Acquisitions and the 1997 Acquisitions (as hereinafter defined, see "Management's Discussion and Analysis of Financial Condition and Results of Operations"); (b) the distributions to shareholders, the purchase of shares of common stock of the Subsidiaries from certain shareholders and the contribution to capital by shareholders, each of which occurred in connection with the Reorganization; (c) the issuance of $25.0 million senior subordinated promissory notes (the "Senior Notes") and warrants to purchase 1,360,304 shares of Common Stock (the "Warrants"); and (d) the sale by the Company of 3,000,000 shares of Common Stock offered hereby at an assumed offering price of $15.00 per share and the application of the net proceeds therefrom, as if all had occurred as of the beginning of the periods presented. The application of net proceeds includes the retirement of the balance of the Senior Notes in full, which will result in an extraordinary loss of $13.7 million, net of a $6.8 million income tax benefit, which is not reflected in the supplemental pro forma financial information. This loss consists of the unamortized debt discount and the unamortized debt issuance costs. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operation," "Description of Securities--Reorganization," "Management--Warrants" and Unaudited Pro Forma Consolidated Financial Information. The adjustments made to arrive at the supplemental pro forma results for the six months ended June 30, 1997 include the elimination of $1.2 million of non-operating expense arising from a Put Warrants Valuation Adjustment (as hereinafter defined, see note 2 below) and included in the Company's historical results for the same period, as discussed in Note 2 below, which increased supplemental pro forma earnings per share by $0.11. (2) Includes $1.4 million of unusual charges, primarily professional fees, in the year ended December 31, 1996, related to a registration statement filed by the Company with the Securities and Exchange Commission that was subsequently withdrawn and an internal investigation into certain Company transactions. See "Business--Legal Proceedings" and Note 7 to the Company's Consolidated Financial Statements. The holders of the Warrants have a Put Right (as hereinafter defined), as a result of which the Company recorded a liability at the time of the issuance of the Warrants based on their fair value (the "Put Warrants Liability"). Until the Offering is consummated, the Company will adjust 5 the Put Warrants Liability to fair value at the end of each accounting period (the "Put Warrants Valuation Adjustment"). Other expense (income) for the six months ended June 30, 1997 includes non-operating expense of $1.2 million related to the adjustment of the Put Warrants Liability recorded at the time of the issuance of the Warrants on February 21, 1997 and based on their fair value at that time, to the fair value of the Warrants at June 30, 1997. Based on an assumed offering price of $15.00 per share and the consummation of this Offering prior to December 31, 1997, the Put Warrants Valuation Adjustment will result in non-operating expenses in the third and fourth quarters of 1997 totalling $0.6 million ($0.5 million net of income tax benefit). At the time of the Offering, the Warrants, with an adjusted carrying value of $20.4 million (based on an assumed offering price of $15.00 per share), will be reclassified from debt to additional paid-in capital. See Note 5 to the Company's Consolidated Financial Statements. (3) Prior to the Reorganization, each of the Subsidiaries elected to be a subchapter S corporation and, accordingly, were not subject to income taxes; therefore, there is no provision for income taxes for periods prior to the Reorganization. Pro forma income taxes and net income have been computed as if the Company had been fully subject to federal and applicable state income taxes for such periods. The Company recognized a one-time tax benefit of $386,000 as a result of the termination, at the time of the Reorganization, of the Subsidiaries' elections to be treated as S corporations. This benefit is reflected in the historical results of operations for the six months ended June 30, 1997, but has been removed from the pro forma and the supplemental pro forma results presented for that period. See Unaudited Pro Forma Consolidated Financial Information. (4) Includes (a) the 5,448,788 shares of Common Stock issued in connection with the Reorganization and (b) all outstanding options and warrants to purchase Common Stock calculated using the treasury stock method and an assumed offering price of $15.00 per share, as if all such shares, options and warrants had been outstanding for all periods presented; (c) for the historical data only for the periods prior to the Reorganization, the equivalent number of shares (336,430) of Common Stock represented by the shares of common stock of the Subsidiaries purchased from certain shareholders for cash and notes in the Reorganization; and (d) for the supplemental pro forma data only, the sale by the Company of 3,000,000 shares of Common Stock offered hereby. See Note 1 to the Company's Consolidated Financial Statements. (5) The other data is presented to reflect the Company's historical results of operations, adjusted to reflect (a) the elimination of the amount of compensation expense ($0.9 million, $1.2 million, $1.9 million, $2.0 million and $2.0 million for the years ended December 31, 1992, 1993, 1994, 1995 and 1996, respectively, and $809,000 and $262,000 for the six months ended June 30, 1996 and 1997, respectively) for Messrs. Louis A. Morelli, Alan E. Schubert and Lawrence H. Schubert, the Company's founding shareholders (the "Founding Shareholders") and Mr. Paul M. Burrell, the Company's President, Chief Executive Officer and Chairman of the Board (who is also a shareholder), which is in excess of the compensation for such individuals subsequent to the Reorganization; (b) the elimination of $1.4 million of unusual charges in the year ended December 31, 1996 and $1.2 million of non-operating expense arising from the June 30, 1997 Put Warrants Valuation Adjustment, both discussed in Note 2 above; and (c) income taxes computed as if the Company had been subject to federal and applicable state income taxes for such periods. See footnote 1 to the table in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations" for summary operating data reflecting these adjustments. EBITDA is earnings (net income) before the effect of interest income and expense, income tax benefit and expense, depreciation expense and amortization expense. EBITDA is presented because it is a widely accepted financial indicator used by many investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income or as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Cash flows for the periods presented were as follows:
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------------- ------------------------- 1992 1993 1994 1995 1996 1996 1997 ----------- --------- ----------- ----------- ------------ ------------ ------------ (IN THOUSANDS) Cash flows provided by (used in): Operating activities .................. $ 1,489 $ 724 $ 1,267 $ 2,787 $ (1,280) $ (3,202) $ (9,584) Investing activities .................. (136) (107) (2,246) (2,026) (4,834) (3,817) (22,643) Financing activities .................. (1,358) (609) 1,028 678 4,647 5,576 33,361 --------- ------ -------- -------- -------- -------- --------- Net increase (decrease) in cash ...... $ (5) $ 8 $ 49 $ 1,439 $ (1,467) $ (1,443) $ 1,134 ========= ====== ======== ======== ======== ======== =========
(6) System revenues is the sum of the Company's net revenues (excluding revenues from franchise royalties and services performed for flexible staffing franchisees (the "Franchisees")) and the net revenues of the Franchisees. System revenues provide information regarding the Company's penetration of the market for its services, as well as the scope and size of the Company's operations, but are not an alternative to revenues determined in accordance with generally accepted accounting principles as an indicator of operating performance. The net revenues of Franchisees, which are not earned by or available to the Company, are derived from reports that are unaudited. System revenues consist of the following:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------- SUPPLEMENTAL PRO FORMA 1992 1993 1994 1995 1996 1996 ----------- ----------- ---------- ---------- ------------ -------------- (IN THOUSANDS) Company's net revenues ............ $ 39,737 $ 43,472 $ 80,647 $149,825 $ 280,171 $ 346,753 Less Company revenues from: Franchise royalties ............... (1,393) (1,586) (2,712) (4,138) (5,671) (4,827) Services to franchisees ............ -- -- (4,698) (7,507) (35,079) (35,079) Add Franchisees' net revenues ...... 38,123 50,610 78,171 104,501 149,893 127,119 --------- --------- -------- -------- ---------- ---------- System revenues ..................... $ 76,467 $ 92,496 $151,408 $242,681 $ 389,314 $ 433,966 ========= ========= ======== ======== ========== ========== SIX MONTHS ENDED JUNE 30, -------------------------------------- SUPPLEMENTAL PRO FORMA 1996 1997 1997 ------------ ----------- ------------- Company's net revenues ............ $ 116,122 $ 193,197 $ 204,446 Less Company revenues from: Franchise royalties ............... (2,640) (2,905) (2,779) Services to franchisees ............ (13,200) (17,003) (17,003) Add Franchisees' net revenues ...... 64,181 75,283 71,431 ---------- --------- ---------- System revenues ..................... $ 164,463 $248,572 $ 256,095 ========== ========= ==========
(7) As adjusted to give effect to the sale by the Company of 3,000,000 shares of Common Stock offered hereby at an assumed offering price of $15.00 per share and the application of the net proceeds therefrom to retire (a) the balance of the Senior Notes in full, (b) a portion of the outstanding indebtedness under the Company's $50.0 million line of credit facility (the "Revolving Facility"), (c) various promissory notes due to certain existing shareholders of the Company, their family members and an executive officer of the Company, and (d) various promissory notes issued to related parties in connection with certain acquisitions. See "Use of Proceeds." 6 THE COMPANY The Company was organized under the laws of the State of Florida on April 19, 1996. The Company's operations began in Chicago, Illinois in 1974. On February 21, 1997, the Company consummated a Reorganization with the Subsidiaries and the shareholders of each of the Subsidiaries which resulted in the Company becoming the parent company of the Subsidiaries. Immediately prior to the Offering, the Company will: (i) effectuate a reverse stock split pursuant to which each then issued and outstanding share of Common Stock will be converted into approximately 0.65 shares of Common Stock; and (ii) amend its Amended and Restated Articles of Incorporation (the "Articles") to provide for a classified board of directors (the "Board") and certain other provisions. See "Description of Securities--Common Stock," "Description of Securities--Reorganization" and "Description of Securities--Certain Anti-Takeover Provisions Included in the Company's Articles of Incorporation and Bylaws." The Company's principal executive offices are located at 1144 East Newport Center Drive, Deerfield Beach, Florida 33442, and its telephone number is (954) 418-6200. RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. POTENTIAL FOR UNFAVORABLE INTERPRETATION OF GOVERNMENT REGULATIONS As an employer, the Company is subject to all federal, state and local statutes and regulations governing its relationships with its employees and affecting businesses generally, including its employees assigned to work at client company locations (sometimes referred to as "worksite employees"). Although the Company is not subject to additional regulation by virtue of its flexible staffing operations, as a result of its PEO operations, the Company is affected by specifically applicable licensing and other regulatory requirements and by the uncertainty of the application of numerous federal and state laws relating to labor, tax and employment matters. Because many such laws were enacted prior to the development of alternative employment arrangements, such as those provided by PEOs and other staffing businesses, many of these laws do not specifically address the obligations and responsibilities of non-traditional employers. Interpretive issues concerning such relationships have arisen and remain unsettled. Uncertainties arising under the Internal Revenue Code of 1986, as amended (the "Code") include, but are not limited to, the qualified tax status and favorable tax status of certain benefit plans provided by the Company and other alternative employers. The unfavorable resolution of these unsettled issues could have a material adverse effect on the Company's results of operations, financial condition and liquidity. In addition, the Internal Revenue Service ("IRS") is conducting an examination division market segment specialization program to examine PEOs throughout the United States. See "--Potential Legal Liability" and "--Risk of Loss of Qualified Status for Certain Tax Purposes." While many states do not explicitly regulate PEOs, approximately one-third of the states (including Florida) have passed laws that mandate licensing or registration requirements for PEOs and several additional states are considering such regulation. Such laws vary from state to state but generally provide, among other things, for monitoring the fiscal responsibility of PEOs and specify some of the employer responsibilities assumed by PEOs. The length of time required to obtain regulatory approval to begin such operations will vary from state to state, and there can be no assurance that the Company will be able to satisfy the licensing requirements or other applicable regulations of any particular state in which it is not currently operating, that it will be able to provide the full range of services currently offered, or that it will be able to operate profitably within the regulatory environment of any state in which it does obtain regulatory approval. The Company is presently licensed in eleven states, has 7 submitted license applications in two other states, and intends to submit license applications in two other states. The absence of required licenses in those states where licensing is required could prohibit the Company from providing PEO services in such states. See "Business--Industry Regulation." Future growth of the Company's PEO operations will depend, in part, on the Company's ability to offer its services to prospective clients in other states. In order to provide PEO services effectively in other states, the Company must obtain all necessary regulatory approvals, achieve acceptance in the local market, comply with state regulatory requirements, adapt to local market conditions, secure favorable rates for non-statutory benefits, and establish internal controls that enable it to conduct operations in several locations. Moreover, as the Company expands into additional states, there can be no assurance that the Company will be able to duplicate in other markets the revenue growth and operating results experienced in its current markets. In addition, there can be no assurance that existing laws and regulations which are not currently applicable to the Company will not be interpreted more broadly in the future so as to apply to the Company's existing activities or that new laws and regulations will not be enacted with respect to the Company's activities, either of which could have a material adverse effect on the Company's business, financial condition, results of operations and liquidity. See "Business--Industry Regulation." INCREASED EMPLOYEE COSTS The Company is required to pay a number of federal, state and local payroll taxes and related payroll costs, including unemployment taxes, workers' compensation insurance premiums and claims, Social Security, and Medicare, among others, for its employees (including its worksite employees and the worksite employees of many of its franchise associates). The Company also provides certain additional benefits to many of its core employees (including many of its worksite employees) and incurs certain costs related to the provision of such benefits, such as insurance premiums for health care. Health insurance premiums, unemployment taxes and workers' compensation insurance premiums and costs are significant to the Company's operating results, and are determined, in part, by the Company's claims experience. Accordingly, the Company employs extensive procedures in an attempt to control such costs. The Company's costs could increase as the result of proposed health care reforms. Recent federal and certain state legislative proposals have included provisions extending health insurance benefits to employees who do not presently receive such benefits. There can be no assurance that the Company will be able to increase the fees charged to its clients in a timely manner and sufficient amount to cover increased costs related to workers' compensation, unemployment insurance or health insurance benefits that may be extended to worksite employees. LIABILITY FOR WORKERS' COMPENSATION CLAIMS The Company's worker's compensation insurance coverage for calendar 1997 provides for a $250,000 deductible per accident or industrial illness with an aggregate annual dollar limit on the Company's potential liability for deductible payments of 2.2% of aggregate annual payroll. For claims related to periods prior to 1997, there was no aggregate maximum dollar limit on the Company's potential liability for deductible payments. From May 1, 1995 through December 31, 1996, in exchange for a lower excess insurance premium rate, the Company accepted the responsibility for losses exceeding the $250,000 policy deductible per accident or industrial illness on a dollar-for-dollar basis, but only to the extent such losses cumulatively exceed 85% of the excess insurance premium (excluding the profit and administration component), subject to a maximum additional premium of approximately $750,000 in 1995 and $1.2 million in 1996. As a result, the Company pays substantially all workers' compensation claims of its employees. To the extent the Company is not successful in managing the severity of workers' compensation claims remaining open from periods prior to 1997, the costs incurred by the Company will increase and could have a material adverse effect on the Company's financial condition, results of operations and liquidity. In addition, because the Company's aggregate liability for deductible payments was not limited for claims related to periods prior to 1997, the adverse development of any claims involving significant dollar amounts could also have a material adverse effect on the Company's financial condition and results of operations. 8 The Company employs the services of an independent third-party administrator to assist management in establishing an appropriate accrual for the uninsured portion of claims. However, such accrual is an estimate of future payments relating to known claims and claims incurred but not reported, based on prior experience and other relevant data. Although there can be no assurance that the Company's actual future workers' compensation obligations for periods prior to 1997 will not exceed the amount of its workers' compensation reserves, management believes the recorded reserve is adequate. Moreover, the Company may incur costs related to workers' compensation claims at a higher rate in future years due to such causes as higher than anticipated losses from known claims or an increase in the number and severity of new claims. Workers' compensation insurance premiums and other costs may increase as a result of changes in the Company's experience rating or applicable laws. For a discussion of the adequacy of workers' compensation related reserves, see "Business--Risk Management Program--Workers' Compensation." The Company secures its obligations to pay the uninsured portion of its workers' compensation claims through bank standby letters of credit in favor of the insurer. Any failure by the Company to maintain sufficient letters of credit or other collateral to secure its workers' compensation obligations, or any adverse change in the Company's experience rating or applicable laws, may adversely affect the Company's workers' compensation insurance rates and ultimately the Company's business, financial condition, results of operations and liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." ABILITY TO CONTINUE GROWTH The Company has experienced significant growth in the past through acquisitions, internal growth and by granting franchises. There can be no assurance that, in the future, the Company will be able to expand its market presence in its current locations or successfully enter other markets. The ability of the Company to continue its growth will depend on a number of factors, including the availability of working capital to support such growth, existing and emerging competition and the Company's ability to maintain sufficient profit margins in the face of pricing pressures. The Company must also manage costs in a changing regulatory environment, adapt its infrastructure and systems to accommodate growth and recruit and train additional qualified personnel. The Company plans to expand its business, in part, through acquisitions primarily of flexible industrial staffing companies and PEOs. Although the Company continuously reviews potential acquisition candidates and currently has several offers outstanding, it has not entered into any agreement, understanding or commitment with respect to any additional acquisitions at this time. There can be no assurance that the Company will be able to continue to successfully identify suitable acquisition candidates, complete acquisitions on favorable terms, or at all, or integrate acquired businesses into its operations. Moreover, there can be no assurance that future acquisitions will not have a material adverse effect on the Company's operating results, particularly in the fiscal quarters immediately following the consummation of such transactions, while the operations of the acquired business are being integrated into the Company's operations. Once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as at existing Company-owned locations or otherwise perform as expected. The Company is unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. The Company competes for acquisition and expansion opportunities with entities that have substantially greater resources. In addition, acquisitions involve a number of special risks, such as diversion of management's attention, difficulties in the integration of acquired operations and retention of personnel, unanticipated problems or legal liabilities, and tax and accounting issues, some or all of which could have a material adverse effect on the Company's results of operations and financial condition. See "Business--Company Strategy." Franchise growth poses the additional risk of the inability of the Company to control the quality of services provided by its franchise associates. Moreover, the failure of its franchise associates to pay royalties due to the Company could have a material adverse effect on the Company's financial condition and results of operations. 9 RISKS RELATED TO INTANGIBLE ASSETS The 1996 Acquisitions and the 1997 Acquisitions (as hereinafter defined, see "Management's Discussion and Analysis of Financial Condition and Results of Operations") resulted in significant increases in goodwill and other intangible assets. Net identifiable intangible assets, which include customer lists, employee lists and covenants not to compete acquired in the acquisitions were approximately $6.0 million at June 30, 1997, representing approximately 6.2% of the Company's total assets. Net identifiable intangible assets are recorded at fair value on the date of acquisition and are being amortized over periods ranging from one to 15 years, or a weighted average of 6.1 years. Goodwill, which relates to the excess of cost over the fair value of net assets of businesses acquired, was approximately $25.2 million at June 30, 1997 representing approximately 26.0% of the Company's total assets. The Company amortizes goodwill on a straight line basis over periods ranging from 15 to 40 years, or a weighted average of 32.7 years. There can be no assurance that the value of intangible assets will ever be realized by the Company. On an ongoing basis, the Company makes an evaluation based on undiscounted cash flows, whether events and circumstances indicate that all or a portion of the carrying value of intangible assets may no longer be recoverable, in which case an additional charge to earnings may be necessary. Although at June 30, 1997 the net unamortized balance of intangible assets is not considered to be impaired, any future determination requiring the write off of a significant portion of unamortized intangible assets could have a material adverse effect on the Company's financial condition and results of operations. See Note 2 to the Company's Consolidated Financial Statements. RELIANCE ON INFORMATION PROCESSING SYSTEMS AND PROPRIETARY TECHNOLOGY The Company's business depends, in part, upon its ability to store, retrieve, process, and manage significant databases, and periodically to expand and upgrade its information processing capabilities. The Company's computer equipment and software systems are maintained at its Deerfield Beach, Florida headquarters. Interruption or loss of the Company's information processing capabilities through loss of stored data, breakdown or malfunction of computer equipment and software systems, telecommunications failure, conversion difficulties, or damage to the Company's headquarters and systems could have a material adverse effect on the Company. POTENTIAL LEGAL LIABILITY Providers of staffing services may be subject to claims relating to the actions of their employees (including their worksite employees), including possible claims of discrimination and harassment, theft of client property, misuse of client proprietary information, other criminal actions or torts and other claims. Management has adopted and implemented policies and guidelines to reduce its exposure to these risks. However, the failure of any Company employee to follow these policies and guidelines may result in negative publicity, injunctive relief and the payment by the Company of money damages or fines. Although the Company historically has not had any significant problems in this area, there can be no assurance that the Company will not experience such problems in the future. As an employer, the Company may be subject to a wide variety of employment-related claims such as claims for injuries, wrongful death, harassment, discrimination, wage and hour violations and other matters. In addition, a number of legal issues remain unresolved with respect to co-employment arrangements among PEOs, their clients and worksite employees, including questions concerning ultimate liability for violations of employment and discrimination laws. The Company's standard PEO client service agreement establishes a contractual division of responsibilities between the Company and each client for various human resource matters, including compliance with and liability under various governmental regulations. However, as a result of the Company's status as co-employer, the Company may be subject to liability for violations of these and other laws despite these contractual provisions and even if it does not participate in such violations. Although such client service agreements generally provide that the client is to indemnify the Company for any liability attributable to the client's failure to comply with its contractual obligations and the requirements imposed by law, the Company may not be able to collect on such a contractual obligation claim and thus may be responsible for satisfying such 10 liabilities. The Company carries liability insurance, but there can be no assurance that any such insurance will be sufficient to cover any judgments, settlements or costs relating to any present or future claims, suits or complaints or that sufficient insurance will be available to the Company or such providers in the future on satisfactory terms, if at all. If insurance is not sufficient to cover any judgments, settlements or costs relating to any present or future claims, suits or complaints, the Company's business, financial condition, results of operations and liquidity could be materially adversely affected. See "--Potential for Unfavorable Interpretation of Government Regulations" and "Business--Industry Regulation." The Company may be subject to claims asserting that it is vicariously liable for the damages allegedly caused by its franchisees. Generally, franchisor liability for the acts or inactions of its franchisees are based on agency concepts. The Company's franchise agreements state that the parties are not agents and that the franchisees control the day-to-day operations of their businesses. Furthermore, the franchise agreements require the franchisees to undertake certain efforts to inform the public that they are not agents of the Company and that they are independently owned and operated. Moreover, the Company has taken certain additional steps to insulate its potential liability based on claims from the franchisees' conduct, including requiring the franchisees to indemnify the franchisor for such claims and mandating that the franchisees carry certain insurance coverage naming the Company as an additional insured. Despite these efforts to minimize the risk of vicarious liability, there can be no assurance that a claim will not be made against the Company, nor that the indemnification requirements and insurance coverage will be sufficient to cover any judgments, settlements or costs relating to such a claim. COMPETITION The staffing industry is highly competitive, with approximately 7,000 companies providing flexible staffing services through approximately 17,000 locations and approximately 2,000 companies providing PEO services. The Company competes with larger full-service and specialized flexible staffing and PEO competitors in national, regional and local markets. In addition, the Company may encounter substantial competition from new market entrants. Many of the Company's competitors have significantly greater name recognition and have greater marketing, financial and other resources than the Company. The Company expects that there will be significant consolidation in the staffing industry in the future, resulting in increased competition from larger national and regional companies. There can be no assurance that the Company will be able to compete effectively against such competitors in the future. See "Business--The Staffing Industry" and "Business--Competition." DEPENDENCE ON CERTAIN CLIENTS Approximately 16% of the Company's total 1996 revenues and approximately 26% of the 1996 revenues of its PEO operations were derived from services provided to independent Allstate insurance agents. As of June 30, 1997, such services were provided to approximately 2,500 such agents. Although each of these agents has the authority to make its own decisions concerning outside vendors, they are required to choose service providers from among those that are approved by the respective agent's regional headquarters office. The failure of the Company to remain an approved service provider may result in the loss of some or all of these customers, which could have a material adverse effect on the Company's business, financial condition, results of operations and liquidity. In addition, approximately 13% of the Company's total 1996 revenues and 20% of the 1996 revenues of its PEO operations were derived from services provided to certain of the Company's flexible industrial staffing franchises. SEASONAL VARIATIONS IN RESULTS The Company normally experiences higher revenues in its third and fourth quarters because of increased demand for temporary industrial personnel during this time. Demand is higher during these two quarters because most of the Company's flexible staffing clients are increasing production in preparation for the end of the year holiday season. The Company's quarterly operating results also 11 fluctuate as a result of a number of timing factors, including the effect of employment tax limits. In addition, the Company usually experiences lower revenues in the first quarter due to unfavorable weather conditions and lower overall economic activity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality." FINANCIAL CONDITION OF CLIENTS The Company is obligated to pay the wages and salaries of its worksite employees regardless of whether the Company's clients pay the Company on a timely basis or at all. The Company also makes advances to certain flexible staffing franchise associates to fund payroll for temporary personnel provided by those franchise associates to their clients. To the extent that a client or flexible staffing franchise associate experiences financial difficulty, or is otherwise unable to meet its obligations as they become due, the Company's financial condition, results of operations and liquidity could be materially adversely affected. DURATION OF PEO SERVICES AGREEMENT The Company's standard PEO services agreements are generally subject to termination by the Company or the client at any time upon 30 to 45 days' prior written notice. A significant number of terminations could have a material adverse effect on the Company's financial condition, results of operations and liquidity. See "Business--Clients." RISK OF LOSS OF QUALIFIED STATUS FOR CERTAIN TAX PURPOSES For purposes of the Company's 413(c) multiple-employer retirement plans (similar to 401(k) retirement plans and hereafter referred to as the "Multi-Employer Retirement Plans"), cafeteria plan and federal employment tax withholding, the Company treats worksite employees as the employees of the Company. It is possible that in connection with an examination by the IRS of a client company and/or the Company, the IRS may determine that the Company is not the employer of the worksite employees. The IRS is conducting an examination division market segment specialization program, coordinated through its Houston, Texas district office, to examine PEOs throughout the United States. If the Company is not the employer of the worksite employees, the qualified tax status of the Company's Multi-Employer Retirement Plans and cafeteria plan may be revoked and the Company may lose its ability to assume a client company's federal employment tax withholding obligations. If the loss of qualified tax status for the Company's Multi-Employer Retirement Plans or cafeteria plan is applied retroactively, employees' vested account balances may become taxable immediately to the employees, the Company would lose its tax deduction to the extent the contributions were not vested, the plan trust would become a taxable trust and penalties could be assessed. A retroactive application by the IRS of an adverse conclusion could have a material effect on the Company's financial position, results of operations and liquidity. In such a scenario, the Company would also face the risk of client dissatisfaction as well as potential litigation. In addition, if the Company is required to report and pay employment taxes for the separate accounts of its clients rather than for its own account as a single employer, the Company could incur increased administrative burdens. The Company is unable to predict the timing or nature of the findings of an IRS examination. See "Business--Industry Regulation." POSSIBLE ADVERSE EFFECT OF FLUCTUATIONS IN THE GENERAL ECONOMY AND BUSINESS OF CLIENTS Historically, the general level of economic activity has significantly affected the demand for temporary personnel. As economic activity has slowed, the use of temporary employees often has been curtailed before core employees have been laid off. There can be no assurance that an economic downturn would not adversely affect the demand for temporary personnel. During periods of increased economic activity and generally higher levels of employment, the competition among flexible staffing firms for qualified temporary personnel is intense. There can be no assurance, however, that the 12 Company's PEO operations will not be adversely affected by decreases in economic activity. Staffing providers are also affected by fluctuations and interruptions in the business of their clients. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." DECREASE IN GROSS PROFIT AND OPERATING MARGINS The Company's gross profit margin decreased from 18.4% in 1994 to 13.6% in 1996 and its operating margin decreased from 4.4% in 1994 to 2.0% in 1996. The decreases in the Company's gross profit and operating margins were primarily attributable to the increase from 44.2% in 1994 to 61.4% in 1996 of the portion of the Company's total net revenues generated by its PEO services, which has significantly lower gross profit and operating margins than its flexible industrial staffing services. In the event that revenues derived from PEO services comprise a greater percentage of the Company's total net revenues in the future, the Company's gross profit and operating margins will continue to decrease. POTENTIAL LOSS OF WORKING CAPITAL FUNDING SOURCE Flexible industrial staffing employees are paid by the Company on a daily or weekly basis and PEO employees are paid by the Company on a weekly, bi-weekly, semi-monthly or monthly basis. The Company, however, receives payment for these services from all its flexible industrial staffing customers and approximately 10% of its PEO customers, on average, 35 to 45 days from the date of invoice. As new offices are established or acquired, or as existing offices expand, there will be increasing requirements for cash to fund these payroll obligations. The Company's primary source of working capital funds is the Revolving Facility. If the Revolving Facility became unavailable and the Company was unable to secure alternative financing on acceptable terms, its business, financial condition, results of operations and liquidity would be materially adversely affected. ANTI-TAKEOVER PROVISIONS Pursuant to the Company's Articles, the Board has the authority to issue shares of preferred stock and to determine the designations, preferences, rights and qualifications or restrictions of those shares without any further vote or action by the shareholders. The rights of the holders of Common Stock will be subject to, and may be materially adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate actions, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. Prior to the consummation of the Offering, the Company will amend its Articles (as so amended, the "Amended Articles") to provide for the classification of the Company's Board into three classes, each class to be as nearly equal in number of directors as possible, and amend its Bylaws (as so amended, the "Amended Bylaws"). These and other additional provisions contained in the Company's Amended Articles, Amended Bylaws and the Florida Business Corporation Act ("FBCA"), could have the effect of making it more difficult for a party to acquire, or of discouraging a party from attempting to acquire, control of the Company without approval of the Company's Board. See "Description of Securities-Certain Anti-Takeover Provisions Included in the Company's Articles of Incorporation and Bylaws" and "Description of Securities--Certain Provisions of Florida Law." In addition, prior to the consummation of the Offering, the Company will enter into a shareholder protection rights agreement (the "Rights Agreement") and will declare a dividend of one right (a "Right") for each outstanding share of Common Stock. The Rights may cause substantial dilution to a person or group that attempts to acquire the Company in a manner or on terms not approved by the Board. These provisions and agreements are intended to encourage a person interested in acquiring the Company to negotiate with, and to obtain the approval of, the Board in connection with such a transaction. However, certain of these provisions and agreements may discourage a future acquisition of the Company, including an acquisition in which shareholders might otherwise receive a premium for their shares. As a result, shareholders who might desire to participate in such a transaction may not have the opportunity to do so. See "Description of Securities--Shareholder Rights Plan." 13 VOTING TRUST AGREEMENT; SHAREHOLDERS' AGREEMENT On February 21, 1997, certain shareholders of the Company deposited 4,683,982 shares of Common Stock into a voting trust (the "Voting Trust"), the trustees of which are Messrs. Paul M. Burrell, the President, Chief Executive Officer and Chairman of the Board of the Company, and Richard J. Williams, a director of the Company (the "Trustees"). The term of the Voting Trust is ten years. Pursuant to the terms of the Voting Trust, the Trustees have sole and exclusive right to vote the shares of Common Stock deposited in the Voting Trust. Upon consummation of this Offering, the shares of Common Stock in the Voting Trust will constitute approximately 47.2% of the issued and outstanding shares of Common Stock (or 40.6% if the Underwriters' over-allotment option is exercised in full). Accordingly, the Trustees will retain sufficient voting power to control the election of the Board or the outcome of any extraordinary corporate transaction submitted to the shareholders for approval for the foreseeable future. Effective February 21, 1997, the shareholders of the Company (the former shareholders of the Subsidiaries) agreed to elect a Board comprised of seven persons: three persons designated by the chief executive officer of the Company (the "Management Directors"), two persons designated by the holders of $25.0 million senior subordinated promissory notes (the "Senior Notes") issued by the Company (the "Investor Directors") and two additional persons selected by the Management Directors and the Investor Directors. In the event of a default under the Senior Notes or the failure of the Company to achieve certain performance criteria, the holders of the Senior Notes have the right to designate up to two additional members of the Board. The shareholders further agreed to ratify any merger, consolidation or sale of the Company, any acquisitions made by the Company, and any amendments to the Company's Articles or Bylaws to the extent such actions are approved by the Board. See "Management--Voting Trust and Shareholders' Agreement" and "Principal and Selling Shareholders." ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock. Although the Company has applied to have the Common Stock approved for quotation on the Nasdaq National Market, there can be no assurance that an active trading market will develop for the Common Stock or, if one does develop, that it will be maintained. The initial public offering price of the Common Stock will be negotiated between the Company and the representatives of the Underwriters and may not be indicative of the market price of the Common Stock after the Offering. Additionally, the market price of the Common Stock could be subject to significant fluctuations in response to operating results of the Company, announcements of new services or market expansions by the Company or its competitors, changes in general conditions in the economy, the financial markets, the employment services industry, or other developments and activities affecting the Company, its clients or its competitors, some of which may be unrelated to the Company's performance. See "Underwriting." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market following the Offering could have an adverse effect on prevailing market prices of the Common Stock. After the Offering, the 3,700,000 shares of Common Stock offered hereby will be freely tradeable without restriction. However, the shareholders of the Company as of the date of this Prospectus (the "Existing Shareholders") who, upon the completion of this Offering, will beneficially own (excluding options and Warrants) an aggregate of approximately 4,748,788 shares of Common Stock (or 4,193,788 shares, if the Underwriters' over-allotment option is exercised in full) have agreed with the Underwriters not to sell any of their shares for a period of 180 days from the date of this Prospectus without the prior consent of Smith Barney Inc. See "Shares Eligible for Future Sale." The Company has reserved 1,040,000 shares of Common Stock for issuance under the Company's Stock Option Plan, as amended and restated (the "Stock Option Plan"). As of the date of this Prospectus, options to purchase up to 611,792 shares of Common Stock (net of forfeitures) have been 14 granted under the Stock Option Plan. The Company intends to file a registration statement on Form S-8 under the Securities Act to register shares of Common Stock reserved for issuance under the Stock Option Plan, thereby permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act. After the consummation of this Offering, the Company has agreed, upon demand, to register up to 1,360,304 shares of Common Stock issuable upon the exercise of the Warrants (the "Warrant Shares"), subject to certain terms and conditions of a registration rights agreement. The Company has also agreed to include the Warrants Shares and shares of Common Stock owned by the Existing Shareholders in certain registration statements under the Securities Act which may be filed by the Company with respect to an offering of Common Stock for its own account or the account of any of its shareholders. See "Management--Stock Option Plan," "Management--Warrants" and "Shares Eligible for Future Sale." DILUTION Purchasers of the Common Stock offered hereby will experience immediate and significant dilution of $12.89 per share in the net tangible book value of their shares. See "Dilution." 15 USE OF PROCEEDS The net proceeds to the Company from the sale of 3,000,000 shares of Common Stock offered by the Company hereby, after deducting estimated expenses of the Offering payable by the Company and underwriting discounts and commissions, will be approximately $40.5 million, based upon an assumed initial public offering price of $15.00 per share. The Company intends to allocate the net proceeds of the Offering as follows: (i) approximately $34.8 million will be used to reduce indebtedness under certain credit obligations; and (ii) approximately $5.7 million will be used to repay shareholder notes and indebtedness incurred in connection with certain acquisitions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions." The principal amount of the indebtedness to be retired with the proceeds of the Offering consists of approximately: (i) $25.0 million incurred in connection with the issuance of the Senior Notes to Triumph-Connecticut Limited Partnership ("Triumph") and Bachow Investment Partners III, L.P. ("Bachow")(collectively, the "Senior Note Holders"), bearing interest at the rate of 11% per annum through February 1999 and at the rate of 12.5% thereafter, with $10.0 million of the principal amount maturing on March 31, 2001 and the balance due and payable on February 20, 2002; (ii) $9.8 million under the Company's $50.0 million line of credit facility (the "Revolving Facility") with Bank of Boston Connecticut, Lasalle National Bank and Comerica Bank (the "Lenders"), bearing interest at Bank of Boston Connecticut's base rate or Eurodollar rate (at the Company's option), plus a margin based upon the ratio of the Company's total indebtedness to the Company's earnings (as defined in the Revolving Facility), resulting in a rate of 8.8% per annum at June 30, 1997; (iii) $2.9 million under various promissory notes due to certain of the Existing Shareholders, their family members and an executive officer of the Company, bearing interest at annual rates ranging from 10% to 21%, most of which are currently payable; and (iv) $2.8 million due to related parties under various promissory notes issued in connection with recent acquisitions, bearing interest at annual rates ranging from 4% to 14%, most of which mature during the next two years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Securities--Reorganization." As a result of the reduction of outstanding indebtedness under the Revolving Facility, an aggregate of $18.9 million will be available under the Revolving Facility to the Company for general corporate purposes, including potential acquisitions of PEO and flexible staffing businesses and expansion of the Company's operations. The Company is currently negotiating a $35.0 million increase in the Revolving Facility to $85.0 million, primarily to finance additional acquisitions by the Company over the next several years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The foregoing represents the Company's estimate of its allocation of the net proceeds of the Offering based upon its contemplated operations, the Company's business plan and certain economic and industry conditions. The use of proceeds is subject to reapportionment among the categories in response to, among other things, changes in the Company's plans, industry conditions and future revenues and expenditures. The Company will not receive any of the proceeds from the sale of shares of Common Stock being offered by the Selling Shareholders. See "Principal and Selling Shareholders." DIVIDEND POLICY The Company intends to retain future earnings, if any, to finance future operations and expansion and, therefore, does not anticipate paying any cash dividends in the foreseeable future. The Revolving Facility restricts the Company's ability to declare and pay dividends. Any future determination as to the payment of dividends will be made at the discretion of the Board and will depend upon the financial condition, capital requirements and earnings of the Company, as well as upon other factors that the Board may deem relevant. 16 CAPITALIZATION The following table sets forth the actual capitalization of the Company at June 30, 1997, and at such date as adjusted to give effect to the sale of 3,000,000 shares of Common Stock offered by the Company hereby at an assumed offering price of $15.00 per share, and the application of net proceeds therefrom as described under the caption "Use of Proceeds."
JUNE 30, 1997 --------------------------------- ACTUAL AS ADJUSTED(1) --------------- --------------- Short-term debt: Current maturities of long term debt to related parties ............... $ 731,797 $ -- Current maturities of obligations under capital leases and other ... 2,784,308 2,784,308 ------------ ------------- Total short-term debt ................................................ 3,516,105 2,784,308 ------------ ------------- Long-term debt, less current maturities: Revolving Facility ................................................... 35,113,585 25,280,318 Senior Notes(2) ...................................................... 6,794,074 -- Put Warrants Liability(3) .......................................... 19,785,948 -- Due to related parties ............................................. 4,944,936 -- Other ............................................................... 11,367,960 11,367,960 ------------ ------------- Total long-term debt, less current maturities ........................ 78,006,503 36,648,278 ------------ ------------- Shareholders' equity (deficit): Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued ...................................................... Common stock, actual -- $.001 par value, 100,000,000 shares authorized, 5,448,788 issued and outstanding; as adjusted -- 8,448,788 shares issued and outstanding(4) ........................ 5,449 8,449 Additional paid-in capital (deficit)(3) .............................. (7,484,321) 53,406,300 Retained earnings (deficit)(2) ....................................... (968,028) (15,195,721) ------------ ------------- Total shareholders' equity (deficit) ................................. (8,446,900) (38,219,028) ------------ ------------- Total capitalization ................................................ $ 73,075,708 $ 77,651,614 ============ =============
- ---------------- (1) Reflects the effects of the sale by the Company of 3,000,000 shares of Common Stock in the Offering at an assumed price of $15.00 per share, and the application of net proceeds therefrom. See "Use of Proceeds." (2) The adjusted amounts reflect a $13.7 million extraordinary loss (net of a $6.8 million income tax benefit) the Company will record as a result of the intended use of proceeds of this Offering to repay the $25.0 million balance of the Senior Notes. This loss consists of the unamortized debt discount and the unamortized debt issuance costs related to the Senior Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Securities--Reorganization." (3) The adjusted amounts reflect the termination of the Put Right which will occur upon consummation of the Offering and which will result in the reclassification of the Warrants from debt to additional paid-in capital. This adjustment includes non-operating expenses of $0.6 million ($0.5 million net of income tax benefit) that would have been recognized had the Offering been consummated on June 30, 1997 at an assumed offering price of $15.00 per share, due to the Put Warrants Valuation Adjustment. See "Management--Warrants." (4) Excludes 611,792 shares of Common Stock issuable pursuant to options granted under the Stock Option Plan, and 1,360,304 Warrant Shares. See "Management--Stock Option Plan" and "Management--Warrants." 17 DILUTION The net tangible book value (deficit) of the Company at June 30, 1997 was ($39.7) million or ($7.28) per share of Common Stock. Net tangible book value (deficit) per share is determined by dividing the net tangible book value (deficit) (total assets less goodwill and identifiable intangible assets arising from acquisitions and total liabilities) of the Company at June 30, 1997 by the number of shares of Common Stock outstanding at June 30, 1997. After giving effect to (i) the dilutive effects of the Warrants (ii) the sale of 3,000,000 shares of Common Stock offered by the Company hereby (at an assumed offering price of $15.00 per share) and the termination of the Put Right which will occur upon consummation of the Offering and result in the reclassification of the Warrants from debt to additional paid-in capital, the pro forma net tangible book value of the Company at June 30, 1997 would have been $2.11 per share of Common Stock. This represents an immediate dilution in pro forma net tangible book value of $12.89 per share to new investors purchasing shares in the Offering and an immediate increase in pro forma net tangible book value of $7.94 (including $2.92 attributable to the termination of the Put Right) per share to the Existing Shareholders. The following table illustrates this per share dilution: Assumed public offering price per share .......................................... $ 15.00 Net tangible book value (deficit) per share before the Offering(1) ............... ($ 7.28) Effect of the Warrants ......................................................... $ 1.45 Pro forma increase in net tangible book value per share attributable to: Termination of the Put Right(2) ................................................ 2.92 New Investors .................................................................. 5.02 ------- Pro forma net tangible book value per share of Common Stock, after the Offering 2.11 -------- Dilution per share to New Investors(1) .......................................... $ 12.89 ========
The above calculation does not give effect to the $13.7 million extraordinary loss (net of a $6.8 million income tax benefit) the Company will record as a result of the intended use of the proceeds of this Offering to repay the full balance of the Senior Notes. Including the dilutive effect of the extraordinary loss, the pro forma net tangible book value would be $0.72 per share of Common Stock. This represents an adjusted dilution in pro forma net tangible book value of $14.28 per share to new investors purchasing shares in the Offering and an adjusted increase in pro forma net tangible book value of $6.55 (including $2.92 attributable to the termination of the Put Right) per share to the Existing Shareholders. The following table sets forth, as of June 30, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company, and the average price paid per share by the Existing Shareholders and by purchasers of the shares of Common Stock offered hereby:
SHARES PURCHASED TOTAL CONSIDERATION ----------------------- ------------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- --------- ------------------- --------- -------------- Existing Shareholders ...... 5,448,788 64.5% $ -- (3) 0.0% $ -- New Investors ............... 3,000,000 35.5 45,000,000(4) 100.0 $15.00 --------- ------ --------------- ------ Total(5) .................. 8,448,788 100.0% $ 45,000,000 100.0% ========= ====== =============== ======
- ---------------- (1) Excludes 611,792 shares of Common Stock issuable pursuant to outstanding options under the Stock Option Plan. (2) The increase in the net tangible book value due to the termination of the Put Right includes (i) the Put Warrants Valuation Adjustment of $0.6 million ($0.5 million net of income tax benefit) that would have been recognized had the Offering been consummated on June 30, 1997 at an assumed offering price of $15.00 per share and (ii) the reclassification of the resulting adjusted Put Warrant Liability of $20.4 million from debt to additional paid-in capital upon consummation of the Offering. (3) On February 21, 1997, the shareholders of the Subsidiaries (the "Subsidiaries' Shareholders") exchanged all of their shares of common stock of the Subsidiaries for shares of the Company's Common Stock, as well as cash and notes. The shares of common stock of the Subsidiaries had a market value significantly in excess of the effective cash contribution by the Subsidiaries' Shareholders for the initial issuance of those shares. However, distributions to the Subsidiaries' Shareholders in connection with the Reorganization exceeded retained earnings and additional paid-in capital. See "Description of Securities--Reorganization." (4) Before deducting the underwriting discount and offering expenses payable by the Company. (5) Excludes 611,792 shares of Common Stock issuable pursuant to outstanding options under the Stock Option Plan and 1,360,304 Warrant Shares. See "Management--Stock Option Plan," "Management--Warrants" and Notes 5 and 10 to the Company's Consolidated Financial Statements. 18 SELECTED CONSOLIDATED FINANCIAL DATA The historical selected consolidated balance sheet data and consolidated statement of income data set forth below as of and for each of the five years in the period ended December 31, 1996 and the six months ended June 30, 1996 and 1997 has been derived from the historical consolidated financial statements of the Company. The Consolidated Financial Statements of the Company as of December 31, 1994 and for the year then ended have been audited by McGladrey & Pullen, LLP, independent auditors, as stated in their report appearing elsewhere in this Prospectus. The Consolidated Financial Statements of the Company as of December 31, 1995 and 1996 and for the years then ended have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing elsewhere in this Prospectus. The Consolidated Financial Statements of the Company as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 are unaudited, but in the opinion of management include all adjustments necessary, including normal accruals, to present fairly financial position and results of operations in conformity with generally accepted accounting principles. The system revenues data has been derived from the Company's records. The Pro Forma and Supplemental Pro Forma data has been derived from Unaudited Pro Forma Consolidated Financial Information included elsewhere herein. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's Consolidated Financial Statements and related Notes thereto, and other financial information included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- SUPPLEMENTAL PRO FORMA 1992 1993 1994 1995 1996 1996(1) ---------- ---------- ----------- ----------- ---------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA: Net revenues .............................. $39,737 $43,472 $ 80,647 $149,825 $280,171 $346,753 Cost of revenues ........................... 31,966 34,367 65,813 126,270 242,102 292,035 ------- ------- -------- -------- --------- --------- Gross profit .............................. 7,771 9,105 14,834 23,555 38,069 54,718 Shareholders' compensation .................. 898 1,400 2,245 2,370 2,321 634 Amortization of intangible assets ......... -- -- -- 41 424 2,403 Other selling, general and administrative ... 5,305 6,098 9,008 17,688 29,841 41,547 ------- ------- -------- -------- --------- --------- Operating income ........................... 1,568 1,607 3,581 3,456 5,483 10,134 Net interest expense ..................... 328 263 820 1,259 2,175 2,390 Other expense (income)(2) .................. (59) (237) (51) (11) 1,448 943 ------- ------- -------- -------- --------- --------- Income (loss) before provision (benefit) for income taxes ........................ 1,299 1,581 2,812 2,208 1,860 6,801 Pro forma income taxes (benefit)(3) ...... 486 595 1,059 859 757 2,620 ------- ------- -------- -------- --------- --------- Pro forma net income(loss)(3) ............ $ 813 $ 986 $ 1,753 $ 1,349 $ 1,103 $ 4,181 ======= ======= ======== ======== ========= ========= Pro forma weighted average common shares outstanding(4) ..................... 6,050 6,050 6,050 6,050 6,050 9,950 ======= ======= ======== ======== ========= ========= Pro forma earnings (loss) per share ...... $ .13 $ .16 $ .29 $ .22 $ .18 $ .42 ======= ======= ======== ======== ========= ========= OTHER DATA(5): System Revenues(6) ........................ $76,467 $92,496 $151,408 $242,681 $389,314 $433,966 ======= ======= ======== ======== ========= ========= EBITDA, as adjusted ........................ $ 2,792 $ 3,618 $ 5,993 $ 6,276 $ 9,005 $ 14,481 ======= ======= ======== ======== ========= ========= Net income (loss), as adjusted ............ $ 1,382 $ 1,715 $ 2,947 $ 2,586 $ 3,220 $ 5,081 ======= ======= ======== ======== ========= ========= Pro forma earnings (loss) per share, as adjusted .............................. $ .53 $ .51 ========= ========= SIX MONTHS ENDED JUNE 30, ------------------------------------- SUPPLEMENTAL PRO FORMA 1996 1997 1997(1) ---------- ------------ ------------- CONSOLIDATED STATEMENT OF INCOME DATA: Net revenues .............................. $116,122 $193,197 $204,447 Cost of revenues ........................... 100,370 165,838 174,427 --------- -------- -------- Gross profit .............................. 15,752 27,359 30,020 Shareholders' compensation .................. 963 292 72 Amortization of intangible assets ......... 148 892 1,190 Other selling, general and administrative ... 12,684 23,377 25,539 --------- -------- -------- Operating income ........................... 1,957 2,798 3,219 Net interest expense ..................... 774 3,513 1,669 Other expense (income)(2) .................. 55 1,219 (59) --------- -------- -------- Income (loss) before provision (benefit) for income taxes ........................ 1,128 (1,934) 1,609 Pro forma income taxes (benefit)(3) ...... 459 (467) 612 --------- -------- -------- Pro forma net income(loss)(3) ............ $ 669 $ (1,467) $ 997 ========= ======== ======== Pro forma weighted average common shares outstanding(4) ..................... 6,050 6,690 9,950 ========= ======== ======== Pro forma earnings (loss) per share ...... $ .11 $ (.22) $ .10 ========= ======== ======== OTHER DATA(5): System Revenues(6) ........................ $164,463 $248,572 $256,095 ========= ======== ======== EBITDA, as adjusted ........................ $ 3,208 $ 5,007 $ 6,783 ========= ======== ======== Net income (loss), as adjusted ............ $ 1,178 $ (276) $ 997 ========= ======== ======== Pro forma earnings (loss) per share, as adjusted .............................. $ (0.04) $ .10 ======== ========
19
AS OF DECEMBER 31, AS OF JUNE 30, ----------------------------------------------------- ---------------- 1992 1993 1994 1995 1996 1997 ----------- -------- --------- --------- ------------ ---------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital (deficit) ........................... $ ( 130) $1,313 $ 1,596 $ 1,540 $ (3,172) $ 17,894 Total assets ....................................... 5,191 5,923 13,791 24,708 55,877 96,754 Revolving Facility and line of credit ............... 1,788 1,523 4,827 6,468 9,889 35,114 Senior Notes ....................................... -- -- -- -- -- 6,794 Put Warrants Liability .............................. -- -- -- -- -- 19,786 Long-term debt to related parties, less current maturities ........................... -- -- -- -- 2,403 4,945 Other long-term debt, less current maturities ...... 370 60 2,713 2,815 10,874 11,368 Total shareholders' equity (deficit) ............... 262 1,843 2,701 3,603 4,495 (8,447)
- ---------------- (1) The supplemental pro forma financial information reflects the Company's historical results of operations, adjusted for (a) the 1996 Acquisitions and the 1997 Acquisitions; (b) the distributions to shareholders, the purchase of shares of Common Stock of the Subsidiaries from certain shareholders and the contribution to capital by shareholders, each of which occurred in connection with the Reorganization; (c) the issuance of the Senior Notes and the Warrants; and (d) the sale by the Company of 3,000,000 shares of Common Stock offered hereby at an assumed offering price of $15.00 per share and the application of the net proceeds therefrom, as if all had occurred as of the beginning of the periods presented. The application of net proceeds includes the retirement of the balance of the Senior Notes in full, which will result in an extraordinary loss of $13.7 million, net of a $6.8 million income tax benefit, which is not reflected in the supplemental pro forma financial information. This loss consists of the unamortized debt discount and the unamortized debt issuance costs. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Securities--Reorganization," "Management--Warrants" and Unaudited Pro Forma Consolidated Financial Information. The adjustments made to arrive at the supplemental pro forma results for the six months ended June 30, 1997 include the elimination of $1.2 million of non-operating expense arising from a Put Warrants Valuation Adjustment and included in the Company's historical results for the same period, as discussed in Note 2 below, which increased supplemental pro forma earnings per share by $0.11. (2) Includes $1.4 million of unusual charges, primarily professional fees, in the year ended December 31, 1996, related to a registration statement filed by the Company with the Securities and Exchange Commission that was subsequently withdrawn and an internal investigation into certain Company transactions. See "Business--Legal Proceedings" and Note 7 to the Company's Consolidated Financial Statements. The holders of the Warrants have a Put Right, as a result of which the Company recorded a Put Warrants Liability. Until the Offering is consummated, the Company will adjust the Put Warrants Liability to fair value at the end of each future accounting period. Other expense (income) for the six months ended June 30, 1997 includes non-operating expense of $1.2 million related to the adjustment of the initial liability recorded at the time of the issuance of the Warrants on February 21, 1997 and based on their fair value at that time, to the fair value of the Warrants at June 30, 1997. Based on an assumed offering price of $15.00 per share and the consummation of this Offering prior to December 31, 1997, the Put Warrants Valuation Adjustment will result in non-operating expenses in the third and fourth quarters of 1997 totalling $0.6 million ($0.5 million net of income tax benefit). At the time of the Offering, the Warrants, with an adjusted carrying value of $20.4 million (based on an assumed offering price of $15.00 per share), will be reclassified from debt to additional paid-in capital. See Note 5 to the Company's Consolidated Financial Statements. (3) Prior to the Reorganization, each of the Subsidiaries elected to be a subchapter S corporation and, accordingly, were not subject to income taxes; therefore, there is no provision for income taxes for periods prior to the Reorganization. Pro forma income taxes and net income have been computed as if the Company had been fully subject to federal and applicable state income taxes for such periods. The Company recognized a one-time tax benefit of $386,000 as a result of the termination, at the time of the Reorganization, of the Subsidiaries' elections to be treated as S corporations. This benefit is reflected in the historical results of operations for the six months ended June 30, 1997, but has been removed from the pro forma and the supplemental pro forma results presented for that period. See Unaudited Pro Forma Consolidated Financial Information. (4) Includes (a) the 5,448,788 shares of Common Stock issued in connection with the Reorganization and (b) all outstanding options to purchase Common Stock and Warrants calculated using the treasury stock method and an assumed offering price of $15.00 per share, as if all such shares, options and warrants had been outstanding for all periods presented; (c) for the historical data only for for the periods prior to the Reorganization, the equivalent number of shares (336,430) of Common Stock represented by the shares of common stock of the Subsidiaries purchased from certain shareholders for cash and notes in the Reorganization; and (d) for the supplemental pro forma data only, the sale by the Company of 3,000,000 shares of Common Stock offered hereby. See Note 1 to the Company's Consolidated Financial Statements. (5) The other data is presented to reflect the Company's historical results of operations, adjusted to reflect (a) the elimination of the amount of compensation expense ($0.9 million, $1.2 million, $1.9 million, $2.0 million and $2.0 million for the years ended December 31, 1992, 1993, 1994, 1995 and 1996, respectively, and $809,000 and $262,000 for the six months ended June 30, 1996 and 1997, respectively,) for the Founding Shareholders and Mr. Burrell which is in excess of the compensation for such individuals subsequent to the Reorganization; (b) the elimination of $1.4 million of unusual charges in the year ended December 31, 1996 and $1.2 million of non-operating expense arising from the June 30, 1997 Put Warrants Valuation Adjustment, both discussed in Note 2 above; and (c) income taxes computed as if the Company had been subject to federal and applicable state income taxes for such periods. See footnote 1 to the table in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations" for summary operating data reflecting these adjustments. 20 EBITDA is earnings (net income) before the effect of interest income and expense, income tax benefit and expense, depreciation expense and amortization expense. EBITDA is presented because it is a widely accepted financial indicator used by many investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income or as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Cash flows for the periods presented were as follows:
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------------- ------------------------- 1992 1993 1994 1995 1996 1996 1997 ----------- --------- ----------- ----------- ------------ ------------ ------------ (IN THOUSANDS) Cash flows provided by (used in): Operating activities .................. $ 1,489 $ 724 $ 1,267 $ 2,787 $ (1,280) $ (3,202) $ (9,584) Investing activities .................. (136) (107) (2,246) (2,026) (4,839) (3,817) (22,643) Financing activities .................. (1,358) (609) 1,028 678 4,647 5,576 33,361 --------- ------ -------- -------- -------- -------- --------- Net increase (decrease) in cash ...... $ (5) $ 8 $ 49 $ 1,439 $ (1,467) $ (1,443) $ 1,134 ========= ====== ======== ======== ======== ======== =========
(6) System revenues is the sum of the Company's net revenues (excluding revenues from franchise royalties and services performed for the Franchisees and the net revenues of the Franchisees. System revenues provide information regarding the Company's penetration of the market for its services, as well as the scope and size of the Company's operations, but are not an alternative to revenues determined in accordance with generally accepted accounting principles as an indicator of operating performance. The net revenues of Franchisees, which are not earned by or available to the Company, are derived from reports that are unaudited. System revenues consist of the following:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------- SUPPLEMENTAL PRO FORMA 1992 1993 1994 1995 1996 1996 ----------- ----------- ---------- ---------- ------------ -------------- (IN THOUSANDS) Company's net revenues ............ $ 39,737 $ 43,472 $ 80,647 $149,825 $ 280,171 $ 346,753 Less Company revenues from: Franchise royalties ............... (1,393) (1,586) (2,712) (4,138) (5,671) (4,827) Services to franchisees ............ -- -- (4,698) (7,507) (35,079) (35,079) Add Franchisees' net revenues ...... 38,123 50,610 78,171 104,501 149,893 127,119 --------- --------- -------- -------- ---------- ---------- System revenues ..................... $ 76,467 $ 92,496 $151,408 $242,681 $ 389,314 $ 433,966 ========= ========= ======== ======== ========== ========== SIX MONTHS ENDED JUNE 30, -------------------------------------- SUPPLEMENTAL PRO FORMA 1996 1997 1997 ------------ ----------- ------------- Company's net revenues ............ $ 116,122 $ 193,197 $ 204,446 Less Company revenues from: Franchise royalties ............... (2,640) (2,905) (2,779) Services to franchisees ............ (13,200) (17,003) (17,003) Add Franchisees' net revenues ...... 64,181 75,283 71,431 ---------- --------- ---------- System revenues ..................... $ 164,463 $248,572 $ 256,095 ========== ========= ==========
21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a rapidly growing national provider of human resource services focusing on the flexible industrial staffing market through its Tandem division and on the PEO market through its Synadyne division. The Company's revenues are based upon the salaries and wages of worksite employees. The Company's fee structure is based on the gross payroll of each employee, the estimated costs of employment related taxes, health benefits, workers' compensation benefits, insurance and other services offered by the Company plus a negotiated mark-up. The Company's revenues are dependent on the number of clients enrolled, the resulting number of employees paid each period and the gross payroll of such employees. The Company's primary direct costs are (i) the salaries and wages of worksite employees (payroll cost), (ii) employment related taxes, (iii) health benefits and (iv) workers' compensation benefits and insurance. See "Business--Risk Management Program--Workers' Compensation." Employment related taxes consist of the employer's portion of payroll taxes required under the Federal Income Contribution Act ("FICA"), which includes Social Security and Medicare, and federal and state unemployment taxes. The federal tax rates are defined by the appropriate federal regulations. State unemployment tax rates vary from state to state and are affected by claims experience. Health benefits are comprised primarily of medical insurance costs but also include costs of other employee benefits such as prescription coverage, vision care, disability insurance and employee assistance plans. The Company's gross profit margin is determined in part by its ability to accurately estimate and control direct costs and its ability to incorporate such costs in the service fees charged to clients. The Company attempts to reflect changes in the primary direct costs through adjustments in service fees charged to clients, subject to contractual arrangements. RECENT ACQUISITIONS During 1995, the Company expanded its business into seven additional geographic regions by establishing offices in Arizona, northern California, southern California, Georgia, Maryland/ Pennsylvania/Virginia, Massachusetts/New Hampshire and Michigan. This expansion included the Company's acquisition of four flexible industrial staffing franchises (the "1995 Acquisitions"), with five offices and approximately $7.0 million in annual revenue. During 1996, the Company made five flexible industrial staffing acquisitions (the "1996 Acquisitions"): franchises in Illinois and Wisconsin, with eight offices and approximately $7.0 million in annual revenue; a competitor in Massachusetts, with one office and approximately $5.0 million in annual revenue; a franchise in Tennessee, with two offices and approximately $2.0 million in annual revenue; a franchise in Indiana, with one office and approximately $1.0 million in annual revenue; and a franchise in California, with one office and approximately $1.0 million in annual revenue. From January 1 to June 30, 1997, the Company made eight flexible industrial staffing acquisitions (the "1997 Acquisitions"): a competitor in New Jersey with six offices and approximately $17.0 million in annual revenue; a franchise in Florida with ten offices and approximately $14.0 million in annual revenue; two competitors in Colorado, with ten offices and approximately $20.0 million in annual revenue; a franchise in Georgia, with two offices and approximately $3.0 million in annual revenue; a competitor in Massachusetts, with one office and approximately $4.0 million in annual revenue; a competitor in Wisconsin with approximately $1.0 million in annual revenue; and a franchise in Minnesota, with one office and approximately $2.0 million in annual revenue. The 1997 Acquisitions, which generated adjusted EBITDA of approximately $5.2 million in 1996, were purchased by the Company for $24.6 million, not including the cost of tangible assets. Adjusted EBITDA is net income before interest, taxes, depreciation, amortization and discontinued shareholder compensation and expenses. 22 The 1996 Acquisitions and 1997 Acquisitions have resulted in a significant increase in goodwill and other intangible assets. At June 30, 1997, the unamortized portion of net intangible assets was $31.2 million, including $6.0 million of net identifiable intangible assets and $25.2 million of goodwill, principally due to the 1996 Acquisitions and 1997 Acquisitions. Substantially all of the aggregate purchase price of the 1996 Acquisitions and 1997 Acquisitions (approximately $31.7 million) was recorded as either identifiable intangible assets or goodwill. See Note 2 to the Company's Consolidated Financial Statements. Net identifiable intangible assets include customer lists, employee lists, and covenants not to compete acquired in connection with the acquisitions and are being amortized on a straight line basis over periods ranging from one to 15 years. Goodwill represents the excess of cost over the fair value of the net assets of the acquisitions and is being amortized on a straight line basis over periods ranging from 15 to 40 years. For the year ended December 31, 1996, amortization of net indentifiable intangible assets and goodwill on a pro forma basis including the 1996 Acquisitions and 1997 Acquisitions was $2.4 million. The Company will evaluate the carrying values attributed to intangible assets on an on-going basis. See "Risk Factors--Risks Related to Intangible Assets." The effect of the 1996 Acquisitions and the 1997 Acquisitions on the Company's results of operations is more fully discussed in Note 2 to the Company's Consolidated Financial Statements and the Unaudited Pro Forma Consolidated Financial Information. RESULTS OF OPERATIONS Effective February 21, 1997, the Company consummated a Reorganization whereby it acquired all of the outstanding capital stock of its Subsidiaries. See "Description of Securities--Reorganization." The historical operating results of the Company contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" also include the historical operating results of the Subsidiaries for the periods noted. The following tables set forth the amounts and percentage of net revenues of certain items in the Company's consolidated statements of income for the indicated periods.
