UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): NOVEMBER 5, 1997
THE VINCAM GROUP, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 0-28148 59-2452823
- -------------------------------- ----------------------- ------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
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
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(Former name, former address, and former fiscal year, if changed since last
report)
<PAGE>
ITEM 5. OTHER EVENTS
On June 30, 1997, The Vincam Group, Inc. (the "Company") acquired
Amstaff, Inc. ("AMI"), a privately held professional employer organization
("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 of The Vincam Group, Inc.
presented herein include the assets and liabilities and results of operations of
AMI.
The following information presents the audited pooled consolidated
results of operations for the years ended December 31, 1994, 1995 and 1996, and
the pooled consolidated balance sheets as of December 31, 1995 and 1996 of the
Company and AMI.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
THE VINCAM GROUP, INC.
Report of Independent Certified Public Accountants........................ 3
Balance Sheets as of December 31, 1995 and 1996........................... 4
Consolidated Statements of Income for the Years Ended
December 31, 1994, 1995 and 1996........................................ 5
Consolidated Statement of Changes in Stockholders' (Deficit)
Equity for the Years Ended December 31, 1994, 1995 and 1996............. 6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996........................................ 7
Notes to Consolidated Financial Statements................................ 9
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.......................................................... 28
2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The Vincam Group, Inc.
In our opinion, based upon our audits and the reports of other
auditors, the accompaying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of The Vincam Group, Inc. and its subsidiaries at December 31, 1995 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Amstaff, Inc. which statements reflect total assets of
$2,530,044 and $4,308,304 at December 31, 1995 and 1996, respectively, and total
revenues of $23,253,911, $43,665,424 and $66,542,568 for the years ended
December 31, 1994, 1995 and 1996, respectively. We did not audit the financial
statements of Staff Administrators, Inc., which statements reflect total assets
of $4,791,571 and $5,723,717 at December 31, 1995 and 1996, respectively, and
total revenues of $33,310,475, $55,824,216 and $77,975,919 for the years ended
December 31, 1994, 1995 and 1996, respectively. Those statements were audited by
other auditors whose reports thereon have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Amstaff,
Inc. and Staff Administrators, Inc., is based solely on the report of the other
auditors. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 2, on June 30, 1997, The Vincam Group, Inc. merged
with Amstaff, Inc. in a transaction accounted for as a pooling of interest. The
accompanying consolidated financial statements give retroactive affect to the
merger of The Vincam Group, Inc. with Amstaff, Inc.
PRICE WATERHOUSE LLP
Miami, Florida
February 21, 1997
except as to the pooling of interest with Amstaff, Inc.
which is as of June 30, 1997
3
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 1,964,581 $ 17,522,030
Investments ................................................ 639,232 149,626
Restricted cash ............................................ 5,290,955 2,331,917
Accounts receivable ........................................ 10,808,048 24,391,893
Due from affiliates ........................................ 301,373 292,957
Deferred taxes ............................................. 1,844,386 2,279,226
Reinsurance recoverable .................................... -- 1,728,000
Prepaid workers' compensation insurance premium ............ -- 5,483,972
Prepaid expenses and other current assets .................. 598,934 1,170,282
------------ ------------
Total current assets ................................ 21,447,509 55,349,903
Property and equipment, net ................................ 2,960,188 4,601,868
Deferred taxes ............................................. 703,476 733,431
Reinsurance recoverable .................................... -- 1,472,000
Client contracts ........................................... 117,440 1,430,951
Goodwill ................................................... -- 4,791,836
Other assets ............................................... 324,295 255,225
------------ ------------
$ 25,552,907 $ 68,635,214
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ...................... $ 3,120,775 $ 4,102,765
Accrued salaries, wages and payroll taxes .................. 9,577,391 17,926,012
Amounts due under acquisition agreement .................... -- 2,623,437
Reserve for claims ......................................... 3,750,376 5,651,766
Reserve for other state taxes............................... 1,243,738 2,208,738
Income taxes payable ....................................... 650,044 1,395,899
Current portion of long term borrowings .................... 1,445,167 136,053
Distribution payable ....................................... 700,000 --
Deferred compensation ...................................... 263,000 242,013
Deferred gain .............................................. -- 323,157
------------ ------------
Total current liabilities ........................... 20,750,491 34,609,840
Long term borrowings, less current portion .................... 1,308,062 883,689
Reserve for claims ............................................ 1,556,615 3,154,438
Income taxes payable .......................................... 1,386,323 672,818
Deferred compensation ......................................... 294,300 41,200
Deferred gain ................................................. -- 275,275
Other liabilities ............................................. 223,655 365,954
------------ ------------
Total liabilities ................................... 25,519,446 40,003,214
------------ ------------
Preferred Stock,$.01 par value, 20,000,000 shares
authorized 165.376 shares mandatorily redeemable
Series A Preferred Stock issued and outstanding
in 1995 ................................................... 6,263,610 --
------------ ------------
Commitments and contingencies (Note 14) ....................... -- --
------------ ------------
Stockholders' (deficit) equity:
Common stock, $.001 par value, 60,000,000 shares
authorized, 4,956,066 and 8,013,332 shares issued
and outstanding in 1995 and 1996, respectively ........... 4,956 8,013
Additional paid in capital ................................. -- 33,241,867
Accumulated deficit ........................................ (6,235,105) (4,617,880)
------------ ------------
Total stockholders' (deficit) equity ................ (6,230,149) 28,632,000
------------ ------------
$ 25,552,907 $ 68,635,214
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues ................................ $ 248,096,954 $ 338,897,350 $ 540,138,025
------------- ------------- -------------
Direct costs:
Salaries, wages and employment
taxes of worksite employees ....... 218,378,461 301,037,190 477,738,190
Health care and workers' compensation 13,812,921 17,336,493 25,677,179
State unemployment taxes and other .. 2,172,881 2,688,969 5,285,246
------------- ------------- -------------
Total direct costs ............ 234,364,263 321,062,652 508,700,615
------------- ------------- -------------
Gross profit ............................ 13,732,691 17,834,698 31,437,410
------------- ------------- -------------
Operating expenses:
Administrative personnel ............ 5,426,114 9,151,610 15,290,256
Other general and administrative .... 3,579,438 5,280,626 7,795,686
Sales and marketing ................. 1,783,425 2,739,016 4,976,681
Provision for doubtful accounts ..... 52,000 278,969 416,193
Depreciation and amortization ....... 284,362 451,796 889,920
------------- ------------- -------------
Total operating expenses ...... 11,125,339 17,902,017 29,368,736
------------- ------------- -------------
Operating income ........................ 2,607,352 (67,319) 2,068,674
Interest (expense) income, net .......... (3,720) 151,498 699,652
------------- ------------- -------------
Income before taxes ..................... 2,603,632 84,179 2,768,326
Provision for income taxes .............. (858,759) (53,496) (890,386)
------------- ------------- -------------
Net income .............................. $ 1,744,873 $ 30,683 $ 1,877,940
============= ============= =============
Net income per common and common
equivalent share .................... $ 0.23 $ 0.00 $ 0.22
============= ============= =============
Weighted average number of shares
outstanding used in earnings per
share calculation ................... 7,594,819 7,359,180 8,695,973
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK RETAINED
---------------------------- ADDITIONAL EARNINGS
PAID IN (ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT) TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 ...................... 6,249,341 $ 6,249 $ 42,156 $ 219,963 $ 268,368
Purchase of a business .......................... -- -- -- (8,105) (8,105)
Net income ...................................... -- -- -- 1,744,873 1,744,873
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 .................... 6,249,341 6,249 42,156 1,956,731 2,005,136
Acquisition of shares ........................... (249,342) (249) (42,156) (1,457,595) (1,500,000)
Recapitalization, including transaction costs
of $445,150 charged to retained earnings ...... (1,043,933) (1,044) -- (6,707,716) (6,708,760)
Distributions to shareholders ................... -- -- -- (57,208) (57,208)
Net income ...................................... -- -- -- 30,683 30,683
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 .................... 4,956,066 4,956 -- (6,235,105) (6,230,149)
