-----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, Ka2VYcCjqgo1pCndS/mul6szwZ6MOz1v5KPUNFMNNOXzHzoU9A9ZlN3uw95qlStJ lNI6BH3qvEE5VQiRoulyhw== 0001016843-99-001127.txt : 19991117 0001016843-99-001127.hdr.sgml : 19991117 ACCESSION NUMBER: 0001016843-99-001127 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAFF LEASING INC CENTRAL INDEX KEY: 0001035185 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 650735612 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22701 FILM NUMBER: 99752360 BUSINESS ADDRESS: STREET 1: 600 301 BLVD W STREET 2: STE 202 CITY: BRADENTON STATE: FL ZIP: 34205 BUSINESS PHONE: 9417484340 MAIL ADDRESS: STREET 1: 600 301 BLVD W STREET 2: STE 202 CITY: BRADENTON STATE: FL ZIP: 34205 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 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 No. 0-28148 STAFF LEASING, INC. ------------------------------------------------------ (exact name of registrant as specified in its charter) Florida 65-0735612 ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 301 Blvd West, Suite 202 Bradenton, FL 34205 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (Registrant's Telephone Number, Including Area Code): (941) 748-4540 Indicate by check mark 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. CLASS OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 11, 1999 --------------------- ----------------------------------- Par value $0.01 per share 21,709,542 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE ITEM 1. Financial Statements Condensed Consolidated Income Statements (unaudited)for the Three and Nine Months Ended September 30, 1998 and 1999 ...........3 Condensed Consolidated Balance Sheets as of December 31, 1998 and September 30, 1999 (unaudited) ................................4 Condensed Consolidated Statement of Changes in Shareholders' Equity (unaudited) for the Nine Months Ended September 30, 1999 .....5 Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 1998 and 1999 .............6 Notes to Condensed Consolidated Financial Statements (unaudited) ..........7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................10 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ...14 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ............................................14 ITEM 5. Other Information ............................................14 ITEM 6. Exhibits and Reports on Form 8-K .............................15 SIGNATURES ...................................................................16 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements STAFF LEASING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS UNAUDITED
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ----------------------------- ----------------------------- 1998 1999 1998 1999 ----------- ----------- ----------- ----------- (in $000's, except share and per share data) Revenues $ 607,342 $ 680,502 $ 1,729,169 $ 1,992,108 ----------- ----------- ----------- ----------- Cost of services: Salaries, wages and payroll taxes 551,885 619,858 1,568,875 1,811,232 Benefits, workers' compensation, state unemployment taxes and other costs 26,681 27,211 77,089 86,110 ----------- ----------- ----------- ----------- Total cost of services 578,566 647,069 1,645,964 1,897,342 ----------- ----------- ----------- ----------- Gross profit 28,776 33,433 83,205 94,766 ----------- ----------- ----------- ----------- Operating expenses: Salaries, wages and commissions 12,858 15,546 37,115 43,994 Other general and administrative 5,407 6,550 15,973 19,320 Depreciation and amortization 1,525 1,988 4,207 5,556 ----------- ----------- ----------- ----------- Total operating expenses 19,790 24,084 57,295 68,870 ----------- ----------- ----------- ----------- Operating income 8,986 9,349 25,910 25,896 Interest income 909 958 2,441 2,329 Interest expense (20) -- (69) (21) Other non operating expense -- -- -- (850) ----------- ----------- ----------- ----------- Income before income tax provision 9,875 10,307 28,282 27,354 Income tax provision 3,701 3,897 10,604 10,341 ----------- ----------- ----------- ----------- Net income $ 6,174 $ 6,410 $ 17,678 $ 17,013 =========== =========== =========== =========== Net income per share - Basic $ .26 $ .30 $ .75 $ .78 - Diluted $ .26 $ .29 $ .72 $ .76 =========== =========== =========== =========== Weighted average shares outstanding - Basic 23,321 21,725 23,488 21,802 - Diluted 24,133 22,147 24,478 22,284 =========== =========== =========== ===========
See notes to condensed consolidated financial statements. 3 STAFF LEASING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS UNAUDITED
