-----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, Sn9RLgz5sfj2NyBMbSCofCJTn1Vj9FjU8XUYI3s1IoUeKtZppjGEOArFPcfXaY3B LzsfA2P4MgklOPbPbU5VMQ== 0001042910-99-000641.txt : 19990518 0001042910-99-000641.hdr.sgml : 19990518 ACCESSION NUMBER: 0001042910-99-000641 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-23147 FILM NUMBER: 99627724 BUSINESS ADDRESS: STREET 1: 1144 E NEWPORT CENTER DR 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 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 000-23147 OUTSOURCE INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0675628 ------- ---------- (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
1144 East Newport Center Drive, Deerfield Beach, Florida 33442 -------------------------------------------------------------- (Address of Principal Executive Offices, Zip Code) Registrant's Telephone Number, Including Area Code: (954) 418-6200 Indicate whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at May 7, 1999 ----- -------------------------- Common Stock, par value $.001 per share 8,657,913 OUTSOURCE INTERNATIONAL, INC. INDEX PART I - FINANCIAL INFORMATION
Page ---- Item 1 - Financial Statements Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998................................................... 2 Consolidated Statements of Income for the three months ended March 31, 1999 and 1998....................................... 3 Consolidated Statements of Shareholders' Equity for the three months ended March 31, 1999 and 1998...................... 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998....................................... 5 Notes to Consolidated Financial Statements.......................... 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 13 Item 3 - Quantitative and Qualitative Disclosures about Market Risk................. 22 PART II - OTHER INFORMATION Item 3 - Defaults Upon Senior Securities............................................ 23 Item 5 - Other Information.......................................................... 23 Item 6 - Exhibits and Reports on Form 8-K........................................... 24 Signatures.......................................................................... 25
TANDEM (R), SYNADYNE (R) and OFFICE OURS (R) are registered trademarks of OutSource International, Inc. and its subsidiaries. 1 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1999 1998 ---- ---- ASSETS (Dollars in thousands) CURRENT ASSETS: Cash .................................................................. $ 1,418 $ 5,501 Trade accounts receivable, net of allowance for doubtful accounts of $2,216 and $1,924 ................................................... 18,287 12,946 Funding advances to franchises ........................................ 376 441 Deferred income taxes and other current assets ........................ 8,343 7,795 ---------- ---------- Total current assets ................................................ 28,424 26,683 PROPERTY AND EQUIPMENT, net ........................................... 17,569 17,628 GOODWILL AND OTHER INTANGIBLE ASSETS, net ............................. 63,377 64,262 OTHER ASSETS .......................................................... 3,548 3,429 ---------- ---------- Total assets ........................................................ $ 112,918 $ 112,002 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ...................................................... $ 8,681 $ 5,217 Accrued expenses: Payroll ............................................................. 5,646 4,322 Payroll taxes ....................................................... 3,934 4,067 Workers' compensation and insurance ................................. 8,854 10,659 Other ............................................................... 2,680 2,482 Other current liabilities ............................................. 885 1,312 Current maturities of long-term debt to related parties ............... 367 541 Current maturities of other long-term debt ............................ 7,290 6,782 ---------- ---------- Total current liabilities ........................................... 38,337 35,382 NON-CURRENT LIABILITIES: Revolving credit facility ............................................. 20,728 20,980 Long-term debt to related parties, less current maturities ............ 933 745 Other long-term debt, less current maturities ......................... 8,109 9,257 Other non-current liabilities ......................................... 804 1,050 ---------- ---------- Total liabilities ................................................... 68,911 67,414 ---------- ---------- COMMITMENTS AND CONTINGENCIES (NOTES 3 and 5) SHAREHOLDERS' EQUITY: Preferred stock, $.001 par value; 10,000,000 shares authorized, none issued .............................................................. -- -- Common stock, $.001 par value; 100,000,000 shares authorized; 8,657,913 issued and outstanding .............................................. 9 9 Additional paid-in capital ............................................ 53,546 53,546 Accumulated deficit ................................................... (9,548) (8,967) ---------- ---------- Total shareholders' equity .......................................... 44,007 44,588 ---------- ---------- Total liabilities and shareholders' equity .......................... $ 112,918 $ 112,002 ========== ==========
See notes to consolidated financial statements. 2 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, ---------------------------- 1999 1998 ---- ---- (Dollars in thousands, except per share data) Net revenues ................................. $ 134,114 $ 120,986 Cost of revenues ............................. 114,651 102,948 ------------ ------------ Gross profit ................................. 19,463 18,038 ------------ ------------ Selling, general and administrative expenses: Amortization of intangible assets .......... 924 745 Other selling, general and administrative... 18,030 15,376 ------------ ------------ Total selling, general and administrative expenses ................ 18,954 16,121 ------------ ------------ Operating income ............................. 509 1,917 ------------ ------------ Other expense (income): Interest expense (net) ..................... 1,582 1,080 Other income (net) ......................... (43) (6) ------------ ------------ Total other expense (income) ............... 1,539 1,074 ------------ ------------ Income (loss) before provision (benefit) for income taxes ............................... (1,030) 843 Provision (benefit) for income taxes ......... (449) 170 ------------ ------------ Net income (loss) ............................ $ (581) $ 673 ============ ============ Weighted average common shares outstanding: Basic ...................................... 8,657,913 8,486,685 ============ ============ Diluted .................................... 8,657,913 10,025,379 ============ ============ Earnings (loss) per share: Basic ...................................... $ (0.07) $ 0.08 ============ ============ Diluted .................................... $ (0.07) $ 0.07 ============ ============
See notes to consolidated financial statements. 3 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Additional Common Paid-In Accumulated Stock Capital (Deficit) Total ----- ------- --------- ----- (Dollars in thousands) Balance, December 31, 1998.......... $ 9 $ 53,546 $ (8,967) $ 44,588 Net loss ........................... -- -- (581) (581) ------ -------- ---------- --------- Balance, March 31, 1999 ............ $ 9 $ 53,546 $ (9,548) $ 44,007 ====== ======== ========== ========= Balance, December 31, 1997 ......... $ 8 $ 53,201 $ (12,431) $ 40,778 Issuance of common stock ........... -- 775 -- 775 Net income ......................... -- -- 673 673 ------ -------- ---------- --------- Balance, March 31, 1998 ............ $ 8 $ 53,976 $ (11,758) $ 42,226 ====== ======== ========== =========
See notes to consolidated financial statements. 4 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, ---------------------------- 1999 1998 ---- ---- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ...................................................... $ (581) $ 673 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ........................................ 1,807 1,419 Deferred income taxes ................................................ (77) 293 Changes in assets and liabilities (excluding effects of acquisitions): (Increase) decrease in: Trade accounts receivable ........................................ (5,341) 520 Prepaid expenses and other current assets ........................ (123) (326) Other assets ..................................................... (414) 199 Increase (decrease) in: Accounts payable ................................................. 1,749 (63) Accrued expenses: Payroll ........................................................ 1,324 1,923 Payroll taxes .................................................. (133) (200) Workers' compensation and insurance ............................ (1,805) 1,068 Other .......................................................... 198 (625) Other current liabilities .......................................... (427) 481 --------- ---------- Net cash provided by (used in) operating activities ............... (3,823) 5,362 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Funding repayments from franchises, net ................................ 66 955 Property and equipment expenditures .................................... (811) (1,263) Expenditures for acquisitions .......................................... (39) (18,168) --------- ---------- Net cash used in investing activities ............................. (784) (18,476) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in excess of outstanding checks over bank balance, included in accounts payable ........................... 1,715 1,229 Net proceeds from (repayment of) revolving credit facility ............. (252) 14,521 Related party borrowings (repayments) .................................. 14 (100) Repayment of other long-term debt ...................................... (953) (1,385) --------- ---------- Net cash provided by financing activities ......................... 524 14,265 --------- ---------- Net increase (decrease) in cash ........................................ (4,083) 1,151 Cash, beginning of period .............................................. 5,501 1,685 --------- ---------- Cash, end of period .................................................... $ 1,418 $ 2,836 ========= ========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid .......................................................... $ 1,292 $ 1,267 ========= ==========
See notes to consolidated financial statements. 5 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. INTERIM FINANCIAL STATEMENTS The interim consolidated financial statements and the related information in these notes as of March 31, 1999 and for the three months ended March 31, 1999 and 1998 are unaudited. Such interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (including normal accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. The interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 1998, included in the Company's Form 10-K filed with the Securities and Exchange Commission on March 31, 1999. In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 defines derivatives and establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, and cannot be applied retroactively. The Company intends to first implement SFAS No. 133 in its consolidated financial statements as of and for the three months ended March 31, 2000, although it has not determined the effects, if any, that implementation will have. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was issued and established standards for reporting comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 does not apply to the Company since the Company has no items of other comprehensive income in any of the periods presented. NOTE 2. ACQUISITIONS As of May 7, 1999 the Company had made no acquisitions during 1999. The following pro forma results of operations for the three months ended March 31, 1998 have been prepared assuming the acquisitions completed by the Company during 1998 (and described in the Company's audited consolidated financial statements for that year) had occurred as of the beginning of the periods presented, including adjustments to the historical financial statements for additional amortization of intangible assets, increased interest on borrowings to finance the acquisitions and discontinuance of certain compensation previously paid by the acquired businesses to their shareholders, as well as the related income tax effects. The pro forma operating results are not necessarily indicative of what would have occurred had these acquisitions been consummated as of the beginning of the periods presented, or of future operating results. In certain cases, the operating results for periods prior to the acquisition are based on (a) unaudited financial statements provided by the seller or (b) an estimate of revenues, cost of revenues and/or selling, general and administrative expenses based on information provided by the seller or otherwise available to the Company. In these cases, the Company has made a reasonable attempt to obtain the most complete and reliable financial information and believes that the financial information it used is reasonably accurate, although the Company has not independently verified such information.