Issuance of common stock, net of transaction
costs of $3,058,685 charged to paid in capital . 2,000,000 2,000 26,939,315 -- 26,941,315
Conversion of preferred stock into common
Stock .......................................... 1,043,933 1,044 6,262,566 -- 6,263,610
Issuance of common stock to employees
under stock option plans ....................... 13,333 13 39,986 -- 39,999
Distributions to shareholders ................... -- -- -- (260,715) (260,715)
Net income ...................................... -- -- -- 1,877,940 1,877,940
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 .................... 8,013,332 $ 8,013 $ 33,241,867 $ (4,617,880) $ 28,632,000
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................... $ 1,744,873 $ 30,683 $ 1,877,940
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization .............................. 284,362 451,796 889,920
Provision for doubtful accounts ............................ 52,000 278,969 416,193
Deferred gain .............................................. -- -- 598,432
Deferred income tax benefit ................................ (403,944) (768,410) (464,795)
Changes in assets and liabilities:
(Increase) decrease in restricted cash ................... (3,399,328) 79,579 4,209,038
Increase in accounts receivable .......................... (2,381,834) (3,526,683) (13,116,851)
Decrease (increase) in due from affiliates ............... (66,698) 52,680 8,416
Increase in reinsurance recoverable ...................... -- -- (3,200,000)
Increase in prepaid workers' compensation
insurance premium ...................................... -- -- (5,483,972)
Increase in prepaid expenses and other current assets ... (70,433) (363,253) (569,392)
Increase in other assets ................................. (138,208) (41,361) (197,460)
Increase in accounts payable and accrued expenses ........ (534,782) 1,920,708 1,584,769
Increase in accrued salaries, wages and payroll taxes .... 2,989,258 2,489,740 7,123,833
Increase in reserve for claims ........................... 2,012,216 1,737,559 3,068,743
Increase (decrease) in income taxes payable .............. 225,158 355,938 (32,350)
Increase (decrease) in deferred compensation ............. 41,200 -- (274,087)
Increase (decrease) in other liabilities ................. 30,501 (15,757) 142,299
------------ ------------ ------------
Net cash provided by (used in) operating activities ............. 384,341 2,682,188 (3,354,624)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment .......................... (971,345) (1,001,256) (2,365,784)
Redemption (purchases) of short term investments ............ 202,580 (639,232) 489,606
Cash placed in escrow in connection with acquisition of SMG .. -- -- (1,250,000)
Cash paid in acquisition of SMG, net of cash acquired
of $137,748 ................................................ -- -- (2,219,566)
(Issuance) collection of notes receivable from stockholders .. (123,078) 123,078 --
Acquisition of client contracts .............................. (8,105) (117,440) (29,295)
------------ ------------ ------------
Net cash used in investing activities ........................... (899,948) (1,634,850) (5,375,039)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on borrowings ............................. (224,837) (30,000) (1,733,487)
Proceeds from borrowings ..................................... 241,684 251,812 --
Recapitalization costs ....................................... -- (445,150) --
Cash paid in connection with acquisition of stock ............ -- (300,000) --
Payment of distribution payable to shareholders .............. -- -- (700,000)
Distributions to shareholders ................................ -- (57,208) (260,715)
Issuance of common stock, net of transaction costs of
$3,058,685 ................................................. -- -- 26,941,315
Issuance of common stock to employees under stock option plans -- -- 39,999
------------ ------------ ------------
Net cash provided by (used in) financing activities ............. 16,487 (580,546) 24,287,112
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ............ (498,760) 466,792 15,557,449
Cash and cash equivalents, beginning of year .................... 1,996,549 1,497,789 1,964,581
------------ ------------ ------------
Cash and cash equivalents, end of year .......................... $ 1,497,789 $ 1,964,581 $ 17,522,030
============ ============ ============
SUPPLEMENTAL DISCLOSURES INFORMATION OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ..................................................... $ 96,572 $ 183,242 $ 147,131
============ ============ ============
Income taxes ................................................. $ 1,026,396 $ 481,421 $ 1,181,997
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE>
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Acquisition of Assets and Liabilities of The Stone Mountain Group, Inc.
On August 30, 1996, the Company acquired substantially all of the
assets and liabilities of The Stone Mountain Group, Inc. ("SMG") in a
transaction accounted for as a purchase. The fair value of the assets acquired
and liabilities assumed, and the consideration paid or to be paid were as
follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of net assets acquired:
Client contracts....................................................... $ 1,300,000
Accounts receivable.................................................... 883,187
Prepaid expenses and other assets...................................... 10,231
----------------
Total non-cash assets.................................................. 2,193,418
Accounts payable and accrued expenses.................................. 362,221
Accrued salaries, wages and payroll taxes.............................. 430,470
---------------
Total liabilities assumed.............................................. 2,017,479
---------------
Net assets acquired, excluding cash.................................... 175,939
Cash acquired.......................................................... 137,748
---------------
Net assets acquired.................................................... $ 313,687
================
Promissory notes payable to SMG shareholders........................... $ 1,373,437
Cash placed in escrow.................................................. 1,250,000
Cash paid for acquisition of SMG....................................... 2,357,314
---------------
Purchase price......................................................... $ 4,980,751
================
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......................................................... $ 4,980,751
Net assets acquired.................................................... (313,687)
Costs associated with the acquisition.................................. 189,000
---------------
Amount allocated to goodwill........................................... $ 4,856,064
===============
</TABLE>
In connection with the acquisition of the assets of SMG, the Company
issued promissory notes for $1,373,437 due in 1997 and placed in escrow
$1,250,000, in accordance with an escrow agreement for potential purchase price
adjustments in the event that, among other things, client retention fails to
meet certain targets.
In January 1995, the Company issued a subordinated note payable for
$1,200,000 as partial consideration for shares reacquired by the Company.
During February 1995, the Company and its stockholders entered into an
Agreement and Plan of Recapitalization whereby the Company's stockholders
exchanged a portion of their shares of common stock for approximately 166 shares
of Series A Participating Convertible Preferred Stock valued at approximately
$6,264,000.
During 1995, the Company acquired $334,054 of computer hardware and
software under a capital lease agreement.
The accompanying notes are an integral part of these consolidated
financial statements.
8
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Vincam Group, Inc. and its subsidiaries (the "Company") are a
professional employer organization ("PEO") engaged primarily in the provision of
human resource management and personnel administration services. In addition,
the Company provides certain managed care services, including managed behavioral
health care, employee assistance programs, drug-free workplace programs,
utilization review services, comprehensive workers' compensation managed care,
risk management and loss containment services.
The Company provides PEO services primarily to small and medium sized
companies in a variety of industries, including manufacturing, retail, and
hospitality. Managed care services are provided to PEO clients and to health and
workers' compensation insurance companies, health maintenance organizations,
other managed care providers and large, self insured employers.
PEO service contracts with client companies are generally for one year
terms with automatic renewal options and subject to termination on 30 days'
notice by either party during the first year and annually thereafter. Managed
care contracts with clients are for terms of one or more years and are subject
to cancellation by either party upon 30 to 180 days' notice depending on the
nature of the services provided.
The Company does not have a concentration of customers in any one
industry; however, during 1994, 1995 and 1996, a significant portion of the
Company's revenues were generated in South Florida. The Company's revenues are
generated predominantly by PEO services.
A summary of the significant accounting policies followed in the
preparation of the accompanying consolidated financial statements is presented
below:
PRINCIPLES OF CONSOLIDATION. The accompanying financial statements
include the accounts of The Vincam Group, Inc. and its principal subsidiaries,
Vincam Human Resources, Inc. ("VHR"), Vincam/Staff Administrators, Inc.
("VSAI"), Vincam/Amstaff, Inc. ("VAMI"), Psych/Care, Inc. ("Psych/Care") and
Vincam Occupational Health Services, Inc. ("VOHS"). All material intercompany
balances and transactions have been eliminated.