DECEMBER 31, 1998 SEPTEMBER 30, 1999 -------------------------------------------- (in $000's, except share and per share data) ASSETS Current assets: Cash and cash equivalents $ 15,412 $ 17,874 Certificates of deposit - restricted 8,379 7,781 Marketable securities 32,022 46,251 Accounts receivable, net of allowance for doubtful accounts of $802 and $934, respectively 38,637 61,676 Other current assets 6,182 3,929 --------- --------- Total current assets 100,632 137,511 Property and equipment, net 25,071 26,287 Goodwill, net of accumulated amortization of $3,779 and $4,329 respectively 10,892 10,342 Deferred income tax asset 2,898 2,676 Other assets, net of accumulated amortization of $245 and $0, respectively 285 180 --------- --------- $ 139,778 $ 176,996 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accrued insurance premiums and health $ 22,757 $ 22,577 Accrued payroll and payroll taxes 38,748 61,818 Accounts payable and other accrued liabilities 5,515 4,477 Income taxes payable -- 3,111 Deferred income tax liabilities 5,729 5,089 Customer deposits and prepayments 2,741 2,594 --------- --------- Total current liabilities 75,490 99,666 Long-term liabilities 1,499 1,254 Commitments and contingencies (See notes) Shareholders' equity : Common stock, $.01 par value 221 217 Shares authorized: Shares issued and outstanding: 100,000,000 December 31, 1998 - 33,131,267 September 30, 1999 - 31,709,542 Additional paid in capital 46,804 42,987 Retained earnings 16,051 33,064 Other (287) (192) --------- --------- Total shareholders' equity 62,789 76,076 --------- --------- $ 139,778 $ 176,996 ========= =========
See notes to condensed consolidated financial statements. 4
STAFF LEASING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY UNAUDITED ACCUMULATED COMMON ADDITIONAL DEFERRED SHARE- OTHER STOCK COMMON PAID IN COMPEN- HOLDER COMPREHENSIVE RETAINED (SHARES) STOCK CAPITAL SATION NOTES INCOME EARNINGS TOTAL ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (in $000's except share data) Balance, January 1, 1999 22,121,267 $ 221 $ 46,804 $ (282) $ (61) $ 56 $ 16,051 $ 62,789 Repurchase of common stock (411,725) (4) (4,287) (4,291) Tax benefit of restricted stock plan vesting 470 470 Other 214 5 219 Unrealized loss on marketable securities, net of tax (124) Net income 17,013 Total comprehensive income 16,889 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, September 30, 1999 21,709,542 $ 217 $ 42,987 $ (68) $ (56) $ (68) $ 33,064 $ 76,076 ========== ========== ========== ========== ========== ========== ========== ==========
See notes to condensed consolidated financial statements. 5 STAFF LEASING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1998 1999 -------- -------- (in $000's) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 17,678 $ 17,013 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,207 5,556 Deferred taxes, net 9,292 126 Provision for bad debts 500 425 Other 117 71 Changes in operating working capital: (Increase) decrease in certificates of deposit - restricted 85 598 Increase in accounts receivable (28,872) (23,464) (Increase) decrease in other current assets (2,891) 2,253 (Decrease) in accounts payable and other accrued liabilities (1,388) (1,038) Increase in accrued payroll and payroll taxes 22,449 23,070 Increase in accrued insurance premiums and health reserves 3,088 (180) Increase (decrease) in income taxes payable -- 3,111 Increase (decrease) in customer deposits and prepayments 651 (147) Increase in other long-term assets (159) 105 Increase (decrease) in long term liabilities 8 (245) -------- -------- Net cash provided by operating activities 24,765 27,254 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities, net (21,900) (14,450) Capital expenditures (7,809) (6,197) -------- -------- Net cash used in investing activities (29,709) (20,647) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sales of common shares 1,094 -- Repayment of shareholders' notes receivable 134 7 Repurchase and retirement of common stock (17,318) (4,152) -------- -------- Net cash provided by (used in) financing activities (16,090) (4,145) -------- -------- Net increase (decrease) in cash (21,034) 2,462 Cash and cash equivalents - beginning of period 21,051 15,412 ======== ======== Cash and cash equivalents - end of period $ 17 $ 17,874 ======== ======== Supplemental disclosure of cash flow information: Income taxes paid $ 2,894 $ 5,200 ======== ======== Interest paid $ 56 $ 21 ======== ========
