<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d)
--- of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1997
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 0-28148
THE VINCAM GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2452823
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2850 Douglas Road Coral Gables, Florida 33134
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(305) 460-2350
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
-----------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
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
--- ---
As of November 14, 1997, The Vincam Group, Inc. had 9,037,652 shares of
common stock, $.001 par value, outstanding.
1
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THE VINCAM GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
----
Part I Financial Information
Item 1. Financial Statements........................................ 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 16
Part II Other Information
Item 2. Changes in Securities and Use of Proceeds................... 26
Item 6. Exhibits and Reports on Form 8-K............................ 27
Signatures............................................................ 28
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
The Vincam Group, Inc. ----
- ----------------------
Consolidated Balance Sheets as of September 30, 1997 (Unaudited)
and December 31, 1996............................................. 4
Unaudited Consolidated Statements of Operations for the Three and
the Nine Months Ended September 30, 1997 and 1996................. 5
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1997............... 6
Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996.......................... 7
Notes to Consolidated Financial Statements (Unaudited).............. 9
3
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THE VINCAM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1997 1996
------------- -------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents ............................ $ 8,051,725 $ 17,522,030
Investments .......................................... 564,853 149,626
Restricted cash ...................................... 2,570,000 2,331,917
Accounts receivable, net ............................. 38,716,592 24,391,893
Due from affiliates .................................. 294,955 292,957
Deferred taxes ....................................... 1,851,184 2,279,226
Reinsurance recoverable .............................. 398,501 1,728,000
Prepaid workers' compensation insurance premium ...... 1,737,784 5,483,972
Prepaid expenses and other current assets ............ 2,273,164 1,170,282
------------- -------------
Total current assets .......................... 56,458,758 55,349,903
Property and equipment, net .......................... 6,751,966 4,601,868
Deferred taxes ....................................... 1,533,155 733,431
Reinsurance recoverable .............................. 2,658,450 1,472,000
Client contracts and other assets .................... 1,611,006 1,430,951
Goodwill ............................................. 5,195,277 4,791,836
Other assets ......................................... 1,157,265 255,225
------------- -------------
$ 75,365,877 $ 68,635,214
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ................ $ 3,605,962 $ 4,102,765
Accrued salaries, wages and payroll taxes ............ 27,144,826 17,926,012
Amounts due under acquisition agreement .............. 1,250,000 2,623,437
Reserve for claims ................................... 1,486,895 5,651,766
Reserve for other state taxes ........................ 3,003,456 2,208,738
Income taxes payable ................................. 1,578,442 1,395,899
Current portion of long term borrowings .............. 84,407 136,053
Deferred compensation ................................ 6,617 242,013
Deferred gain ........................................ 169,796 323,157
------------- -------------
Total current liabilities ..................... 38,330,401 34,609,840
Long term borrowings, less current portion ............... 782,881 883,689
Reserve for claims ....................................... 2,658,450 3,154,438
Income taxes payable ..................................... -- 672,818
Deferred compensation .................................... -- 41,200
Deferred gain ............................................ 528,744 275,275
Other liabilities ........................................ 460,961 365,954
------------- -------------
Total liabilities ............................. 42,761,437 40,003,214
------------- -------------
Commitments and contingencies (Note 6) ................... -- --
------------- -------------
Stockholders' equity:
Common stock, $.001 par value, 60,000,000 shares
authorized, 9,027,569 shares issued and outstanding 9,027 8,013
Additional paid in capital ........................... 34,431,097 33,241,867
Accumulated deficit .................................. (1,835,684) (4,617,880)
------------- -------------
Total stockholders' equity .................... 32,604,440 28,632,000
------------- -------------
$ 75,365,877 $ 68,635,214
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
Revenues .................................. $ 215,053,257 $ 135,500,237 $ 612,143,511 $ 371,954,723
-------------- -------------- -------------- --------------
Direct costs:
Salaries, wages and employment
taxes of worksite employees ......... 191,862,901 119,324,020 545,308,431 328,967,003
Health care and workers' compensation . 8,384,541 6,852,249 23,731,471 17,975,986
State unemployment taxes and other .... 1,980,250 1,246,595 6,020,754 3,570,028
-------------- -------------- -------------- --------------
Total direct costs .............. 202,227,692 127,422,864 575,060,656 350,513,017
-------------- -------------- -------------- --------------
Gross profit .............................. 12,825,565 8,077,373 37,082,855 21,441,706
-------------- -------------- -------------- --------------
Operating expenses:
Administrative personnel .............. 5,551,132 4,159,829 16,045,751 10,479,319
Other general and administrative ...... 2,646,740 1,892,230 9,731,095 5,401,116
Sales and marketing ................... 1,624,333 1,357,695 5,033,603 3,366,159
Provision for doubtful accounts ....... 243,845 105,312 670,261 358,201
Depreciation and amortization ......... 522,774 214,338 1,513,256 549,354
-------------- -------------- -------------- --------------
Total operating expenses ........ 10,588,824 7,729,404 32,993,966 20,154,149
-------------- -------------- -------------- --------------
Operating income .......................... 2,236,741 347,969 4,088,889 1,287,557
Interest (expense) income, net ............ 47,574 338,939 333,496 518,145
-------------- -------------- -------------- --------------
Income before taxes ....................... 2,284,315 686,908 4,422,385 1,805,702
Provision for income taxes ................ (598,000) (387,606) (1,639,624) (529,979)
-------------- -------------- -------------- --------------
Net income ................................ $ 1,686,315 $ 299,302 $ 2,782,761 $ 1,275,723
============== ============== ============== ==============
Net income per common and common
equivalent share ...................... $ 0.18 $ 0.03 $ 0.31 $ 0.15
============== ============== ============== ==============
Weighted average number of shares
outstanding used in earnings per
share calculation ..................... 9,428,223 9,419,860 9,122,327 8,449,048
============== ============== ============== ==============
Pro forma earnings per share (see Note 8)
- -----------------------------------------
Pro forma net income per common and
common equivalent share ............... $ 0.12 $ 0.02 $ 0.20 $ 0.10
============== ============== ============== ==============
Pro forma weighted average number of shares
outstanding used in earnings per
share calculation ..................... 14,142,335 14,129,790 13,683,491 12,673,572
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Common Stock Retained
--------------------------- Additional Earnings
Paid in (Accumulated
Shares Par Value Capital Deficit) Total
------------ ------------- ------------- ------------- -------------
Balance at December 31, 1996 ................ 8,013,332 $ 8,013 $ 33,241,867 $ (4,617,880) $ 28,632,000
Issuance of common stock under
acquisition agreements ..................... 885,162 885 868,169 (565)
868,489
Issuance of common stock to
employees under stock option plans ......... 129,075 129 387,096 -- 387,225
Initial public offering costs charged to paid
in capital ................................ -- -- (66,035) --
(66,035)
Net income .................................. -- -- -- 2,782,761 2,782,761
------------ ------------- ------------- ------------- -------------
Balance at September 30, 1997 ............... 9,027,569 $ 9,027 $ 34,431,097 $ (1,835,684) $ 32,604,440
============ ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
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THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Months
Ended September 30,
1997 1996
------------- -------------
Cash flows from operating activities:
Net income ..................................................... $ 2,782,761 $ 1,275,723
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization ................................ 1,513,256 549,354
Provision for doubtful accounts .............................. 670,261 416,193
Deferred gain ................................................ 100,108 --
Deferred income tax benefit .................................. (371,682) (1,293,926)
Changes in assets and liabilities:
(Decrease) increase in restricted cash ..................... (238,083) 132,558
Increase in accounts receivable ............................ (14,994,960) (5,114,036)
Increase in due from affiliates ............................ (1,998) (110,725)
Decrease in reinsurance recoverable ........................ 143,049 --
Decrease in prepaid workers' compensation
insurance premium ........................................ 3,746,188 --
Increase in prepaid expenses and other current assets ..... (1,102,882) (660,672)
Increase in other assets ................................... (902,040) (255,046)
(Decrease) increase in accounts payable and accrued expenses (496,803) 970,818
Increase in accrued salaries, wages and payroll taxes ...... 9,218,814 1,059,267
(Decrease) increase in reserve for claims .................. (4,660,859) 2,577,131
Increase in reserve for other state taxes .................. 794,718 689,493
(Decrease) increase in income taxes payable ................ (490,275) 663,037
Decrease in deferred compensation .......................... (276,596) (274,087)
Increase in other liabilities .............................. 95,007 42,310
------------- -------------
Net cash (used in) provided by operating activities ............... (4,472,016) 667,392
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment ............................ (3,378,361) (1,211,478)
(Purchases) redemption of short term investments ............... (415,227) 236,497
Acquisition of client contracts ................................ -- (29,295)
Increase in restricted cash .................................... -- (1,250,000)
Payment of amounts due under acquisition agreement ............. (1,373,437) (2,219,566)
------------- -------------
Net cash used in investing activities ............................. (5,167,025) (4,473,842)
------------- -------------
Cash flows from financing activities:
Principal payments on borrowings ............................... (152,454) (1,639,775)
Payment of distribution payable to shareholders ................ -- (948,037)
Initial public offering costs charged to paid in capital ....... (66,035) --
Issuance of common stock ....................................... -- 26,941,315
Issuance of common stock to employees under stock plans ........ 387,225 --
Net cash provided by financing activities ......................... 168,736 24,353,503
------------- -------------
Net (decrease) increase in cash and cash equivalents .............. (9,470,305) 20,547,053
Cash and cash equivalents, beginning of period .................... 17,522,030 1,964,581
------------- -------------
Cash and cash equivalents, end of period .......................... $ 8,051,725 $ 22,511,634
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
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THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental disclosure of non-cash financing activities:
Acquisition of minority interest of Staff Administrators of Western
Colorado, Inc.