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------ ------------------------- 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ------------ (IN THOUSANDS) Net revenues: Flexible industrial staffing ............... $ 41,622 $ 57,791 $ 97,397 $ 37,715 $ 83,298 PEO ....................................... 35,609 85,557 172,069 73,682 103,520 Franchise royalties ........................ 2,712 4,138 5,671 2,640 2,905 Other ....................................... 704 2,339 5,034 2,085 3,474 --------- --------- --------- --------- -------- Total net revenues ........................ $ 80,647 $149,825 $280,171 $116,122 $193,197 ========= ========= ========= ========= ======== Gross profit ................................. $ 14,834 $ 23,555 $ 38,069 $ 15,752 $ 27,359 Selling, general and administrative expenses(1) 11,253 20,099 32,586 13,795 24,561 --------- --------- --------- --------- -------- Operating income ........................... 3,581 3,456 5,483 1,957 2,798 Net interest and other expense(1) ............ 769 1,248 3,623 829 4,732 --------- --------- --------- --------- -------- Income (loss) before provision (benefit) for income taxes .............................. 2,812 2,208 1,860 1,128 (1,934) Pro forma income taxes (benefit)(1) ......... 1,059 859 757 459 (467) --------- --------- --------- --------- -------- Pro forma net income (loss)(1) ............... $ 1,753 $ 1,349 $ 1,103 $ 669 $ (1,467) ========= ========= ========= ========= ======== System Revenues(2) ........................... $151,408 $242,681 $389,314 $164,463 $248,572 ========= ========= ========= ========= ========
23
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------ ----------------------- 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- Net revenues: Flexible industrial staffing ............... 51.6% 38.6% 34.8% 32.5% 43.1% PEO ....................................... 44.2 57.1 61.4 63.4 53.6 Franchise royalties ........................ 3.4 2.8 2.0 2.3 1.5 Other ....................................... 0.8 1.5 1.8 1.8 1.8 ------ ------ ------ ------ --------- Total net revenues ........................ 100.0% 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ====== ========= Gross profit ................................. 18.4% 15.7% 13.6% 13.6% 14.1% Selling, general and administrative expenses(1) 14.0 13.4 11.6 11.9 12.7 ------ ------ ------ ------ --------- Operating income ........................... 4.4 2.3 2.0 1.7 1.4 Net interest and other expense(1) ............ 0.9 0.8 1.3 0.7 2.4 ------ ------ ------ ------ --------- Income (loss) before provision (benefit) for income taxes .............................. 3.5 1.5 0.7 1.0 (1.0) Pro forma income taxes (benefit)(1) ......... 1.3 0.6 0.3 0.4 (0.2) ------ ------ ------ ------ --------- Pro forma net income (loss)(1) ............... 2.2% 0.9% 0.4% 0.6% (0.8)% ====== ====== ====== ====== =========
- ---------------- (1) For the years ended December 31, 1994, 1995 and 1996, and for the eight week period ended February 21, 1997, the Company elected to be treated as a subchapter S corporation and, accordingly, the Company's income was taxed at the shareholder level. In addition, during those periods, the Company paid compensation to the Founding Shareholders and Mr. Burrell, who is also a shareholder of the Company ("Shareholder Compensation"). All of the compensation for the Founding Shareholders and a portion of the compensation for Mr. Burrell was discontinued after the Reorganization. The discontinued Shareholder Compensation was $1.9 million in 1994, $2.0 million in 1995, $2.0 million in 1996, $809,000 for the six months ended June 30, 1996 and $262,000 for the six months ended June 30, 1997. In 1996, the Company incurred unusual expenses of approximately $1.4 million in relation to a registration statement filed by the Company with the Securities and Exchange Commission that was subsequently withdrawn and an internal investigation into certain Company transactions (See "Business--Legal Proceedings" and Note 7 to the Company's Consolidated Financial Statements.) During the six months ended June 30, 1997, the Company recorded non-operating expense of approximately $1.2 million related to the Put Warrants Valuation Adjustment (See Note 5 to the Company's Consolidated Financial Statements). The following table sets forth the amounts and the percentage of certain items in the Company's consolidated statements of income, adjusted for the above items as follows: (i) selling, general and administrative expenses excludes discontinued Shareholder Compensation; (ii) operating income excludes discontinued Shareholder Compensation and (iii) net income (loss) excludes discontinued Shareholder Compensation, the unusual expenses in 1996, and the June 30, 1997 Put Warrants Valuation Adjustment and is calculated assuming the Company had been subject to federal and state income taxes and taxed as a C corporation during each of these periods.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ----------------------------------------- --------------------------- 1994 1995 1996 1996 1997 ----------- ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES) Selling, general and administrative expenses, as adjusted .............................. $ 9,337 $ 18,074 $ 30,635 $ 12,986 $ 24,299 As a percentage of net revenues ............ 11.6% 12.1% 10.9% 11.2% 12.6% Operating income, as adjusted ............... $ 5,497 $ 5,481 $ 7,434 $ 2,766 $ 3,060 As a percentage of net revenues ............ 6.8% 3.7% 2.7% 2.4% 1.6% Net income (loss), as adjusted ............ $ 2,947 $ 2,586 $ 3,220 $ 1,178 $ (276) As a percentage of net revenues ............ 3.7% 1.7% 1.1% 1.0% (0.1)%
(2) System revenues is the sum of the Company's net revenues (excluding revenues from franchise royalties and services performed for the Franchisees and the net revenues of the Franchisees. System revenues provide information regarding the Company's penetration of the market for its services, as well as the scope and size of the Company's operations, but are not an alternative to revenues determined in accordance with generally accepted accounting principles as an indicator of operating performance. The net revenues of Franchisees, which are not earned by or available to the Company, are derived from reports that are unaudited. System revenues consist of the following: 24
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------------- --------------------------- 1994 1995 1996 1996 1997 ---------- ---------- ----------- ----------- ------------- (IN THOUSANDS) Company's net revenues ............ $ 80,647 $149,825 $280,171 $116,122 $ 193,197 Less Company revenues from: Franchise royalties ............... (2,712) (4,138) (5,671) (2,640) (2,905) Services to franchisees ............ (4,698) (7,507) (35,079) (13,200) (17,003) Add Franchisees' net revenues ...... 78,171 104,501 149,893 64,181 75,283 -------- -------- --------- --------- --------- System revenues ..................... $151,408 $242,681 $389,314 $164,463 $ 248,572 ======== ======== ========= ========= =========
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 NET REVENUES. Net revenues increased $77.1 million, or 66.4%, from $116.1 million in the first six months of 1996 to $193.2 million in the first six months of 1997. This increase resulted from growth in PEO revenues from the first six months of 1996 to the first six months of 1997 of $29.8 million, or 40.5%, and flexible industrial staffing revenues of $45.6 million, or 120.9%. The increase in PEO revenues was primarily due to a broadening of the Company's targeted PEO client base. Flexible industrial staffing revenues increased due to: (i) the 1996 Acquisitions (which were primarily consummated during the second quarter of 1996) and the 1997 Acquisitions, which resulted in an increase of $27.0 million in revenues; and (ii) internal growth, which resulted in an increase of $18.6 million due to development of existing Company-owned locations and an increase in the number of Company-owned offices. The Company-owned flexible industrial staffing offices increased from 37 locations as of June 30, 1996 to 80 locations as of June 30, 1997, with 30 of the 43 additional locations arising from the 1996 Acquisitions and 1997 Acquisitions. System revenues increased $84.1 million, or 51.1%, from $164.5 million in the first six months of 1996 to $248.6 million in the first six months of 1997. The increase in system revenues was attributable to the $77.0 million increase in the Company's net revenues discussed above, of which $4.1 million related to services provided to franchises, and a $11.1 million increase in franchise industrial staffing revenues. System revenues include franchise revenues which are not earned by or available to the Company. GROSS PROFIT. Gross profit increased $11.6 million, or 73.7%, from $15.8 million in the first six months of 1996 to $27.4 million in the first six months of 1997. Gross profit as a percentage of net revenues increased from 13.6% in the first six months of 1996 to 14.1% in the first six months of 1997. This increase was primarily due to the significantly higher growth rate for flexible industrial staffing revenues as compared to the growth rate for PEO revenues, which generate lower gross profit margins. In the first six months of 1997, PEO net revenues generated gross profit margins of 3.3% as compared to gross profit margins of 23.8% generated by flexible industrial staffing operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses, increased $10.8 million, or 78.0%, from $13.8 million in the first six months of 1996 to $24.6 million in the first six months of 1997. This increase was primarily a result of operating costs associated with increased flexible industrial staffing volume at existing locations, the 1996 Acquisitions, the 1997 Acquisitions, and pre-opening expenses associated with 20 new office locations in existing flexible industrial staffing regions. As a percentage of net revenues, selling, general and administrative expenses increased from 11.9% in the first six months of 1996 to 12.7% in the first six months of 1997. NET INTEREST AND OTHER EXPENSE. Net interest and other expense increased by $3.9 million, from $0.8 million in the first six months of 1996 to $4.7 million in the first six months of 1997. This increase included $1.2 million attributable to the Put Warrants Valuation Adjustment. The remaining increase of $2.7 million in net interest expense was primarily due to interest and other expense, including amortization of debt discount and issuance costs, associated with the Senior Notes which were issued in the first quarter of 1997, as well as interest expense associated with net additional borrowings of $25.2 25 million in the first six months of 1997 under the Revolving Facility to finance working capital requirements and the 1997 Acquisitions. See Note 5 to the Company's Consolidated Financial Statements. NET INCOME (LOSS). Net income (loss) decreased by $2.2 million, from $0.7 million in net income in the first six months of 1996 to a $1.5 million net loss in the first six months of 1997. This decrease was primarily due to a $1.2 million Put Warrants Valuation Adjustment with the remainder due to increases in selling, general and administrative expenses (including a $0.7 million increase in amortization of intangible assets arising primarily from the 1997 Acquisitions) and net interest expense, as discussed above. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 NET REVENUES. Net revenues increased $130.3 million, or 87.0%, from $149.8 million in 1995 to $280.2 million in 1996. This increase resulted primarily from the increase in PEO revenues from 1995 to 1996 of $86.5 million, or 101.1%. The increase in PEO revenues was primarily due to a broadening of the Company's targeted PEO client base. Flexible industrial staffing revenues grew by $39.6 million, 68.5%, with $12.4 million of the increase resulting from the 1996 Acquisitions and the remainder due to development of existing Company-owned locations and an increase in the number of Company-owned offices. Company-owned flexible industrial staffing offices increased from 19 locations as of December 31, 1995 to 43 locations as of December 31, 1996. System revenues increased $146.6 million, or 60.4%, from $242.7 million in 1995 to $389.3 million in 1996. The increase in system revenues was attributable to the $130.3 million increase in the Company's net revenues discussed above, of which $29.2 million related to services provided to franchises, and a $45.4 million increase in franchise industrial staffing revenues. System revenues include franchise revenues which are not earned by or available to the Company. GROSS PROFIT. Gross profit increased $14.5 million, or 61.6%, from $23.6 million in 1995 to $38.1 million in 1996. Gross profit as a percentage of net revenues decreased from 15.7% in 1995 to 13.6% in 1996. The Company's gross profit as a percentage of net revenues decreased from 1995 to 1996 since PEO revenues, which generate lower gross profit margins than flexible industrial staffing revenues, increased at a higher rate than the flexible industrial staffing revenues. In 1996, PEO net revenues generated gross profit margins of 3.7% as compared to gross profit margins of 24.5% generated by flexible industrial staffing operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $12.5 million, or 62.1%, from $20.1 million in 1995 to $32.6 million in 1996. The increase in selling, general and administrative expenses in 1996 was primarily a result of an incremental $6.4 million for salaries and other operating costs incurred in continuing the establishment of flexible industrial staffing offices in seven new geographic regions. The remainder of the increase was primarily due to marketing and support costs related to the broadening of the PEO client base, operating costs associated with increased flexible industrial staffing volume at existing locations and buildup of corporate infrastructure in contemplation of the 1997 Acquisitions. As a percentage of net revenues, selling, general and administrative expenses decreased from 13.4% in 1995 to 11.6% in 1996, primarily due to the significant increase in 1996 of the PEO operations in proportion to total Company revenues. The PEO operations have lower associated selling, general and administrative expenses (as a percentage of revenues) than flexible industrial staffing revenues. NET INTEREST AND OTHER EXPENSE. Net interest and other expense increased by $2.4 million, from $1.2 million in 1995 to $3.6 million in 1996. This increase included $1.4 million attributable to unusual expenses related to the Company's withdrawal of a registration statement and an internal investigation into certain Company transactions. The remaining increase of $1.0 million in net interest expense was principally due to interest associated with net additional borrowings of $3.6 million in 1996 under the Company's line of credit to finance working capital requirements as well as interest arising from $4.4 million of indebtedness incurred in connection with the 1996 Acquisitions. 26 NET INCOME (LOSS). Net income decreased by $0.2 million, from $1.3 million in 1995 to $1.1 million in 1996. This decrease was primarily due to $1.4 million of unusual expenses related to the Company's withdrawal of a registration statement and an internal investigation into certain Company transactions, as well as an incremental $0.5 million of operating losses incurred in continuing the establishment of flexible industrial staffing offices in seven new geographic regions. The effect of these expenses was partially offset by increases in net revenues and gross profit, as discussed above. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 NET REVENUES. Net revenues increased $69.2 million, or 85.8%, from $80.6 million in 1994 to $149.8 million in 1995. This increase resulted primarily from increases in PEO revenues from 1994 to 1995 of $49.9 million, or 140.3%. The increase in PEO revenues was primarily due to a broadening of the Company's targeted PEO client base. Flexible industrial staffing revenues grew by $16.2 million, or 38.8%, with $6.9 million of the increase as a result of the 1995 Acquisitions and the remainder due to development of existing Company-owned locations and an increase in the number of Company-owned offices. Company-owned flexible industrial staffing offices increased from eight locations as of December 31, 1994 to 19 locations as of December 31, 1995. System revenues increased $91.3 million, or 60.3%, from $151.4 million in 1994 to $242.7 million in 1995. The increase in system revenues was attributable to the $69.2 million increase in the Company's net revenues discussed above, of which $4.2 million related to services provided to franchises, and a $26.3 million increase in franchise industrial staffing revenues. System revenues include franchise revenues which are not earned by or available to the Company. GROSS PROFIT. Gross profit increased $8.7 million, or 58.8%, from $14.8 million in 1994 to $23.6 million in 1995. Gross profit as a percentage of net revenues decreased from 18.4% in 1994 to 15.7% in 1995. The Company's gross profit, as a percentage of net revenues, decreased since PEO revenues, which generate lower gross profit margins than flexible industrial staffing, increased at a higher rate than the flexible industrial staffing revenues. In 1995, PEO net revenues generated gross profit margins of 3.9% as compared to gross profit margins of 25.2% generated by flexible industrial staffing operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $8.8 million, or 78.6%, from $11.3 million in 1994 to $20.1 million in 1995. The increase in selling, general and administrative expenses in 1995 was primarily a result of $4.8 million for salaries and other operating costs incurred in establishing flexible industrial staffing offices in seven new geographic regions. The remainder of the increase was primarily due to marketing and support costs related to broadening the PEO client base and operating expenses from higher flexible industrial staffing sales volume at existing locations. As a percentage of net revenues, selling, general and administrative expenses decreased from 14.0% in 1994 to 13.4% in 1995. NET INTEREST AND OTHER EXPENSE. Net interest and other expense increased $0.4 million, from $0.8 million in 1994 to $1.2 million in 1995. The increase in net interest and other expense was primarily due to interest associated with net additional borrowings in 1995 of $1.6 million under the Company's line of credit to finance working capital requirements, as well as similar borrowings made late in 1994 but not fully reflected in the Company's interest expense until 1995. NET INCOME (LOSS). Net income decreased by $0.5 million, from $1.8 million in 1994 to $1.3 million in 1995. This decrease was primarily due to $2.2 million of operating losses incurred in connection with the establishment of flexible industrial staffing offices in seven new geographic regions, offset by increases in net revenues and gross profit, as discussed above. 27 ADDITIONAL OPERATING INFORMATION The following table sets forth the gross profit margins for the Company's two primary areas of operations for the indicated periods.
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, --------------------------- ---------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------ Flexible industrial staffing ...... 25.0% 25.2% 24.5% 25.4% 23.8% PEO .............................. 3.9 3.9 3.7 3.5 3.3
The Company's flexible industrial staffing division generates significantly higher gross profit margins than its PEO division. The higher flexible industrial staffing division margin reflects compensation for recruiting, training and other services not required as part of many PEO relationships, where the employees have already been recruited by the client and are trained and in place at the beginning of the relationship. FLEXIBLE INDUSTRIAL STAFFING Net revenues from the Company's flexible industrial staffing services increased $55.8 million, from $41.6 million in 1994 to $97.4 million in 1996, or a compound annual growth rate of 53.0%. However, this increase represented a decreasing share of the Company's total net revenues, from 51.6% in 1994 to 34.8% in 1996. Gross profit from the Company's flexible industrial staffing services increased $13.5 million, from $10.4 million in 1994 to $23.9 million in 1996, or a compound annual growth rate of 51.4% per year. Although this represented a decreasing share of the Company's total gross profit, from 70.1% in 1994 to 62.7% in 1996, this decrease was less than the decrease in the share of the Company's total net revenues attributable to flexible industrial staffing because of the higher gross profit percentage from flexible industrial staffing as compared to PEO. The percentages of the Company's total net revenues and gross profit from flexible industrial staffing services increased to 43.1% and 72.5%, respectively, for the six months ended June 30, 1997, primarily due to the 1997 Acquisitions, all of which were flexible industrial staffing businesses. PEO Net revenues from the Company's PEO services increased $136.5 million, from $35.6 million in 1994 to $172.1 million in 1996, or a compound annual growth rate of 119.8%. This also represented an increasing share of the Company's total net revenues, from 44.2% in 1994 to 61.4% in 1996. Gross profit from the Company's PEO services increased $5.0 million, from $1.4 million in 1994 to $6.4 million in 1996, or a compound annual growth rate of 114.1%. Although this represented an increasing share of the Company's total gross profit, from 9.4% in 1994 to 16.7% in 1996, this increase was less than the increase in the share of the Company's total net revenues attributable to PEO because of the lower gross profit percentage from PEO as compared to flexible industrial staffing. The percentages of the Company's total net revenues and gross profit from PEO services decreased to 53.6% and 12.4%, respectively, for the six months ended June 30, 1997, primarily due to the 1997 Acquisitions, all of which were flexible industrial staffing businesses. FRANCHISE AND OTHER Net revenues from the Company's franchise and other services increased $7.3 million, from $3.4 million in 1994 to $10.7 million in 1996, or a compound annual growth rate of 77.0%. This increase represented a slightly decreasing share of the Company's total net revenues, from 4.2% in 1994 to 3.8% in 1996. 28 Gross profit from the Company's franchise and other services increased $4.8 million, from $3.0 million in 1994 to $7.8 million in 1996, or a compound annual growth rate of 60.6%. This increase represented a slightly increasing share of the Company's total gross profit, from 20.5% in 1994 to 20.6% in 1996. The percentage of the Company's total net revenues and gross profit from franchise and other services decreased to 3.3% and 15.1%, respectively, for the six months ended June 30, 1997, primarily due to the 1997 Acquisitions, all of which were flexible industrial staffing businesses. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds for working capital and other needs have been a $50.0 million Revolving Facility with the Lenders, the Senior Notes and borrowings from related parties. The Revolving Facility is for a term of four years and expires in February 2001. Outstanding amounts under the Revolving Facility are secured by substantially all of the Company's assets and the pledge of all of the outstanding shares of common stock of each of the Subsidiaries. Amounts borrowed under the Revolving Facility bear interest at Bank of Boston Connecticut's base rate or Eurodollar rate (at the Company's option) plus a margin based upon the ratio of the Company's total indebtedness to the Company's earnings (as defined in the Revolving Facility). As of June 30, 1997, the Company had outstanding borrowings under the Revolving Facility of $35.1 million, bearing interest at an effective interest rate of 8.8%. The Company intends to use a portion of the net proceeds from the Offering to repay a portion of the outstanding borrowings under the Revolving Facility. The Revolving Facility contains certain affirmative and negative covenants relating to the Company's operations. See Note 5 to the Company's Consolidated Financial Statements. On February 21, 1997, the Company issued Senior Notes in the principal amounts of $14.0 million and $11.0 million to Triumph and Bachow, respectively. The Senior Notes are subordinate to borrowings under the Revolving Facility. A portion of the principal amount of the Senior Notes ($10.0 million) is due and payable on March 31, 2001 and the balance of the principal ($15.0 million) is due and payable on February 20, 2002. The Senior Notes bear interest at the rate of 11% per annum through February 1999 and at the rate of 12.5% per annum thereafter. The Company used the proceeds of the Senior Notes primarily to fund flexible industrial staffing acquisitions and to pay shareholder distributions and other amounts in connection with the Reorganization. In connection with the issuance of Senior Notes, the Company issued 786,517 of the Warrants (the "Initial Warrants") to the Senior Note Holders and placed an additional 573,787 Warrants (the "Additional Warrants") in escrow. The Warrants are exercisable at a price of $.015 per share and, under certain conditions, the holders have a right to require the Company to repurchase any unexercised Warrants and any Warrant Shares. See "Description of Securities--Reorganization" and "Management--Warrants." As of June 30, 1997, the Company also (i) was indebted to certain of its shareholders, their family members and an executive officer of the Company for approximately $2.9 million under promissory notes that bear interest at annual rates ranging from 10% to 21% and are subordinated to the repayment of the Revolving Facility and the Senior Notes; (ii) had bank standby letters of credit outstanding, in the aggregate amount of $5.7 million under a $10.0 million letter of credit facility (which is part of the Revolving Facility) to secure certain workers' compensation obligations; (iii) had $6.2 million of promissory notes outstanding in connection with certain acquisitions, bearing interest at rates ranging from 4.0% to 10.0%, which are payable primarily during the next two years (except for $1.9 million due to a shareholder which is payable over the next four years at 14% annual interest), and subordinated to the repayment of the Revolving Facility and the Senior Notes; (iv) had obligations under capital leases for buildings and equipment in the aggregate amount of $8.0 million; and (v) had obligations under mortgages totalling $2.5 million. See Notes 5 and 11 to the Company's Consolidated Financial Statements. One of the key elements of the Company's multi-faceted growth strategy is expansion through acquisitions, which may require significant sources of financing. These financing sources include cash 29 from operations, seller financing, bank financing, and issuance of the Company's Common Stock. The Company can initially allocate up to $35.0 million under the Revolving Facility for the financing for certain prescribed acquisitions. The Company is currently negotiating a $35.0 million increase in the Revolving Facility to $85.0 million, primarily to finance additional acquisitions by the Company over the next several years. The Company is a service business and therefore a majority of its tangible assets are customer accounts receivable. Flexible industrial staffing employees are paid by the Company on a daily or weekly basis. The Company, however, receives payment from customers for these services, on average, 35 to 45 days from the date of invoice. As new flexible staffing offices are established or acquired, or as existing offices expand, there will be increasing requirements for cash to fund operations. The Company pays its PEO employees on a weekly, bi-weekly, semi-monthly or monthly basis for their services, and currently receives payments on a simultaneous basis from approximately 10% of its existing customers. The remainder of the Company's PEO customers generally make payment 35 to 45 days after the date of invoice. The Company's principal uses of cash are for wages and related payments to temporary and PEO employees, operating costs, capital expenditures and advances made to certain Tandem franchise associates to fund their payroll obligations and repayment of debt and interest thereon. During the year ended December 31, 1996, cash used in operations was approximately $1.3 million. Cash used in investing activities was approximately $4.8 million, which included expenditures for property and equipment of $2.1 million (primarily computers and software), expenditures of $1.9 million for acquisitions (primarily intangible assets), and net funding advances to franchises of $0.8 million. Cash provided by financing activities was approximately $4.6 million, including $3.6 million from borrowings under a bank line of credit and $0.6 million of related party borrowings. During the six months ended June 30, 1997, cash used in operations was approximately $9.6 million. Cash used in investing activities was approximately $22.6 million, which included expenditures of $21.4 million for acquisitions (primarily intangible assets) and expenditures for property and equipment of $1.8 million (primarily computers and software). Cash provided by financing activities was approximately $33.4 million, including $22.6 million net proceeds from the Senior Notes and Warrants and $25.2 million from borrowings under the Revolving Facility, offset by payments of $10.1 million for shareholder distributions and other amounts in connection with the Reorganization and $5.4 million of repayments of long-term debt. See "Description of Securities--Reorganization" and Notes 1, 2, 5 and 11 to the Company's Consolidated Financial Statements. The Company anticipates spending up to approximately $6.0 million during the next twelve months for new flexible staffing locations and other corporate facilities, improvements to its management information and operating systems, exercise of its option to purchase its new national office and support center and related leasehold improvements, and other capital expenditures. The Company believes that funds provided by operations, available borrowings under the Revolving Facility, current cash balances and the net proceeds from the Offering will be sufficient to meet its presently anticipated needs for working capital, capital expenditures and acquisitions for the next twelve months. The Company also believes that sufficient long-term liquidity for its future needs will be provided by funds from operations, expanded new borrowing facilities, and/or additional equity offerings. INFLATION The effects of inflation on the Company's operations were not significant during the periods presented in the financial statements. Throughout the periods discussed above, the increases in revenues have resulted primarily from higher volumes, rather than price increases. 30 SEASONALITY The Company's results of operations reflect the seasonality of higher customer demand for flexible industrial staffing services in the last two quarters of the year, as compared to the first two quarters. Even though there is a seasonal reduction of flexible industrial staffing revenues in the first quarter of a year as compared to the fourth quarter of the prior year, the Company does not reduce the related core personnel and other operating expenses since that infrastructure is needed to support anticipated increased revenues in subsequent quarters. The reduction of flexible industrial staffing revenues in the first quarter of a year is substantially offset by increased PEO revenues, which are generally not subject to seasonality. However, the net income contribution of PEO revenues, expressed as a percentage of sales, is significantly lower than for flexible industrial staffing revenues. As a result of the above factors, the Company traditionally experiences operating income in the first quarter of a year that is significantly less than (i) the fourth quarter of the preceding year and (ii) the subsequent three quarters of the same year. In addition, operating income is typically lower in the fourth quarter of a year as compared to the preceding third quarter due to a decrease in industrial staffing revenues (versus continuing increases in PEO revenues) that begins with the November and December holiday season. The following table sets forth, adjusted to exclude discontinued Shareholder Compensation, the amounts of certain items in the Company's consolidated statements of income for the four quarters of 1995 and 1996 and the first two quarters of 1997.
1995 1996 1997 --------------------------------------- --------------------------------------- ------------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS) Net revenues ...... $26,555 $31,724 $41,309 $50,237 $51,169 $64,953 $77,680 $86,369 $85,374 $107,823 Gross profit ...... 4,790 5,324 6,530 6,911 6,690 9,062 10,982 11,335 11,135 16,224 Operating income ............ 1,157 1,139 1,703 1,482 887 1,878 2,764 1,905 837 2,223
NON-OPERATING EXPENSES The holders of the Warrants have a Put Right as a result of which the Company recorded a Put Warrants Liability at the time of the issuance of the Warrants based on their fair value. Until the Offering is consummated, the Company will adjust this Put Warrants Liability at the end of each accounting period subsequent to June 30, 1997. Based on an assumed offering price of $15.00 per share and the consummation of this Offering prior to December 31, 1997, Put Warrants Valuation Adjustments will result in non-operating expenses in the third and fourth quarters of 1997 totalling $0.6 million ($0.5 million net of income tax benefit). See "Management--Warrants." As a result of the intended use of the proceeds of the Offering to repay the full balance of the Senior Notes, the Company will record an extraordinary loss at the time of that early repayment. This loss consists of the unamortized debt discount and the unamortized debt issuance costs related to the Senior Notes, and would have been $13.7 million (net of a $6.8 million income tax benefit), if the repayment had taken place on June 30, 1997. See "Description of Securities--Reorganization." NEW ACCOUNTING PRONOUNCEMENTS In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," was issued. SFAS No. 128, which supersedes Accounting Principles Board ("APB") Opinion No. 15, requires a dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is computed by dividing income or loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or 31 other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted earnings per share is computed similarly to fully diluted earnings per share under APB Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. See Note 1 to the Company's Consolidated Financial Statements. In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 requires that a company (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company has not determined the effects, if any, that SFAS No. 130 will have on its Consolidated Financial Statements. In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued. SFAS No. 131 establishes standards for the way that public companies report selected information about operating segments in annual financial statements and requires that those companies report selected information about segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131, which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers, requires that a public company report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS No. 131 requires that a public company report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. However, SFAS No. 131 does not require the reporting of information that is not prepared for internal use if reporting it would be impracticable. SFAS No. 131 also requires that a public company report descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used in the enterprise's general-purpose financial statements, and changes in the measurement of segment amounts from period to period. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. The Company has not determined the effects, if any, that SFAS No. 131 will have on the disclosures in its Consolidated Financial Statements. 32 BUSINESS GENERAL The Company is a rapidly growing national provider of human resource services focusing on the flexible industrial staffing market through its Tandem division and on the PEO market through its Synadyne division. The Tandem division recruits, trains and deploys temporary industrial personnel and provides payroll administration, risk management and benefits administration services to its clients. Tandem's clients include businesses in the manufacturing, distribution, hospitality and construction industries. Through its Synadyne division, the Company offers a comprehensive package of PEO services including payroll administration, risk management, benefits administration and human resource consultation to companies in a wide range of industries. The Company's operations began in Chicago, Illinois in 1974. As of June 30, 1997, the Company and its franchise associates operated 163 offices, with an estimated 28,000 employees in 38 states and the District of Columbia. The Tandem division provides approximately 17,000 flexible industrial staffing personnel daily through a nationwide network of 80 Company-owned and 74 franchised offices. The Tandem division has approximately 14,000 clients and on a daily basis provides services to approximately 3,000 of such clients. Between 1994 and 1996, Company and franchise flexible industrial staffing revenues increased from $119.8 million to $247.3 million, a compound annual growth rate of approximately 44%. The Synadyne division, which began in 1994, has approximately 11,000 employees. Between 1994 and 1996, PEO revenues increased from $35.6 million to $172.1 million, a compound annual growth rate of approximately 120%. To implement its expansion strategy, the Company completed 17 acquisitions of flexible industrial staffing companies since January 1, 1995, with 48 offices and approximately $84 million in annual revenue. During this period, the number of Company-owned flexible staffing and PEO offices increased from ten to 89, the number of geographic regions served by the Company increased from one to nine, and the Company implemented advanced information systems, further developed back office capabilities and invested in other infrastructure enhancements necessary to support its future growth. The Company's operation of both a flexible industrial staffing division and a PEO division provides it with significant competitive advantages. Both Tandem and Synadyne offer a number of common services including payroll administration, risk management and benefits administration. The Company designs and administers these services through common facilities, personnel and information systems which give the Company the ability to develop and provide a wider range of services at lower costs than its primary competitors. In addition, the Company is able to provide a full spectrum of staffing services to its industrial clients ranging from a temporary employee for one day to comprehensive outsourcing of human resource functions through the Company's PEO division. The Company expects Tandem's national network of locations to facilitate the rapid expansion of the Synadyne division, and over time increase the Company's penetration of local markets. THE STAFFING INDUSTRY The staffing industry consists of companies which provide four basic services to clients: flexible staffing, PEO services, placement and search, and outplacement. Based on information provided by NATSS, NAPEO and SIAI, 1996 staffing industry revenues were approximately $74.4 billion. According to industry sources, approximately 7,000 flexible staffing firms and 2,000 PEO firms employed approximately 5.2 million people per day, or approximately 4% of the entire United States workforce, in 1996. Over the last five years, the staffing industry has experienced compound annual growth of approximately 15%, due largely to the utilization of temporary help across a broader range of industries as well as the emergence of the PEO sector. The flexible staffing sector has traditionally been the largest staffing industry sector, accounting for an estimated $43.6 billion, or 61%, of estimated 1996 staffing industry revenues. According to NATSS, flexible industrial staffing currently represents 31.8% of the estimated $43.6 billion in 1996 flexible 33 staffing revenues. The Company believes that the flexible industrial staffing market is highly fragmented and that in excess of 75% of flexible industrial staffing industry revenues are generated by small local and regional companies. According to NATSS, the flexible industrial staffing sector grew from $5.6 billion in 1991 to $13.9 billion in 1996, representing a compound annual growth rate of approximately 20%. The Company's goal is to target opportunities in this fragmented, rapidly growing market which has to date been under-served by large full service staffing companies. The PEO sector has recently emerged as one of the largest and fastest growing sectors within the staffing industry, with an estimated $17.3 billion, or 23%, of estimated 1996 staffing industry revenues. This sector evolved in the early 1980's, largely in response to difficulties faced by small and medium-size businesses in procuring workers' compensation insurance coverage on a cost-effective basis and in operating in an increasingly complex legal environment. While various service providers, such as payroll processing firms, benefits and safety consultants and temporary staffing firms, were available to assist these business with specific tasks, PEOs began to emerge as providers of a more comprehensive outsourcing solution to these burdens. As a result, small and medium size businesses have begun to outsource human resource administration to PEOs, allowing management to focus on core business activities. According to industry sources, there were approximately 5.2 million businesses in the United States with fewer than 500 employees in 1995. Collectively, these businesses employed an estimated 50.4 million people, and represented approximately $1.1 trillion in aggregate annual payroll, of which PEOs represented less than 2%. Growth in the PEO industry has been significant. According to NAPEO, the number of employees under PEO arrangements in the United States has grown from approximately 10,000 in 1984 to approximately two million in 1995. SIAI, an employment industry research firm, estimates that gross revenues in the PEO industry grew from $5.0 billion in 1991 to $17.3 billion in 1996, a compound annual growth rate of approximately 29%. The Company believes there are significant opportunities for companies with proven PEO success to experience growth as a result of the large number of small competitors in the industry, low current PEO market penetration and an increasingly complex regulatory environment. COMPANY STRATEGY The Company's objective is to become the dominant provider of flexible industrial staffing and PEO services in select geographic regions. To achieve this objective, the Company intends to: /bullet/ PROVIDE A COMPREHENSIVE PACKAGE OF SINGLE-SOURCE HUMAN RESOURCE SERVICES. By offering a comprehensive range of high quality, human resource services to the flexible industrial staffing and PEO markets, the Company believes that it has a competitive advantage in meeting the diverse needs of the marketplace. These needs may include flexible industrial staffing, PEO services, or a combination of both. The Company believes this single source delivery platform is capable of servicing its clients needs, thereby fostering a high level of client satisfaction and retention, and securing a stable source of revenue. /bullet/ CONTINUE TO FOCUS ON UNDER-SERVED MARKETS WHICH PROVIDE HIGH GROWTH OPPORTUNITIES. The Company believes that flexible industrial staffing and PEO market sectors offer high growth opportunities within the staffing industry. Historically, these market sectors have been under- served by many small, independent, local staffing companies which lack both the depth of services and economies of scale necessary to compete with large national or multi-regional staffing companies such as OutSource. Moreover, few large companies have focused on these market sectors. Given its single source delivery platform and 23 year history in the staffing industry, the Company believes it is well-positioned to capitalize on these opportunities. The Company's compound annual revenue growth rate from 1994 to 1996 of approximately 86% exceeds industry averages in the flexible industrial staffing and PEO market sectors. /bullet/ GEOGRAPHICALLY CLUSTER OFFICES TO ACHIEVE REGIONAL MARKET LEADERSHIP. The Company believes the geographic clustering of offices will lead to significant cost savings, higher quality client 34 service, enhanced employee benefits, and ultimately regional market leadership. Clustering shortens the distance from the Company to the local workforce, thereby allowing the Company to recruit, train and develop a broader-skilled and more flexible workforce. The Company believes its ability to spread relatively fixed, common regional management, advertising, recruiting, and training costs across a broader employee base will result in significant cost efficiencies. Ultimately, regional aggregation will allow the Company to negotiate better regional benefits and services at favorable rates, which the Company can pass on to its client and employee base. The Company believes the lower cost structure, attractive client and employee benefit packages, and flexible workforce attributable to clustering provides competitive advantages in highly competitive, major metropolitan markets. The benefits of clustering are best illustrated in the Chicago, Illinois metropolitan area where, based upon data provided by the Omnicomp Group, the 19 Company-owned and franchised Chicago metropolitan area offices, with 5,400 service employees and 1996 revenues of $80.2 million, have achieved approximately 19% of all flexible industrial staffing revenues in that market, which the Company believes establishes it as the regional market leader. The region experienced a 22.7% compound annual revenue growth rate from 1992 through 1996 and the operating profit from those offices averaged 12.9% of revenues in 1996. /bullet/ INCREASE MARKET PENETRATION THROUGH MULTI-FACETED GROWTH STRATEGY. To achieve high growth within the flexible industrial staffing and PEO businesses, the Company has developed an aggressive, multi-faceted growth strategy which includes: internal growth, acquisitions, franchising and strategic alliances. This multi-faceted growth strategy has proven successful over the past three years, as evidenced by the Company's 86% compound annual revenue growth rate from 1994 to 1996. The key elements of this multi-faceted growth strategy are: /bullet/ INTERNAL GROWTH. The Company seeks internal growth by opening new offices and broadening its offering of high quality services. To effect its clustering strategy, the Company plans to open additional offices in each of its nine major regions. In addition, the Company intends to expand to additional major metropolitan areas where demographics and business conditions are favorable. During 1996, the Company opened 25 new Tandem offices, of which eight were located in new markets. During 1996, the Company increased the number of its PEO employees by approximately 3,000, or 41%, resulting primarily from the expansion of its PEO sales force. In addition to opening new offices and expanding its sales force, the Company will continue to expand its offering of high quality human resource services to its clients, including a broader array of staffing and PEO services, consulting services and other benefits. /bullet/ ACQUISITIONS. Due to the highly fragmented nature of the flexible industrial staffing and PEO industries, OutSource believes it has an excellent opportunity to continue its acquisition strategy of consolidating small, local businesses into a national network of staffing and PEO providers. These acquisitions would include existing franchises and competing businesses. As a potential advantage over internal growth, OutSource believes acquisitions allow the Company to quickly access new customer relationships, employees and staff knowledgeable of the local market, thereby accelerating market penetration. The Company believes it can quickly improve the profitability of the acquired businesses by applying its back office support and lower cost structure. In addition, the Company believes it can integrate acquisitions using its back office support center and information processing capabilities to achieve higher operating margins. Since 1995, the Company completed 17 acquisitions of flexible industrial staffing companies, representing 48 offices in 23 markets and approximately $84 million in aggregate revenues. Although the Company continuously reviews potential acquisition candidates and currently has several offers outstanding, it has not entered into any agreement, understanding or commitment with respect to any additional acquisitions at this time. /bullet/ FRANCHISING. The Company has identified over 150 attractive markets which it believes are too small to warrant a direct investment of the Company's resources. In these small markets, 35 the Company intends to offer franchises. OutSource believes that franchising allows the Company to quickly, and cost-effectively, build regional brand awareness and increase market penetration. In addition, these franchise service centers give the Company the ability to attract large national accounts which require national service coverage. The Company has a fully staffed franchise development department and has been successful in recruiting and awarding flexible industrial staffing franchises. As of June 30, 1997, the Company had 36 Tandem franchise associates operating 74 Tandem franchise locations in 34 states. These franchise associates had revenues of $150 million in 1996. In May 1997, the Company began marketing its PEO franchise program. /bullet/ STRATEGIC ALLIANCES. The Company will consider strategic alliances with those companies that offer significant growth opportunities for the PEO business. For example, as an approved provider for Allstate Insurance, OutSource provides its services to approximately 2,500 independent Allstate agents. As part of its strategy, the Company intends to enter into, contracts with general insurance agencies which allow the agencies to act as a marketing agent for the Company's PEO business. The Company believes it will benefit significantly from the insurance agencies' network of agents, and their extensive established business relationships. The Company also intends to enter into strategic alliances with other service companies including payroll processing firms and employee-benefit consultants. /bullet/ CONTINUE TO MAXIMIZE OPERATING EFFICIENCIES THROUGH INTEGRATED TECHNOLOGY AND BACK OFFICE SUPPORT. Due to the similarities in the technology and back-office support services utilized by Tandem and Synadyne, the Company believes that there are significant opportunities to achieve cost efficiencies. As a result, the Company has invested in the development of an integrated computer network and related software packages that improve the communication between the corporate headquarters and 89 Company-owned and 74 franchised field offices. This integrated network is designed to improve the Company's ability to monitor and rapidly respond to client demand and workers' compensation claims for both the industrial staffing and PEO businesses on a cost-effective basis. OutSource believes this level of integration will strengthen the Company's ability to deliver high quality human resource services at competitive prices. /bullet/ BECOME THE "GUARDIAN EMPLOYER". The ultimate goal for the Company is to represent a critical mass of jobs within a defined geographic area so it will be able to commit to permanent employment, over time, for its flexible industrial staffing and PEO employees. Employees are thus able to affiliate with the Company on a permanent basis and concentrate on their core skills, while the Company keeps them at maximum employability through job sourcing, career planning and training. As a result of the Company's ability to provide both PEO and flexible staffing services, it is able to provide permanent employment benefits to employees and believes it can attract, maintain and keep employed the best work force for its clients. This could reduce the Company's and its clients' cost in recruiting, training and down time and ultimately improve long-term profitability. COMPANY SERVICES The Company offers its clients a full array of staffing services principally through its Tandem and Synadyne divisions. Because the Company serves as the employer of record with respect to both PEO and flexible staffing services, the Company provides certain common services to both of these markets, utilizing a common support system. The degree of utilization of these common services depends upon the needs of the clients and employees. Common services offered by both Tandem and Synadyne are: /bullet/ PAYROLL ADMINISTRATION. The Company assumes responsibility for payroll and attendant record-keeping, payroll tax deposits, payroll tax reporting, and all federal, state, county and city payroll tax reports (including 941s, 940s, W-2s, W-3s, W-4s and W-5s), state unemployment taxes, employee file maintenance, unemployment claims and monitoring and responding to changing regulatory 36 requirements. The Company develops and administers customized payroll policies and procedures for each of its clients, which are fully integrated from the clients' offices to the Company's central processing center. /bullet/ AGGREGATION OF STATUTORY AND NON-STATUTORY EMPLOYEE BENEFITS. Employee benefits packages can include health care options, such as preferred provider organizations ("PPOs") and health maintenance organizations ("HMOs"), and supplemental benefit programs such as dental care, vision care, prescription drugs, an employee assistance plan and life and disability insurance options. The Company offers Multi-Employer Retirement Plans and cafeteria plans to its eligible employees and provides workers' compensation and unemployment insurance. Workers' compensation is a state-mandated comprehensive insurance program that requires employers to fund medical expenses, lost wages and other costs that result from work-related injuries and illnesses, regardless of fault and without any co-payment by the employee. Unemployment insurance is an insurance tax imposed by both federal and state governments. Historically, the largest controllable direct costs incurred by businesses relate to the provision of health care and workers' compensation benefits. In order to remain competitive, staffing companies must continue to arrange for the delivery of these services to their clients at costs below those which clients could obtain on their own by efficiently managing health care and workers' compensation costs. The Company intends to aggressively manage health care and workers' compensation costs through the utilization of vertically integrated managed care systems. The Company's ultimate goal is to vertically integrate all employee medical costs through a comprehensive 24-hour medical management program that can coordinate group health and workers' compensation for all employees. As part of its service package, the Company administers all employee benefit plans and is responsible for negotiating the benefits provided by, and costs of, each such plan. The Company's human resources and claims administration departments serve as liaisons for the delivery of such services to the client employee and monitor and review workers' compensation claims for loss control purposes. The Company believes that its ability to provide and administer a wide variety of employee benefit plans on behalf of its clients tends to mitigate the competitive disadvantages small businesses normally face in the areas of employee benefits cost control and employee recruiting and retention. /bullet/ HUMAN RESOURCE COMPLIANCE ADMINISTRATION. Because OutSource is the employer of record with respect to both flexible staffing and PEO services and assumes responsibility for compliance with many employment related regulations, the Company is prepared and trained to address compliance and regulatory issues inherent in an employment relationship. For example, the Company provides compliance administration services with respect to unemployment claims, workers compensation claims, and claims arising under the Fair Labor Standards Act. In addition, the Company assists its clients in understanding and complying with other employment-related requirements for which the Company does not assume responsibility. Generally, the most significant compliance administration services provided by the Company are in the area of workers' compensation and state unemployment laws. With respect to workers' compensation, the Company provides claims management services which include prompt identification and reporting of injuries to the insurance carrier and local branch office, use of designated health care providers, case management, fee audits and aggressive back-to-work programs. Services provided by the Company in the area of state unemployment compliance include ensuring that only eligible personnel receive unemployment benefits, assisting in re-employing personnel and auditing state reporting records and rate formulas. 37 /bullet/ PROACTIVE HUMAN RESOURCE MANAGEMENT SERVICES. The basic differences between the Tandem services and Synadyne services are referred to by the Company as "Proactive Human Resource Management Services." PEO services are typically provided for an indefinite time frame, while flexible industrial staffing assignments are normally contracted for a definite period of time with the flexibility to meet ongoing business demands. In addition, the flexible industrial staffing services are often bundled for one base fee, while PEO services are characterized by a base fee, plus additional fees for added services. As part of its base services in both the flexible staffing and PEO markets, the Company conducts a human resource needs analysis for clients and client employees. Based on the results of that review, the Company recommends basic and additional services which the client should implement. Set forth below are examples of suggested services included within the Company's base service fee and other services provided on fee-for-service basis in the flexible industrial staffing and PEO sectors.