Three Months Ended March 31, ---------------------------- 1999 (Historical) 1998 (Pro Forma) ----------------- ---------------- (Dollars in thousands) Net revenues ................................ $ 134,114 $ 135,627 Operating income ............................ 509 2,598 Net income (loss) ........................... (581) 741 Weighted average common shares outstanding: Basic ..................................... 8,657,913 8,506,597 =========== =========== Diluted ................................... 8,657,913 10,048,542 =========== =========== Earnings (loss) per share: Basic ..................................... $ (0.07) $ 0.09 =========== =========== Diluted ................................... $ (0.07) $ 0.07 =========== ===========
6 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2. ACQUISITIONS (CONTINUED) Earnings (loss) per share included in the above information has been prepared on the same basis as discussed in Note 8, except for an increase by 19,912 basic and 23,163 diluted shares for the three months ended March 31, 1998 in order to reflect adjustments for the timing of the issuance of common stock and options in connection with the acquisitions. Goodwill and other intangible assets consist of the following:
As of As of March 31, December 31, 1999 1998 ---- ---- (Dollars in thousands) Goodwill ...................................... $32,845 $32,806 Territory rights .............................. 24,743 24,743 Customer lists ................................ 10,105 10,105 Covenants not to compete ...................... 2,191 2,191 Employee lists ................................ 417 417 -------- ---------- Goodwill and other intangible assets .......... 70,301 70,262 Less accumulated amortization ................. 6,924 6,000 -------- ---------- Goodwill and other intangible assets, net...... $63,377 $64,242 ======== ==========
NOTE 3. INCOME TAXES The Company's effective tax rate differed from the statutory federal rate of 35%, as follows:
Three Months Ended March 31, 1999 1998 ---- ---- Amount Rate Amount Rate ------ ---- ------ ---- (Dollars in thousands) Statutory rate applied to income (loss), before income taxes .................................... $(360) (35.0)% $ 295 35.0% Increase (decrease) in income taxes resulting from: State income taxes, net of federal benefit ...... (30) (2.9) 50 5.9 Employment tax credits .......................... (126) (12.2) (204) (24.2) Nondeductible expenses .......................... 56 5.5 35 4.2 Other ........................................... 11 1.0 (6) (0.7) ------- ------- -------- ------- Total ........................................... $(449) (43.6)% $ 170 20.2% ======= ======= ======== =======
The employment tax credit carryforward of $1.4 million as of March 31, 1999 will expire in 2012 through 2019. The employment tax credits recorded by the Company from February 21, 1997 through March 31, 1999 include Federal Empowerment Zone ("FEZ") credits which represent a net tax benefit of approximately $0.6 million. Although the Company believes that these FEZ credits have been reasonably determined, the income tax law addressing how FEZ credits are determined for staffing companies is evolving and as a result the Company's positions with regards to its calculation of FEZ credits has been challenged by the Internal Revenue Service ("IRS"), as discussed below. In April 1999, the Company received a report from an IRS agent proposing adjustments to the previously reported taxable income and tax credits for certain of the Company's subsidiaries for the years ended December 31, 1994, 1995 and 1996. The Company has disagreed with these proposed adjustments and as a result, the IRS agent's supervisor has agreed to meet with the Company's management to discuss these adjustments before the IRS makes a final determination and assessment, if any, with respect to these matters. Since the subsidiaries were S corporations for the periods under examination, the proposed adjustments would not result in a materially unfavorable effect on the Company's results of operations although shareholder distributions of up to approximately $5.0 million would result as discussed in Note 5. 7 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4. DEBT The Company's primary sources of funds for working capital and other needs are a $34.0 million credit line with a syndicate of lenders led by BankBoston, N.A. (the "Revolving Credit Facility") and a $50.0 million accounts receivable securitization facility with a BankBoston affiliate. Effective July 27, 1998, the Company entered into a five year financing arrangement under which it can sell up to a $50.0 million secured interest in its eligible accounts receivable to EagleFunding Capital Corporation ("Eagle"), which uses the receivables to secure A-1 rated commercial paper (the "Securitization Facility"). The Company's cost for this arrangement is classified as interest expense and is based on the interest paid by Eagle on the balance of the outstanding commercial paper, which in turn is determined by prevailing interest rates in the commercial paper market and was approximately 4.95% as of March 31, 1999. As of March 31, 1999, a $36.1 million interest in the Company's uncollected accounts receivable had been sold under this agreement, which amount is excluded from the accounts receivable balance presented in the Company's consolidated financial statements. The Securitization Facility requires bank liquidity commitments ("Liquidity Facility") totaling no less than $51.0 million. The Liquidity Facility has been provided by the syndicate of commercial banks that participate in the Revolving Credit Facility for a one year term expiring July 26, 1999 at 0.375% per annum. The Company is currently discussing renewal of the Liquidity Facility, as well as other financing options, with the syndicate and other banks. The Revolving Credit Facility contains certain affirmative and negative covenants relating to the Company's operations, certain of which were amended in February 1999 in order to provide additional flexibility to the Company as well as enabling it to be in compliance as of December 31, 1998. These covenant modifications also resulted in a 0.5% per annum increase in the bank margin component of the interest rate charged thereunder, which was offset by a 0.6% per annum decrease in the Eurodollar base rate during the first quarter of 1999, resulting in an annualized total interest rate of approximately 7.7% at March 31, 1999. See Note 5. As of March 31, 1999, the Company had bank standby letters of credit outstanding, in the aggregate amount of $10.4 million under a $15.0 million letter of credit facility (which is part of the Revolving Credit Facility) to secure certain workers' compensation obligations already recorded as a liability on the Company's balance sheet. In April 1999, the Company negotiated a $2.0 million reduction in the outstanding letters of credit. In order to remain in compliance with certain covenants in its Revolving Credit Facility, and to reduce the cash impact of scheduled payments under its subordinated acquisition debt, the Company, commencing in February and continuing through May 1999, has negotiated extensions of the payment dates and modified the interest rates and other terms of certain of its subordinated acquisition notes payable. See Note 6. During April 1999, the Company received approximately $1.6 million from a financial institution in connection with a sale/leaseback transaction, which amount was approximately equal to the net book value of property and equipment previously purchased by the Company. These proceeds were used to reduce outstanding borrowings under the Revolving Credit Facility and are repayable over three years at an interest rate of approximately 10% per annum. NOTE 5. COMMITMENTS AND CONTINGENCIES Shareholder distribution: Effective February 21, 1997, the Company acquired all of the outstanding capital stock of nine companies under common ownership and management, in exchange for shares of the Company's common stock and distribution of previously undistributed taxable earnings of those nine companies (the "Reorganization"). That distribution, supplemented by another distribution made in September 1998, is subject to adjustment based upon the final determination of taxable income through February 21, 1997. Although the Company has completed and filed its Federal and state tax returns for all periods through February 21, 1997, further distributions may be required in the event the Company's taxable income for any period through February 21, 1997 is adjusted due to audits or any other reason. See Note 3. Stock options: As of March 31, 1999, options issued prior to 1999 to purchase 1,188,052 shares of the Company's common stock were still outstanding. During January 1999, the Company granted options to purchase 72,500 shares of the Company's common stock, vesting over a 4 year period from the grant date and with an exercise price of $6.00 per share 8 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) based on the market price of the shares at the grant date. During March 1999, the Company granted options to purchase 95,675 shares of the Company's common stock, vesting immediately upon grant and with an exercise price of $4.125 per share based on the market price of the shares at the grant date. The total number of shares of common stock reserved for issuance under the stock option plan as of March 31, 1999 was 1,040,000. The Company's Board of Directors has agreed to increase the number of reserved shares to 2,000,000, and that increase was approved by the Company's shareholders at their May 1999 annual meeting. Revolving Credit Facility Covenants: The Company regularly evaluates its compliance with the financial covenants included in the Revolving Credit Facility, and was in compliance with the covenants in effect as of March 31, 1999. The Company believes that it will be in compliance with those covenants until the expiration of the Liquidity Facility in July 1999 and it expects to be in compliance subject to appropriately restructured debt and/or convenants after that date; however, there can be no assurance that the Company will be in compliance with those covenants at June 30, 1999 or that it will not require waivers from the syndicate of lenders led by BankBoston, N.A., regarding compliance with those covenants as of that date, or at subsequent dates. In the event waivers are required, but are not granted, the Company could experience liquidity problems depending on the ability and willingness of the syndicate of lenders to continue lending to the Company, and the availability and cost of financing from other sources. Interest Rate Collar Agreement: In February 1998, the Company entered into an interest rate collar agreement with BankBoston, N.A., which involves the exchange of 30 day floating rate interest payments periodically over the life of the agreement without the exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and is recognized over the life of the agreement as an adjustment to interest expense. The agreement is a five year notional $42.5 million interest rate collar, whereby the Company receives interest on that notional amount to the extent 30 day LIBOR exceeds 6.25% per annum, and pays interest on that amount to the extent 30 day LIBOR is less than 5.43% per annum. This derivative financial instrument is