On January 7, 1997, the Company acquired the 49% minority interest in Staff
Administrators of Western Colorado, Inc., a subsidiary of Staff Administrators,
Inc. ("SAI"), in a transaction accounted for as a purchase. The fair value of
the interest acquired and the consideration paid were as follows:
Fair value of net assets acquired:
Client contracts ............................................... $301,848
Accounts receivable ............................................ 220,643
Property and equipment ......................................... 36,807
---------
Fair value of non-cash assets acquired ......................... 559,298
---------
Accounts payable and accrued expenses .......................... 8,938
Accrued salaries, wages and payroll taxes ...................... 240,630
Other liabilities .............................................. 140,624
---------
Fair value of liabilities assumed .............................. 390,192
---------
Fair value of net assets acquired, excluding cash .............. 169,106
Cash acquired .................................................. 124,253
---------
Fair value of net assets acquired .............................. $293,359
=========
Purchase price (20,000 shares x $43.00) ........................ $860,000
=========
The following is a reconciliation of the purchase price to the excess of
costs associated with the acquisition over the estimated fair value of net
assets acquired allocated to goodwill:
Purchase price ........................................... $ 860,000
Net assets acquired ...................................... (293,359)
==========
Amount allocated to goodwill ............................. $ 566,641
==========
In May 1996, the Company's mandatorily redeemable Series A Participating
Convertible Preferred Stock was converted into 1,043,933 shares of the Company's
common stock.
The accompanying notes are an integral part of these consolidated financial
statements.
8
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THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and December 31, 1996
Note 1 - Basis for Presentation of Consolidated Financial Statements
The accompanying unaudited consolidated financial statements of The Vincam
Group, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Rule 10-01 of Regulation S-X. They do not include
all information and notes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with (i) the
audited consolidated financial statements and notes thereto for the year ended
December 31, 1996 included in the Company's Annual Report on Form 10-K, (ii) the
pooled consolidated financial statements for the year ended December 31, 1996,
included in the Company's Current Report on Form 8-K, dated May 8, 1997 and
(iii) the pooled consolidated financial statements for the year ended December
31, 1996, included in the Company's Current Report on Form 8-K, dated November
5, 1997. The audited financial information presented herein as of December 31,
1996, has been derived from the audited pooled consolidated financial statements
included in the Company's Current Report on Form 8-K, dated November 5, 1997.
The unaudited financial information herein presented for the three and nine
month periods ended September 30, 1996, has been derived from the Company's
unaudited quarterly financial information included in the Company's Quarterly
Report on Form 10-Q for the three and nine month periods ended September 30,
1996, and the unaudited quarterly financial information of Staff Administrators,
Inc. and Amstaff, Inc. for the three and nine months ended September 30, 1996.
The unaudited financial information herein presented for the three and nine
month periods ended September 30, 1997, includes the assets and liabilities and
results of operations of the Company, Staff Administrators, Inc. and Amstaff,
Inc. for such periods. 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 of cash flows for the interim periods
presented. The results of operations for the periods presented are not
necessarily indicative of the results for the entire year.
The accompanying unaudited financial statements include the accounts of The
Vincam Group, Inc. and its subsidiaries ("Vincam" or the "Company"). All
material intercompany balances and transactions have been eliminated.
Note 2 - Acquisitions
On August 30, 1996, the Company acquired substantially all of the assets
and liabilities of The Stone Mountain Group, Inc. ("SMG"), a professional
employer organization ("PEO") in Snellville, Georgia for $4,980,751 in cash and
notes (the "SMG Acquisition"). Of the $4,980,751 purchase price, $2,357,314 was
paid at closing, $412,500 was paid in January 1997, $960,937 was paid in August
1997, and $1,250,000 was placed in escrow for potential purchase price
adjustments in the event that, among other things, client retention fails to
meet certain targets. On November 11, 1997, after the Company completed the
evaluation of the SMG Acquisition purchase price adjustments, $1,177,012 out of
the $1,250,000 in escrow was paid to SMG shareholders. The difference will be
recorded as a reduction of goodwill. The SMG Acquisition was accounted for using
the purchase method of accounting. Excess of costs over the estimated fair value
of net assets acquired associated with the SMG Acquisition was allocated to
goodwill and is being amortized over a period of 25 years.
9
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On January 7, 1997, the Company acquired Staff Administrators, Inc.
("SAI"), a privately held PEO headquartered in Denver, Colorado (the "SAI
Acquisition"). The Company issued 500,000 shares of its common stock in exchange
for all of the outstanding shares of common stock of SAI. The transaction has
been accounted for in accordance with the pooling of interests accounting
treatment; accordingly, all prior period financial statements presented herein
include the assets and liabilities and results of operations of SAI. In
connection with the acquisition of SAI, the Company also acquired, in a
transaction accounted for as a purchase, a 49% minority interest in Staff
Administrators of Western Colorado, Inc. ("SAWCI"), a 51% subsidiary of SAI (the
"SAWCI Acquisition"). The Company issued 20,000 shares of its common stock for
the 49% interest in SAWCI. The most significant adjustments to the balance sheet
resulting from the SAWCI Acquisition are disclosed in the supplemental
disclosure of non-cash investing and financing activities in the accompanying
consolidated statements of cash flows.
On June 30, 1997, the Company acquired Amstaff, Inc. ("AMI"), a privately
held PEO headquartered in Novi, Michigan (the "AMI Acquisition"). The Company
issued 365,162 shares of its common stock in exchange for all of the outstanding
shares of common stock of AMI and its subsidiaries. The transaction has been
accounted for in accordance with the pooling of interests accounting treatment;
accordingly, all prior period financial statements presented herein include the
assets and liabilities and results of operations of AMI.