PEO FLEXIBLE INDUSTRIAL STAFFING --------------------------------- SERVICE BASE FEE BASE FEE FEE-FOR-SERVICE - -------------------------------------------------- ----------------------------- -------------- ---------------- /bullet/ Continuous H/R Review and Analysis /check mark/ /check mark/ /bullet/ Screening /check mark/ /check mark/ /bullet/ Recruiting /check mark/ /check mark/ /bullet/ Training /check mark/ /check mark/ /bullet/ Workforce Deployment /check mark/ /check mark/ /bullet/ Loss Prevention and Safety Training /check mark/ /check mark/ /bullet/ Pre-employment Testing and Assessment /check mark/ /check mark/ /bullet/ Background Searches /check mark/ /check mark/ /bullet/ Compensation Program Design /check mark/ /check mark/ /bullet/ Customized Personnel Management Reports /check mark/ /check mark/ /bullet/ Job Profiling, Description, Application /check mark/ /check mark/ /bullet/ Turnover Tracking and Analysis /check mark/ /check mark/ /bullet/ Customer Service Training /check mark/ /check mark/
The Company provides certain other services to its PEO clients on a fee-for-service basis that are also available to its flexible industrial staffing clients. These services include drug testing policy administration, outplacement assistance, relocation assistance, executive benefits, affirmative action plans, opinion surveys and follow-up analysis, exit interviews and follow-up analysis, management development skills workshops, team building programs, grammar and business correspondence skills workshops and management skills assessment. OPERATIONS Because of the similarities in the type of services that the Company offers to its PEO and flexible staffing clients, and due to technological and communication advances, many of these services are provided from the Company's national office and support center in Deerfield Beach, Florida. These services include payroll processing, tax reporting, unemployment claims, workers' compensation and other insurance claims, insurance procurement, health and other employee benefits administration, interactive voice mail, design and production of training programs and materials, accounting, billing and collections, customized management reporting, employee background checks, pre-employment testing, affirmative action plans, executive recruiting, executive benefits, compensation program design, and turnover tracking and analysis. TANDEM Tandem delivers its flexible industrial staffing services through a nationwide network of 80 Company-owned and 74 franchise recruiting and training centers. Each Company-owned recruiting and training center is staffed with a manager, one or two service and recruiting coordinators, two to four 38 staffing consultants, an office administrator and one to four clerical assistants. The number of people in each of the positions will vary by the size of the recruiting and training centers and degree of penetration of their territory within the market. The Company believes that its success is due in part to its close familiarity with the businesses of its clients. The Company's sales consultants visit client job sites regularly to become familiar with the skill required by the client's business, conduct job site safety inspections and to ensure that employees are appropriately equipped for the job. To ensure customer satisfaction, Tandem sales consultants and service coordinators play an active role in daily work assignments. The Company also attempts to become familiar with its pool of industrial employees. Each employee is subject to a two-day screening process that evaluates skills, abilities and attitudes. This not only permits the Company to institute appropriate training programs and assign its workers, but also helps the Company retain desirable employees. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Seasonality" for a discussion of the seasonality of the Company's business. SYNADYNE Synadyne delivers basic PEO services through client service teams consisting of human resource professionals and payroll and benefits specialists located in each of the two Florida markets the Company serves. The client service team is assigned as soon as the Company's account executive has secured the client, thus allowing the account executive to concentrate on sales of PEO services to additional clients. Although the client service teams have primary responsibility for servicing their assigned clients, they rely on the Company's national support center staff to provide advice in specialized areas such as workers' compensation, unemployment insurance and payroll processing. The client's principal contact within the client service team is the human resource professional, whose level of expertise is tailored to each client depending upon the nature and complexity of the client's business. The Company believes that its team approach ultimately results in maximum client satisfaction. SALES AND MARKETING The Company markets its flexible industrial staffing and PEO services through a combination of marketing channels including direct sales, franchising and strategic alliances. The Company believes this multi-channel approach is unique and allows the Company to quickly access a pool of skilled employees, develop regional brand awareness and ultimately become a market leader. The Company believes its compound annual revenue growth rate of approximately 86% from 1994 to 1996 demonstrates the success of this multi-channel approach. Of the three marketing channels employed by the Company, direct sales and franchising are common to both the flexible industrial staffing and PEO businesses, while strategic alliances are unique to the PEO business. /bullet/ DIRECT SALES FORCE. The Company believes there are significant differences in the initial sales process and sales cycle between flexible industrial staffing and PEO service sales. As a result, the Company markets these services through four distinct, highly trained sales forces who share a common profile. Flexible industrial staffing services are marketed through 99 sales associates located in 89 Company-owned Tandem offices nationwide. The Company's PEO services are marketed through eight sales associates located in three Synadyne offices in Florida and one telemarketing center, with five tele-marketing professionals, located in the Company's national support center. The Company's eight sales associates focus on full service PEO clients while the telemarketing center concentrates on the Company's "small business" clients (those with fewer than five employees). Although the sales process and sales cycle are different between the flexible industrial staffing and PEO businesses, the method and philosophy that the Company employs in the selection, training and compensation of its sales force is very similar. It is the Company's philosophy to 39 employ the best sales force available, and all of the Company's sales associates receive a generous compensation package which includes commissions throughout the life of the client's relationship with the Company. All sales associates receive two weeks of initial classroom and on-the-job training and attend additional training sessions on a regular basis. The additional training is conducted by specialists and by sales managers of the respective divisions. /bullet/ FRANCHISING. The Company offers distinct franchising arrangements for the flexible industrial staffing and PEO businesses. Under industrial staffing franchising agreements, the Company grants the franchisee the exclusive right to operate under the Tandem trade name within a select geographic market in return for a royalty on staffing services rendered. In contrast, under the PEO franchising agreement, the franchisee merely serves as a sales agent, receiving a commission for those services rendered and collected by the Company with no guarantee of market exclusivity. In either case, the franchisee assumes the marketing costs and, as a result, the Company believes franchising is a cost-effective method of building regional brand awareness. As of June 30, 1997, there were 74 Tandem and two Office Ours (the Company's clerical staffing division) franchise locations. The Company initiated its PEO franchise program in May 1997 although it currently has no PEO franchises. /bullet/ STRATEGIC ALLIANCES. The Company intends to enter into a strategic alliance with a general insurance agency whereby such agency acts as a marketing agent for the Company's PEO business. The general insurance agency identifies, educates and counsels other insurance agents who will introduce the PEO product to their client base. The structure of the arrangement is consistent with traditional insurance commission arrangements. In addition, the Company plans to provide bonuses and equity participation based on performance. The Company also intends to enter into strategic alliances with other service companies including payroll processing firms and employee-benefit consultants. CLIENTS As of June 30, 1997, Tandem employed approximately 17,000 flexible industrial staffing employees. The Tandem division has approximately 14,000 clients and on a daily basis provides services to approximately 3,000 of such clients. These companies represented a cross-section of the industrial sector, of which no single client represented more than 5% of the Company's total revenues. Tandem's clients includes such companies as Michelin Corporation, AT&T Wireless Services, Inc., Toys "R" Us, Inc., Hon Industries Inc., the Thomas J. Lipton Company, a subsidiary of Unilever PLC, and Waste Management, Inc. As of June 30, 1997, Synadyne employed approximately 11,000 employees pursuant to PEO contracts with approximately 2,900 companies. These companies covered a diverse range of industries, including insurance and staffing. The Company's primary insurance PEO clients are Allstate Insurance agents. The Company provides basic PEO services to approximately 2,500 Allstate agents, each of whom has selected OutSource from among Allstate's approved providers. The Company's primary staffing PEO clients are its Tandem franchises. The Company provides basic PEO services to the employees of its franchises. For the six months ended June 30, 1997, approximately 28% and 16% of the Company's total PEO revenues were attributed to services provided to Allstate agents and Tandem franchises, respectively. The Company attempts to maintain diversity within its client base in order to decrease its exposure to downturns or volatility in any particular industry. As part of this client selection strategy, the Company currently offers its services only to those businesses that operate in certain industries, eliminating industries that it believes present a higher risk of employee injury (such as roofing, excavation, chemical manufacturing and maritime). All prospective clients undergo a rigorous underwriting process to evaluate workers' compensation risk, group medical history, creditworthiness, unemployment history and operating stability. Generally, flexible industrial staffing clients do not sign long-term contracts. 40 RISK MANAGEMENT PROGRAM--WORKERS' COMPENSATION The Company believes that careful client selection, pro-active accident prevention programs, and aggressive control of claims will result in reduced workers' compensation costs. OutSource seeks to prevent workplace injuries by implementing a variety of training, safety, and mandatory drug-free workplace programs (including pre-employment screening, random testing, and post-accident drug monitoring) to ensure that safety awareness is heightened at the sites to which the Company sends its workers. Further, the Company insists that clients adhere to ongoing safety practices at the clients' worksite as a necessary condition to a continued business relationship. The Company believes that its risk management policy allows for flexibility, profitability, and cost control. The Company's workers' compensation insurance coverage for calendar 1997 provides for a $250,000 deductible per accident or industrial illness with an aggregate annual dollar limit on the Company's potential liability for deductible payments of 2.2% of aggregate annual payroll. As such, the Company's workers' compensation expense for claims is effectively capped at a contractually agreed upon percentage of payroll and cannot exceed these amounts for fiscal year 1997. The Company's claims experience in 1996 was approximately 2.0% of payroll. For claims related to periods prior to 1997, there was no aggregate maximum dollar limit on the Company's potential liability for deductible payments. From May 1, 1995 through December 31, 1996, in exchange for a lower excess insurance premium rate, the Company accepted the responsibility for losses exceeding the $250,000 policy deductible per accident or industrial illness on a dollar-for-dollar basis, but only to the extent such losses cumulatively exceed 85% of the excess insurance premium (excluding the profit and administration component), subject to a maximum additional premium of approximately $750,000 in 1995 and $1.2 million in 1996. The Company secures its workers' compensation obligations by the issuance of bank standby letters of credit to its insurance carriers, minimizing the required current cash outflow for such items. The Company has been successful in lowering its workers' compensation costs as a percentage of revenues (weighted proportionately between PEO and flexible industrial staffing) by approximately 32% from 1991 to 1996. Each month, the risk management team, comprised of professionals from a variety of functional areas, reviews workplace accidents for the relevant period to determine the appropriate reserves. Each quarter, all cases are reviewed such that the reserves, payments, and expected future costs for each case are reconciled. The Company believes it has maintained adequate reserves for all of its workers' compensation claims. In addition, the Company has selected Gallagher Bassett Services for third-party claims administration and CRA Managed Care for medical case management. Each vendor has established designated regional teams for the handling of the Company's workers' compensation claims. The regional team is managed by a Company in-house claims analyst. All claims arising within a given region are reported to the claims analyst who verifies the employment of the claimant and assigns the claim to Gallagher Bassett Services and as needed to CRA Managed Care, for defense and/or processing. Together, the team of the in-house analyst, the third-party administrator and medical case manager aggressively follow each claim from its origin to its conclusion. INFORMATION TECHNOLOGY The Company believes that the effective use of technology to increase operational efficiency and enhance client service is a key factor in remaining competitive. The Company has developed, and continues to invest in, information support systems at its franchise, Company-owned and corporate headquarters locations. At the field level, custom developed systems support the day-to-day operational needs of both Tandem and Office Ours. At the corporate headquarters, centralized accounting, billing and reporting applications provide support for all of the field offices and a specialized package provides support for Synadyne. In November 1996, the Company entered into a series of major projects to expand its information infrastructure and replace, or re-develop, many of its major operational systems in order to support future growth. The initial phase of the project was an installation of a Company-wide data base 41 management system that now provides consistency across all applications and allows information to move between applications. This allows for consolidated reporting and analysis across all of the Company's divisions. The second phase of the project, completed in February 1997, implemented an integrated financial management system for all accounting functions to streamline the central processing of billing and financial reporting. The third phase of the project is the development of a state-of-the-art system to support Synadyne. Since no comprehensive, commercially available system exists for the PEO industry, the Company entered into a developmental agreement with F.W. Davison, a provider of human resource and benefit systems, to produce a system tailored to the needs of Synadyne. The final phase of the project is the development of a new support system for the Tandem and Office Ours offices that will use a centrally based processing resource. Each field office will be connected to a central processor, via a FRAME relay network connection. COMPETITION The staffing market is highly fragmented, characterized by many small providers in addition to several large public companies. There are limited barriers to entry and new competitors frequently enter the market. Although a large percentage of flexible staffing providers are locally operated with fewer than five offices, many of the large public companies have significantly greater marketing, financial and other resources than the Company. However, unlike the Company, these companies do not focus primarily on the supply of temporary industrial personnel. The Company believes that by focusing primarily on the placement of temporary industrial personnel, it enjoys a competitive advantage over many of its competitors that attempt to provide a broader base of temporary employees. The Company also believes that by targeting emerging companies, rather than the larger companies that are generally being pursued by its competitors, it can also gain certain competitive advantages. The Company believes that there are several factors that must be met in order to obtain and retain clients in the flexible staffing market. These factors include an adequate number of well located offices, an understanding of clients' specific job requirements, the ability to reliably provide the correct number of employees on time, the ability to monitor job performance, and the ability to offer competitive prices. To attract qualified industrial candidates for flexible employment assignments, companies must offer competitive wages, vacations and holiday pay, positive work environments, flexibility of work schedules, and an adequate number of available work hours. The Company believes it is highly competitive in these areas. Competition in the highly fragmented PEO sector is generally on a local or regional basis, and new entries in the market are increasing at 6.5% per year. The primary competitive factors in this sector are quality of service, choice and quality of benefits, reputation, and price. The Company believes that name recognition, regulatory expertise, financial resources, risk management, and data processing capability distinguish leading PEOs from the rest of the industry and OutSource is highly competitive in all of these areas. The Company's competitors include: (i) in-house human resource departments; (ii) other PEOs; and (iii) providers of discrete employment-related services such as payroll processing firms, commercial insurance brokers, human resource consultants, and temporary help firms who might .enter the PEO market. Some of these companies have greater financial and other resources than the Company. The Company believes that barriers to entry are increasing and are greater than those of the flexible staffing business. Some of the barriers to entry include: (i) the complexity of the PEO business and the need for expertise in multiple disciplines; (ii) the number of years of experience required to establish experience ratings in key cost areas of workers' compensation, health insurance, and unemployment; (iii) the need for sophisticated management information systems to track all aspects of business in a high-growth environment; and (iv) increased regulations and licensing requirements in many states. 42 INDUSTRY REGULATION OVERVIEW As an employer, the Company is subject to all federal, state and local statutes and regulations governing its relationships with its employees and affecting businesses generally, including its client employees. In addition, as a result of its PEO operations, the Company is affected by specifically applicable licensing and other regulatory requirements and by uncertainty in the application of numerous federal and state laws relating to labor, tax and employment matters. UNCERTAINTY AS TO THE EMPLOYER RELATIONSHIP By entering into a co-employment relationship with client employees, the Company assumes certain obligations and responsibilities of an employer under federal and state laws. Many of these federal and state laws were enacted prior to the development of nontraditional employment relationships, such as PEOs, temporary employment, and outsourcing arrangements, and do not specifically address the obligations and responsibilities of PEOs. Whether certain laws apply to the Company depends in many cases upon whether the Company is deemed to be an "employer" for purposes of the law. The definition of "employer" under these laws is not uniform and, therefore, the application of these laws to the Company's business is not always certain. In many cases, a person's status as an "employer" is determined by application of a common law test involving the examination of several factors to determine an employer/employee relationship. Uncertainty as to the application of certain laws governing "employer" relationships is particularly important to the Company in federal tax and employee benefit matters. FEDERAL AND STATE EMPLOYMENT TAXES. The Company assumes the sole responsibility and liability for the payment of federal and state employment taxes with respect to wages and salaries paid to its employees, including client employees. To date, the IRS has relied extensively on the common law test of employment in determining employer status and the resulting liability for failure to withhold. However, the IRS has formed an examination division market segment specialization program for the purpose of examining selected PEOs, such as the Company, throughout the United States. Upon examination, the IRS may determine that a PEO is not the employer of the client employees under the Code provisions applicable to federal employment taxes and, consequently, that the client companies are exclusively responsible for payment of employment taxes on wages and salaries paid to such employees. A determination by the IRS that the Company is not the employer of the client employees may impact the Company's ability to report employment taxes on its own account rather than for the accounts of its clients and would increase administrative burdens on the Company's payroll service function. In addition, while the Company believes that it can contractually assume the client company's withholding obligations, in the event the Company fails to meet these obligations the client company may be held jointly and severally liable therefore. The Company's management believes that the economic strength and reputation of the Company has prevented this potential liability from discouraging prospective clients. EMPLOYEE BENEFIT PLANS. The Company offers various benefit plans to its client employees. These plans include Multi-Employer Retirement Plans, a cafeteria plan, a group health plan, a group life insurance plan, a group disability insurance plan and an employee assistance plan. Generally, employee benefit plans are subject to provisions of both the Code and the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). In order to qualify for favorable tax treatment under the Code, the plans must be established and maintained by an employer for the exclusive benefit of the Company's employees. An IRS examination of the Company and/or a client company may determine that the Company is not the employer of client employees under Code provisions applicable to employee benefit plans. Consequently, the Company may not be able to offer client employees benefit plans that qualify for favorable tax treatment. If the IRS were to conclude that the Company is not the employer of its 43 client employees for plan purposes, client employees could not continue to make tax favored contributions to the Company's Multi-Employer Retirement Plans or cafeteria plan. The Company believes that, although unfavorable to the Company, a prospective application by the IRS of an adverse conclusion would not have a material adverse effect on its financial position and results of operations. If such conclusion were applied retroactively, employees' vested account balances may become taxable immediately, the Company would lose its tax deduction to the extent the contributions were not vested, the plan trust would become a taxable trust and penalties could be assessed. In such a scenario, the Company would face the risk of client dissatisfaction, as well as potential litigation. A retroactive application by the IRS of an adverse conclusion could have a material adverse effect on the Company's financial position, results of operations and liquidity. While the Company believes that a retroactive disqualification is unlikely, there can be no assurance as to the ultimate resolution of these issues. Employee pension and welfare benefit plans are also governed by ERISA. The United States Supreme Court has held that the common law test of employment must be applied to determine whether an individual is an employee or an independent contractor under ERISA. A definitive judicial interpretation of employer in the context of a PEO arrangement has not been established. If the Company were found not to be an employer for ERISA purposes, its plans would not be subject to ERISA. As a result of such finding, the Company and its plans would not enjoy the preemption of state law provided by ERISA and could be subject to varying state laws and regulations, as well as to claims based upon state common laws. WORKERS' COMPENSATION Workers' compensation is a state mandated, comprehensive insurance program that requires employers to fund medical expenses, lost wages and other costs resulting from work-related injuries and illnesses. In exchange for providing workers' compensation coverage for employees, employers are generally immune from any liability for benefits in excess of those provided by the relevant state statutes. In most states, the extensive benefits coverage for both medical costs and lost wages is provided through the purchase of commercial insurance from private insurance companies, participation in state-run insurance funds, self insurance funds or, if permitted by the state, employer self-insurance. Workers' compensation benefits and arrangements vary on a state-by-state basis and are often highly complex. The Company's ability to use comprehensive workers' compensation managed care techniques in its PEO operations depends in part on its ability to contract with or create networks of health care providers. The Company requires that injured workers use the Company's network of providers. Laws regulating the operation of managed care provider networks have been adopted by a number of states. These laws may apply to managed care provider networks having contracts with the Company or to provider networks which the Company may organize. To the extent the Company is governed by these regulations, it may be subject to additional licensing requirements, financial oversight and procedural standards for beneficiaries and providers. See "--Risk Management Program--Workers' Compensation." PEO LICENSING REQUIREMENTS Approximately one-third of the states, including Florida, have passed laws that have licensing or registration requirements for PEOs and several additional states are considering such regulation. Such laws vary from state to state but generally provide for monitoring the fiscal responsibility of PEOs. State regulation assists in screening insufficiently capitalized PEO operations and, in the Company's view, has the effect of legitimizing the PEO industry generally by resolving interpretative issues concerning employee status for specific purposes under applicable state law. Existing regulations are relatively new and, therefore, limited interpretive or enforcement guidance is available. The Company cannot predict with certainty the nature or direction of the development of federal, state and local regulations. In Florida, the Company's PEO operations are licensed under the Florida Employee Leasing Licensing Act of 1991 (the "Florida Licensing Act"). Among other things, the Florida Licensing Act 44 requires PEOs and their controlling persons to be licensed, mandates reporting requirements, allocates several employer responsibilities and requires the payment of an annual licensing fee based upon gross payroll amounts. The Florida Licensing Act also requires licensed PEOs to submit annual audited financial statements and to maintain a tangible accounting net worth and positive working capital. In addition, the Florida Licensing Act requires PEOs to: (i) reserve the right of direction and control over leased employees, (ii) enter into written agreements with their clients, (iii) pay wages to leased employees, (iv) pay and collect payroll taxes, (v) maintain authority to hire, terminate, discipline and reassign employees, and (vi) reserve the right to direct and control the management of safety, risk and hazard control at the worksite, including the right to perform safety inspections, to promulgate and administer employment and safety policies, and to manage workers' compensation claims, claim filings, and related procedures. TRADEMARKS AND SERVICE MARKS The Company has registered the following marks with the United States Patent and Trademark Office: LABOR WORLD, LABOR WORLD in conjunction with globe logo, OFFICE OURS, Office Ours clock logo, SYNADYNE, OUTSOURCE INTERNATIONAL--THE LEADER IN HUMAN RESOURCES and design, and SYNADYNE--A PROFESSIONAL EMPLOYER and design. The Company has applications pending before the United States Patent and Trademark Office for federal registration of the following marks: OSI, TANDEM, TANDEM logo design, HIGH EFFICIENCY STAFFING SOLUTIONS, LABOR TECHNOLOGIES and Labor Technologies logo. See "--Legal Proceedings." The Company has applications pending with the Office for Harmonization in the Internal Market (Trademark and Designs) for European Community registration of the following marks: LABOR WORLD, OFFICE OURS, SYNADYNE and OUTSOURCE INTERNATIONAL. The Company also has applications pending in Canada for registration of the following marks: SYNADYNE, OFFICE OURS and OUTSOURCE INTERNATIONAL. CORPORATE EMPLOYEES As of June 30, 1997, the Company had 786 corporate employees, of whom 78 were employed in PEO service operations, 560 were employed in flexible staffing service operations, and 148 were employed in shared support services such as human resources, risk management, and information systems. None of the Company's employees are covered by collective bargaining agreements. The Company believes that its relationships with its employees are good. PROPERTIES The Company's national office and support center is currently located in a 50,000 square foot office building in Deerfield Beach, Florida. The lease for this property expires in December 2011, and provides for annual lease payments of approximately $610,000. The Company has an option to purchase the property for $5.3 million during the first two years of the lease term and intends to exercise that option in the fall of 1997. The Company also leases 89 flexible industrial staffing office locations and certain other facilities, with approximately 224,000 total square feet for an annual base rent of approximately $1.5 million. A portion of a warehouse is leased from TMT Properties, Inc., a company controlled by Mr. Burrell, on a month-to-month basis for $1,468 per month. The Company also owns small office buildings in Chicago, Illinois and Waukegan, Illinois and a condominium in Boca Raton, Florida. See "Certain Transactions." The Company believes that its facilities are generally adequate for its needs and does not anticipate difficulty in replacing such facilities or locating additional facilities, if needed. 45 LEGAL PROCEEDINGS The Company is occasionally a party to legal proceedings incidental to its ordinary business operations. At present, the Company is not a party to any pending legal proceedings that the Company believes could have a material adverse effect on its financial condition or results of operations. In 1996, the Company commissioned and completed an independent investigation (the "Investigation") which focused on: (i) allegations that the Company made improper payments to a customer's management employee who made purchasing decisions regarding the Company's services; and (ii) the likelihood that other similar payments may have been made by the Company. The Investigation, which was conducted by a large national law firm and a "big six" accounting firm did not find any other improper payments. The Company disclosed the matter, and voluntarily paid approximately $108,000 as a compensatory payment (the estimated amount of the improper payment) to such customer and filed appropriate amended tax returns. The customer is continuing to transact business with the Company. The Company also disclosed the matter to the office of the appropriate State's Attorney's Office, which has advised the Company that it has no present intention of pursuing any charges against the Company, its shareholders or management. The Investigation determined that, although the payments in question were initially solicited by the customer's management employee from a former employee of the Company, the Founding Shareholders during that period all had varying degrees of knowledge of, and participation with respect to, those payments. Two officers of the Company also were aware of the payments but, upon objection, were overruled by the Founding Shareholders. The Founding Shareholders resigned as officers and directors in November 1996 and no longer have any involvement in the operations of the Company. Effective February 21, 1997, the Company discontinued payment of compensation to the Founding Shareholders. Finally, in connection with the issuance of the Senior Notes, all shares of common stock owned by those shareholders and their families were placed in a voting trust. See "Management--Voting Trust and Shareholders' Agreement," "Principal and Selling Shareholders" and "Certain Transactions--Founder Salaries". On March 21, 1997, Source Services Corporation ("SSC") filed a Petition to Cancel Registration with the Trademark Trial and Appeal Board in which SSC seeks cancellation of the Company's service mark "OutSource International--The Leader in Human Resources". SSC has alleged that it has been using the service mark "Source" in various forms since 1986 and, in its petition, alleges that the Company's use of the "OutSource" service mark violates various provisions of the Lanham Act. On May 28, 1997, the Company filed an answer to the Petition to Cancel Registration and asserted various affirmative defenses. If the Company prevails in the administrative proceeding, the "OutSource" mark will retain its federal registration. If SSC prevails, the "OutSource" registration would be cancelled. However, even in the event of a cancellation, the Patent and Trademark Office has no authority to grant injunctive relief or award damages. Furthermore, the decision as to whether the Company can continue to use the "OutSource" service mark cannot be decided in the administrative proceeding, but rather would have to be separately litigated. The Company has been advised that SSC also intends to file an action in federal court seeking to enjoin the Company's use of the name "OutSource". See "--Trademarks and Service Marks." 46 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The Company's executive officers, directors, and director nominees are as follows:
NAME AGE POSITION - --------------------------- ----- ------------------------------------------------- Paul M. Burrell ......... 37 President, Chief Executive Officer and Chairman of the Board of Directors Robert A. Lefcort ......... 51 Executive Vice President, Secretary and Director Robert E. Tomlinson ...... 40 Chief Financial Officer, Treasurer and Director James E. Money ............ 55 President, Tandem Division Benjamin Cueto ............ 61 President, Synadyne Division Robert J. Mitchell ...... 58 President, Office Ours Division Samuel H. Schwartz ...... 33 Director Richard J. Williams ...... 36 Director David S. Hershberg ...... 55 Director Nominee
PAUL M. BURRELL has been President, Chief Executive Officer and Chairman of the Board of the Company since its formation on April 19, 1996. Since June 1988, Mr. Burrell has served in various officer capacities with the Subsidiaries, including as Chief Financial Officer and President. Prior to joining the Company, Mr. Burrell was a Certified Public Accountant with the accounting firm of Deloitte Haskins & Sells, from 1983 until 1988. Mr. Burrell is a member of several associations including the American Institute of Certified Public Accountants, the Florida Institute of Certified Public Accountants, the National Association of Temporary and Staffing Services, and the National Association of Professional Employer Organizations, which has certified him as a Professional Employer Specialist. Mr. Burrell currently serves as the President of the Broward County Business Roundtable and is the Treasurer of the Florida Association of Temporary Services. ROBERT A. LEFCORT has been Executive Vice President and a Director of the Company since its formation on April 19, 1996. Since August 1990, Mr. Lefcort has served in various officer capacities with the Subsidiaries, including as Chief Operating Officer and Director of Franchise Development. Mr. Lefcort was the President of the Miami International Merchandise Mart, the largest regional wholesale trade mart in the United States, from October 1974 to September 1984. ROBERT E. TOMLINSON has been Chief Financial Officer and a Director of the Company since its formation on April 19, 1996. Since March 1994, Mr. Tomlinson has served as Chief Financial Officer of the Subsidiaries. Prior to joining the Company, Mr. Tomlinson served in various financial capacities from August 1982 to January 1993 with Embraer Aircraft Corporation, finally as Senior Vice President of Finance and Treasurer, and served on its board of directors from 1991 through March 1994. Mr. Tomlinson is a Certified Public Accountant and a member of the Florida Institute of Certified Public Accountants and worked for the accounting firm of Price Waterhouse from September 1977 through August 1982. JAMES E. MONEY has been President of the Tandem Division since March 1995. From June 1993 to May 1994, Mr. Money served as President and Chief Operating Officer of J.D. Byrider Systems, a car sales and financing franchise company. From September 1988 to June 1993, Mr. Money was President and Chief Operating Officer of Snelling and Snelling, Inc., a temporary placement company and served on its board of directors from March 1986 to June 1993. BENJAMIN CUETO has been President of the Synadyne Division since September 1997. From May 1994 to August 1997, Mr. Cueto was the Sales Director, Latin America, for the Marriott Corporation. From April 1993 to May 1994, Mr. Cueto was responsible for Latin American sales for Disney Vacation Development, Inc. From January 1992 to April 1993, Mr. Cueto was the Chief Operating Officer of the Texas Back Institute. 47 ROBERT J. MITCHELL has been President of the Office Ours Division since January 1996. From March 1995 to January 1996, Mr. Mitchell served as Senior Vice President and General Manager of the Office Ours Division. From April 1993 to January 1995, Mr. Mitchell served as Vice President, Marketing for Homeowners Marketing Services. From September 1988 to September 1992, Mr. Mitchell was President of REDI Real Estate Information Services, a publisher of real property data. SAMUEL H. SCHWARTZ has been a Director of the Company since February 1997. Since January 1995, Mr. Schwartz has been Vice President and Partner at Bachow & Associates, Inc., an investment company, in Bala Cynwyd, Pennsylvania. Mr. Schwartz also serves on the board of directors of CARE Systems, Inc., a provider of workers' compensation managed care claims administration. From August 1990 to January 1995, Mr. Schwartz was employed as a Manager of The Boston Consulting Group. RICHARD J. WILLIAMS has been a Director of the Company since February 1997. Since March 1990, Mr. Williams has been a Managing Director of Triumph Capital Group, Inc., a private equity investment firm based in Boston, Massachusetts. Mr. Williams also serves on the board of directors of Clarity Telecom, Inc., Hatten Communications, Inc., International Computer Graphics, Inc., Longview Group, Inc. and United Natural Foods, Inc. DAVID S. HERSHBERG has been nominated to become a Director of the Company immediately following the closing of this Offering. Mr. Hershberg is Vice President, Assistant General Counsel of the IBM Corporation. Prior to joining IBM in October 1995, Mr. Hershberg was Executive Vice President and director of Viatel, Inc., an international long-distance telephone company, with responsibility for legal, administrative and certain financial matters. From December 1991 to June 1993, he was an advisor to the Board of Buckeye Communications, Inc. From 1984 to 1991, he was Vice Chairman, General Counsel and director of Shearson Lehman Brothers. Prior to 1984, he was Deputy General Counsel for American Express Company. Mr. Hershberg is an advisory director of Bank Julius Baer, New York branch, a Swiss private bank. VOTING TRUST AND SHAREHOLDERS' AGREEMENT On February 21, 1997, certain shareholders of the Company deposited 4,683,982 shares of Common Stock into the Voting Trust, of which Messrs. Burrell and Williams are the Trustees. The term of the Voting Trust is ten years. Pursuant to its terms, the Trustees have sole and exclusive right to vote the shares of Common Stock deposited in the Voting Trust. Upon consummation of this Offering, the shares of Common Stock deposited into the Voting Trust will constitute approximately 47.2% of the issued and outstanding shares of Common Stock (or 40.6% if the Underwriters' over-allotment option is exercised in full). Accordingly, the Trustees will retain sufficient voting power to control the election of the Board or the outcome of any extraordinary corporate transaction submitted to the shareholders for approval for the foreseeable future. Effective February 21, 1997, the shareholders of the Company agreed to vote their shares for the election of a Board comprised of seven persons: three Management Directors, two Investor Directors and two additional persons selected by the Management Directors and the Investor Directors. In the event of a default under the Senior Notes or the failure of the Company to achieve certain performance criteria, the holders of the Senior Notes have the right to designate up to two additional members of the Board. The shareholders of the Company further agreed to ratify any merger, consolidation or sale of the Company, any acquisitions made by the Company, and any amendments to the Articles or Bylaws, to the extent such actions are approved by the Board. Those shareholders and the Senior Note Holders also have pre-emptive rights to purchase a pro rata portion of securities the Company may issue and sell from time to time excluding: (i) Common Stock in an underwritten public offering; (ii) securities issued in connection with a business acquisition; (iii) the Warrant Shares; and (iv) certain options to purchase Common Stock. 48 BOARD OF DIRECTORS The Company currently has five directors and one director nominee. Pursuant to the Voting Trust, the Company is actively seeking an additional non-employee director to fill the vacant seat on the Board. See "--Voting Trust and Shareholders' Agreement". Prior to the consummation of the Offering, the Company intends to amend the Articles to classify the Board into three classes, each class to be as nearly equal in number of directors as possible. One class will serve initially for a one-year term and thereafter be elected for a three-year term. A second class of directors will serve initially for a two-year term and thereafter be elected for a three-year term. The third class of directors will immediately commence a three-year term. Any director elected to fill a vacancy will hold office for the remainder of the full term of the class of directors in which the vacancy occurred and until such director's successor is duly elected and qualified. If at any time the size of the Board is changed, the increase or decrease in the number of directors would be apportioned among the three classes to make all classes as nearly equal as possible. See "Description of Securities--Certain Anti-Takeover Provisions Included in the Company's Articles of Incorporation and Bylaws." COMMITTEES The Board intends to establish an Executive Committee, a Compensation and Stock Option Committee, an Audit Committee, and a Nominating Committee prior to the consummation of the Offering. From time to time, the Board will delegate to the Executive Committee the power and authority to act on behalf of the Board. It is expected that Messrs. Burrell, Tomlinson and Lefcort will comprise the Executive Committee. The Compensation and Stock Option Committee will administer the Stock Option Plan including, among other things, determining the amount, exercise price and vesting schedule of stock options awarded under the plan. The Compensation and Stock Option Committee will administer the Company's other compensation programs and perform such other duties as may from time to time be determined by the Board. It is expected that Messrs. Williams, Schwartz and Burrell will comprise the Compensation and Stock Option Committee. The Audit Committee will review the scope and results of the annual audit of the Company's consolidated financial statements conducted by the Company's independent accountants, the scope of other services provided by the Company's independent accountants, proposed changes in the Company's financial and accounting standards and principles, and the Company's policies and procedures with respect to its internal accounting, auditing and financing controls. The Audit Committee will also examine and consider other matters relating to the financial affairs and accounting methods of the Company, including selection and retention of the Company's independent accountants. It is expected that Messrs. Schwartz, Hershberg and Tomlinson will comprise the Audit Committee. The Nominating Committee will recommend nominees to fill vacancies on the Board, newly created directorships and expired terms of directors. It is expected that Messrs. Williams, Hershberg and Burrell will comprise the Nominating Committee. DIRECTOR COMPENSATION Each non-employee director of the Company receives a $1,000 quarterly retainer and a $1,500 fee for attendance at each meeting of the Board. In addition, directors receive $500 for attendance at committee meetings of the Board. Directors are also reimbursed for travel expenses. Pursuant to the Stock Option Plan, the Board intends to adopt a formula plan for its non-employee directors (the "Formula Plan") prior to the consummation of this Offering. Under the Formula Plan, 49 upon his election to the Board, an eligible non-employee director will receive an option to purchase 9,825 shares of Common Stock ("Initial Option"). The Initial Option will expire as follows: 3,275 shares on the first anniversary of the grant date, 3,275 on the second anniversary of the grant date and 3,275 on the third anniversary of the grant date. On the first anniversary of the date of the grant of his Initial Option, an eligible non-employee director who then owns 3,275 shares of Common Stock at the end of this twelve-month period will receive an option to purchase 3,275 additional shares of the Common Stock. On the second anniversary of the date of the grant of his Initial Option, an eligible non-employee director who has held a minimum of 3,275 shares of Common Stock throughout the entire preceding twelve-month period will receive an option to purchase 3,275 additional shares of Common Stock. On the third anniversary of the date of the Initial Option, an eligible non-employee director who has held a minimum of 3,275 shares of Common Stock throughout the entire preceding twelve-month period will receive an option to purchase an additional 3,275 shares of the Common Stock. The exercise price of each option will be 100% of the fair market value of the Common Stock on the date of grant of the option. All options granted under the Formula Plan are 100% vested on the date of the grant. Except for the Initial Option, the duration of an option granted under the Formula Plan is three years from the date of grant, or such shorter period as may result from death, disability, or termination of the services as a director of the non-employee director to whom the option is granted. The options are non-transferable other than by will or by the laws of descent and distribution. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1996, Messrs. Burrell, Lefcort and Tomlinson participated in deliberations of the Board concerning executive officer compensation. In addition, the Founding Shareholders also participated in such deliberations until their resignation as members of the Board on November 22, 1996. See "Certain Transactions" for a description of certain payments made to the Founding Shareholders. EXECUTIVE COMPENSATION The following table sets forth certain information with respect to compensation paid or accrued by the Company during the fiscal years ended December 31, 1996, 1995 and 1994, to the Company's Chief Executive Officer and to the other executive officers of the Company whose annual salary and bonuses exceeded $100,000 during the fiscal year ended December 31, 1996 (collectively, the "Named Executive Officers"). 50 SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------- ------------- AWARDS ------------- SECURITIES UNDERLYING NAME AND SALARY BONUS OPTIONS/SARS PRINCIPAL POSITION YEAR ($) ($) (#) - ------------------------------------------- ------ --------- --------- ------------- Paul M. Burrell 1996 368,208 -- 35,456 President and Chief Executive Officer(1) 1995 428,819 -- -- 1994 329,389 -- -- Robert A. Lefcort 1996 128,077 9,574 -- Executive Vice President 1995 120,000 20,000 -- 1994 110,000 127,240 -- Robert E. Tomlinson 1996 122,308 24,000 31,908 Chief Financial Officer 1995 90,000 20,700 -- 1994 67,560 6,000 -- James E. Money 1996 160,208 45,231 28,364 President, Tandem Division 1995 99,079 22,000 -- 1994 -- -- -- Joseph F. Bello 1996 92,418 10,000 17,728 President, Synadyne Division(2) 1995 80,000 200 -- 1994 41,539 10,000 --
- ---------------- (1) Effective with the Reorganization, Mr. Burrell's salary was adjusted to $250,000 per annum plus bonus and benefits. See "--Employment Agreements." (2) Mr. Bello served as President of the Synadyne Division until July 1997 and currently serves as Vice President--Mid Atlantic region, Synadyne. The following table contains information about stock option grants to Named Executive Officers during the fiscal year ended December 31, 1996.
INDIVIDUAL GRANTS ------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION NUMBER OF SECURITIES % OF TOTAL OPTIONS EXERCISE PRICE FOR OPTION TERM(2) UNDERLYING OPTIONS GRANTED TO EMPLOYEES OR BASE PRICE EXPIRATION ------------------ NAME GRANTED(#) IN FISCAL YEAR(1) ($/SHARE)(1) DATE 5%($) 10%($) - ------------------------ ---------------------- ---------------------- --------------- ----------- --------- -------- Paul M. Burrell ...... 35,456(3) 11.2 10.38 1/1/06 231,454 586,550 Robert A. Lefcort ... -- -- -- -- -- -- Robert E. Tomlinson ... 31,908(3) 10.1 10.38 1/1/06 208,293 527,856 James E. Money ...... 28,364(3) 9.0 10.38 1/1/06 185,158 469,227 Joseph F. Bello ...... 17,728(3) 5.6 10.38 1/1/06 115,727 293,275
- ---------------- (1) Options were granted under a stock option plan initially adopted by OutSource International, Inc., an Illinois corporation ("OI"), which was merged with and into OutSource International of America, Inc., a Florida corporation and a wholly-owned subsidiary of the Company. The total options granted during the fiscal year ended December 31, 1996 and the exercise price per share have been adjusted to reflect the adoption of the OI stock option plan by the Company. See "--Stock Option Plan." (2) Amounts reflect hypothetical gains that could be achieved for the options if they are exercised at the end of the option term. Those gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the option was granted through the expiration date. (3) Options were granted on January 1, 1996 and vest and become exercisable in four equal annual installments beginning on January 1, 1997. 51 The following table provides information about the number and value of options held by the Named Executive Officers at December 31, 1996. None of the Named Executive Officers exercised any options to purchase Common Stock during the fiscal year ended December 31, 1996. FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT FY-END(#) AT FY-END($)(1) ------------------------------- ------------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------- ------------- --------------- ------------- -------------- Paul M. Burrell ......... 8,864 26,592 $9,484 $28,453 Robert A. Lefcort ......... ---- ---- ---- --- Robert E. Tomlinson ...... 7,977 23,931 $8,535 $25,606 James E. Money ............ 7,091 21,273 $7,587 $22,762 Joseph F. Bello ......... 4,432 13,296 $4,742 $14,227
- ---------------- (1) For purposes of determining the values of the options held by Named Executive Officers, the Company has assumed that Common Stock had a value of $11.45 per share on December 31, 1996, which is the estimated fair market value the Board had attributed to the Common Stock on such date. The option value is based on the difference between the fair market value of the shares on December 31, 1996 and the option exercise price per share, multiplied by the number of shares of Common Stock subject to the option. See Note 10 to the Company's Consolidated Financial Statements. EMPLOYMENT AGREEMENTS The Company entered into an employment agreement with Mr. Burrell on February 21, 1997 and intends to enter into employment agreements with each of its other current executive officers effective as of March 3, 1997. Except as described below, these agreements generally contain the same terms and provide for a base salary, which is reviewed annually and may be increased by the Board or any committee designated by the Board to review such salary. Mr. Burrell's employment agreement is for successive one year periods. The other employment agreements may be terminated by either party at any time and continue in effect until terminated by either party in accordance with the terms thereof. In the event Mr. Burrell or another executive officer resigns without "good reason" or is terminated for "cause," compensation under such employment agreement will end. In the event that the Company terminates Mr. Burrell or another executive officer without cause or such officer resigns for good reason, the terminated officer will receive, among other things, severance compensation, including a multiple of the officer's annual base salary and bonus. In addition, all options and stock appreciation rights become immediately exercisable upon termination of employment and certain other unpaid awards made previously under any of the Company's compensation plans or programs immediately vest on the date of such termination. Severance provisions also apply if an executive officer is terminated within two years (three years in the case of Mr. Burrell) after the occurrence of a "change of control." A change of control includes: (i) the acquisition by an individual, group or entity of 15% or more of the then outstanding shares of capital stock or voting securities of the Company; (ii) incumbent members of the Board and individuals whose election to the Board was approved by a vote of the incumbent directors cease to constitute a majority of the Board; (iii) a reorganization, merger or consolidation in which all holders of then outstanding shares of capital stock and voting securities immediately prior to such event do not, following such event, own 60% of the outstanding shares of capital stock or voting securities; (iv) a complete liquidation or dissolution of the Company; or (v) a sale of substantially all of the assets of the Company to an unaffiliated third party. In the event the Company terminates an executive officer for any reason within two years (three years in the case of Mr. Burrell) following the occurrence of a change in control, or during such two or three-year period an executive officer resigns for good reason, such executive officer shall be entitled to 52 receive on the date of such termination an amount equal to, among other things, a multiple of such executive officer's base salary and target bonus under the Company's bonus program as well as any other benefits to which any such employee would be entitled where termination was without cause or with good reason. In addition, the employment agreements contain confidentiality, noncompetition and nonsolicitation covenants during the period ending one year immediately following termination of an executive officer. STOCK OPTION PLAN The Stock Option Plan provides for the grant of both nonstatutory stock options and stock options intended to be treated as incentive stock options within the meaning of Section 422 of the Code. The Stock Option Plan is intended to provide incentives to, and rewards for, certain eligible employees and non-employee directors of the Company who have contributed and will continue to contribute to the success of the Company. The Stock Option Plan was initially adopted in December 1995 by the Board of Directors of OutSource International, Inc., an Illinois corporation ("OI"), which was merged with and into OutSource International of America, Inc., a Florida corporation, a wholly owned subsidiary of the Company following consummation of the Reorganization. On January 1, 1996, OI granted options to purchase 815,860 shares of OI's common stock at an exercise price of $4.77 per share, which an independent appraiser determined to be the fair market value of OI's common stock on January 1, 1996, the date of grant. Following certain forfeitures, options to purchase 709,512 shares of OI common stock were outstanding on February 18, 1997. On that date, the Company adopted the Stock Option Plan and, pursuant to the terms of the Stock Option Plan, adjusted the number of shares of Common Stock subject to outstanding options to 318,568, and the exercise price of such options to $10.38 per share. The adjustment was made based upon the ratio of the fair market value of OI common stock to the fair market value of Common Stock, as determined by an independent appraiser as of the date of grant. On March 12, 1997, the Board granted options to purchase an additional 201,339 shares of Common Stock of which an aggregate of 19,885 options were granted to Named Executive Officers. The exercise price of the options granted on March 12, 1997 was $11.42 per share based on the fair market value of Common Stock, as determined by an independent appraiser as of the date of the grant. The options vest and become exercisable in four equal annual installments commencing on March 12, 1998. On September 2, 1997 the Board granted options to purchase an additional 106,303 shares of Common Stock of which an aggregate of 2,303 options were granted to Named Executive Officers and an aggregate of 29,455 options were granted to non-employee directors. The exercise price of the options granted on September 2, 1997 will be the initial public offering price. The options vest and become exercisable in four equal annual installments commencing on September 2, 1998 except for the options granted to non-employee directors, which vest and become exercisable as of the date of the grant (See "Director Compensation"). The total number of shares of Common Stock reserved for issuance under the Stock Option Plan is 1,040,000, of which 428,208 shares (following certain forfeitures) remain available for issuance. See Note 10 to the Company's Consolidated Financial Statements. The Compensation and Stock Option Committee is authorized to administer the Stock Option Plan, including the selection of employees of the Company to whom options may be granted and the terms of each option grant. The duration of an option granted under the Stock Option Plan is ten years from the date of grant, or such shorter period as may be determined by the Compensation and Stock Option Committee at the time of grant, or as may result from the death, disability, or termination of the employment of the employee to whom the option is granted. Incentive stock options granted under the Stock Option Plan are non-transferable other than by will or by the laws of descent and distribution. The Stock Option Plan may be amended at any time by the Board, although the Board may condition any amendment on the approval of the shareholders of the Company if such approval is necessary or advisable with respect to tax, securities or other applicable laws. The Stock Option Plan terminates in 2007. 53 WARRANTS In connection with the issuance of the Senior Notes, the Company issued the Initial Warrants to the Senior Note Holders and placed the Additional Warrants in escrow, pending release to either the shareholders of the Company at the time the Initial Warrants were issued or the Senior Note Holders, based upon the achievement by the Company of certain specified performance criteria. The Initial Warrants are currently exercisable at an exercise price of $.015 per share and expire on February 20, 2002. Following the successful consummation of certain acquisitions by the Company, 180,891 Additional Warrants were released from escrow in April 1997 and distributed to the shareholders of the Company at the time the Initial Warrants were issued. The remaining 392,896 Additional Warrants will be released to those same shareholders or the Senior Note Holders no later than February 1999. The Additional Warrants are exercisable upon release from escrow at an exercise price of $.015 per share and expire on February 20, 2002. If the Company does not consummate an initial public offering in which the net proceeds received by the Company equal or exceed $25.0 million (at a minimum offering price of $13.65 per share) prior to February 20, 2001, the holders of the Warrants have a right to require the Company to repurchase the unexercised portion of the Warrants and the Warrant Shares purchased upon exercise of the Warrants at fair market value (the "Put Right"). The Company has granted the holders of the Warrants demand and piggyback registration rights with respect to the Warrant Shares. See "Shares Eligible For Future Sale." 54 CERTAIN TRANSACTIONS ACQUISITIONS Effective January 1, 1995, the Company entered into an asset purchase agreement with All Temps, Inc. ("All Temps") pursuant to which the Company acquired certain of the assets of All Temps, a former franchise of the Company, and the parties terminated their franchise agreement. The Founding Shareholders are the principal shareholders of All Temps. Under the terms of the asset purchase agreement, as amended, the Company: (i) paid $1,229,043 in cash; and (ii) delivered a promissory note in an amount equal to 2.1875% of the gross profits earned through December 31, 1999 by all present and future Tandem offices in Los Angeles and Orange Counties, California, with annual minimum payments of $40,000 and a minimum aggregate payment of $150,000. Effective June 4, 1995, the Company entered into an asset purchase agreement to acquire certain assets of WAD, Inc. ("WAD"), a former franchise of the Company, and the parties terminated their franchise agreements. Mr. Paul M. Burrell, the Company's President, Chief Executive Officer and Chairman of the Board and Mr. Robert A. Lefcort, the Company's Executive Vice President, Secretary and a Director of the Company, are the shareholders of WAD. Under the terms of the asset purchase agreement, as amended, the purchase price was set at $976,076, and the Company (i) paid $235,094 in cash and (ii) delivered a promissory note in the aggregate principal amount of $731,982, bearing interest at the rate of 10% per annum, $331,982 of which was paid on February 24, 1997 with the remaining principal and interest payable in eight quarterly installments commencing on May 1, 1997. The Company intends to use a portion of the proceeds of the Offering to repay this indebtedness. See "Use of Proceeds." Effective April 1, 1996, the Company entered into an asset purchase agreement with Payray, Inc. ("PRI"), Tri-Temps, Inc. ("TTI") (collectively, the "Morelli Sellers"), Employees Unlimited, Inc. ("EUI") and Raymond S. Morelli, pursuant to which the Company acquired substantially all of the assets of PRI and TTI. In connection with the acquisition of the assets of the Morelli Sellers, the Company acquired eight of its flexible industrial staffing franchise offices, four in Illinois and four in Wisconsin by terminating franchise agreements with TTI and EUI. Raymond S. Morelli, a shareholder of the Company and the son of Louis A. Morelli, a Founding Shareholder, is the principal shareholder of each of the Morelli Sellers and EUI. Under the terms of the asset purchase agreement, as amended, the Company: (i) paid approximately $2.3 million in cash and (ii) delivered promissory notes in the aggregate principal amount of approximately $2.6 million, payable in 48 monthly installments commencing April 1, 1997 and accruing interest at the rate of 14% per annum. The Company intends to use a portion of the proceeds of the Offering to repay this indebtedness. See "Use of Proceeds." Effective June 10, 1996, the Company entered into an asset purchase agreement, as amended, with Temp Aid, Inc. ("Temp Aid") pursuant to which the Company acquired certain of the assets of Temp Aid, a franchise, for $26,370. The principal shareholders of Temp Aid are Matthew Schubert, a shareholder of the Company and the son of Lawrence H. Schubert, a Founding Shareholder, Louis J. Morelli, the son of Louis A. Morelli, a Founding Shareholder, and John Janisch, the son-in-law of Louis A. Morelli. The purchase price with respect to each of the acquisitions described above was determined by arms-length negotiations based upon the sale price of comparable companies. Mr. Burrell made such determination for the Company with respect to the acquisitions of All Temps, PRI, TTI and Temp Aid. The Founding Shareholders made such determination with respect to WAD. WORKING CAPITAL LOANS Certain shareholders, relatives of such shareholders and executive officers have made working capital loans to the Company from time to time. This indebtedness bears interest at an annual rate of 21% and is subordinated to the repayment of the Revolving Facility and the Senior Notes. As of 55 December 31, 1994, 1995 and 1996, the Company was indebted with respect to such working capital loans: (i) in an aggregate principal amount of $170,019, $222,124, and $726,192, respectively, to Mr. Burrell and certain relatives of Mr. Burrell; (ii) in an aggregate principal amount of $0, $0, and $200,000 respectively, to Mr. Robert E. Tomlinson, the Treasurer, Chief Financial Officer and a director of the Company; (iii) in an aggregate principal amount of $200,000, $200,000 and $325,000, respectively, to Mr. Louis A. Morelli and certain of his relatives; and (iv) in an aggregate principal amount of $0, $0 and $50,000, respectively, to Mr. Robert J. Mitchell, President, Office Ours Division. The Company intends to use a portion of the proceeds from this Offering to repay $1,200,000 of this indebtedness currently outstanding. See "Use of Proceeds." REORGANIZATION In connection with the Reorganization, the Company issued promissory notes in the aggregate principal amount of $1.7 million to the following shareholders of the Company: (i) Mr. Lawrence H. Schubert, in the principal amount of $407,000; (ii) Mrs. Nadya I. Schubert, in the principal amount of $408,000; (iii) Mr. Alan E. Schubert, in the principal amount of $605,000; and (iv) Mr. Burrell, in the principal amount of $325,000. This indebtedness bears interest at an annual rate of 10% and is subordinated to the payment of the Revolving Facility and the Senior Notes. The Company intends to use a portion of the proceeds from this Offering to repay $1,685,000 of this indebtedness currently outstanding. See "Use of Proceeds." The Subsidiaries' Shareholders contributed approximately $4.3 million in outstanding promissory notes issued on December 31, 1996 to the capitalization of the Company. On February 20, 1997, certain of the Subsidiaries declared a dividend to the Subsidiaries' Shareholders of previously taxed, but undistributed S corporation earnings, in the aggregate amount of approximately $9.1 million, subject to adjustment based upon the final determination of taxable income (the "S Corporation Distribution"). Substantially all of the S Corporation Distribution was paid in cash immediately following the Reorganization. The Subsidiaries' Shareholders used a portion of the S Corporation Distribution to repay approximately $4.3 million in outstanding debt owed to the Company for promissory notes issued on December 31, 1996. Included in such indebtedness were promissory notes issued by the following officers and directors of the Company: (i) Mr. Burrell, in the principal amount of approximately $417,000 and (ii) Mr. Lefcort, in the principal amount of approximately $130,000. This indebtedness bore interest at the annual rate of 10% and was payable on demand. See "Description of Securities--Reorganization" and Note 1 to the Company's Consolidated Financial Statements. At the time of the Reorganization, the Company also decided to purchase certain real property used in its operations from certain related parties who had previously leased such property to the Company. On June 13, 1997, a Subsidiary of the Company purchased certain commercial property in Chicago, Illinois from Mr. Burrell, which had previously been leased by the Company (Mr. Burrell held title to such property as an accommodation to SMSB Associates Limited Partnership, a Florida limited partnership ("SMSB")). The limited partners of SMSB are the Founding Shareholders and Mr. Burrell. Mr. Tomlinson is the chief financial officer of SMSB. Mr. Burrell and the Founding Shareholders are also the shareholders of SMSB Incorporated, SMSB's corporate general partner. The purchase price of $430,000 was negotiated between the Company and Mr. Burrell and was less than the $460,000 independent appraisal which the Company obtained from Norbert L. Gold, Real Estate Appraiser ("Gold"). On July 31, 1997, a Subsidiary of the Company purchased certain commercial property in Waukegan, Illinois from an unrelated third party, which had previously been leased by the Company from SMSB. SMSB had an interest in the property by virtue of an installment agreement for warranty deed between SMSB and the unrelated third party, which interest was assigned to the Company as part of the July 1997 transaction. The purchase price of $310,000 ($102,968 of which was paid to SMSB) was negotiated between the Company and SMSB. Although the property was appraised at $240,000 by Gold, the Company believes that the purchase price more accurately reflects the fair value of the property to the Company. 56 On August 14, 1997, a Subsidiary of the Company purchased a residential condominium in Boca Raton, Florida from Mr. Burrell for $100,000. That condominium is used to house visiting Company employees and clients and was previously leased from Mr. Burrell. The property was independently appraised at $99,000 by Ross Realty and Appraisal. The Company is a guarantor under a first mortgage on its former national office and support center in Boca Raton, Florida, which property is currently leased from SMSB. As a result of the Company's purchase of certain assets from Labor World USA, Inc. (an inactive affiliate of the Company), the Company may also be contingently liable under a second mortgage held by an unrelated third party on such property. As of June 30, 1997, the amount of the second mortgage was approximately $0.6 million. SMSB is a co-maker of the second mortgage note and has made the monthly payments on that note since its execution. SMSB is attempting to sell the Boca Raton office building and, upon such sale, intends that the Company's obligations under these mortgages and its lease will be terminated. The assets and liabilities of SMSB, including the previously discussed mortgages, are consolidated in the Company's consolidated financial statements due to the control exercised by the Company over the assets of SMSB. See Note 1 and Note 5 to the Company's Consolidated Financial Statements. FRANCHISE ROYALTIES Certain entities owned by shareholders and executive officers of the Company have entered into franchise agreements with the Company. During 1994, the Company was paid an aggregate of $631,486 in franchise royalties from the following franchise associates pursuant to these agreements: EUI and TTI, All Temps, WAD, and LM Investors, Inc. ("LM"), an entity owned by Messrs. Matthew Schubert and Louis J. Morelli, the son of Louis A. Morelli, a Founding Shareholder. During 1995, the Company was paid an aggregate of $547,477 in franchise royalties from the following franchise associates pursuant to these agreements: EUI, TTI, WAD, LM, and Temp Aid. During 1996, the Company was paid an aggregate of $684,122 from the following franchise associates pursuant to these agreements: EUI, TTI, LM, Temp Aid and All Staff Temps, Inc. ("AST"), an entity whose principal shareholder is Raymond S. Morelli. FRANCHISE PEO SERVICES During 1994, the Company received revenues of $5,551,806 for the provision of PEO services to All Temps. During 1995 the Company received revenues of $4,466,241 for the provision of PEO services to PRI, TTI and LM. During 1996, the Company received revenues of $13,505,481 for the provision of PEO services to PRI, TTI, LM and AST. These revenues consisted of payroll, statutory employee benefits plus an administrative fee, and resulted in gross profit to the Company of approximately $53,000, $42,000 and $203,000 in 1994, 1995 and 1996, respectively. FOUNDER SALARIES Each of the Founding Shareholders received compensation during the fiscal years ended 1994, 1995, 1996 and the six months ended June 30, 1997. Mr. Alan E. Schubert received $744,506 in 1994, $616,980 in 1995, $570,721 in 1996, and $86,000 for the six months ended June 30, 1997. Mr. Louis A. Morelli received $573,374 in 1994, $689,050 in 1995, $848,011 in 1996, and $86,000 for the six months ended June 30, 1997. Mr. Lawrence H. Schubert received $597,625 in 1994, $636,499 in 1995, $532,260 in 1996, and $89,000 for the six months ended June 30, 1997. Prior to their resignations from the Board in November 1996, as the principal shareholders of the Subsidiaries, the Founding Shareholders provided day-to-day operational supervision and ultimate control over each of the Subsidiaries. Following the Reorganization, the Company discontinued payment of compensation to the Founding Shareholders. See "Description of Securities--Reorganization." Mr. Jason Schubert, a shareholder of the Company and the son of Lawrence H. Schubert, a Founding Shareholder, is employed by the Company as a field consultant, a non-management position, with an annual salary of $40,000 plus the Company's standard employee benefits. 57 LEGAL FEES Mr. Louis J. Morelli, a shareholder of the Company, received legal fees for services rendered to the Company during the years ended December 31, 1994, 1995 and 1996, and the six months ended June 30, 1997, in the approximate amounts of $131,000, $52,000, $80,000, and $97,000, respectively. In 1996, the Company advanced $4,645 in legal fees to Mr. Lefcort in connection with the transfer of Common Stock to his family trust. RENTAL PAYMENTS Mr. Raymond Morelli, a shareholder of the Company, received rental payments for three Chicago area properties leased by him to the Company during the years ended December 31, 1994, 1995, and 1996 and the six months ended June 30, 1997, in the approximate amounts of $0, $0, $27,000, and $18,000, respectively. The Company vacated two of these properties as of March and August 1997, respectively, and intends to vacate the third property in October 1997, but is obligated to pay monthly rent of approximately $3,000 until Mr. Morelli obtains new tenants or the lease expiration date of September, 2003, whichever is sooner. The Company also leases warehouse storage space from TMT Properties, Inc., a company controlled by Mr. Burrell, on a month-to-month basis for $1,468 per month. CONSULTING FEES During 1996, Mr. David S. Hershberg, a director nominee of the Company, received $37,500 in consulting fees for services rendered in connection with the Investigation. See "Business--Legal Proceedings." CLOSING FEE Triumph and Bachow received closing fees of $210,000 and $165,000, respectively, in connection with the issuance of the Senior Notes in February 1997. Mr. Richard J. Williams, a director of the Company, serves as a Managing Director of Triumph and Mr. Samuel H. Schwartz, a director of the Company, serves as a Vice President of Bachow. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 58 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth, as of the date of this Prospectus and as adjusted at that date to reflect the sale of Common Stock offered by the Company hereby, information with respect to the beneficial ownership of the Company's Common Stock by: (i) each Selling Shareholder; (ii) each person known by the Company to beneficially own more than five percent (5%) of the outstanding shares of the Company's Common Stock; (iii) each director and director nominee of the Company; (iv) the Company's Named Executive Officers; and (v) all directors and executive officers as a group. Unless otherwise indicated, each of the shareholders named in this table: (a) has sole voting and investment power with respect to all shares of Common Stock beneficially owned; and (b) has the same address as the Company. This table does not include warrants to purchase 392,896 shares, currently held in escrow, but immediately exercisable upon release from escrow. See "Management--Warrants."