See notes to condensed consolidated financial statements. 6 STAFF LEASING, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (in $000's, except share and per share data) 1. GENERAL The accompanying unaudited condensed consolidated financial statements of Staff Leasing, Inc. ("the Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. These financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto for the year ended December 31, 1998, included in the Company's Form 10-K. The financial information furnished reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The Company's operations are currently conducted through a number of subsidiary limited partnerships (the "OLPs"). The consolidated operations of the Company exclude intercompany accounts and transactions. Certain reclassifications have been made to the consolidated financial statements of prior periods to conform to the current period presentation. 2. ACCOUNTS RECEIVABLE Accounts receivable consisted of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 -------- --------- Billed to clients ...................................... $ 15,391 $ 9,936 Unbilled revenues ...................................... 24,048 52,674 -------- --------- 39,439 62,610 Less: Allowance for doubtful accounts............ (802) (934) -------- --------- $ 38,637 $ 61,676 ======== =========
3. PROPERTY AND EQUIPMENT Property and equipment (at cost) was comprised of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 -------- --------- Leasehold improvements .................................. $ 1,484 $ 1,725 Furniture and fixtures .................................. 2,508 2,806 Vehicles ................................................ 103 103 Equipment ............................................... 1,799 1,730 Computer hardware and software .......................... 29,490 35,237 -------- -------- Total property and equipment ............................ 35,384 41,601 Less accumulated depreciation ..................... (10,313) (15,314) -------- -------- $ 25,071 $ 26,287 ======== ========
For the nine months ended September 30, 1999 depreciation expense was $5,001. 7 STAFF LEASING, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (in $000's, except share and per share data) 4. COMMITMENTS AND CONTINGENCIES The Company is a party to certain pending claims which have arisen in the normal course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the consolidated financial position or results of operations if adversely resolved. On April 30, 1999, a shareholder of the Company brought a class action alleging that the directors and senior officers of the Company breached their fiduciary duty to shareholders in order to entrench themselves in the management of the Company by failing to pursue a proposal from Paribas Principal Partners to acquire the Company. Plaintiff seeks injunctive relief and unspecified damages including attorneys' and experts' fees. The Company believes the lawsuit is wholly without merit. The Company's employer and health care operations are subject to numerous Federal, state and local laws related to employment, taxes and benefit plan matters. Generally, these regulations affect all companies in the U.S. However, the regulatory environment for professional employer organizations ("PEOs") is an evolving area due to uncertainties resulting from the non-traditional employment relationships. Many Federal and state laws relating to tax and employment matters were enacted prior to the development of PEOs and do not specifically address the obligations and responsibilities of these PEO relationships. If the IRS concludes that PEOs are not "employers" of certain worksite employees for purposes of the Internal Revenue Code of 1986, as amended (the "Code"), the tax qualified status of the Company's 401(k) retirement plan as in effect prior to April 1, 1998 could be revoked, its cafeteria plan may lose its favorable tax status and the Company may no longer be able to assume the client's Federal employment tax withholding obligations. Any adverse developments in the above noted areas could have a material effect on the Company's financial condition and future results of operations. 5. EQUITY In August 1998, the Company's Board of Directors approved a program to repurchase up to two million shares of the Company's common stock. Purchases may be made from time to time depending upon the Company's stock price, and will be made primarily in the open market, but may also be made through privately negotiated transactions. In 1998, the Company repurchased 1.6 million shares of its common stock for a total cost of $21.0 million. In January 1999, the Company's board of Directors increased this share repurchase plan to three million shares. In the nine months ending September 30, 1999, the Company repurchased 411,725 shares at a cost of $4.3 million. 6. INCOME TAXES The Company records income tax expense using the asset and liability method of accounting for deferred income taxes. Under such method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statements and the income tax bases of the Company's assets and liabilities. The Company's effective tax rate provides for Federal and state income taxes. The effective tax rate for the three and nine months ended September 30, 1999 was 37.8%. 