REVENUE RECOGNITION. Revenues and the related costs of wages, salaries,
and employment taxes from professional employer services related to worksite
employees are recognized in the period in which the employee performs the
service. Because the Company is at risk for all of its direct costs,
independently of whether payment is received from its clients, and consistent
with industry practice, all amounts billed to clients for gross salaries and
wages, related employment taxes, and health care and workers' compensation
coverage are recognized as revenue by the Company. The Company establishes a
reserve for doubtful accounts when it determines that collection from a client
is unlikely.
Revenues from behavioral health services are recognized during the
period in which the Company is obligated to provide behavioral health services
to participants. Revenues from risk management, loss containment and workers'
compensation managed care services are recognized in the period in which the
services are performed.
ACCOUNTING ESTIMATES. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
9
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
revenues and expenses during the reporting period. The more significant
estimates relate to the Company's reserve for claims. Actual results could
differ from those estimates.
RESERVE FOR CLAIMS. The Company's workers' compensation benefits and
certain of its health care benefits are provided under large deductible insured
plans. The Company records reserves for workers' compensation and health care
claims costs based on actuarial calculations using the Company's loss history of
workers' compensation and health care claims, including estimates of incurred
but not reported claims. Prior to 1994, the Company's workers' compensation
insurance was under a loss-sensitive retrospectively rated plan which provided
for retroactive premium adjustments based on actual loss experience.
In December 1996, VHR entered into an agreement with a national
insurance company to provide guaranteed fixed cost 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 will
record workers' compensation costs based primarily on the fixed portion of the
premium of its workers' compensation insurance policy.
In addition, in December 1996, VHR entered an agreement to reinsure its
remaining claims under the Company's large deductible workers' compensation
insurance policies for the years 1994, 1995, and 1996, for an aggregate premium
of $3,200,000. As a result, the Company has recorded the premium as a
reinsurance recoverable at December 31, 1996 and a deferred gain in the amount
of approximately $600,000 which will be recognized to income in future periods
based on the proportion of cumulative claims paid to the total estimated
liability for claims.
At December 31, 1995 and 1996, the Company has classified as current
the estimated amounts of reserves established for claims and reinsurance
recoverable expected to be paid and to be collected, respectively, within one
year, as well as the related deferred gain expected to be recognized within one
year.
RESERVES FOR OTHER STATE TAXES. The reserve for other state taxes has
been established for amounts expected to be due in connection with certain state
tax matters. The Company is presently in discussions with the state tax
authorities regarding these matters.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight line method over
the estimated useful lives of the respective assets. Repairs and maintenance are
charged to expense as incurred, while expenditures which extend the useful lives
of the assets are capitalized.
GOODWILL. Assets and liabilities acquired in connection with business
combinations accounted for under the purchase method are recorded at their
respective estimated fair values. Goodwill represents the excess of the purchase
price over the fair value of net assets acquired, including the recognition of
applicable deferred taxes, and is amortized on a straight-line basis over a 25
year period. The Company reviews long-lived assets, identifiable intangibles and
goodwill and reserves for impairment whenever events or changes in circumstances
indicate the carrying amount of the assets may not be fully recoverable. At
December 31, 1996, the Company had recorded goodwill of $4,791,836, net of
accumulated amortization of $64,228.
ADVERTISING COSTS. Advertising expenditures are charged to operations
as incurred. Advertising expense amounted to $333,600, $386,123 and $547,698 in
1994, 1995 and 1996, respectively.
CLIENT CONTRACTS. Costs incurred in connection with the acquisition of
client contracts from other professional employer organizations, as well as the
fair market value of contracts acquired in connection with purchase business
combinations, are capitalized and amortized using the straight line method over
a period of 5 to 15 years, based on the previous professional employer
organization client retention rate.
10
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
The Company periodically assesses the status of contracts acquired to determine
the future realizability of the capitalized costs. At December 31, 1995 and
1996, the Company had recorded client contracts of $117,440 and $1,430,951,
respectively (net of accumulated amortization of $0 in 1995 and $59,183 in
1996).
CASH AND CASH EQUIVALENTS. Cash equivalents include investments with
original maturities of three months or less and are stated at cost which
approximates market value.
INCOME TAXES. The Company records income tax expense using the
liability method of accounting for deferred income taxes. Under the liability
method, deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial statement
and income tax bases of the Company's assets and liabilities. An allowance is
recorded when it is more likely than not that any or all of a deferred tax asset
will not be realized. The provision for income taxes includes taxes currently
payable plus the net change during the year in deferred tax assets and
liabilities recorded by the Company.
The Company is subject to certain state taxes based on gross receipts,
payroll and taxable income within that state. Taxes based on gross receipts and
payroll are classified as salaries, wages and employment taxes of worksite
employees in the accompanying consolidated statements of income, while taxes
based on income are included in the provision for income taxes.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE. Net income per
common and common equivalent share has been computed based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during each of the three years ended December 31, 1996. The Company
has considered as outstanding common stock equivalents during each of the three
years ended December 31, 1996, options awarded to employees and directors of the
Company (see Notes 10 and 11), as well as the shares of common stock that have
been issued in connection with the SAI and AMI acquisitions. For purposes of the
calculation of net income per common and common equivalent share, the
mandatorily redeemable preferred stock is also considered a common stock
equivalent.
Net income per common and common equivalent share amounts for each of
the years presented have been calculated giving retroactive effect to an
approximate 8,417 to 1 stock split effected by the Company in June 1995 and a 3
for 4 split effected on February 21, 1996 (jointly, the "Stock Splits," see Note
10). All common and common equivalent share amounts have also been retroactively
adjusted to reflect the Stock Splits.
STOCK BASED COMPENSATION. Effective 1996, the Company adopted the
disclosure provisions of Statement of Financial Accounting Standard No. 123,
Accounting for Stock Based Compensation ("SFAS 123") and retained the intrinsic
value method of accounting for such stock based compensation (see Note 11).
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company estimates the fair
market value of financial instruments through the use of public market prices,
quotes from financial institutions and other available information. Considerable
judgment is required in interpreting data to develop estimates of market value
and, accordingly, amounts are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. At December 31, 1995 and
1996, the Company's financial instruments consist primarily of instruments
without extended maturities, the fair value of which, based on management's
estimates, equaled their carrying values.
11
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
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 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, $1,373,437 is
payable in 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. The SMG Acquisition was accounted for by the Company
using the purchase method of accounting. Excess of costs over the estimated fair
value of net assets acquired of $4,856,064 associated with the SMG Acquisition
was allocated to goodwill, and is being amortized over a period of 25 years. The
most significant adjustments to the balance sheet resulting from the SMG
Acquisition are disclosed in the supplemental disclosure of non-cash investing
and financing activities in the accompanying statement of cash flows.
The following information presents the unaudited pro forma consolidated
results of operations of the Company for the years ended December 31, 1995 and
1996 as if the SMG Acquisition had occurred on January 1, 1995, after giving
effect to certain adjustments.
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
Revenues ......................... $337,148,831 $505,567,360
============ ============
Net income ....................... $ 710,498 $ 2,508,064
============ ============
Net income per common and
common equivalent share ........ $ 0.06 $ 0.30
============ ============
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 acquisition actually occurred on January
1, 1995.
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 equity in SAI and its subsidiaries (other than Staff
Administrators of Western Colorado, Inc.). The transaction has been accounted
for in accordance with the pooling of interest 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, 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 will be reflected on the Company's balance sheet as of January 7,
1997 and will primarily consist of approximately $570,000 increase in goodwill
and $300,000 increase in client contracts.
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.