BEFORE OFFERING AFTER OFFERING(1) - ------------------------------ NUMBER OF ------------------- NUMBER OF SHARES BEING NUMBER OF NAME/ADDRESS SHARES PERCENT OFFERED(1) SHARES PERCENT - ------------------------------------------------ ------------------ --------- ------------- ----------- -------- Paul M. Burrell .............................. 5,206,587(2) 95.0 700,000 4,506,587 53.2 Richard J. Williams(3) ........................ 4,683,982(4) 86.0 700,000 3,983,982 47.2 Alan E. Schubert .............................. 2,066,836(5) 37.5 233,333 1,883,503 21.5 Lawrence H. Schubert ........................ 1,111,349(6) 20.3 233,334 878,015 10.3 Nadya I. Schubert ........................... 1,111,349(7) 20.3 233,334 878,015 10.3 Louis A. Morelli .............................. 850,008(8) 15.5 233,333 616,675 7.3 Lawrence H. Schubert Revocable Trust ......... 525,799(9) 9.6 116,667 409,132 4.8 Susan Burrell ................................. 522,605(10) 9.5 -- 522,605 6.2 Nadya I. Schubert Revocable Trust ............ 493,299(11) 9.0 116,667 376,632 4.4 Triumph-Connecticut Limited Partnership(12) ... 440,449(13) 7.5 -- 440,449 5.0 Matthew B. Schubert ........................... 381,004(14) 7.0 -- 381,004 4.5 Bachow Investment Partners III, L.P.(15) ...... 346,068(16) 6.0 -- 346,048 3.9 Jason Schubert OutSource Trust ............... 323,003(17) 5.9 -- 323,003 3.8 Margaret Ann Janisch ........................ 271,448(18) 5.0 -- 271,448 3.2 Robert A. Lefcort ........................... 179,273(19) 3.3 -- 179,273 2.1 Robert E. Tomlinson ........................... 7,977(20) * -- 7,977 * James E. Money .............................. 7,091(21) * -- 7,091 * Joseph F. Bello .............................. 4,432(22) * -- 4,432 * Samuel H. Schwartz(23) ........................ -- -- -- -- -- David S. Hershberg(24) ........................ -- -- -- -- -- All directors and executive officers as a group (8 persons) ................................. 5,448,788(25) 98.2 700,000 4,703,587 55.3
- ---------------- * Less than 1% (1) Assumes that the Underwriters' over-allotment option is not exercised. (2) Represents: (i) 45,500 shares held of record by Paul M. Burrell; (ii) 45,500 shares held of record by Susan Burrell, Mr. Burrell's wife; (iii) 401,812 shares held of record by Mr. and Mrs. Burrell as tenants by the entirety; (iv) 4,683,982 shares held of record by Messrs. Burrell and Williams as Trustees under the Voting Trust; (v) the presently exercisable right to exercise a warrant to purchase 20,929 shares; and (vi) the presently exercisable right to exercise an option to purchase 8,864 shares. Does not include 98,437 shares held as of record by Scott T. Burrell as Trustee of the Paul and Susan Burrell Family Trust. See "Management--Voting Trust and Shareholders' Agreement." (3) Mr. Williams' address is Triumph Capital Group, Inc., 60 State Street, 21st Floor, Boston, Massachusetts 02109. (4) Represents 4,683,982 shares held of record by Messrs. Burrell and Williams as Trustees under the Voting Trust. See "Management--Voting Trust and Shareholders' Agreement." (5) Represents: (i) 1,431,691 shares held of record by Messrs. Burrell and Williams as Trustees for Alan E. Schubert under the Voting Trust; (ii) 312,710 shares held of record by Messrs. Burrell and Williams as Trustees for Alan E. Schubert and Matthew B. Schubert as Trustees of the Jason Schubert OutSource Trust under the Voting Trust; (iii) 282,210 shares held of record by Messrs. Burrell and Williams as Trustees for Alan E. Schubert and Jason D. Schubert as Trustees of the Matthew Schubert OutSource Trust under the Voting Trust; and (iv) presently exercisable warrants to purchase 47,140, 10,293 and 8,448 shares by Alan E. Schubert, the Jason Schubert OutSource Trust, and the Matthew Schubert OutSource Trust, respectively. (6) Represents: (i) 509,030 shares held of record by Messrs. Burrell and Williams as Trustees for Lawrence H. Schubert as Trustee of the Lawrence H. Schubert Revocable Trust under the Voting Trust; (ii) 476,530 shares held of record by Messrs. Burrell and Williams as Trustees for Nadya I. Schubert, Mr. Schubert's wife, as Trustee of the Nadya I. Schubert Revocable Trust under the Voting Trust; (iii) 32,500 shares held of record by Messrs. Burrell and Williams as Trustees for 59 Lawrence H. Schubert, Trustee of the Nadya I. Schubert GRAT-1997, under a trust agreement dated May 16, 1997; (iv) 57,852 shares held of record by Nadya I. Schubert as co-trustee of the Robert A. Lefcort Irrevocable Trust; and (v) the presently exercisable warrants to purchase 16,769, 16,769 and 1,899 shares held by the Lawrence H. Schubert Revocable Trust, the Nadya I. Schubert Revocable Trust, and the Robert A. Lefcort Irrevocable Trust, respectively. (7) Represents: (i) 476,530 shares held of record by Messrs. Burrell and Williams as Trustees for Nadya I. Schubert as Trustee of the Nadya I. Schubert Revocable Trust under the Voting Trust; (ii) 509,030 shares held of record by Messrs. Burrell and Williams as Trustees for Lawrence H. Schubert, Mrs. Schubert's husband, as Trustee of the Lawrence H. Schubert Revocable Trust under the Voting Trust; (iii) 32,500 shares held of record by Messrs. Burrell and Williams as Trustees for Lawrence H. Schubert, Trustee of the Nadya I. Schubert GRAT-1997, under a trust agreement dated May 16, 1997; (iv) 57,852 shares held of record by Nadya I. Schubert and Robert A. Lefcort as Co-Trustees of the Robert A. Lefcort Irrevocable Trust; and (v) presently exercisable warrants to purchase 16,769, 16,769 and 1,899 shares held by the Nadya I. Schubert Revocable Trust, the Lawrence H. Schubert Revocable Trust, and the Robert A. Lefcort Irrevocable Trust, respectively. (8) Represents: (i) 710,165 shares held of record by Messrs. Burrell and Williams as Trustees for Louis A. Morelli under the Voting Trust; (ii) 56,230 held of record by Messrs. Burrell and Williams as Trustees for Louis A. Morelli as Trustee of the Louis J. Morelli S-Stock Trust under the Voting Trust; (iii) 56,516 shares of record by Messrs. Burrell and Williams as Trustees for Louis A. Morelli as Trustee of the Margaret Ann Janisch S-Stock Trust under the Voting Trust; and (iv) presently exercisable warrants to purchase 23,389, 1,845 and 1,863 shares held by Louis A. Morelli, the Louis J. Morelli S-Stock Trust, and the Margaret Ann Janisch S-Stock Trust, respectively. (9) Represents 509,030 shares held of record and a presently exercisable warrant to purchase 16,769 shares. (10) Represents: (i) 45,500 shares held of record by Susan Burrell; (ii) 45,500 shares held of record by Paul M. Burrell, Mrs. Burrell's husband; (iii) 401,812 shares held of record by Mr. and Mrs. Burrell as tenants by the entirety; (iv) the presently exercisable right of Mr. Burrell to exercise a warrant to purchase 20,929 shares; and (v) the presently exercisable right of Mr. Burrell to exercise an option to purchase 8,864 shares. Does not include 98,437 shares held of record by Scott T. Burrell as Trustee of the Paul and Susan Burrell Family Trust and 4,683,982 shares held of record by Messrs. Burrell and Williams as Trustees under the Voting Trust. See "Management-Voting Trust and Shareholders' Agreement." (11) Represents 476,530 shares held of record and a presently exercisable warrant to purchase 16,769 shares. (12) The address of Triumph-Connecticut Limited Partnership is 60 State Street, 21st Floor, Boston, Massachusetts 02109. (13) Represents a presently exercisable warrant to purchase 440,449 shares. (14) Represents: (i) 56,156 shares held of record by Messrs. Burrell and Williams as Trustees for Matthew Schubert under the Voting Trust; (ii) 312,710 shares held of record by Messrs. Burrell and Williams as Trustees for Matthew Schubert and Alan E. Schubert as Trustees of the Jason Schubert OutSource Trust under the Voting Trust; and (iii) presently exercisable warrants to purchase 1,845 and 10,293 shares held by Matthew Schubert and the Jason Schubert OutSource Trust, respectively. (15) The address of Bachow Investment Partners, L.P. is 3 Bala Plaza East, 5th Floor, Bala Cynwyd, Pennsylvania 19004. (16) Represents a presently exercisable warrant to purchase 346,068 shares. (17) Represents 312,710 shares held of record and a presently exercisable warrant to purchase 10,293 shares. (18) Represents: (i) 262,801 shares held of record by Messrs. Burrell and Williams as Trustees for Margaret Ann Janisch under the Voting Trust; and (ii) a presently exercisable warrant to purchase 8,647 shares. (19) Represents: (i) 115,705 shares held of record; (ii) 57,852 shares held as co-trustee of the Robert A. Lefcort Irrevocable Trust; (iii) presently exercisable warrants to purchase 3,817 and 1,899 shares held by Mr. Lefcort and the Robert A. Lefcort Irrevocable Trust, respectively. (20) Represents a presently exercisable option to purchase 7,977 shares. (21) Represents a presently exercisable option to purchase 7,091 shares. (22) Represents a presently exercisable option to purchase 4,432 shares. (23) Mr. Schwartz' address is Bachow & Associates, 3 Bala Plaza East, 5th Floor, Bala Cynwyd, Pennsylvania 19004. (24) Mr. Hershberg's address is IBM Corporation, Old Orchard Rd, Armonk, NY 10504. (25) Represents: (i) 45,500 shares held of record by Paul M. Burrell; (ii) 45,500 shares held of record by Mrs. Burrell; (iii) 401,812 shares held of record by Mr. and Mrs. Burrell as tenants by the entirety; (iv) 4,683,982 shares held of record by Mr. Paul M. Burrell and Mr. Richard J. Williams as Trustees under the Voting Trust; (v) the presently exercisable right by Mr. Burrell to exercise a warrant to purchase 20,929 shares; (vi) the presently exercisable right by Mr. Burrell to exercise an option to purchase 8,864 shares; (vii) 115,705 shares held of record by Mr. Lefcort; (viii) 57,852 shares held by Mr. Lefcort as co-trustee of the Robert A. Lefcort Irrevocable Trust; (ix) the presently exercisable right by Mr. Lefcort to exercise warrants to purchase 3,817 and 1,899 shares held by Mr. Lefcort and the Robert A. Lefcort Irrevocable Trust, respectively; and (x) the presently exercisable right by Mr. Tomlinson, Mr. Money and Mr. Mitchell to exercise options to purchase 7,977, 7,091 and 2,659 shares, respectively. Does not include 98,437 shares held of record by Scott T. Burrell as Trustee of the Paul and Susan Burrell Family Trust. 60 DESCRIPTION OF SECURITIES The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock having a par value of $.001 per share and 10,000,000 shares of Preferred Stock having a par value of $.001 per share ("Preferred Stock"). As of the date of this Prospectus, 5,448,788 shares of Common Stock and no shares of Preferred Stock were outstanding. An additional 611,792 shares of Common Stock may be issued upon the exercise of outstanding stock options and an additional 1,360,304 shares of Common Stock upon the exercise of outstanding warrants. COMMON STOCK Each holder of Common Stock is entitled to one vote for each share held. Shareholders do not have the right to cumulate their votes in elections of directors. Accordingly, subject to the provisions of the Voting Trust and the Shareholders' Agreement, holders of a majority of the issued and outstanding Common Stock will have the right to elect all the Company's directors and otherwise control the affairs of the Company. See "Management--Voting Trust and Shareholders' Agreement." Pursuant to the terms of the Shareholders' Agreement, the Existing Shareholders and the Senior Note Holders have pre-emptive rights to purchase a pro rata portion of securities the Company may issue and sell from time to time excluding: (i) Common Stock in an underwritten public offering; (ii) securities issued in connection with a business acquisition; (iii) the Warrant Shares; and (iv) certain options to purchase Common Stock. See "Management--Voting Trust and Shareholders' Agreement." Holders of Common Stock are entitled to dividends on a pro rata basis upon declaration of dividends by the Board. Dividends are payable only out of funds legally available for the payment of dividends. The Board is not required to declare dividends, and it currently expects to retain earnings to finance the development of the Company's business. See "Dividend Policy." Upon a liquidation of the Company, holders of the Common Stock will be entitled to a pro rata distribution of the assets of the Company, after payment of all amounts owed to the Company's creditors, and subject to any preferential amount payable to holders of Preferred Stock of the Company, if any. Holders of Common Stock have no preemptive, subscription, conversion, redemption or sinking fund rights. Immediately prior to the Offering, the Company will effectuate a reverse stock split pursuant to which each then issued and outstanding share of Common Stock will be converted into approximately 0.65 shares of Common Stock. PREFERRED STOCK The Articles permit the Board to issue shares of Preferred Stock in one or more series and to fix the relative rights, preferences and limitations of each series. Among such rights, preferences and limitations are dividend rates, provisions of redemption, rights upon liquidation, conversion privileges and voting powers. Should the Board elect to exercise this authority, the rights and privileges of holders of Common Stock could be made subject to the rights and privileges of any such series of Preferred Stock. The Board currently has no plans to issue any shares of Preferred Stock. See "--Shareholder Rights Plan." The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. REORGANIZATION On February 21, 1997, the Company consummated a Reorganization involving the Subsidiaries: OutSource International of America, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., OutSource Franchising, Inc., Capital Staffing Fund, Inc., and Employees Insurance Services, Inc. and the Subsidiaries' Shareholders. Pursuant to the terms of the 61 Reorganization, the Company acquired all of the outstanding capital stock of the Subsidiaries from the Subsidiaries' Shareholders in exchange for the issuance of 5,448,788 shares of Common Stock to those shareholders, and the payment of approximately $5.7 million in cash and the issuance of promissory notes in the aggregate principal amount of approximately $1.4 million to certain of those shareholders. In connection with the Reorganization, the Subsidiaries' Shareholders contributed approximately $4.3 million in outstanding promissory notes to the capitalization of the Company. As a result of the Reorganization, the Subsidiaries became wholly-owned by the Company and the Subsidiaries' Shareholders owned Common Stock in approximately the same proportion as the capital stock of the Subsidiaries owned by them immediately prior to the Reorganization. See Note 1 to the Company's Consolidated Financial Statements. Prior to the Reorganization, each Subsidiary had been treated for federal and state income tax purposes as an S corporation under Subchapter S of the Code, and comparable provisions of state income tax laws. As a result, earnings were taxed for federal and certain state income tax purposes directly to the Subsidiaries' Shareholders. As of February 21, 1997, the Company became responsible for the payment of state and federal income taxes on earnings. On February 20, 1997, certain of the Subsidiaries declared a dividend to the Subsidiaries' Shareholders of the S Corporation Distribution. Substantially all of the S Corporation Distribution was paid in cash immediately following the Reorganization, although it is subject to adjustment based upon the final determination of taxable income. The Subsidiaries' Shareholders used a portion of the S Corporation Distribution to repay approximately $4.3 million in outstanding debt owed to the Company. For purposes of this Prospectus, references to the Company's subchapter S corporation status refers to the S corporation status of each of the Subsidiaries, and the termination of the Company's S corporation status refers to termination of the S corporation status of each of the Subsidiaries. See "Certain Transactions" and Note 1 to the Company's Consolidated Financial Statements. CERTAIN ANTI-TAKEOVER PROVISIONS INCLUDED IN THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS Prior to the consummation of the Offering, the Company will amend its Articles and Bylaws as described below. The following is qualified in its entirety by reference to the Amended Articles and the Amended Bylaws, copies of which are included as exhibits to the Registration Statement of which this Prospectus is a part. The Amended Articles and Bylaws will provide for a classified Board. The directors will be divided into three classes, as nearly equal in number as possible. The directors will be elected for three-year terms, which are staggered so that the terms of approximately one-third of the directors expire each year. The Amended Articles will permit removal of directors only for cause by the shareholders of the Company at a meeting by the affirmative vote of at least 60% of the outstanding shares entitled to vote for the election of directors (the "Voting Stock"). The Amended Articles will provide that any vacancy on the Board may be filled only by the remaining directors then in office. The Amended Articles will also contain provisions which require: (i) the affirmative vote of 60% of the Voting Stock to amend the Articles or Bylaws; and (ii) the demand of not less than 50% of all votes entitled to be cast on any issue to be considered at a proposed special meeting to call a special meeting of shareholders. The Amended Bylaws will establish an advance notice procedure for the nomination of candidates for election as directors by shareholders as well as for shareholder proposals to be considered at shareholder meetings. The above-described provisions may have certain anti-takeover effects. Such provisions, in addition to the provisions described below, may make it more difficult for persons, without the approval of the Board, to make a tender offer or acquire substantial amounts of the Common Stock or launch other takeover attempts that a shareholder might consider in such shareholder's best interests, including attempts that might result in the payment of a premium over the market price for the Common Stock held by such shareholder. CERTAIN PROVISIONS OF FLORIDA LAW The FBCA prohibits the voting of shares in a publicly-held Florida corporation that are acquired in a "control share acquisition" unless the holders of a majority of the corporation's voting shares 62 (exclusive of shares held by officers of the corporation, inside directors or the acquiring party) approve the granting of voting rights as to the shares acquired in the control share acquisition or unless the acquisition is approved by the corporation's board of directors. A "control share acquisition" is defined as an acquisition that immediately thereafter entitles the acquiring party to vote in the election of directors within each of the following ranges of voting power: (i) one-fifth or more, but less than one-third of such voting power: (ii) one-third or more, but less than a majority of such voting power; and (iii) more than a majority of such voting power. The Amended Articles authorize the Company, under certain circumstances, to redeem shares acquired in a control share acquisition. SHAREHOLDER RIGHTS PLAN Prior to the consummation of the Offering, the Company will adopt a Shareholder Protection Rights Agreement (the "Rights Agreement"). The Company anticipates that the terms of the Rights Agreement will be substantially as described herein, subject to such changes as may result from negotiations between the Company and the Rights Agent selected by the Company to administer the Rights Agreement. Pursuant to the terms of the Rights Agreement, preferred stock purchase rights (the "Rights") will be distributed, as a dividend, to holders of record of shares of Common Stock as of the date the Company enters into the Rights Agreement ("Record Date"), at a rate of one Right for each share of the Company's Common Stock held on the Record Date. Rights will also be attached to all shares of Common Stock issued on or after the Record Date. Each Right will entitle its holder to purchase from the Company, after the Separation Time (as defined below), one one-hundredth of a share of Preferred Stock, par value $0.001 per share, for a price to be determined by the Board at a later date (the "Exercise Price"), subject to adjustment. The Rights will expire on the close of business on the tenth anniversary of the Record Date unless earlier terminated by the Company. Initially, the Rights will be attached to all Common Stock certificates, and the Rights will automatically trade with shares of Common Stock. However, ten business days after a person or group announces an offer the consummation of which would result in such person or group owning 15% or more of the Common Stock (the "Acquiring Person"), or the first date of a public announcement that a person or group has acquired 15% or more of the Common Stock (the "Separation Time"), the Rights will become exercisable, and separate certificates representing the Rights will be issued. In the event that any person becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person and its affiliates and associates (which will thereafter be void), will have the right to receive, upon exercise of each Right, that number of shares of Company Stock having an aggregate Market Price (as defined in the Rights Agreement), on the date of the public announcement of a person becoming an Acquiring Person, equal to twice the Exercise Price for an amount in cash equal to the then current Exercise Price. At any time after an Acquiring Person crosses the 15% threshold and prior to the acquisition by such person of 50 percent or more of the outstanding shares of Common Stock, the Board may exchange the Rights (other than Rights owned by the Acquiring Person), in whole or in part, at an exchange ratio of one Share of Common Stock per Right. The Rights have certain anti-takeover effects. The Rights may cause substantial dilution to a person or group that attempts to acquire the Company in a manner or on terms not approved by the Board. The Rights, however, should not deter any prospective offeror willing to negotiate in good faith with the Board, nor should the Rights interfere with any merger or other business combination approved by the Board. TRANSFER AGENT AND REGISTRAR BankBoston, N.A. (Massachusetts) has been appointed the transfer agent and registrar for the Common Stock. Its address is 150 Royall Street, Canton, Massachusetts 02021. 63 SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of the Offering, the Company will have 8,448,788 shares of Common Stock outstanding. Of these shares, the 3,700,000 shares offered hereby will be freely tradeable without restriction or further registration under the Securities Act, except that shares purchased by an "affiliate" of the Company (in general, a person who has a control relationship with the Company), will be subject to the resale limitations of Rule 144 promulgated under the Securities Act. The remaining 4,748,788 shares are deemed to be "restricted securities," as that term is defined under Rule 144, in that such shares were issued and sold by the Company in private transactions not involving a public offering and, as such, may only be sold: (i) pursuant to an effective registration under the Securities Act; (ii) in compliance with the exemption provisions of Rule 144; or (iii) pursuant to another exemption under the Securities Act. These restricted shares will be eligible for sale under Rule 144 (subject to certain recurring three-month volume limitations prescribed by Rule 144 and the lock-up arrangements with the Underwriters described in the following paragraph) commencing on February 21, 1998. In general, under Rule 144 as currently in effect, subject to the satisfaction of certain other conditions, a person, including an affiliate of the Company (or persons whose shares are aggregated with an affiliate), who has owned restricted shares of Common Stock beneficially for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the total number of outstanding shares of the same class or, if Common Stock is quoted on the Nasdaq National Market, the average weekly trading volume during the four calendar weeks preceding the sale. A person who has not been an affiliate of the Company for at least three months immediately preceding the sale and who has beneficially owned shares of Common Stock for at least two years is entitled to sell such shares under Rule 144 without regard to any of the limitations described above. The Existing Shareholders, who will beneficially own (excluding options and Warrants) an aggregate of 4,748,788 shares of Common Stock upon consummation of the Offering (4,193,788 if the Underwriters' over-allotment option is exercised in full), have agreed with the Underwriters not to sell or otherwise dispose of any of those shares of Common Stock for a period of 180 days after the date of this Prospectus without the written consent of Smith Barney Inc., one of the Representatives of the Underwriters. Smith Barney Inc. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the Lock-up Agreements. The Company has reserved 1,040,000 shares of Common Stock for issuance under the Stock Option Plan. As of the date of this Prospectus, options to purchase up to 611,792 shares of Common Stock have been granted and are outstanding under the Stock Option Plan. The Company intends to file a registration statement on Form S-8 under the Securities Act to register shares of Common Stock reserved for issuance under the Stock Option Plan, thereby permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act. See "Management--Stock Option Plan." After the consummation of this Offering, the Company has agreed, upon demand, to register up to 1,360,304 Warrant Shares, subject to certain terms and conditions of a registration rights agreement. The Company has also agreed to include the Warrant Shares and shares of Common Stock owned by the Existing Shareholders in certain registration statements under the Securities Act which may be filed by the Company with respect to an offering of Common Stock for its own account or the account of any of its shareholders. See "Management--Warrants." No prediction can be made as to the effect, if any, that public sales of shares of Common Stock or the availability of such shares for sale will have on the market prices of the Common Stock prevailing from time to time. Nevertheless, the possibility that substantial amounts of Common Stock may be sold in the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company's ability in the future to raise additional capital through the sale of its equity securities. 64 UNDERWRITING Under the terms and subject to the conditions stated in the Underwriting Agreement dated the date hereof, each Underwriter named below has severally agreed to purchase, and the Company and the Selling Shareholders have agreed to sell to such Underwriter, the respective number of shares of Common Stock set forth opposite the name of such Underwriter.
NUMBER OF UNDERWRITER SHARES - ------------------------------------------------------------ ---------- Smith Barney Inc. ....................................... Robert W. Baird & Co. Incorporated ........................ Donaldson, Lufkin & Jenrette Securities Corporation ...... ---------- Total ................................................... ==========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters, for whom Smith Barney Inc., Robert W. Baird & Co. Incorporated, and Donaldson, Lufkin & Jenrette Securities Corporation are acting as Representatives (the "Representatives"), propose to offer part of the shares of Common Stock directly to the public at the public offering price set forth on the cover page hereof and part of the shares of Common Stock to certain dealers at a price which represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial public offering, the public offering price, such concessions and other selling terms may be changed by the Underwriters. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. The Selling Shareholders and certain other shareholders of the Company have granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 555,000 additional shares of Common Stock at the public offering price set forth on the cover page of this Prospectus minus the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, incurred in connection with the sale of the shares offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares set forth opposite such Underwriter's name in the preceding table bears to the total number of shares in such table. In connection with this Offering and in compliance with applicable law, the Underwriters may overallot (i.e., sell more Common Stock than the total amount shown on the list of Underwriters which appears above) and may effect transactions which stablilize, maintain or otherwise affect the market price of Common Stock at levels above those which might otherwise pervail in the open market. Such transactions may include placing bids for Common Stock or effecting purchases of Common Stock for the purpose of pegging, fixing or maintaining the price of Common Stock or for purpose of reducing a syndicate short position created in connection with the Offering. In addition, the contractual arrangements among the Underwriters include a provision whereby, if the Representatives purchase Common Stock in the open market for the account of the underwriting syndicate and Common Stock purchased can be traced to a particular Underwriter or member of the selling group, the underwriting syndicate may require the Underwriter or selling group member in question to purchase the Common Stock in question at the cost price to the syndicate or may recover from (or decline to pay to) the Underwriter or selling group member in question the selling concession applicable to the Common Stock in question. The Underwriters are not required to engage in any of these activities and any such activities, if commenced, may be discontinued at any time. In addition, a syndicate short position may be covered by exercise of the option described above in lieu of or in addition to open market purchases. 65 The Company, its officers, directors and the Existing Shareholders, who will beneficially own (excluding options and Warrants) an aggregate of 4,748,788 shares of Common Stock upon consummation of the Offering (4,193,788 if the Underwriters' over-allotment option is exercised in full) have agreed that, for a period of 180 days from the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, Common Stock. At the Company's request, the Representatives have agreed to reserve up to 185,000 shares of Common Stock for sale at the public offering price to Company employees and other persons having certain business relationships with the Company. The number of shares available for sale to the general public will be reduced to the extent these persons purchase such reserved shares. Any reserved shares not purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. Prior to the Offering, there has not been any public market for the Common Stock. Consequently, the initial public offering price for the shares of Common Stock included in this Offering has been determined by negotiations between the Company, the Selling Shareholders and the Representatives. Among the factors considered in determining such price were the history of and the prospects for the Company's business and the industry in which it competes, an assessment of the Company's management and the present state of the Company's development, the past and present revenues and earnings of the Company, the prospects for growth of the Company's revenues and earnings, the current state of the economy in the United States and the current level of economic activity in the industry in which the Company competes and in related or comparable industries, and currently prevailing conditions in the securities markets, including current market valuations of publicly traded companies which are comparable to the Company. The Company and the Selling Shareholders have agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriter may be required to make in respect thereof. INDEPENDENT PUBLIC ACCOUNTANTS On March 4, 1996, the Board approved the dismissal of McGladrey & Pullen, LLP and approved the appointment of Deloitte & Touche LLP as the Company's independent auditors. During the year ended December 31, 1994 and subsequently through the date of dismissal (i) there was no disagreement between the Company and McGladrey & Pullen, LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of McGladrey & Pullen, LLP would have caused McGladrey & Pullen, LLP to make reference to the subject matter of such disagreement in connection with their report and (ii) there were no "reportable events" as defined in Item 304(a)(1)(v) of Regulation S-K. The report of McGladrey & Pullen, LLP on the Company's consolidated financial statements for the year ended December 31, 1994 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles. EXPERTS The consolidated financial statements of OutSource International, Inc. and Subsidiaries as of December 31, 1995 and 1996 and for the years then ended included in this prospectus and the related financial statement schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. 66 The consolidated financial statements of OutSource International, Inc. and Subsidiaries for the year ended December 31, 1994 included in this prospectus and the related financial statement schedule included elsewhere in the registration statement have been audited by McGladrey & Pullen, LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The combined financial statements of Payray, Inc. and Tri-Temps, Inc. as of December 31, 1995 and for the year then ended included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of CST Services Inc., as of December 31, 1994 and 1995 and for the years then ended included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of Standby Personnel of Colorado Springs, Inc. as of December 31, 1996 and for the year then ended and of Stand-By, Inc. as of September 30, 1996 and for the year then ended, included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The financial statements of Superior Temporaries, Inc. as of December 31, 1995 and 1996 and for the years then ended included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. LEGAL MATTERS Certain legal matters with respect to the Offering will be passed upon for the Company by the law firm of Holland & Knight LLP, One East Broward Boulevard, Suite 1300, Fort Lauderdale, Florida 33301. Certain legal matters will be passed upon for the Underwriters by Steel Hector & Davis LLP, 200 South Biscayne Boulevard, Suite 4000, Miami, Florida 33131. Certain legal matters with respect to the Offering will be passed upon for the Selling Shareholders by Bell Boyd & Lloyd, Suite 3300, 70 West Madison Street, Chicago, Illinois 60607. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act, with respect to the securities offered hereby. This Prospectus, which constitutes part of the Registration Statement, does not contain all the information set forth in the Registration Statement, certain portions of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement and to the exhibits and schedules thereto. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 7 World 67 Trade Center, Suite 1300, New York, New York 10048 and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission located at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission with a Web site address of http://www.sec.gov. The Company intends to furnish its shareholders with annual reports containing financial statements audited by the Company's independent accountants and to make available quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. 68 INDEX TO FINANCIAL STATEMENTS
PAGE ----- OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES Independent Auditors' Report of McGladrey & Pullen, LLP .............................. F-3 Independent Auditors' Report of Deloitte & Touche LLP ................................. F-4 Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 ...... F-5 Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997 .................................... F-6 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997 ...................... F-7 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997 .............................. F-8 Notes to Consolidated Financial Statements .......................................... F-9 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES Unaudited Pro Forma Consolidated Financial Information (Introduction) ............... F-33 Unaudited Pro Forma Consolidated Statement of Income for the year ended December 31, 1996 ................................................... F-34 Unaudited Pro Forma Consolidated Statement of Income for the six months ended June 30, 1997 ................................................ F-35 Notes to Unaudited Pro Forma Consolidated Statements of Income ........................ F-36 PAYRAY, INC. AND TRI-TEMPS, INC. Independent Auditors' Report ......................................................... F-40 Combined Balance Sheet as of December 31, 1995 ....................................... F-41 Combined Statement of Operations and Retained Earnings for the year ended December 31, 1995 .................................................................. F-42 Combined Statement of Cash Flows for the year ended December 31, 1995 ............... F-43 Notes to the Combined Financial Statements .......................................... F-44 CST SERVICES INC. Independent Auditors' Report ......................................................... F-46 Balance Sheets as of December 31, 1994 and 1995 and March 30, 1996 .................. F-47 Statements of Income for the years ended December 31, 1994 and 1995 and the three months ended April 1, 1995 and March 30, 1996 ........................... F-48 Statements of Stockholder's Equity for the years ended December 31, 1994 and 1995 and the three months ended April 1, 1995 and March 30, 1996 ........................... F-49 Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the three months ended April 1, 1995 and March 30, 1996 ........................... F-50 Notes to Financial Statements ......................................................... F-51
F-1
PAGE ----- STANDBY PERSONNEL OF COLORADO SPRINGS, INC. Independent Auditors' Report ...................................................... F-53 Balance Sheet as of December 31, 1996 ............................................. F-54 Statement of Income for the year ended December 31, 1996 ........................... F-55 Statement of Stockholder's Equity for the year ended December 31, 1996 ............ F-56 Statement of Cash Flows for the year ended December 31, 1996 ..................... F-57 Notes to the Financial Statements ................................................ F-58 SUPERIOR TEMPORARIES, INC. Independent Auditors' Report ...................................................... F-60 Balance Sheets as of December 31, 1995 and 1996 .................................... F-61 Statements of Income for the years ended December 31, 1995 and 1996 ............... F-62 Statements of Shareholders' Equity for the years ended December 31, 1995 and 1996 F-63 Statements of Cash Flows for the years ended December 31, 1995 and 1996 ............ F-64 Notes to Financial Statements ...................................................... F-65 STAND-BY, INC. Independent Auditors' Report ...................................................... F-69 Balance Sheets as of September 30, 1996 and December 31, 1996 ..................... F-70 Statements of Income for the year ended September 30, 1996 and the three months ended December 31, 1995 and 1996 .............................. F-71 Statements of Stockholder's Equity for the year ended September 30, 1996 and the three months ended December 31, 1995 and 1996 .............................. F-72 Statements of Cash Flows for the year ended September 30, 1996 and the three months ended December 31, 1995 and 1996 .............................. F-73 Notes to Financial Statements ................................................... F-74
F-2 INDEPENDENT AUDITORS' REPORT OutSource International, Inc. and Subsidiaries: We have audited the consolidated statements of income, shareholders' equity (deficit), and cash flows of OutSource International, Inc. and Subsidiaries (the "Company") for the year ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of OutSource International, Inc. and Subsidiaries for the year ended December 31, 1994 in conformity with generally accepted accounting principles. Certified Public Accountants Fort Lauderdale, Florida March 7, 1995 (October , 1997 as to the effects of the reverse stock split discussed in Note 10) ---------------- The accompanying consolidated financial statements reflect the .65 for one reverse split of the Company's outstanding common stock which is to be effected on or about October 10, 1997. The above report is in the form which will be furnished by McGladrey & Pullen, LLP upon completion of such reverse split, which is described in Note 10 to the consolidated financial statements and assuming that from March 7, 1995 to the date of such reverse split, no other events shall have occurred that would affect the accompanying consolidated financial statements and notes thereto. MCGLADREY & PULLEN, LLP Fort Lauderdale, Florida September 23, 1997 F-3 INDEPENDENT AUDITORS' REPORT OutSource International, Inc. and Subsidiaries: We have audited the consolidated balance sheets of OutSource International, Inc. and Subsidiaries (the "Company") as of December 31, 1995 and 1996, and the related consolidated statements of income, shareholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of OutSource International, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Certified Public Accountants Fort Lauderdale, Florida April 4, 1997 (October , 1997 as to the effects of the reverse stock split discussed in Note 10) ---------------- The accompanying consolidated financial statements reflect the .65 for one reverse split of the Company's outstanding common stock which is to be effected on or about October 10, 1997. The above report is in the form which will be furnished by Deloitte & Touche LLP upon completion of such reverse split, which is described in Note 10 to the consolidated financial statements and assuming that from April 4, 1997 to the date of such reverse split, no other events shall have occurred that would affect the accompanying consolidated financial statements and notes thereto. DELOITTE & TOUCHE LLP Fort Lauderdale, Florida September 23, 1997 F-4 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30, ------------------------------- ---------------- 1995 1996 1997 -------------- -------------- ---------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash ............................................................... $ 1,511,399 $ 44,790 $ 1,178,615 Trade accounts receivable, net of allowance for doubtful accounts of $375,243, $978,250 and $1,255,611.................................... 14,934,160 26,349,648 40,667,344 Funding advances to franchises ....................................... 2,401,858 3,231,839 2,684,705 Notes receivable and other amounts due from related parties ......... 355,761 4,887,604 -- Prepaid expenses and other current assets ........................... 627,163 420,021 557,883 ------------- ------------- ------------ Total current assets ............................................. 19,830,341 34,933,902 45,088,547 PROPERTY AND EQUIPMENT, net ....................................... 4,322,177 13,127,107 15,417,271 GOODWILL AND OTHER INTANGIBLE ASSETS, net ........................... 227,521 7,454,806 31,215,644 OTHER ASSETS ......................................................... 327,590 361,333 5,032,210 ------------- ------------- ------------ Total assets ...................................................... $ 24,707,629 $ 55,877,148 $ 96,753,672 ============= ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable ................................................... $ 2,082,925 $ 2,676,093 $ 3,983,040 Accrued expenses: Payroll ............................................................ 1,979,224 4,213,723 5,275,921 Payroll taxes ...................................................... 3,405,090 2,180,130 3,136,950 Workers' compensation and insurance .............................. 1,855,499 5,463,845 7,414,659 Other ............................................................... 779,692 1,440,118 2,871,415 Income taxes payable ................................................ 732,394 Other current liabilities .......................................... 618,679 1,377,559 263,585 Line of credit ...................................................... 6,468,327 9,888,507 -- Current maturities of long-term debt .............................. 439,291 1,992,962 2,784,308 Current maturities of long-term debt to related parties ............ 661,226 8,872,497 731,797 ------------- ------------- ------------ Total current liabilities ....................................... 18,289,953 38,105,434 27,194,069 NON-CURRENT LIABILITIES: Revolving credit facility .......................................... -- -- 35,113,585 Senior notes ......................................................... -- -- 6,794,074 Put warrants liability ............................................. -- -- 19,785,948 Long-term debt to related parties, less current maturities ......... -- 2,402,661 4,944,936 Other long-term debt, less current maturities ..................... 2,815,139 10,873,828 11,367,960 ------------- ------------- ------------ Total liabilities ................................................ 21,105,092 51,381,923 105,200,572 ------------- ------------- ------------ COMMITMENTS AND CONTINGENCIES (NOTES 6,9) SHAREHOLDERS' EQUITY (DEFICIT) (NOTE 10): Preferred stock, $.001 par value; 10,000,000 shares authorized, none issued ............................................................ -- -- -- Common stock, $.001 par value; 100,000,000 shares authorized; 5,448,788 issued and outstanding at June 30, 1997 .................. 5,785 5,785 5,449 Additional paid-in capital (deficit) ................................. 95,315 95,315 (7,484,321) Retained earnings (deficit) .......................................... 3,501,437 4,394,125 (968,028) ------------- ------------- ------------ Total shareholders' equity (deficit) .............................. 3,602,537 4,495,225 (8,446,900) ------------- ------------- ------------ Total liabilities and shareholders' equity (deficit) ............... $ 24,707,629 $ 55,877,148 $ 96,753,672 ============= ============= ============
See notes to consolidated financial statements. F-5 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------- ------------------------------- 1994 1995 1996 1996 1997 -------------- --------------- --------------- -------------- ---------------- (UNAUDITED) Net revenues .................................... $80,646,707 $ 149,825,165 $ 280,171,104 $116,121,790 $193,197,372 ----------- ------------- ------------- ------------ ------------ Cost of revenues: Payroll .......................................... 58,509,787 112,241,752 214,038,992 88,591,375 145,920,461 Taxes .......................................... 5,422,367 10,010,329 19,251,276 8,063,306 13,582,711 Workers' compensation and insurance ............ 1,262,837 2,787,850 6,133,597 3,292,747 4,352,761 Other .......................................... 617,305 1,230,391 2,678,525 422,372 1,982,427 ----------- ------------- ------------- ------------ ------------ Total cost of revenues ........................ 65,812,296 126,270,322 242,102,390 100,369,800 165,838,360 ----------- ------------- ------------- ------------ ------------ Gross profit .................................... 14,834,411 23,554,843 38,068,714 15,751,990 27,359,012 ----------- ------------- ------------- ------------ ------------ Selling, general and administrative expenses: Shareholders' compensation ..................... 2,244,894 2,370,350 2,321,201 962,560 292,001 Amortization of intangible assets ............... -- 40,565 423,550 147,940 892,573 Other selling, general and administrative ...... 9,008,462 17,687,765 29,840,722 12,684,500 23,376,689 ----------- ------------- ------------- ------------ ------------ Total selling, general and administrative expenses ..................... 11,253,356 20,098,680 32,585,473 13,795,000 24,561,263 ----------- ------------- ------------- ------------ ------------ Operating income ................................. 3,581,055 3,456,163 5,483,241 1,956,990 2,797,749 ----------- ------------- ------------- ------------ ------------ Other expense (income): Interest income ................................. (25,465) (22,821) (42,396) (20,000) (75,909) Interest expense ................................. 845,626 1,281,560 2,218,245 793,820 3,588,794 Put warrants valuation adjustment ............... -- -- -- -- 1,243,952 Other expense (income) ........................... (51,580) (10,995) -- 55,290 (24,979) Other charges ................................. -- -- 1,447,555 -- -- ----------- ------------- ------------- ------------ ------------ Total other expense (income) .................. 768,581 1,247,744 3,623,404 829,110 4,731,858 ----------- ------------- ------------- ------------ ------------ Income (loss) before provision (benefit) for income taxes .................................... 2,812,474 2,208,419 1,859,837 1,127,880 (1,934,109) Provision (benefit) for income taxes ............ -- -- -- -- (793,584) ----------- ------------- ------------- ------------ ------------ Net income (loss) ................................. $ 2,812,474 $ 2,208,419 $ 1,859,837 $ 1,127,880 $ (1,140,525) =========== ============= ============= ============ ============ UNAUDITED PRO FORMA DATA: Income (loss) before provision (benefit) for income taxes .................................... $ 2,812,474 $ 2,208,419 $ 1,859,837 $ 1,127,880 $ (1,934,109) Provision (benefit) for income taxes ............ 1,059,000 859,000 757,000 459,000 (467,000) ----------- ------------- ------------- ------------ ------------ Net income (loss) ................................. 1,753,474 1,349,419 1,102,837 668,880 (1,467,109) =========== ============= ============= ============ ============ Weighted average common shares outstanding .................................... 6,050,000 6,050,000 6,050,000 6,050,000 6,690,214 =========== ============= ============= ============ ============ Earnings (loss) per share ........................ $ .29 $ .22 $ .18 $ .11 $ (.22) =========== ============= ============= ============ ============
See notes to consolidated financial statements. F-6 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
ADDITIONAL RETAINED COMMON PAID-IN EARNINGS STOCK CAPITAL (DEFICIT) (DEFICIT) TOTAL -------- ------------------- -------------- --------------- Balance, December 31, 1993 .................. $5,785 $ 95,315 $ 1,747,366 $ 1,848,466 Distributions to shareholders ............... -- -- (1,959,599) (1,959,599) Net income ................................. -- -- 2,812,474 2,812,474 ------ ------------ ------------ ------------- Balance, December 31, 1994 .................. 5,785 95,315 2,600,241 2,701,341 Distributions to shareholders ............... -- -- (1,307,223) (1,307,223) Net income ................................. -- -- 2,208,419 2,208,419 ------ ------------ ------------ ------------- Balance, December 31, 1995 .................. 5,785 95,315 3,501,437 3,602,537 Distributions to shareholders ............... -- -- (967,149) (967,149) Net income ................................. -- -- 1,859,837 1,859,837 ------ ------------ ------------ ------------- Balance, December 31, 1996 .................. 5,785 95,315 4,394,125 4,495,225 Net loss for the period from January 1, 1997 through February 21, 1997 (unaudited) ...... -- -- (172,497) (172,497) Distributions and other adjustments in connection with the Reorganization (unaudited) ................................. (336) (7,579,636) (4,221,628) (11,801,600) Net loss for the period from February 22, 1997 through June 30, 1997 (unaudited) ......... -- -- (968,028) (968,028) ------ ------------ ------------ ------------- Balance, June 30, 1997 (unaudited) ......... $5,449 $ (7,484,321) $ (968,028) $ (8,446,900) ====== ============ ============ =============
See notes to consolidated financial statements. F-7 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------------ 1994 1995 1996 --------------- --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ....................................... $ 2,812,474 $ 2,208,419 $ 1,859,837 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ........................ 445,529 765,580 1,592,166 Amortization of debt discount and issuance costs ...... -- -- -- Put warrants valuation adjustment ..................... -- -- -- Deferred income taxes ................................. -- -- -- (Gain) loss on disposal of property and equipment ....................................... (18,051) -- 23,032 Changes in assets and liabilities: (Increase) decrease in: Trade accounts receivable ........................ (2,786,750) (7,292,532) (11,353,115) Prepaid expenses and other current assets ......... (294,769) (301,784) 94,297 Other assets ....................................... 64,701 153,093 (112,674) Increase (decrease) in: Accounts payable .................................... 189,345 644,458 315,061 Accrued expenses: Payroll .......................................... 593,467 1,311,169 2,234,500 Payroll taxes .................................... 369,718 2,757,651 (1,224,960) Workers' compensation and insurance ............... (268,073) 1,628,127 3,608,345 Other ............................................. (18,188) 618,304 817,352 Income taxes payable .............................. Other current liabilities ........................... 177,315 294,644 866,088 ------------- ------------- -------------- Net cash provided by (used in) operating activities ........................... 1,266,718 2,787,129 (1,280,071) ------------- ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Funding (advances) repayments to franchises, net ...... (1,750,158) (651,700) (805,124) Property and equipment expenditures .................. (521,815) (1,283,975) (2,128,826) Expenditures for acquisitions ........................ -- (120,374) (1,949,595) Proceeds from disposal of property and equipment ...... 25,500 30,318 50,093 ------------- ------------- -------------- Net cash used in investing activities ............ (2,246,473) (2,025,731) (4,833,452) ------------- ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in excess of outstanding checks over bank balance, included in accounts payable ............ (214,517) 956,171 278,106 Net proceeds (repayments) from line of credit and revolving credit facility ........................... 2,898,904 1,641,660 3,620,180 Related party borrowings (repayments) .................. 484,017 (475,172) 576,503 Proceeds of senior notes and put warrants, net of issuance costs ....................................... -- -- -- Proceeds of long-term debt ........................... 1,749,500 510,000 1,500,000 Repayment of long-term debt ........................... (1,929,937) (647,704) (1,327,875) Payments in connection with the Reorganization ......... -- -- -- Distributions paid to shareholders ..................... (1,959,599) (1,307,223) -- ------------- ------------- -------------- Net cash provided by financing activities ......... 1,028,368 677,732 4,646,914 ------------- ------------- -------------- Net increase (decrease) in cash ........................ 48,613 1,439,130 (1,466,609) Cash, beginning of period .............................. 23,656 72,269 1,511,399 ------------- ------------- -------------- Cash, end of period .................................... $ 72,269 $ 1,511,399 $ 44,790 ============= ============= ============== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid .......................................... $ 795,567 $ 976,295 $ 1,841,624 ============= ============= ============== SIX MONTHS ENDED JUNE 30, -------------------------------- 1996 1997 --------------- ---------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ....................................... $ 1,127,880 $ (1,140,525) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ........................ 555,789 1,877,072 Amortization of debt discount and issuance costs ...... -- 430,050 Put warrants valuation adjustment ..................... -- 1,243,952 Deferred income taxes ................................. -- (1,525,978) (Gain) loss on disposal of property and equipment ....................................... -- 2,686 Changes in assets and liabilities: (Increase) decrease in: Trade accounts receivable ........................ (4,531,634) (14,317,696) Prepaid expenses and other current assets ......... (451,055) (137,862) Other assets ....................................... (306,814) (1,509,066) Increase (decrease) in: Accounts payable .................................... 700,938 333,720 Accrued expenses: Payroll .......................................... (567,289) 1,062,198 Payroll taxes .................................... (1,378,705) 956,820 Workers' compensation and insurance ............... 1,558,804 1,950,814 Other ............................................. 264,183 1,571,297 Income taxes payable .............................. -- 732,394 Other current liabilities ........................... (173,676) (1,113,974) ------------- -------------- Net cash provided by (used in) operating activities ........................... (3,201,579) (9,584,098) ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Funding (advances) repayments to franchises, net ...... (987,402) 547,134 Property and equipment expenditures .................. (879,114) (1,804,708) Expenditures for acquisitions ........................ (1,950,000) (21,385,000) Proceeds from disposal of property and equipment ...... -- -- ------------- -------------- Net cash used in investing activities ............ (3,816,516) (22,642,574) ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in excess of outstanding checks over bank balance, included in accounts payable ............ 2,675,271 973,227 Net proceeds (repayments) from line of credit and revolving credit facility ........................... 4,183,187 25,225,078 Related party borrowings (repayments) .................. (32,286) (2,455,821) Proceeds of senior notes and put warrants, net of issuance costs ....................................... -- 22,614,984 Proceeds of long-term debt ........................... -- -- Repayment of long-term debt ........................... (805,357) (2,940,371) Payments in connection with the Reorganization ......... -- (10,056,600) Distributions paid to shareholders ..................... (445,233) -- ------------- -------------- Net cash provided by financing activities ......... 5,575,582 33,360,497 ------------- -------------- Net increase (decrease) in cash ........................ (1,442,513) 1,133,825 Cash, beginning of period .............................. 1,511,399 44,790 ------------- -------------- Cash, end of period .................................... $ 68,896 $ 1,178,615 ============= ============== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid .......................................... $ 868,769 $ 1,973,998 ============= ==============
See notes to consolidated financial statements. F-8 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business: OutSource International, Inc. and Subsidiaries (the "Company") provide emerging businesses with a single source of customized, flexible human resource solutions principally through its professional employer organization ("PEO") services under the tradename of Synadyne and its flexible industrial staffing services under the tradenames of Labor World and Tandem. The Company provides these services through company-owned and franchise locations. PEO services include payroll administration, workers' compensation insurance, health, life and disability insurance, retirement plans, and human resource compliance, administration and management. Flexible industrial staffing services include certain PEO services, as well as recruiting, training and workforce re-deployment services. REORGANIZATION: On February 21, 1997, a Reorganization was consummated in which nine companies under common ownership and management became wholly-owned subsidiaries of OutSource International, Inc. (the "Reorganization"). OutSource International, Inc. was incorporated in April 1996 for the purpose of becoming the parent holding company, but was inactive with no assets, liabilities or operations prior to the Reorganization. The nine companies which became subsidiaries of OutSource International, Inc. are OutSource International of America, Inc., OutSource Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance Services, Inc. and Capital Staffing Fund, Inc. (the "Subsidiaries"). Except for Capital Staffing Fund, Inc., the outstanding common stock of each of the Subsidiaries was owned prior to the Reorganization by the same shareholders with identical ownership percentages. The shareholders and their ownership percentages were: (a) a control group consisting of two brothers, who were founders, their immediate families and four family trusts (the "S Group")--58.2%; (b) a control group consisting of an individual, who was a founder, his immediate family and two family trusts (the "M Group")--29.1%; (c) the chief executive officer of the Subsidiaries (the "CEO")--9.7%; and (d) the executive vice president of the Subsidiaries and a family trust (the "EVP")--3.0%. The shareholders and their ownership percentages of Capital Staffing Fund, Inc. prior to the Reorganization were: S Group--48.5%; M Group--24.25 %; CEO--24.25% and EVP--3.0%. In 1974, the three founders began the flexible industrial staffing services business which became the operations of the Subsidiaries, and these operations expanded to also include franchising of flexible industrial staffing services, PEO services, and funding services to certain franchises. The operations of the Subsidiaries historically have been integrated to provide a single source of human resource services for customers under the direction of a single executive management group and with a centralized administrative and business support center. The Reorganization consisted of (a) the distribution by the Subsidiaries, which were S corporations, of previously undistributed accumulated taxable earnings to all shareholders, in proportion to their ownership interests, a portion of which was used to repay $4,300,000 in notes receivable of OutSource Franchising, Inc. from its shareholders, in proportion to their ownership interests; (b) the contribution to paid-in capital of Synadyne II, Inc. and Synadyne III, Inc. of $4,300,000 in notes payable by such Subsidiaries to their shareholders, in proportion to their ownership interests; F-9 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) and (c) the exchange by all of the shareholders of all of their shares of common stock in the Subsidiaries for shares of common stock in OutSource International, Inc., except that the founders in the S Group and M Group received cash and notes for a portion of their common stock, aggregating 5.8% of the total ownership interests in the Subsidiaries (the equivalent of 336,430 shares of common stock of OutSource International, Inc.). The following is a summary of the cash paid, notes issued, repayment of notes receivable, contribution to additional paid-in capital, and common stock of OutSource International, Inc. issued in the Reorganization:
ISSUANCE OF COMMON STOCK ----------------------- REPAYMENT OF CASH NOTES NOTES RECEIVABLE TOTAL SHARES PERCENTAGE ------------- ------------ ------------------ ------------- ----------- ----------- S Group ...... $ 5,840,800 $1,420,000 $2,502,000 $ 9,762,800 3,131,667 57.5% M Group ...... 3,849,900 -- 1,251,000 5,100,900 1,552,315 28.5% CEO ......... 225,760 325,000 417,000 967,760 591,249 10.8% EVP ......... 140,140 -- 130,000 270,140 173,557 3.2% ------------ ----------- ----------- ------------ ---------- ------ $10,056,600 $1,745,000 $4,300,000 16,101,600 5,448,788 100.0% ============ =========== =========== ========== ======
Less contribution to additional paid-in capital of notes payable of Synadyne II, Inc. and Synadyne III, Inc. . (4,300,000) ------------ Net charge to shareholders' equity .................. $ 11,801,600 ============
All shareholders of the Subsidiaries owned virtually the same proportion of the common stock of OutSource International, Inc. after the Reorganization as they owned of the Subsidiaries prior to the Reorganization. Additionally, all of the Subsidiaries were historically an integrated operation under the direction of a single executive management group and with a centralized administrative and business support center, which continued after the Reorganization. Accordingly, the Reorganization was accounted for as a combination of companies at historical cost. The effects of the Reorganization on common stock have been reflected retroactively in the financial statements of prior years. In addition, the results of operations and cash flows of Labor World USA, Inc. for the year ended December 31, 1994 have been included in these financial statements. This company, now inactive, was owned by the same shareholders with identical ownership percentages as OutSource International of America, Inc., one of the Subsidiaries, which succeeded to its operations as of January 1, 1995. Subsequent to the Reorganization, all compensation for the three founders (principal shareholders) was discontinued, and the Subsidiaries terminated their elections to be treated as S corporations. The distribution by the Subsidiaries to all shareholders at the time of the Reorganization is subject to adjustment based upon the final determination of taxable income through February 21, 1997. A summary of the Company's significant accounting policies follows: BASIS OF PRESENTATION: The accompanying consolidated financial statements present the financial position, results of operations and cash flows of OutSource International, Inc. and the Subsidiaries, as well as SMSB Associates ("SMSB"), a Florida limited partnership comprised of the Company's three F-10 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) principal shareholders and the CEO. SMSB, a special purpose entity which leases certain properties to the Company, is consolidated in these financial statements, based on the criteria for a non-substantive lessor in Emerging Issues Task Force No. 90-15, due to the control exercised by the Company over the assets of SMSB. All significant intercompany balances and transactions are eliminated in consolidation. UNAUDITED INTERIM FINANCIAL STATEMENTS: The interim consolidated financial statements and the related information in these notes as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 are unaudited. Such interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (including normal accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. PERVASIVENESS OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION: All flexible staffing and PEO revenues are based upon the gross payroll of the Company's flexible staffing and PEO employees plus a corresponding fee. The Company's fee structure is based upon the estimated costs of employment related taxes, health benefits, workers' compensation benefits, insurance and other services offered by the Company plus a negotiated mark-up. All flexible staffing and PEO customers are invoiced on a weekly to monthly billing cycle. The flexible staffing and PEO revenues are recognized as the related service is performed, net of provisions for credits and allowances. Initial franchise fees are generally recognized when substantially all services or conditions relating to the sale have been performed or satisfied by the Company. Costs relating to such fees are charged to selling, general and administrative expenses when incurred. When the fees are collected over an extended period of time and no reasonable basis for estimating collections exists, the fees are recognized as income when received through the use of the installment method. Royalties, which are based on gross sales and gross profit of the related franchisees, are recognized as revenue when earned and become receivable from the franchisees. FUNDING ADVANCES: The Company makes advances on behalf of certain of its franchises to fund the payroll and other related costs for industrial personnel provided by those franchises to their clients. The advances are secured by the franchises' accounts receivable from these clients. The Company invoices the clients and receives payment directly from the clients as part of this arrangement. These payments are applied to reimburse outstanding advances, and to pay franchise royalties and the fee charged for these funding and billing services, with any remaining amounts remitted to the franchise. The funding fee is charged and recognized as revenue by the Company as the weekly invoices are produced. PROPERTY AND EQUIPMENT: Property and equipment is stated at cost and depreciated or amortized on an accelerated and straight-line bases over the estimated useful service lives of the respective assets. F-11 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Leasehold improvements are stated at cost and amortized over the shorter of the term of the lease or estimated useful life of the improvement. Amortization of property under capital leases, leasehold improvements and computer software is included in depreciation expense. The estimated useful lives of buildings range from 15 to 32 years, while the estimated useful lives of other items range from 5 to 7 years. LONG-LIVED ASSETS: Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 121 requires that impairments, measured using fair value, are recognized whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable and the future undiscounted cash flows attributed to the assets are less than their carrying values. Adoption of this statement did not have a material effect on the Company's consolidated financial statements. INTANGIBLE ASSETS: Identifiable intangible assets include customer lists, employee lists and covenants not to compete acquired in connection with acquisitions. Such assets are recorded at fair value on the date of acquisition as determined by management with assistance by an independent valuation consultant and are being amortized over the estimated periods to be benefitted, ranging from 1 to 15 years. Goodwill relates to the excess of cost over the fair value of net assets of the businesses acquired. Amortization is calculated on a straight-line basis over periods ranging from 15 to 40 years. The overall business strategy of the Company includes the acquisition and integration of independent and franchise flexible staffing and PEO operations. The Company believes that this strategy creates synergies, achieves operating efficiencies and allows the Company to be more competitive in its pricing, all of which will provide benefits for the foreseeable future. Management assesses on an ongoing basis if there has been an impairment in the carrying value of its intangible assets. If the undiscounted future cash flows over the remaining amortization period of the respective intangible asset indicates that the value assigned to the intangible asset may not be recoverable, the carrying value of the respective intangible asset will be reduced. The amount of any such impairment would be determined by comparing anticipated discounted future cash flows from acquired businesses with the carrying value of the related assets. In performing this analysis, management considers such factors as current results, trends and future prospects, in addition to other relevant factors. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash, receivables, funding advances to franchises, accounts payable, accrued expenses, except workers' compensation and insurance, other current liabilities and other amounts due from and to related parties: The carrying amounts approximate fair value because of the short maturity of those instruments. Although the accrued workers' compensation and insurance liability is anticipated to be F-12 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) paid over a number of years, due to the lack of a defined payment schedule and the estimates inherent in establishing the recorded liability amount, management believes that it is not practical to estimate the fair value of this financial instrument. Notes receivable, line of credit, revolving credit facility, long-term debt and senior notes: The carrying amounts approximate the fair value at December 31, 1995 and 1996 and June 30, 1997, because the interest rates on these instruments, including amortization of debt discount, approximate interest rates currently available for similar borrowings. Put warrants liability: The carrying amounts are recorded at fair value as of June 30, 1997. See Note 5. INCOME TAXES: Effective February 21, 1997, the Subsidiaries terminated their elections to be treated as S corporations under applicable provisions of the Internal Revenue Code. Prior to the date such election was terminated, items of income, loss, credits, and deductions were not taxed within the Company but were reported on the income tax returns of the Company's shareholders. Accordingly, no provision for income taxes was recorded. Since the Reorganization, the Company provides for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for the differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense equals the taxes payable or refundable for the period plus or minus the change in the period of deferred tax assets and liabilities. WORKERS' COMPENSATION: Effective January 1, 1997, the Company's workers' compensation insurance coverage provides for a $250,000 deductible per accident or industrial illness with an aggregate maximum dollar limit based on 2.2% of covered payroll. For claims related to periods prior to 1997, there was no aggregate maximum dollar limit on the Company's liability for deductible payments. From May 1, 1995 through December 31, 1996, in exchange for a lower excess insurance premium rate, the Company accepted the responsibility for certain losses exceeding the $250,000 policy deductible per accident or industrial illness on a dollar-for-dollar basis, but only to the extent such losses cumulatively exceed 85% of the excess insurance premiums (excluding the profit and administration component) and subject to a maximum additional premium (approximately $750,000 in 1995 and $1,200,000 in 1996). The Company employs an independent third-party administrator to assist management in establishing an appropriate accrual for the uninsured portion of workers' compensation claims, including claims incurred but not reported, based on prior experience and other relevant data. However, the Company is only required to pay such claims as they actually arise, which may be over a period extending up to 5 years after the related incident occurred. AMORTIZATION OF DEBT DISCOUNT AND ISSUANCE COSTS: The Company records debt discount as a contra-liability and debt issuance costs as a non-current asset. Both are amortized to interest expense using the interest method. F-13 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) STOCK BASED COMPENSATION: Effective January 1, 1996, the Company adopted SFAS 123, "Stock Based Compensation". This statement requires the Company to choose between two different methods of accounting for stock options. The statement defines a fair-value-based method of accounting for stock options but allows an entity to continue to measure compensation cost for stock options using the accounting prescribed by APB Opinion 25 (APB 25) "Accounting for Stock Issued to Employees". The Company has elected to continue using the accounting methods prescribed by APB 25 and to provide the pro forma disclosures required by SFAS 123. ADVERTISING: The Company expenses advertising and promotional expenditures as incurred. Total advertising and promotional expenses were approximately $353,000, $651,000 and $726,000 for the years ended December 31, 1994, 1995 and 1996, respectively. NEW ACCOUNTING PRONOUNCEMENTS: In February 1997, SFAS No. 128, "Earnings Per Share," was issued. SFAS No. 128, which supersedes Accounting Principles Board ("APB") Opinion No. 15, requires a dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is computed by dividing income or loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted earnings per share is computed similarly to fully diluted earnings per share under APB Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. Had SFAS No. 128 been adopted for the year ended December 31, 1996 and the six months ended June 30, 1996 and 1997, pro forma basic earnings (loss) per share would have been $0.19, $0.12 and $(0.28), respectively, and pro forma diluted earnings (loss) per share would have been $0.19, $0.11 and $(0.22), respectively. In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 requires that a company (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company has not determined the effects, if any, that SFAS No. 130 will have on its consolidated financial statements. In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued. SFAS No. 131 establishes standards for the way that public companies report selected information about operating segments in annual financial statements and requires that those companies report selected information about segments in interim financial reports issued to F-14 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131, which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers, requires that a public company report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS No. 131 requires that a public company report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. However, SFAS No. 131 does not require the reporting of information that is not prepared for internal use if reporting it would be impracticable. SFAS No. 131 also requires that a public company report descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used in the enterprise's general-purpose financial statements, and changes in the measurement of segment amounts from period to period. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. The Company has not determined the effects, if any, that SFAS No. 131 will have on the disclosures in its consolidated financial statements. RECLASSIFICATIONS: Certain reclassifications have been made in amounts for prior periods to conform to current period presentation. NOTE 2. ACQUISITIONS Goodwill and other intangible assets consist of the following:
AS OF DECEMBER 31, AS OF JUNE 30, ------------------------- --------------- WEIGHTED AVERAGE 1995 1996 1997 AMORTIZATION PERIODS ---------- ------------ --------------- --------------------- Goodwill ........................... $268,086 $7,072,872 $26,500,834 32.7 years Customer lists ..................... -- 658,015 4,672,178 5.5 years Covenants not to compete ............ -- 110,644 1,202,841 9.4 years Employee lists ..................... -- 77,390 196,479 .2 year --------- ----------- ------------ Goodwill and other intangible assets ........................... 268,086 7,918,921 32,572,332 27.7 years Less accumulated amortization ...... 40,565 464,115 1,356,688 --------- ----------- ------------ Goodwill and other intangible assets, net ........................ $227,521 $7,454,806 $31,215,644 ========= =========== ============
The costs of each acquisition have been allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition as determined by management with the assistance of an independent valuation consultant. As of June 30, 1997 the costs of the acquisitions in 1997 and as of December 31, 1996, the costs of the acquisitions in 1996 have been allocated on a preliminary basis F-15 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 2. ACQUISITIONS--(CONTINUED) while the Company obtains final information regarding the fair value of assets acquired and liabilities assumed. Although the allocation and amortization periods are subject to adjustment, the Company does not expect that such adjustments will have a material effect on the consolidated financial statements. Effective January 1, 1995, the Company purchased the franchise rights for two flexible staffing locations from All Temps, Inc. and converted these locations to Company-owned locations. The terms of the purchase, as set forth in an asset purchase agreement, required the Company to pay a purchase price based on a percentage of gross profits for 5 years. Three of the four shareholders of the franchise are shareholders with a cumulative controlling interest in the Company. The acquisition was accounted for as a business combination of entities under common control and the purchase of the remaining minority interest in the franchise. No material tangible assets were acquired. Effective October 1, 1996 the purchase price was renegotiated and the remaining portion of the five year earnout due to the Company's shareholders was settled in exchange for a promissory note of $799,000 bearing interest at 10% per annum, due on demand. This note, including accrued interest, was paid on February 24, 1997. The remaining portion of the five year earnout, due to the minority interest, will continue to be paid as originally agreed. However, as part of the purchase price renegotiation, the Company agreed that the remaining payments to the minority interest would be no less than $40,000 per year from 1997 through 1999 and no less than $150,000 on a cumulative basis for that three year period. During 1995 and 1996, $250,907 and $1,128,136, respectively, of the purchase price was accrued, with $219,543 and $967,151 payable to the Company shareholders in 1995 and 1996, respectively, recorded as a distribution and the remainder as goodwill. Effective June 4, 1995, the Company purchased the franchise rights for one flexible staffing location from WAD, Inc. and converted this location to a Company-owned location. The terms of the purchase, as set forth in an asset purchase agreement, require the Company to pay a purchase price based on a percentage of gross profits for five years. Both shareholders of the franchise are shareholders and officers of the Company but do not hold a controlling interest. Effective October 1, 1996 the purchase price was renegotiated and the remaining portion of the five year earnout was settled in exchange for a promissory note of $731,982 bearing interest at 10% per annum, with the portion in excess of $400,000 due on demand. The demand portion of $331,982 plus accrued interest was paid on February 24, 1997 and the remaining balance of $400,000 is payable in equal quarterly installments of principal and interest over the next two years. During 1995 and 1996, $79,693 and $887,383, respectively, of the purchase price was accrued. During 1995, the Company purchased the franchise rights for two flexible staffing locations from Komco Inc. and Demark, Inc. and converted them to Company-owned locations. The terms of the purchases, as set forth in asset purchase agreements, required the Company to pay $178,292 plus a percentage of revenues for a period ranging up to two years. The total purchase price recorded as of December 31, 1996 was $227,926. Effective April 1, 1996, the Company purchased the franchise rights for eight flexible staffing locations from Payray, Inc. and Tri-Temps, Inc. and converted these locations to Company-owned locations. Some shareholders of the franchises are shareholders of the Company but do not hold a F-16 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 2. ACQUISITIONS--(CONTINUED) controlling interest in the Company. The terms of the purchase, as set forth in an asset purchase agreement, required the Company to pay $4,922,745 with $750,000 due at closing and a note for the remainder to be paid in 60 monthly installments plus 10% per annum interest through July 1, 1996 and 14% per annum interest thereafter. On February 21, 1997, these payment terms were renegotiated. The renegotiated terms called for a payment of $1,250,000 against the outstanding balance and a note for the remainder of $2,573,703 to be paid in 48 equal monthly installments including interest of 14% per annum, commencing April 1, 1997. This obligation is fully payable at the time of an initial public offering. Effective May 4, 1996, the Company purchased certain assets and the business of CST Services Inc., a flexible staffing operation not previously affiliated with the Company. The terms of the purchase, as set forth in an asset purchase agreement, required the Company to pay up to $1,780,000 with $1,200,000 due at closing, a $200,000 note to be paid in two annual installments plus interest at 7% per annum and annual contingent payments, not to exceed an aggregate of $380,000, based upon income before taxes of the acquired operation for the two years following the acquisition. The total purchase price recorded was $1,400,000 and $1,592,000 as of December 31, 1996 and June 30, 1997, respectively. During 1996, the Company purchased the franchise rights for four flexible staffing locations from Temp Aid, Inc., LL Corps, Inc. and Kesi, Inc. and converted them to Company-owned locations. The terms of the purchases, as set forth in asset purchase agreements, required the Company to pay $250,912 plus a percentage of revenues for a period ranging up to two years. The total purchase price recorded as of December 31, 1996 was $260,734. Effective February 14, 1997, the Company purchased the franchise rights for two flexible staffing locations from LaPorte, Inc. and converted these locations to Company-owned locations. The purchase price was $1,300,000, with $650,000 paid at closing and issuance of two notes for $400,000 and $250,000. The first note plus accrued interest at 10% per annum is due in June 1997 and the second note bearing interest at 7% per annum is payable in 18 monthly installments ending August 1998. Effective February 21, 1997, the Company purchased a flexible staffing operation with one location from Apex, Inc. (not previously affiliated with the Company) for $1,000,000 which was paid at closing. The seller also received options to purchase 4,876 shares of the Company's common stock at their fair market value at the date of issuance. Such options were issued March 12, 1997. Effective February 24, 1997, the Company purchased a flexible staffing operation with four locations from Standby Personnel of Colorado Springs, Inc. (not previously affiliated with the Company) for $3,100,000, with $2,250,000 paid at closing and issuance of a $850,000 note to be paid in two installments in March 1998 and March 1999 with interest at 4% per annum (imputed at 12% for financial statement purposes). These installments may each increase or decrease by an amount not to exceed $250,000, based on the gross margin from the acquired locations for the two years following the acquisition. Effective February 24, 1997, the Company purchased a flexible staffing operation from Staff Net, Inc. (not previously affiliated with the Company) for $320,000, with $160,000 paid at closing and F-17 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 2. ACQUISITIONS--(CONTINUED) issuance of a $160,000 note having no stated interest rate (imputed at 12% for financial statement purposes), to be paid in four quarterly installments maturing March 1998. Effective March 3, 1997, the Company purchased the franchise rights for ten flexible staffing locations from Superior Temporaries, Inc. and converted these locations to Company-owned locations. The purchase price was $9,000,000 paid at closing. Effective March 3, 1997, the Company purchased a flexible staffing operation with six locations from Staff Management, Inc. (not previously affiliated with the Company) for $4,150,000, with $2,500,000 paid at closing and issuance of a $1,650,000 note bearing interest at 4% per annum (imputed at 12% for financial statement purposes), to be paid in two installments: $925,000 plus interest in March 1998 and $725,000 plus interest in March 1999. The seller also received options to purchase 3,250 shares of the Company's common stock at their fair market value at the date of issuance. Such options were issued on March 12, 1997. Effective March 31, 1997, the Company purchased a flexible staffing operation with six locations from Stand-By, Inc. (not previously affiliated with the Company) for $5,500,000, with $5,000,000 paid at closing and issuance of a $500,000 note having no stated interest rate (imputed at 12% for financial statement purposes), to be paid in two equal installments in April 1998 and April 1999. These installment payments may each increase by an amount not to exceed $30,000 or decrease by an amount not to exceed $250,000, based on the gross margin from the acquired locations for the two years following the acquisition. Effective June 30, 1997, the Company purchased the franchise rights for one flexible staffing location from Labor World of Minneapolis, Inc., and converted this location to a Company-owned location. The purchase price was $825,000 paid at closing. The above acquisitions, except All Temps, Inc., have been accounted for as purchases. The results of operations of the acquired businesses are included in the Company's consolidated statements of income from the effective date of acquisition. The additional payments based on future revenues, gross margin or income before income taxes of certain acquired businesses are not contingent on continuing employment of the sellers. Such additional amounts, if paid, will be recorded as additional purchase price. F-18 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 2. ACQUISITIONS--(CONTINUED) The following unaudited pro forma results of operations have been prepared assuming the acquisitions described above had occurred as of the beginning of the periods presented, including adjustments to the historical financial statements for additional amortization of intangible assets, increased interest on borrowings to finance the acquisitions and discontinuance of certain compensation previously paid by the acquired businesses to their shareholders. The unaudited pro forma operating results are not necessarily indicative of operating results that would have occurred had these acquisitions been consummated as of the beginning of the periods presented, or of future operating results.