being used by the Company to reduce interest rate volatility and the associated risks arising from the floating rate structure of its Revolving Credit Facility and its Securitization Facility, and is not held or issued for trading purposes. On July 27, 1998, the Company redesignated a portion of this hedge, no longer applicable to its Revolving Credit Facility, to anticipated transactions under the Securitization Facility. The Company adjusted the carrying value of the redesignated portion of the hedge from zero to its fair value based primarily on information from BankBoston, resulting in a $0.1 million liability as of March 31, 1999 which is included in Other Non-current Liabilities on the Company's balance sheet. The associated loss, which may never be realized due to the volatility of interest rates and the Company's intention not to terminate the interest rate collar agreement, has been deferred and is included in Other Assets. The unrealized loss related to the portion of the hedge designated to the Revolving Credit Facility and not reflected on the Company's balance sheet as of December 31, 1998 was approximately $0.1 million. The Company reevaluates the portion of the hedge designated to the Revolving Credit Facility and the Securitization Facility on a monthly basis. Employment Agreements: As of March 31, 1999, the Company had certain obligations under employment agreements it entered into in 1998 and 1997 with its Chief Executive Officer ("CEO") and six other officers. Under the terms of those agreements, in the event that the Company terminates any of those officers without cause or the officer resigns for good reason, the terminated officer will receive, among other things, severance compensation, including a multiple of the officer's annual base salary and bonus. In addition, all incentive stock options become immediately exercisable. Similar severance provisions apply if any of those officers is terminated within two years (three years for the CEO) after the occurrence of a "change of control", as defined in the employment agreements. In February 1999, one of those officers resigned his position, which resulted in the Company's agreement to pay that officer's salary for the subsequent year, in exchange for the former employee's agreement, among other things, to not compete with the Company during that period. Significant Customer: For the three months ended March 31, 1999, approximately nine percent of the Company's revenues were from professional employer organization ("PEO") services performed for individual insurance agent offices under a preferred provider designation previously granted to the Company on a regional basis by the agents' common corporate employer. The corporate employer recently began granting that designation on a national basis only and the Company has been granted that designation for 1999. 9 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) In addition, the Company is aware of pending litigation against that corporate employer regarding its use of PEO services. The Company has not determined what impact, if any, that the ultimate result of these developments will have on its financial position or results of operations. Litigation: On September 24, 1998, an action was commenced against the Company for breach of contract in connection with a purported services arrangement, seeking damages of approximately $0.6 million. The Company filed an answer denying any breach of contract and moved to transfer the action to Florida. The motion for removal was granted and the case has been transferred to, and is now pending in, the Southern District of Florida, Fort Lauderdale division. The action is presently in discovery and no trial date has been set. The Company believes that the claim is without merit and the resolution of this lawsuit will not have a material adverse effect on its financial position or future operating results; however, no assurance can be given as to the ultimate outcome of this lawsuit. On November 12, 1997, an action was commenced against the Company, alleging state law claims of pregnancy/maternity discrimination and violations of the Family and Medical Leave Act as a result of an alleged demotion following the plaintiff's return from maternity leave. The complaint also asserts a claim for unpaid overtime based on both state law and the Fair Labor Standards Act. The case is presently in discovery and no trial date has been set. The Company believes the claims are without merit and is vigorously defending this action. Employee Benefit Plan: Pursuant to the terms of a now inactive 401(k) plan (containing previous contributions still managed by the Company), highly compensated employees were not eligible to participate. However, as a result of administrative errors in 1996 and prior years, some highly compensated employees were inadvertently permitted to make elective salary deferral contributions. The Company has sought IRS approval regarding the proposed correction under the Voluntary Closing Agreement Program ("VCAP"). There will be a penalty payable by the Company, associated with a correction under the VCAP, although the Company believes this penalty will be insignificant. Unemployment Taxes: Federal and state unemployment taxes represent a significant component of the Company's cost of revenues. State unemployment taxes are determined as a percentage of covered wages, such percentage determined in accordance with the laws of each state and usually taking into account specific work and employment history of the Company's employees in that state. The Company has realized reductions in its state unemployment tax expense as a result of changes in its organizational structure from time to time. Although the Company believes that these expense reductions were achieved in compliance with applicable laws, taxing authorities of a particular state have recently indicated that they may challenge these reductions. The Company is unable at this time to reasonably estimate the effect of such a challenge by this state or by other states. NOTE 6. RELATED PARTY TRANSACTIONS Effective August 31, 1998, certain Company shareholders owning franchises entered into a buyout agreement with the Company. Buyouts are early terminations of franchise agreements entered into by the Company in order to allow the Company to develop the related territories. At the time of the buyout, the Company received an initial payment from the former franchisee and was to have continued to receive quarterly payments from the former franchisee based on the gross revenues of the formerly franchised locations for two years after the termination date, which was generally consistent with the terms of buyout agreements between the Company and unrelated third parties. Effective March 31, 1999, the Company received another payment from the former franchisee in consideration of the elimination of the equivalent of the last five months of payments under the initial agreement. The amount of this payment was generally consistent with the terms of similar agreements between the Company and unrelated third parties. During the three months ended March 31, 1999, the Company recognized revenue of $0.6 million from all franchises owned by shareholders of the Company, which includes royalties and payments under the buyout agreement. 10 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6. RELATED PARTY TRANSACTIONS (CONTINUED) Effective February 16, 1998, the Company purchased certain staffing locations and the related franchise rights from certain Company shareholders. The $6.9 million purchase price included the issuance of a $1.7 million note bearing interest at 7.25% per annum and payable quarterly over three years. Effective February 1, 1999, the note was renegotiated so that the remaining principal balance of $1.3 million would bear interest at 8.50% per annum and would be payable in monthly payments totaling $0.3 million in the first year and $0.6 million in the second year, plus a $0.4 million payment at the end of the two year term. NOTE 7. SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES The consolidated statements of cash flows do not include the following noncash investing and financing transactions, except for the net cash paid for acquisitions:
Three Months Ended March 31, ---------------------------- 1999 1998 ---- ---- (Dollars in thousands) Acquisitions: Tangible and intangible assets acquired........ $ 39 $ 28,937 Liabilities assumed ........................... -- (1,368) Debt issued ................................... -- (8,626) Common stock issued ........................... -- (775) -------- ---------- Net cash paid for acquisitions .................. $ 39 $ 18,168 ======== ========== Reduction of deferred loss on interest rate collar agreement ............. $ 281 $ -- ======== ========== Increase in other current assets and notes payable, due to insurance financing ........... $ 348 $ -- ======== ==========
NOTE 8. EARNINGS (LOSS) PER SHARE The Company calculates earnings (loss) per share in accordance with the requirements of SFAS No. 128, "Earnings Per Share". The weighted average shares outstanding used to calculate basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended March 31, ---------------------------- 1999 1998 ---- ---- Shares issued in connection with the Reorganization ................. 5,448,788 5,448,788 Shares sold by the Company in October 1997 .......................... 3,000,000 3,000,000 Shares issued in connection with a February 1998 acquisition ....................................................... 57,809 37,897 Warrants exercised in May 1998 ...................................... 151,316 -- ---------- ---------- Weighted average common shares - basic .............................. 8,657,913 8,486,685 Outstanding options and warrants to purchase common stock - remaining shares after assumed repurchase using proceeds from exercise ...................................... -- 1,538,694 ---------- ---------- Weighted average common shares - diluted ............................ 8,657,913 10,025,379 ========== ==========
11 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8. EARNINGS (LOSS) PER SHARE (CONTINUED) Certain of the outstanding options and warrants to purchase common stock were anti-dilutive for certain of the periods presented above and accordingly were excluded from the calculation of diluted weighted average common shares for those periods, including the equivalent of 826,142 shares excluded for the three months ended March 31, 1999 solely because the result of operations was a net loss instead of net income. NOTE 9. OPERATING SEGMENT INFORMATION The Company's reportable operating segments are (i) the Industrial Staffing segment, which derives revenues from recruiting, training and deployment of temporary industrial personnel and provides payroll administration, risk management and benefits administration services to its clients, (ii) the PEO segment, which derives revenues from providing a comprehensive package of PEO services to its clients including payroll administration, risk management, benefits administration and human resource consultation and (iii) the Franchising segment, which derives revenues under agreements with industrial staffing franchisees that provide those franchises with, among other things, exclusive geographical areas of operations, continuing advisory and support services and access to the Company's confidential operating manuals. Transactions between segments affecting their reported income are immaterial. Differences between the reportable segments' operating results and the Company's consolidated financial statements relate primarily to other operating divisions of the Company and items excluded from segment operating measurements, such as corporate support center expenses and interest expense in excess of interest charged to the segments based on their outstanding receivables (before deducting amounts sold under the Securitization Facility). See Note 5 for information regarding a significant customer. Financial information for the Company's operating segments, reconciled to Company totals, is as follows:
Three Months Ended March 31, ---------------------------- 1999 1998 ---- ---- (Dollars in thousands) REVENUES Industrial Staffing .................................................... $ 73,096 $ 66,138 PEO .................................................................... 53,080 44,742 Franchising ............................................................ 1,973 1,095 Other Company revenues ........................................... 5,965 9,011 -------------- ------------- Total Company revenues ........................................... $ 134,114 $ 120,986 ============== ============= INCOME (LOSS) Industrial Staffing ..................................................... $ 583 $ 2,466 PEO ..................................................................... 255 372 Franchising ............................................................ 1,797 825 Other Company income (expenses) ................................ (3,665) (2,820) -------------- ------------- Total Company income (loss) before taxes ....................... $ (1,030) $ 843 ============== =============
12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a national provider of human resource services focusing on the staffing market through its Tandem division and on the PEO market through its Synadyne division. While implementing its growth strategies, the Company completed 36 acquisitions, primarily staffing companies, from January 1, 1995 through May 7, 1999 - the last acquisition closed in October 1998. These acquisitions included 89 offices and collectively generated approximately $189.0 million in revenue for the twelve months preceding each acquisition. The Company acquired 41 of those offices in 1998 (the "1998 Acquisitions"). See "-Acquisitions" below. Due to these acquisitions as well as new offices opened by the Company, during this period the number of Company-owned staffing and PEO offices increased from 10 to 128 and the number of metropolitan markets (measured by Metropolitan Statistical Areas, or MSAs) served by Company-owned locations increased from one to 50. In order to support its growth, the Company implemented new information systems, further developed back office capabilities and invested in other infrastructure enhancements. The Company's revenues are based on the salaries and wages of worksite employees. Staffing and PEO revenues, and related costs of wages, salaries, employment taxes and benefits related to worksite employees, are recognized in the period in which those employees perform the staffing and PEO services. Because the Company is at risk for all of its direct costs, independent of whether payment is received from its clients, and consistent with industry practice, all amounts billed to clients for gross salaries and wages, related employment taxes, health benefits and workers' compensation coverage are recognized as revenue by the Company, net of credits and allowances. The Company's primary direct costs are (i) the salaries and wages of worksite employees (payroll cost), (ii) employment related taxes, (iii) health benefits and (iv) workers' compensation benefits and insurance. The Company's staffing operations generate significantly higher gross profit margins than its PEO operations. The higher staffing margin reflects compensation for recruiting, training and other services not required as part of many PEO relationships, where the employees have already been recruited by the client and are trained and in place at the beginning of the relationship. RESULTS OF OPERATIONS The following tables set forth, on an unaudited basis, the amounts and percentage of net revenues of certain items in the Company's consolidated statements of income for the indicated periods.
Three Months Ended March 31, ---------------------------- 1999 1998 ---- ---- (Dollars in thousands) Net revenues: Flexible industrial staffing (1) ................ $ 64,799 $ 60,632 PEO (1) ......................................... 65,401 57,313 Franchising ..................................... 1,973 1,095 Other ........................................... 1,941 1,946 -------- --------- Total net revenues .............................. $134,114 $120,986 ======== ========= Gross profit .................................... $ 19,463 $ 18,038 Selling, general and administrative expenses..... 18,954 16,121 -------- --------- Operating income ................................ 509 1,917 Net interest and other expense .................. 1,539 1,074 -------- --------- Income (loss) before provision (benefit) for income taxes .................................. (1,030) 843 Income taxes (benefit) .......................... (449) 170 -------- --------- Net income (loss) ............................... $ (581) $ 673 ======== ========= Other Data: EBITDA (2) ...................................... $ 2,360 $ 3,340 ======== ========= System Revenues (3) ............................. $147,396 $140,060 ======== ========= System employees (number at end of period) ...... 33,000 29,800 ======== ========= System offices (number at end of period) ........ 172 182 ======== =========
13
Three Months Ended March 31, --------- 1999 1998 ---- ---- Net revenues: Flexible industrial staffing (1) .............. 48.3% 50.1% PEO (1) ....................................... 48.8 47.4 Franchising ................................... 1.5 0.9 Other ......................................... 1.4 1.6 ------ -------- Total net revenues ............................ 100.0% 100.0% ====== ======== Gross profit .................................. 14.5% 14.9% Selling, general and administrative expenses... 14.1 13.3 ------ -------- Operating income .............................. 0.4 1.6 Net interest and other expense ................ 1.1 0.9 ------ -------- Income (loss) before provision (benefit) for income taxes ................................ (0.7) 0.7 Income taxes (benefit) ........................ (0.3) 0.1 ------ -------- Net income (loss) ............................. (0.4)% 0.6% ====== ========
- --------------- (1) SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's reportable operating segments under SFAS No. 131 include the Industrial Staffing segment and the PEO segment. PEO revenues, as reported above, include certain industrial revenues that the Company believes are operationally consistent with the PEO business and operational model, but are not includable in the PEO segment due to the way the Company is organized. Following is a reconciliation of Flexible Industrial Staffing net revenues and the PEO net revenues, as shown above, to the revenues reported by the Company in accordance with the requirements of SFAS No. 131 - see Note 9 to the Company's Consolidated Financial Statements.
Three Months Ended March 31, ---------------------------- 1999 1998 ---- ---- (Dollars in thousands) Flexible Industrial Staffing revenues ................... $ 64,799 $ 60,632 Add: industrial staffing client payrolling .............. 8,297 5,506 -------- --------- Industrial Staffing operating segment revenues .......... $ 73,096 $ 66,138 ======== ========= PEO revenues ............................................ $ 65,401 $ 57,313 Less: industrial staffing client payrolling ............. (8,297) (5,506) Less: PEO services to industrial staffing franchises..... (4,024) (7,065) -------- --------- PEO operating segment revenues .......................... $ 53,080 $ 44,742 ======== =========
Gross profit amounts and percentages discussed herein are calculated on a consistent basis with the revenues reported herein. - --------------- (2) EBITDA is earnings (net income) before the effect of interest income and expense, income tax benefit and expense, depreciation expense and amortization expense. EBITDA is presented because it is a widely accepted financial indicator used by many investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income or as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. - --------------- (3) System revenues is the sum of the Company's net revenues (excluding revenues from franchise royalties and services performed for the franchisees) and the net revenues of the franchisees. System revenues provide information regarding the Company's penetration of the market for its services, as well as the scope and size of the Company's operations, but are not an alternative to revenues determined in accordance with generally accepted accounting principles as an indicator of operating performance. The net revenues of franchisees, which are not earned by or available to the Company, are derived from reports that are unaudited. System revenues consist of the following:
Three Months Ended March 31, ---------------------------- 1999 1998 ---- ---- (Dollars in thousands) Company's net revenues ................ $ 134,114 $ 120,986 Less Company revenues from: Franchise royalties ................. (1,973) Services to franchisees ............. (4,024) (7,065) Add franchisees' net revenues.......... 19,279 27,234 --------- ---------- System revenues ....................... $ 147,396 $ 140,060 ========= ==========