12
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
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 audited selected historical financial
information of Vincam (as reported in the Annual Report as reported on Form
10-k) and of SAI, AMI and Vincam for the years ended December 31, 1994, 1995 and
1996, and reflects the most significant adjustments resulting from the SAI and
AMI acquisitions.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------------------------------
VINCAM SAI & AMI ADJUSTMENTS RESULTS
------------------ ------------------ ---------------- ------------
<S> <C> <C> <C> <C>
Revenues ................... $ 191,532,568 $ 56,564,386 $ -- $248,096,954
================== ================== ================ ============
Net income ................. $ 1,799,950 $ (178,157) $ 123,080 $ 1,744,873
================== ================== ================ ============
Net income per common and
common equivalent share .. $ 0.27 $ -- $ -- $ 0.23
================== ================== ================ ============
DECEMBER 31, 1995
----------------------------------------------------------------------------
VINCAM SAI & AMI ADJUSTMENTS RESULTS
------------------ ------------------ ---------------- ------------
Revenues ................... $ 239,407,710 $ 99,489,640 $ -- $338,897,350
================== ================== ================ ============
Net income ................. $ 809,837 $ (975,164) $ 196,010 $ 30,683
================== ================== ================ ============
Net income per common and
common equivalent share .. $ 0.13 $ $ -- $ 0.00
================== ================== ================ ============
DECEMBER 31, 1996
----------------------------------------------------------------------------
VINCAM SAI & AMI ADJUSTMENTS RESULTS
------------------ ------------------ ---------------- ------------
Revenues ................... $ 395,619,538 $ 144,518,487 $ -- $540,138,025
================== ================== ================ ============
Net income ................. $ 3,585,976 $ (2,222,286) $ 514,250 $ 1,877,940
================== ================== ================ ============
Net income per common and
common equivalent share .. $ 0.46 $ -- $ -- $ 0.22
================== ================== ================ ============
</TABLE>
13
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
The following unaudited pro forma financial information is presented to reflect
the effect of the merger of AMI with a wholly owned sudsidiary of the Company,
which acquisition has been accounted for as a pooling of interest. The pro forma
financial information for each of the three years ended December 31, 1996,
assume that the merger was consummated on January 1, 1994. The pro forma
financial information is presented for informational purposes only and is not
necessarily indicative of the results that would have been achieved had the
merger actually been consummated on the date indicated or that may be obtained
in the future. The following pro forma adjustments to net income as reflected in
the consolidated statements of income herein presented relate to the recording
of the provision for income taxes as if AMI were taxed as a "C" corporation. The
adjustments apply the historical tax rate of the Company. The pro forma
adjustments result from the fact that AMI was taxed under the Subchapter S
provisions of the Internal Revenue Code before its acquisition by the Company.
See Note 12.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Net income reported in consolidated
statement of income....... $ 1,744,873 $ 30,683 $ 1,877,940
Pro forma adjustments:
Provision for taxes
Current.............. $ (29,600) $ (20,400) $ (46,700)
-------------- ------------- -------------
Pro forma net income........ $ 1,715,273 $ 10,283 $ 1,831,240
============== ============= =============
Pro forma net income per common
and common equivalent share $ 0.23 $ -- $ 0.21
============== ============= =============
</TABLE>
NOTE 3 - INITIAL PUBLIC OFFERING
In May 1996, the Company completed its initial public offering and
received proceeds of approximately $27,900,000, net of $2,100,000 underwriting
discounts and commissions, from the sale of 2,000,000 shares of common stock of
the Company. The Company used a portion of the proceeds to retire a subordinated
promissory note in the amount of $1,200,000 (see Note 8) and to pay a $700,000
distribution payable related to the Company's repurchase of an option to
purchase the Company's headquarters. In addition, the Company incurred
approximately $1,095,000 in other costs in connection with the offering.
Simultaneously with the completion of the initial public offering, the Company's
mandatorily redeemable Series A Participating Convertible Preferred Stock (the
"Series A Preferred Stock") was converted into 1,043,933 shares of the Company's
common stock (see Note 9).
Also in connection with the completion of the Company's initial public
offering, the Company amended and restated its Articles of Incorporation to
increase the authorized number of shares of the Company's common stock from
39,500,000 to 60,000,000, and to increase the authorized number of shares of
preferred stock from 500,000 to 20,000,000.
NOTE 4 - RESTRICTED CASH
The Company had cash deposits at December 31, 1995 and 1996 of
$5,290,955 and $1,081,917, respectively, which served as collateral on certain
standby letters of credit issued in connection with the Company's workers'
compensation insurance plan (see Note 7).
In connection with the SMG Acquisition, the Company has in escrow
$1,250,000. At December 31, 1996, the escrow funds have been classified as
restricted cash in the accompanying consolidated balance sheet (see Note 2).
NOTE 5 - ACCOUNTS RECEIVABLE
At December 31, 1995 and 1996, accounts receivable consisted of the
following:
1995 1996
------------ ------------
Billed to clients ....................... $ 3,619,855 $ 8,187,375
Unbilled revenues ....................... 7,372,784 16,781,168
------------ ------------
10,992,639 24,968,543
Less: allowance for doubtful account ... (184,591) (576,650)
------------ ------------
$ 10,808,048 $ 24,391,893
============ ============
14
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
1995 1996 (IN YEARS)
------------- ------------- ------------
<S> <C> <C> <C>
Land................................................... $ 284,374 $ 284,374
Building............................................... 775,158 775,158 30
Building and leasehold improvements.................... 618,917 755,749 7
Furniture and fixtures................................. 470,137 809,585 5
Office and computer equipment.......................... 1,678,594 3,423,624 3-5
Vehicles............................................... 158,370 199,068 3
-------------- -------------
3,985,550 6,247,558
Less: accumulated depreciation and amortization........ (1,025,362) (1,645,690)
------------- -------------
$ 2,960,188 $ 4,601,868
============= =============
</TABLE>
At December 31, 1995 and 1996, gross fixed assets included $346,690 and
$0 of office and computer equipment under capital lease obligations. The Company
purchased these assets during 1996. See Notes 8, 10 and 14.
NOTE 7 - RESERVE FOR CLAIMS
In December 1996, VHR 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 will record 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, VHR entered into agreements to reinsure
substantially all of the remaining claims under the Company's large deductible
worker's compensation insurance policies for the years 1994, 1995 and 1996, for
an aggregate premium of $3,200,000. Since reserves for claims for these years
have been previously provided, the Company has recorded the premium as a
reinsurance recoverable at December 31, 1996 and a deferred gain in the amount
of approximately $600,000 which will be recognized to income in future periods
based on the proportion of cumulative claims paid to the total estimated
liability for claims.
In connection with the reinsurance of claims exposure from 1994 to
1996, the insurance carrier has agreed to provide letters of credit in favor of
the Company's lender to guarantee outstanding letters of credit under the
Company's credit agreement (see Note 8).
As a consequence of the reinsurance agreement described above, at
December 31, 1996, the Company has classified as current the estimated amounts
of reserves established for claims and reinsurance recoverable expected to be
paid and to be collected, respectively, within one year, as well as the related
deferred gain expected to be recognized within one year.
At December 31, 1995 and 1996, the Company's reserves for claims costs
are as follows:
<TABLE>
<CAPTION>
1995 1996
------------- --------------
<S> <C> <C>
Accrued workers' compensation claims.................. $ 4,226,424 $ 7,161,630
Accrued health care claims............................ 784,182 1,119,109
Reserve for behavioral health care claims............. 296,385 525,465
-------------- --------------
5,306,991 8,806,204
Less: workers' compensation claims expected
to be settled in more than one year.................. (1,556,615) (3,154,438)
------------- --------------
Reserve for claims--current............................ $ 3,750,376 $ 5,651,766
============= ==============
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 8 - BORROWINGS
Borrowings at December 31, 1995 and 1996 are as follows: 1995 1996
-------------- --------------
<S> <C> <C>
Subordinated note payable in quarterly instalments of $150,000 beginning in
March 1998, interest due quarterly at the quoted rate for 1 year U.S. Treasury
Bills (7% at December 31, 1996), paid in June 1996............................... $ 1,200,000 --
Note payable to bank, original amount of $1 million, repayable in monthly
instalments of $4,167, plus interest at 8.50% per annum, through November 1998
when a balloon payment of $750,000 is due, secured by land and building.......... 895,732 841,561
Note payable for state unemployment taxes, maturing in 1998 with
monthly payments of $3,264....................................................... 207,647 55,489
Capital lease obligation for computer hardware and software, payable in monthly
instalments of $7,479 through May 2000, interest imputed at 12.30%
per annum, paid in September 1996................................................ 310,602 --
Other notes payable, bearing interest at rates ranging from 7.50% to 10.75%,
repayable in various monthly instalments......................................... 139,248 122,692
--------------- --------------
2,753,229 1,019,742
Less: current portion............................................................ (1,445,167) (136,053)
--------------- --------------
$ 1,308,062 $ 883,689
=============== =============
</TABLE>
The Company incurred interest expense of approximately $102,000,
$214,000 and $149,000 during 1994, 1995 and 1996, respectively.