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------------- ----------------- 1995 1996 1997 -------------- -------------- ----------------- UNAUDITED PRO FORMA: Net revenues .............................. $211,941,170 $346,746,982 $204,459,860 Operating income ........................ 4,777,322 8,375,220 2,904,827 Income before provision (benefit) for income taxes .................................... (1,146,058) 855,374 (3,189,872) Net income (loss) ........................ (1,146,058) 855,374 (2,396,287)
The following unaudited pro forma, as adjusted, information has been prepared on the same basis as the preceding data and also reflects the pro forma adjustment for income taxes and weighted average shares outstanding as discussed in Note 13 except that the number of shares attributable to outstanding options and warrants has been increased by 568,883 shares for the year ended December 31, 1996 and 164,158 shares for the six months ended June 30, 1997, in order to reflect an adjustment in the calculation of proceeds from the exercise of warrants associated with the portion of the Senior Notes utilized to finance the above acquisitions:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, -------------- ----------------- 1996 1997 -------------- ----------------- UNAUDITED PRO FORMA, AS ADJUSTED: Income before provision (benefit) for income taxes ...... 855,374 (3,189,872) Pro forma provision (benefit) for income taxes ......... 377,899 (812,913) ----------- ------------ Pro forma net income .................................... $ 477,475 $ (2,376,959) =========== ============ Weighted average common shares outstanding ............... 6,618,883 6,854,372 =========== ============ Earnings per share .................................... $ .07 $ (.35) =========== ============
F-19 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
AS OF DECEMBER 31, AS OF JUNE 30, ----------------------------- --------------- 1995 1996 1997 ------------- ------------- --------------- Buildings and land ................................. $ 3,093,700 $ 6,459,439 $ 6,369,756 Furniture, fixtures and equipment .................. 2,025,117 4,108,625 5,893,254 Computer software .................................... 708,814 2,321,094 3,339,108 Leasehold improvements .............................. 471,940 1,031,106 1,450,012 Vehicles ............................................. 167,234 132,703 321,876 Assets held for disposal ........................... -- 2,090,000 1,950,000 ------------ ------------ ------------ Property and equipment .............................. 6,466,805 16,142,967 19,324,006 Less accumulated depreciation and amortization ...... 2,144,628 3,015,860 3,906,735 ------------ ------------ ------------ Property and equipment, net ........................ $ 4,322,177 $13,127,107 $15,417,271 ============ ============ ============
Depreciation and amortization expense for property and equipment for the years ended December 31, 1994, 1995 and 1996 amounted to $418,529, $725,016 and $1,093,546, respectively, and $416,926 and $984,499 for the six months ended June 30, 1996 and 1997, respectively. Building and land owned by SMSB and formerly utilized by the Company as its national office and support center have been held for disposal since December 1996. The Company has determined that the fair market value of these assets, less disposal costs, exceeds their current net carrying value which was $1,950,000, after an impairment loss of $140,000 that was recognized by SMSB in the six months ended June 30, 1997. NOTE 4. INCOME TAXES The net deferred tax asset as of June 30, 1997 includes deferred tax assets and liabilities attributable to the following items, including amounts recorded as a result of the February 21, 1997 termination of the elections by the Subsidiaries to be treated as S corporations:
JUNE 30, 1997 -------------- Workers' compensation accrual ........................ $ 2,309,782 Allowance for doubtful accounts ........................ 360,413 Debt discount related to warrants ..................... 135,201 Change from cash to accrual tax basis .................. (1,306,173) Other ................................................ 26,755 ------------ Net deferred tax asset, included in other assets ...... $ 1,525,978 ============
F-20 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 4. INCOME TAXES--(CONTINUED) The components of the income tax benefit for the six months ended June 30, 1997 are as follows: Federal--Current ......... $ 625,347 State--Current ............ 107,047 Federal-Deferred ......... (1,302,941) State-Deferred ............ (223,037) ------------ Income tax benefit ...... $ (793,584) ============
The Company's effective tax rate for the six months ended June 30, 1997 differed from the statutory federal rate of 35% as follows:
AMOUNT RATE -------------- ------------ Statutory rate applied to loss before income taxes ...... $ (676,938) (35.0)% Increase (decrease) in income taxes resulting from: Effect of termination of S corporation status ......... (385,693) (19.9) Loss prior to termination of S corporation status ...... 58,652 3.0 Put warrants valuation adjustment ..................... 300,785 15.6 Other ................................................... (90,390) (4.7) ---------- --------- Total ................................................ $ (793,584) (41.0)% ========== =========
NOTE 5. DEBT Bank financing: On February 21, 1997, following the Reorganization, the Company entered into a revolving credit facility ("Revolving Credit Facility"). The Revolving Credit Facility is for a term of four years and expires on February 20, 2001. The maximum amount available for borrowing is $50,000,000 which includes a letter of credit facility of $10,000,000. The interest rate on the Revolving Credit Facility is based upon: 1) the bank's prime rate (8.5% at June 30, 1997) plus a margin of up to 1.75% according to the Company's consolidated debt to earnings ratio (as defined by the terms of the Revolving Credit Facility) or 2) the Eurodollar base rate (5.6875% at June 30, 1997) plus a margin from 1.25% to 3.25% according to the Company's consolidated debt to earnings ratio. The effective interest rate at June 30, 1997 was 8.8%. Revolving Credit Facility borrowings are collateralized by all tangible and intangible assets of the Company and are governed by certain covenants, which include an interest coverage ratio, a cash flow coverage ratio, an indebtedness to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio and the current ratio. Prior to February 21, 1997, the Company had a line of credit facility ("Line of Credit") dated July 20, 1995 with two commercial lending institutions which was amended on November 21, 1995, May 8, 1996 and June 28, 1996. The Line of Credit, which included a letter of credit facility ("Letter of Credit"), was for a term of three years with an expiration date of June 30, 1998. The maximum amount available for Line of Credit borrowings and Letter of Credit issuances was $14,900,000. These Line of Credit borrowings and Letter of Credit issuances were permitted based upon certain formulas outlined in the Line of Credit Agreement and were collateralized by the accounts receivable of the Company F-21 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 5. DEBT--(CONTINUED) and the personal guarantees of the Company's principal shareholders. At December 31, 1996 the Line of Credit borrowing interest rate was at prime plus 2% (10.25% per annum) and the Letter of Credit fee was 1% per annum. The Company secures its liability for the deductible portion of its workers' compensation coverage by the issuance of Letters of Credit to its insurance carriers which amounted to $4,651,000 at December 31, 1996 and $5,740,000 at June 30, 1997. Prior to July 20, 1995, the Company had a line of credit agreement with terms requiring the shareholders' personal guarantees, allowing for borrowings up to $5,300,000 limited by eligible receivables and collateralized by substantially all of the assets of the Subsidiaries. These borrowings incurred interest at prime plus 2% per annum. SENIOR NOTES: On February 21, 1997, following the Reorganization, the Company entered into senior subordinated agreements ("Senior Notes") with two investors (the "Investors") for borrowings totaling $25,000,000, with payments of $10,000,000 in March 2001 and $15,000,000 in February 2002. The Senior Notes require quarterly interest payments at 11% per annum through February 1999 and 12.5% thereafter. The Senior Notes are subordinated to the Revolving Credit Facility and are governed by certain covenants which include an indebtedness to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio. The Company also issued to the Investors warrants to purchase 786,517 shares of common stock at $.015 per share to be exercised at the discretion of the Investors and expiring five years from issuance (the "A warrants"). In connection with the Senior Notes, warrants to purchase 573,787 shares of the Company's common stock at $.015 per share were issued by the Company into escrow. In April 1997, warrants to purchase 180,891 shares (the "B warrants") were released from escrow to the Company's shareholders as of February 21, 1997, as a result of the Company's consummation of the last of certain acquisitions in accordance with conditions of the agreements related to the Senior Notes. The remaining warrants to purchase 392,896 shares (the "C warrants") will be released from escrow on or before February 1999. The C warrants will be released to the same Company shareholders that received the B warrants, if by that date the Company has fully repaid the Senior Notes and has had a qualified public offering or qualified sale that results in a specified market valuation of the A warrants. In the event that all conditions have been met at that time except that the market valuation of the A warrants meets a specified lower threshold, 50% of the C warrants will be released to the Investors and 50% will be released to the now existing Company shareholders. If the Senior Notes have not been repaid or such lower market valuation threshold for the A warrants is not achieved by February 1999, all of the C warrants will be released to the Investors. The warrants in escrow are exercisable any time after being released from escrow and expire in February 2002. The A warrants issued to the Investors, as well as the B and C warrants placed in escrow, all contain a put option, whereby the Company would be required at the holder's option to purchase the warrants for the "publicly traded" fair value of those warrants should the Company not consummate a qualified initial public offering, as defined in the warrant agreement, by February 2001. This put option, if it becomes effective, expires in February 2003. The Company may satisfy the required purchase of the F-22 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 5. DEBT--(CONTINUED) warrants by the issuance of a three year subordinated note payable in equal quarterly principal installments with the first payment due six months from the issuance of the note. Interest would be payable quarterly at the rate of 13% per annum. The proceeds of the Senior Notes were recorded as a liability. The fair value of the A warrants issued to the Investors, plus the fair value of the B and C warrants, was recorded as debt discount, which is a contra-account to the Senior Notes liability and is periodically amortized using the interest method, resulting in a level effective rate of 55.7% per annum applied to the sum of the face amount of the debt less the unamortized discount. Interest expense (including discount amortization of $336,070) of $1,266,803 was recorded related to these Senior Notes for the six months ended June 30, 1997. The B and C warrants were designed to provide the Investors with additional consideration for their $25 million investment if certain performance criteria (in the case of the B warrants) are not met or if certain triggering events (in the case of the C warrants) do not occur. Therefore, the value of the the B and C warrants is, in substance, embedded within the $25 million subordinated debt proceeds and, as such, was accounted for in the same manner as the A warrants. Accordingly, the amount allocated from the $25 million subordinated debt proceeds to the detachable stock purchase warrants includes the fair value of the B and C warrants. The original debt discount, based on the fair value of the A warrants issued to the Investors plus the fair value of B and C warrants, was $18,541,996. The fair value of the warrants was determined by an independent appraiser as of the date of their issuance. Due to the put option included in all of the warrants, their fair value of $18,541,996 at the date of issuance was classified as a liability which will be adjusted to fair value at each reporting date until the put option terminates. This liability was adjusted to a fair value of $19,785,948 as of June 30, 1997, with the adjustment of $1,243,952 included in non-operating expense for the six months ended June 30, 1997. The fair value of the warrants as of June 30, 1997 was estimated by the Company with the assistance of an independent valuation consultant. The Company incurred $2,385,016 of costs related to the issuance of the Senior Notes, which are recorded in other non-current assets and are being amortized to interest expense using the interest method. Amortization of $93,980 was recorded for the six months ended June 30, 1997. F-23 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 5. DEBT--(CONTINUED) LONG-TERM DEBT:
AS OF DECEMBER 31, AS OF JUNE 30, ---------------------------- --------------- 1995 1996 1997 ------------ ------------- --------------- Obligations under capital leases. See discussion below. ................................. $ 33,262 $ 7,801,224 $ 8,033,616 Acquisition notes payable, subordinated to the Revolving Credit Facility. See Note 2. ............ -- 200,689 3,370,337 Mortgage notes payable in monthly installments and collateralized by buildings and land. The interest rates range from 8.5% to prime plus 2% per annum (10.50% at June 30, 1997). .................. 2,611,059 2,472,063 2,467,385 Notes payable in monthly installments and a balloon payment of $100,000 in November 1997, collateralized by property and equipment. The interest rates range from 5.9% to 13% per annum. 172,609 126,147 280,930 Term and equipment notes payable in quarterly installments through July 1997, with an interest rate of prime plus 2% (10.25% at December 31, 1996). The balance was paid in February 1997. ...... 437,500 2,266,667 -- ----------- ------------ ------------ Long-term debt ....................................... 3,254,430 12,866,790 14,152,268 Less current maturities of long-term debt ............ 439,291 1,992,962 2,784,308 ----------- ------------ ------------ Long-term debt, less current maturities ............ $2,815,139 $10,873,828 $11,367,960 =========== ============ ============
The aggregate annual principal payments on long-term debt are as follows:
YEAR AS OF DECEMBER 31, 1996 - ---------------------- ------------------------ 1997 ............ $ 1,992,962 1998 ............ 1,015,490 1999 ............ 1,114,584 2000 ............ 1,908,870 2001 ............ 889,515 Thereafter ...... 5,945,369 ------------ $12,866,790 ============
CAPITAL LEASES: Since December 1996, the Company has occupied an office building for its national office and support center under a 15 year capital lease agreement with an unrelated party, having annual lease payments of approximately $610,000. The Company has an option to buy the building during the first two years of the lease term and it is the Company's intention to exercise that option. Accordingly, the capitalized costs relating to this lease are equal to the purchase option price. F-24 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 5. DEBT--(CONTINUED) As of December 31, 1996, buildings and other assets held under capital leases and included in property and equipment were $7,818,393, net of accumulated depreciation of approximately $57,000. The following is a summary of future minimum lease payments, and their present value, required under all capital leases for the years ended after December 31, 1996: 1997 ............................................. $ 1,186,364 1998 ............................................. 1,217,281 1999 ............................................. 1,289,988 2000 ............................................. 1,324,088 2001 ............................................. 1,278,215 Thereafter ....................................... 9,828,208 ------------ Total future minimum lease payments ............... 16,124,144 Less amount representing interest ............... (8,322,920) ------------ Present value of net minimum lease payments ...... $ 7,801,224 ============
NOTE 6. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS: The Company conducts its operations in various leased facilities under leases that are classified as operating leases for financial reporting purposes. The leases provide for the Company to pay real estate taxes, common area maintenance and certain other expenses. Lease terms, excluding renewal option periods exercisable by the Company at escalated rents, expire between 1997 and 2003. Also, certain equipment used in the Company's operations are leased under operating leases. A schedule of fixed minimum lease commitments as of June 30, 1997 consisted of the following:
YEAR RENTAL AMOUNT - ------------------------------------------------------ -------------- For the six months ended December 31, 1997 ...... $ 903,395 1998 ............................................. 1,412,625 1999 ............................................. 1,107,213 2000 ............................................. 788,374 2001 ............................................. 545,215 ----------- Total .......................................... $4,756,822 ===========
Rent expense, including equipment rental, was $57,195, $373,090 and $878,300 for the years ended December 31, 1994, 1995 and 1996, and $612,151 and $1,304,329 for the six months ended June 30, 1996 and 1997, respectively. FRANCHISE AGREEMENTS: The Company has granted 50, 67 and 75 Labor World franchises (some covering multiple locations) as of December 31, 1994, 1995 and 1996, respectively. In consideration for royalties paid by the franchise holders, the agreements provide among other things, that the Company will provide the franchise holder with the following for terms ranging from 10 to 15 years with varying renewal options: exclusive geographical areas of operations, continuing advisory and support services and access to the Company's confidential operating manuals. F-25 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 6. COMMITMENTS AND CONTINGENCIES--(CONTINUED) The following tables set forth various revenues from franchises as well as a schedule showing franchise offices opened and purchased by the Company, as well as the number of Company owned locations.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------- -------------------------- 1994 1995 1996 1996 1997 ------------ ------------- ------------- ------------- ------------ PEO services ............ $4,698,190 $ 7,507,774 $35,078,655 $13,200,058 $17,002,820 Royalties ............... 2,712,605 4,137,150 5,670,458 2,639,477 2,905,389 Payroll funding services 313,550 718,807 1,288,205 604,150 351,852 Initial franchise fees ... 250,000 446,000 84,000 41,000 -- Other ..................... 5,778 70,000 41,000 30,000 -- ----------- ------------ ------------ ------------ ------------ Total revenues ......... $7,980,123 $12,879,731 $42,162,318 $16,514,685 $20,260,061 =========== ============ ============ ============ ============
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED ------------------------------ JUNE 30, 1994 1995 1996 1997 --------- --------- ------ ----------------- Number of franchise locations, beginning ...... 37 57 83 95 New franchises sold ........................... 22 31 24 2 Franchises closed/Buyouts ..................... (2) -- -- (10) Franchises purchased by the Company ............ -- (5) (12) (13) ---- ---- ---- ---- Number of franchise locations, ending ......... 57 83 95 74 Number of Company owned locations ............ 11 25 51 89 ---- ---- ---- ---- Total locations .............................. 68 108 146 163 ==== ==== ==== ====
PEO services revenues are based on the payroll and other related costs for industrial personnel provided by the franchises to their clients, under a relationship whereby the Company is the employer of those industrial personnel. The Company's gross profit on these services is approximately 1.5% of the related revenues. See Note 1 for a discussion of initial franchise fees, royalties, and payroll funding services (funding advances). The Company's gross profit on these services is 100% of the related revenues. NOTE 7. OTHER CHARGES In 1996, the Company incurred $1,447,555 of expenses, primarily professional fees, related to (i) a Form S-1 Registration Statement filed by the Company with the Securities and Exchange Commission that the Company withdrew and (ii) subsequent due diligence, which included an internal investigation of allegations regarding payments by the Company to a management employee of a customer of the Company. Based on the findings of the investigation, the Company paid restitution to the customer, is continuing to transact business with the customer and believes that further expenses or liabilities, if any, related to this matter will not be material to its financial position or results of operations. These expenses have been separately disclosed as other charges in the consolidated statement of income due to their unusual nature. F-26 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK For the years ended December 31, 1994, 1995 and 1996, approximately 19%, 21% and 16%, respectively, of the Company's revenues were from services performed for individual insurance agent offices under a Preferred Provider designation granted to the Company on a regional basis by the agents' common corporate employer. The Company had received this designation in 15, 22 and 31 states as of December 31, 1994, 1995 and 1996, respectively. In addition, for the years ended December 31, 1994, 1995 and 1996, approximately 66% , 39% and 27%, respectively, of the Company's revenues were from the provision of services to customers in the Chicago, Illinois area. For the years ended December 31, 1994, 1995 and 1996, approximately 17%, 29% and 29% of the Company's revenues were from the provision of services to customers in the South Florida area. The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash, trade accounts receivable and funding advances to franchises. The Company places its cash with what it believes to be high credit quality institutions. At times cash deposits may be in excess of the FDIC insurance limit. The Company grants credit to its customers generally without collateral and regularly assesses their financial strength. Funding advances to franchises are collateralized by the franchises' accounts receivable from their clients. The Company believes that credit risk related to its trade accounts receivable and funding advances is limited. NOTE 9. EMPLOYEE BENEFIT PLANS The Company had a 401(k) profit-sharing plan and a 413(c) multi-employer retirement plan covering all employees except for (1) employees under the age of 21 for both plans, (2) employees with less than one year of service for both plans, and (3) all highly compensated employees as defined by the Internal Revenue Code for the 401(k) plan and certain highly compensated employees under the 413(c) plan. On February 28, 1997, the above 401(k) plan was made inactive by the Company. All participating employees were enrolled in the 413(c) for future contributions and all net assets remained in the 401(k) plan. Eligible employees who participate elect to contribute to the plan from 2% to 15% of their salary. Each year, the Company's Board of Directors determines a matching percentage to contribute to each participant's account; if a determination is not made, the matching percentage is 50% of the participant's contributions. The matching contribution is limited to the first 6% of each participant's salary contributed by the participants. Matching contributions by the Company for its employees, which includes PEO employees, were $26,264, $39,070 and $309,222 for the years ended December 31, 1994, 1995 and 1996, respectively, and $239,424 for the six months ended June 30, 1997. Pursuant to the terms of the previous 401(k) plan, highly compensated employees were not eligible to participate. However, as a result of administrative errors, some highly compensated employees have been permitted to make elective salary deferral contributions. The Company has sought IRS approval regarding the proposed correction under the Voluntary Closing Agreement Program ("VCAP"). There will be a penalty payable by the Company, associated with a correction under the VCAP, although the Company believes this penalty will be insignificant. F-27 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 10. SHAREHOLDERS' EQUITY VOTING TRUST: The Company's three principal shareholders resigned from the Company's Board of Directors in November 1996. On February 21, 1997, in connection with the issuance of the Senior Notes and the closing of the Revolving Credit Facility, 4,683,982 shares of the common stock of the Company, owned by the those shareholders and their families, were placed in a voting trust. Under the terms of the voting trust and agreement among the Company, the Company's shareholders and the Investors, the shares of common stock in the voting trust, which represent approximately 86% of the voting interest of the Company, will be voted in favor of the election of a Board of Directors having seven members and comprised of three directors nominated by the CEO of the Company, two directors nominated by the Investors, and two independent directors nominated by the vote of both directors nominated by the Investors and at least two of the directors nominated by the CEO of the Company. Should there be a default of the terms of the Senior Notes or should the warrants to purchase 392,896 shares, as discussed in Note 5, be released from escrow to the Investors, the number of directors would be increased by two, with the additional directors nominated by the Investors. Further, the shares in the voting trust will be voted as recommended by the Board of Directors for any merger, acquisition or sale of the Company, or any changes to the Articles of Incorporation or Bylaws of the Company. On any other matter requiring a vote by the shareholders, the shares in the voting trust will be voted as directed by the current CEO of the Company. REVERSE STOCK SPLIT: The Company anticipates selling shares of its Common Stock to the public (the "Offering") during the fourth quarter of 1997. Immediately prior to the Offering, the Company will effecuate a reverse stock split pursuant to which each then issued and outstanding share of Common Stock will be converted into approximately 0.65 shares of Common Stock. The effect of this reverse split has been retroactively applied to all share, option and warrant amounts, including the related option and warrant exercise prices. INCENTIVE STOCK OPTION PLAN: During 1995, a Subsidiary of the Company established an incentive stock option plan ("Stock Option Plan") for that Subsidiary only, whereby incentive stock options could be granted to employees to purchase a specified number of shares of common stock at a price not less than fair market value on the date of the grant and for a term not to exceed 10 years. Once awarded, these options became vested and exercisable at 25% per year. On January 1, 1996, the Subsidiary granted options to purchase 815,860 shares of common stock at an exercise price of $4.77 per share, which an independent appraiser determined to be the fair market value of that Subsidiary's common stock on the date of grant. On February 18, 1997, the Company adopted the Stock Option Plan and, pursuant to the terms of the Stock Option Plan, adjusted the number of shares of Common Stock subject to then outstanding options to 318,568, and the exercise price of such options to $10.38 per share, such conversion determined by an independent appraiser as of the date of grant. On March 12, 1997, the Company granted options to purchase 201,339 shares of the Company's Common Stock, with the exercise price of $11.42 based on the fair market value of the Company's Common Stock, as determined by an independent appraiser as of the date of the grant. The total number of shares of Common Stock reserved for issuance under the stock option plan is 1,040,000. As of June 30, 1997, the status of all outstanding options was as follows:
GRANT DATE TOTAL OPTIONS EXERCISABLE OPTIONS EXERCISE PRICE - --------------------------- --------------- --------------------- --------------- January 1, 1996 ...... 309,072 77,268 $10.38 March 12, 1997 ...... 196,417 -- 11.42
F-28 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 10. SHAREHOLDERS' EQUITY--(CONTINUED) The weighted average remaining contractual life of the above options was 9.0 years as of December 31, 1996 and June 30, 1997. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its stock options. Under APB 25, because the exercise price of the Company's employee stock option equals the fair value of the underlying stock on the grant date, no compensation is recognized. However SFAS 123, "Accounting for Stock-Based Compensation", requires presentation of pro forma net income as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method. The Company has estimated the fair value of stock options granted to employees on January 1, 1996 and March 12, 1997 to be $2.20 and $2.59 per option as of the respective grant dates, using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 6.12% for the 1996 grant and 6.65% for the 1997 grant; no volatility factor because the Company was not a public entity when the options were granted; no expected dividends; and expected option life of 4 years. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the vesting period. Under the fair value method, the Company's net income (loss) on a pro forma basis (including the effect of income taxes, only for periods subsequent to the Reorganization) would have been $1,693,102 for the year ended December 31, 1996 and $(1,218,930) for the six months ended June 30, 1997. In the event that a vested option becomes unexercisable or expires in accordance with the plan prior to a successful completion of an initial public offering, the option holder will be entitled to receive 50% of the increase of the fair market value of the vested options from the date of grant to the last day of the Company's taxable year immediately preceding the date on which the option becomes unexercisable or expires. This plan feature, which terminates upon completion of an initial public offering, is accounted for as a variable provision in accordance with APB 25. The amount of related compensation expense for the year ended December 31, 1996 and the six months ended June 30, 1997 was not material. On September 2, 1997, the Company granted options to purchase 106,303 shares of the Company's Common Stock, with the exercise price to be equal to the price of the shares sold in the Offering.. NOTE 11. RELATED PARTY TRANSACTIONS REVENUES: Certain shareholders of the Company owned franchises from which the Company received the following revenues in the periods indicated:
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------------------- ----------------- 1994 1995 1996 1997 ------------ ------------ ------------- ----------------- PEO services .................. $5,551,806 $4,466,241 $13,505,481 $462,019 Royalties ..................... 631,486 547,477 684,122 317,979 ----------- ----------- ------------ --------- Included in net revenues ...... $6,183,292 $5,013,718 $14,189,603 $779,998 =========== =========== ============ =========
F-29 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 11. RELATED PARTY TRANSACTIONS--(CONTINUED) These franchises owed the Company $251,912 and $150,763 at December 31, 1995 and 1996, respectively, and $119,663 at June 30, 1997, which are included in trade accounts receivable, relating to the above revenues. RECEIVABLES: The Company had the following notes and advances receivable due on demand from shareholders and affiliates. The notes had an interest rate at 10% per annum and the advances are non-interest bearing.
AS OF DECEMBER 31, ------------------------ 1995 1996 ---------- ----------- Notes receivable from shareholders .............................. $ -- $4,300,000 Advances due from: Shareholders ................................................... 249,978 477,417 Affiliates ...................................................... 105,783 110,187 --------- ----------- Notes receivable and other amounts due from related parties ...... $355,761 $4,887,604 ========= ===========
Total interest income from notes receivable and other amounts due from related parties was $12,899, $-0- and $29,223 for the years ended December 31, 1994, 1995, and 1996, respectively and $68,099 for the six months ended June 30, 1997.
AS OF DECEMBER 31, AS OF JUNE 30, -------------------------- --------------- 1995 1996 1997 LONG-TERM DEBT: ---------- ------------- --------------- Acquisition notes payable, subordinated to the Revolving Credit Facility and Senior Notes. The interest rates range from 7% to 14% per annum. See Note 2. ........................... $239,101 $ 5,573,966 $2,791,733 Demand notes payable due to shareholders of the Company with an interest rate of 10% per annum. These notes were contributed to the additional paid-in capital of Synadyne II, Inc. and Synadyne III, Inc. in connection with the Reorganization. See Note 1. .................................... -- 4,300,000 -- Notes payable in quarterly installments beginning in February 1999, subordinated to the Revolving Credit Facility and Senior Notes. The interest rate is 21% per annum. ............... 422,125 1,401,192 1,200,000 Notes payable for amounts due to shareholders in connection with the Reorganization, subordinated to the Revolving Credit Facility and the Senior Notes. These notes are payable in quarterly installments beginning in February 1999 through 2001. The interest rate is 10% per annum. ............... -- -- 1,685,000 --------- ------------ ----------- Long-term debt to related parties ................................. 661,226 11,275,158 5,676,733 Less current maturities of long-term debt to related parties ...... 661,226 8,872,497 731,797 --------- ------------ ----------- Long-term debt to related parties, less current maturities ......... $ -- $ 2,402,661 $4,944,936 ========= ============ ===========
F-30 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 11. RELATED PARTY TRANSACTIONS--(CONTINUED) The aggregate annual principal payments on long-term debt to related parties are as follows:
AS OF DECEMBER 31, 1996 AS OF JUNE 30, 1997 ------------------------- -------------------- 1997 ............ $ 8,872,497 $ 731,797 1998 ............ 784,338 1,349,506 1999 ............ 718,342 1,662,265 2000 ............ 762,294 1,913,690 2001 ............ 137,687 19,475 Thereafter ...... -- -- ------------ ----------- Total ............ $11,275,158 $5,676,733 ============ ===========
Total interest expense for long-term debt to related parties was $67,847, $136,326 and $667,265 for the years ended December 31, 1994, 1995 and 1996, respectively, and $482,131 for the six months ended June 30, 1997. The Company has purchased certain real estate previously owned by SMSB and consolidated in these financial statements. The total purchase price was $840,000 for assets with a net book value of $618,732 at December 31, 1996. On June 13, 1997, the Company consummated a portion of this purchase for a price of $430,000, corresponding to assets with a net book value of $293,467 on the date of purchase. In July and August 1997 the Company consummated the remainder of this purchase, for a price of $410,000, corresponding to assets with a net book value of $314,659 on the date of purchase. A law firm owned by a shareholder of the Company received legal fees for services rendered to the Company during 1994, 1995, 1996 and for the Six months ended June 30, 1997, in the approximate amounts of $131,000, $52,000, $80,000 and $97,000, respectively. F-31 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) NOTE 12. SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES The consolidated statements of cash flows do not include the following noncash investing and financing activities:
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------------- ------------------------------- 1994 1995 1996 1996 1997 ---------- ------------- --------------- --------------- --------------- Acquisitions: Tangible and intangible assets acquired ........................... $ -- $ 248,666 $ 8,497,841 $ 6,322,745 $ 25,067,375 Liabilities assumed .................. -- (4,885) (146,991) -- (54,455) Debt issued ........................... -- (123,407) (6,401,255) (4,372,745) (3,627,920) --------- ---------- ------------ ------------ ------------ Cash paid .............................. $ -- $ 120,374 $ 1,949,595 $ 1,950,000 $ 21,385,000 ========= ========== ============ ============ ============ Increase in property and equipment and long-term debt, primarily capitalized leases .................. $311,741 $ 55,926 $ 7,370,322 $ -- $ 720,815 ========= ========== ============ ============ ============ Debt to shareholders for distributions and amounts in connection with the Reorganization ........................ $ -- $ -- $ 967,150 $ -- $ 1,745,000 ========= ========== ============ ============ ============ Increase in line of credit due to retirement of long-term debt-other . $405,110 $ -- $ -- $ -- $ -- ========= ========== ============ ============ ============ Shareholders' contribution to additional paid-in capital in connection with the Reorganization . $ -- $ -- $ -- $ -- $ 4,300,000 ========= ========== ============ ============ ============
NOTE 13. UNAUDITED PRO FORMA DATA Pro forma net income includes adjustments made to historical net income for pro forma income taxes computed as if the Company had been fully subject to federal and applicable state income taxes. The pro forma weighted average shares outstanding (6,050,000 for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 6,690,214 for the six months ended June 30, 1997) used to calculate adjusted pro forma earnings per share includes (a) the 5,448,788 shares of common stock issued in connection with the Reorganization, (b) all outstanding options and warrants to purchase common stock calculated using the treasury stock method and an assumed Offering price of $15.00 per share, as if all such options and warrants had been outstanding for all periods presented (264,782 for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1,144,235 for the six months ended June 30, 1997) and (c) for the periods prior to the Reorganization, the equivalent number of shares (336,430 for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 97,191 for the six months ended June 30, 1997) of common stock represented by the shares of common stock of the Subsidiaries purchased from certain shareholders for cash and notes in the Reorganization. See Note 1. F-32 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The following Unaudited Pro forma Consolidated Statements of Income for the year ended December 31, 1996 and the six months ended June 30, 1997 include the Company's historical results of operations, adjusted to reflect (a) the 1996 Acquisitions and 1997 Acquisitions (see Note 1 for the acquired businesses included); (b) the elimination of the amount of compensation expense for the Company's three principal shareholders and its president and chief executive officer (who is also a shareholder) which is in excess of the compensation for such individuals subsequent to the Reorganization and the elimination of the amount of compensation expense for the former owners of the 1996 Acquisitions and 1997 Acquisitions which is in excess of the compensation for such individuals subsequent to the Acquisitions; (c) the distributions to shareholders, the purchase of shares of common stock of the Subsidiaries from certain shareholders and the contribution to capital by shareholders, each of which occurred in connection with the Reorganization; (d) the issuance of the Senior Notes and Warrants; and (e) the sale by the Company of the 3,000,000 shares of Common Stock offered hereby at an assumed offering price of $15.00 per share and the application of the net proceeds therefrom, as if all such events and transactions had occurred as of January 1, 1996. In addition, income taxes were computed as if the Company and the 1996 Acquisitions and the 1997 Acquisitions had been fully subject to federal and applicable state income taxes as of January 1, 1996. The Unaudited Pro Forma Consolidated Financial Information is not necessarily indicative of the results that would have occurred if the events and transactions referred to above had occurred on January 1, 1996 or which may be realized in the future. The Unaudited Pro Forma Consolidated Financial Information should be read in conjunction with the historical financial statements and the notes thereto included elsewhere in this Prospectus. F-33 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL ------------------------------ ACQUIRED PRO FORMA COMPANY BUSINESSES(1) ADJUSTMENTS -------------- --------------- ------------------- Net revenues .............................. $ 280,171 $67,505 $ 923(2) Cost of revenues ........................... 242,102 50,856 (923)(2) ----------- ------- Gross profit .............................. 38,069 16,649 Selling, general and administrative expenses: Shareholders' compensation ............... 2,321 1,806 (3,493) (3) Amortization of intangible assets ......... 424 -- 1,979 (4) Other selling, general and administrative expenses ................................. 29,841 11,535 171 (4) ----------- ------- Operating income ........................... 5,483 3,308 Interest expense (income), net ............ 2,175 380 5,915 (5) Other expense (income), net ............... 1,448 (505) ----------- ------- Income before provision (benefit) for income taxes .............................. 1,860 3,433 Pro forma provision (benefit) for income taxes .............................. 757(6) -- (367) (7) ----------- ------- ------------ Pro forma net income ..................... $ 1,103 $ 3,433 $ 4,205 =========== ======= ============ Pro forma weighted average common shares outstanding .............................. 6,050(8) =========== Pro forma earnings per share ............... $ .18 =========== OFFERING SUPPLEMENTAL PRO FORMA ADJUSTMENTS (10) PRO FORMA ---------------- ------------------ ---------------- Net revenues .............................. $ 346,753 $ 346,753 Cost of revenues ........................... 292,035 292,035 ----------- ----------- Gross profit .............................. 54,718 54,718 Selling, general and administrative expenses: Shareholders' compensation ............... 634 634 Amortization of intangible assets ......... 2,403 2,403 Other selling, general and administrative expenses ................................. 41,547 41,547 ----------- ----------- Operating income ........................... 10,134 10,134 Interest expense (income), net ............ 8,470 $ (6,080) 2,390 Other expense (income), net ............... 943 943 ----------- ----------- Income before provision (benefit) for income taxes .............................. 721 6,801 Pro forma provision (benefit) for income taxes .............................. 390 2,230 2,620 ----------- -------- ----------- Pro forma net income ..................... $ 331 $ (3,850) $ 4,181 =========== ======== =========== Pro forma weighted average common shares outstanding .............................. 6,950 (9) 9,950(10) =========== =========== Pro forma earnings per share ............... $ .05 $ .42 =========== ===========
See notes to unaudited pro forma statements of income. F-34 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL ---------------------------------- ACQUIRED PRO FORMA COMPANY BUSINESSES (1) ADJUSTMENTS ----------------- ---------------- ----------------- Net revenues .............................. $ 193,197 $11,389 $ 139(2) Cost of revenues ........................... 165,838 8,728 (139)(2) ---------- ------- Gross profit .............................. 27,359 2,661 Selling, general and administrative expenses: Shareholders' compensation ............... 292 168 (388) (3) Amortization of intangible assets ......... 892 -- 298 (4) Other selling, general and administrative expenses ................................. 23,377 2,136 26 (4) ---------- ------- Operating income ........................... 2,798 357 Interest expense (income), net ............ 3,513 32 1,484 (5) Other expense (income), net ............... 1,219 (34) ---------- ------- Income (loss) before provision (benefit) for income taxes .............................. (1,934) 359 Pro forma provision (benefit) for income taxes .............................. (467) (6) (273)(7) ---------- ---------- Pro forma net income (loss) ............... $ (1,467) $ 359 $ 1,147 ========== ======= ========== Pro forma weighted average common shares outstanding .............................. 6,690 (8) ========== Pro forma earnings (loss) per share ...... $ (.22) ========== OFFERING SUPPLEMENTAL PRO FORMA ADJUSTMENTS (10) PRO FORMA ---------------- ------------------ ------------------ Net revenues .............................. $ 204,447 $ 204,447 Cost of revenues ........................... 174,427 174,427 ----------- ----------- Gross profit .............................. 30,020 30,020 Selling, general and administrative expenses: Shareholders' compensation ............... 72 72 Amortization of intangible assets ......... 1,190 1,190 Other selling, general and administrative expenses ................................. 25,539 25,539 ----------- ----------- Operating income ........................... 3,219 3,219 Interest expense (income), net ............ 5,029 $ (3,360) 1,669 Other expense (income), net ............... 1,185 (1,244)(11) (59) ----------- ----------- Income (loss) before provision (benefit) for income taxes .............................. (2,995) 1,609 Pro forma provision (benefit) for income taxes .............................. (740) 1,352 612 ----------- ------------ ----------- Pro forma net income (loss) ............... $ (2,255) $ (3,252) $ 997 =========== ============ =========== Pro forma weighted average common shares outstanding .............................. 6,950 (9) 9,950 (10) =========== =========== Pro forma earnings (loss) per share ...... $ .32 $ .10 =========== ===========
See notes to unaudited pro forma statements of income. F-35 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME NOTE 1 Includes the historical results of operations of the 1996 Acquisitions and 1997 Acquisitions from January 1, 1996 to the date of acquisition. These historical results for the year ended December 31, 1996 include $500,000 of other income attributable to life insurance proceeds for a key officer of Stand-By, Inc. All of such acquisitions have been accounted for as purchases, and consist of the following:
DATE OF ACQUISITION PURCHASE PRICE --------------------- --------------- 1996 ACQUISITIONS: LL Corps., Inc. ................................. March 15, 1996 $ 84,752 Payray, Inc. and Tri-Temps, Inc. .................. April 1, 1996 4,922,745 CST Services Inc. ................................. May 6, 1996 1,592,000 Temp Aid, Inc. .................................... June 10, 1996 15,322 Kesi, Inc. ....................................... September 30, 1996 160,660 1997 ACQUISITIONS: Laporte Enterprises, Inc. ........................ February 14, 1997 1,300,000 Apex, Inc. ....................................... February 21, 1997 1,000,000 Standby Personnel of Colorado Springs, Inc. ...... February 24, 1997 3,090,302 Staff Net, Inc. ................................. February 24, 1997 308,333 Staff Management, Inc. ........................... March 3, 1997 3,970,997 Superior Temporaries, Inc. ........................ March 3, 1997 9,000,000 Stand-By, Inc. .................................... March 31, 1997 5,444,437 Labor World of Minneapolis, Inc. .................. June 30, 1997 825,000
The terms of the above acquisitions are discussed in Note 2 to the Company's consolidated financial statements. The agreements for certain acquisitions contain provisions for contingent payments of additional purchase price based on the net revenues, gross margin or income before income taxes of the acquired businesses over periods of two years after the acquisition. Should the contingent payments be made, they would be recorded as additional purchase price and increase the amount of goodwill. The above purchase prices have been adjusted to reflect imputed interest on acquisition financing. NOTE 2 To eliminate revenues of the Company and (i) related expenses and costs of Payray, Inc. and Tri-Temps, Inc., LL Corps., Inc., Temp Aid, Inc., Kesi, Inc., Laporte Enterprises, Inc., Superior Temporaries, Inc. and Labor World of Minneapolis, Inc. related to franchise royalties and (ii) expenses and costs of Laporte Enterprises, Inc. related to funding fees, for services provided by the Company to these acquired businesses, which were franchisees prior to their acquisition. NOTE 3 To (i) eliminate the amount of compensation for the Company's three principal shareholders and its president and chief executive officer (who is also a shareholder) which is in excess of the compensation for such individuals established at the time of the Reorganization, (ii) to reduce the amount of compensation and other expenses of the former owners of the 1996 Acquisitions and 1997 Acquisitions to the amounts paid to them in accordance with the terms of their compensation contracts after such acquisitions and (iii) to eliminate the amount of compensation and other expenses of the former owners of the 1996 Acquisitions and 1997 Acquisitions that was discontinued due to the termination of their employment at the time of the acquisition. F-36 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME--(CONTINUED) NOTE 4 To reflect additional depreciation and amortization of the assets purchased in the 1996 Acquisitions and 1997 Acquisitions. The following table summarizes the values assigned to the assets acquired and the weighted average amortization or depreciation periods.