7. EARNINGS PER SHARE (EPS) The number of common stock equivalents included in the diluted weighted average shares outstanding for the three and nine months ended September 30, 1998 and 1999, related to warrants issued in connection with the Company's reorganization and initial public offering, was 741,792 and 825,188 for the three and nine months ended September 30, 1998, respectively, and totaled 421,518 and 462,465 for the three and nine months ended September 30, 1999, respectively. Also included as common stock equivalents for diluted weighted average shares outstanding were options granted in connection with the Company's stock option plan, which totaled 70,099 and 164,922 for the three and nine months ended September 30, 1998, respectively, and 449 and 19,326 for the three and nine months ended September 30, 1999, respectively. 8 STAFF LEASING, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The reconciliation of net income attributable to common stock and shares outstanding for the purposes of calculating basic and diluted earnings per share for the three and nine months ended September 30, 1998 and 1999 is as follows:
INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ---------- ----------- ----------- (in $000's) (in 000's) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998: BASIC EPS : Net income $ 6,174 23,321 $ .26 DILUTED EPS : Effect of dilutive securities: Warrants 742 Options 70 ----------- Net income $ 6,174 24,133 $ .26 ========== =========== =========== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998: BASIC EPS : Net income $ 17,679 23,488 $ .75 DILUTED EPS : Effect of dilutive securities: Warrants 825 Options 165 ----------- Net income $ 17,679 24,478 $ .72 ========== =========== =========== FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999: BASIC EPS : Net income $ 6,410 21,725 $ .30 DILUTED EPS : Effect of dilutive securities: Warrants 422 Options -- ----------- Net income $ 6,410 22,147 $ .29 ========== =========== =========== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999: BASIC EPS : Net income $ 17,013 21,802 $ .78 DILUTED EPS : Effect of dilutive securities: Warrants 463 Options 19 ----------- Net income $ 17,013 22,284 $ .76 ========== =========== ===========
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table presents the Company's results of operations for the three and nine months ended September 30, 1998 and 1999, expressed as a percentage of revenues:
FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1998 1999 1998 1999 ------- ------- ------- ------- Revenues ............................... 100.0% 100.0% 100.0% 100.0% Cost of services: Salaries, wages and payroll taxes .... 90.9 91.1 90.7 90.9 Benefits, workers' compensation, state unemployment taxes and other costs 4.4 4.0 4.5 4.3 ------- ------- ------- ------- Total cost of services ....... 95.3 95.1 95.2 95.2 ------- ------- ------- ------- Gross profit ........................... 4.7 4.9 4.8 4.8 ------- ------- ------- ------- Operating expenses: Salaries, wages and commissions ...... 2.1 2.3 2.2 2.2 Other general and administrative ..... .9 1.0 .9 1.0 Depreciation and amortization ........ .2 .3 .2 .3 ------- ------- ------- ------- Total operating costs .................. 3.2 3.5 3.3 3.5 ------- ------- ------- ------- Operating income ....................... 1.5 1.4 1.5 1.3 Interest income ........................ .1 .1 .1 .1 Other expense .......................... -- -- -- -- ------- ------- ------- ------- Income before income taxes ............. 1.6 1.5 1.6 1.4 Income tax provision ................... .6 .6 .6 .5 ------- ------- ------- ------- Net income ............................. 1.0 .9 1.0 .9 ======= ======= ======= =======
Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998 Revenues were $680.5 million for the three months ended September 30, 1999, compared to $607.3 million for the three months ended September 30, 1998, representing an increase of $73.2 million, or 12.1%. This increase was due primarily to an increased number of clients and worksite employees. From September 30, 1998 to September 30, 1999, the number of clients increased 1.7% from 10,406 to 10,581. The number of worksite employees increased 5.8%, from 122,809 to 129,900. Revenue growth exceeded headcount growth by 6.3% due primarily to wage inflation and expansion in higher wage markets. The increase in the number of clients and worksite employees was the result of continuing sales and marketing efforts in existing markets, as well as the development of new markets. The Company opened three new sales offices in the third quarter of 1999. Two new sales offices were opened in the third quarter of 1998. Cost of services was $647.1 million for the three months ended September 30, 1999, compared to $578.6 million for the three months ended September 30, 1998, representing an increase of $68.5 million, or 11.8%. Cost of services was 95.1% and 95.3% of revenues for the three months ended September 30, 1999 and 1998, respectively. Salaries, wages and payroll taxes of worksite employees were $619.9 million for the three months ended September 30, 1999, compared to $551.9 million for