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
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.
16
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
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 Company's prior revolving credit facility, the Company had
outstanding $6,250,000 in standby letters of credit at December 31, 1996, which
guarantee the payment of claims to the Company's workers' compensation insurance
carrier. As of that date there were no amounts outstanding for working capital
or advances to finance acquisitions under the revolving credit facility.
The Company also has $1,200,000 in standby letters of credit with a
separate bank at December 31, 1996, which guarantee the payment of workers'
compensation claims acquired upon the SAI Acquisition.
As of December 31, 1996, the scheduled annual maturities of the
Company's debt are summarized as follows:
1997................................. $ 136,053
1998................................. 844,050
1999................................. 22,411
2000................................. 15,285
2001................................. 1,943
-------------
$ 1,019,742
=============
NOTE 9 - MANDATORILY REDEEMABLE PREFERRED STOCK
The Company has authorized 20,000,000 shares of preferred stock with a
par value of $.01 per share. These shares can be issued from time to time, in
one or more series as authorized by the Company's Board of Directors.
During February 1995, the Company and its stockholders entered into an
Agreement and Plan of Recapitalization whereby the Company's stockholders
exchanged 1,043,933 (after adjusting for the effect of the Stock Splits) shares
of common stock for 165.376 shares of Series A Participating Convertible
Preferred Stock ("Series A Preferred Stock").
The Series A Preferred Stock was recorded at $6,263,610 in the
accompanying balance sheet as of December 31, 1995 based on its fair market
value on the date of issuance, as evidenced by the sale of Series A Preferred
Stock by the Company's principal stockholders to an unaffiliated party. Both the
fair market value and the costs incurred of approximately $445,000 in connection
with the recapitalization were charged to retained earnings at the time of the
transaction.
In accordance with the Recapitalization Agreement, the Series A
Preferred Stock was converted upon completion of the Company's initial public
offering into 1,043,933 shares of common stock, after adjusting retroactively
for the effects of the Stock Splits (see Note 3).
17
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 10 - STOCKHOLDERS' EQUITY
During June 1995, the Company increased its authorized common stock
from 500,000 shares to 39,500,000 shares and simultaneously effected an
approximate 8,417 to 1 stock split. On February 21, 1996, the Company effected a
3 for 4 reverse stock split. After the completion of the Company's initial
public offering, the Company amended and restated its Articles of Incorporation
to increase the authorized number of shares of the Company's common stock from
39,500,000 to 60,000,000, and to increase the authorized number of shares of
preferred stock from 500,000 to 20,000,000. All references in the financial
statements to per share amounts have been retroactively restated to reflect the
change in the number of common shares outstanding as a result of the Stock
Splits.
In connection with the stock split and increase in authorized shares
effected in June 1995, the Company reduced the par value of its common stock to
$.001 from $1.00.
In June 1993, CP Investments, Inc., an entity controlled by the
Company's principal stockholders, assigned to the Company an option which CP
Investments held to purchase, from a third party for $1,000,000, the land and
building which is owned by the Company and where the Company's headquarters are
located. In October 1993, the Company exercised the option and purchased the
land and building. As part of the assignment of the option, CP Investments
retained the right to purchase the land and building from the Company for
$1,000,000 for a ten year period.
Based on two independent appraisals of the land and building subject to
the previously described option, the Company valued the option at $700,000
(based on the difference between the market value of the building and its
November 1993 purchase price) and recorded a distribution to its principal
stockholders in June 1993. Because the transaction was entered into between
commonly controlled entities, the value of the option was not considered
additional basis in the building. Amounts due in connection with this
distribution have been recorded as distribution payable at December 31, 1995 and
paid in 1996 upon completion of the initial public offering.
In January 1995, the Company entered into an agreement to reacquire
certain of its outstanding shares from a minority shareholder. Under the terms
of the agreement, the Company acquired and canceled 249,342 shares of its common
stock, after adjusting for the effect of the Stock Splits, for $300,000 in cash
and a subordinated note for $1,200,000 (see Note 8). Simultaneously, the
Company's principal shareholders acquired 66,281 outstanding shares of the
Company's common stock, after adjusting for the effect of the Stock Splits, for
$400,000.
NOTE 11 - STOCK OPTION PLAN
In February 1996, the Company adopted the 1996 Long Term Incentive Plan
(the "1996 Plan") under which 800,000 shares of common stock, after adjusting
for the effect of the Stock Splits, were reserved for issuance upon exercise of
or in connection with stock options, stock appreciation rights, performance
awards, grants of restricted stock and other stock based or stock related
awards. The 1996 Plan provides for the grant of both incentive stock options and
nonqualified stock options, as well as other stock-based awards, to the
Company's directors, employees and consultants as determined in the discretion
of the Stock Option Committee. Under the 1996 Plan, incentive stock options and
nonqualified stock options may not be granted with an exercise price which is
less than 100% of the fair market value of the Company's shares of common stock
at the date of grant of the option.
18
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
In May 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan") under which 666,665 shares of common stock, after adjusting for the
effect of the Stock Splits, were reserved for issuance upon exercise of stock
options. The 1995 Plan provides for the grant of both incentive stock options
intended to qualify as such under Section 422 of the Internal Revenue Code
("incentive stock options") and nonqualified stock options to the directors,
officers, key employees, consultants and other individual contributors of or to
the Company and its subsidiaries, as determined in the discretion of the Stock
Option Committee. Under the 1995 Plan, incentive stock options and nonqualified
stock options may not be granted with an exercise price which is less than 100%
and 85%, respectively, of the fair market value of the Company's shares of
common stock at the date of grant of the option.
Stock options normally have a term of ten years and generally become
exercisable 40% after the second year from the date of grant and in instalments
of 5% quarterly thereafter.
19
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
The following table summarizes stock option activity:
WEIGHTED
EXERCISE AVERAGE
STOCK OPTION PRICE EXERCISE PRICE
------------ --------------- --------------
<S> <C> <C> <C>
Outstanding at January 1, 1995............ -- -- --
Granted.............................. 514,997 $ 3.00 - $3.33 $ 3.05
Canceled............................. -- -- --
Exercised............................ -- -- --
----------- ---------------- -------
Outstanding at December 31, 1995.......... 514,997 $ 3.00 - $3.33 $ 3.05
Granted.............................. 311,499 $4.67 - $33.13 $ 20.62
Canceled............................. (44,999) $3.00 - $8.05 $ 5.81
Exercised............................ (13,333) $3.00 $ 3.00
------------ --------------- -------
Outstanding at December 31, 1996.......... 768,164 $ 3.00 - $33.13 $ 9.81
============ =============== =======
Exercisable at:
December 31, 1995.................... 0 --
December 31, 1996.................... 40,000 $ 3.00
Available for grant at:
December 31, 1995.................... 951,668
December 31, 1996.................... 702,390
</TABLE>
The Company has adopted the disclosure provisions of SFAS 123. The
assumptions used in the calculation of the fair value of the options, using the
Black-Scholes method, issued to employees and directors of the Company during
1995 and 1996 were as follows:
1995 1996
------ -----
Expected life (years) 6.5 6.5
Interest rate.................................... 6.20% 6.20%
Volatility....................................... 55% 55%
Dividend yield................................... 0% 0%
20
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
Had compensation cost for the Company's two option plans been
determined based on fair market value at the grant date for awards in 1995 and
1996 using the straight line method to recognize such cost, the Company's net
income and net income per common equivalent share would have been reduced to the
pro forma amounts indicated below:
1995 1996
-------------- -----------
Pro forma net (loss) income .......... $ (68,265) $ 560,315
============== ===========
Pro forma net (loss) income per common
and common equivalent share ........ $ (0.01) $ 0.06
============== ===========
Weighted-average fair value of options granted during the year 1995 and
1996 was $1.86 and $14.05, respectively.