14 THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO MARCH 31, 1998 Net Revenues. Net revenues increased $13.1 million, or 10.9%, to $134.1 million in the three months ended March 31, 1999 ("Q1 1999") from $121.0 million in the three months ended March 31, 1998 ("Q1 1998"). This increase resulted from growth in staffing revenues in Q1 1999 of $4.2 million, or 6.9%, and PEO revenues growth of $8.1 million, or 14.1%, compared to Q1 1998. Staffing revenues increased primarily due to the 1998 Acquisitions. The Company-owned staffing offices increased by seven locations to 115 locations as of March 31, 1999. This increase was the result of 13 additional staffing locations attributable to the 1998 Acquisitions consummated after Q1 1998, offset by offices closed and consolidated into other Company-owned locations. The increase in PEO revenues was primarily due to new PEO clients, as well as an increase in the number of worksite employees at certain existing PEO clients. System revenues, which include franchise revenues not earned by or available to the Company, increased $7.3 million, or 5.2%, to $147.4 million in Q1 1999 from $140.1 million in Q1 1998. The increase in system revenues was attributable to the $13.1 million increase in the Company's net revenues discussed above. Franchise revenues of franchisees operating as of March 31, 1999 increased $4.1 million, or 27.2%, in Q1 1999 as compared to Q1 1998, offset by a $12.1 million decrease in revenues for the same period resulting from other franchisees no longer operating. The result is a net decrease of franchise revenues of $8.0 million. The Company acquired and converted 17 franchise locations to Company-owned locations during 1998 and also allowed the early termination of franchise agreements in 1998 attributable to another 15 locations to enable the Company to develop the related territories. At the time the Company agrees to terminate a franchise agreement, it receives an initial buyout payment from the former franchisee. The Company continues to receive payments from the former franchisees based on a percentage of the gross revenues of the formerly franchised locations for up to three years after the termination dates. Although those gross revenues are not included in the Company's franchisee or system revenues totals, the initial buyout payment, as well as subsequent payments from the former franchisees, are reflected in total royalties reported by the Company. Gross Profit. Gross profit (margin) increased $1.5 million, or 7.9%, to $19.5 million in Q1 1999, from $18.0 million in Q1 1998. Gross profit as a percentage of net revenues decreased to 14.5% in Q1 1999 from 14.9% in Q1 1998. This decrease was primarily due to (i) decreased gross profit margin percent for the Company's staffing operations and (ii) the lower growth rate for staffing revenues as compared to the growth rate for PEO revenues, which generate lower gross profit margins. In Q1 1999, PEO operations generated gross profit margins of 4.1% as compared to gross profit margins of 22.0% generated by staffing operations. Gross profit margin percent for the Company's staffing operations decreased to 22.0% in Q1 1999 from 23.2% in Q1 1998, primarily due to the impact of (i) the continued execution of a strategy to obtain larger contracts which have higher per hour billing and pay rates but lower gross profit margin percentages and (ii) the increased wages necessary to recruit staffing employees in areas of historically low unemployment. The Company anticipates these factors will continue to affect margins from staffing operations, although in many cases the Company expects the impact to be offset by lower selling, general and administrative expenses (measured as a percentage of gross profit) due to the economies of scale in servicing larger contracts. PEO gross profit margin percent increased slightly to 4.1% in Q1 1999 from 4.0% in Q1 1998. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") increased $2.9 million, or 17.6%, to $19.0 million in Q1 1999 from $16.1 million in Q1 1998. This increase was primarily a result of operating costs related to the 1998 Acquisitions and sales costs associated with increased staffing volume at existing locations. Total direct operating costs associated with the 1998 Acquisition locations (for the portion of Q1 1999 for which there was no corresponding Q1 1998 activity) were $0.8 million in Q1 1999. In addition, starting in Q1 1998 and increasing during the two subsequent quarters, the Company incurred indirect infrastructure costs to evaluate, acquire and integrate these operations, as well as to support the larger customer base. Net Interest and Other Expense. Net interest and other expense increased by $0.4 million, to $1.5 million in Q1 1999 from $1.1 million in Q1 1998. This increase was primarily due to a $0.5 million increase in interest expense, arising from (i) an increase in total debt outstanding related to the purchases of the 1998 Acquisitions and (ii) financing increased accounts receivable arising from increased staffing revenues as discussed above, partially offset by a decrease in the average interest rate as a result of the Securitization Facility. Net Income (Loss). Net income (loss) decreased by $1.3 million, to a $0.6 million loss in Q1 1999 from $0.7 million net income in Q1 1998. This decrease was primarily due to a $1.4 million reduction in operating income (resulting from the $2.9 million increase in SG&A, partially offset by the $1.5 million increase in gross profit) and a $0.5 million increase in interest expense, both discussed above, partially offset by the related income tax benefit. 15 ADDITIONAL OPERATING AND SEGMENT INFORMATION SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's reportable operating segments under SFAS No. 131 differ from the operating information presented below, as explained in footnote 1 to the table in "---Results of Operations" above. Gross profit amounts and percentages discussed below are also calculated on a consistent basis with the revenues reported below. See Note 9 to the Company's Consolidated Financial Statements. Flexible Industrial Staffing: Net revenues from the Company's staffing services increased $4.2 million, to $64.8 million for Q1 1999 from $60.6 million for Q1 1998, or an annualized growth rate of 6.9%. Staffing comprised a decreasing share of the Company's total net revenues, to 48.3% for Q1 1999 from 50.1% for Q1 1998, reflecting a lower internal growth rate for staffing services as well as the Company's discontinuance of staffing acquisitions since October 1998. The Company expects this lower internal growth rate and the absence of acquisition activity to continue for the remainder of 1999. As a result, the Company expects staffing's share of the Company's total net revenues to continue to decline. Gross profit from the Company's staffing services increased $0.2 million, to $14.3 million for Q1 1999 from $14.1 million for Q1 1998, or an annualized growth rate of 1.9%. However, consistent with the revenue trend discussed above, this represented a decreasing share of the Company's total gross profit, to 73.4% for Q1 1999 from 78.0% for Q1 1998. PEO: Net revenues from the Company's PEO services increased $8.1 million, to $65.4 million for Q1 1999 from $57.3 million for Q1 1998, or an annualized growth rate of 14.1%. Due to a higher internal growth rate for PEO services as well as the Company's discontinuance of staffing acquisitions since October 1998, PEO revenues represented an increasing share of the Company's total net revenues, to 48.8% for Q1 1999 from 47.4% for Q1 1998. The Company expects that PEO sales growth will continue at its present rate during most of 1999. Approximately 20% of the Company's Q1 1999 PEO revenues were from services performed for individual insurance agent offices under a preferred provider designation previously granted to the Company on a regional basis by the agents' common corporate employer. The corporate employer recently began granting that designation on a national basis only and the Company has been granted that designation for 1999. In addition, the Company is aware of pending litigation against that corporate employer regarding its use of PEO services. The Company has not determined what impact, if any, that the ultimate result of these developments will have on its financial position or results of operations. Gross profit from the Company's PEO services increased $0.4 million, to $2.7 million for Q1 1999 from $2.3 million for Q1 1998, or an annualized growth rate of 14.5%. This also represented an increasing share of the Company's total gross profit, to 13.7% for Q1 1999 from 12.7% for Q1 1998. Franchising: Net revenues from the Company's franchising operations increased $0.9 million, to $2.0 million for Q1 1999 from $1.1 million for Q1 1998, or an annualized growth rate of 80.2%. Franchising operations represented an increasing share of the Company's total net revenues, to 1.5% in Q1 1999 from 0.9% for Q1 1998, reflecting buyout payments received in 1999 from former franchisees. The Company allowed the early termination (buyout) of certain franchise agreements in 1998, attributable to 15 locations, to enable the Company to develop the related territories. Due to the reduced number of remaining franchises, the Company does not anticipate buyout payments in the future to be of the magnitude recorded in Q1 1999, although the Company expects to continue to convert franchise locations to Company-owned locations and to allow terminations of franchise agreements in key markets that the Company believes it can develop further. Such acquisitions and terminations will be subject to the Company's ability to negotiate them on acceptable terms. The Company also expects to continue to sell new franchises in smaller, less populated geographic areas, subject to, among other factors, the success of the Company's marketing efforts in this regard. 16 Gross profit from the Company's franchising operations increased $0.9 million, to $2.0 million for Q1 1999 from $1.1 million for Q1 1998, or an annualized growth rate of 80.2%. Consistent with the revenue trend discussed above, this area represented an increasing share of the Company's total gross profit, to 10.1% for Q1 1999 from 6.1% for Q1 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds for working capital and other needs are a $34.0 million credit line with a syndicate of lenders led by BankBoston, N.A. (the "Revolving Credit Facility") and a $50.0 million accounts receivable securitization facility with a BankBoston affiliate. Effective July 27, 1998, the Company entered into a five year financing arrangement under which it can sell up to a $50.0 million secured interest in its eligible accounts receivable to EagleFunding Capital Corporation ("Eagle"), which uses the receivables to secure A-1 rated commercial paper (the "Securitization Facility"). Under this arrangement, the Company receives cash equivalent to the gross outstanding balance of the accounts receivable being sold, less reserves which are adjusted on a monthly basis based on collection experience and other defined factors. There is no recourse to the Company for the initial funds received. Amounts collected in excess of the reserves are retained by the Company. The Company's cost for this arrangement is classified as interest expense and is based on the interest paid by Eagle on the balance of the outstanding commercial paper, which in turn is determined by prevailing interest rates in the commercial paper market and was approximately 4.95% as of March 31, 1999. As of March 31, 1999, a $36.1 million interest in the Company's uncollected accounts receivable had been sold under this agreement, which amount is excluded from the accounts receivable balance presented in the Company's consolidated financial statements. The Securitization Facility contains certain minimum default, delinquency and dilution ratios with respect to the Company's receivables and requires bank liquidity commitments ("Liquidity Facility") totaling no less than $51.0 million. A default under the Securitization Facility constitutes a default under the Revolving Credit Facility. The Liquidity Facility has been provided by the syndicate of commercial banks that participate in the Revolving Credit Facility for a one year term expiring July 26, 1999 at 0.375% per annum. Eagle may draw against the Liquidity Facility to fund cash shortfalls caused by an inability for any reason to issue commercial paper based on the Company's receivables. There is no recourse to the Company for amounts drawn under the Liquidity Facility, although such amounts would be repaid from and to the extent receivables sold by the Company were collected. Amounts drawn under the Liquidity Facility bear interest at the same rates incurred under the Revolving Credit Facility. The Company is currently discussing renewal of the Liquidity Facility, as well as other financing options, with the syndicate and other banks. Concurrent