The following combines unaudited selected historical financial information
of Vincam (as reflected in the Quarterly Report on Form 10-Q for the period
ended September 30, 1996), SAI and AMI for the periods presented reflecting the
most significant adjustments resulting from the SAI and AMI acquisitions.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Ended September 30, 1997
---------------------------------------------------------
Pooled
Vincam SAI & AMI Adjustments Results
------------- ------------- ------------- -------------
Revenues ................ $469,188,936 $142,954,575 $ -- $612,143,511
============= ============= ============= =============
Net income .............. $ 2,054,285 $ 502,538 $ 225,938 $ 2,782,761
============= ============= ============= =============
Net income per common and
common equivalent share $ 0.25 $ -- $ -- $ 0.31
============= ============= ============= =============
Nine Months Ended September 30, 1996
---------------------------------------------------------
Pooled
Vincam SAI & AMI Adjustments Results
------------- ------------ -------------- -------------
Revenues ................ $268,529,624 $03,425,099 $ -- $371,954,723
============= ============= ============= =============
Net income .............. $ 2,398,329 $(1,441,723) $ 319,117 $ 1,275,723
============= ============= ============= =============
Net income per common and
common equivalent share $ 0.32 $ -- $ -- $ 0.15
============= ============= ============= =============
</TABLE>
10
<PAGE>
These results are presented for informational purposes only and are not
necessarily indicative of the future results of operations or financial position
of the Company or the results of operations or financial position of the Company
that would have been achieved had the SAI and AMI acquisitions actually occurred
at the beginning of the periods presented.
Note 3 - Accounts Receivable
At September 30, 1997 and December 31, 1996, accounts receivable consisted
of the following:
1997 1996
---------------- ---------------
Billed to clients...................... $ 14,626,534 $ 8,187,375
Unbilled revenues...................... 24,939,627 16,781,168
39,566,161 24,968,543
Less: allowance for doubtful accounts.. (849,569) (576,650)
---------------- ---------------
$ 38,716,592 $ 24,391,893
================ ===============
Note 4 - Reserve for Claims
In December 1996, the Company entered into an agreement with a national
insurance company to provide workers' compensation insurance coverage for 1997
through 1999, subject to a deductible of $2,000 per medical only claim.
Accordingly, effective January 1, 1997, the Company records workers'
compensation costs based primarily on the fixed portion of its premium under
such policy, rather than through the previous practice of applying actuarial
estimates.
In addition, in December 1996, March 1997 and September 1997, the Company
entered into agreements to reinsure substantially all of the remaining claims
under the Company's large deductible workers' compensation insurance policies
for the years 1994, 1995 and 1996 (including the remaining claims acquired upon
the acquisition of SAI under its large deductible workers' compensation
insurance policies for the years 1994, 1995 and 1996, and those of AMI for the
years 1995 and 1996 and the first six months of 1997), for an aggregate premium
of $5,795,000. Since reserves for claims for these years have been previously
provided, the Company has recorded the premium as a reinsurance recoverable and
a deferred gain in the amount of $1,149,451, of which $450,911 has been
recognized as a reduction of workers' compensation expense based on the
proportion of cumulative claims paid through September 30, 1997, to the total
estimated liability for claims.
In connection with the reinsurance of claims exposure from 1994 to 1996,
the insurance carrier has provided $4,100,959 in letters of credit in favor of
the Company to secure the insurance carrier's obligation for the payment of
workers' compensation claims.
As a consequence of the reinsurance agreements described above, the Company
has classified as current the estimated amounts of reserves for claims and
reinsurance recoverable expected to be paid and to be collected, respectively,
11
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within one year, as well as the related deferred gain expected to be recognized
within one year. At September 30, 1997 and December 31, 1996, the Company's
reserves for claims costs are as follows:
1997 1996
------------ ------------
Accrued workers' compensation claims ...... $ 3,187,035 $ 6,961,630
Accrued health care claims ................ 225,470 1,119,109
Reserve for behavioral health care claims . 732,840 525,465
------------ ------------
4,145,345 8,606,204
Less: workers' compensation claims expected
to be settled in more than one year ....... (2,658,450) (3,154,438)
------------ ------------
Reserve for claims--current ............... $ 1,486,895 $ 5,651,766
============ ============
Note 5 - Borrowings
Borrowings at September 30, 1997 and December 31, 1996, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
------------ ------------
Note payable to bank, original amount of $1 million, repayable
in monthly instalments of $4,167, plus interest at 8.5% per
annum, through November 1998 when a balloon payment of
$750,000 is due, secured by land and building ................ $ 804,058 $ 841,561
Notes payable to bank, bearing interest at rates ranging from
7.49% to 10.75%, payable in monthly instalments ranging
from $926 to $246, secured by underlying equipment ........... 37,113 122,692
Note payable for state unemployment taxes, maturing in 1998
with monthly payments of $3,264 .............................. 26,117 55,489
------------ ------------
867,288 1,019,742
Less: current portion ........................................ (84,407) (136,053)
------------ ------------
$ 782,881 $ 883,689
============ ============
</TABLE>
In April 1997, the Company entered into a revolving line of credit
agreement for an aggregate amount of $50,000,000 with a group of banks (the
"Credit Agreement"). The Credit Agreement provides for a revolving credit
facility with a sublimit of $15,000,000 to fund working capital advances and
standby letters of credit. The Credit Agreement also provides for advances to
finance acquisitions. Amounts outstanding under the revolving credit facility
mature on April 24, 2000. If, on April 24, 2000, certain conditions are
satisfied, any amounts outstanding under the revolving line of credit may be
12
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converted into a term loan payable in eight quarterly instalments commencing on
August 1, 2000. The Company is required to pay an unused facility fee ranging
from .20% to .35% per annum on the facility, depending upon certain financial
covenants.
The Credit Agreement is secured by a pledge of shares of all of the
Company's subsidiaries. The Credit Agreement contains customary events of
default and covenants which prohibit, among other things, incurring additional
indebtedness in excess of a specified amount, paying dividends, creating liens
and engaging in certain mergers or combinations without the prior written
consent of the lender. The Credit Agreement also contains certain financial
covenants relating to current ratio, debt to capital ratio, debt and fixed
charges coverage and minimum tangible net worth, as defined in the Credit
Agreement.
Interest under the Credit Agreement accrues at rates based, at the
Company's option, on the Bank's Prime Rate plus a margin of as much as .25%, or
its Eurodollar Rate (as defined in the Credit Agreement) plus a margin of 1.00%
to 1.75%, depending on certain financial covenants.
Under the revolving credit facility, the Company had outstanding $6,250,000
in standby letters of credit at September 30, 1997, which guarantee the payment
of claims to the Company's former workers' compensation insurance carrier. As of
that date there were no other amounts outstanding under the revolving line of
credit.
The Company also has $1,200,000 in standby letters of credit with another
bank as of September 30, 1997, which guarantee the payment of workers'
compensation claims acquired upon the SAI Acquisition to SAI former workers'
compensation insurance carrier.