the three months ended September 30, 1998, representing an increase of $68.0 million, or 12.3%. Benefits, workers' compensation, state unemployment taxes and other costs were $27.2 million for the three months ended September 30, 1999, compared to $26.7 million for the three months ended September 30, 1998, representing an increase of $.5 million, or 1.9%. Benefits, workers' compensation, state unemployment taxes and other costs were 4.0% of revenues for the three months ended September 30, 1999, compared to 4.4% for the three months ended September 30, 1998. In third quarter 1999, the Company recorded a $2.2 million 10 reduction in the estimate of prior year health care reserves. In the third quarter 1998, the Company recorded a $.7 million reduction in the estimate of 1997 health care reserves. Gross profit was $33.4 million for the three months ended September 30, 1999, compared to $28.8 million for the three months ended September 30, 1998, representing an increase of $4.6 million, or 16.0%. Gross profit was 4.9% and 4.7% of revenues for the three months ended September 30, 1999 and 1998, respectively. Operating expenses were $24.1 million for the three months ended September 30, 1999, compared to $19.8 million for the three months ended September 30, 1998, representing an increase of $4.3 million, or 21.7%. Operating expenses were 3.5% of revenues for the three months ended September 30, 1999, compared to 3.2% for the three months ended September 30, 1998. Salaries, wages and commissions were $15.5 million for the three months ended September 30, 1999, compared to $12.9 million for the three months ended September 30, 1998, representing an increase of $2.6 million, or 20.2%. This increase was due primarily to an increase in corporate personnel that support the Company's expanded operations and additional sales staff located in its branch offices. Salaries, wages and commissions were 2.3% of revenues for the three months ended September 30, 1999, compared to 2.1% for the three months ended September 30, 1998. Other general and administrative expenses were $6.6 million for the three months ended September 30, 1999, compared to $5.4 million for the three months ended September 30, 1998, representing a increase of $1.2 million, or 22.2%. Other general and administrative expenses were 1.0% of revenues for the three months ended September 30, 1999, compared to .9% for the three months ended September 30, 1998. Depreciation and amortization expenses increased by $.5 million for the three months ended September 30, 1999 compared to the three months ended September 30, 1998, representing an increase of 30.4%. This increase was primarily the result of the Company's investment in management information systems. Interest income was $1.0 million for the three months ended September 30, 1999 and $.9 million for the three months ended September 30, 1998. Income tax expense of $3.9 million for the three months ended September 30, 1999 represented a provision at an effective tax rate of 37.8% compared to $3.7 million for the three months ended September 30, 1998 at an effective tax rate of 37.5%. The Company's effective tax rate for financial reporting purposes differs from the statutory federal rate of 35% primarily because of state income taxes and tax credits. Net income was $6.4 million for the three months ended September 30, 1999, compared to net income of $6.2 million for the three months ended September 30, 1998, representing a increase of $.2 million or 3.2%. Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 Revenues were $1,992.1 million for the nine months ended September 30, 1999, compared to $1,729.2 million for the nine months ended September 30, 1998, representing an increase of $262.9 million, or 15.2%. This increase was due primarily to an increased number of clients and worksite employees. From September 30, 1998 to September 30, 1999, the number of clients increased 1.7% from 10,406 to 10,581. The number of worksite employees increased 5.8%, from 122,809 to 129,900. Revenue growth exceeded headcount growth by 9.4%, due in part, to the effects of wage inflation and higher average wages in the Company's expansion states. Cost of services was $1,897.3 million for the nine months ended September 30, 1999, compared to $1,646.0 million for the nine months ended September 30, 1998, representing an increase of $251.3 million, or 15.3%. Cost of services was 95.2% and 95.2% of revenues for the nine months ended September 30, 1999 and 1998, respectively. Salaries, wages and payroll taxes of worksite employees were $1,811.2 million for the nine months ended September 30, 1999, compared to $1,568.8 million for the nine months ended September 30, 1998, representing an increase of $242.4 million, or 15.5%. Benefits, workers' compensation, state unemployment taxes and other costs were $86.1 million for the nine months ended September 30, 1999, compared to $77.1 million for the nine months ended September 30, 1998, representing an increase of $9.0 million, or 11.7%. Benefits, workers' compensation, state unemployment taxes and other costs were 4.3% of revenues for the nine months ended September 30, 1999 and 4.5% for the nine months ended September 30, 1998. In 1999, the Company recorded $2.2 million due to a reduction in the estimate of prior year health care reserves. In 1998, the Company recorded $1.4 million due to a reduction in the estimate of 1997 health care reserves. 