The following table summarizes stock option average grant date fair
value, and weighted average remaining contract life for options outstanding at
December 31, 1996:
WEIGHTED
AVERAGE REMAINING
RANGE OF NUMBER OF GRANT DATE CONTRACTUAL
EXERCISE PRICE OPTIONS FAIR VALUE LIFE
--------------- --------- ---------- -----------
$ 3.00 - $ 3.33 481,665 $ 1.87 7.5
$ 4.67 - $ 8.05 103,999 $ 5.46 9.5
$21.00 - $28.50 63,500 $16.23 9.5
$33.13 - $37.13 119,000 $24.17 10.0
-------
Stock options outstanding as
of December 31, 1996 768,164
========
21
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 12 - INCOME TAXES
The provision for federal and state income taxes consists of the following:
1994 1995 1996
----------- ----------- -----------
CURRENT
Federal ................. $ 1,197,871 $ 786,866 $ 1,294,182
State ................... 33,724 36,251 61,000
----------- ----------- -----------
1,397,353 823,117 1,355,182
----------- ----------- -----------
DEFERRED
Federal ................. (531,861) (741,880) (438,887)
State ................... (6,733) (27,741) (25,909)
----------- ----------- -----------
(538,594) (769,621) (464,796)
----------- ----------- -----------
Provision for income taxes ... $ 858,759 $ 53,496 $ 890,386
=========== =========== ===========
Subsequent to December 31, 1994, the Company requested and obtained a
change, for income tax purposes, in the method of accounting for its workers'
compensation loss reserves. As a result, the Company recorded a deferred tax
asset relating to the reserves and an increase in income taxes payable of
approximately $1,386,000. Also in December 1996, the Company requested a change,
for income tax purposes, in the method of accounting used by SAI for its
workers' compensation loss reserves. As a result, the Company recorded a
deferred tax asset relating to the reserves and an increase in income taxes
payable of approximately $775,000. Under the provisions of the Internal Revenue
Code ("IRC"), the Company can amortize over three years the payment of taxes due
for changes resulting in taxable income and can recognize currently deductions
resulting from the change in method. The Company has classified as long term
those taxes resulting from this change which it expects to pay in more than one
year.
Prior to June 30, 1997, Amstaff, Inc. was taxed under the Subchapter S
provisions of the 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 $123,000, $196,000 and $514,000 as of December 31, 1994,
1995 and 1996, respectively, in additional deferred tax assets, primarily
related to certain reserves for other state taxes and workers' compensation
claims.
22
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
The gross amounts of deferred tax assets and liabilities recorded in the
accompanying consolidated balance sheets at December 31, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
1995 1996
---------------- --------------
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts........................ $ 59,361 $ 167,301
Accrued health care claims............................. 222,422 315,897
Reserve for workers' compensation claims,
net of reinsurance recoverable....................... 973,788 934,078
Reserve for other state taxes.......................... 392,951 693,851
Accrued bonuses........................................ 47,088 --
Net operating losses................................... -- 142,826
Deferred compensation.................................. 89,420 --
Other.................................................. 59,356 25,273
---------------- --------------
$ 1,844,386 $ 2,279,226
================ ==============
Long term deferred tax assets and (liabilities):
Deferred compensation.................................. $ 100,062 8,878
Reserve for workers' compensation claims,
net of reinsurance recoverable....................... 566,505 737,158
Depreciation and amortization.......................... (20,498) (26,948)
Other.................................................. 57,406 14,343
---------------- --------------
$ 703,476 $ 733,431
================ ==============
</TABLE>
Realization of the above deferred tax assets is dependent on generating
sufficient taxable income in the future to offset the deductible temporary
differences generating the deferred tax assets. Although realization is not
assured, management believes that it is more likely than not that all of the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced if estimates of future taxable
income are reduced.
A reconciliation of the differences between income taxes computed at the
federal statutory tax rate and the income tax provisions reflected in the
accompanying consolidated statements of income is as follows:
1994 1995 1996
--------- --------- ---------
Income taxes computed at the federal
statutory tax rate of 34% .............. $ 885,235 $ 28,621 $ 941,230
State income taxes, net of federal
income tax effect ...................... 22,258 23,925 40,260
Other, net ............................. (48,734) 950 (91,104)
--------- --------- ---------
Provision for income taxes ............. $ 858,759 $ 53,496 $ 890,386
========= ========= =========
23
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution plan covering certain of its
worksite employees for a number of client companies. The Company contributes, on
behalf of each participating client, varying amounts based on client company
elections. Total Company contributions for the years ended December 31, 1994,
1995 and 1996 were $416,922, $550,776 and $1,065,072, respectively. The Company
also has a deferred savings plan covering all internal and worksite employees of
a subsidiary for which contributions are funded by the Company based on the
lesser of 20% of the employee deferrals or 1% of the employee gross wages. Total
Company contributions for the years ended December 31, 1994, 1995 and 1996 were
$35,000, $73,000 and $108,000, respectively.
In August 1996, the Company received a favorable determination letter from
the Internal Revenue Service ("IRS") regarding the qualified status of its
defined contribution plan under Section 401(k) of the IRC. In its application to
the IRS, the Company informed the IRS that the Company is involved in the
business of leasing employees to client companies and that the 401(k) plan
covered worksite or leased employees who satisfied the plan's eligibility
requirements.
The Company sponsors an unfunded deferred compensation plan (the "Deferred
Plan"). The Deferred Plan covers a selected group of employees as determined by
the Company's Board of Directors. The amounts due under the Deferred Plan are
based on bonuses granted by the Board of Directors, at its discretion at each
year end for that year's performance by the employee. Based on the awards
granted, the Company recorded compensation expense of $41,200 during 1994. No
deferred compensation expense was recognized during 1995 and 1996.
The amount of compensation subject to the Deferred Plan and the vesting
period for individual grants, or any changes thereto, is established by the
Company's Board of Directors. Deferred compensation amounts generally vest at
the end of three years from the date of award, provided the participant is
employed by the Company on such date. At December 31, 1996 the vesting schedule
under the Plan is as follows:
1997 $ 242,013
1998 41,200
---------
$ 283,213
=========
The Company has included these amounts within other liabilities in the
accompanying balance sheets as short term or long term based on the applicable
vesting dates. Of the above amounts, approximately $200,000 at December 31,
1996, relate to deferred compensation to the Company's principal stockholders.
All deferred compensation is expected to be paid in cash.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company has entered into non-compete agreements with its Chairman and
Vice-Chairman, who are also the Company's principal stockholders. The agreements
are for a term to be specified by the Company, not to exceed two years, in the
event of the Chairman's or Vice-Chairman's termination. The non-compete
agreements require payment to the Chairman and Vice-Chairman of their full
salary and benefits during the term of the agreement.
The Company leases certain office space, automobiles and office equipment
under non-cancelable operating leases expiring on various dates through the year
2018. Total rent expense
24
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
charged to operations during the years ended December 31, 1994, 1995 and 1996
was approximately $292,200, $508,300 and $638,200 respectively.
At December 31, 1996, the minimum annual rental commitments under the
previously described operating leases are as follows:
FOR THE YEAR ENDING
DECEMBER 31,
--------------------------------------------
1997........................ $ 977,776
1998........................ 788,860
1999........................ 547,959
2000........................ 373,699
2001........................ 324,025
Thereafter.................. 4,218,048
-------------
$ 7,230,367
=============
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 motion
for summary judgment on that basis was denied, and discovery in the 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 recently settled with
the Company's client worksite employee who had been a co-defendant 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
25
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
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
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.
See also Notes 1 and 7.