As of September 30, 1997, the scheduled annual maturities of the Company's
debt are summarized as follows:
1997.............. $ 58,311
1998.............. 769,339
1999.............. 22,411
2000.............. 15,285
2001.............. 1,942
------------
$ 867,288
============
Note 6 - Commitments and Contingencies
The Company is a defendant in a lawsuit related to a wrongful death and
premises liability claim involving a worksite employee. The plaintiff's original
complaint sought damages in excess of $10,000,000; however, such complaint was
dismissed in part and amended to seek damages in excess of $15,000. The court
has sustained plaintiff's amended complaint alleging premises liability against
both the Company and its client as a result of a worksite accident at client's
premises. The Company is asserting that its liability under this claim, if any,
should be limited to $100,000 due to the immunity provisions of the Florida
workers' compensation statute involving worksite accidents. The Company's
motions for summary judgment on that basis were denied, and discovery in the
13
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proceeding continues. While there can be no assurance that the ultimate outcome
of this lawsuit will not have a material adverse effect on the Company's
financial condition or results of operations, management believes, based on
consultations with the Company's counsel, that the ultimate outcome of this
lawsuit should not have such an effect.
The Company is a defendant in a lawsuit brought in Dade County Circuit
Court in November 1995 by an individual who alleges that he was injured by a
worksite employee of a client of the Company, which owns and operates a hotel
and was a co-defendant in the litigation. The plaintiff settled with the
Company's client and worksite employee who had been co-defendants in the
lawsuit. The plaintiff alleges that the employee, while he was working as a
valet parking attendant, was negligent in a motor vehicle collision and severely
and permanently injured the plaintiff. The plaintiff alleged damages in excess
of $50,000 in his amended complaint for, among other things, bodily injury,
medical costs, pain and suffering, and lost ability to earn income. A jury trial
is currently scheduled for March 1998. Based on consultations with the Company's
counsel, management of the Company believes that it has meritorious defenses to
the plaintiff's claims and that if the lawsuit is adversely determined, the
Company may be entitled to indemnification from its client and/or its liability
insurance carrier. Although management believes that the Company's ultimate
liability in this matter should not be material, there can be no assurance that
the Company will prevail in the litigation, in a related claim for
indemnification, or that the liability of the Company, if any, would not have a
material adverse effect on the Company's financial condition and results of
operations.
In October 1996, the Company received a notice of assessment in the
discounted amount of approximately $53,500 from The Treasurer of the State of
Florida Department of Insurance as Receiver of United States Employer Consumer
Self Insurance Fund of Florida, a workers' compensation insurance fund which was
declared insolvent (the "Fund"). The Company paid the discounted assessment in
January 1997. The Company had certain worksite employees covered by the Fund
during the fiscal years ended December 31, 1992, 1993 and 1994. The court order
authorizing the assessment provides that the Company, by paying the discounted
assessment, is deemed to have paid its assessment in full and is not subject to
any further assessment for policyholder loss claims. The Company may be subject
to additional liability for the assessments of other Fund members. The Company
believes that there are approximately 700 members of the Fund which have been
assessed $37,000,000 in the aggregate. Although the amount of the potential
exposure, if any, for such additional liability is not yet determinable,
management believes that the Company would have meritorious defenses to such
additional liability and that its ultimate liability in this matter will not
have a material adverse effect on the Company's financial condition or results
of operations. There cannot, however, be any assurance that any such liability
will not have such material adverse effect.
In June 1995, the National Labor Relations Board ("Board") filed a
complaint charging Amstaff, Inc., with a refusal to bargain with respect to a
collective bargaining agreement, under which a now-former client's employees
were employed, in violation of the National Labor Relations Act. Vincam acquired
Amstaff, Inc. in June 1997. The charge was initially dismissed by a Detroit
office of the Board, but has since been reinstated following a union appeal to
the general counsel for the Board. If the Board rules against the Company, the
Company could be held liable for lost wages and benefits of such employees for a
period of almost four years. Any award would be reduced by any earnings of such
employees which are received or reasonably could have received from other
14
<PAGE>
employment during the relevant time period. The Company cannot currently
estimate its potential liability if the Board were to rule against it. The
Company intends to vigorously defend this case, but there can be no assurance
that the Company will prevail in the proceedings or that the liability of the
Company, if any, would not have a material adverse effect on the Company's
financial condition and results of operations.
The Company is also involved in other legal and administrative proceedings
arising in the ordinary course of business. The outcomes of these actions are
not expected to have a material effect on the Company's financial position or
results of operations.
Note 7 - Income Taxes
Prior to June 30, 1997, Amstaff, Inc. was taxed under the Subchapter S
provisions of the Internal Revenue Code ("IRC") whereby its profits and losses
flowed directly to its former shareholders for U.S. federal income tax purposes.
Upon the merger of Amstaff, Inc. with the Company on June 30, 1997, Amstaff,
Inc. no longer qualified under the Subchapter S provisions of the IRC and became
a taxable entity. In connection with Amstaff, Inc.'s change in tax status, the
Company recorded approximately $226,000 and $319,000, as of September 30, 1997
and 1996, respectively, in additional deferred tax assets, primarily related to
certain reserves for state taxes and workers' compensation claims.
Note 8 - Subsequent Events
On October 27, 1997, the Company announced that it had entered into a
definitive merger agreement with Staffing Network, Inc. ("SNI"), a privately
held PEO headquartered in Manchester, New Hampshire with approximately 525
clients and more than 5,000 worksite employees. The Company will issue 1,200,000
shares of its common stock in exchange for all of the equity of SNI. The merger
will be accounted as a pooling of interests transaction and is expected to close
before year-end following receipt of required regulatory approvals.
On November 7, 1997, the Company announced a three-for-two stock split (the
"Stock Split") of its outstanding shares of Common Stock, par value $.001 per
share. The stock split will be effected in the form of stock dividend and will
entitle each shareholder of record on November 21, 1997 (the "Record Date") to
receive an additional share of Common Stock for every two shares of Common Stock
held by such shareholder of record on the Record Date. The Stock Split will be
paid on December 10, 1997. The Company will pay cash in lieu of fractional
shares resulting from the Stock Split based on the last sale price as reported
on the NASDAQ National Market System on the Record Date.
* * * * * * * * * *
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
(i) the Consolidated Financial Statements and Notes thereto contained herein,
(ii) the Consolidated Financial Statements and the Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing in the 1996 Annual Report on Form 10-K, (iii) the Current
Report on Form 8-K dated May 8, 1997, and (iv) the Current Report on Form 8-K
dated November 5, 1997, filed by The Vincam Group, Inc. ("Vincam" or the
"Company") with the Securities and Exchange Commissions.
The following discussion contains forward-looking statements. The Company's
actual results could differ materially from those discussed in such
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below and elsewhere in this Form 10-Q. In
connection with the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"), 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," "is
anticipated," "estimated," "projection" and "outlook") are not historical facts
and may be forward-looking and, accordingly, such statements involve estimates,
assumptions, and uncertainties which could cause actual results to differ
materially from those expressed in the forward-looking statements. Such
uncertainties include, among others, the following: (i) potential for
unfavorable interpretation of government regulations relating to labor, taxes,
insurance, employment matters and the provision of managed care services; (ii)
the Company's ability to obtain or maintain all required licenses or
certifications required to further expand the range of specialized managed care
services offered by the Company; (iii) potential increases in the Company's
costs, such as health care costs, that the Company may not be able to reflect
immediately in its service fees; (iv) the Company's ability to offer its
services to prospective clients in additional states where it has less or no
market penetration; (v) the level of acquisition opportunities available to the
Company and the Company's ability to efficiently price and negotiate such
acquisitions on a favorable basis; (vi) the financial condition of the Company's
clients; (vii) additional regulatory requirements affecting the Company; (viii)
the impact of competition from existing and new professional employer
organizations; (ix) the failure to properly manage growth and successfully
integrate acquired companies and operations, and to achieve synergies and other
cost savings in the operation of acquired companies; and (x) other factors which
are described in further detail in the Company's filings with the Securities and
Exchange Commission.