with the Securitization Facility, the Revolving Credit Facility was amended, primarily to reduce the maximum amount available for borrowing from $85.0 million to $34.0 million and to extend the remaining term of the Revolving Credit Facility to five years from the date of that amendment. Outstanding amounts under the Revolving Credit Facility are secured by substantially all of the Company's assets and the pledge of all of the outstanding shares of Common Stock of each of its subsidiaries. Amounts borrowed under the Revolving Credit Facility bear interest at BankBoston's base rate or Eurodollar rate (at the Company's option) plus a margin based upon the ratio of the Company's total indebtedness to the Company's earnings (as defined in the Revolving Credit Facility). As of March 31, 1999, the Company had outstanding borrowings under the Revolving Credit Facility of $20.7 million, bearing interest at an annualized rate of 7.7%. The Revolving Credit Facility contains certain affirmative and negative covenants relating to the Company's operations, certain of which were amended in February 1999 in order to provide additional flexibility to the Company as well as enabling it to be in compliance as of December 31, 1998. These covenant modifications also resulted in a 0.5% per annum increase in the bank margin component of the interest rate charged thereunder, which was offset by a 0.6% per annum decrease in the Eurodollar base rate during the first quarter of 1999. The Company regularly evaluates its compliance with the financial covenants included in the Revolving Credit Facility, and was in compliance with the covenants in effect as of March 31, 1999. The Company believes that it will be in compliance with those covenants until the expiration of the Liquidity Facility in July 1999 and it expects to be in compliance subject to appropriately restructured debt and/or convenants after that date; however, there can be no assurance that the Company will be in compliance with those covenants at June 30, 1999 or that it will not require waivers from the syndicate of lenders led by BankBoston, N.A., regarding compliance with those covenants as of that date, or at subsequent dates. In the event waivers are required, but are not granted, the Company could experience liquidity problems depending on the ability and willingness of the syndicate of lenders to continue lending to the Company, and the availability and cost of financing from other sources. 17 In February 1998, the Company entered into a five year notional $42.5 million interest rate collar agreement with Bank Boston, N.A., whereby the Company receives interest on that notional amount to the extent 30 day LIBOR exceeds 6.25% per annum, and pays interest on that amount to the extent 30 day LIBOR is less than 5.43% per annum. This derivative financial instrument is being used by the Company to reduce interest rate volatility and the associated risks arising from the floating rate structure of its Revolving Credit Facility and its Securitization Facility, and is not held or issued for trading purposes. Unrealized losses arising from this agreement are not required to be and have not been recognized in the Company's results of operations - see Note 5 to the Company's Consolidated Financial Statements. As of March 31, 1999, the Company had (i) bank standby letters of credit outstanding, in the aggregate amount of $10.4 million under a $15.0 million letter of credit facility (which is part of the Revolving Credit Facility) to secure certain workers' compensation obligations already recorded as a liability on the Company's balance sheet; (ii) $9.9 million of promissory notes outstanding in connection with certain acquisitions, primarily bearing interest at imputed rates from 8.75% to 12.0% per annum and payable during the next two years, and subordinated to the repayment of the Revolving Credit Facility; (iii) obligations under capital leases for property and equipment in the aggregate amount of $2.0 million; and (iv) obligations under mortgages totaling $4.2 million. The Company's principal uses of cash are for wages and related payments to temporary and PEO employees, operating costs, acquisitions, capital expenditures and repayment of debt and interest thereon. For Q1 1999, cash used by operations was approximately $3.8 million, compared with $5.4 million provided in Q1 1998. Cash used in investing activities during Q1 1999 was approximately $0.8 million, compared with $18.5 million in Q1 1998, primarily expenditures of $18.2 million for acquisitions (primarily intangible assets). Cash provided by financing activities during Q1 1999 was approximately $0.5 million, comprised primarily of a $1.7 million increase in the Company's liability for outstanding checks (in excess of the funded bank balances), offset by $1.0 million of repayments of long term debt. Cash provided by financing activities during Q1 1998 was approximately $14.3 million, primarily $14.5 million from borrowings under the Revolving Credit Facility. Prior to 1999, the Company secured its workers' compensation obligations by the issuance of bank standby letters of credit to its insurance carriers, minimizing the required current cash outflow for such items. In 1999, the Company selected a prefunded deductible program whereby expected claims expenses are funded in advance in exchange for reductions in administrative costs. The required advance funding will be provided through either cash flows from operations or additional borrowings under the Revolving Credit Facility. This new arrangement could adversely affect the Company's ability to meet certain financial covenants, although the Company was successful in reducing the outstanding letter of credit by $2.0 million in April 1999. Although the Company's workers' compensation expense for claims is effectively capped at a contractually agreed upon percentage of payroll and cannot exceed these amounts for the respective fiscal years, this limit was increased to approximately 2.7% for calendar 1999, from approximately 2.4% in 1998, reflecting the inclusion of general and automobile liability coverage as well as an adjustment based on the changing business mix of the Company. One of the key elements of the Company's growth strategy in 1997 and 1998 has been expansion through acquisitions, which require significant sources of financing; however, the Company does not expect to complete further acquisitions until its internal revenue growth rate and the resulting operating performance of its existing locations improve. The financing sources for acquisitions include cash from operations, seller financing, bank financing and issuances of the Company's Common Stock. The Company's previous acquisitions have been primarily in the industrial staffing area, and when it resumes acquisition activity, the Company expects this trend to continue due to the more favorable pricing for those businesses (as a multiple of EBITDA) as compared to PEO businesses. See Note 2 to the Company's Consolidated Financial Statements. The Company is a service business and therefore a majority of its tangible assets are customer accounts receivable. Staffing employees are paid by the Company on a daily or weekly basis. The Company, however, receives payment from customers for these services, on average, 45 to 60 days from the presentation date of the invoice. Beginning in the fourth quarter of 1998, the Company experienced an increase in the percentage of its staffing accounts receivable that are past due. As a result, the Company has taken several actions, including among other things increasing the number of employees focusing on accounts receivable issues and establishing employee compensation plans based on satisfactory collections, which it believes will satisfactorily address this issue so that there is no adverse long-term impact to the Company. As new staffing offices are established or acquired, or as existing offices expand, there will be increasing requirements for cash to fund operations. The Company pays its PEO employees on a weekly, bi-weekly, semi-monthly or monthly basis for their services, and currently receives payments on a simultaneous basis from approximately 80% (based on revenues) of its existing customers, with the remainder paying on average 30 to 45 days from the presentation date of the invoice. The Company anticipates spending up to $4.0 million during the next twelve months to open new staffing locations, improve its management information and operating systems, upgrade existing and acquired locations and other capital 18 expenditures. This amount does not include expenditures for goodwill or other intangible assets arising from acquisitions, which the Company does not expect to be significant in 1999. During February through May 1999, in order to remain in compliance with certain covenants in its Revolving Credit Facility, and to reduce the cash impact of scheduled payments under its subordinated acquisition debt, the Company has negotiated extensions of the payment dates and modified the interest rates and other terms of certain of its subordinated acquisition notes payable. During April 1999, the Company received approximately $1.6 million from a financial institution in connection with a sale/leaseback transaction, which amount was approximately equal to the net book value of property and equipment previously purchased by the Company. The proceeds were used to reduce outstanding borrowings under the Revolving Credit Facility, creating additional availability thereunder, and are repayable over three years at an interest rate of approximately 10% per annum. The Company believes that funds provided by operations, including sales of accounts receivable under the Securitization Facility, plus borrowings under the Revolving Credit Facility and current cash balances will be sufficient to meet its presently anticipated needs for working capital and capital expenditures, not including new acquisitions, for the next twelve months. Significant new acquisitions, which the Company does not expect to pursue during 1999, will require expanded or new borrowing facilities, issuance of Common Stock and/or additional debt or equity offerings. The ability of the Company to make significant future acquisitions is also subject to the Company's ability to successfully negotiate more flexible leverage (e.g., debt to EBITDA) covenants compared to those presently contained in the Revolving Credit Facility and/or the Company's ability to finance future acquisitions by issuance of its Common Stock rather than the debt financing primarily used by the Company for previous acquisitions. There can be no assurance that additional capital will be available to the Company on acceptable terms. Acquisitions During 1995, the Company made four staffing acquisitions including five offices and approximately $7.0 million in revenues for the twelve months preceding each acquisition ("annual historical revenue"). During 1996, the Company made five staffing acquisitions including 13 offices and approximately $16.0 million in annual historical revenue. During 1997, the Company made eight staffing acquisitions including 30 offices and approximately $61.0 million in annual historical revenue. During 1998, the Company made 17 staffing acquisitions including 40 offices and approximately $96.0 million in annual historical revenue. These acquisitions have