NOTE 15 - SUBSEQUENT EVENTS (UNAUDITED)
In March 1997, the Company entered into agreements with national insurance
companies to reinsure substantially all of the Company's responsibility for
remaining claims acquired upon the SAI Acquisition under SAI's large deductible
workers' compensation insurance policies for the years 1994, 1995, and 1996 for
an aggregate premium of $1,870,000. As a result, the Company has recorded a
deferred gain in the amount of approximately $600,000 which will be recognized
to income in future periods based on the proportion of cumulative claims paid to
the total estimated liability for claims.
In September 1997, the Company entered into agreements with national
insurance companies to reinsure substantially all of the Company's
responsibility for remaining claims acquired upon the AMI Acquisition under
AMI's large deductible workers' compensation insurance policies for the years
1995, and 1996 for an aggregate premium of $725,000. No gain resulted from this
transaction.
On June 30, 1997, the Company entered into an agreement with a health
insurance company to purchase a managed care provider network and to terminate
the strategic alliance with such health insurance company under which the
Company provided its workers' compensation managed care services. In connection
with the agreement, the Company made a payment of $1,000,000 and accounted for
such cost as a termination fee. The balance due under the agreement of
approximately $1,400,000
26
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
will be payable in the fourth quarter of 1997 upon delivery of the managed care
provider network, and will be capitalized.
On October 27, 1997, the Company announced that it has entered into a
definitive merger agreement with Staffing Network, Inc. ("SNI"), a
privately-held PEO headquartered in Manchester, N.H. with approximately 525
clients and more than 5,000 worksite employees. The Company will issue 1,200,000
million shares of its common stock in exchange for all of the equity of SNI. The
merger will be accounted as a pooling of interest transaction and is expected to
close in the fourth quarter of 1997 following receipt of required regulatory
approvals.
* * * * * *
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto contained herein, the
Consolidated Financial Statements and the Notes thereto and the Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing in the 1996 Annual Report on Form 10-K and the Current Report on Form
8-K dated May 8, 1997, filed by The Vincam Group, Inc.("Vincam" or the
"Company").
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 8-K. 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
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.
28
<PAGE>
OVERVIEW
Vincam, one of the largest 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 standard PEO services agreement provides for an initial one
year term, subject to termination by the Company or the client at any time
during the first year upon 30 days' prior written notice. Thereafter, the
contract may be terminated upon 30 days' notice given prior to the expiration of
the renewal term or immediately for cause. Revenues from professional employer
services are based on a pricing model that takes into account the gross pay of
each employee and a mark-up which includes the estimated costs of federal and
state employment taxes, workers' compensation, employee benefits and the human
resource administrative services, as well as a provision for profit. The
specific mark-up varies by client based on the workers' compensation
classification of the worksite employees and their eligibility for health care
benefits. Accordingly, the Company's average mark-up percentage will fluctuate
based on client mix, which cannot be predicted with any degree of certainty.
Specialty managed care revenues are generated from a variety of risk-bearing,
capitated, and fee-based arrangements.
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. 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.
See Notes 1 and 7 of the Notes to Consolidated Financial Statements. 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
29
<PAGE>
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 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. In December
1996, the Company entered into arrangements 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 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.
State unemployment taxes are based on rates which vary from state to state.
Generally they are subject to certain minimum rates, but the aggregate rates
payable by an employer are affected by the employer's claims history. The
Company controls unemployment claims by aggressively contesting unfounded claims
and, when possible, quickly returning employees to work by reassigning them to
other worksites.
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 profitability is largely dependent upon its success in
managing its controllable direct costs. The Company manages its controllable
direct costs through its use of (i) its proprietary managed care system, which
includes provider networks, utilization review and case management, (ii)
educational programs designed to reduce the severity and frequency of workplace
accidents, and (iii) a variety of other techniques, including return to work
programs, drug-free workplace programs, involvement in hiring, disciplinary and
termination decisions, adjudication of unemployment claims, and reassignment of
laid off workers.
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 14 of
Notes to Consolidated Financial Statements contained in Item 5, Other Events
of this Current Report on Form 8-K.
RECENT DEVELOPMENTS
In December 1996, the Company entered into an arrangement with Reliance
National Insurance Company ("Reliance National") to provide workers'
compensation insurance coverage for 1997 through 1999, at a substantially fixed
cost, subject to a deductible of only $2,000 per medical only claim. Management
believes that under this policy, the Company's workers' compensation costs will
be at a rate which is lower than that historically incurred by the Company under
its large deductible workers' compensation insurance policy. In addition, the
policy is anticipated to enhance the predictability of the Company's workers'
compensation costs because it substantially eliminates the sensitivity of such
costs to the ongoing loss development and payment of workers' compensation
claims and related reserve adjustments beyond the $2,000 deductible per medical
only claim.
30
<PAGE>
The Company's premium for 1997 is estimated at $6.2 million subject to
adjustment depending on changes in the Company's payroll and other factors. The
premium paid by the Company in December 1996 is reflected as prepaid workers'
compensation insurance premium in the Company's balance sheet at December 31,
1996 and will be amortized over the 1997 policy year. The Company intends to
continue to manage its workers' compensation costs in order to permit it to take
advantage of its right to elect to assume Reliance National's responsibility for
claims up to the first $250,000. In the event of such assumption, the Company
would be paid the excess of a loss fund, if any, which is calculated each year,
over amounts paid by Reliance National with respect to such claims. Also, in
December 1996, March 1997 and September 1997, the Company entered into
agreements with Reliance National and Commercial Risk Re-Insurance Company to
reinsure substantially all of the Company's responsibility for remaining claims
under the Company's large deductible workers' compensation insurance policies
for the years 1994, 1995, and 1996 (including remaining claims of SAI and AMI,
but not those of SMG prior to the date of its acquisition by the Company) for an
aggregate premium of $5.8 million. As a result, the Company has recorded a
deferred gain in the amount of approximately $1.2 million which will be
recognized to income in future periods based on the proportion of cumulative
claims paid to the total estimated liability for claims. Effective January 1,
1997, the Company will record workers' compensation costs based primarily on the
fixed portion of the cost of the policy with Reliance National. See Notes 1 and
7 of the Notes to Consolidated Financial Statements.
In April 1997, the Company entered into a three-year revolving $50 million
credit facility (the "Credit Agreement") with a groups of banks for which Fleet
National Bank acted as an agent. See "Liquidity and Capital Resources" below and
Note 8 of the Notes to Consolidated Financial Statements.
In August 1996, the Company acquired substantially all of the assets and
liabilities of SMG in an acquisition accounted for as a purchase, and in January
1997 and in June 1997 the Company acquired SAI and AMI, respectively, by merger
in acquisitions accounted for as a pooling of interests. See Note 2 of Notes to
Consolidated Financial Statements. The financial condition and results of
operations discussed below include the results of operations since September 1,
1996 of the business acquired from SMG and, accordingly, affects the
comparability of the Company's 1996 results of operations to those of prior
years. The financial information discussed below in "Results of Operations" and
"Liquidity and Capital Resources" includes the operations of SAI and AMI for
periods prior to the SAI and AMI acquisitions. The Company recognized
nonrecurring transaction expenses of approximately $165,000 in the first quarter
of 1997 resulting from the SAI Acquisition and $1.1 million in the second
quarter of 1997 resulting from the AMI Acquisition. Summary financial
information for SAI and AMI on an historical basis and a combined basis with the
Company is set forth below:
31
<PAGE>
SAI SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR END DECEMBER 31,
--------------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT STATISTICAL DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues......................................... $ 33,310 $ 55,824 $ 77,976
========= ========= =========
Gross profit..................................... $ 1,841 $ 2,714 $ 3,212
========= ========= =========
Operating income (loss) (1)...................... $ 74 $ (891) $ (1,490)
========= ========= =========
Net income (loss) (1)............................ $ 54 $ (557) $ (893)
========= ========= =========
STATISTICAL DATA:
Worksite employees at period end................. 1,617 2,669 3,464
PEO clients at period end........................ 118 189 231
Average number of worksite employees per PEO
client company at period end................... 14 14 15
Gross profit margin.............................. 5.53% 4.84% 4.12%
<FN>
- ----------
(1) SAI losses are primarily attributable to workers' compensation and health
care costs and general and administrative expenses. Commencing on the date of
acquisition, SAI worksite employees are covered under the Company's fixed cost
workers' compensation policy.