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
16
<PAGE>
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.
Overview
- --------
Vincam, one of the largest professional employer organizations ("PEOs") in
the industry, provides small and medium-sized businesses with an outsourcing
solution to the complexities and costs related to employment and human
resources. The Company's continuum of integrated employment-related services
consists of human resource administration, employment regulatory compliance
management, workers' compensation coverage, health care and other employee
benefits. The Company establishes a co-employer relationship with its clients
and contractually assumes substantial employer responsibilities with respect to
worksite employees. In addition, the Company offers certain specialty managed
care services on a stand-alone basis to health and workers' compensation
insurance companies, HMOs, managed care providers and large, self-insured
employers.
The Company's revenues include all amounts billed to clients for gross
salaries and wages, related employment taxes, and health care and workers'
compensation coverage of worksite employees. The Company is obligated to pay the
gross salaries and wages, related employment taxes and health care and workers'
compensation costs of its worksite employees whether or not the Company's
clients pay the Company on a timely basis or at all. The Company believes that
including such amounts as revenues appropriately reflects the responsibility
which the Company bears for such amounts and is consistent with industry
practice. In addition, the Company's revenues are subject to fluctuations as the
result of (i) changes in the volume of worksite employees serviced by the
Company; (ii) changes in the wage base and employment tax rates of worksite
employees; and (iii) changes in the mark-up charged by the Company for its
services.
The Company's primary direct costs are (i) salaries, wages, the employer's
portion of social security, Medicare premiums, federal unemployment taxes and
the compensation portion of the Michigan Single Business Tax, (ii) health care
and workers' compensation costs, and (iii) state unemployment taxes and other
direct costs. The Company can significantly impact its gross profit margin by
actively managing the direct costs described in clauses (ii) and (iii).
The Company's health care costs consist of medical insurance premiums,
payments of and reserves for claims subject to deductibles and the costs of
vision care, disability, employee assistance and other similar benefit plans.
The Company's health care benefit plans consist of a mixture of fully insured,
minimum premium arrangements, partially self-insured plans and guaranteed cost
programs, with third party insurers providing insurance with respect to minimum
premium and partially self-insured plans to the extent claims exceed certain
levels ("stop loss coverage"). Under minimum premium arrangements and partially
self-insured plans, liabilities for health care claims are recorded based on the
Company's health care loss history. The Company maintains reserves for medical
and behavioral health claims which reserves are estimates based on periodic
reviews of open claims, past claims experience and other factors deemed relevant
by management. While the Company believes that such reserves are adequate, the
Company cannot predict with certainty the ultimate liability associated with
health care costs and past claims experience may not be indicative of future
results. Accordingly, if estimated reserve amounts prove to be less than the
ultimate liability with respect to such claims, the Company's financial
condition, results of operations and liquidity could be materially adversely
17
<PAGE>
affected. In addition to the extent an insurer delays or denies the payment of a
claim for stop loss coverage, the Company's financial condition, results of
operations and liquidity could be materially adversely affected.
Workers' compensation costs include medical costs and indemnity payments
for lost wages, administrative costs and insurance premiums related to the
Company's workers' compensation coverage. Prior to 1997, the Company was insured
under a large deductible insurance plan. Under this plan, the Company was
obligated to reimburse its insurance carrier for a portion of the insurance risk
related to workers' compensation claims up to a predetermined deductible per
occurrence of $500,000 (or $1,000,000 in the case of SAI). Workers' compensation
costs for 1994, 1995 and 1996 also include reserves for claims which have been
incurred but not reported and for anticipated loss development. The Company has
recently entered into an arrangement with an insurance company under which
substantially all of the cost of the Company's workers' compensation coverage
for the years 1997 to 1999 is fixed. Additionally, the Company has entered into
agreements whereby the Company reinsured substantially all of the remaining
claims under the Company's large deductible workers' compensation insurance
policies for the years 1994, 1995 and 1996 and, with respect to AMI, the first
six months of 1997 also.
The Company's primary operating expenses are administrative personnel
expenses, other general and administrative expenses, and sales and marketing
expenses. Administrative personnel expenses include compensation, fringe
benefits and other personnel expenses related to internal administrative
employees. Other general and administrative expenses include rent, office
supplies and expenses, legal and accounting fees, insurance and other operating
expenses. Sales and marketing expenses include compensation of sales executives
and the marketing staff, as well as marketing and advertising expenses.
The Company's financial condition and results of operations are subject to
several contingencies including the resolutions of certain pending legal
proceedings. For more information regarding such contingencies see Note 6 of
Notes to Consolidated Financial Statements contained in Part I, Item 1,
Financial Statements of this Form 10-Q.
Recent Developments
- -------------------
On October 27, 1997, the Company announced that it had entered into a
definitive merger agreement with Staffing Network, Inc. ("SNI"), a privately
held PEO headquartered in Manchester, New Hampshire with approximately 525
clients and more than 5,000 worksite employees. The Company will issue 1,200,000
shares of its common stock in exchange for all of the equity of SNI. The merger
will be accounted as a pooling of interests transaction and is expected to close
before year-end following receipt of required regulatory approvals.
On November 7, 1997, the Company announced a three-for-two stock split (the
"Stock Split") of its outstanding shares of Common Stock, par value $.001 per
share. The stock split will be effected in the form of stock dividend and will
entitle each shareholder of record on November 21, 1997 (the "Record Date") to
receive an additional share of Common Stock for every two shares of Common Stock
held by such shareholder of record on the Record Date. The Stock Split will be
paid on December 10, 1997. The Company will pay cash in lieu of fractional
shares resulting from the Stock Split based on the last sale price as reported
on the NASDAQ National Market System on the Record Date.
18
<PAGE>
Results of Operations
- ---------------------
The following table sets forth, for September 30, 1997 and 1996, certain
selected income statement data expressed as a percentage of revenues:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------------- -------------------
Revenues ..................................... 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
Direct costs:
Salaries, wages and employment taxes
of worksite employees ................... 89.2% 88.1% 89.1% 88.4%
Health care and workers' compensation ..... 3.9% 5.1% 3.9% 4.8%
State unemployment taxes and other ........ 0.9% 0.9% 1.0% 1.0%
--------- --------- --------- ---------
Total direct costs ...................... 94.0% 94.1% 94.0% 94.2%
--------- --------- --------- ---------
Gross profit ................................. 6.0% 5.9% 6.0% 5.8%
--------- --------- --------- ---------
Operating expenses:
Administrative personnel .................. 2.6% 3.1% 2.6% 2.8%
Other general and administrative, including
provision for doubtful accounts ......... 1.3% 1.4% 1.7% 1.6%
Sales and marketing ....................... 0.8% 1.0% 0.8% 0.9%
Depreciation and amortization ............. 0.2% 0.2% 0.3% 0.1%
--------- --------- --------- ---------
Total operating expenses ................ 4.9% 5.7% 5.4% 5.4%
--------- --------- --------- ---------
Operating income ............................. 1.1% 0.2% 0.6% 0.4%
Interest income (expense), net ............... 0.0% 0.3% 0.1% 0.1%
--------- --------- --------- ---------
Income before taxes .......................... 1.1% 0.5% 0.7% 0.5%
Provision for income taxes ................... 0.3% 0.3% 0.3% 0.2%
--------- --------- --------- ---------
Net income ................................... 0.8% 0.2% 0.4% 0.3%
========= ========= ========= =========
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
- --------------------------------------------------------------------------------
The Company's revenues for the nine months ended September 30, 1997 were
$612.1 million compared to $371.9 million for the nine months ended September
30, 1996, representing an increase of $240.2 million, or 64.6%. This increase
was due primarily to an increased number of PEO clients and worksite employees.