resulted in a significant increase in goodwill and other intangible assets and correspondingly have resulted and will continue to result in increased amortization expense. In addition, the amount of these intangible assets as a percentage of the Company's total assets and shareholders' equity has increased significantly and while the net unamortized balance of intangible assets as of March 31, 1999 is not considered to be impaired, any future determination requiring the write-off of a significant portion of unamortized intangible assets could have a material adverse effect on the Company's financial condition and results of operations. See Note 2 to the Company's Consolidated Financial Statements. Seasonality The Company's quarterly results of operations reflect the seasonality of higher customer demand for industrial staffing services in the last two quarters of the year, as compared to the first two quarters. In 1998, the seasonal increase in industrial staffing revenue was lower than that experienced in prior years, which the Company attributes to slower economic activity in U.S. manufacturing and distribution; however, the Company believes there is evidence that this sector has begun to improve in 1999 although there can be no assurance that this trend exists or will continue. Even though there is a seasonal reduction of industrial staffing revenues in the first quarter of a year as compared to the fourth quarter of the prior year, the Company does not reduce the related core personnel and other operating expenses proportionally because most of that infrastructure is needed to support anticipated increased revenues in subsequent quarters. PEO revenues are generally not subject to seasonality to the same degree as industrial staffing revenues although the net income contribution of PEO revenues expressed as a percentage of sales is significantly lower than the net income contribution of industrial staffing revenues. As a result of the above factors, the Company historically experiences operating income in the first quarter of a year that is significantly less than (i) the fourth quarter of the preceding year and (ii) the subsequent three quarters of the same year. Inflation The effects of inflation on the Company's operations were not significant during the periods presented in the financial statements. Throughout the periods discussed above, the increases in revenues have resulted primarily from higher volumes, rather than price increases. 19 New Accounting Pronouncements In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 defines derivatives and establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, and cannot be applied retroactively. The Company intends to first implement SFAS No. 133 in its consolidated financial statements as of and for the three months ended March 31, 2000, although it has not determined the effects, if any, that implementation will have. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. Year 2000 Issue As many computer systems, software programs and other equipment with embedded chips or processors (collectively, "Information Systems") use only two digits rather than four to define the applicable year, they may be unable to process accurately certain data, during or after the year 2000. As a result, business and governmental entities are at risk for possible miscalculations or systems failures causing disruptions in their business operations. This is commonly known as the Year 2000 ("Y2K") issue. The Y2K issue concerns not only Information Systems used solely within a company but also concerns third parties, such as customers, vendors and creditors, using Information Systems that may interact with or affect a company's operations. The Y2K issue can affect the Company's flexible staffing and PEO operations, including, but not limited to, payroll processing, cash and invoicing transactions, and financial reporting and wire transfers from and to the Company's banking institutions. In 1996, the Company initiated a conversion of the primary software being used in its flexible staffing and PEO operations, as well as its corporate-wide accounting and billing software. Although this conversion was undertaken for the primary purpose of achieving a common data structure for all significant Company applications as well as enhancing processing capacity and efficiency, the Company believes that it also will result in software that properly interprets dates beyond the year 1999 ("Year 2000 Compliant"). The Company's State of Readiness: The Company has implemented a Y2K readiness program with the objective of having all of the Company's significant Information Systems functioning properly with respect to Y2K before January 1, 2000. The first component of the Company's readiness program was to identify the internal Information Systems of the Company that are susceptible to system failures or processing errors as a result of the Y2K issue. This effort is substantially complete. All operating divisions have identified the Information Systems that may require remediation or replacement and have established priorities for repair or replacement. Those Information Systems considered most critical to continuing operations have been given the highest priority. The second component of the Y2K readiness program involves the actual remediation and replacement of Information Systems. The Company is using both internal and external resources to complete this process. Information Systems ranked highest in priority, such as the corporate accounting and billing software, have either been remediated or replaced or scheduled for remediation or replacement. The remediation and replacement of internal Information Systems is substantially complete, with the final testing and certification for Y2K readiness anticipated by June 1999. This does not include the Information Systems utilized in franchise locations, which the Company anticipates will be Year 2000 Compliant no later than September 30, 1999. As to the third component of the Y2K readiness program, the Company has identified its significant customers, vendors and creditors that are believed, at this time, to be critical to business operations subsequent to January 1, 2000, and steps are underway to reasonably ascertain their respective stages of Y2K readiness through the use of questionnaires, interviews, on-site visits and other available means. The Company will take appropriate action based on those responses, but there can be no assurance that the Information Systems provided by or utilized by other companies which affect the Company's operations will be timely converted in such a way as to allow them to continue normal business operations or furnish products, services or data to the Company without disruption. 20 Risks: If needed remediations and conversions to the Information Systems are not made on a timely basis by the Company or its materially-significant customers or vendors, the Company could be affected by business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on the Company's operations, liquidity or financial condition. Although not anticipated, the most reasonably likely worst case scenario in the event the Company or its key customers or vendors fail to resolve the Y2K issue would be an inability on the part of the Company to perform its core functions of payroll administration, tax reporting, unemployment and insurance claims filings, billing and collections, and health benefits administration. Factors which could cause material differences in results, many of which are outside the control of the Company, include, but are not limited to, the Company's ability to identify and correct all relevant computer software, the accuracy of representations by manufacturers of the Company's Information Systems that their products are Y2K compliant, the ability of the Company's customers and vendors to identify and resolve their own Y2K issues and the Company's ability to respond to unforeseen Y2K complications. Contingency Plans: While the Company continues to focus on solutions for Y2K issues, and expects to be Y2K compliant in a timely manner, the Company, concurrently with the Y2K readiness measures described above, has established a Y2K project team whose mission is to develop contingency plans intended to mitigate the possible disruption in business operations that may result from the Y2K issue. The Company's Y2K project team, consisting of personnel from management, information systems/technology and legal areas, is in the process of developing such plans and the cost estimates to implement them. Contingency plans may include purchasing or developing alternative software programs, the purchase of computer hardware and peripheral equipment, and other appropriate measures. Once developed, contingency plans and related cost estimates will be continually refined as additional information becomes available. The Y2K project team expects to conclude the development of these contingency plans by June 30, 1999. Y2K Costs: The Company's management estimates that the total cost to the Company of its Y2K compliance activities will not exceed $150,000, which is not considered material to the Company's business, results of operations or financial condition. The costs and time necessary to complete the Y2K modification and testing processes are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors; however, there can be no assurance that these estimates will be achieved and actual results could differ from the estimates. The Company has capitalized and will continue to capitalize the costs of purchasing and developing new Y2K compliant Information Systems, but will expense the costs of the modifications to existing hardware and software made solely for purposes of Y2K compliance. Most of the cost of purchasing or modifying software in this regard had been incurred as of March 31, 1999. Any remaining capitalized balance for Information Systems no longer utilized because of replacement by Y2K compliant Information Systems will be expensed at the time such hardware and software is replaced. The Company's Y2K readiness program is an ongoing process and the estimates of costs and completion dates for various components of the Y2K readiness program described above are subject to change. Forward-Looking Information: Certain Cautionary Statements Certain statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q are forward looking statements, including but not limited to, statements regarding the Company's expectations or beliefs concerning the Company's strategy and objectives, expected sales and other operating results, the effect of changes in the Company's gross margin, the Company's liquidity, anticipated capital spending, the availability of financing, equity and working capital to meet the Company's future needs, economic conditions in the Company's market areas, the potential for and effect of future acquisitions, the Company's ability to resolve the Year 2000 issue and the related costs and the tax-qualified status of the Company's 401(k) and 413(c) plans. The words "aim," "believe," "expect," "anticipate," "intend," "estimate," "will," "should," 21 "could" and other expressions which indicate future events and trends identify forward looking statements. Such forward looking statements involve known and unknown risks and are also based upon assumptions of future events, which may not prove