11 Gross profit was $94.8 million for the nine months ended September 30, 1999, compared to $83.2 million for the nine months ended September 30, 1998, representing an increase of $11.6 million, or 13.9%. Gross profit was 4.8% of revenues for the nine months ended September 30, 1999 and 4.8% of revenues for the nine months ended September 30, 1998. Operating expenses were $68.9 million for the nine months ended September 30, 1999, compared to $57.3 million for the nine months ended September 30, 1998, representing an increase of $11.6 million, or 20.2%. Operating expenses were 3.5% of revenues for the nine months ended September 30, 1999, compared to 3.3% for the nine months ended September 30, 1998. Salaries, wages and commissions were $44.0 million for the nine months ended September 30, 1999, compared to $37.1 million for the nine months ended September 30, 1998, representing an increase of $6.9 million, or 18.6%. This increase was due primarily to an increase in corporate personnel that support the Company's expanded operations and additional sales staff located in its branch offices. Salaries, wages and commissions were 2.2% of revenues for the nine months ended September 30, 1999 and 2.2% for the nine months ended September 30, 1998. Other general and administrative expenses were $19.3 million for the nine months ended September 30, 1999, compared to $16.0 million for the nine months ended September 30, 1998, representing an increase of $3.3 million, or 20.6%. Other general and administrative expenses were 1.0% of revenues for the nine months ended September 30, 1999, compared to .9% for the nine months ended September 30, 1998. Depreciation and amortization expenses increased by $1.3 million for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998, representing an increase of 32.1%. This increase was primarily the result of the Company's investment in management information systems. Interest income was $2.3 million for the nine months ended September 30, 1999, compared to $2.4 million of interest income for the first half of 1998, a decrease of $.1 million. Other expense was $.9 million for the nine months ended September 30, 1999 compared to $0 million for the nine months ended September 30, 1998. Other expense in 1999 was related to an acquisition proposal received from Paribas Principal Partners in April 1999 and reserves for a shareholder lawsuit filed in the second quarter of 1999. Income tax expense of $10.3 million for the nine months ended September 30, 1999 represented a provision at an effective tax rate of 37.8% compared to $10.6 million for the nine months ended September 30, 1998 at an effective tax rate of 37.5%. Net income was $17.0 million for the nine months ended September 30, 1999, compared to net income of $17.7 million for the nine months ended September 30, 1998, representing a decrease of $.7 million or (4.0%). Liquidity and Capital Resources The Company had approximately $71.9 million in cash, cash equivalents, restricted cash and marketable securities at September 30, 1999. The Company had no long-term debt as of September 30, 1999. At September 30, 1999, the Company had net working capital of $37.8 million, versus $25.1 million as of December 31, 1998, representing an improvement of $12.7 million, or 50.6%. In July 1999, the Company entered into an agreement with NationsBank for a $10 million revolving line of credit to provide for intraday working capital needs. Borrowings under the credit facility bear interest at variable rates based on the lenders' base rate or LIBOR. No borrowings have been made against the credit line. The Company's primary short-term capital requirements relate to the payment of accrued payroll and payroll taxes of its internal and worksite employees, accounts payable for capital expenditures and the payment of accrued workers' compensation expense and health benefit plan premiums. As of September 30, 1999, the Company had $7.8 million of restricted certificates of deposit, with original maturities of less than one year, as collateral for certain standby letters of credit issued in connection with the Company's health benefit plans. Net cash provided by operating activities was $27.3 million for the nine months ended September 30, 1999 compared to net cash provided by operating activities of $24.8 million for the nine months ended September 30, 1998, representing an increase of $2.5 million, or 10.1%. Year 2000 Compliance The Year 2000 issue is the result of potential problems with computer systems or any equipment with computer chips that use dates where the date is stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any clock or date recording mechanims, including date sensitive software which uses only two digits to represent the year, may recognize a date using 00 as the year 1900 rather than the year 2000. 