From September 30, 1996 to September 30, 1997, respectively, the number of PEO
clients increased by 21.5%, from 1,035 to 1,257. The number of worksite
employees increased 46.8% over the same period, from 23,011 worksite employees
to 33,771.
Salaries, wages and employment taxes of worksite employees were $545.3
million for the nine months ended September 30, 1997, compared to $329.0 million
for the same period in 1996, representing an increase of $216.3 million, or
65.7%. Salaries, wages and employment taxes of worksite employees were 89.1% of
revenues for the nine months ended September 30, 1997, compared to 88.4% for the
same period in 1996. The increase of salaries, wages and employment taxes of
worksite employees as a percentage of revenues is a result of a change in the
19
<PAGE>
Company's client mix towards clients having more favorable workers' compensation
risk profiles for which the Company charges a lower fee.
Health care and workers' compensation costs were $23.7 million for the nine
months ended September 30, 1997, compared to $18.0 million for the same period
in 1996, representing an increase of $5.7 million, or 31.7%. This increase was
due mainly to the higher volume of health care and workers' compensation claims
paid and/or reserved during the nine months ended September 30, 1997, which was
a direct function of the increase in the number of PEO clients and worksite
employees. Health care and workers' compensation costs were 3.9% of revenues for
the nine months ended September 30, 1997, compared to 4.8% for the same period
in 1996. The decrease of health care and workers' compensation costs as a
percentage of revenues was due mainly to a reduction of workers' compensation
costs resulting from the Company's guaranteed fixed premium insurance program,
as well as the recognition of part of the deferred gain resulting from the
Company's reinsurance of the remaining claims under its previous workers'
compensation large deductible insurance plans.
State unemployment taxes and other direct costs were $6.0 million for the
nine months ended September 30, 1997, compared to $3.6 million for the same
period in 1996, representing an increase of $2.4 million or 66.7%. This increase
was due mainly to the higher volume of salaries and wages paid during the nine
months ended September 30, 1997, which was a direct function of the increase in
the number of PEO clients and worksite employees, an increased number of client
companies using other services and products (e.g., 401(k), the drug free
workplace program, etc.), as well as an increase in other direct costs related
to the Company's specialty managed care services. State unemployment taxes and
other direct costs were 1.0% of revenues for the nine months ended September 30,
1997 and 1996.
Gross profit was $37.1 million for the nine months ended September 30,
1997, compared to $21.4 million for the same period in 1996, representing an
increase of $15.7 million, or 73.4%. Gross profit was 6.0% of revenues for the
nine months ended September 30, 1997, compared to 5.8% for the same period in
1996. The increase in gross profit was due mainly to the increase in revenues
resulting from an increase in the number of PEO clients and worksite employees.
The increase in gross profit as a percentage of revenues was due mainly to the
Company's elimination of the sensitivity of workers' compensation costs to the
ongoing loss development of historical claims as a result of the Company's
guaranteed fixed premium insurance program and its reinsurance of substantially
all of its responsibility for prior periods claims, as well as the recognition
of part of the deferred gain resulting from the Company's reinsurance of the
remaining claims under its previous workers' compensation large deductible
insurance plans.
Administrative personnel expenses were $16.0 million for the nine months
ended September 30, 1997, compared to $10.5 million for the same period in 1996,
representing an increase of $5.6 million, or 53.1%. This increase was primarily
attributable to increased staffing to support the Company's growth, including
management and senior executive personnel. The Company anticipates that this
trend in administrative personnel expenses will continue in future periods as a
result of the Company's growth and the expansion of its service offerings.
Administrative personnel expenses were 2.6% of revenues for the nine months
ended September 30, 1997, compared to 2.8% for the same period in 1996.
Other general and administrative expenses for the nine months ended
September 30, 1997, including the provision for doubtful accounts and $2.2
million of transaction expenses, were $10.4 million for the nine months ended
September 30, 1997, compared to $5.8 million for the same period in 1996,
representing an increase of $4.6 million, or 80.1%. This increase in other
20
<PAGE>
general and administrative expenses was primarily attributable to transaction
expenses of approximately $1.2 million in connection with the SAI and AMI
acquisitions and an $1.0 million charge related to the purchase of a managed
care provider network and the related conclusion of the strategic alliance under
which the Company previously operated its workers' compensation managed care
business. Other general and administrative expenses, including the provision for
doubtful accounts, were 1.7% of revenues for the nine months ended September 30,
1997, compared to 1.6% for the same period in 1996. The increase in other
general and administrative expenses, including the provision for doubtful
accounts as a percentage of revenues was due mainly to the sustained growth of
the Company and non-recurring charges of $2.2 million, as above described.
Sales and marketing costs were $5.0 million for the nine months ended
September 30, 1997, compared to $3.4 million for the same period in 1996,
representing an increase of $1.7 million, or 49.5%. The increase reflects the
addition of sales executives and marketing personnel, consistent with the
Company's strategy to increase its client base in its existing and acquired
markets. Sales and marketing costs were 0.8% of revenues for the nine months
ended September 30, 1997, compared to 0.9% for the same period in 1996.
Net income was $2.8 million for the nine months ended September 30, 1997,
compared to $1.3 million for the same period in 1996, representing an increase
of $1.5 million, or 118.1%. Earnings per share were $0.31 for the nine months
ended September 30, 1997, compared to $0.15 for the same period in 1996,
representing an increase of $0.16, or 106.7%.
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
- --------------------------------------------------------------------------------
The Company's revenues for the three months ended September 30, 1997 were
$215.1 million compared to $135.5 million for the three months ended September
30, 1996, representing an increase of $79.6 million, or 58.7%. This increase was
due primarily to an increased number of PEO clients and worksite employees. From
September 30, 1996 to September 30, 1997, respectively, the number of PEO
clients increased by 21.5%, from 1,035 to 1,257. The number of worksite
employees increased 46.8% over the same period, from 23,011 worksite employees
to 33,771.
Salaries, wages and employment taxes of worksite employees were $191.9
million for the three months ended September 30, 1997, compared to $119.3
million for the same period in 1996, representing an increase of $72.6 million,
or 60.9%. Salaries, wages and employment taxes of worksite employees were 89.2%
of revenues for the three months ended September 30, 1997, compared to 88.1% for
the same period in 1996. The increase of salaries, wages and employment taxes of
worksite employees as a percentage of revenues is a result of a change in the
Company's client mix towards clients having more favorable workers' compensation
risk profiles for which the Company charges a lower fee.
Health care and workers' compensation costs were $8.4 million for the three
months ended September 30, 1997, compared to $6.9 million for the same period in
1996, representing an increase of $1.5 million, or 21.7%. This increase was due
mainly to the higher volume of health care and workers' compensation claims paid
and/or reserved during the three months ended September 30, 1997, which was a
direct function of the increase in the number of PEO clients and worksite
employees. Health care and workers' compensation costs were 3.9% of revenues for
the three months ended September 30, 1997, compared to 5.1% for the same period
in 1996. The decrease of health care and workers' compensation costs as a
percentage of revenues was due mainly to a reduction of workers' compensation
21
<PAGE>
costs resulting from the Company's guaranteed fixed premium insurance program,
as well as the recognition of part of the deferred gain resulting from the
Company's reinsurance of the remaining claims under its previous workers'
compensation large deductible insurance plans.