to be accurate. Therefore, actual results may differ materially from any future results expressed or implied in the forward looking statements. These known and unknown risks and uncertainties, include, but are not limited to changes in U.S. economic conditions, particularly in the manufacturing sector; the Company's dependence on regulatory approvals; its future cash flows, sales, gross margins and operating costs; the effect of changing market and other conditions in the staffing industry; the ability of the Company to continue to grow; legal proceedings, including those related to the actions of the Company's temporary or leased employees; the availability and cost of credit; the ability to maintain existing banking relationships; the Company's ability to raise capital in the public equity markets; the availability of capital for additional acquisitions and the Company's ability to identify suitable acquisition candidates and to successfully negotiate and complete those acquisitions on favorable terms; the ability to successfully integrate past and future acquisitions into the Company's operations; the recoverability of the recorded value of goodwill and other intangible assets arising from past and future acquisitions; the general level of economic activity and unemployment in the Company's markets, specifically within the construction, manufacturing, distribution and other light industrial trades; increased price competition; changes in government regulations or interpretations thereof, particularly those related to employment; the continued availability of qualified temporary personnel; the financial condition of the Company's clients and their demand for the Company's services (which in turn may be affected by the effects of, and changes in, U.S. and worldwide economic conditions); collection of accounts receivable; the Company's ability to retain large clients; the Company's ability to recruit, motivate and retain key management personnel; the costs of complying with government regulations (including occupational safety and health provisions, wage and hour and minimum wage laws and workers' compensation and unemployment insurance laws) and the ability of the Company to increase fees charged to its clients to offset increased costs relating to these laws and regulations; volatility in the workers' compensation, liability and other insurance markets; inclement weather; interruption, impairment or loss of data integrity or malfunction of information processing systems; changes in government regulations or interpretations thereof, particularly those related to PEOs, including the possible adoption by the IRS of an unfavorable position as to the tax-qualified status of employee benefit plans maintained by PEOs, and other risks detailed from time to time by the Company or in its press releases or in its filings with the Securities and Exchange Commission. In addition, the market price of the Company's stock may from time to time be significantly volatile as a result of, among other things, the Company's operating results, the operating results of other temporary staffing and PEO companies, economic conditions, the proportion of the Company's stock available for active trading and the performance of the stock market in general. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by cautionary statements in this paragraph and elsewhere in this Form 10-Q, and in other reports filed by the Company with the Securities and Exchange Commission, including, but not limited to the Company's Registration Statement on Form S-3 (File No. 333-69125), including the "Risk Factors" section thereof, filed with the Securities and Exchange Commission on December 17, 1998, and declared effective on January 6, 1999. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the Company's assessment of its sensitivity to market risk as of March 31, 1999, as compared to the information included in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", of the Company's Form 10-K for the year ended December 31, 1998, as filed with the Securities and Exchange Commission on March 31, 1999. 22 PART II - OTHER INFORMATION ITEM 3 - DEFAULTS UPON SENIOR SECURITIES The Revolving Credit Facility contains certain affirmative and negative covenants relating to the Company's operations, certain of which were amended in February 1999 in order to provide additional flexibility to the Company as well as enabling it to be in compliance as of December 31, 1998. These covenant modifications also resulted in a 0.5% per annum increase in the bank margin component of the interest rate charged thereunder, which was offset by a 0.6% per annum decrease in the Eurodollar base rate during the first quarter of 1999. The Company regularly evaluates its compliance with the financial covenants included in the Revolving Credit Facility, and was in compliance with the covenants in effect as of March 31, 1999. The Company believes that it will be in compliance with those covenants until the expiration of the Liquidity Facility in July 1999 and it expects to be in compliance subject to appropriately restructured debt and/or convenants after that date; however, there can be no assurance that the Company will be in compliance with those covenants at June 30, 1999 or that it will not require waivers from the syndicate of lenders led by BankBoston, N.A., regarding compliance with those covenants as of that date, or at subsequent dates. In the event waivers are required, but are not granted, the Company could experience liquidity problems depending on the ability and willingness of the syndicate of lenders to continue lending to the Company, and the availability and cost of financing from other sources. ITEM 5 - OTHER INFORMATION Effective February 22, 1999, James E. Money resigned his position as President of the Company's Tandem division. The Tandem division is currently headed by Paul Burrell, the Company's CEO, and Ronald Blain, Tandem's chief operating officer. 23 Effective March 15, 1999, Jay D. Seid, a Managing Director of Bachow and Associates, Inc., replaced Samuel H. Schwartz as Bachow's designated member on the Company's Board of Directors. Mr. Schwartz resigned from the Board of Directors following his resignation as a Vice President of Bachow. Mr. Seid, an attorney, joined Bachow, a Bala Cynwyd, PA based investment firm, in December 1992. Mr. Seid will be a candidate for reelection to the Board at the Company's May 1999 annual meeting of shareholders. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: NUMBER DESCRIPTION 3.1 Amended and Restated Articles of Incorporation of the Company(1) 3.2 Amended and Restated Bylaws of the Company(2) 4.3 Shareholder Protection Rights Agreement(2) 4.6 Warrant Dated February 21, 1997 Issued to Triumph-Connecticut Limited Partnership(3) 4.7 Warrant Dated February 21, 1997 Issued to Bachow Investment Partners III, L.P.(3) 4.8 Warrant Dated February 21, 1997 Issued to State Street Bank and Trust Company of Connecticut, N.A., as Escrow Agent(3) 10.19 Third Amended and Restated Credit Agreement among OutSource International, Inc., the banks from time to time parties hereto and BankBoston, N.A., successor by merger to Bank of Boston, Connecticut, as agent - Revolving Credit Facility dated as of July 27, 1998.(4) 10.34 Receivables Purchase and Sale Agreement dated July 27, 1998 among OutSource International, Inc., OutSource Franchising, Inc., Capital Staffing Fund, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., and OutSource International of America, Inc., each as an originator, and OutSource Funding Corporation, as the buyer, and OutSource International, Inc., as the servicer.(4) 10.35 Receivables Purchase Agreement dated July 27, 1998 among OutSource Funding Corporation, as the seller, and EagleFunding Capital Corporation, as the purchaser, and BancBoston Securities, Inc., as the deal agent and OutSource International, Inc., as the servicer.(4) 10.36 Intercreditor Agreement dated July 27, 1998 by and among BankBoston, N.A., as lender agent; OutSource Funding Corporation, OutSource International, Inc., OutSource Franchising, Inc., Capital Staffing Fund, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc. and OutSource International of America, Inc., as originators; OutSource International, in its separate capacity as servicer; EagleFunding Capital Corporation, as purchaser; and BancBoston Securities Inc., individually and as purchaser agent.(4) 10.50 First Amendment to Third Amended and Restated Credit Agreement among OutSource International, Inc., each of the banks party to the Credit Agreement and BankBoston, N.A., as agent for the banks, dated as of February 22, 1999.(5) 27 Financial Data Schedule - -------------------------------------------------------------------------------- (1) Incorporated by reference to the Exhibits to Amendment No. 3 to the Company's Registration Statement on Form S-1 (Registration Statement No. 333-33443) as filed with the Securities and Exchange Commission on October 21, 1997. (2) Incorporated by reference to the Exhibits to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration Statement No. 333-33443) as filed with the Securities and Exchange Commission on September 23, 1997. (3) Incorporated by reference to the Exhibits to the Company's Registration Statement on Form S-1 (Registration Statement No. 333-33443) as filed with the Securities and Exchange Commission on August 12, 1997. (4) Incorporated by reference to the exhibits to the Company's Form 10-Q for the quarterly period ended June 30, 1998, as filed with the Securities and Exchange Commission on August 14, 1998. (5) Incorporated by reference to the exhibits to the Company's Form 10-K for the year ended December 31, 1998, as filed with the Securities and Exchange Commission on March 31, 1999. - -------------------------------------------------------------------------------- (b) Reports on Form 8 - K: No reports were filed on Form 8-K during the quarter ended March 31, 1999. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OUTSOURCE INTERNATIONAL, INC. Date: May 17, 1999 By: /s/ Paul M. Burrell ------------------------------------------ Paul M. Burrell President, Chief Executive Officer and Chairman of the Board of Directors Date: May 17, 1999 By: /s/ Scott R. Francis ------------------------------------------ Scott R. Francis Chief Financial Officer (Principal Financial Officer) Date: May 17, 1999 By: /s/ Robert E. Tomlinson ------------------------------------------ Robert E. Tomlinson Chief Accounting Officer (Principal Accounting Officer) 25 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule EX-27 2 FDS -- FINANCIAL DATA SCHEDULE
5 MULTIPLIER DOES NOT APPLY TO PER SHARE AMOUNTS. THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE REGISTRANT FOR THE PERIODS NOTED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 12-MOS 3-MOS DEC-31-1999 DEC-31-1998 DEC-31-1998 JAN-01-1999 JAN-01-1998 JAN-01-1998 MAR-31-1999 DEC-31-1998 MAR-31-1998 1,418 5,501 0 0 0 0 20,503 14,870 0 (2,216) (1,924) 0 0 0 0 28,424 26,683 0 25,713 24,903 0 (8,144) (7,275) 0 112,918 112,002 0 38,337 35,382 0 37,427 38,305 0 0 0 0 0 0 0 9 9 0 43,998 44,579 0 112,918 112,002 0 0 0 0 134,114 0 120,986 0 0 0 114,651 0 102,948 0 0 0 0 0 0 1,582 0 1,080 (1,030) 0 843 (449) 0 170 (581) 0 673 0 0 0 0 0 0 0 0 0 (581) 0 673 (0.07) 0 0.08 (0.07) 0 0.07
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