WEIGHTED AVERAGE AMORTIZATION OR AMOUNT DEPRECIATION PERIODS ------------ --------------------- Tangible assets, primarily equipment ...... $ 949,407 5 years Identifiable intangible assets: Covenants not to compete .................. 1,204,841 9.4 years Customer lists ........................... 4,395,981 5.5 years Employee lists ........................... 155,049 .2 year Goodwill ................................. 25,009,270 32.7 years ------------ $31,714,908 ============
The costs of each acquisition have been allocated to the assets acquired and liablilities assumed based on their fair values at the date of acquisition as determined by management with the assistance of an independent valuation consultant. The allocation of the costs of acquisition for the 1997 Acquisitions is preliminary while the Company obtains final information regarding the fair values of all assets acquired; however, management believes that any adjustments to the amounts allocated will not have a material effect on the Company's financial position or results of operations. NOTE 5 To adjust for the additional interest and amortization expense for indebtedness incurred (a) to pay the purchase price and acquisition costs and to provide working capital for the 1996 Acquisitions and 1997 Acquisitions; and (b) to pay the distributions to shareholders and the consideration for the purchase of shares of common stock of the Subsidiaries from certain shareholders, each of which occurred in connection with the Reorganization. The following is a summary of the additional interest and amortization expense:
INTEREST YEAR ENDED SIX MONTHS ENDED RATES DECEMBER 31, 1996 JUNE 30, 1997 ---------- ------------------- ----------------- ADDITIONAL INTEREST EXPENSE Notes due to sellers: 1996 Acquisitions ................................. 7 - 14% $ 147,781 $ -- 1997 Acquisitions ................................. 12% 393,848 73,200 Borrowings under line of credit and Revolving Credit Facility .................................... 8.75% 1,062,843 236,479 Senior Notes ....................................... 11% 2,750,000 458,334 ----------- ----------- 4,354,472 768,013 ADDITIONAL AMORTIZATION EXPENSE Discount on Senior Notes ........................... 1,259,559 602,484 Debt issuance costs, Senior Notes .................. 300,794 79,582 Debt issuance costs, Revolving Credit Facility ...... -- 33,427 ----------- ----------- $5,914,825 $1,483,506 =========== ===========
F-37 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME--(CONTINUED) NOTE 6 To reflect income taxes computed as if the Company had been fully subject to federal and applicable state income taxes. The Company recognized a one-time tax benefit of $385,693, as a result of the termination at the time of Reorganization of the Subsidiaries' elections to be treated as S corporations, that is not reflected in these proforma statements. NOTE 7 To adjust for the effects of income taxes on (a) the historical earnings of the 1996 Acquisitions and the 1997 Acquisitions, all of which (except Stand-By, Inc.) were S corporations prior to acquisition, as if they had been fully subject to federal and applicable state income taxes and (b) the effect of the pro forma adjustments. NOTE 8 Pro forma weighted average common shares outstanding on a historical basis consist of the following:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 JUNE 30, 1997 ------------------- ----------------- Shares issued in the Reorganization, weighted for the equivalent shares representing the Subsidiaries' common stock purchased in connection with the Reorganization on February 21, 1997 ..................... 5,785,216 5,545,978 Effects of options and warrants to purchase common stock, calculated using the treasury stock method and an assumed offering price of $15.00 per share, as if they had been outstanding for the entire period ............ 264,784 1,144,236 ---------- --------- Total outstanding shares ................................. 6,050,000 6,690,214 ========== =========
For purposes of the above application of the treasury stock method for the period from January 1, 1996 through February 21, 1997, the proceeds from the warrants were assumed to be the actual proceeds of $18,541,996, or $13.63 per warrant, received by the Company at the time of their February 21, 1997 issuance. The actual exercise price of $.015 per share was used after that date. F-38 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME--(CONTINUED) NOTE 9 To reflect the effect on outstanding shares of the purchase of shares of common stock of the Subsidiaries from certain shareholders in the Reorganization and the issuance of the Warrants as if both transactions had occurred as of January 1, 1996, calculated as follows:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 JUNE 30, 1997 ------------------- ----------------- Total outstanding shares, historical .................. 6,050,000 6,690,214 Decrease in weighted average number of shares issued in the Reorganization, based on assumed transaction date of January 1, 1996 .................................... (336,430) (97,191) Increase in weighted average number of shares calculated using the treasury stock method, based on the assumed issuance of warrants on January 1, 1996 and the actual exercise price of $.015 per share ..................... 1,236,164 356,711 ---------- --------- Total outstanding shares, pro forma .................. 6,949,734 6,949,734 ========== =========
NOTE 10 To adjust for the effects of the sale by the Company of the 3,000,000 shares of Common Stock offered hereby at an assumed offering price of $15.00 per share and the reduced interest and other debt related expenses, net of income taxes, as a result of the application of the net proceeds therefrom to retire (a) the balance of the Senior Notes in full, (b) a portion of the outstanding indebtedness under the Revolving Credit Facility, (c) various promissory notes due to certain existing shareholders of the Company, their family members and an executive officer of the Company, and (d) various promissory notes issued in connection with certain acquisitions. The retirement of the Senior Notes will also result in an extraordinary loss of $13,694,979, net of a $6,801,983 income tax benefit, which is not reflected in the supplemental pro forma net income. NOTE 11 To eliminate expense arising from a put warrants valuation adjustment included in the Company's historical results for the six months ended June 30, 1997, which increased supplemental pro forma earnings per share by $0.11 per share. The holders of the warrants have a put right, as a result of which the Company recorded a liability at the time of the issuance of the warrants based on their fair value. Until the Offering is consummated, the Company will adjust this liability to fair value at the end of each accounting period. Based on an assumed offering price of $15.00 per share and the consummation of this Offering prior to December 31, 1997, these put warrants valuation adjustments will result in non-operating expenses in the third and fourth quarters of 1997 totaling $597,673 ($532,714 net of income tax benefit). Although this pro forma data was prepared assuming the issuance of the put warrants as of January 1, 1996, these statements do not contain a put warrants valuation adjustment for the year ended December 31, 1996, and the put warrant valuations adjustment included in the pro forma results for the six months ended June 30, 1997 (and eliminated in arriving at the supplemental pro forma results) is the adjustment based on the actual warrant issuance date of February 21, 1997. F-39 INDEPENDENT AUDITORS' REPORT Payray, Inc. and Tri-Temps, Inc.: We have audited the combined balance sheet of Payray, Inc. and Tri-Temps, Inc. (the "Company") as of December 31, 1995, and the related combined statements of operations and retained earnings and of cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of Payray, Inc. and Tri-Temps, Inc. as of December 31, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Certified Public Accountants Chicago, Illinois March 29, 1996 F-40 PAYRAY, INC. AND TRI-TEMPS, INC. COMBINED BALANCE SHEET DECEMBER 31, 1995 ASSETS CURRENT ASSETS: Trade accounts receivable less allowance for doubtful accounts of $90,000 ... $ 925,576 PROPERTY AND EQUIPMENT, net ................................................ 55,054 DEPOSITS .................................................................. 287,145 ----------- TOTAL ASSETS ............................................................... $1,267,775 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Cash overdraft ............................................................ $ 77,351 Accounts payable ......................................................... 107,638 Accrued expenses ......................................................... 381,487 Line of credit ............................................................ 640,000 ----------- Total current liabilities ................................................ 1,206,476 ----------- COMMITMENTS AND CONTINGENCIES (NOTE 5, 7) STOCKHOLDERS' EQUITY: Common stock, no par value, 20,000 shares authorized, 2,000 shares issued and outstanding ............................................................... 2,000 Retained earnings ......................................................... 59,299 ----------- Total stockholders' equity ............................................. 61,299 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. $1,267,775 ===========
See notes to combined financial statements. F-41 PAYRAY, INC. AND TRI-TEMPS, INC. COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS YEAR ENDED DECEMBER 31, 1995 NET REVENUES ................................. $ 7,141,948 COST OF REVENUES .............................. 5,784,631 ----------- TOTAL GROSS PROFIT .............................. 1,357,317 ----------- OPERATING EXPENSES: Stockholder's compensation .................. 264,818 Office rent paid to stockholder ............... 61,650 Other general and administrative ............ 1,224,727 ----------- Total operating expenses ..................... 1,551,195 ----------- OPERATING LOSS ................................. (193,878) OTHER EXPENSE: Interest expense ........................... 38,268 ----------- NET LOSS ....................................... (232,146) RETAINED EARNINGS, Beginning of the year ...... 291,445 ----------- RETAINED EARNINGS, End of the year ............ $ 59,299 ===========
See notes to combined financial statements. F-42 PAYRAY, INC. AND TRI-TEMPS, INC. COMBINED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ..................................................................... $ (232,146) Adjustments to reconcile net loss to net cash flows used in operating activities: Allowance for doubtful accounts ................................................ 31,029 Depreciation and amortization ................................................... 15,275 Change in assets and liabilities: Accounts receivable--net ................................................... 20,129 Deposits ..................................................................... (232,127) Accounts payable and accrued expenses ....................................... 364,191 ---------- Net cash flows used in operating activities ................................. (33,649) ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment .......................................... (32,105) ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in cash overdraft ...................................................... 22,174 Net borrowings under the line of credit ....................................... 43,580 ---------- Net cash flows provided by financing activities .............................. 65,754 ---------- NET CHANGE IN CASH ............................................................... $ -0- ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest ............................................................ $ 38,268 ==========
See notes to combined financial statements. F-43 PAYRAY, INC. AND TRI-TEMPS, INC. NOTES TO THE COMBINED FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS: Payray, Inc and Tri-Temps, Inc. (the "Companies") are Illinois corporations, which provide temporary industrial staffing services in eight regions throughout Illinois and Wisconsin. BASIS OF PRESENTATION: The accompanying combined financial statements present the financial position, results of operations and cash flows of the Companies. The Companies have common ownership and management. All significant intercompany balances and transactions are eliminated in combination. USE OF ESTIMATES: The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. The Companies provide for depreciation of leasehold improvements using the straight-line method over the remaining lease term. All other property and equipment are depreciated using the double declining balance method over the estimated useful lives of the related assets which range from 5 to 7 years. DEPOSITS: Deposits consist of loss collateral deposits paid to an insurance company for pending workers' compensation claims. INCOME TAXES: The Companies have elected to be treated as S corporations under the provisions of the Internal Revenue Code. The taxable income of the Companies is directly taxable to the stockholder for federal tax purposes and the stockholder is responsible for the payment of income taxes thereon. The Companies are subject to the Illinois replacement tax. No allowance for such tax has been made at December 31, 1995 as each Company reported a loss. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of financial instruments included in current assets and liabilities approximates fair values due to the short-term maturities of these instruments. REVENUE RECOGNITION: Revenues are recognized when the related service is performed net of provision for credits and allowances. NOTE 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following: Furniture, fixtures and equipment .................. $23,075 Vehicles ............................................. 24,669 Leasehold improvements .............................. 29,590 -------- Total ................................................ 77,334 Less accumulated depreciation and amortization ...... 22,280 -------- Property and equipment--net ........................ $55,054 ========
NOTE 3. LINE OF CREDIT The Companies maintain a line of credit for $750,000 collateralized by accounts receivable and fixed assets and bearing interest at prime plus .25% (8.75% at December 31, 1995). Borrowings are limited to 75% of trade accounts receivable. Borrowings under the line of credit amounted to $640,000 at December 31, 1995. F-44 PAYRAY, INC. AND TRI-TEMPS, INC. NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 4. ACCRUED EXPENSES Accrued expenses consist of: Workers' compensation ...... $221,012 Payroll ..................... 84,477 Royalties .................. 42,170 Other ..................... 33,828 --------- $381,487 =========
NOTE 5. LEASE COMMITMENTS The Companies lease office facilities and certain office equipment under operating leases which expire through 2003. Three office facilities are leased from the principal stockholder of the Companies (see Note 6). The following is a schedule of future minimum annual rental commitments required under noncancelable operating leases as of December 31, 1995 including $362,700 on leases with the stockholder: 1996 ............ $ 80,022 1997 ............ 65,457 1998 ............ 54,525 1999 ............ 48,901 Thereafter ...... 175,500 --------- Total ............ $424,405 =========
Rent expense was $51,650 for the year ending December 31, 1995, including $32,200 on leases with the stockholder. NOTE 6. RELATED PARTY TRANSACTIONS Operating expenses include amounts paid to or on behalf of the stockholder as follows: Management fees to stockholder ............... $ 180,752 Expenses paid on behalf of stockholder ...... 79,666 Rent paid for office locations ............... 61,650 Other ....................................... 4,400
NOTE 7. CONTINGENCIES The Companies are subject to legal proceedings and claims which have arisen in the ordinary course of their businesses. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material adverse effect on the financial positions of the Companies. NOTE 8. SUBSEQUENT EVENT On February 23, 1996 the Companies signed a letter of intent to sell its business and certain assets to a subsidiary of OutSource International, Inc. The sale was subsequently consummated. F-45 INDEPENDENT AUDITORS' REPORT CST Services Inc.: We have audited the accompanying balance sheets of CST Services Inc. as of December 31, 1994 and 1995, and the related statements of income, stockholder's equity, and cash flows for each of the two years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of CST Services Inc. as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 4 to the financial statements, the Company has sold its business and certain assets to a subsidiary of OutSource International, Inc. DELOITTE & TOUCHE LLP Certified Public Accountants Boston, Massachusetts April 18, 1996, except as to Note 4 for which the date is May 6, 1996 F-46 CST SERVICES INC. BALANCE SHEETS
DECEMBER 31, MARCH 30, ------------------------- ------------ 1994 1995 1996 ----------- ----------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash ............................................. $500,720 $531,376 $554,195 Trade accounts receivable, net of allowance for doubtful accounts of $3,000 at December 31, 1995 and March 30, 1996 .............................. 263,525 314,696 323,105 Prepaid and other assets ........................ 21,707 51,827 49,848 -------- --------- -------- Total current assets ........................... 785,952 897,899 927,148 -------- --------- -------- EQUIPMENT: Office equipment ................................. 13,342 13,342 15,382 Accumulated depreciation ........................ (3,933) (7,627) (8,523) -------- --------- -------- Equipment, net ................................. 9,409 5,715 6,859 -------- --------- -------- $795,361 $903,614 $934,007 ======== ========= ======== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable and other ........................ $ 14,190 $ 7,665 $ 6,043 Accrued payroll expenses ........................... 176,317 112,114 118,977 Accrued workers' compensation expense ............ 54,586 95,489 101,531 Accrued professional fees ........................ 25,000 40,000 46,000 -------- --------- -------- Total current liabilities ........................ 270,093 255,268 272,551 -------- --------- -------- CONTINGENCY (NOTE 3) STOCKHOLDER'S EQUITY Common stock, no par value: Authorized, 200,000 shares; issued and outstanding, 100 shares .................................... 8,500 8,500 8,500 Retained earnings ................................. 516,768 639,846 652,956 -------- --------- -------- Total stockholder's equity ..................... 525,268 648,346 661,456 -------- --------- -------- $795,361 $ 903,614 $934,007 ======== ========= ========
See notes to financial statements. F-47 CST SERVICES INC. STATEMENTS OF INCOME
YEARS ENDED DECEMBER THREE MONTHS ENDED 31, ------------------------ APRIL 1, MARCH 30, 1994 1995 1995 1996 ------------ ------------ ---------- ----------- (UNAUDITED) NET REVENUES ........................... $3,684,244 $4,421,992 $901,761 $1,047,081 ----------- ----------- --------- ----------- COST OF REVENUES: Payroll .............................. 2,318,455 2,814,776 585,024 667,238 Payroll taxes ........................ 313,448 367,658 75,815 84,469 Workers' compensation insurance ...... 153,328 232,651 43,875 71,906 ----------- ----------- --------- ----------- Total cost of revenues ............ 2,785,231 3,415,085 704,714 823,613 ----------- ----------- --------- ----------- GROSS PROFIT ........................... 899,013 1,006,907 197,047 223,468 ----------- ----------- --------- ----------- OPERATING EXPENSES ..................... 488,667 520,680 117,230 126,202 ----------- ----------- --------- ----------- OTHER INCOME: Placement fees ..................... 35,660 8,850 2,250 2,000 Interest income ..................... 2,595 3,997 814 794 ----------- ----------- --------- ----------- Total other income .................. 38,255 12,847 3,064 2,794 ----------- ----------- --------- ----------- NET INCOME ........................... $ 448,601 $ 499,074 $ 82,881 $ 100,060 =========== =========== ========= ===========
See notes to financial statements. F-48 CST SERVICES INC. STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON RETAINED STOCK EARNINGS -------- ------------- BALANCE, JANUARY 1, 1994 ........................ $8,500 $ 173,491 Distributions to stockholder .................. -- (105,324) Net income .................................... -- 448,601 ------- ---------- BALANCE, DECEMBER 31, 1994 ..................... 8,500 516,768 Distributions to stockholder .................. -- (375,996) Net income .................................... -- 499,074 ------- ---------- BALANCE, DECEMBER 31, 1995 ..................... 8,500 639,846 Distributions to stockholder (unaudited) ...... -- (86,950) Net income (unaudited) ........................ -- 100,060 ------- ---------- BALANCE, MARCH 30, 1996 (UNAUDITED) ............ $8,500 $ 652,956 ======= ==========
See notes to financial statements. F-49 CST SERVICES INC. STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, ------------------------- ----------------------------- APRIL 1, MARCH 30, 1994 1995 1995 1996 ------------- ------------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income .......................................... $ 448,601 $ 499,074 $ 82,881 $100,060 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ....................................... 2,639 3,694 923 896 Increase (decrease) arising from working capital items: Accounts receivable .............................. (135,865) (51,171) 14,987 (8,409) Prepaids and other assets ........................ (20,349) (30,120) (1,397) 1,979 Accounts payable and other ..................... 9,413 (6,525) (10,246) (1,622) Accrued payroll ................................. 101,902 (64,203) (69,095) 6,863 Accrued workers' compensation .................. 14,086 40,903 29,140 6,042 Accrued professional fees ........................ 7,000 15,000 5,500 6,000 ---------- ---------- --------- --------- Net cash provided by operating activities ...... 427,427 406,652 52,693 111,809 ---------- ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of office equipment ..................... (6,679) -- -- (2,040) ---------- ---------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of loan from stockholder .................. (10,200) -- -- -- Distributions to stockholder ........................ (105,324) (375,996) (48,000) (86,950) ---------- ---------- --------- --------- Net cash used for financing activities ......... (115,524) (375,996) (48,000) (86,950) ---------- ---------- --------- --------- NET INCREASE IN CASH ................................. 305,224 30,656 4,693 22,819 CASH, BEGINNING OF YEAR .............................. 195,496 500,720 500,720 531,376 ---------- ---------- --------- --------- CASH, END OF YEAR .................................... $ 500,720 $ 531,376 $505,413 $554,195 ========== ========== ========= =========
See notes to financial statements. F-50 CST SERVICES INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO MARCH 30, 1996 AND THE THREE MONTHS ENDED APRIL 1, 1995 AND MARCH 30, 1996 IS UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS - CST Services Inc. (the "Company") is a Massachusetts corporation which provides temporary light industrial and clerical staffing services. UNAUDITED INTERIM FINANCIAL STATEMENTS - The interim financial statements and the related information in the notes as of March 30, 1996 and for the three months ended April 1, 1995 and March 30, 1996 are unaudited. Such interim financial statements have been prepared on the same basis as the audited 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. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from these estimates. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. The Company provides for depreciation using the straight-line method over the estimated useful lives of the related assets which range from 3 to 5 years. INCOME TAXES - The Company has elected to be treated as an S corporation under the provisions of the Internal Revenue Code. The Company is subject to Massachusetts excise tax based on the Company's net worth. These amounts have been recorded as operating expenses in the financial statements. The taxable income of the Company is directly taxable to the stockholder for federal and state tax purposes and the stockholder is responsible for the payment of income taxes thereon. REVENUE RECOGNITION - All revenues are recognized as the related service is performed net of provision for credits and allowances. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of the accounts receivable and accounts payable balances approximate their fair values. NOTE 2. OFFICE SPACE The Company rents office space on a month-to-month basis. Total rent expense amounted to $8,600 in 1994 and $9,600 in 1995. NOTE 3. CONTINGENCY As of December 31, 1995 there is a disagreement between the Company and its former insurance carrier relating to premiums paid under a general liability insurance policy for the year ended December 1994. The insurance carrier has asserted that the Company owes additional premiums in the amount of $48,000, plus accrued interest on this amount. The Company is attempting to settle this F-51 CST SERVICES INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO MARCH 30, 1996 AND THE THREE MONTHS ENDED APRIL 1, 1995 AND MARCH 30, 1996 IS UNAUDITED) NOTE 3. CONTINGENCY--(CONTINUED) matter out-of-court. In the event that the matter proceeds to litigation, the likelihood of an unfavorable outcome cannot be predicted and, accordingly, an accrual for this matter has not been provided for in the accompanying financial statements. NOTE 4. SUBSEQUENT EVENT On May 6, 1996, the Company signed an agreement to sell its business and certain assets to a subsidiary of OutSource International, Inc. for a purchase price of $1,780,000. The price is comprised of $1,200,000 in cash, a $200,000 note to be paid in two annual installments plus interest of 7% per annum, and annual contingent payments, not to exceed $380,000, based upon net income of the Company for two years following the acquisition. F-52 INDEPENDENT AUDITORS' REPORT Standby Personnel of Colorado Springs, Inc.: We have audited the accompanying balance sheet of Standby Personnel of Colorado Springs, Inc. (the "Company") as of December 31, 1996, and the related statements of income, stockholder's equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Standby Personnel of Colorado Springs, Inc. at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Certified Public Accountants Denver, Colorado June 6, 1997 F-53 STANDBY PERSONNEL OF COLORADO SPRINGS, INC. BALANCE SHEET DECEMBER 31, 1996 ASSETS CURRENT ASSETS: Cash ................................................ $139,461 Trade accounts receivable, net of allowance for doubtful accounts of $15,000 ..................... 429,000 --------- Total current assets .............................. 568,461 PROPERTY AND EQUIPMENT, net ........................ 147,698 OTHER ASSETS ....................................... 11,138 --------- TOTAL ASSETS ....................................... $727,297 ========= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable .................................... $ 4,954 Accrued compensation .............................. 24,806 Note payable ....................................... 5,534 --------- Total current liabilities ........................ 35,294 ========= COMMITMENTS AND CONTINGENCIES (Note 4) STOCKHOLDER'S EQUITY: Common stock, $1 par value, 50,000 shares authorized, 10,000 shares issued and outstanding ............ 10,000 Additional paid-in capital ........................ 8,384 Retained earnings ................................. 673,619 --------- Total stockholder's equity ........................ 692,003 --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ......... $727,297 =========
See notes to financial statements. F-54 STANDBY PERSONNEL OF COLORADO SPRINGS, INC. STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1996 NET REVENUES ................................................ $5,346,882 ----------- COST OF REVENUES: Payroll ................................................... 3,137,746 Taxes ...................................................... 269,270 Workers' compensation and insurance ........................ 176,993 Other ...................................................... 47,643 ----------- Total cost of revenues ................................. 3,631,652 ----------- GROSS PROFIT ................................................ 1,715,230 ----------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Stockholder compensation ................................. 235,636 Other selling, general and administrative expenses ......... 866,801 ----------- Total selling, general and administrative expenses ...... 1,102,437 ----------- OPERATING INCOME .......................................... 612,793 ----------- OTHER INCOME: Interest income .......................................... 15,179 Gain on sale of equipment ................................. 527 ----------- Total other income ....................................... 15,706 ----------- NET INCOME ................................................ $ 628,499 ===========
See notes to financial statements. F-55 STANDBY PERSONNEL OF COLORADO SPRINGS, INC. STATEMENT OF STOCKHOLDER'S EQUITY YEAR ENDED DECEMBER 31, 1996
COMMON STOCK ADDITIONAL TOTAL -------------------- PAID-IN RETAINED STOCKHOLDER'S SHARES AMOUNT CAPITAL EARNINGS EQUITY -------- --------- ------------ ------------- -------------- BALANCE, JANUARY 1, 1996 ......... 10,000 $10,000 $8,384 $ 838,274 $ 856,658 Distributions to stockholder ...... -- -- -- (793,154) (793,154) Net income ........................ -- -- -- 628,499 628,499 ------- -------- ------- ---------- ---------- BALANCE, DECEMBER 31, 1996 ......... 10,000 $10,000 $8,384 $ 673,619 $ 692,003 ======= ======== ======= ========== ==========
See notes to financial statements. F-56 STANDBY PERSONNEL OF COLORADO SPRINGS, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................... $ 628,499 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .................................... 60,179 Amortization .................................... 1,653 Gain on sale of equipment ........................ (527) Changes in operating assets and liabilities: Trade accounts receivable ........................ 331,523 Other assets .................................... 212 Accounts payable ................................. (18,978) Accrued compensation ........................... 12,016 ---------- Net cash provided by operating activities ...... 1,014,577 ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ............... (108,768) Proceeds from sale of equipment .................. 2,300 ---------- Net cash used in investing activities ............ (106,468) ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of note payable ........................... (9,402) Cash distributions ................................. (793,154) ---------- Net cash used in financing activities ......... (802,556) ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS ......... 105,553 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...... 33,908 ---------- CASH AND CASH EQUIVALENTS, END OF YEAR ............ $ 139,461 ==========
See notes to financial statements. F-57 STANDBY PERSONNEL OF COLORADO SPRINGS, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS - Standby Personnel of Colorado Springs, Inc. (the "Company") is in the business of providing temporary employees to construction, commercial and light industrial companies located in the Colorado Springs metropolitan area. CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company invests temporary cash in demand deposits with federally insured financial institutions. Such deposit amounts at times exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company's trade receivables are geographically concentrated in the Colorado Springs metropolitan area. The Company believes that concentrations of credit risk with respect to receivables are limited due to the large number of customers and generally short payment terms. USE OF ESTIMATES - The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. REVENUE RECOGNITION - All revenues are recognized as the related service is performed, net of provision for credits and allowances. CASH EQUIVALENTS - For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT - Property and equipment is stated at cost and depreciated or amortized on an accelerated basis over the estimated useful service lives of the respective assets. Amortization of property under capital leases, leasehold improvements and computer software is included in depreciation expense. The estimated useful lives of property and equipment range from 3 to 7 years. LONG-LIVED ASSETS - SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of this statement had no effect on the financial position or results of operations of the Company for the year ended December 31, 1996. INCOME TAXES - Effective for the year ended December 31, 1991, the Company elected to be treated as an S corporation under applicable provisions of the Internal Revenue Code. Accordingly, any liability for income taxes is the obligation of the stockholder and no income tax liability has been recorded by the Company. WORKER'S COMPENSATION - The Company manages its workers compensation risk through a premium based insurance policy. The Company is responsible for payment of premiums only to the insurance carrier and is not obligated to reimburse its insurance carrier for claim payments. ADVERTISING - The Company expenses advertising and promotional expenditures as incurred. Total advertising and promotional expenses was $15,405 for the year ended December 31, 1996. F-58 STANDBY PERSONNEL OF COLORADO SPRINGS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 1996: Furniture, fixtures and equipment ..................... $138,496 Leasehold improvements .............................. 24,053 Vehicles ............................................. 134,691 --------- Property and equipment .............................. 297,240 Less: accumulated depreciation and amortization ...... 149,542 --------- Property and equipment, net ........................... $147,698 =========
Depreciation and amortization for property and equipment amounted to $61,832 for the year ended December 31, 1996. NOTE 3. CREDIT AGREEMENT AND NOTE PAYABLE Pursuant to a revolving line of credit agreement, in effect at December 31, 1996 and expiring April 30, 1997, the Company may borrow from a commercial bank up to $150,000. The line of credit is secured by accounts receivable and equipment. At December 31, 1996, no funds are outstanding on the line of credit. The Company has a note payable to a commercial bank, payable in monthly installments of $784 including interest at a rate of 8.5% with final payment of principal and interest due July 31, 1997. At December 31, 1996, $5,534 is outstanding on the note payable. NOTE 4. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS - The Company leases four facilities. One of these facilities is owned by a relative of the sole stockholder. These renewable lease agreements are classified as operating leases and range in term from two to five years with renewal rights for additional years. Total rental expense related to these leases was $45,792 for the year ended December 31, 1996. The Company is obligated, pursuant to these lease agreements, to pay property taxes and special assessments during the term of the leases. Future minimum rental payments under these leases are as follows:
RELATED TOTAL PARTY OTHER --------- --------- -------- 1997 ...... $53,534 $18,000 $35,534 1998 ...... 33,000 18,000 15,000 1999 ...... 12,000 12,000 -- -------- -------- -------- Total ...... $98,534 $48,000 $50,534 ======== ======== ========
NOTE 5. SUBSEQUENT EVENTS On February 24, 1997, the business and certain assets of the Company were acquired by a subsidiary of OutSource International, Inc. F-59 INDEPENDENT AUDITORS' REPORT Superior Temporaries, Inc. We have audited the accompanying balance sheets of Superior Temporaries, Inc. as of December 31, 1995 and 1996, and the related statements of income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Superior Temporaries, Inc. as of December 31, 1995 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Certified Public Accountants Fort Lauderdale, Florida July 14, 1997 F-60 SUPERIOR TEMPORARIES, INC. BALANCE SHEETS DECEMBER 31, 1995 AND 1996
1995 1996 ------------ ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents .............................. $ 326,839 $ 44,947 Trade accounts receivable, net of allowance for doubtful accounts of $153,679 in 1995 and 195,475 in 1996 ...... 1,412,246 2,240,034 Notes receivable due from shareholders .................. -- 84,377 Due from related party ................................. 16,778 733 Prepaid expenses and other current assets ............... 25,925 32,540 ----------- ----------- Total current assets ................................. 1,781,788 2,402,631 PROPERTY AND EQUIPMENT, net ........................... 425,681 494,533 INTANGIBLE ASSETS, net ................................. 31,311 23,408 OTHER ASSETS .......................................... 74,248 121,878 ----------- ----------- Total assets ....................................... $2,313,028 $3,042,450 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ....................................... $ 56,285 $ 82,953 Accrued expenses: Workers' compensation and insurance .................. 507,620 599,778 Other ................................................ 27,473 55,347 Line of credit .......................................... 550,000 589,552 Current maturities of long-term debt .................. 104,151 27,933 Due to related party .................................... 12,046 46,077 ----------- ----------- Total current liabilities ........................... 1,257,575 1,401,640 ----------- ----------- LONG-TERM DEBT, less current maturities ............... 99,425 73,592 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 5) .................. SHAREHOLDERS' EQUITY: Common stock, $1 par value, 7,500 shares authorized, 600 shares issued and outstanding ..................... 600 600 Additional paid-in capital .............................. 45,400 45,400 Retained earnings ....................................... 910,028 1,521,218 ----------- ----------- Total shareholders' equity ........................... 956,028 1,567,218 ----------- ----------- Total liabilities and shareholders' equity ......... $2,313,028 $3,042,450 =========== ===========
See notes to financial statements. F-61 SUPERIOR TEMPORARIES, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996 ------------ --------------- Net revenues ................................................ $9,794,777 $14,048,034 ---------- ----------- Cost of revenues: Payroll ................................................... 5,768,750 8,499,107 Taxes ...................................................... 517,989 730,086 Workers' compensation and insurance ........................ 708,651 853,051 Other ...................................................... 310,132 407,189 ---------- ----------- Total cost of revenues ................................. 7,305,522 10,489,433 ---------- ----------- Gross profit ............................................. 2,489,255 3,558,601 ---------- ----------- Selling, general and administrative expenses: Shareholders' compensation ................................. 127,422 182,074 Other selling, general and administrative .................. 1,807,427 2,324,763 ---------- ----------- Total selling, general and administrative expenses ...... 1,934,849 2,506,837 ---------- ----------- Operating income .......................................... 554,406 1,051,764 ---------- ----------- Other expense (income): Interest income .......................................... (8,117) (15,577) Interest expense .......................................... 58,943 52,378 Other ...................................................... 15,176 (949) ---------- ----------- Total other expense (income) ........................... 66,002 35,852 ---------- ----------- Net income ................................................ $ 488,404 $ 1,015,912 ========== ===========
See notes to financial statements. F-62 SUPERIOR TEMPORARIES, INC. STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995 AND 1996
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS -------- ----------- ------------- Balance, January 1, 1995 ............ $600 $42,515 $ 567,624 Capital contributions ............... -- 2,885 -- Distributions to shareholders ...... -- -- (146,000) Net income ........................ -- -- 488,404 ----- -------- ---------- Balance, December 31, 1995 ......... 600 45,400 910,028 Distributions to shareholders ...... -- -- (404,722) Net income ........................ -- -- 1,015,912 ----- -------- ---------- Balance, December 31, 1996 ......... $600 $45,400 $1,521,218 ===== ======== ==========
See notes to financial statements. F-63 SUPERIOR TEMPORARIES, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996 ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................... $ 488,404 $1,015,912 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .............................. 42,921 56,744 Changes in assets and liabilities: Trade accounts receivables, net ........................... (602,542) (827,788) Due to related party ....................................... (111,423) 34,031 Prepaid expenses and other current assets .................. (11,443) (6,615) Other assets ............................................. (55,379) (47,630) Accounts payable and accrued expenses ..................... 500,336 146,700 ---------- ---------- Net cash provided by operating activities ............... 250,874 371,354 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ........................ (343,293) (109,193) Other assets ................................................ (11,710) (8,500) ---------- ---------- Net cash used in investing activities ..................... (355,003) (117,693) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit ........................ 550,000 39,552 Capital contributions ....................................... 2,885 -- Notes receivable due from shareholders ..................... -- (84,377) Due from related party ....................................... (303,225) 16,045 Long-term debt borrowings (repayments) ..................... 146,615 (102,051) Distributions paid to shareholders ........................... (146,000) (404,722) ---------- ---------- Net cash provided by (used in) financing activities ...... 250,275 (535,553) ---------- ---------- Net increase (decrease) in cash .............................. 146,146 (281,892) Cash and cash equivalents, beginning of year ............... 180,693 326,839 ---------- ---------- Cash and cash equivalents, end of year ..................... $ 326,839 $ 44,947 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments for interest ................................. $ 54,039 $ 53,327 ========== ==========
See notes to financial statements. F-64 SUPERIOR TEMPORARIES, INC. NOTES TO THE FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS: Superior Temporaries , Inc. ("Company") provides flexible industrial staffing services to various clients under the trade name Labor World, as allowed by franchise agreements between the Company and OutSource Franchising, Inc. The Company provides these services through ten Company-owned locations. A summary of the Company's significant accounting policies follows: USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION: All revenues are recognized as the related service is performed, net of provision for credits and allowances. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT: Property and equipment is stated at cost and depreciated or amortized on a straight-line basis over the estimated useful service lives of the respective assets. Leasehold improvements are stated at cost and amortized over the shorter of the term of the lease or estimated useful life of the improvement. Amortization of leasehold improvements is included in depreciation expense. The estimated useful lives of property and equipment range from 3 to 7 years. LONG-LIVED ASSETS: Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 121 requires that impairments, measured using fair market value, are recognized whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable and the future undiscounted cash flows attributed to the assets are less than their carrying values. Adoption of this statement did not have a material effect on the Company's financial statements. INTANGIBLE ASSETS: The Company has customer lists that are being amortized on a straight line basis over five years. Accumulated amortization was $69,767 and $86,170 as of December 31, 1995 and 1996, respectively. INCOME TAXES: The Company has elected to be treated as an S corporation and, as such, all of its income is taxed directly to its shareholders for federal income tax purposes. Therefore, no provision or liability for income taxes has been included in these financial statements. WORKERS' COMPENSATION: The Company manages its workers compensation risk through a loss sensitive insurance policy. The Company is obligated to reimburse its insurance carriers for claim payments up to a maximum of $250,000 per occurrence (with no aggregate maximum dollar limit on the Company's liability for claim payments) as well as for certain fixed and variable expenses. Provisions for expected future payments are accrued based on the Company's estimate of its aggregate liability for all open claims and claims incurred but not reported. F-65 SUPERIOR TEMPORARIES, INC. NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) ADVERTISING: The Company expenses advertising and promotional expenditures as incurred. Total advertising and promotional expenses were $17,007 and $27,685 for the years ended December 31, 1995 and 1996, respectively. NOTE 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
1995 1996 ---------- --------- Land ................................................ $ 81,850 $ 81,850 Buildings .......................................... 277,804 326,805 Furniture, fixtures and equipment .................. 84,994 123,773 Leasehold improvements .............................. 6,126 29,386 --------- --------- Property and equipment .............................. 450,774 561,814 Less accumulated depreciation and amortization ...... 25,093 67,281 --------- --------- Property and equipment, net ........................ $425,681 $494,533 ========= =========
Depreciation expense, including amortization of leasehold improvements, was $17,248 and $42,188 for the years ended December 31, 1995 and 1996, respectively. NOTE 3. LONG-TERM DEBT Long-term debt consists of the following:
1995 1996 ---------- --------- Mortgage note payable in monthly principal installments of $1,650 and collateralized by real estate. The interest rate was prime plus 2% (8.25% at December 31, 1996) per annum. The note matures on October 1, 2000 .................................... $ 95,250 $77,550 Mortgage note payable in monthly principal and interest installments of $973, with an interest rate of 8% per annum and collateralized by real estate. The note matures on April 1, 1999 33,326 23,975 Note payable with interest only paid monthly and a balloon payment in 1996. The note was collateralized by the assets of the Company and personally guaranteed by the shareholders. The note had an interest rate of prime plus 1.5% (8.5% at December 31, 1995) per annum ................................. 75,000 -- --------- --------- Long-term debt ................................................ 203,576 101,525 Less current maturities of long-term debt ..................... 104,151 27,933 --------- --------- Long-term debt, less current maturities ........................ $ 99,425 $73,592 ========= =========
NOTE 4. LINE OF CREDIT The Company maintained a line of credit which matured on April 30, 1997 and was not renewed. The borrowing amount was limited to $1,250,000, was secured by the assets of the Company and was F-66 SUPERIOR TEMPORARIES, INC. NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED) NOTE 4. LINE OF CREDIT--(CONTINUED) personally guaranteed by the shareholders. The line of credit had a stated interest rate equivalent to the 30 day commercial paper rate (which was 5.95% per annum at December 31, 1996) plus 2.65%. NOTE 5. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company conducts its operations in various leased facilities under leases that are classified as operating leases for financial reporting purposes. The leases provide for the Company to pay real estate taxes, common area maintenance and certain other expenses. Lease terms, excluding renewal option periods exercisable by the Company at escalated rents, expire between 1997 and 2000. The Company does not have any fixed minimum lease commitments with related parties. A schedule of fixed minimum lease commitments is as follows:
YEAR RENTAL AMOUNT - ------------------------ -------------- 1997 ...... $ 79,823 1998 ...... 67,475 1999 ...... 26,832 2000 ...... 11,669 2001 ...... -- --------- Total ...... $185,799 =========
Rent expense was $89,000 and $98,000 for the years ended December 31, 1995 and 1996, respectively. The Company owns real property at one of its operating locations in which groundwater contamination was detected in 1995 at levels that exceeded the Florida groundwater standards for certain pollutants. Based on a preliminary oral communication to the Company of the results of recent testing performed to identify the nature and source of the contamination, it is the Company's belief that the contamination was caused by a third party neighbor to the Company's property. The Company believes that the clean up costs that will have to be paid related to this matter will be the responsiblity of the third party neighbor and furthermore will be funded by a Florida tax levied on businesses similar to the third party neighbor for this purpose. Based on the above the financial statements do not include any provision for any loss related to this matter. However, legal fees and related expenses, which have not been material, are being incurred to protect the Company's interest in the event, which the Company believes is remote, that the State of Florida does not fund the payment of the clean up costs. NOTE 6. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company places its cash with what it believes to be high credit quality institutions. At times cash deposits may be in excess of the FDIC insurance limit. The Company has not incurred any losses in such accounts. The Company grants credit to its customers generally without collateral and regularly assesses their financial strength. The Company believes that credit risk related to its accounts receivable is limited. F-67 SUPERIOR TEMPORARIES, INC. NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED) NOTE 7. RELATED PARTY TRANSACTIONS The Company had notes receivable due from shareholders of $84,377 at December 31, 1996. The notes bear interest at 12% per annum and are unsecured. The notes are due on demand. The Company leases certain personnel from Productivity Partners, which is an affiliated company due to common ownership. The Company owed Productivity Partners $12,046 and $46,077 as of December 31, 1995 and 1996, respectively. Productivity Partners incurs certain corporate office expenses on behalf of the Company, which are subsequently reimbursed to Productivity Partners by the Company. Selling general and administrative expenses include $293,500 and $395,576 of corporate expenses for the years ended December 31, 1995 and 1996, respectively, that the Company reimbursed to Productivity Partners. In the normal course of business, the Company enters into transactions with Genesis Financial Services, Inc., which is an affiliated company due to common ownership. Such transactions consist primarily of cash advances, which do not bear interest and have no stated maturity dates. Genesis Financial Services, Inc. owed the Company $16,778 and $733 as of December 31, 1995 and 1996, respectively. The Company did not incur any interest expense or recognize any interest income in connection with its transactions with Genesis Financial Services, Inc. during the years ended December 31, 1995 and 1996, respectively. NOTE 8. SUBSEQUENT EVENTS On March 3, 1997, the assets and business of the Company were acquired by a subsidiary of OutSource International, Inc. and the franchise agreements between the Company and OutSource Franchising, Inc. were terminated. F-68 INDEPENDENT AUDITORS' REPORT Stand-By, Inc. We have audited the accompanying balance sheet of Stand-By, Inc. (the "Company") as of September 30, 1996, and the related statements of income, stockholder's equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stand-By, Inc. at September 30, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Certified Public Accountants Denver, Colorado June 6, 1997 F-69 STAND-BY, INC. BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1996 1996 --------------- ------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents .............................. $ 683,494 $ 819,875 Trade accounts receivable, net of allowance for doubtful accounts of $47,000 ................................. 1,823,947 1,684,875 Advances to affiliates ................................. 1,392,951 1,234,114 Other accounts receivable .............................. 752,268 346,646 Deferred tax asset .................................... 310,872 310,872 Prepaid expenses and other current assets ............ 54,784 13,035 ----------- ----------- Total current assets ................................. 5,018,316 4,409,417 PROPERTY AND EQUIPMENT, net ........................... 802,656 781,593 MARKETABLE SECURITIES, available for sale ............... 924,134 918,494 OTHER ASSETS .......................................... 388,321 384,230 ----------- ----------- TOTAL ASSETS ....................................... $7,133,427 $6,493,734 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable ....................................... $ 303,257 $ 181,324 Accrued payroll ....................................... 822,577 348,036 Accrued workers' compensation and insurance ............ 768,502 767,099 Line of credit ....................................... 1,802,603 1,736,331 Current maturities of long-term debt .................. 182,215 181,875 ----------- ----------- Total current liabilities ........................... 3,879,154 3,214,665 ----------- ----------- LONG-TERM DEBT, LESS CURRENT MATURITIES ............... 126,365 13,592 ----------- ----------- DEFERRED INCOME TAXES ................................. 39,618 39,618 ----------- ----------- COMMITMENTS AND CONTINGENCIES (NOTE 6, 8) STOCKHOLDER'S EQUITY: Common stock, no par value, 70,000 shares authorized, 10,000 shares issued and outstanding ............... 10,000 10,000 Retained earnings .................................... 3,078,290 3,215,859 ----------- ----------- Total stockholder's equity ........................... 3,088,290 3,225,859 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY . $7,133,427 $6,493,734 =========== ===========
See notes to financial statements. F-70 STAND-BY, INC. STATEMENTS OF INCOME
YEAR ENDED THREE MONTHS ENDED SEPTEMBER 30, DECEMBER 31, --------------- ----------------------------- 1996 1995 1996 --------------- ------------ -------------- (UNAUDITED) NET REVENUES ................................................ $13,693,776 $3,138,437 $3,876,609 ----------- ---------- ---------- COST OF REVENUES: Payroll ................................................... 7,169,335 1,658,865 1,986,277 Payroll taxes ............................................. 678,936 130,935 141,348 Workers' compensation and insurance ........................ 971,857 318,761 279,232 Other ...................................................... 90,844 56,711 57,070 ----------- ---------- ---------- Total cost of revenues ................................. 8,910,972 2,165,272 2,463,927 ----------- ---------- ---------- GROSS PROFIT ................................................ 4,782,804 973,165 1,412,682 ----------- ---------- ---------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Stockholder compensation ................................. 657,472 62,317 53,802 Other selling, general and administrative expenses ......... 3,976,882 980,377 1,098,177 ----------- ---------- ---------- Total selling, general and administrative expenses ...... 4,634,354 1,042,654 1,151,979 ----------- ---------- ---------- OPERATING INCOME (LOSS) .................................... 148,450 (69,489) 260,703 ----------- ---------- ---------- OTHER EXPENSE (INCOME): Proceeds from life insurance policy ........................ (500,000) -- -- Interest income .......................................... (124,226) (16,296) (13,995) Interest expense .......................................... 158,000 56,778 62,778 Other ...................................................... (31,368) (8,865) (7,488) ----------- ---------- ---------- Total other expense (income) ........................... (497,594) 31,617 41,295 ----------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES ........................... 646,044 (101,106) 219,408 INCOME TAXES PROVISION (BENEFIT): Current ................................................... 106,296 7,324 81,839 Deferred ................................................... (60,274) -- -- ----------- ---------- ---------- NET INCOME (LOSS) .......................................... $ 600,022 $(108,430) $ 137,569 =========== ========== ==========
See notes to financial statements. F-71 STAND-BY, INC. STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON STOCK TOTAL -------------------- RETAINED STOCKHOLDER'S SHARES AMOUNT EARNINGS EQUITY -------- --------- ------------ -------------- BALANCE, OCTOBER 1, 1995 ..................... 10,000 $10,000 $2,478,268 $2,488,268 Net income ................................. -- -- 600,022 600,022 ------- -------- ----------- ----------- BALANCE, SEPTEMBER 30, 1996 .................. 10,000 10,000 3,078,290 3,088,290 Net income (unaudited) ..................... -- -- 137,569 137,569 ------- -------- ----------- ----------- BALANCE, DECEMBER 31, 1996 (unaudited) ...... 10,000 $10,000 $3,215,859 $3,225,859 ======= ======== =========== ===========
See notes to financial statements. F-72 STAND-BY, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED THREE MONTHS ENDED SEPTEMBER 30, DECEMBER 31, --------------- ----------------------------- 1996 1995 1996 --------------- -------------- ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) ............................................. $ 600,022 $ (108,430) $ 137,569 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation ................................................... 116,987 25,581 25,581 Amortization of investment premium ........................... 22,560 5,640 5,640 (Gain) loss on sale of equipment .............................. 3,513 -- (700) Provision for deferred income taxes ........................... (60,274) -- -- Changes in operating assets and liabilities: Trade accounts receivable, net .............................. (107,078) 406,844 139,072 Other accounts receivable .................................... (379,051) 68,165 405,621 Prepaids and other current assets ........................... (11,181) (24,077) 41,749 Other assets ................................................ (42,203) (48,850) 4,093 Accounts payable ............................................. 114,062 66,894 (121,933) Accrued payroll ............................................. 497,587 (81,732) (474,541) Accrued workers' compensation and insurance .................. (221,854) 168,312 (1,403) ---------- ---------- ---------- Net cash provided by operating activities .................. 533,090 478,347 160,748 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment .............................. (223,763) (2,175) (5,839) Advances to affiliates, net .................................... (458,256) (348,648) 158,837 Proceeds from sale of equipment ................................. 1,075 -- 2,021 ---------- ---------- ---------- Net cash provided by (used in) investing activities ......... (680,944) (350,823) 155,019 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit of credit and other borrowings ....................................... 1,051,603 -- 480,000 Principal payments on revolving line of credit and other borrowings ....................................... (656,455) (271,709) (659,386) ---------- ---------- ---------- Net cash provided by (used in) by financing activities ...... 395,148 (271,709) (179,386) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................................. 247,294 (144,185) 136,381 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......................................... 436,200 436,200 683,494 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................ $ 683,494 $ 292,015 $ 819,875 ========== ========== ========== SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES Interest paid ................................................... $ 168,216 $ 50,499 $ 50,966 ========== ========== ========== Income taxes paid ................................................ $ 156,000 $ -- $ 104,298 ========== ========== ==========
See notes to financial statements. F-73 STAND-BY, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS - Stand-By, Inc. (the "Company") is in the business of providing temporary employees to construction, commercial and light industrial companies located in the Denver metropolitan area. UNAUDITED INTERIM FINANCIAL STATEMENTS - The interim unaudited financial statements and the related information in the notes as of December 31, 1996 and for the three months ended December 31, 1995 and 1996 are unaudited. Such interim financial statements have been prepared on the same basis as the audited 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. CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company invests temporary cash in demand deposits with federally insured financial institutions. Such deposit amounts at times exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company's trade receivables are geographically concentrated in the Denver metropolitan area. The Company believes that concentrations of credit risk with respect to receivables are limited due to the large number of customers and generally short payment terms. USE OF ESTIMATES - The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. REVENUE RECOGNITION - All revenues are recognized as the related service is performed, net of provision for credits and allowances. CASH EQUIVALENTS - The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT - Property and equipment is stated at cost and depreciated or amortized on an accelerated or straight-line basis over the estimated useful service lives of the respective assets. Amortization of property under capital leases, leasehold improvements and computer software is included in depreciation expense. The estimated useful lives of property and equipment range from 3 to 7 years. INVESTMENT IN MARKETABLE SECURITIES - SFAS No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES," requires debt and equity securities with readily determinable fair values be segregated into one of the following categories: trading, available-for-sale, or held-to-maturity. The Company does not hold securities for trading or as held-to-maturity. Available-for-sale securities are carried at their fair values, as determined from published prices of recent trading in the securities. Changes in the fair values of available for sale securities are recognized as a component of stockholder's equity until such securities are sold. The difference between the cost and the face amount of the F-74 STAND-BY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) marketable debt security is treated as premium. The amount of premium is amortized as expense over the life of the security or its earliest call date in such a way as to result in a constant rate of interest being recognized in the financial statements over the Company's holding period for the debt security. LONG-LIVED ASSETS - SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of this statement had no effect on the financial position or results of operations of the Company for the year ended September 30, 1996. INCOME TAXES: - The Company provides for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for the differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense equals the taxes payable or refundable for the period plus or minus the change in the period of deferred tax assets and liabilities. WORKERS COMPENSATION - Since October 1, 1990, the Company has participated in a large deductible workers compensation insurance program. Under this arrangement, the Company has a deductible of $250,000 per occurrence with an overall deductible limit of $1,643,400 in the aggregate. Total workers compensation expense under this program was $971,857 for the year ended September 30, 1996. The estimated unpaid expense is reported in the accompanying financial statements as a liability. NOTE 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following at September 30, 1996: Furniture, fixtures and equipment ..................... $ 709,140 Leasehold improvements .............................. 352,800 Vehicles ............................................. 212,119 ----------- Property and equipment .............................. 1,274,059 Less: accumulated depreciation and amortization ...... 471,403 ----------- Property and equipment, net ........................... $ 802,656 ===========
Depreciation and amortization expense for property and equipment amounted to $116,987 for the year ended September 30, 1996. F-75 STAND-BY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED) NOTE 3. MARKETABLE DEBT SECURITIES The Company holds municipal debt securities at September 30, 1996 with a fair value of $924,134 at September 30, 1996, which approximates the amortized cost. At September 30, 1996 contractual maturities of marketable debt securities were $510,000 after one year through five years and $385,000 after 10 years. As a condition of a letter of credit these securities have been pledged to a commercial bank. NOTE 4. LONG-TERM DEBT Long-term debt consists of the following at September 30, 1996: Term loan, payable in monthly installments of $6,667 plus interest at the bank's prime rate (8.25% at September 30, 1996) plus 1% with final payment of principal and interest due February 28, 1998. Secured by the Company's assets, a first deed of trust and assignment of leases and rents on real estate owned by the Company's sole stockholder, and assignment of a life insurance policy on the life of the Company's sole stockholder .................................... $119,986 Term loan payable in monthly installments of $1,890 including interest at 8.25% with final payment of principal and interest due April 15, 1999, secured by four vehicles ............................................................... 52,453 Term loan payable in monthly installments of $2,017 including interest at 8.25% with final payment of principal and interest due July 15, 1999, secured by four vehicles ............................................................... 60,834 Obligations under capital leases. ................................................ 75,307 --------- Long-term debt .................................................................. 308,580 Less current maturities of long-term debt ....................................... 182,215 --------- Long-term debt, less current maturities .......................................... $126,365 =========
The aggregate annual principal payments on long-term debt and the future minimum lease payments, at present value, for capitalized lease obligations are as follows:
CAPITAL LONG-TERM LEASE SEPTEMBER 30, DEBT OBLIGATIONS - ------------------------------------------- ----------- ------------ 1997 ................................. $119,330 $ 67,272 1998 ................................. 82,666 12,630 1999 ................................. 31,277 -- --------- -------- Total future minimum payments ......... $233,273 79,902 ========= Less: interest ........................ (4,595) -------- Obligations under capital leases ...... $ 75,307 ========
F-76 STAND-BY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED) NOTE 5. LINE OF CREDIT Pursuant to a revolving line of credit agreement, in effect at September 30, 1996 and expiring February 28, 1997, the Company along with its affiliated companies, may borrow from a commercial bank up to the lesser of $2,500,000 or a percentage of the three affiliated companies' accounts receivable and certain investments. The obligation for this line of credit is joint and several. Therefore, the entire balance on this loan is shown as an obligation of the Company. Amounts borrowed by the two affiliates are treated as amounts receivable from these companies. Amounts borrowed by the affiliated companies are collateralized by substantially all of those companies' assets. Interest is due monthly at the bank's prime rate (8.25% at September 30, 1996) plus 3/4% with principal of $1,802,603 as of September 30, 1996 and accrued interest due February 28, 1997. NOTE 6. LETTER OF CREDIT In connection with the Company's participation in a large deductible workers compensation insurance program, the Company is required to maintain an irrevocable standing letter of credit from its commercial bank in an amount equal to the estimated incurred losses for workers compensation insurance. The letter is secured by certain investments in money market accounts, investment grade municipal securities and the personal guarantee of the Company's sole stockholder. The letter of credit is automatically renewable for one year periods, unless the bank provides notice within sixty (60) days, with a final expiration of December 31, 1998. As of September 30, 1996, no funds have been drawn against the letter of credit. NOTE 7. INCOME TAXES A reconciliation of income taxes determined using the statutory U.S. rate of 34% to actual income taxes provided was as follows: Tax at U.S. statutory rate ...... $ 219,655 Life insurance proceeds ......... (170,000) Municipal bond interest ......... (14,805) Other ........................... 11,172 ---------- $ 46,022 ==========
F-77 STAND-BY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED) NOTE 7. INCOME TAXES--(CONTINUED) The tax-effected temporary differences and carryforwards which comprised deferred tax assets and liabilities were as follows:
TAX TAX ASSETS LIABILITIES --------- ------------ Allowance for doubtful accounts ...... $ 15,980 $ -- Accrued compensation .................. 174,053 -- Accrued workers compensation ......... 114,897 -- Alternative minimum tax ............... 20,879 -- Depreciation ........................ 54,555 -------- Total ................................. 325,809 $54,555 ========= ======== Net deferred tax asset ............... $271,254 =========
NOTE 8. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS - The Company leases four facilities owned by its sole stockholder, one facility owned by its sole stockholder and another Company officer and two facilities owned by third parties. These renewable lease agreements are classified as operating leases and range in term from five to ten years with renewal rights for an additional ten years. Total rental expense related to these leases was $175,819 for the year ended September 30, 1996. The Company is obligated, pursuant to these lease agreements, to pay property taxes and special assessments during the term of the leases. Total property tax expense related to these leases was $17,587 for the year ended September 30, 1996. Future minimum rental payments under these leases are as follows:
RELATED SEPTEMBER 30, TOTAL PARTY OTHER - --------------------- ---------- --------- --------- 1997 ............ $175,700 $31,500 $144,200 1998 ............ 118,800 26,400 92,400 1999 ............ 108,900 16,500 92,400 2000 ............ 100,650 8,250 92,400 2001 ............ 75,200 -- 75,200 Thereafter ...... 155,000 -- 155,000 --------- -------- --------- Total ............ $734,250 $82,650 $651,600 ========= ======== =========
NOTE 9. RELATED PARTY TRANSACTIONS The Company has made cash advances to corporations affiliated by common stock ownership. Total advances as of September 30, 1996 were $1,392,951 of which $607,819 was drawn on the line of credit as of September 30, 1996. The Company receives reimbursement for the cost of interest from these affiliates on this revolving line. All other advances are payable with interest at 1% over the Company's cost of money. The Company earned management fees of $ 24,000 by providing administrative and accounting services to one of the companies affiliated by common stock ownership during the year ended September 30, 1996. F-78 STAND-BY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1996 AND THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED) NOTE 10. SUBSEQUENT EVENTS On March 31, 1997, the business and certain assets of the Company were acquired by a subsidiary of OutSource International, Inc. F-79 [INSIDE BACK COVER] DESCRIPTION OF GRAPHIC: A map of the United States that shows all of OutSource's offices by division throughout the United States. One legend indicates that Tandem division offices are represented by blue dots, Synadyne division offices by red dots and Office Ours division offices by yellow dots. In addition, OutSource's headquarters location is represented by the Company's logo. There is an additional legend that shows various sized dots that represent the number of offices in a particular area. ================================================================================ NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS; IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. -------------------------- TABLE OF CONTENTS
PAGE ---------- Prospectus Summary ........................ 3 The Company .............................. 7 Risk Factors .............................. 7 Use of Proceeds ........................... 16 Dividend Policy ........................... 16 Capitalization ........................... 17 Dilution ................................. 18 Selected Consolidated Financial Data ...... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations ............... 22 Business ................................. 33 Management ................................. 47 Certain Transactions ..................... 55 Principal and Selling Shareholders ......... 59 Description of Securities .................. 61 Shares Eligible for Future Sale ............ 64 Underwriting .............................. 65 Independent Public Accountants ............ 66 Experts .................................... 66 Legal Matters .............................. 67 Available Information ..................... 67 Index to Financial Statements ............ F-1
----------------------------------- UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ================================================================================ ================================================================================ 3,700,000 SHARES [GRAPHIC OMITTED] [OUTSOURCE/registered trademark/] [INTERNATIONAL] [THE LEADER IN HUMAN RESOURCES] Common Stock ----------------- P R O S P E C T U S , 1997 ----------------- SMITH BARNEY INC. Robert W. Baird & Co. Incorporated Donaldson, Lufkin & Jenrette Securities Corporation ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following sets forth expenses and costs (other than underwriting discounts and commissions) expected to be incurred in connection with the issuance and distribution of the securities being registered and payable by the Company. All amounts except the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market filing fee are estimated. Securities and Exchange Commission Registration Fee ...... $ 20,630 NASD filing fee .......................................... 7,308 Nasdaq National Market listing fee ........................ 40,000 Transfer Agent and Registrar fees ........................ 4,500 Legal fees and expenses ................................. 280,000 Accounting fees and expenses .............................. 600,000 Blue Sky fees and expenses .............................. 7,500 Printing expenses ....................................... 320,000 Miscellaneous ............................................. 60,062 ----------- Total ................................................... $1,340,000 ===========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company has authority to indemnify its directors and officers to the extent provided in the FBCA. Section 607.0850 of the FBCA permits a Florida corporation to indemnify a present or former director or officer of the corporation (and certain other persons serving at the request of the corporation in related capacities) for liabilities, including legal expenses, arising by reason of service in such capacity if such person shall have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and in any criminal proceeding if such person had no reasonable cause to believe his conduct was unlawful. However, in the case of actions brought by or in the right of the corporation, no indemnification may be made with respect to any matter as to which such director or officer shall have been adjudged liable, except in certain limited circumstances. The Articles and Bylaws provide that the Company shall indemnify its officers and directors to the fullest extent provided by law. At present, there is no pending litigation or proceeding involving a director or officer of the Company as to which indemnification is being sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification by an officer or director. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Within the last three years, the Company issued the following securities without registration under the Securities Act: SYNADYNE II, INC. On December 28, 1994, Synadyne II, Inc. issued an aggregate of 10,000 shares of its common stock to Alan E. Schubert, Lawrence H. Schubert, Louis A. Morelli, Paul M. Burrell, Louis J. Morelli, Raymond S. Morelli, Margaret Morelli Janisch, Matthew B. Schubert and Jason D. Schubert. Synadyne II, Inc. received nominal consideration for the issuance of these shares. The securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. No underwriting commissions were recorded in connection with the foregoing issuances of stock. SYNADYNE IV, INC. On January 24, 1995, Synadyne IV, Inc. issued an aggregate of 10,000 shares of its common stock to Alan E. Schubert, Lawrence H. Schubert, Louis A. Morelli, Paul M. Burrell, Louis J. Morelli, Raymond S. Morelli, Margaret Morelli Janisch, Matthew B. Schubert and Jason D. Schubert. Synadyne IV, Inc. received nominal consideration for the issuance of these shares. The securities were II-1 issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. No underwriting commissions were recorded in connection with the foregoing issuances of stock. SYNADYNE V, INC. On January 24, 1995, Synadyne V, Inc. issued an aggregate of 10,000 shares of its common stock to Alan E. Schubert, Lawrence H. Schubert, Louis A. Morelli, Paul M. Burrell, Louis J. Morelli, Raymond S. Morelli, Margaret Morelli Janisch, Matthew B. Schubert and Jason D. Schubert. Synadyne V, Inc. received nominal consideration for the issuance of these shares. The securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. No underwriting commissions were recorded in connection with the foregoing issuances of stock. OUTSOURCE FRANCHISING, INC. On February 7, 1995, Outsource Franchising, Inc. issued an aggregate of 10,000 shares of its common stock to Alan E. Schubert, Lawrence H. Schubert, Louis A. Morelli, Paul M. Burrell, Louis J. Morelli, Raymond S. Morelli, Margaret Morelli Janisch, Matthew B. Schubert, Jason D. Schubert and Mindi Wagner. As consideration, Outsource Franchising received nominal consideration for the issuance of these shares. The securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. No underwriting commissions were recorded in connection with the foregoing issuances of stock. OUTSOURCE INTERNATIONAL, INC. On February 15, 1996, OutSource International, Inc., an Illinois corporation ("OI") effectuated a 9,000 for 1 stock split pursuant to which OI issued an aggregate of 9,000,000 shares of its common stock to the following shareholders: Robert A. Lefcort, Lawrence H. Schubert as Trustee of the Lawrence H. Schubert Revocable Trust dated 8/25/95, Nadya I. Schubert as Trustee of the Nadya I. Schubert Revocable Trust dated 8/25/95, Paul M. Burrell, Alan E. Schubert, Louis A. Morelli as Trustee of the Louis J. Morelli S Stock Trust dated 1/1/95, Louis J. Morelli, Matthew B. Schubert, Jason D. Schubert and Alan E. Schubert as Trustees of the Matthew Schubert Outsource Trust dated 11/24/95, Matthew B. Schubert and Alan E. Schubert as Trustees of the Jason Schubert Outsource Trust dated 11/24/95, Mindi Wagner, Louis A. Morelli, Raymond S. Morelli, Louis A. Morelli as Trustee of the Margaret Ann Janisch S Stock Trust dated 1/1/95 and Margaret Morelli Janisch. No consideration was received by OI in connection with the stock split. The securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. No underwriting commissions were recorded in connection with the foregoing issuances of stock. EMPLOYEES INSURANCE SERVICES, INC. On January 14, 1997, Employees Insurance Services, Inc. issued an aggregate of 315.79 shares of its common stock to Robert A. Lefcort, Robert A. Lefcort and Nadya I. Schubert as Co-Trustees of the Robert A. Lefcort Irrevocable Trust dated 2/28/96, Lawrence H. Schubert as Trustee of the Lawrence H. Schubert Revocable Trust dated 8/25/95, Nadya I. Schubert as Trustee of the Nadya I. Schubert Revocable Trust dated 8/25/95, Paul M. Burrell, Alan E. Schubert, Louis A. Morelli as Trustee of the Louis J. Morelli S Stock Trust dated 1/1/95, Louis J. Morelli, Matthew B. Schubert, Jason D. Schubert and Alan E. Schubert as Trustees of the Matthew Schubert Outsource Trust dated 11/24/95, Matthew B. Schubert and Alan E. Schubert as Trustees of the Jason Schubert Outsource Trust dated 11/24/95, Mindi Wagner, Louis A. Morelli, Raymond S. Morelli, Louis A. Morelli as Trustee of the Margaret Ann Janisch S Stock Trust dated 1/1/95 and Margaret Morelli Janisch (the "Subsidiary Shareholders"). Employees Insurance Services, Inc. received nominal consideration for the issuance of these shares. The securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. No underwriting commissions were recorded in connection with the foregoing issuances of stock. OUTSOURCE INTERNATIONAL OF AMERICA, INC. On February 21, 1997, Outsource International of America, Inc. ("OIA") issued an aggregate of 1,000 shares of its common stock to the Subsidiary Shareholders. The shares were issued in connection with the merger of OI with and into OIA. The securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. No underwriting commissions were recorded in connection with the foregoing issuances of stock. REORGANIZATION. On February 21, 1997, the Company consummated a reorganization (the "Reorganization") with the Subsidiaries: OutSource International of America, Inc., Synadyne I, Inc., II-2 Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., OutSource Franchising, Inc., Capital Staffing Fund, Inc., and Employees Insurance Services, Inc. and the Subsidiaries' Shareholders. Pursuant to the terms of the Reorganization, the Company acquired all of the outstanding capital stock of the Subsidiaries from the Subsidiaries' Shareholders in exchange for the issuance of 5,448,788 shares of newly issued Common Stock to those shareholders, and the payment of approximately $5.7 million in cash and the issuance of promissory notes in the aggregate principal amount of approximately $1.4 million to certain of those shareholders (the "Reorganization"). The Common Stock was issued in reliance upon the exemption from registration provided by Section 4(2) under the Securities Act. In connection with the Reorganization, the Subsidiaries' Shareholders contributed approximately $4.3 million in outstanding promissory notes to the capitalization of the Company. As a result of the Reorganization, the Subsidiaries became wholly-owned by the Company and the Subsidiaries' Shareholders owned Common Stock in virtually the same proportion as the capital stock of the Subsidiaries was owned by them immediately prior to the Reorganization. SENIOR NOTES. On February 21, 1997, the Company issued Senior Notes in the principal amounts of $14,000,000 and $11,000,000 to Triumph and Bachow, respectively. A portion of the principal amount of the Senior Notes ($10,000,000) is due and payable on March 31, 2001 and the balance of the principal ($15,000,000) is due and payable on February 20, 2002. The Senior Notes bear interest at the rate of 11% per annum through February 1999 and at the rate of 12.5% per annum thereafter. The securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. WARRANTS. In connection with the issuance of the Senior Notes, the Company issued the Initial Warrants to the Senior Note Holders and issued the Additional Warrants into escrow, pending release to either certain shareholders of the Company or the Senior Note Holders, based upon the achievement by the Company of certain specified criteria. The Initial Warrants are currently exercisable at an exercise price of $.015 per share and expire on February 20, 2002. Following the successful consummation of certain acquisitions by the Company in April 1997, 180,891 of the Additional Warrants were released from escrow and distributed to certain shareholders of the Company. The remaining 392,896 Additional Warrants will be released to certain shareholders of the Company or the Senior Note Holders no later than February 1999. The Additional Warrants are exercisable upon release from escrow at an exercise price of $.015 per share and expire on February 20, 2002. If the Company does not consummate an initial public offering in which the net proceeds received by the Company equal or exceed $25.0 million prior to February 20, 2001, the holders of the Warrants have a right to require the Company to repurchase the unexercised portion of the warrants and the Warrant Shares purchased upon exercise of the Warrants at fair market value. The Company has granted the holders of the Warrants demand and piggyback registration rights with respect to the Warrant Shares. The securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. Triumph and Bachow received closing fees of $210,000 and $165,000, respectively, and Smith Barney Inc. received a placement fee of $1,500,000, in connection with the issuance of the Senior Notes and the Warrants. II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER EXHIBIT DESCRIPTION - -------- ----------------------------------------------------------------------------------------------- 1 Form of Underwriting Agreement among the Company, Smith Barney Inc., Robert W. Baird & Co. Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation, as Representatives of the several Underwriters* 2.1 Amended and Restated Agreement Among Shareholders dated February 21, 1997* 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* 3.1 Amended and Restated Articles of Incorporation of the Company* 3.2 Bylaws of the Company* 3.3 Form of Amended and Restated Articles of Incorporation of the Company, as amended 3.4 Form of Amended and Restated Bylaws of the Company 4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws of the Company defining the rights of holders of Common Stock of the Company 4.2 Form of Common Stock Certificate of the Company 4.3 Form of Shareholder Protection Rights Agreement 4.4 Senior Subordinated Note due February 20, 2002 issued to Triumph-Connecticut Limited Partnership* 4.5 Senior Subordinated Note due February 20, 2002 issued to Bachow Investment Partners III, L.P.* 4.6 Warrant dated February 21, 1997 issued to Triumph-Connecticut Limited Partnership* 4.7 Warrant dated February 21, 1997 issued to Bachow Investment Partners III, L.P.* 4.8 Warrant dated February 21, 1997 issued to State Street Bank and Trust Company of Connecticut, N.A., as Escrow Agent* 4.9 See Exhibit 10.4 for certain pre-emptive rights provisions 5 Opinion of Holland & Knight LLP 9 Voting Trust Agreement among OutSource International, Inc., Richard J. Williams and Paul M. Burrell, as Trustees, and certain shareholders of Outsource International, Inc. dated as of February 21, 1997* 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* 10.2 Escrow Agreement Among State Street Bank and Trust Company of Connecticut, N.A., certain shareholders of OutSource International, Inc., and OutSource International, Inc. dated as of February 21, 1997* 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* 10.4 Agreement among Shareholders and Investors in OutSource International, Inc. dated as of February 21, 1997* 10.5 Asset Purchase Agreement among Payray, Inc., Tri-Temps, Inc., Employees Unlimited, Inc. and OutSource International, Inc. dated as of April 1, 1996, as amended on February 21, 1997* 10.6 Asset Purchase Agreement among CST Services, Inc., Claire Schmidt and OutSource International, Inc. dated as of May 6, 1996* 10.7 Asset Purchase Agreement among Standby Personnel of Colorado Springs, Inc., Adrian Walker and OutSource International, Inc. dated as of February 24, 1997*
II-4
EXHIBIT NUMBER EXHIBIT DESCRIPTION - -------- ------------------------------------------------------------------------------------------------- 10.8 Asset Purchase Agreement between Staff Management Services, Inc. and OutSource International, Inc. dated as of March 3, 1997* 10.9 Asset Purchase Agreement between Superior Temporaries, Inc. and OutSource International, Inc. dated as of March 3, 1997* 10.10 Asset Purchase Agreement among Stand-By, Inc., Carlene Walker and OutSource International of America, Inc. dated as of March 31, 1997* 10.11 Employment Agreement between Paul M. Burrell and the Company dated as of February 21, 1997* 10.12 Form of Employment Agreement between Robert A. Lefcort and the Company dated as of March 3, 1997* 10.13 Form of Employment Agreement between Robert E. Tomlinson and the Company dated as of March 3, 1997* 10.14 Form of Employment Agreement between James E. Money and the Company dated as of March 3, 1997* 10.15 Form of Employment Agreement between Robert J. Mitchell and the Company dated as of March 3, 1997* 10.16 Stock Option Plan, As Amended and Restated Effective February 1, 1997* 10.17 Lease dated October 19, 1995 between Daniel S. Catalfumo, as Trustee, and OutSource International, Inc., as amended* 10.18 Option Agreement dated October 19, 1995 between Daniel S. Catalfumo, as Trustee, and OutSource International, Inc.* 10.19 Credit Agreement among Bank of Boston Connecticut, Comerica Bank, Lasalle National Bank and OutSource International, Inc. dated as of February 21, 1997 and amended and restated as of March 18, 1997* 10.20 OI Pledge Agreement made by OutSource International, Inc. in favor of Bank of Boston Connecticut, as Agent, dated as of February 21, 1997* 10.21 OI Security Agreement made by OutSource International, Inc. in favor of Bank of Boston Connecticut, as Agent, dated as of February 21, 1997* 10.22 Subsidiary Security Agreement made by Capital Staffing Fund, Inc., OutSource Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance Services, Inc. and OutSource International of America, Inc. in favor of Bank of Boston Connecticut, As Agent, dated as of February 21, 1997* 10.23 Subsidiary Guarantee by Capital Staffing Fund, Inc., OutSource Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance Services, Inc. and OutSource International of America, Inc. in favor of Bank of Boston Connecticut, As Agent, dated as of February 21, 1997* 10.24 Trademark Security Agreement made by OutSource International, Inc. and OutSource Franchising, Inc. in favor of Bank of Boston Connecticut dated as of February 21, 1997* 10.25 Promissory Note dated February 21, 1997 issued by the Company to Paul M. Burrell* 10.26 Promissory Note dated February 21, 1997 issued by the Company to Alan Schubert* 10.27 Promissory Note dated February 21, 1997 issued by the Company to the Lawrence H. Schubert Revocable Trust* 10.28 Promissory Note dated February 21, 1997 issued by the Company to the Nadya I. Schubert Revocable Trust* 10.29 Form of Promissory Note dated February 21, 1997 issued by Capital Staffing Fund, Inc. to the following shareholders of the Company, relatives of such shareholders, or executive officers of the Company, in the following principal amounts: Paul M. Burrell-$500,000; Richard E. Burrell-$125,000; Scott T. Burrell-$50,000; Robert E. Tomlinson-$200,000; Louis J. Morelli- $100,000; Raymond L. Morelli-$100,000; and Rachele Spadoni-$125,000*
II-5
EXHIBIT NUMBER EXHIBIT DESCRIPTION - -------- ----------------------------------------------------------------------------------------------- 10.30 Form of Promissory Note dated December 31, 1996 issued by Synadyne II, Inc. to the following shareholders of the Company in the following principal amounts: Lawrence H. Schubert Revocable Trust-$219,017; Robert A. Lefcort Irrevocable Trust-$22,000; Nadya I. Schubert Revocable Trust-219,017; Louis J. Morelli S Stock Trust-$22,000; Margaret Ann Janisch S Stock Trust-$22,000; Matthew Schubert OutSource Trust-$100,509; Jason Schubert OutSource Trust-$122,509; Alan E. Schubert-$575,923; Louis A. Morelli-$311,300; Louis J. Morelli-$80,300; Raymond S. Morelli-$102,300; Matthew B. Schubert-$22,000; Mindi Wagner- $21,426; Margaret Morelli Janisch-$102,300; Robert A. Lefcort-$44,000; and Paul M. Burrell- $213,400* 10.31 Form of Promissory Note dated December 31, 1996 issued by Synadyne III, Inc. to the following shareholders of the Company in the following principal amounts: Lawrence H. Schubert Revocable Trust-$209,061; Robert A. Lefcort Irrevocable Trust-$21,000; Nadya I. Schubert Revocable Trust-209,061; Louis J. Morelli S Stock Trust-$21,000; Margaret Ann Janisch S Stock Trust-$21,000; Matthew Schubert OutSource Trust-$95,941; Jason Schubert OutSource Trust-$116,941; Alan E. Schubert-$549,744; Louis A. Morelli-$297,150; Louis J. Morelli-$76,650; Raymond S. Morelli-$97,650; Matthew B. Schubert-$21,000; Mindi Wagner- $20,452; Margaret Morelli Janisch-$97,650; Robert A. Lefcort-$42,000; and Paul M. Burrell- $203,700* 10.32 Form of Promissory Note dated December 31, 1996 issued to OutSource Franchising, Inc. by the following shareholders of the Company in the following principal amounts: Lawrence H. Schubert Revocable Trust-$428,078; Robert A. Lefcort Irrevocable Trust-$43,000; Nadya I. Schubert Revocable Trust-428,078; Louis J. Morelli S Stock Trust-$43,000; Margaret Ann Janisch S Stock Trust-$43,000; Matthew Schubert OutSource Trust-$196,450; Jason Schubert OutSource Trust-$239,450; Alan E. Schubert-$1,125,667; Louis A. Morelli-$608,450; Louis J. Morelli-$156,950; Raymond S. Morelli-$199,950; Matthew B. Schubert-$43,000; Mindi Wagner- $41,878; Margaret Morelli Janisch-$199,950; Robert A. Lefcort-$86,000; and Paul M. Burrell- $417,000* 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* 10.34 Workers' Compensation and Employees Liability Insurance Policy from January 1, 1997 to January 1, 1998 Policy Period* 10.35 Standby Letter of Credit issued by The First National Bank of Boston in favor of National Union Fire Insurance Company* 10.36 Form of Standard Franchise Agreement* 10.37 Form of Standard PEO Services Agreement* 10.38 Form of Standard Service Agreement with Allstate Insurance Company* 16 Letter from McGladrey & Pullen, LLP 21 Subsidiaries of the Company* 23.1 Consent of Holland & Knight LLP (included in Exhibit 5 above) 23.2 Consent of McGladrey & Pullen, LLP 23.3 Consent of Deloitte & Touche LLP-OutSource International, Inc. and Subsidiaries 23.4 Consent of Deloitte & Touche LLP-Payray, Inc. and Tri-Temps, Inc. 23.5 Consent of Deloitte & Touche LLP-CST Services Inc. 23.6 Consent of Deloitte & Touche LLP-Superior Temporaries, Inc.