12 In addition, the Year 2000 is a leap year, which also may not be addressed by such systems. Either issue could result in a system failure or miscalculations causing disruption of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in similar activities. CURRENT STATE OF READINESS - The Company's primary internal computer applications were purchased from Microsoft and Oracle. These companies have issued public documents affirming Year 2000 compliance for certain versions of their applications. Staff Leasing is in the process of upgrading or migrating to those specific versions. The Oracle application upgrade is substantially complete. Certification of the Company's mission critical systems and applications (packaged and custom) began in early 1999 and is expected to be complete in November. The Company has completed a Year 2000 inventory of its computer hardware, supporting software, and non-IT systems; assessed non-compliance issues; and has identified upgrades or replacements necessary to ensure Year 2000 compliance. These upgrades and replacements are substantially complete. In addition, the Company has initiated formal communications with its significant vendors to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. This includes service vendors with IT interfaces to the Company's applications and non-IT systems suppliers. The Company has been testing the impact of any modifications made by these vendors on the Company's internal systems. COSTS - At present, these Year 2000 remediation costs are estimated to be $.5 million, and will be expensed as incurred in 1999. These costs are not expected to have a material effect on the Company's financial position or results of operations. RISKS - It is the Company's belief that the most reasonably likely worst case scenario from the Year 2000 issue is that a third party vendor will not remediate its own Year 2000 issues in time, resulting in a disruption of additional client services, such as the processing of insurance claims or the direct deposit of payroll to a financial institution. The Company is focusing the majority of its Year 2000 efforts to address these issues. The Company can give no guarantee that current Year 2000 remediation cost estimates will be achieved and actual results could differ materially from existing plans. Factors that might cause material differences include the availability and cost of personnel trained in this area, the ability to locate and correct errors or defects in the technology used in internal IT and non-IT systems, and the ability of the Company's significant suppliers, customers and others with which it conducts business, including Federal and state government agencies, to identify and resolve their own Year 2000 issues and similar uncertainties. Further, the impact of a Year 2000 failure on the Company's future results of operations, liquidity or financial condition cannot be determined at this time, but is a risk which should be considered in evaluating future growth of the Company. CONTINGENCY PLANS - A contingency plan for a possible Year 2000 failure of any key internal hardware, software or non-IT systems is in development so that the Company's critical business processes can be expected to continue to function on January 1, 2000 and beyond. Cautionary Note Regarding Forward-looking Statements In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Staff Leasing, Inc. (the "Company") is hereby providing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Reform Act) made by or on behalf of the Company herein or orally, whether in presentations, in response to questions or otherwise. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as "will result," "are expected to," "will continue," "estimated," and "projection") are not historical facts and may be forward-looking and, accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. Such known and unknown risks, uncertainties and other factors include, but are not limited to, the following: (i) the potential for additional subsidies for health benefit plans; (ii) volatility in workers' compensation rates and unemployment taxes; (iii) possible adverse application of certain Federal and state laws and the possible enactment of unfavorable laws or regulation; (iv) impact of competition from existing and new professional employer organizations; (v) risks associated with expansion into additional states where the Company does not have a presence or significant market penetration; (vi) risks associated with the Company's dependence on key vendors; (vii) the possibility for client attrition; (viii) risks associated with geographic market concentration and concentration of clients in the construction industry; (ix) the financial condition of clients; (x) the failure to properly manage growth and successfully integrate acquired companies and operations; and (xi) other factors which are described in further detail in the Company's filings with the Securities and Exchange Commission. 