State unemployment taxes and other direct costs were $2.0 million for the
three months ended September 30, 1997, compared to $1.2 million for the same
period in 1996, representing an increase of $0.8 million or 66.7%. This increase
was due mainly to the higher volume of salaries and wages paid during the three
months ended September 30, 1997, which was a direct function of the increase in
the number of PEO clients and worksite employees, an increased number of client
companies using other services and products (e.g., 401(k), the drug free
workplace program, etc.), as well as an increase in other direct costs related
to the Company's specialty managed care services. State unemployment taxes and
other direct costs were 0.9% of revenues for the three months ended September
30, 1997, compared to 0.9% for the same period in 1996.
Gross profit was $12.8 million for the three months ended September 30,
1997, compared to $8.1 million for the same period in 1996, representing an
increase of $4.7 million, or 58.0%. Gross profit was 6.0% of revenues for the
three months ended September 30, 1997, compared to 5.9% for the same period in
1996. The increase in gross profit was due mainly to the increase in revenues
resulting from an increase in the number of PEO clients and worksite employees.
The increase in gross profit as a percentage of revenues was due mainly to the
Company's elimination of the sensitivity of workers' compensation costs to the
ongoing loss development of historical claims as a result of the Company's
guaranteed fixed premium insurance program and its reinsurance of substantially
all of its responsibility for prior periods claims, as well as the recognition
of part of the deferred gain resulting from the Company's reinsurance of the
remaining claims under its previous workers' compensation large deductible
insurance plans.
Administrative personnel expenses were $5.6 million for the three months
ended September 30, 1997, compared to $4.2 million for the same period in 1996,
representing an increase of $1.4 million, or 33.3%. This increase was primarily
attributable to increased staffing to support the Company's growth, including
management and senior executive personnel. The Company anticipates that this
trend in administrative personnel expenses will continue in future periods as a
result of the Company's growth and the expansion of its service offerings.
Administrative personnel expenses were 2.6% of revenues for the three months
ended September 30, 1997, compared to 3.1% for the same period in 1996.
Other general and administrative expenses for the three months ended
September 30, 1997, including the provision for doubtful accounts, were $2.9
million for the three months ended September 30, 1997, compared to $2.0 million
for the same period in 1996, representing an increase of $0.9 million, or 45.0%.
Other general and administrative expenses, including the provision for doubtful
accounts, were 1.2% of revenues for the three months ended September 30, 1997,
compared to 1.4% for the same period in 1996.
Sales and marketing costs were $1.6 million for the three months ended
September 30, 1997, compared to $1.4 million for the same period in 1996,
representing an increase of $0.2 million, or 14.3%. The increase reflects the
addition of sales executives and marketing personnel, consistent with the
Company's strategy to increase its client base in its existing and acquired
markets. Sales and marketing costs were 0.8% of revenues for the three months
ended September 30, 1997, compared to 1.0% for the same period in 1996.
22
<PAGE>
Net income was $1.7 million for the three months ended September 30, 1997,
compared to net income of $0.3 for the same period in 1996, representing an
increase of $1.4, or 466.7%. Earnings per share were $0.18 for the three months
ended September 30, 1997, compared to $0.03 for the same period in 1996,
representing an increase of $0.15, or 500.0%.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1997, the Company had working capital of $18.1 million,
compared to $20.7 million at December 31, 1996. The Company had $10.6 million in
cash and cash equivalents at September 30, 1997. Of this amount, $2.6 million is
restricted.
The Company's Credit Agreement with a group of banks for which Fleet
National Bank ("Fleet Bank") acted as agent provides for a $50.0 million
revolving line of credit with a sublimit of $15.0 million for standby letters of
credit and revolving credit loans for working capital purposes. The Credit
Agreement also provides for advances to finance acquisitions. The Company uses
letters of credit primarily to secure its obligations to reimburse its former
workers' compensation insurance carrier for workers' compensation payments
subject to the policy deductible. Borrowings bear interest at rates based, at
the Company's option, on Fleet Bank's Prime Rate plus a margin of as much as
0.25% or its Eurodollar Rate (as defined in the Credit Agreement) plus a margin
of 1.00% to 1.75%, depending on certain financial covenants. The facility is
secured by a pledge of the shares of all of the Company's subsidiaries. The
revolving line of credit matures on April 24, 2000. If, on April 24, 2000,
certain conditions are satisfied, any amounts outstanding under the revolving
line of credit may be converted into a term loan payable in eight quarterly
instalments commencing on August 1, 2000. The Credit Agreement contains
customary events of default and covenants which prohibit, among other things,
incurring additional indebtedness in excess of a specified amount, paying
dividends, creating liens and engaging in certain mergers or combinations
without the prior written consent of the lender. The Credit Agreement also
contains certain financial covenants relating to current ratio, debt to capital
ratio, debt and fixed charges coverage and minimum tangible net worth, as
defined in the Credit Agreement. The Company is required to pay an unused
facility fee ranging from .20% to .35% per annum on the facilities, depending
upon certain financial covenants. Under the revolving credit facility, the
Company had outstanding approximately $6.3 million in standby letters of credit
at September 30, 1997 which guarantee the payment of claims to the Company's
previous workers' compensation insurance carrier. As of that date, there were no
other amounts outstanding under the revolving line of credit.
Under the Company's large deductible workers' compensation insurance
policies for 1994, 1995 and 1996, the Company is required to provide its former
insurance carriers with $7.6 million in letters of credit, of which $6.3 million
has been issued by the lenders under the Credit Agreement. In connection with
the reinsurance of the Company's responsibility for remaining claims (the
"Remaining Claims"), Commercial Risk Re-Insurance Company ("Commercial Risk")
has provided a $4.1 million letter of credit in favor of the Company to secure
Commercial Risk's obligation for the payment of Remaining Claims.
The Company also has $1.3 million in standby letters of credit with another
bank at September 30, 1997, which guarantee the payment of workers' compensation
claims acquired upon the SAI Acquisition to SAI former workers' compensation
insurance carrier.
The Company's primary short-term liquidity requirements include prepayment
of the Company's workers' compensation insurance premiums for 1998 of
approximately $11.0 million, payment of approximately $1.4 million in connection
23
<PAGE>
with the Company's purchase of a provider network for its workers' compensation
managed care services, and payment of $1.2 million due under the SMG Acquisition
agreement, which was paid in November 1997. The Company anticipates that it will
obtain short-term financing of the prepayment of the 1998 workers' compensation
insurance premium at a favorable rate from a third party. In addition, the
Company expects that it will enter into an arrangement in the fourth quarter of
1997 to finance the construction and lease of a new headquarters facility
providing for an aggregate commitment by the Company of approximately $12
million.
The Company anticipates that available cash, cash flows from operations and
borrowing availability under the Credit Agreement will be sufficient to satisfy
the Company's liquidity and working capital requirements for the foreseeable
future; however, to the extent that the Company should desire to increase its
financial flexibility and capital resources or require or choose to fund future
capital commitments from sources other than operating cash or from borrowings
under its revolving line of credit or its acquisition loan facility, the Company
may consider raising capital through the offering of equity and/or debt
securities in the public or private markets, as well as from banks.