II-6
EXHIBIT NUMBER EXHIBIT DESCRIPTION - -------- ------------------------------------------------------------------------------------------- 23.7 Consent of Deloitte & Touche LLP-Standby Personnel of Colorado Springs, Inc. and Stand-By, Inc. 24 Power of Attorney* 27 Financial Data Schedule 99 Consent of David Hershberg*
- ---------------- * Previously Filed. (b) Financial Statement Schedules (i) Schedule II-Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (c) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Deerfield Beach, Florida on September 23, 1997. OUTSOURCE INTERNATIONAL, INC. By: /s/ PAUL M. BURRELL Paul M. Burrell, President, Chief Executive Officer and Chairman of the Board of Directors Pursuant to the requirements of the Securities Act of 1993, as amended, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE - ------------------------------- ------------------------------------ ------------------- /s/ PAUL M. BURRELL President, Chief Executive September 23, 1997 Paul M. Burrell Officer and Chairman of the Board of Directors (Principal Executive Officer) */s/ ROBERT A. LEFCORT Executive Vice President, September 23, 1997 Robert A. Lefcort Secretary and Director */s/ ROBERT E. TOMLINSON Chief Financial Officer, Treasurer September 23, 1997 Robert E. Tomlinson and Director (Principal Financial and Accounting Officer) */s/ RICHARD J. WILLIAMS Director September 23, 1997 Richard J. Williams */s/ SAMUEL H. SCHWARTZ Director September 23, 1997 Samuel H. Schwartz
- ---------------- *By: /s/ PAUL M. BURRELL September 23, 1997 Paul M. Burrell Attorney-in-Fact
II-8 SCHEDULE II OUTSOURCE INTERNATIONAL, INC. AND AFFILIATES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
CHARGED TO CREDITS BALANCE, COSTS AND ISSUED AND BALANCE, DESCRIPTION JANUARY 1, 1994 EXPENSES OTHER CHARGE OFFS DECEMBER 31, 1994 - ------------------------------- ----------------- ------------ ------- ------------- ------------------ Allowance for doubtful accounts and credit memos ............ $125,293 $244,662 $ -- $ (246,119) $123,836
CHARGED TO CREDITS BALANCE, COSTS AND ISSUED AND BALANCE, DESCRIPTION JANUARY 1, 1995 EXPENSES OTHER CHARGE OFFS DECEMBER 31, 1995 - ------------------------------- ----------------- ------------ ------- ------------- ------------------ Allowance for doubtful accounts and credit memos ............ $123,836 $867,953 $ -- $ (616,546) $375,243
CHARGED TO CREDITS BALANCE, COSTS AND ISSUED AND BALANCE, DESCRIPTION JANUARY 1, 1996 EXPENSES OTHER CHARGE OFFS DECEMBER 31, 1996 - ------------------------------- ----------------- ------------ ------- ------------- ------------------ Allowance for doubtful accounts and credit memos ............ $375,243 $1,442,370 $ -- $ (839,363) $978,250
The amounts shown above include uncollectible amounts as well as customer credits issued for early payment discounts, pricing adjustments, customer service concessions, billing corrections, and other matters. S-1 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - -------- ----------------------------------------------------------------------------- 3.3 Form of Amended and Restated Articles of Incorporation of the Company, as amended 3.4 Form of Amended and Restated Bylaws of the Company 4.2 Form of Common Stock Certificate of the Company 4.3 Form of Shareholder Protection Rights Agreement 5 Opinion of Holland & Knight LLP 16 Letter from McGladrey & Pullen, LLP 23.2 Consent of McGladrey & Pullen, LLP 23.3 Consent of Deloitte & Touche LLP-OutSource International, Inc. and Subsidiaries 23.4 Consent of Deloitte & Touche LLP-Payray, Inc. and Tri-Temps, Inc. 23.5 Consent of Deloitte & Touche LLP-CST Services Inc. 23.6 Consent of Deloitte & Touche LLP-Superior Temporaries, Inc. 23.7 Consent of Deloitte & Touche LLP-Standby Personnel of Colorado Springs, Inc. and Stand-By, Inc. 27 Financial Data Schedule
EX-3.3 2 EXHIBIT 3.3 FORM OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF OUTSOURCE INTERNATIONAL, INC. In accordance with Section 607.1007 of the Florida Statutes, the Amended and Restated Articles of Incorporation of OUTSOURCE INTERNATIONAL, INC., a Florida corporation (the "Corporation"), are hereby amended and restated (such amended and restated Amended and Restated Articles of Incorporation to be referred to herein as the "Articles of Incorporation") to read in their entirety as follows: ARTICLE I - NAME ---------------- The name of the Corporation is OutSource International, Inc. ARTICLE II - ADDRESS -------------------- The mailing address for the Corporation is 1144 East Newport Center Drive, Deerfield Beach, Florida 33442. ARTICLE III - DURATION ---------------------- The duration of the Corporation shall be perpetual. ARTICLE IV - PURPOSE -------------------- The Corporation is organized to engage in any activity or business permitted under the laws of the United States and the State of Florida. ARTICLE V - INCORPORATOR ------------------------ The name of the incorporator of this Corporation is Paul M. Burrell, and his new address is 1144 East Newport Center Drive, Deerfield Beach, Florida 33442. ARTICLE VI - REGISTERED OFFICE AND AGENT ---------------------------------------- The address of the registered office of the Corporation is 1144 East Newport Center Drive, Deerfield Beach, Florida 33442, and the name of the registered agent of the Corporation at such address is Robert A. Lefcort. ARTICLE VII - CAPITAL STOCK --------------------------- The total number of shares of all classes of capital stock of the Corporation which the Corporation shall have the authority to issue is 110,000,000, of which 100,000,000 shares having a par value of $.001 per share shall be designated as Common Stock and 10,000,000 shares having a par value of $.001 per share shall be designated as Preferred Stock. Shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares in each series, the designation thereof and the relative rights, preferences and limitations of each series, and specifically, the Board of Directors is authorized to fix with respect to each series (a) the dividend rate; (b) redeemable features, if any; (c) rights upon liquidation; (d) whether or not the shares of such series shall be subject to a purchase, retirement or sinking fund provision; (e) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class and, if so, the rate of conversion or exchange; (f) restrictions, if any, upon the payment of dividends on common stock; (g) restrictions, if any, upon the creation of indebtedness; (h) voting powers, if any, of the shares of each series; and (i) such other rights, preferences and limitations as shall not be inconsistent with the laws of the State of Florida. ARTICLE VIII - BOARD OF DIRECTORS --------------------------------- (a) CLASSIFIED BOARD. The number of directors shall be determined by the Board of Directors in accordance with the Bylaws. The directors shall be divided into three classes, Class I, Class II and Class III, as nearly equal in number as possible. The term of office for the Class I directors shall expire at the first annual meeting of the shareholders in 1998; the term of office for the Class II directors shall expire at the annual meeting of the shareholders in 1999; and the term of office for the Class III directors shall expire at the annual meeting of the shareholders in 2000. At each annual meeting of the shareholders commencing in 1998, the successors to the directors whose term is expiring shall be elected to a term expiring at the third succeeding annual meeting of the shareholders. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. (b) REMOVAL. Subject to the rights, if any, of the holders of shares of preferred stock then outstanding, any or all of the directors of the Corporation may be removed from office for cause only by the shareholders of the Corporation at any annual or special meeting of shareholders by the affirmative vote of the holders of at least 60% of the outstanding shares of -2- capital stock of the Corporation generally entitled to vote for the election of directors, voting together as a single class. Notice of any such annual or special meeting of shareholders shall state that the removal of a director or directors for cause is among the purposes of the meeting. Directors may not be removed by the shareholders without cause. (c) VACANCIES. Newly created directorships resulting from any increase in the number of directors or any vacancy on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum, or by a sole remaining director. Any director elected in accordance with the preceding sentence shall hold office until the next annual meeting of the Shareholders of the Corporation and until such director's successor shall have been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. (d) ADVANCE NOTICE OF NOMINATIONS. Advance notice of nominations for the election of directors, other than by the Board of Directors or a committee thereof, shall be given within the term and in the manner provided in the Bylaws of the Corporation. ARTICLE IX - SHAREHOLDER MEETINGS --------------------------------- (a) ANNUAL MEETINGS. Annual meetings shall be called and conducted in the manner provided in the Bylaws of the Corporation. (b) SPECIAL MEETINGS. Special meetings of the shareholders of the Corporation for any purpose or purposes may be called at any time by (i) the Chairman of the Board of Directors, the President of the Corporation or a majority of the Board of Directors or (ii) holders of not less than 50% of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting, if such shareholders sign, date and deliver to the Corporation's Secretary one or more written demands for the meeting describing the purpose or purposes for which it is to be held. Special meetings of the shareholders of the Corporation may not be called by any other person. At any special meeting of shareholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been set forth in the notice of such special meeting. (c) ADVANCE NOTICE OF SHAREHOLDER PROPOSALS. Advance notice of shareholder proposals shall be given within the term and in the manner provided in the Bylaws of the Corporation. ARTICLE X - AMENDMENTS TO ARTICLES OF INCORPORATION --------------------------------------------------- The Corporation reserves the right to amend, alter, change or repeal any provision in these Articles of Incorporation in the manner now or hereafter prescribed by statute, and all rights conferred upon the shareholders herein are subject to this reservation. Notwithstanding anything -3- contained in these Articles of Incorporation to the contrary, the affirmative vote of the holders of at least 60% of the outstanding shares of the capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class shall be required to amend these Articles of Incorporation or to adopt any provision inconsistent therewith. ARTICLE XI - BYLAWS ------------------- The Board of Directors is expressly authorized to amend, repeal or adopt any Bylaw of and for the Corporation. The holders of voting stock shall to the extent such power is at the time conferred on them by applicable law, also have the power, by the affirmative vote of the holders of at least 60% of the outstanding shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class, to make, alter, amend or repeal any By-law of and for the Corporation. ARTICLE XII - CONTROL-SHARE ACQUISITIONS ---------------------------------------- The Corporation elects to be governed by Florida Statute Section 607.0902, as amended, relating to control-share acquisitions (the "Control-Share Act"). The Corporation is expressly authorized to the fullest extent permitted by the Control-Share Act to redeem control shares acquired in a control-share acquisition at the fair value thereof pursuant to procedures adopted by the Board of Directors. ARTICLE XIII - AFFILIATED TRANSACTIONS -------------------------------------- The Corporation elects not to be governed by Florida Statutes Section 607.0901, as amended, concerning affiliated transactions. ARTICLE XIV - DIRECTOR LIABILITY -------------------------------- A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except to the extent that such exemption from liability or limitation thereof is not permitted under the Florida Business Corporation Act as currently in effect or as the same may hereafter be amended. No amendment, modification or repeal of this Article XIII (including any amendment or repeal of this Article XIII made by virtue of any change in the Florida Business Corporation Act after the date hereof) shall adversely affect any right or protection of a director that exists at the time of such amendment, modification or repeal on account of any action taken or any failure to act by such director prior to such time. IN WITNESS WHEREOF, the undersigned has executed these Articles of Incorporation this __ day of ______________, 1997. ------------------------------ Paul M. Burrell President -4- CERTIFICATE TO AMENDED AND RESTATED ARTICLES OF INCORPORATION OF OUTSOURCE INTERNATIONAL, INC. The undersigned, Paul M. Burrell, President of OUTSOURCE INTERNATIONAL, INC., a Florida corporation (the "Corporation"), does hereby certify as follows: 1. In accordance with Section 607.1003 of the Florida Statutes, the Board of Directors of the Corporation recommended by written consent on July 18, 1997, that the shareholders of the Corporation approve, and shareholders having approved by written consent on July 18, 1997, the number of votes cast by the shareholders being sufficient for such approval, in accordance with Sections 607.1003 and 607.1006 of the Florida Statutes, the amendment and restatement of the Corporation's Articles of Incorporation as attached hereto. 2. The undersigned officer of the Corporation has been duly authorized to submit these Amended and Restated Articles of Incorporation of the Corporation to the Department of State of Florida for filing in accordance with Section 607.1007 of the Florida Statutes. OUTSOURCE INTERNATIONAL, INC. By: ----------------------------- Paul M. Burrell President EX-3.4 3 EXHIBIT 3.4 FORM OF AMENDED AND RESTATED BYLAWS OF OUTSOURCE INTERNATIONAL, INC. ARTICLE I SHAREHOLDERS Section 1.1 ANNUAL MEETINGS. An annual meeting of shareholders shall be held for the election of Directors on the fourth Friday in April at 10:00 a.m. at the offices of the Corporation, or at such other date, time and place either within or without the State of Florida as may be designated by the Board of Directors from time to time. To the extent notice has been provided in accordance with sections 1.4 and 1.12, any other proper business may be transacted at the annual meeting. Section 1.2 SPECIAL MEETINGS. Special meetings of the shareholders of the Corporation for any purpose or purposes may be called at any time by (i) the Chairman of the Board of Directors, the President of the Corporation or a majority of the Board of Directors or (ii) upon delivery of one or more written demands for a meeting describing the purpose or purposes for the meeting and signed and dated by the holders of not less than 50 percent (50%) of all votes entitled to be cast on any issue proposed to be considered at such special meeting. Special meetings of shareholders of the Corporation may not be called by any other person or persons. At any special meeting of shareholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall be set forth in the notice of such special meeting. Section 1.3 SHAREHOLDER ACTION. Any action required or permitted to be taken at any annual or special meeting of the shareholders of the Corporation may be taken only upon the vote of shareholders at a duly convened meeting of shareholders in accordance with the Articles of Incorporation and these Bylaws, and may not be taken by written consent of shareholders. Section 1.4 NOTICE OF MEETINGS. Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each shareholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the shareholder at such shareholders' addresses as they appear on the records of the Corporation. Section 1.5 ADJOURNMENTS. Any meeting of shareholders, annual or special, may be adjourned from time to time, to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 1.6 QUORUM. At each meeting of shareholders, except where otherwise provided by law or the Articles of Incorporation or these Bylaws, the holders of a majority of the outstanding shares of stock entitled to vote on a matter at the meeting, present in person or represented by proxy, shall constitute a quorum. For purposes of the foregoing, where a separate vote by class or classes is required for any matter, the holders of a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum to take action with respect to that vote on that matter. Two or more classes or series of stock shall be considered a single class if the holders thereof are entitled to vote together as a single class at the meeting. In the absence of a quorum of the holders of any class of stock entitled to vote on a matter, the holders of such class so present or represented may, by majority vote, adjourn the meeting of such class from time to time in the manner provided by Section 1.5 of these Bylaws until a quorum of such class shall be so present or represented. Shares of its own capital stock belonging on the record date for the meeting to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of Directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Section 1.7 ORGANIZATION. Meetings of shareholders shall be presided over by the Chairman of the Board of Directors, if any, or in the absence of the Chairman of the Board of Directors by the Vice Chairman of the Board of Directors, if any, or in the absence of the Vice Chairman of the Board of Directors by the President, or in the absence of the President, by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary, or in the absence of the Secretary an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary, the chairman of the meeting may appoint any person to act as secretary of the meeting. The order of business at each such meeting shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments 2 on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof and the opening and closing of the voting polls. Section 1.8 INSPECTORS. Prior to any meeting of shareholders, the Board of Directors or the President shall appoint one or more inspectors to act at such meeting and make a written report thereof and may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at the meeting of shareholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall ascertain the number of shares outstanding and the voting power of each, determine the shares represented at the meeting and the validity of proxies and ballots, count all votes and ballots, determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors and certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons to assist them in the performance of their duties. The time of the opening and closing of the polls for each matter upon which the shareholders will vote at a meeting shall be announced at the meeting. No ballot, proxy or vote, nor any revocation thereof or change thereto, shall be accepted by the inspectors after the closing of the polls. In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted therewith, any information provided by a shareholder who submits a proxy by telegram, cablegram or other electronic transmission from which it can be determined that the proxy was authorized by the shareholder, ballots and the regular books and records of the corporation, and they may also consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the shareholder holds of record. If the inspectors consider other reliable information for such purpose, they shall, at the time they make their certification, specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors' belief that such information is accurate and reliable. Section 1.9 VOTING; PROXIES. Unless otherwise provided in the Articles of Incorporation, each shareholder entitled to vote at any meeting of shareholders shall be entitled to one vote for each share of stock held by such shareholder which has voting power upon the matter in question. If the Articles of Incorporation provides for more or less than one vote for any share on any matter, every reference in these Bylaws to a majority or other proportion of stock shall refer to such majority or other proportion of the votes of such stock. Each shareholder entitled to vote at a meeting of shareholders may authorize another person or persons to act for such shareholder by proxy, but no such proxy shall be voted or acted upon after eleven months from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power, regardless of whether the interest with which it is coupled 3 is an interest in the stock itself or an interest in the Corporation generally. A shareholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. Voting at meetings of shareholders need not be by written ballot unless the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or represented by proxy at such meeting shall so determine. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of Directors. In all other matters, unless otherwise provided by law or by the Articles of Incorporation or these Bylaws, the affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the shareholders. Where a separate vote by class or classes is required, the affirmative vote of the holders of a majority of the shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class or classes, except as otherwise provided by law or by the Articles of Incorporation or these Bylaws. Section 1.10 FIXING DATE FOR DETERMINATION OF SHAREHOLDERS OF RECORD. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the Corporation may determine the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 1.11 LIST OF SHAREHOLDERS ENTITLED TO VOTE. The Secretary shall prepare and make, at least ten (10) days before every meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each shareholder and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, for any purpose germane to the 4 meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any shareholder who is present. Section 1.12 ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. At any annual or special meeting of shareholders, proposals by shareholders and persons nominated for election as Directors by shareholders shall be considered only if advance notice thereof has been timely given as provided herein and such proposals or nominations are otherwise proper for consideration under applicable law and the Articles of Incorporation and Bylaws of the Corporation. Notice of any proposal to be presented by any shareholder or of the name of any person to be nominated by any shareholder for election as a Director of the Corporation at any meeting of shareholders shall be delivered to the Secretary of the Corporation at its principal executive office not less than sixty (60) nor more than ninety (90) days prior to the date of the meeting; provided, however, that if the date of the meeting is first publicly announced or disclosed (in a public filing or otherwise) less than seventy (70) days prior to the date of the meeting, such advance notice shall be given not more than ten (10) days after such date is first so announced or disclosed. Public notice shall be deemed to have been given more than seventy (70) days in advance of the annual meeting if the Corporation shall have previously disclosed, in these Bylaws or otherwise, that the annual meeting in each year is to be held on a determinable date, unless and until the Board of Directors determines to hold the meeting on a different date. Any shareholder who gives notice of any such proposal shall deliver therewith the text of the proposal to be presented and a brief written statement of the reasons why such shareholder favors the proposal and setting forth such shareholder's name and address, the number and class of all shares of each class of stock of the Corporation beneficially owned by such shareholder and any material interest of such shareholder in the proposal (other than as a shareholder). Any shareholder desiring to nominate any person for election as a Director of the Corporation shall deliver with such notice a statement in writing setting forth the name of the person to be nominated, the number and class of all shares of each class of stock of the Corporation beneficially owned by such person, the information regarding such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission (or the corresponding provisions of any regulation subsequently adopted by the Securities and Exchange Commission applicable to the Corporation), such person's signed consent to serve as a Director of the Corporation if elected, such shareholder's name and address and the number and class of all shares of each class of stock of the Corporation beneficially owned by such shareholder. As used herein, shares "beneficially owned" shall mean all shares as to which such person, together with such person's affiliates and associates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934), may be deemed to beneficially own pursuant to Rules 13d- 3 and 13d-5 under the Securities Exchange Act of 1934, as well as all shares as to which such person, together with such person's affiliates and associates, has the right to become the beneficial owner pursuant to any agreement or understanding, or upon the exercise of warrants, options or rights to convert or exchange (whether such rights are exercisable immediately or only after the passage of time or the occurrence of conditions). The person presiding at the meeting, in addition 5 to making any other determinations that may be appropriate to the conduct of the meeting, shall determine whether such notice has been duly given and shall direct that proposals and nominees not be considered if such notice has not been given. ARTICLE II BOARD OF DIRECTORS Section 2.1 POWERS; NUMBER; QUALIFICATIONS. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by law or in the Articles of Incorporation. The Board of Directors shall consist of not less than three (3) or more than fifteen (15) members, the number thereof to be determined from time to time by the Board of Directors. Directors need not be shareholders. The number of directors may be increased or decreased from time to time by action of the Board of Directors, but no decrease shall have the effect of shortening the term of any incumbent director. Section 2.2 ELECTION; TERM OF OFFICE; RESIGNATION; REMOVAL; VACANCIES. The Directors of the Corporation shall be divided into three classes, as nearly equal in number as reasonably possible, as determined by the Board of Directors, with the initial term of office of the first class of such Directors to expire at the first annual meeting of shareholders thereafter, the initial term of office of the second class of such Directors to expire at the second annual meeting of shareholders thereafter and the initial term of office of the third class of such Directors to expire at the third annual meeting thereafter, with each class of Directors to hold office until their successors have been duly elected and qualified. At each annual meeting of shareholders following such initial classification and election, Directors elected to succeed the Directors whose terms expire at such annual meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders in the third year following the year of their election and until their successors have been duly elected and qualified. If the number of Directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain or attain a number of Directors in each class as nearly equal as reasonably possible, but no decrease in the number of Directors may shorten the term of any incumbent Director. Any Director may resign at any time upon written notice to the Board of Directors or to the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. Subject to the rights, if any, of the holders of shares of preferred stock then outstanding, any Director or the entire Board of Directors may be removed by the shareholders of the Corporation at any annual or special meeting of shareholders, only for cause in accordance with the provisions of the Articles of Incorporation, by the affirmative vote of the holders of sixty percent (60%) of the shares then generally entitled to vote at an election of Directors, voting together as a single class. Unless otherwise provided in the Articles of Incorporation or these Bylaws, vacancies and newly created directorships resulting from any increase in the authorized number of Directors elected by all of the shareholders having the right to vote as a single class or from any other cause shall be filled by a majority of the Directors then in office, although less than a quorum, 6 or by the sole remaining Director. Any Director elected or appointed to fill a vacancy shall hold office until the next election of the class of Director which such Director replaced, and until his or her successor is elected and qualified or until his or her earlier resignation or removal in accordance with the Articles of Incorporation and these Bylaws. Section 2.3 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held at such places within or without the State of Florida and at such times as the Board of Directors may from time to time determine, and if so determined notice thereof need not be given. Section 2.4 SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time or place within or without the State of Florida whenever called by the Chairman of the Board of Directors, if any, by the Vice Chairman of the Board of Directors, if any, by the President or by any three Directors. Reasonable notice thereof shall be given by the person or persons calling the meeting. Section 2.5 PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE PERMITTED. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or of such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Bylaw shall constitute presence in person at such meeting. Section 2.6 QUORUM; VOTE REQUIRED FOR ACTION. Subject to the Articles of Incorporation, at all meetings of the Board of Directors one-third of the entire Board of Directors shall constitute a quorum for the transaction of business. The vote of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless the Articles of Incorporation or these Bylaws shall require a vote of a greater number. In case at any meeting of the Board of Directors a quorum shall not be present, the members of the Board of Directors present may adjourn the meeting from time to time until a quorum shall be present. Section 2.7 ORGANIZATION. Meetings of the Board of Directors shall be presided over by the Chairman of the Board of Directors, if any, or in the absence of the Chairman of the Board of Directors by the Vice Chairman of the Board of Directors, if any, or in the absence of the Vice Chairman of the Board of Directors by the President, or in his absence by a chairman chosen at the meeting. The Secretary, or in the absence of the Secretary an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary, the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.8 ACTION BY DIRECTORS WITHOUT A MEETING. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or of such committee, as the case may be, consent 7 thereto in writing, and the writing or writings are filed with the minutes of T proceedings of the Board of Directors or committee. Section 2.9 COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of Directors. ARTICLE III COMMITTEES Section 3.1 COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation. The Board of Directors may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board of Directors or in these Bylaws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Articles of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation, recommending to the shareholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the shareholders a dissolution of the Corporation or a revocation of a dissolution or amending these Bylaws; and, unless the resolution, these Bylaws or the Articles of Incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, to adopt a certificate of ownership and merger or to remove or indemnify Directors. Section 3.2 COMMITTEE RULES. Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may adopt, amend and repeal rules for the conduct of its business. In the absence of a provision by the Board of Directors or a provision in the rules of such committee to the contrary, a majority of the entire authorized number of members of such committee shall constitute a quorum for the transaction of business, the vote of a majority of the members present at a meeting at the time of such vote if a quorum is then present shall be the act of such committee, and in other respects each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these Bylaws. 8 ARTICLE IV OFFICERS Section 4.1 OFFICERS; ELECTION. As soon as practicable after the annual meeting of shareholders in each year, the Board of Directors shall elect a President, a Chief Executive Officer, a Treasurer and a Secretary, and it may, if it so determines, elect from among its members a Chairman of the Board of Directors and a Vice Chairman of the Board of Directors. The Board of Directors may also elect one or more Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers and such other officers as the Board of Directors may deem desirable or appropriate and may give any of them such further designations or alternate titles as it considers desirable. Any number of offices may be held by the same person unless the Articles of Incorporation or these Bylaws otherwise provide. Section 4.2 TERM OF OFFICE; RESIGNATION; REMOVAL; VACANCIES. Unless otherwise provided in the resolution of the Board of Directors electing any officer, each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any officer may resign at any time upon written notice to the Board of Directors or to the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. The Board of Directors may remove any officer with or without cause at any time. Any such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation, but the election of an officer shall not of itself create contractual rights. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board of Directors at any regular or special meeting or by unanimous written consent of the Board of Directors. Section 4.3 POWERS AND DUTIES. The officers of the Corporation shall have such powers and duties in the management of the Corporation as shall be stated in these Bylaws or in a resolution of the Board of Directors which is not inconsistent with these Bylaws and, to the extent not so stated, as generally pertain to their respective offices, subject to the control of the Board of Directors. The Secretary shall have the duty to record the proceedings of the meetings of the shareholders, the Board of Directors and any committees in a book to be kept for that purpose. The Board of Directors may require any officer, agent or employee to give security for the faithful performance of his or her duties. 9 ARTICLE V STOCK Section 5.1 CERTIFICATES. Every holder of stock in the Corporation shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman or Vice Chairman of the Board of Directors, if any, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, representing the number of shares of stock in the Corporation owned by such holder. If such certificate is manually signed by one officer or manually countersigned by a transfer agent or by a registrar, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. If the Corporation is authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided by law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each shareholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 5.2 LOST, STOLEN OR DESTROYED STOCK CERTIFICATES: ISSUANCE OF NEW CERTIFICATES. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner's legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. ARTICLE VI INDEMNIFICATION Section 6.1 RIGHT TO INDEMNIFICATION. Any person, his heirs, or personal representative, made, or threatened to be made a party to any threatened, pending, or completed action or proceeding, whether civil, criminal, administrative, regulatory, or investigative ("Proceeding") 10 because he is or was a director or officer of this Corporation or serves or served any other corporation or other enterprise in any capacity at the request of this Corporation, shall be indemnified by this Corporation, to the full extent permitted by the Florida Business Corporation Act; provided, however, that the Corporation shall indemnify any such person seeking indemnity in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. In discharging his duty, any director or officer, when acting in good faith, may rely upon information, opinions, reports, or statements, including financial statements and other financial data, in each case prepared or presented by (1) one or more officers or employees of the Corporation whom the director or officer reasonably believes to be reliable and competent in the matters presented, (2) counsel, public accountants, or other persons as to matters that the director or officer believes to be within that person's professional or expert competence, or (3) in the case of a director, a committee of the board of directors upon which he does not serve, duly designated according to law, as to matters within its designated authority, if the director reasonably believes that the committee is competent. Section 6.2 ADVANCES. The rights set forth above in this Article VI shall include the right to be paid by the Corporation expenses incurred in defending or being represented in any such Proceeding in advance of its final disposition; provided, however, that the payment of such expenses incurred by a director or officer because he is or was a director or officer of this Corporation or serves or served any other corporation or enterprise in any capacity at the request of this Corporation (and not in any other capacity in which service was or is rendered by such person while a director or officer, including service to an employee benefit plan) in advance of the final disposition of such Proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Article VI or otherwise. Section 6.3 CONTRACT RIGHT. All rights to indemnification, including advancement of expenses, shall be deemed to be provided by a contract between the Corporation and the director or officer who serves in such capacity at any time while this Article VI and other relevant provisions of the Florida Business Corporation Act and other applicable law, if any, are in effect, such that any repeal or modification thereof shall not adversely affect any right existing at the time of such repeal or modification. Section 6.4 RIGHT TO BRING SUIT. If a claim under the preceding paragraphs of this Article VI is not paid in full by the Corporation within 90 days after a written claim therefor has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense, including attorney's fees, of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking has been tendered to the Corporation) that the claimant has not met the applicable standard of conduct which makes it permissible under the Florida Business Corporation 11 Act for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the T failure of the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Florida Business Corporation Act, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant had not met the applicable standard of conduct. Section 6.5 NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Article VI shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of these Bylaws, the Articles of Incorporation, agreement, vote of shareholders or disinterested directors or otherwise. Section 6.6 INSURANCE. The Corporation may maintain insurance, at its expense, for the purpose of indemnifying itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, trust or other enterprise, whether or not the Corporation would have the power to provide such indemnity under the Florida Business Corporation Act. ARTICLE VII MISCELLANEOUS Section 7.1 FISCAL YEAR. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 7.2 SEAL. The Corporation may have a corporate seal which shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. The corporate seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. Section 7.3 WAIVER OF NOTICE OF MEETINGS OF SHAREHOLDERS, DIRECTORS AND COMMITTEES. Whenever notice is required to be given by law or under any provision of the Articles of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the shareholders, Directors or members of a committee of Directors need be specified in any written waiver of notice unless so required by the Articles of Incorporation or these Bylaws. 12 Section 7.4 INTERESTED DIRECTORS; QUORUM. No contract or transaction between the Corporation and one or more of its Directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its Directors or officers are Directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the Director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or her or their votes are counted for such purpose, if: (1) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested Directors, even though the disinterested Directors be less than a quorum; or (2) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the shareholders. Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Section 7.5 FORM OF RECORDS. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 7.6 AMENDMENT OF BYLAWS. The Board of Directors is expressly authorized to amend, repeal or adopt any Bylaw of and for the Corporation. The holders of voting stock shall to the extent such power is at the time conferred on them by applicable law, also have the power, by the affirmative vote of the holders of at least sixty percent (60%) of the outstanding shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class, to make, alter, amend or repeal any Bylaw of and for the Corporation. 13 EX-4.2 4 EXHIBIT 4.2 INCORPORATED UNDER THE LAWS OF THE STATE OF FLORIDA NUMBER OUTSOURCE [LOGO] SHARES OUTSOURCE INTERNATIONAL, INC. THIS CERTIFICATE IS TRANSFERABLE IN THE CITIES OF BOSTON OR NEW YORK COMMON STOCK CUSIP 690131 10 7 SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES that is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF OUTSOURCE INTERNATIONAL, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal and the facsimile signature of the duly authorized officers of the Corporation. Dated: Robert A. Lefcort OUTSOURCE INTERNATIONAL INC Paul M. Burrell CORPORATE SEAL 1996 FLORIDA SECRETARY PRESIDENT COUNTERSIGNED AND REGISTERED BANKBOSTON, N.A. TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE OUTSOURCE INTERNATIONAL, INC. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, RELATIVE RIGHTS AND LIMITATIONS APPLICABLE TO THE SHARES OF EACH CLASS AND SERIES OF ITS AUTHORIZED STOCK, SO FAR AS THE SAME HAVE BEEN DETERMINED, AND OF THE AUTHORITY OF THE BOARD OF DIRECTORS TO DIVIDE THE SHARES INTO CLASSES OR SERIES AND TO DETERMINE AND CHANGE THE RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF ANY CLASS OR SERIES, SUCH REQUEST MAY BE MADE TO THE SECRETARY OF THE CORPORATION OR TO THE TRANSFER AGENT NAMED ON THIS CERTIFICATE. THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER HEREOF TO CERTAIN RIGHTS AS SET FORTH IN A RIGHTS AGREEMENT BETWEEN THE CORPORATION AND BANKBOSTON, N.A., AS THE RIGHTS AGENT, DATED AS OF , 1997 (THE "RIGHTS AGREEMENT"), THE TERMS OF WHICH ARE HEREBY INCORPORATED HEREIN BY REFERENCE AND A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, SUCH RIGHTS MAY BE TERMINATED, MAY BE EXCHANGED FOR SHARES OF COMMON STOCK OR OTHER SECURITIES OR ASSETS OF THE CORPORATION OR A SUBSIDIARY OF THE CORPORATION, MAY EXPIRE, MAY BECOME VOID OR MAY BE EVIDENCED BY SEPARATE CERTIFICATES AND MAY NO LONGER BE EVIDENCED BY THIS CERTIFICATE. THE CORPORATION WILL MAIL TO THE HOLDER OF THIS CERTIFICATE A COPY OF THE RIGHTS AGREEMENT WITHOUT CHARGE AFTER RECEIPT OF A WRITTEN REQUEST THEREFOR, UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS ISSUED TO, OR HELD BY, ANY PERSON WHO IS, WAS OR BECOMES AN ACQUIRING PERSON OR ANY AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT), WHETHER CURRENTLY HELD BY OR ON BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT HOLDER, MAY BECOME NULL AND VOID. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - _____________ Custodian __________________ (Cust) (Minor) under Uniform Gifts to Minors Act _________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED_______________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _______________________________________ _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ ________________________________________________________________________SHARES OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT ______________________________________________________________________ATTORNEY TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES. ______________________________________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED:_______________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM). PURSUANT TO S.E.C. RULE 17 Ad-15. EX-4.3 5 EXHIBIT 4.3 OUTSOURCE INTERNATIONAL, INC. AND [RIGHTS AGENT] RIGHTS AGENT FORM OF PREFERRED SHARES RIGHTS AGREEMENT DATED AS OF ____, 1997 TABLE OF CONTENTS PAGE ---- Section 1. Certain Definitions................................................1 Section 2. Appointment of Rights Agent........................................7 Section 3. Issuance of Rights Certificates....................................7 Section 4. Form of Rights Certificates........................................8 Section 5. Countersignature and Registration..................................9 Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.........................................9 Section 7. Exercise of Rights; Exercise Price; Expiration Date of Rights...............................................................10 Section 8. Cancellation and Destruction of Rights Certificates...............12 Section 9. Reservation and Availability of Preferred Shares..................12 Section 10. Record Date......................................................13 Section 11. Adjustment of Exercise Price, Number of Shares or Number of Rights.....................................................13 Section 12. Certificate of Adjusted Exercise Price or Number of Shares...............................................................19 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.....................................................19 Section 14. Fractional Rights and Fractional Shares..........................22 Section 15. Rights of Action.................................................23 Section 16. Agreement of Rights Holders......................................23 Section 17. Rights Certificate Holder Not Deemed a Stockholder...............24 Section 18. Concerning the Rights Agent......................................24 Section 19. Merger or Consolidation or Change of Name of Rights Agent........25 Section 20. Duties of Rights Agent...........................................25 (i) Section 21. Change of Rights Agent...........................................27 Section 22 Issuance of New Rights Certificates...............................27 Section 23. Redemption.......................................................28 Section 24. Exchange.........................................................29 Section 25. Notice of Certain Events.........................................30 Section 26. Notices..........................................................30 Section 27. Supplements and Amendments.......................................31 Section 28. Successors.......................................................31 Section 29. Determinations and Actions by the Board of Directors, etc........32 Section 30. Benefits of this Agreement.......................................32 Section 31. Severability.....................................................32 Section 32. Governing Law....................................................32 Section 33. Counterparts.....................................................32 Section 34. Descriptive Headings.............................................32 EXHIBITS Exhibit A Form of Certificate of Designation Exhibit B Form of Rights Certificate Exhibit C Summary of Rights (ii) RIGHTS AGREEMENT This Agreement is dated as of ______, 1997 and is entered into between Outsource International, Inc. a Florida corporation, and [Rights Agent]. On __________, 1997 (the "RIGHTS DIVIDEND DECLARATION DATE"), the Board of Directors of the Company authorized and declared a dividend of one Preferred Share Purchase Right (a "RIGHT") for each Common Share (as hereinafter defined) of the Company outstanding as of the Close of Business (as hereinafter defined) on _________, 1997 (the "RECORD DATE"), each Right representing the right to purchase one one-hundredth of a share of Series A Participating Preferred Stock (as such number may be adjusted pursuant to the provisions of this Agreement), having the rights, preferences and privileges set forth in the form of Certificate of Designations of Rights, Preferences and Privileges of Series A Participating Preferred Stock attached hereto as Exhibit A, upon the terms and subject to the conditions herein set forth, and further authorized and directed the issuance of one Right (as such number may be adjusted pursuant to the provisions of this Agreement) with respect to each Common Share that shall become outstanding between the Record Date and the earlier of the Distribution Date and the Expiration Date (as such terms are hereinafter defined), and in certain circumstances after the Distribution Date. NOW, THEREFORE, in consideration of the promises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms have the meanings indicated: (a) "ACQUIRING PERSON" shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 15% or more of the Common Shares then outstanding, but shall not include the Company, any Subsidiary of the Company or any employee benefit plan of the Company or of any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no Person shall be deemed to be an Acquiring Person as the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the Common Shares of the Company then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 15% or more of the Common Shares of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional Common Shares of the Company (other than pursuant to a dividend or distribution paid or made by the Company on the outstanding Common Shares in Common Shares or pursuant to a split or subdivision of the outstanding Common Shares), then such Person shall be deemed to be an Acquiring Person unless upon becoming the Beneficial Owner of such additional Common Shares of the Company such Person does not beneficially own 15% or more of the Common Shares of the Company then outstanding. Notwithstanding the foregoing, (i) if a majority of the Continuing Directors then in office determines in good faith that a Person who would otherwise be an "Acquiring Person," as defined pursuant to the foregoing provisions of this paragraph (a), has become such inadvertently (including, without limitation, because (A) such Person was unaware that it beneficially owned a percentage of the Common Shares that would otherwise cause such Person to be an "ACQUIRING PERSON," as defined pursuant to the foregoing provisions of this paragraph (a), or (B) such Person was aware of the extent of the Common Shares it beneficially owned but had no actual knowledge of the consequences of such beneficial ownership under this Agreement) and without any intention of changing or influencing control of the Company, and if such Person divested or divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an "Acquiring Person," as defined pursuant to the foregoing provisions of this paragraph (a), then such Person shall not be deemed to be or to have become an "Acquiring Person" for any purposes of this Agreement; and (ii) if, as of the date hereof, any Person is the Beneficial Owner of 15% or more of the Common Shares outstanding, such Person shall not be or become an "Acquiring Person," as defined pursuant to the foregoing provisions of this paragraph (a), unless and until such time as such Person shall become the Beneficial Owner of additional Common Shares (other than pursuant to a dividend or distribution paid or made by the Company on the outstanding Common Shares in Common Shares or pursuant to a split or subdivision of the outstanding Common Shares), unless, upon becoming the Beneficial Owner of such additional Common Shares, such Person is not then the Beneficial Owner of 15% or more of the Common Shares then outstanding. (b) "ADJUSTMENT FRACTION" shall have the meaning set forth in Section 11(a)(i) hereof. (c) "AFFILIATE" and "ASSOCIATE" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on the date of this Agreement. (d) A Person shall be deemed the "BENEFICIAL OWNER" of and shall be deemed to "BENEFICIALLY OWN" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly, for purposes of Section 13(d) of the Exchange Act and Rule 13d-3 thereunder (or any comparable or successor law or regulation); (ii) which such Person or any of such Person's Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; provided, however, that a Person shall not be deemed pursuant to this Section(d)(ii)(A) to be the Beneficial Owner of, or to beneficially own, (1) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange, or (2) securities which a Person or any of such Person's Affiliates or Associates may be deemed to have the right to acquire pursuant to any merger or other acquisition agreement between the Company and such Person (or one or more of its Affiliates or Associates) if such agreement has been approved by the Board of Directors of the Company prior to there being an Acquiring Person; or the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security under this Section(d)(ii)(B) if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations of the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or 2 (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding, whether or not in writing (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section 1(d)(ii)(B)) or disposing of any securities of the Company; provided, however, that in no case shall an officer or director of the Company be deemed (x) the Beneficial Owner of any securities beneficially owned by another officer or director of the Company solely by reason of actions undertaken by such persons in their capacity as officers or directors of the Company or (y) the Beneficial Owner of securities held of record by the trustee of any employee benefit plan of the Company or any Subsidiary of the Company for the benefit of any employee of the Company or any Subsidiary of the Company, other than the officer or director, by reason of any influence that such officer or director may have over the voting of the securities held in the plan provided that nothing in paragraphs 1(d)(i), 1(d)(ii) or 1(d)(iii) hereof shall cause a Person engaged in business as an underwriter of securities to be the "Beneficial Owner" of, or to "Beneficially Own," any securities acquired through such Person's participation in good faith in a firm commitment underwriting until the expiration of forty days after the date of such acquisition. For purposes of this Agreement, in determining the percentage of the outstanding shares of Common Stock with respect to which a Person is the Beneficial Owner, all shares as to which such Person is deemed the Beneficial Owner shall be deemed to be outstanding. (e) "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in the State of New York and the State of Florida are authorized or obligated by law or executive order to close. (f) "CLOSE OF BUSINESS" on any given date shall mean 5:00 P.M., New York time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 P.M., New York time, on the next succeeding Business Day. (g) "COMMON SHARES" when used with reference to the Company shall mean the shares of Common Stock of the Company, $0.001 par value. Common Shares when used with reference to any Person other than the Company shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. (h) "COMMON STOCK EQUIVALENTS" shall have the meaning set forth in Section 11(a)(iii) hereof. (i) "COMPANY" shall mean Outsource International, Inc., a Florida corporation, subject to the terms of Section 13(a)(ii)(C) hereof. (j) "CONTINUING DIRECTOR" shall mean (i) any member of the Board of Directors of the Company who, while a member of the Board, is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who was a member of the Board prior to there being an Acquiring Person, and (ii) any Person who subsequently becomes a member of the Board and who, while a member of the Board, is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, if such Person's nomination for election or election to the Board is recommended or approved by a majority of the Continuing Directors. 3 (k) "CURRENT PER SHARE MARKET PRICE" of any security (a "Security" for purposes of this definition), for all computations other than those made pursuant to Section 11(a)(iii) hereof, shall mean the average of the daily closing prices per share of such Security for the thirty (30) consecutive Trading Days immediately prior to such date, and for purposes of computations made pursuant to Section 11(a)(iii)hereof, the Current Per Share Market Price of any Security on any date shall be deemed to be the average of the daily closing prices per share of such Security for the ten (10) consecutive Trading Days immediately prior to such date; provided, however, that in the event that the Current Per Share Market Price of the Security is determined during a period following the announcement by the issuer of such Security of (i) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares or (ii) any subdivision, combination or reclassification of such Security, and prior to the expiration of the applicable thirty (30) Trading Day or ten (10) Trading Day period, after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the Current Per Share Market Price shall be appropriately adjusted to reflect the current market price per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last sale price or, if such last sale price is not reported, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. If on any such date no market maker is making a market in the Security, the fair value of such shares on such date as determined in good faith by the Board of Directors of the Company shall be used. If the Preferred Shares are not publicly traded, the Current Per Share Market Price of the Preferred Shares shall be conclusively deemed to be the Current Per Share Market Price of the Common Shares as determined pursuant to this Section 1(k), as appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof, multiplied by 1000. If the Security is not publicly held or so listed or traded, Current Per Share Market Price shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. (l) "CURRENT VALUE" shall have the meaning set forth in Section 11(a)(iii) hereof. (m) "DISTRIBUTION DATE" shall mean the earlier of (i) the Close of Business on the tenth day (or such later date as may be determined by action of a majority of Continuing Directors then in office) after the Shares Acquisition Date (or, if the tenth day after the Shares Acquisition Date occurs before the Record Date, the Close of Business on the Record Date) or (ii) the Close of Business on the tenth Business Day (or such later date as may be determined by action of a majority of Continuing Directors then in office) after the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan) is first published or sent or given within the meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act, if, assuming the successful consummation thereof, such Person would be an Acquiring Person. 4 (n) "EQUIVALENT SHARES" shall mean Preferred Shares and any other class or series of capital stock of the Company which is entitled to the same rights, privileges and preferences as the Preferred Shares. (o) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (p) "EXCHANGE RATIO" shall have the meaning set forth in Section 24(a) hereof. (q) "EXERCISE PRICE" shall have the meaning set forth in Section 4(a) hereof. (r) "EXPIRATION DATE" shall mean the earliest to occur of: (i) the Close of Business on the Final Expiration Date, (ii) the Redemption Date, (iii) consummation of any transaction contemplated by Section 13(f)hereof, or (iv) the time at which the Board of Directors orders the exchange of the Rights as provided in Section 24 hereof. (s) "FINAL EXPIRATION DATE" shall mean ________, 2007. (t) "NASDAQ" shall mean the National Association of Securities Dealers, Inc. Automated Quotations System. (u) "PERMITTED OFFER" shall mean a tender offer for all outstanding Common Shares made in the manner prescribed by Section 14(d) of the Exchange Act and the rules and regulations promulgated thereunder; provided, however, that such tender offer occurs at a time when Continuing Directors are in office and a majority of the Continuing Directors then in office has determined that the offer is both fair and otherwise in the best interests of the Company and its stockholders (taking into account all factors that such Continuing Directors deem relevant). (v) "PERSON" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. (w) "POST-EVENT TRANSFEREE" shall have the meaning set forth in Section 7(e) hereof. (x) "PREFERRED SHARES" shall mean shares of Series A Participating Preferred Stock, $0.001 par value, of the Company. (y) "PRE-EVENT TRANSFEREE" shall have the meaning set forth in Section 7(e) hereof. (z) "PRINCIPAL PARTY" shall have the meaning set forth in Section 13(b) hereof. (aa) "RECORD DATE" shall have the meaning set forth in the recitals at the beginning of this Agreement. (bb) "REDEMPTION DATE" shall have the meaning set forth in Section 23(a) hereof. (cc) "REDEMPTION PRICE" shall have the meaning set forth in Section 23(a) hereof. (dd) "RIGHTS AGENT" shall mean [Rights Agent] or its successor or replacement as provided in Sections 19 and 21 hereof. 5 (ee) "RIGHTS CERTIFICATE" shall mean a certificate substantially in the form attached hereto as Exhibit B. (ff) "RIGHTS DIVIDEND DECLARATION DATE" shall have the meaning set forth in the recitals at the beginning of this Agreement. (gg) "SECTION 11(a)(li) TRIGGER DATE" shall have the meaning set forth in Section 11(a)(iii) hereof. (hh) "SECTION 13 EVENT" shall mean any event described in clause (A), (B) or (C) of Section 13(a)(i) hereof. (ii) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. (jj) "SHARES ACQUISITION DATE" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d)under the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such; provided that, if such Person is determined not to have become an Acquiring Person pursuant to Section 1(a)hereof, then no Shares Acquisition Date shall be deemed to have occurred. (kk) "SPREAD" shall have the meaning set forth in Section 11(a)(iii) hereof. (ll) "SUBSIDIARY" of any Person shall mean any corporation or other entity of which an amount of voting securities sufficient to elect a majority of the directors or Persons having similar authority of such corporation or other entity is beneficially owned, directly or indirectly, by such Person, or any corporation or other entity otherwise controlled by such Person. (mm) "SUBSTITUTION PERIOD" shall have the meaning set forth in Section 11(a)(iii)hereof. (nn) "SUMMARY OF RIGHTS" shall mean a summary of this Agreement substantially in the form attached hereto as Exhibit C. (oo) "TOTAL EXERCISE PRICE" shall have the meaning set forth in Section 4(a) hereof. (pp) "TRADING DAY" shall mean a day on which the principal national securities exchange on which a referenced security is listed or admitted to trading is open for the transaction of business or, if a referenced security is not listed or admitted to trading on any national securities exchange, a Business Day. (qq) A "TRIGGERING EVENT" shall be deemed to have occurred upon any Person becoming an Acquiring Person. Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall prior to the Distribution Date also be the holders of the Common Shares) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable. To the extent that any co-Rights Agent takes any action pursuant to this Agreement, such co-Rights Agent shall 6 be entitled to all of the rights and protections of, and subject to all of the applicable duties and obligations imposed on, the Rights Agent pursuant to the terms of this Agreement. Section 3. ISSUANCE OF RIGHTS CERTIFICATES. (a) Until the Distribution Date, (i) the Rights will be evidenced (subject to the provisions of Sections 3(b)and3(c) hereof) by the certificates for Common Shares registered in the names of the holders thereof (which certificates shall also be deemed to be Rights Certificates) and not by separate Rights Certificates and (ii) the right to receive Rights Certificates will be transferable only in connection with the transfer of Common Shares. Until the earlier of the Distribution Date or the Expiration Date, the surrender for transfer of certificates for Common Shares shall also constitute the surrender for transfer of the Rights associated with the Common Shares represented thereby. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested, send) by first-class, postage-prepaid mail, to each record holder of Common Shares as of the Close of Business on the Distribution Date, at the address of such holder shown on the records of the Company, a Rights Certificate evidencing one Right for each Common Share so held, subject to adjustment as provided herein. In the event that an adjustment in the number of Rights per Common Share has been made pursuant to Section 11 hereof, then at the time of distribution of the Rights Certificates, the Company shall make the necessary and appropriate rounding adjustments (in accordance with Section 14(a) hereof) so that Rights Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any fractional Rights. As of the Distribution Date, the Rights will be evidenced solely by such Rights Certificates and may be transferred by the transfer of the Rights Certificates as permitted hereby, separately and apart from any transfer of Common Shares, and the holders of such Rights Certificates as listed in the records of the Company or any transfer agent or registrar for the Rights shall be the record holders thereof. (b) On the Record Date or as soon as practicable thereafter, the Company will send a copy of the Summary of Rights by first-class, postage-prepaid mail, to each record holder of Common Shares as of the Close of Business on the Record Date, at the address of such holder shown on the records of the Company's transfer agent and registrar. With respect to certificates for Common Shares outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof together with the Summary of Rights. Until the Distribution Date (or, if earlier, the Expiration Date), the surrender for transfer of any certificate for Common Shares outstanding on the Record Date, with or without a copy of the Summary of Rights, shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. (c) Unless the Board of Directors by resolution adopted at or before the time of the issuance of any Common Shares specifies to the contrary, Rights shall be issued in respect of all Common Shares that are issued after the Record Date but prior to the earlier of the Distribution Date or the Expiration Date or, in certain circumstances provided in Section 22 hereof, after the Distribution Date. Certificates representing such Common Shares shall also be deemed to be certificates for Rights, and shall bear the following legend: THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER HEREOF TO CERTAIN RIGHTS AS SET FORTH IN A RIGHTS AGREEMENT BETWEEN OUTSOURCE INTERNATIONAL, INC. AND [RIGHTS AGENT], AS THE RIGHTS AGENT, DATED AS OF _______ 1997 (A, (THE "RIGHTS AGREEMENT"), THE TERMS OF WHICH ARE HEREBY INCORPORATED HEREIN BY REFERENCE AND A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF OUTSOURCE 7 INTERNATIONAL, INC. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, SUCH RIGHTS MAY BE TERMINATED, MAY BE EXCHANGED FOR SHARES OF COMMON STOCK OR OTHER SECURITIES OR ASSETS OF THE COMPANY OR A SUBSIDIARY OF THE COMPANY, MAY EXPIRE, MAY BECOME VOID OR MAY BE EVIDENCED BY SEPARATE CERTIFICATES AND MAY NO LONGER BE EVIDENCED BY THIS CERTIFICATE. OUTSOURCE INTERNATIONAL, INC. WILL MAIL TO THE HOLDER OF THIS CERTIFICATE A COPY OF THE RIGHTS AGREEMENT WITHOUT CHARGE AFTER RECEIPT OF A WRITTEN REQUEST THEREFOR. UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS ISSUED TO, OR HELD BY, ANY PERSON WHO IS, WAS OR BECOMES AN ACQUIRING PERSON OR ANY AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT), WHETHER CURRENTLY HELD BY OR ON BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT HOLDER, MAY BECOME NULL AND VOID. With respect to such certificates containing the foregoing legend, until the earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. The failure to print the foregoing legend on any such certificate for Common Shares or any other defect therein shall not affect in any manner whatsoever the application or interpretation of the provisions of Section 7(e) hereof. (d) In the event that the Company purchases or acquires any Common Shares after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed canceled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares which are no longer outstanding. Section 4. FORM OF RIGHTS CERTIFICATES. (a) The Rights Certificates (and the forms of election to purchase Common Shares and of assignment to be printed on the reverse thereof) shall be substantially in the form of Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange or a national market system, on which the Rights may from time to time be listed or included, or to conform to usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights Certificates, whenever distributed, shall be dated as of the Record Date (or in the case of Rights issued with respect to Common Shares issued by the Company after the Record Date, as of the date of issuance of such Common Shares) and on their face shall entitle the holders thereof to purchase such number of one-hundredths of a Preferred Share as shall be set forth therein at the price set forth therein (such exercise price per one one-hundredth of a Preferred Share being hereinafter referred to as the "EXERCISE PRICE" and the aggregate Exercise Price of all Preferred Shares issuable upon exercise of one Right being hereinafter referred to as the "TOTAL EXERCISE PRICE"), but the number and type of securities purchasable upon the exercise of each Right and the Exercise Price shall be subject to adjustment as provided herein. (b) Any Rights Certificate issued pursuant to Section 3(a) or Section 22 hereof that represents Rights beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate of an 8 Acquiring Person, (ii) a Post-event Transferee; a Pre-event Transferee or (iv) any subsequent transferee receiving transferred Rights from a Post-Event Transferee or a Pre-Event Transferee, either directly or through one or more intermediate transferees, and any Rights Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer, exchange, replacement or adjustment of any other Rights Certificate referred to in this sentence, shall contain (to the extent feasible) the following legend: THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF THE RIGHTS AGREEMENT. Section 5. COUNTERSIGNATURE AND REGISTRATION. (a) The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board, its Chief Executive Officer, its Chief Financial Officer, its President or any Vice President, either manually or by facsimile signature, and by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature, and shall have affixed thereto the Company's seal (if any) or a facsimile thereof. The Rights Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates on behalf of the Company had not ceased to be such officer of the Company; and any Rights Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its office designated for such purposes, books for registration and transfer of the Rights Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Rights Certificates, the number of Rights evidenced on its face by each of the Rights Certificates and the date of each of the Rights Certificates. Section 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES. (a) Subject to the provisions of Sections 7(e), 14 and 24 hereof, at any time after the Close of Business on the Distribution Date, and at or prior to the Close of Business on the Expiration Date, any Rights Certificate or Rights Certificates may be transferred, split up, combined or exchanged for another Rights Certificate or Rights Certificates, entitling the registered holder to purchase a like number of one-hundredths of a Preferred Share (or, following a Triggering Event, other securities, cash or other assets, as the case may be) as the Rights Certificate or Rights Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Rights Certificate or Rights Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Rights Certificate or Rights Certificates to be transferred, split up, combined or exchanged at the office of the Rights Agent designated for such purpose. Neither the 9 Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Rights Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall, subject to Sections 17(e), 14 and 24 hereof, countersign and deliver to the person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Rights Certificates. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company will make and deliver a new Rights Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. Section 7. EXERCISE OF RIGHTS; EXERCISE PRICE; EXPIRATION DATE OF RIGHTS. (a) Except as otherwise provided herein (including without limitation in Sections 7(e), 23(b) and 24(b) hereof), the registered holder of any Rights Certificate may exercise the Rights evidenced thereby) in whole or in part at any time after the Distribution Date and prior to the Close of Business on the Expiration Date by surrender of the Rights Certificate, with the form of election to purchase on the reverse side thereof duly executed, to the Rights Agent at the office of the Rights Agent designated for such purpose, together with payment of the Exercise Price for each one-hundredth of a Preferred Share (or, following a Triggering Event, other securities, cash or other assets as the case may be) as to which the Rights are exercised and an amount equal to any applicable transfer tax or other governmental charge. (b) The Exercise Price for each one-hundredth of a Preferred Share issuable pursuant to the exercise of a Right shall initially be $________ shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below. (c) Upon satisfaction of the requirements of Section 7(a) and subject to Section 20(k), the Rights Agent shall promptly (i) (A) requisition from any transfer agent of the Preferred Shares (or make available, if the Rights Agent is the transfer agent for the Preferred Shares) a certificate or certificates for the number of one-hundredths of a Preferred Share (or, following a Triggering Event, other securities, cash or other assets as the case may be) to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests or (B) if the Company shall have elected to deposit the total number of one-hundredths of a Preferred Share (or, following a Triggering Event, other securities, cash or other assets as the case may be) issuable upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent depositary receipts representing such number of one-hundredths of a Preferred Share (or, following a Triggering Event, other securities, cash or other assets as the case may be) as are to be purchased (in which case certificates for the Preferred Shares (or, following a Triggering Event, other securities, cash or other assets as the case may be) represented by such receipts shall be deposited by the transfer agent with 10 the depositary agent) and the Company hereby directs the depositary agent to comply with such request, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt thereof, deliver such cash to or upon the order of the registered holder of such Rights Certificate. The payment of the Exercise Price (as such amount may be reduced (including to zero) pursuant to Section 11(a)(iii) hereof) and an amount equal to any applicable transfer tax required to be paid by the holder of such Rights Certificate in accordance with Section 9(e) hereof, may be made in cash or by certified bank check, cashier's check or bank draft payable to the order of the Company. In the event that the Company is obligated to issue securities of the Company other than Preferred Shares, pay cash and/or distribute other property pursuant to Section 11(a) hereof, the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. (d) In case the registered holder of any Rights Certificate shall exercise less than all the Rights evidenced thereby, a new Rights Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Rights Certificate or to his or her duly authorized assigns, subject to the provisions of Section 14 hereof. (e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Triggering Event, any Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such (a "POST- EVENT TRANSFEREE"), (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which a majority of the Continuing Directors then in office has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(e)(a "PRE-EVENT TRANSFEREE") or (iv) any subsequent transferee receiving transferred Rights from a Post-Event Transferee or a Pre-Event Transferee, either directly or through one or more intermediate transferees, shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to ensure that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have no liability to any holder of Rights Certificates or to any other Person as a result of its failure to make any determinations with respect to an Acquiring Person or any of such Acquiring Person's Affiliates, Associates or transferees hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall, in addition to having complied with the requirements of Section 7(a), have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. 11 Section 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All Rights Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all canceled Rights Certificates to the Company, or shall, at the written request of the Company, destroy such canceled Rights Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. Section 9. RESERVATION AND AVAILABILITY OF PREFERRED SHARES. (a) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued Preferred Shares not reserved for another purpose (and, following the occurrence of a Triggering Event, out of its authorized and unissued Common Shares and/or other securities), the number of Preferred Shares (and, following the occurrence of the Triggering Event, Common Shares and/or other securities) that will be sufficient to permit the exercise in full of all outstanding Rights. (b) If the Company shall hereafter list any of its Preferred Shares on a national securities exchange, then so long as the Preferred Shares (and, following the occurrence of a Triggering Event, Common Shares and/or other securities) issuable and deliverable upon exercise of the Rights may be listed on such exchange, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable (but only to the extent that it is reasonably likely that the Rights will be exercised), all shares reserved for such issuance to be listed on such exchange upon official notice of issuance upon such exercise. (c) The Company shall use its best efforts to (i) file, as soon as practicable following the earliest date after the first occurrence of a Triggering Event in which the consideration to be delivered by the Company upon exercise of the Rights as described in Section 11(a)(ii) or Section 11(a)(iii) hereof, or as soon as is required by law following the Distribution Date, as the case may be, a registration statement under the Securities Act with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities and (B) the date of expiration of the Rights. The Company may temporarily suspend, for a period not to exceed ninety (90) calendar days after the date set forth in clause (i) of the first sentence of this Section 9(c), the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective. Upon any such suspension, the Company shall issue a public announcement stating, and notify the Rights Agent, that the exercisability of the Rights has been temporarily suspended, as well as a public announcement and notification to the Rights Agent at such time as the suspension is no longer in effect. The Company will also take such action as may be appropriate under, or to ensure compliance with, the securities or "Blue Sky" laws of the various states in connection with the exercisability of the Rights. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction, unless the requisite qualification in such jurisdiction shall have been obtained, or an exemption therefrom shall be available, and until a registration statement has been declared effective. 12 (d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Preferred Shares (or other securities of the Company) delivered upon exercise of Rights shall, at the time of delivery of the certificates for such securities (subject to payment of the Exercise Price), be duly and validly authorized and issued and fully paid and nonassessable shares. (e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the original issuance or delivery of the Rights Certificates or of any Preferred Shares (or other securities of the Company) upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Rights Certificates to a person other than, or the issuance or delivery of certificates or depositary receipts for the Preferred Shares (or other securities of the Company) in a name other than that of, the registered holder of the Rights Certificate evidencing Rights surrendered for exercise or to issue or to deliver any certificates or depositary receipts for Preferred Shares (or other securities of the Company) upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Rights Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. Section 10. RECORD DATE. Each Person in whose name any certificate for a number of one-hundredths of a Preferred Share (or other securities of the Company) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of Preferred Shares (or other securities of the Company) represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Total Exercise Price with respect to which the Rights have been exercised (and any applicable transfer taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the transfer books of the Company are closed, such Person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a holder of Preferred Shares (or other securities of the Company) for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 11 . ADJUSTMENT OF EXERCISE PRICE, NUMBER OF SHARES OR NUMBER OF RIGHTS. The Exercise Price, the number and kind of shares or other property covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) If the Company shall at any time after the date of this Agreement (A) pay a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock into a greater number of shares, (C) combine the outstanding Preferred Stock into a smaller number of shares or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock (including any such reclassification in connection with a consolidation or merger involving the Company), the Purchase Price in effect immediately prior to the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of Preferred Stock or other capital stock issuable on such date shall be proportionately adjusted so that each holder of a Right shall (except as otherwise provided herein, including Section 7(d)) thereafter be entitled to receive, upon exercise thereof at the Purchase Price in effect immediately prior to such date, the aggregate number and kind of shares of Preferred Stock or other capital stock, as the case may be, 13 which, if such Right had been exercised immediately prior to such date and at a time when the applicable transfer books of the Company were open, such holder would have been entitled to receive upon such exercise and by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which requires an adjustment under both this Section 11(a)(i) and Section 11(a)(ii) the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii). (ii) In the event a Triggering Event shall have occurred, then promptly following such Triggering Event each holder of a Right, except as provided in Section hereof, shall thereafter have the right to receive for each Right, upon exercise thereof in accordance with the terms of this Agreement and payment of the Exercise Price in effect immediately prior to the occurrence of the Triggering Event, in lieu of a number of one-hundredths of a Preferred Share, such number of Common Shares of the Company as shall equal the result obtained by multiplying the Exercise Price in effect immediately prior to the occurrence of the Triggering Event by the number of one-hundredths of a Preferred Share for which a Right was exercisable (or would have been exercisable if the Distribution Date had occurred) immediately prior to the first occurrence of a Triggering Event, and dividing that product by 50% of the Current Per Share Market Price for Common Shares on the date of occurrence of the Triggering Event; provided, however, that the Exercise Price and the number of Common Shares of the Company so receivable upon exercise of a Right shall be subject to further adjustment as appropriate in accordance with Section 11(e) hereof to reflect any events occurring in respect of the Common Shares of the Company after the occurrence of the Triggering Event. Notwithstanding the foregoing provisions of this Section 11(a)(ii), the right to buy Common Shares of the Company pursuant to Section 11(a)(ii) hereof shall not arise as a result of any Person becoming an Acquiring Person through an acquisition of Common Shares pursuant to a Permitted Offer. (iii) In lieu of issuing Common Shares in accordance with Section hereof, the Company may, if a majority of the Continuing Directors then in office determines that such action is necessary or appropriate and not contrary to the interest of holders of Rights and, in the event that the number of Common Shares which are authorized by the Company's Certificate of Incorporation but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights are not sufficient to permit the exercise in full of the Rights, or if any necessary regulatory approval for such issuance has not been obtained by the Company, the Company shall: (A) determine the excess of (1) the value of the Common Shares issuable upon the exercise of a Right (the "CURRENT VALUE") over (2) the Exercise Price (such excess, the "SPREAD") and (B) with respect to each Right, make adequate provision to substitute for such Common Shares, upon exercise of the Rights, (1) cash, (2) a reduction in the Exercise Price, (3) other equity securities of the Company (including, without limitation, shares or units of shares of any series of preferred stock which a majority of the Continuing Directors then in office has deemed to have the same value as Common Shares (such shares or units of shares of preferred stock are herein called "COMMON STOCK EQUIVALENTS")), except to the extent that the Company has not obtained any necessary stockholder or regulatory approval for such issuance, (4) debt securities of the Company, except to the extent that the Company has not obtained any necessary stockholder or regulatory approval for such issuance, (5) other assets or (6) any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by a majority of the Continuing Directors then in office based upon the advice of a nationally recognized investment banking firm selected by a majority of the Continuing Directors then in office; provided, however, if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) the first occurrence of a Triggering Event and (y) the date on which the Company's right of redemption pursuant to Section 23(a) expires (the later of (x) and (y) being referred to herein as the "SECTION 11(a)(li)TRIGGER DATE"), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring 14 payment of the Exercise Price, Common Shares (to the extent available), except to the extent that the Company has not obtained any necessary stockholder or regulatory approval for such issuance, and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. If a majority of the Continuing Directors then in office shall determine in good faith that it is likely that sufficient additional Common Shares could be authorized for issuance upon exercise in full of the Rights or that any necessary regulatory approval for such issuance will be obtained, the thirty (30) day period set forth above may be extended to the extent necessary, but not more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that the Company may seek stockholder approval for the authorization of such additional shares or take action to obtain such regulatory approval (such period, as it may be extended, the "SUBSTITUTION PERIOD"). To the extent that the Company determines that some action need be taken pursuant to the first and/or second sentences of this Section 11(a)(iii), the Company (x) shall provide, subject to Section 7(e) hereof, that such action shall apply uniformly to all outstanding Rights and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares, to take any action to obtain any required regulatory approval and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 11(a)(iii), the value of the Common Shares shall be the Current Per Share Market Price of the Common Shares on the Section 11(a)(ii) Trigger Date and the value of any Common Stock Equivalent shall be deemed to have the same value as the Common Shares on such date. (b) In case the Company shall, at any time after the date of this Agreement, fix a record date for the issuance of rights, options or warrants to all holders of Preferred Shares entitling such holders (for a period expiring within forty-five (45) calendar days after such record date) to subscribe for or purchase Preferred Shares or Equivalent Shares or securities convertible into Preferred Shares or Equivalent Shares at a price per share (or having a conversion price per share, if a security convertible into Preferred Shares or Equivalent Shares) less than the then Current Per Share Market Price of the Preferred Shares or Equivalent Shares on such record date, then, in each such case, the Exercise Price to be in effect after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Preferred Shares and Equivalent Shares (if any) outstanding on such record date, plus the number of Preferred Shares or Equivalent Shares, as the case may be, which the aggregate offering price of the total number of Preferred Shares or Equivalent Shares, as the case may be, to be offered or issued (and/or the aggregate initial conversion price of the convertible securities to be offered or issued) would purchase at such current market price, and the denominator of which shall be the number of Preferred Shares and Equivalent Shares (if any) outstanding on such record date, plus the number of additional Preferred Shares or Equivalent Shares, as the case may be, to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible); provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by a majority of the Continuing Directors then in office, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Preferred Shares and Equivalent Shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed, and in the event that such rights, options or warrants are not so 15 issued, the Exercise Price shall be adjusted to be the Exercise Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall, at any time after the date of this Agreement, fix a record date for the making of a distribution to all holders of the Preferred Shares or of any class or series of Equivalent Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend, if any, or a dividend payable in Preferred Shares) or subscription rights, options or warrants (excluding those referred to in Section 11(b)), then, in each such case, the Exercise Price to be in effect after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the Current Per Share Market Price of a Preferred Share or an Equivalent Share on such record date, less the fair market value per Preferred Share or Equivalent Share (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the cash, assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to a Preferred Share or Equivalent Share, as the case may be, and the denominator of which shall be such Current Per Share Market Price of a Preferred Share or Equivalent Share on such record date; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. Such adjustments shall be made successively whenever such a record date is fixed, and in the event that such distribution is not so made, the Exercise Price shall be adjusted to be the Exercise Price which would have been in effect if such record date had not been fixed. (d) Anything herein to the contrary notwithstanding, no adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Exercise Price; provided, however, that any adjustments which by reason of this Section 11(d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest ten-thousandth of a Common Share or other share or one hundred-thousandth of a Preferred Share, as the case may be. Notwithstanding the first sentence of this Section 11(d), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three (3) years from the date of the transaction which requires such adjustment or (ii) the Expiration Date. (e) If as a result of an adjustment made pursuant to Section 11(a) or 13(a)(i) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock other than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right and, if required, the Exercise Price thereof, shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Shares contained in Sections(11)(a), 11(b), 11(c), 11(d), 11(g), 11(h), 11(i), 11(j), 11(k) and 11(l), and the provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Shares shall apply on like terms to any such other shares. (f) All Rights originally issued by the Company subsequent to any adjustment made to the Exercise Price hereunder shall evidence the right to purchase, at the adjusted Exercise Price, the number of one-hundredths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (g) Unless the Company shall have exercised its election as provided in Section 11(h), upon each adjustment of the Exercise Price as a result of the calculations made in Sections 11(b) 16 and 11(c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of Preferred Shares (calculated to the nearest one hundred-thousandth of a share) obtained by (i) multiplying (x) the number of Preferred Shares covered by a Right immediately prior to this adjustment, by (y) the Exercise Price in effect immediately prior to such adjustment of the Exercise Price, and (ii) dividing the product so obtained by the Exercise Price in effect immediately after such adjustment of the Exercise Price. (h) The Company may elect on or after the date of any adjustment of the Exercise Price as a result of the calculations made in Section 11(b) or 11(c) to adjust the number of Rights, in substitution for any adjustment in the number of Preferred Shares purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one-hundredths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one hundred-thousandth) obtained by dividing the Exercise Price in effect immediately prior to adjustment of the Exercise Price by the Exercise Price in effect immediately after adjustment of the Exercise Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Exercise Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten (10) days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(h), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Exercise Price) and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. (i) Irrespective of any adjustment or change in the Exercise Price or the number of Preferred Shares issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Exercise Price per one one-hundredth of a Preferred Share and the number of one-hundredths of a Preferred Share which were expressed in the initial Rights Certificates issued hereunder. (j) Before taking any action that would cause an adjustment reducing the Exercise Price below the par or stated value, if any, of the number of one-hundredths of a Preferred Share issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue as fully paid and nonassessable shares such number of one-hundredths of a Preferred Share at such adjusted Exercise Price. (k) In any case in which this Section 11 shall require that an adjustment in the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Right exercised after such record date of the number of one-hundredths 17 of a Preferred Share and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the number of one-hundredths of a Preferred Share and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Exercise Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) upon the occurrence of the event requiring such adjustment. (l) Anything in this Section 11 to the contrary notwithstanding, prior to the Distribution Date, the Company shall be entitled to make such reductions in the Exercise Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any (i) consolidation or subdivision of the Preferred or Common Shares, (ii) issuance wholly for cash of any Preferred or Common Shares at less than the current market price, (iii) issuance wholly for cash of Preferred or Common Shares or securities which by their terms are convertible into or exchangeable for Preferred or Common Shares, (iv) stock dividends or (v) issuance of rights, options or warrants referred to in this Section 11, hereafter made by the Company to holders of its Preferred or Common Shares shall not be taxable to such stockholders. (m) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by Sections 23, 24 or 27,27 hereof, take (or permit to be taken) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights. (n) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Common Shares payable in Common Shares, (B) subdivide the outstanding Common Shares, (C) combine the outstanding Common Shares (by reverse stock split or otherwise) into a smaller number of Common Shares, or (D) issue any shares of its capital stock in a reclassification of the Common Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), then, in each such event, except as otherwise provided in this Section 11(a) and Section 7(e) hereof: (1) each Common Share (or shares of capital stock issued in such reclassification of the Common Shares) outstanding immediately following such time shall have associated with it the number of Rights as were associated with one Common Share immediately prior to the occurrence of the event described in clauses (A)-(D) above; (2) the Exercise Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification shall be adjusted so that the Exercise Price thereafter shall equal the result obtained by multiplying the Exercise Price in effect immediately prior to such time by a fraction, the numerator of which shall be the total number of Common Shares outstanding immediately prior to the event described in clauses (A)-(D) above, and the denominator of which shall be the total number of Common Shares outstanding immediately after such event; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of such Right; and (3) the number of one-hundredths of a Preferred Share (or shares of such other capital stock) issuable upon the exercise of each Right outstanding after such event shall equal the number of one-hundredths of a Preferred Share (or shares of such other capital stock) as were issuable with respect to one Right immediately prior to such event. Each Common Share that shall become outstanding after an adjustment has been made pursuant to this Section 11(n) shall have associated with it the number of Rights, exercisable at the Exercise Price and for the number of one-hundredths of a Preferred Share (or shares of such other capital stock) as one Common Share has associated with it immediately following the adjustment made pursuant to this Section 11(n). If an event occurs which would require an adjustment under both this Section 11(n)and Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(n) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii) hereof. 18 Section 12. CERTIFICATE OF ADJUSTED EXERCISE PRICE OR NUMBER OF SHARES. Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Preferred Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Rights Certificate in accordance with Section 26 hereof. Notwithstanding the foregoing sentence, the failure of the Company to make such certification or give such notice shall not affect the validity of such adjustment or the force or effect of the requirement for such adjustment. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment contained therein and shall not be deemed to have knowledge of such adjustment unless and until it shall have received such certificate. Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER. (a) In the event that, (i) following a Triggering Event, directly or indirectly: (A) the Company shall consolidate with, or merge with and into, any other Person (other than a wholly-owned Subsidiary of the Company in a transaction the principal purpose of which is to change the state of incorporation of the Company and which complies with Section 11(m) hereof); (B) any Person shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such consolidation or merger and, in connection with such merger, all or part of the Common Shares shall be changed into or exchanged for stock or other securities of any other person (or the Company); or (C) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company or one or more of its wholly owned Subsidiaries in one or more transactions, each of which individually (and together) complies with Section 11(m) hereof), then: (ii) concurrent with and in each such case, (A) each holder of a Right (except as provided in Section 7(e) hereof) shall thereafter have the right to receive, upon the exercise thereof at a price equal to the Total Exercise Price applicable immediately prior to the occurrence of the Section 13 Event in accordance with the terms of this Agreement, such number of validly authorized and issued, fully paid, nonassessable and freely tradeable Common Shares of the Principal Party (as hereinafter defined), free of any liens, encumbrances, rights of call or redemption, rights of first refusal or other adverse claims, as shall be equal to the result obtained by dividing such Total Exercise Price by 50% of the Current Per Share Market Price of the Common Shares of such Principal Party on the date of consummation of such Section 13 Event, provided, however, that the Exercise Price and the number of Common Shares of such Principal Party so receivable upon exercise of a Right shall be subject to further adjustment as appropriate in accordance with Section 11(e) hereof; 19 (B) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (C) the term "Company" shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 hereof shall apply only to such Principal Party following the first occurrence of a Section 13 Event; (D) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares) in connection with the consummation of any such transaction as may be necessary to ensure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its Common Shares thereafter deliverable upon the exercise of the Rights. (iii) For purposes hereof, the "earning power" of the Company and its Subsidiaries shall be determined in good faith by the Company's Board of Directors on the basis of the operating earnings of each business operated by the Company and its Subsidiaries during the three fiscal years preceding the date of such determination (or, in the case of any business not operated by the Company or any Subsidiary during three full fiscal years preceding such date, during the period such business was operated by the Company or any Subsidiary). (b) For purposes of this Agreement, the term "PRINCIPAL PARTY" shall mean: (i) in the case of any transaction described in clause (A) or (B) of Section 13(a)(i) hereof: (A) the Person that is the issuer of the securities into which the Common Shares are converted in such merger or consolidation, or, if there is more than one such issuer, the issuer the Common Shares of which have the greatest aggregate market value of shares outstanding, or (B) if no securities are so issued, (x) the Person that is the other party to the merger, if such Person survives said merger, or, if there is more than one such Person, the Person the Common Shares of which have the greatest aggregate market value of shares outstanding or (y) if the Person that is the other party to the merger does not survive the merger, the Person that does survive the merger (including the Company if it survives) or (z) the Person resulting from the consolidation; and (ii) in the case of any transaction described in clause (C) of Section 13(a)(i) hereof, the Person that is the party receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions, or, if more than one Person that is a party to such transaction or transactions receives the same portion of the assets or earning power so transferred and each such portion would, were it not for the other equal portions, constitute the greatest portion of the assets or earning power so transferred, or if the Person receiving the greatest portion of the assets or earning power cannot be determined, whichever of such Persons is the issuer of Common Shares having the greatest aggregate market value of shares outstanding; provided, however, that in any such case described in the foregoing clause (b)(i) or (b)(ii), if the Common Shares of such Person are not at such time or have not been continuously over the preceding 12-month period registered under Section 12 of the Exchange Act, then (1) if such Person is a direct or indirect Subsidiary of another Person the Common Shares of which are and have been so registered, the term "Principal Party" shall refer to such other Person, or (2) if such Person is a Subsidiary, directly or indirectly, of more than one Person, the Common Shares of which are and have been so registered, the term "Principal Party" shall refer to whichever of such Persons is the issuer of Common Shares having the greatest aggregate market value of shares outstanding, or (3) if such Person is owned, directly or indirectly, by a joint venture formed by two or more Persons that are not owned, directly or indirectly by the same Person, the rules set forth 20 in clauses (1) and (2) above shall apply to each of the owners having an interest in the venture as if the Person owned by the joint venture was a Subsidiary of both or all of such joint venturers, and the Principal Party in each such case shall bear the obligations set forth in this Section 13 in the same ratio as its interest in such Person bears to the total of such interests. (c) The Company shall not consummate any Section 13 Event unless the Principal Party shall have a sufficient number of authorized Common Shares that have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13 and unless prior thereto the Company and such issuer shall have executed and delivered to the Rights Agent a supplemental agreement confirming that such Principal Party shall, upon consummation of such Section 13 Event, assume this Agreement in accordance with Sections 13(a) and 13(b) hereof, that all rights of first refusal or preemptive rights in respect of the issuance of Common Shares of such Principal Party upon exercise of outstanding Rights have been waived, that there are no rights, warrants, instruments or securities outstanding or any agreements or arrangements which, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights and that such transaction shall not result in a default by such Principal Party under this Agreement, and further providing that, as soon as practicable after the date of such Section 13 Event, such Principal Party will: (i) prepare and file a registration statement under the Securities Act with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, use its best efforts to cause such registration statement to become effective as soon as practicable after such filing and use its best efforts to cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the Expiration Date, and similarly comply with applicable state securities laws; (ii) use its best efforts to list (or continue the listing of) the Rights and the securities purchasable upon exercise of the Rights on a national securities exchange or to meet the eligibility requirements for quotation on Nasdaq and list (or continue the listing of) the Rights and the securities purchasable upon exercise of the Rights on Nasdaq; and (iii) deliver to holders of the Rights historical financial statements for such Principal Party which comply in all respects with the requirements for registration on Form 10 (or any successor form) under the Exchange Act. In the event that at any time after the occurrence of a Triggering Event some or all of the Rights shall not have been exercised at the time of a transaction described in this Section 13, the Rights which have not theretofore been exercised shall thereafter be exercisable in the manner described in Section ? (without taking into account any prior adjustment required by Section 11(a)(ii)). (d) In case the "Principal Party" for purposes of Section 13(b) hereof has provision in any of its authorized securities or in its certificate of incorporation or by-laws or other instrument governing its corporate affairs, which provision would have the effect of (i) causing such Principal Party to issue (other than to holders of Rights pursuant to Section 13 hereof), in connection with, or as a consequence of, the consummation of a Section 13 Event, Common Shares or Equivalent Shares of such Principal Party at less than the then Current Per Share Market Price thereof or securities exercisable for, or convertible into, Common Shares or Equivalent Shares of such Principal Party at less than such then Current Per Share Market Price, or (ii) providing for any special payment, tax or similar provision in connection with the issuance of the Common Shares of such Principal Party pursuant to the provisions of Section 13 hereof, then, in such event, the Company hereby agrees with each holder 21 of Rights that it shall not consummate any such transaction unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing that the provision in question of such Principal Party shall have been canceled, waived or amended, or that the authorized securities shall be redeemed, so that the applicable provision will have no effect in connection with or as a consequence of, the consummation of the proposed transaction. (e) The Company covenants and agrees that it shall not, at any time after the Distribution Date, effect or permit to occur any Section 13 Event, if (i) at the time or immediately after such Section 13 Event there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights, (ii) prior to, simultaneously with or immediately after such Section 13 Event, the stockholders of the Person who constitutes, or would constitute, the "Principal Party" for purposes of Section 13(b) hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates or Associates or (iii) the form or nature of organization of the Principal Party would preclude or limit the exercisability of the Rights. (f) Notwithstanding anything in this Agreement to the contrary, Section 13 shall not be applicable to a transaction described in clauses (A) and (B) of Section 13(a)(i) if: (i) such transaction is consummated with a Person or Persons who acquired Common Shares pursuant to a Permitted Offer (or a wholly-owned Subsidiary of any such Person or Persons); (ii) the price per share of Common Shares offered in such transaction is not less than the price per share of Common Shares paid to all holders of Common Shares whose shares were purchased pursuant to such Permitted Offer; and (iii) the form of consideration being offered to the remaining holders of Common Shares pursuant to such transaction is the same form as the form of consideration paid pursuant to such Permitted Offer. Upon consummation of any such transaction contemplated by this Section 13(f), all Rights hereunder shall expire. (g) The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company shall not be required to issue fractions of Rights or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable, as determined pursuant to the second sentence of Section 1(k) hereof. (b) The Company shall not be required to issue fractions of Preferred Shares (other than fractions that are integral multiples of one one-hundredth of a Preferred Share) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Shares (other than fractions that are integral multiples of one one-hundredth of a Preferred Share). Interests in fractions of Preferred Shares in integral multiples of one one-hundredth of a Preferred Share may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it; provided, that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Shares represented by such depositary receipts. In lieu 22 of fractional Preferred Shares that are not integral multiples of one one-hundredth of a Preferred Share, the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of a Preferred Share. For purposes of this Section 14(b), the current market value of a Preferred Share shall be one hundred times the closing price of a Common Share (as determined pursuant to the second sentence of Section 1(k) hereof) for the Trading Day immediately prior to the date of such exercise. (c) The Company shall not be required to issue fractions of Common Shares or to distribute certificates which evidence fractional Common Shares upon the exercise or exchange of Rights. In lieu of such fractional Common Shares, the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of a Common Share. For purposes of this Section 14(c), the current market value of a Common Share shall be the closing price of a Common Share (as determined pursuant to the second sentence of Section 1(k) hereof) for the Trading Day immediately prior to the date of such exercise. (d) The holder of a Right by the acceptance of the Right expressly waives his or her right to receive any fractional Rights or any fractional shares (other than fractions that are integral multiples of one one-hundredth of a Preferred Share) upon exercise of a Right. Section 15. RIGHTS OF ACTION. All rights of action in respect of this Agreement, excepting the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, of the Common Shares), without the consent of the Rights Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, of the Common Shares), may, in his or her own behalf and for his or her own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his or her right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of, the obligations of any Person subject to this Agreement. Section 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office or offices of the Rights Agent designated for such purposes, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed; and (c) subject to Sections 6(a) and 7(f) hereof, the Company and the Rights Agent may deem and treat the person in whose name the Rights Certificate (or, prior to the Distribution Date, the associated Common Shares certificate) is registered as the absolute owner thereof and of the Rights 23 evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary. Section 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose to be the holder of the Preferred Shares or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof. Section 18. CONCERNING THE RIGHTS AGENT. (a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises. In no event will the Rights Agent be liable for special, indirect, incidental or consequential loss or damage of any kind whatsoever, even if the Rights Agent has been advised of the possibility of such loss or damage. (b) The Rights Agent shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement in reliance upon any Rights Certificate or certificate for the Preferred Shares or Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or other paper or document reasonably believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof. Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the corporate trust business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, however, that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created 24 by this Agreement, any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the written advice or opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such written advice or opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of any Acquiring Person and the determination of Current Per Share Market Price) be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer, the Secretary or any Assistant Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Rights Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Rights Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for any change in the exercisability of the Rights or any adjustment in the terms of the Rights (including the manner, 25 method or amount thereof) provided for in Sections 3, 11, 13, 23 or 24, the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after receipt by the Rights Agent of a certificate furnished pursuant to Section 12 describing such change or adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares to be issued pursuant to this Agreement or any Rights Certificate or as to whether any Preferred Shares will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer, the Secretary or any Assistant Secretary of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent under this Rights Agreement and the date on and/or after which such action shall be taken or such omission shall be effective. The Rights Agent shall not be liable for any action taken by, or omission of, the Rights Agent in accordance with a proposal included in any such application on or after the date specified in such application (which date shall not be less than five (5) Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. 26 (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause 1 and/or 2 thereof, the Rights Agent shall not take any further action with respect to such requested exercise or transfer without first consulting with the Company. Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon thirty (30) days' notice in writing mailed to the Company and to each transfer agent of the Preferred Shares and the Common Shares by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Preferred Shares and the Common Shares by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit his or her Rights Certificate for inspection by the Company), then the registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of any state of the United States, in good standing, which is authorized under such laws to exercise corporate trust or stockholder services powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $10 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Preferred Shares and the Common Shares, and mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Exercise Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of Common Shares following the Distribution Date and prior to the redemption or expiration of the Rights, the Company (a) shall, with respect to Common Shares so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement or upon the exercise, conversion or exchange of other securities of the Company outstanding at the date hereof or upon the exercise, conversion or exchange of securities hereinafter issued by the Company and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) no such Rights Certificate shall be issued and this sentence shall be null and void ab initio if, and to the extent that, 27 such issuance or this sentence would create a significant risk of or result in material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be issued or would create a significant risk of or result in such options' or employee plans' or arrangements' failing to qualify for otherwise available special tax treatment and (ii) no such Rights Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. Section 23. REDEMPTION. (a) The Company may, at its option and with the approval of the Board of Directors, at any time prior to the Close of Business on the earlier of (i) the tenth day following the Shares Acquisition Date (or such later date as may be determined by action of a majority of Continuing Directors then in office and publicly announced by the Company) and (ii) the Final Expiration Date, redeem all but not less than all the then outstanding Rights at a redemption price of $0.01 per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being herein referred to as the "REDEMPTION PRICE") and the Company may, at its option, pay the Redemption Price either in Common Shares (based on the Current Per Share Market Price thereof at the time of redemption) or cash. Such redemption of the Rights by the Company may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish; provided, however, if the Board of Directors of the Company authorizes redemption of the Rights on or after the time a Person becomes an Acquiring Person, then there must be Continuing Directors then in office and such authorization shall require the concurrence of a majority of such Continuing Directors. The date on which the Board of Directors elects to make the redemption effective shall be referred to as the "REDEMPTION DATE." (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights, evidence of which shall have been filed with the Rights Agent, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Company shall promptly give public notice of any such redemption; provided, however, that the failure to give or any defect in, any such notice shall not affect the validity of such redemption. Within ten (10) days after the action of the Board of Directors ordering the redemption of the Rights, the Company shall give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such notice to all such holders at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of Common Shares prior to the Distribution Date. Section 24. EXCHANGE. (a) Subject to applicable laws, rules and regulations, and subject to subsection 24(c) below, the Company may, at its option, by majority vote of the Board of Directors and a majority vote of the Continuing Directors, at any time after the occurrence of a Triggering Event, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 7(e) hereof) for Common Shares at an exchange ratio of one Common Share per Right, appropriately adjusted to reflect any stock split, stock dividend or similar 28 transaction occurring after the date hereof (such exchange ratio being hereinafter referred to as the "EXCHANGE RATIO"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary, or any entity holding Common Shares for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Shares then outstanding. (b) Immediately upon the action of the Board of Directors ordering the exchange of any Rights pursuant to subsection 24(a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall give public notice of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 7(e) hereof) held by each holder of Rights. (c) In the event that there shall not be sufficient Common Shares issued but not outstanding or authorized but unissued to permit any exchange of Rights as contemplated in accordance with Section 24(a), the Company shall either take such action as may be necessary to authorize additional Common Shares for issuance upon exchange of the Rights or alternatively, at the option of a majority of the Board of Directors, with respect to each Right (i) pay cash in an amount equal to the Current Value (as hereinafter defined), in lieu of issuing Common Shares in exchange therefor, or (ii) issue debt or equity securities or a combination thereof, having a value equal to the Current Value, in lieu of issuing Common Shares in exchange for each such Right, where the value of such securities shall be determined by a nationally recognized investment banking firm selected by majority vote of the Board of Directors, or (iii) deliver any combination of cash, property, Common Shares and/or other securities having a value equal to the Current Value in exchange for each Right. For purposes of this Section 24(c) only, the Current Value shall mean the product of the Current Per Share Market Price of Common Shares on the date of the occurrence of the event described above in subparagraph (a), multiplied by the number of Common Shares for which the Right otherwise would be exchangeable if there were sufficient shares available. To the extent that the Company determines that some action need be taken pursuant to clauses (i), (ii) or (iii) of this Section 24(c), the Board of Directors may temporarily suspend the exercisability of the Rights for a period of up to sixty (60) days following the date on which the event described in Section 24(a) shall have occurred, in order to seek any authorization of additional Common Shares and/or to decide the appropriate form of distribution to be made pursuant to the above provision and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended. (d) The Company shall not be required to issue fractions of Common Shares or to distribute certificates which evidence fractional Common Shares. In lieu of such fractional Common Shares, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Common Shares would otherwise be issuable, an amount in cash equal to the same fraction 29 of the current market value of a whole Common Share (as determined pursuant to the second sentence of Section 1(k) hereof). (e) The Company may, at its option, by majority vote of the Board of Directors, at any time before any Person has become an Acquiring Person, exchange all or part of the then outstanding Rights for rights of substantially equivalent value, as determined reasonably and with good faith by the Board of Directors, based upon the advice of one or more nationally recognized investment banking firms. (f) Immediately upon the action of the Board of Directors ordering the exchange of any Rights pursuant to subsection 24(e) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of rights in exchange therefor as has been determined by the Board of Directors in accordance with subsection 24(e) above. The Company shall give public notice of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the transfer agent for the Common Shares of the Company. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Rights will be effected. Section 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall propose to effect or permit to occur any Triggering Event or Section 13 Event, the Company shall give notice thereof to each holder of Rights in accordance with Section 26 hereof at least twenty (20) days prior to occurrence of such Triggering Event or such Section 13 Event. (b) In case any Triggering Event or Section 13 Event shall occur, then, in any such case, the Company shall as soon as practicable thereafter give to each holder of a Rights Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which shall specify the event and the consequences of the event to holders of Rights under Sections 11(a)(ii) and 13 hereof. Section 26. NOTICES. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Outsource International, Inc. 1144 East Newport Center Drive Deerfield Beach, Florida 33442 Attention: Robert A. Lefcort with a copy to: Holland & Knight LLP One East Broward Boulevard Fort Lauderdale, Florida 33301 Attention: Donn A. Beloff 30 Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. SUPPLEMENTS AND AMENDMENTS. Prior to the occurrence of a Distribution Date, the Company may supplement or amend this Agreement in any respect without the approval of any holders of Rights and the Rights Agent shall, if the Company so directs, execute such supplement or amendment. From and after the occurrence of a Distribution Date, the Company and the Rights Agent may from time to time supplement or amend this Agreement without the approval of any holders of Rights in order to (i) cure any ambiguity, (ii) correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) shorten or lengthen any time period hereunder (which shortening or lengthening shall be effective only if there are Continuing Directors and shall require the concurrence of a majority of such Continuing Directors) or (iv) to change or supplement the provisions hereunder in any manner that the Company may deem necessary or desirable and that shall not adversely affect the interests of the holders of Rights (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person); provided, this Agreement may not be supplemented or amended to lengthen, pursuant to clause (iii) of this sentence, (A) a time period relating to when the Rights may be redeemed at such time as the Rights are not then redeemable or (B) any other time period unless such lengthening is for the purpose of protecting, enhancing or clarifying the rights of, and/or the benefits to, the holders of Rights (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person). Upon the delivery of a certificate from an appropriate officer of the Company that states that the proposed supplement or amendment is in compliance with the terms of this Section , the Rights Agent shall execute such supplement or amendment. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Shares. Section 28. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS, ETC. For all purposes of this Agreement, any calculation of the number of Common Shares outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding Common Shares of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Company (or, where specifically provided for herein, the Continuing Directors) shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board, or the Company (or, where specifically provided for herein, the Continuing Directors), or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement and 31 (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend the Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) which are done or made by the Board (or, where specifically provided for herein, by the Continuing Directors) in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights Certificates and all other parties and (y) not subject the Board or the Continuing Directors to any liability to the holders of the Rights. Section 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the Common Shares) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the Common Shares). Section 31. SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; provided, however, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the Close of Business on the tenth day following the date of such determination by the Board of Directors. Section 32. GOVERNING LAW. This Agreement and each Right and each Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Florida and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 33. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 32 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. "Company" Outsource International, Inc. By: ------------------------- Name: Title: "RIGHTS AGENT" [RIGHTS AGENT] By: ------------------------- Name: Title: 33 EXHIBIT A ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF OUTSOURCE INTERNATIONAL, INC. ----------------------------------------- Pursuant to Section 607.0602 of the Florida Business Corporation Act ------------------------------------------ Pursuant to Section 607.0602 of the Florida Business Corporation Act (the "FBCA"), Outsource International, Inc. (the "CORPORATION") hereby adopts the following Amendment to its Articles of Incorporation (the "AMENDMENT"): (a) The name of the Corporation is Outsource International, Inc. (b) The Amendment set forth below was duly adopted on ___________, 1997 by the Board of Directors pursuant to a special meeting, duly called and held in accordance with Section 607.0820 of the FBCA. (c) This Amendment to the Corporation's Articles of Incorporation shall amend Article ____ in its entirety as follows: ARTICLE ____ The number of shares of stock that this Corporation is authorized to have outstanding at any one time is: ONE HUNDRED AND TEN MILLION (110,000,000) SHARES CONSISTING OF ONE HUNDRED MILLION (100,000,000) SHARES OF COMMON STOCK HAVING A PAR VALUE OF ONE TENTH OF A CENT ($.001) PER SHARE AND TEN MILLION (10,000,000) SHARES OF PREFERRED STOCK (ONE MILLION (1,000,000) SHARES OF WHICH SHALL BE DESIGNATED "SERIES A PARTICIPATING PREFERRED STOCK") HAVING A PAR VALUE OF ONE TENTH OF A CENT ($.001) PER SHARE. The Board of Directors of the Corporation, by resolution, shall establish the rights, privileges, vote, liquidation preference, series, convertibility, dividend (whether cumulative or non-cumulative), and redemption provisions of the Preferred Stock (other than Series A Participating Preferred Stock, the rights, privileges, vote, liquidation preference, series, convertibility, dividend (whether cumulative or non-cumulative) and redemption provisions for which are set forth below). The holders of the Preferred Stock shall be entitled to dividends thereon at the rate established by the Board of Directors (except for dividends on Series A Participating Preferred Stock, the rate for which is set forth below). All remaining profits which the Board of Directors may determine to apply in payment of dividends shall be distributed among the holders of Common Stock exclusively, except as may otherwise be set forth below. Except as otherwise set forth below with respect to Series A Participating Preferred Stock, upon dissolution, whether voluntary or involuntary, the holders of Preferred Stock shall first be entitled to receive, out of the net assets of the Corporation, the liquidating 1 value established by the Board of Directors, of their shares plus unpaid accumulated dividends and any other distributions declared thereon, without interest. A. Series A Participating Preferred Stock. Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "SERIES A PARTICIPATING PREFERRED STOCK." The Series A Participating Preferred Stock shall have a par value of $0.001 per share, and the number of shares constituting such series shall be 50,000. Section 2. PROPORTIONAL ADJUSTMENT. In the event the Corporation shall at any time after the issuance of any share or shares of Series A Participating Preferred Stock (i) declare any dividend on Common Stock of the Corporation ("COMMON STOCK") payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Corporation shall simultaneously effect a proportional adjustment to the number of outstanding shares of Series A Participating Preferred Stock. Section 3. DIVIDENDS AND DISTRIBUTIONS. (a) Subject to the prior and superior right of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Participating Preferred Stock with respect to dividends, the holders of shares of Series A Participating Preferred Stock shall be entitled to receive when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of January, April, July and October in each year (each such date being referred to herein as a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Participating Preferred Stock. (b) The Corporation shall declare a dividend or distribution on the Series A Participating Preferred Stock as provided in paragraph (a) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock). (c) Dividends shall begin to accrue on outstanding shares of Series A Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may 2 fix a record date for the determination of holders of shares of Series A Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 4. VOTING RIGHTS. The holders of shares of Series A Participating Preferred Stock shall have the following voting rights: (a) Each share of Series A Participating Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. (b) Except as otherwise provided herein or by law, the holders of shares of Series A Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Except as required by law, holders of Series A Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 5. CERTAIN RESTRICTIONS. (a) The Corporation shall not declare any dividend on, make any distribution on, or redeem or purchase or otherwise acquire for consideration any shares of Common Stock after the first issuance of a share or fraction of a share of Series A Participating Preferred Stock unless concurrently therewith it shall declare a dividend on the Series A Participating Preferred Stock as required by Section 3 hereof. (b) Whenever quarterly dividends or other dividends or distributions payable on the Series A Participating Preferred Stock as provided in Section 3 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Participating Preferred Stock; (ii) declare or pay dividends on, make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with Series A Participating Preferred Stock, except dividends paid ratably on the Series A Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Participating Preferred Stock; 3 (iv) purchase or otherwise acquire for consideration any shares of Series A Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (c) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 5, purchase or otherwise acquire such shares at such time and in such manner. Section 6. REACQUIRED SHARES. Any shares of Series A Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein and, in the Restated Certificate of Incorporation, as then amended. Section 7. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A Participating Preferred Stock shall be entitled to receive an aggregate amount per share equal to 1000 times the aggregate amount to be distributed per share to holders of shares of Common Stock plus an amount equal to any accrued and unpaid dividends on such shares of Series A Participating Preferred Stock. Section 8. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. Section 9. NO REDEMPTION. The shares of Series A Participating Preferred Stock shall not be redeemable. Section 10. RANKING. The Series A Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 11. AMENDMENT. The Restated Certificate of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preference or special rights of the Series A Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority of the outstanding shares of Series A Participating Preferred Stock, voting separately as a class. Section 12. FRACTIONAL SHARES. Series A Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to 4 exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Participating Preferred Stock. IN WITNESS WHEREOF, the Corporation has caused the foregoing Articles of Amendment to the Articles of Incorporation to be signed on _______ __, 1997. OUTSOURCE INTERNATIONAL, INC. ______________________________________________ Paul M. Burrell, President, Chief Executive Officer and Chairman of the Board of Directors ______________________________________________ Robert A. Lefcort, Secretary 5 EXHIBIT B Form of Rights Certificate Certificate No. R- Series a Preferred Purchase Rights Not Exercisable After The Earlier of (I) ________________ (Ii) The Date Terminated by The Company or (Iii) The Date The Company Exchanges The Rights Pursuant to The Rights Agreement. The Rights Are Subject to Redemption, at The Option of The Company, at $0.01 Per Right on The Terms Set Forth in The Rights Agreement. Under Certain Circumstances, Rights Beneficially Owned by an Acquiring Person or an Affiliate or Associate of an Acquiring Person (As Such Terms Are Defined in The Rights Agreement) And Any Subsequent Holder of Such Rights May Become Null And Void. [The Rights Represented by This Rights Certificate Are or Were Beneficially Owned by a Person Who Was or Became an Acquiring Person or an Affiliate or Associate of an Acquiring Person (As Such Terms Are Defined in The Rights Agreement). Accordingly, This Rights Certificate And The Rights Represented Hereby May Become Null And Void in The Circumstances Specified in Section 7(e) of Such Rights Agreement.]* Rights Certificate Outsource International, Inc. This Certifies That ______________________________, or Registered Assigns, Is the Registered Owner of the Number of Rights Set Forth Above, Each of Which Entitles the Owner Thereof, Subject to the Terms, Provisions and Conditions of the Rights Agreement Dated as of _______, 1997, (The "RIGHTS AGREEMENT"), between Outsource International, Inc., a Florida corporation (the "COMPANY"), and [RIGHTS AGENT] ( the "RIGHTS AGENT"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., New York time, on __________, 1997 at the office of the Rights Agent designated for such purpose, or at the office of its successor as Rights Agent, one one-hundredth (1/1,000) of a fully paid non-assessable share of Series A Participating Preferred Stock, no par value, (the "PREFERRED SHARES"), of the Company, at a Exercise Price of $______ per one-hundredth of a Preferred Share (the "EXERCISE PRICE"), upon presentation and surrender of this Rights Certificate with the Form of Election to Purchase and related Certificate duly executed. The number of Rights evidenced by this Rights Certificate (and the number of one-hundredths of a Preferred Share which may be purchased upon exercise hereof) set forth above are the number and Exercise Price as of ________, 1997 based on the Preferred Shares as constituted at such date. As provided in the Rights Agreement, the Exercise Price and the number and kind of Preferred Shares or other securities which may be purchased upon the exercise of the Rights evidenced by this Rights Certificate are subject to modification and adjustment upon the happening of certain events. This Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates, which limitations of rights include the temporary suspension of the exercisability of such Rights under the specific circumstances set forth in the Rights Agreement. Copies of the - -------- *The portion of the legend in bracket shall be inserted only if applicable and shall replace the preceding sentence. suspension of the exercisability of such Rights under the specific circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the principal executive offices of the Company and the above-mentioned office of the Rights Agent. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Rights Certificate (i) may be redeemed by the Company, at its option, at a redemption price of $0.01 per Right or (ii) may be exchanged by the Company in whole or in part for Common Shares, substantially equivalent rights or other consideration as determined by the Company. This Rights Certificate, with or without other Rights Certificates, upon surrender at the office of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate amount of securities as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered shall have entitled such holder to purchase. If this Rights Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. No fractional portion of less than one one-hundredth of a Preferred Share will be issued upon the exercise of any Right or Rights evidenced hereby but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Rights Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Shares or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement. This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of _______________, 19____. ATTEST: OUTSOURCE INTERNATIONAL, INC. ______________________________ By:___________________________ Robert A. Lefcort, Secretary Its:__________________________ 2 Countersigned: [RIGHTS AGENT] as Rights Agent By: ------------------------- Its: ------------------------- 3 FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Rights Certificate) FOR VALUE RECEIVED ___________________________ hereby sells, assigns and transfers unto ________________________________________________________________________________ Please print name and address of transferee) this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint __________________________ Attorney, to transfer the within Rights Certificate on the books of the within-named Company, with full power of substitution. Dated: _______________, 19____ ___________________________ Signature Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. 4 CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) this Rights Certificate [ ] is [ ] is not being sold, assigned and transferred by or on behalf of a Person who is or was an Acquiring Person, or an Affiliate or Associate of any such Person (as such terms are defined in the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of any such Person. Dated: _______________, 19____ _____________________________ Signature Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. 5 FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE -- CONTINUED FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise the Rights Certificate) To: ___________________________ The undersigned hereby irrevocably elects to exercise _________________________ Rights represented by this Rights Certificate to purchase the number of one-hundredths of a Preferred Share issuable upon the exercise of such Rights and requests that certificates for such number of one-hundredths of a Preferred Share issued in the name of: Please insert social security or other identifying number _______________________________________________________________________________ (Please print name and address) _______________________________________________________________________________ If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number _______________________________________________________________________________ (Please print name and address) Dated: _______________, 19____ _______________________________ Signature Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. 6 CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Person (as such terms are defined in the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of any such Person. Dated: _______________, 19____ ___________________________ Signature Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. 7 FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE -- CONTINUED NOTICE The signature in the foregoing Forms of Assignment and Election must conform to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. 8
EXHIBIT C STOCKHOLDER RIGHTS PLAN OUTSOURCE INTERNATIONAL, INC. Summary of Rights Distribution and Transfer of Rights; Rights The Board of Directors has declared a dividend of Certificate: one Right for each share of Outsource International, Inc. Common Stock outstanding. Prior to the Distribution Date referred to below, the Rights will be evidenced by and trade with the certificates for the Common Stock. After the Distribution Date, Outsource International, Inc. (the "COMPANY") will mail Rights certificates to the Company's stockholders and the Rights will become transferable apart from the Common Stock. Distribution Date: Rights will separate from the Common Stock and become exercisable following (a) the tenth day (or such later date as may be deter mined by a majority of the Directors not affiliated with the acquiring person or group (the "CONTINUING DIRECTORS")) after a person or group acquires beneficial ownership of 15% or more of the Company's Common Stock or (b) the tenth business day (or such later date as may be determined by a majority of the Continuing Directors) after a person or group announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 15% or more of the Company's Common Stock. Preferred Stock Purchasable Upon Exercise of After the Distribution Date, each Right will entitle Rights: the holder to purchase for ______ (the "EXERCISE PRICE"), a fraction of a share of the Company's Preferred Stock with economic terms similar to that of one share of the Company's Common Stock. Flip-In: If an acquiror (an "ACQUIRING PERSON") obtains 15% or more of the Company's Common Stock (other than pursuant to a tender offer deemed adequate and in the best interests of the Company and its stockholders by the Continuing Directors (a "PERMITTED OFFER")), then each Right (other than Rights owned by an Acquiring Person or its affiliates) will entitle the holder thereof to purchase, for the Exercise Price, a number of shares of the Company's Common Stock having a then current market value of twice the Exercise Price. Flip-Over: If, after an Acquiring Person obtains 15% or more of the Company's Common Stock, (a) the Company merges into another entity, (b) an acquiring entity merges into the Company or (c) the Company sells more than 50% of the Company's assets or earning power, then each Right (other than Rights owned by an Acquiring Person or its affiliates) will entitle the holder thereof to purchase, for the Exercise Price, a number of shares of Common Stock of the person engaging in the transaction having a then current market value of twice the Exercise Price (unless the transaction satisfies certain conditions and is consummated with a person who acquired shares pursuant to a Permitted Offer, in which case the Rights will expire). Exchange Provision: At any time after the date an Acquiring Person obtains 15% or more of the Company's Common Stock and prior to the acquisition by the Acquiring Person of 50% of the outstanding Common Stock, a majority of the Board of Directors and a majority of the Continuing Directors of the Company may exchange the Rights (other than Rights owned by the Acquiring Person or its affiliates), in whole or in part, for shares of Common Stock of the Company at an exchange ratio of one share of Common Stock per Right (subject to adjustment). Redemption of the Rights: Rights will be redeemable at the Company's option for $0.01 per Right at any time on or prior to the tenth day (or such later date as may be determined by a majority of the Continuing Directors) after public announcement that a Person has acquired beneficial ownership of 15% or more of the Company's Common Stock (the "SHARES ACQUISITION DATE"). Expiration of the Rights: The Rights expire on the earliest of (a) ten years after the date of adoption of the Plan, (b) exchange or redemption of the Rights as described above, or (c) consummation of a merger, consolidation or asset sale resulting in expiration of the Rights as described above. 2 Amendment of Terms of Rights: The terms of the Rights and the Rights Agreement may be amended in any respect without the consent of the Rights holders on or prior to the Distribution Date; thereafter, the terms of the Rights and the Rights Agreement may be amended without the consent of the Rights holders in order to cure any ambiguities or to make changes which do not adversely affect the interests of Rights holders (other than the Acquiring Person). Voting Rights: Rights will not have any voting rights. Anti-Dilution Provisions: Rights will have the benefit of certain customary anti-dilution provisions. Taxes: The Rights distribution should not be taxable for federal income tax purposes. However, following an event which renders the Rights exercisable or upon redemption of the Rights, stockholders may recognize taxable income.
The foregoing is a summary of certain principal terms of the Plan only and is qualified in its entirety by reference to the detailed terms of the Preferred Shares Rights Agreement between the Company and the Rights Agent. 3 EX-5 6 EXHIBIT 5 September 16, 1997 OutSource International, Inc. 1144 East Newport Center Drive Deerfield Beach, FL 33442 RE: Registration Statement on Form S-1 (File No. 333-33443) Gentlemen: We refer to the Registration Statement (the "Registration Statement") on Form S-1 (File No. 333-33443), filed by OutSource International, Inc. (the "Company") with the Securities and Exchange Commission, for the purpose of registering under the Securities Act of 1933 an aggregate of 3,700,000 shares of the Company's common stock, par value $.001 per share (the "Common Stock"), to be offered to the public pursuant to a proposed underwriting agreement (the "Underwriting Agreement") between the Company and Smith Barney Inc., Robert W. Baird & Co. Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation, as representatives of a group of underwriters. In connection with the foregoing registration, we have acted as counsel for the Company, and have examined originals, or copies certified to our satisfaction, of all such corporate records of the Company, certificates of public officials, and representatives of the Company, and other documents as we deemed necessary to require as a basis for the opinion hereafter expressed. Based upon the foregoing, and having regard for legal considerations that we deem relevant, it is our opinion that: The Common Stock will be, when and if issued in accordance with the Underwriting Agreement and the Company's Amended and Restated Articles of Incorporation, duly authorized, legally issued, fully paid and non-assessable. OutSource International, Inc. September 16, 1997 Page Two We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement, and to the use of our name in the Prospectus constituting a part thereof in connection with the matters referred to under the caption "Legal Matters." In giving this consent, we do not thereby admit that we are included within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder. Very truly yours, HOLLAND & KNIGHT LLP By: /s/ TERESITA H. GARCIA ---------------------------- Teresita H. Garcia EX-16 7 EXHIBIT 16 September 23, 1997 Securities and Exchange Commission Mail Stop 9-5 450 5th Street, N.W. Washington, D.C. 20549 Dear Sirs/Madams: We have read and agree with the comments under the caption "Independent Public Accountants" in this registration statement on Form S-1 of OutSource International, Inc. Yours truly, /s/ McGLADREY & PULLEN, LLP cc: Paul M. Burrell, President and Chief Executive Officer, OutSource International, Inc. EX-23.2 8 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE We consent to the use in this Amendment No. 1 to Registration Statement No. 333-33443 on Form S-1 of our report dated March 7, 1995 (October __, 1997 as to the effects of the reverse stock split discussed in Note 10), on the consolidated statements of income, shareholders' equity (deficit), and cash flows of OutSource International, Inc. and Subsidiaries for the year ended December 31, 1994, appearing in the Prospectus, which is part of this Registration Statement and to the reference to us under the headings "Selected Consolidated Financial Data" and "Experts" in such Prospectus. Our audit of the consolidated financial statements referred to in our aforementioned report also included the consolidated financial statement schedule for the year ended December 31, 1994 of OutSource International, Inc. and Subsidiaries, listed in Item 16(b). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Fort Lauderdale, Florida October __, 1997 ___________________________ The consolidated financial statements reflect the .65 for one reverse split of the Company's outstanding common stock which is to be effected on or about October 10, 1997. Our consent is in the form which will be furnished by McGladrey & Pullen, LLP upon completion of such reverse split, which is described in Note 10 to the consolidated financial statements and assuming that from March 7, 1995 to the date of such reverse split, no other events shall have occurred that would affect the accompanying consolidated financial statements and notes thereto. /s/ MCGLADREY & PULLEN, LLP Fort Lauderdale, Florida September 23, 1997 EX-23.3 9 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE OutSource International, Inc. and Subsidiaries: We consent to the use in this Amendment No. 1 to Registration Statement No. 333-33443 of OutSource International, Inc. and Subsidiaries on Form S-1 of our report dated April 4, 1997 (October __, 1997, as to the effects of the reverse stock split discussed in Note 10 on the consolidated financial statements of OutSource International, Inc. and Subsidiaries), appearing in the Prospectus, which is part of this Registration Statement, and to the references to us under the headings "Selected Consolidated Financial Data" and "Experts" in such Prospectus. Our audit of the consolidated financial statements referred to in our aforementioned report also included the consolidated financial statement schedule for the years ended December 31, 1995 and 1996 of OutSource International, Inc. and Subsidiaries, listed in Item 16(b). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Fort Lauderdale, Florida October __, 1997 ___________________________ The consolidated financial statements reflect the .65 for one reverse split of the Company's outstanding common stock which is to be effected on or about October 10, 1997. Our consent is in the form which will be furnished by Deloitte & Touche LLP upon completion of such reverse split, which is described in Note 10 to the consolidated financial statements and assuming that from April 4, 1997 to the date of such reverse split, no other events shall have occurred that would affect the accompanying consolidated financial statements and notes thereto. /s/ DELOITTE & TOUCHE LLP Fort Lauderdale, Florida September 23, 1997 EX-23.4 10 EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-33443 of OutSource International, Inc. and Subsidiaries on Form S-1 of our report dated March 29, 1996, on the combined financial statements of Payray, Inc. and Tri-Temps, Inc. as of December 31, 1995 and for the year then ended, appearing in the Prospectus, which is part of this Registration Statement, and to the references to us under the heading "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Chicago, Illinois September 23, 1997 EX-23.5 11 EXHIBIT 23.5 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-33443 of OutSource International, Inc. and Subsidiaries on Form S-1 of our report dated April 18, 1996 (except as to Note 4 for which the date is May 6, 1996), on the financial statements of CST Services Inc. as of December 31, 1994 and 1995 and for the years then ended, appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts September 23, 1997 EX-23.6 12 EXHIBIT 23.6 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-33443 of OutSource International, Inc. and Subsidiaries on Form S-1 of our report dated July 14, 1996, on the financial statements of Superior Temporaries, Inc. as of December 31, 1995 and 1996 and for the years then ended, appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Fort Lauderdale, Florida September 23, 1997 EX-23.7 13 EXHIBIT 23.7 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-33443 of OutSource International, Inc. and Subsidiaries on Form S-1 of our reports dated June 6, 1997, on the financial statements of Stand-By, Inc. as of September 30, 1996 and for the year then ended and of Standby Personnel of Colorado Springs, Inc. as of December 31, 1996 and for the year then ended, appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Denver, Colorado September 23, 1997 EX-27 14
5 6-MOS 6-MOS 12-MOS 12-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 DEC-31-1994 JAN-01-1997 JAN-01-1996 JAN-01-1996 JAN-01-1995 JUL-01-1994 JUN-30-1997 JUN-30-1996 DEC-31-1996 DEC-31-1995 DEC-31-1994 1,178,615 0 44,790 1,511,399 0 0 0 0 0 0 41,922,955 0 27,327,898 15,309,403 0 1,255,611 0 978,250 375,243 0 0 0 0 0 0 45,088,547 0 34,933,902 19,830,341 0 0 0 16,142,967 6,466,805 0 984,499 416,926 1,093,546 725,016 418,529 96,753,672 0 55,877,148 24,707,629 0 27,194,069 0 38,105,434 18,289,953 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5,449 0 6,364 6,364 0 (8,452,349) 0 4,488,861 3,596,173 0 96,753,672 0 55,877,148 24,707,629 0 193,197,372 116,121,790 280,171,104 149,825,165 80,646,707 193,197,372 116,121,790 280,171,104 149,825,165 80,646,707 165,838,360 100,369,800 242,102,390 126,270,322 65,812,296 165,838,360 100,369,800 242,102,390 126,270,322 65,812,296 24,561,263 13,795,000 32,585,473 20,098,680 11,253,356 0 0 0 0 0 3,588,794 793,820 793,820 1,281,560 845,626 (1,934,109) 1,127,880 1,127,880 2,208,419 2,812,474 (793,584) 0 0 0 0 (1,140,525) 1,127,880 1,127,880 2,208,419 2,812,474 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (1,140,525) 1,127,880 1,859,837 2,208,419 2,812,474 0 0 0 0 0 0 0 0 0 0
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