13 The Company cautions that the factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. 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. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk The Company is subject to market risk from exposure to changes in interest rates based on its investing and cash management activities. The Company utilizes U.S. government agency and other corporate debt with fixed rates and maturities of less than one year to manage its exposures to interest rates. The Company does not expect changes in interest rates to have a material effect on income or cash flows in fiscal 1999, although there can be no assurances that interest rates will not change. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings LAWRENCE E. EGLE V. STAFF LEASING, INC., ET AL. On April 30, 1999, the plaintiff, a shareholder of the Company, brought this class action alleging that the directors and senior officers of the Company breached their fiduciary duty to shareholders by failing to pursue a proposal from Paribas Principal Partners to acquire the company in order to entrench themselves in the management of the Company. Plaintiff seeks injunctive relief and unspecified damages including attorneys' and experts' fees. The Company believes the lawsuit is wholly without merit. The Company is not a party to any other material pending legal proceedings other than routine legal matters incidental to its business. The Company believes that the ultimate resolution of these matters would not have a material adverse effect on its financial condition or results of operations. ITEM 5. Other Information In May 1999, Joyce Lillis McGill, Senior Vice President of Sales since March 1997, resigned. Richard A. Goldman, President of Staff Leasing, has assumed responsibility for sales. In August 1999, the Company's Board of Directors announced its decision to explore various strategic alternatives available to the Company in order to maximize shareholder value. Such alternatives could include a sale of the Company or a recapitalization. No timetable has been set for the completion of the strategic alternatives review. There can be no assurance that any actions taken by the Company will result in a transaction or, if any such transaction were to occur, as to the value to be obtained by the Company or its shareholders. In August 1999, the Company announced the completion of a new workers' compensation program with CNA and the Texas Workers' Compensation Insurance Fund ("Texas Fund") which commences on January 1, 2000. The Texas Fund will be the provider of workers' compensation insurance in Texas. This program is a guaranteed cost plan based on a percentage of manual premium. It is a one year contract. For the remainder of the country, the Company's carrier will be CNA. This program is an insured loss sensitive program that is based on a percentage of manual premium. It is a one year contract. The Company anticipates that its workers' compensation costs will increase beginning in 2000 as a result of this workers' compensation arrangement; however, by shifting to a percentage of manual premium program, the Company should be able to broaden its client base. 14 ITEM 6. Exhibits and Reports on Form 8-K (a) EXHIBIT NO. DESCRIPTION - ------- ----------- 27.1(b) Financial Data Schedule for the nine months ended September 30, 1999 (b) Form 8-K None 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. STAFF LEASING, INC. Dated: November 15, 1999 By /s/ RICHARD A. GOLDMAN - -------------------------------------------------------------------------------- Richard A. Goldman President Dated: November 15, 1999 By /s/ JOHN E. PANNING - -------------------------------------------------------------------------------- John E. Panning Chief Financial Officer (the Principal Financial and Accounting Officer) 16 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 27.1(b) Financial Data Schedule EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF STAFF LEASING, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 INCLUDED IN FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 17,874 46,251 62,610 934 0 137,511 41,601 15,314 176,996 99,667 0 0 0 217 75,859 176,996 1,992,108 1,992,108 0 1,897,342 68,870 425 21 27,354 10,341 0 0 0 0 17,013 .78 .76
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