Net cash used in operating activities was $4.5 million for the nine months
ended September 30, 1997, compared to cash provided by operating activities of
approximately $0.7 million for the same period in 1996. The Company's negative
operating cash flow for the nine months ended September 30, 1997, was due
primarily to the payment of $1.0 million in connection with the Company's
purchase of a provider network for its workers' compensation managed care
services, the payment of approximately $2.6 million in connection with the
reinsurance of certain remaining claims under the Company's large deductible
workers' compensation insurance policies related to SAI and AMI, the payment of
acquisition costs of approximately $1.2 million, a $15.0 million increase in
accounts receivable, an increase in prepaid expenses and other current assets of
$1.1 million, an increase in other assets of $0.9 million, a decrease in
accounts payable and accrued expenses of $0.5 million, a decrease in reserve for
claims of $4.7 million, a decrease in deferred compensation of $0.3 million, and
a decrease in income taxes of $0.5 million, partially reduced by noncash items
such as depreciation and amortization of $1.5 million, provision for doubtful
accounts of $0.7 million and a net change of deferred gain of $0.1 million, a
decrease in prepaid workers' compensation insurance premium of $3.8 million, a
net decrease in reinsurance recoverable of $0.1 million, an increase in accrued
salaries, wages, and payroll taxes of $9.2 million, and an increase in reserve
for other state taxes of $0.8 million. The increase in accounts receivable
resulted from both a higher number of PEO clients and worksite employees served
during 1997 and the timing of the payroll cycle. The Company's accounts
receivable and accrued salaries, wages, and payroll taxes are subject to
fluctuations depending on the proximity of the closing date of the reporting
period to that of the payroll cycle. The net decrease in reinsurance recoverable
was due mainly to the increase of $2.6 million in reinsurance recoverable from
the loss portfolio risk transfer of substantially all of the Company's
responsibility for remaining claims acquired upon the SAI and AMI acquisitions
under their respective large deductible workers' compensation policies for
periods prior to their respective acquisition by the Company, offset by the
settlement of workers' compensation claims by the Company's insurance carriers
of approximately $2.7 million.
Net cash used in investing activities was $5.2 million for the nine months
ended September 30, 1997, compared to $4.5 million used in investing activities
in the same period in 1996. This reflects payment of $1.4 million due under the
SMG Acquisition agreement, an increase in cash investments maturing over three
months of $ 0.4 million and $3.4 million in expenditures for property and
equipment to support the Company's growth.
24
<PAGE>
Net cash provided for financing activities was $0.2 million for the nine
months ended September 30, 1997, compared to $24.4 million provided by financing
activities in the same period in 1996. The 1997 cash flow reflects the Company's
issuance of shares of common stock to employees under the Company's stock option
plans, partially offset by principal payment on borrowings and additional costs
incurred in connection with the Company's initial public offering.
New Accounting Pronouncement
- ----------------------------
In January 1997 the Financial Accounting Standards Board issued Statement
of Financial Standard ("SFAS") No. 128, "Earnings Per Share" which requires dual
presentation of basic and fully diluted earnings per share. The adoption of SFAS
No. 128 is not expected to have a material effect on the Company's earnings per
share computation.
Inflation
- ---------
The Company believes the effects of inflation have not had a significant
impact on its results of operations or financial condition.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USES OF PROCEEDS
The following information amends the Report of Sales of Securities and Use
of Proceeds Therefrom on Form SR for the fifteen month period ended August 9,
1997, filed with the Securities and Exchange Commission on August 19, 1997. The
following information will end the Company's requirements for the reporting of
uses of proceeds resulting from its initial public offering in May 1996 of
2,000,000 shares of common stock. The Company received net offering proceeds of
$26,875,280, net of $ 2,100,000 underwriting discounts and commissions and
$1,024,720 in related offering expenses.
As of September 30, 1997, the Company had utilized the net offering
proceeds as follows:
Acquisition of other businesses..................... $ 4,907,763
Payment of costs related to the acquisition
of other businesses................................ 1,215,459
Payment of a subordinated promissory note........... 1,200,000
Payment of distribution payable to
principal stockholders............................. 700,000
Funding of workers' compensation
premiums and accrued losses........................ 5,795,000
Prepayment of workers' compensation
insurance premiums................................. 5,483,972
Termination of workers' compensation
managed care provider network agreement............ 1,000,000
Purchases of property and equipment................. 3,378,361
Working capital..................................... 3,194,725
---------------
$ 26,875,280
===============
Other than the payment of the $700,000 distribution payable, which was made
to the Company's two principal stockholders who each own in excess of 10% of the
Company's outstanding common stock and who are also officers and directors of
the Company, none of the net offering proceeds was paid to officers, directors
or persons owning 10% or more of the Company's outstanding common stock.
26
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
- ------- -----------
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
On September 16, 1997, the Company filed Amendment No. 3 to Current Report
on Form 8-K dated June 30, 1997 with the Commission reporting information under
Item 7, Financial Statements and Exhibits.
On September 16, 1997, the Company filed Amendment No. 2 to Current Report
on Form 8-K dated June 30, 1997 with the Commission reporting information under
Item 7, Financial Statements and Exhibits.
On July 23, 1997, the Company filed Amendment No. 1 to Current Report on
Form 8-K dated June 30, 1997 with the Commission reporting information under
Item 7, Financial Statements and Exhibits.
On July 3, 1997, the Company filed Current Report on Form 8-K dated June
30, 1997 with the Commission reporting information under Item 2, Acquisition or
Disposition of Assets and Item 7, Financial Statements and Exhibits.
27
<PAGE>
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.
THE VINCAM GROUP, INC.
November 14, 1997 By: /S/ STEPHEN L. WAECHTER
- ----------------- --------------------------------------------------
Date Stephen L. Waechter, Chief Financial Officer,
Senior Vice President Finance and Administration
(Principal Financial Officer)
November 14, 1997 By: /S/ MARTINIANO J. PEREZ
- ----------------- -------------------------------------------------
Date Martiniano J. Perez, Vice President and Controller
(Principal Accounting Officer)
28
<PAGE>
THE VINCAM GROUP, INC.
EXHIBITS INDEX
Exhibit
No. Description
- ------- -----------
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
THE VINCAM GROUP, INC.
CALCULATION OF NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 1,685,315 $ 299,302 $ 2,782,761 $ 1,275,723
============ ============ ============ ============
Weighted average number of common shares
outstanding during the period 8,956,271 7,841,228 8,630,852 7,343,254
Assumed exercise of stock options, net of
treasury shares acquired 471,952 534,699 491,475 501,613
Issuance of mandatorily redeemable preferred
stock deemed a common stock equivalent -- 1,043,933 -- 604,181
------------ ------------ ------------ ------------
Weighted average number of shares used in
earnings per share calculation 9,428,223 9,419,860 9,122,327 8,449,048
============ ============ ============ ============
Net income per common and common
equivalent share $ 0.18 $ 0.03 $ 0.31 $ 0.15
============ ============ ============ ============
Fully diluted net income per common
and common equivalent share * $ 0.18 $ 0.03 $ 0.31 $ 0.15
============ ============ ============ ============
</TABLE>
- ------------------------------
* In accordance with the provisions of the Accounting Principles Board
Opinion No. 15, Earnings per Share, fully diluted net income per common and
common equivalent share is not presented in the Company's consolidated
statements of income due to the fact that the aggregated dilution from the
Company's common stock equivalents outstanding during each of the periods
presented is less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE VINCAM GROUP, INC. FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997 INCLUDED IN THIS FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,621,725
<SECURITIES> 564,853
<RECEIVABLES> 39,566,161
<ALLOWANCES> 849,569
<INVENTORY> 0
<CURRENT-ASSETS> 56,458,758
<PP&E> 8,542,323
<DEPRECIATION> 1,790,357
<TOTAL-ASSETS> 75,365,877
<CURRENT-LIABILITIES> 38,330,401
<BONDS> 0
0
0
<COMMON> 9,027
<OTHER-SE> 32,431,097
<TOTAL-LIABILITY-AND-EQUITY> 75,365,877
<SALES> 612,143,511
<TOTAL-REVENUES> 612,143,511
<CGS> 0
<TOTAL-COSTS> 575,060,656
<OTHER-EXPENSES> 32,993,966
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,422,385
<INCOME-TAX> 1,639,624
<INCOME-CONTINUING> 2,782,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,782,761
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