</FN>
</TABLE>
AMI SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR END DECEMBER 31,
--------------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT STATISTICAL DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues ........................................ $ 23,253 $ 43,665 $ 66,542
========= ========= =========
Gross profit .................................... $ 1,177 $ 2,177 $ 2,642
========= ========= =========
Operating loss (2) .............................. $ (219) $ (417) $ (1,244)
========= ========= =========
Net loss (2) .................................... $ (232) $ (418) $ (1,329)
========= ========= =========
STATISTICAL DATA:
Worksite employees at period end ................ 1,334 1,740 2,839
PEO clients at period end ....................... 85 116 150
Average number of worksite employees per PEO
client company at period end .................. 15 15 18
Gross profit margin ............................. 4.27% 4.99% 5.06%
<FN>
- ----------
(1) AMI losses are primarily attributable to workers' compensation and health
care costs and general and administrative expenses and to high salary expenses
payable primarily to AMI's former president and sole shareholder. Commencing on
the date of acquisition, AMI worksite employees are covered under the Company's
fixed cost workers' compensation policy.
</FN>
</TABLE>
<PAGE>
SAI, AMI AND THE COMPANY SUMMARY COMBINED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR END DECEMBER 31,
--------------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT STATISTICAL DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues........................................... $ 248,097 $ 338,897 $ 540,138
========= ========= =========
Gross profit....................................... $ 13,733 $ 17,835 $ 31,437
========= ========= =========
Operating income................................... $ 2,607 $ (67) $ 2,069
========= ========= =========
Net income......................................... $ 1,745 $ 31 $ 1,878
========= ========= =========
Net income per common and common equivalent share.. $ 0.23 $ 0.00 $ 0.22
========= ========= =========
STATISTICAL DATA:
Worksite employees at period end................... 11,541 15,800 27,409
PEO client companies at period end................. 488 644 1,059
Average number of worksite employees per PEO
client company at period end..................... 23 24 25
Gross profit margin................................ 5.53% 5.26% 5.82%
</TABLE>
32
<PAGE>
On June 30, 1997, the Company entered into an agreement with a health
insurance company to purchase a managed care provider network and to terminate
the strategic alliance with such health insurance company under which the
Company provided its workers' compensation managed care services. In connection
with the purchase of the provider network and the related termination of the
strategic alliance, the Company made a payment of $1,000,000. The balance of the
purchase price of approximately $1,400,000 will be payable in the fourth quarter
of 1997 and will be capitalized.
RESULTS OF OPERATIONS
The following table sets forth, for each of 1994, 1995 and 1996, certain
selected income statement data expressed as a percentage of revenues:
<TABLE>
<CAPTION>
AS A PERCENT OF REVENUES
-----------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- --------- --------
<S> <C> <C> <C>
Revenues.......................................... 100.0% 100.0% 100.0%
--------- --------- --------
Direct costs:
Salaries, wages and employment taxes of
worksite employees........................... 88.0% 88.8% 88.4%
Health care and workers' compensation.......... 5.6% 5.1% 4.7%
State unemployment taxes and other............. 0.9% 0.8% 1.0%
--------- --------- --------
Total direct costs........................... 94.5% 94.7% 94.1%
--------- --------- --------
Gross profit...................................... 5.5% 5.3% 5.9%
--------- --------- --------
Operating expenses:
Administrative personnel....................... 2.2% 2.7% 2.8%
Other general and administrative, including
provision for doubtful accounts.............. 1.5% 1.7% 1.6%
Sales and marketing............................ 0.7% 0.8% 0.9%
Depreciation and amortization.................. 0.1% 0.1% 0.2%
--------- --------- --------
Total operating expenses..................... 4.4% 4.3% 5.4%
--------- --------- --------
Operating income.................................. 1.1% 0.0% 0.5%
Interest income (expense), net.................... .00% 0.0% 0.1%
--------- --------- --------
Income before taxes............................... 1.0% 0.0% 0.6%
Provision for income taxes........................ 0.3% 0.0% 0.2%
--------- --------- --------
Net income........................................ 0.7% 0.0% 0.4%
========= ========= ========
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's revenues for the year ended December 31, 1996 were $540.1
million compared to $338.9 million for the year ended December 31, 1995,
representing an increase of $201.2 million, or 59.4%. This increase was due
primarily to an increased number of PEO clients and worksite employees. In
addition, $16.1 million of the increase is attributable to the operations of
SMG. Between December 31, 1995 and December 31, 1996, the number of PEO clients
increased by 64.4%, from 644 to 1,059, of which 137 were acquired from SMG. The
number of worksite employees increased 73.5% over the same period, from 15,800
worksite employees to 27,409, of which 1,987 were acquired from SMG.
Salaries, wages and employment taxes of worksite employees were $477.7
million for 1996, compared to $301.0 million for 1995, representing an increase
of $176.7 million, or 58.7%. Salaries, wages and employment taxes of worksite
employees were 88.4% of revenues for 1996, compared to
33
<PAGE>
88.8% for 1995. The decrease of salaries, wages and employment taxes of
worksite employees as a percentage of revenues was due mainly to incremental
revenues from the Company's specialty managed care services.
Health care and workers' compensation costs were $25.7 million for 1996,
compared to $17.3 million for 1995, representing an increase of $8.4 million, or
48.6%. This increase was due mainly to the higher volume of health care and
workers' compensation claims paid and/or reserved during 1996 which was a direct
function of the increase of PEO clients and worksite employees. Health care and
workers' compensation costs were 4.7% of revenues for 1996, compared to 5.1% for
1995. The decrease of health care and workers' compensation costs as a
percentage of revenues was due mainly to improved effectiveness in managing the
frequency and severity of workers' compensation and health care costs and
incremental revenues from the Company's specialty managed care services.
State unemployment taxes and other direct costs were $5.3 million for 1996,
compared to $2.9 million for 1995, representing an increase of $2.4 million or
82.8%. This increase was due mainly to the higher volume of salaries and wages
paid during 1996 which was a direct function of the increase 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 1996, compared to 0.8% for 1995, primarily due to increases in
other direct costs.
Gross profit was $31.4 million for 1996, compared to $17.8 million for
1995, representing an increase of $13.6 million, or 76.4%, due mainly to the
increase in revenues resulting from an increase of PEO clients and worksite
employees. Gross profit was 5.9% of revenues for 1996, compared to 5.3% for
1995. This increase was due mainly to the Company's effectiveness in managing
the frequency and severity of workers' compensation and health care costs and an
increase in revenues from the Company's specialty managed care services which
carry a higher margin than the Company's PEO services.
Administrative personnel expenses were $15.3 million for 1996, compared to
$9.2 million for 1995, representing an increase of $6.1 million, or 66.3%. This
increase was primarily attributable to increased staffing to support the
Company's future growth, including management and senior executive personnel.
Administrative personnel expenses were 2.8% of revenues for the 1996, compared
to 2.7% for 1995. 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.
Other general and administrative expenses, including the provision for
doubtful accounts, were $8.2 million for 1996, compared to $5.6 million for
1995, representing an increase of $2.6 million, or 46.4%. This increase in other
general and administrative expenses was primarily attributable to the growth of
the Company's business and the addition of workers' compensation managed care
services, which the Company made available to external clients for the first
time in 1995. Other general and administrative expenses, including the provision
for doubtful accounts, were 1.6% of revenues for 1996, compared to 1.7% for
1995.
Sales and marketing costs were $5.0 million for 1996, compared to $2.7
million for 1995, representing an increase of $2.3 million, or 81.7%. 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 0.9% of revenues
for 1996, compared to 0.8% for 1995.
Net income was $1.9 million for 1996, compared to $30,683 for 1995,
representing an increase of $1.9 million, or 6,020.5%. Earnings per share were
$0.22 for 1996, compared to $0.00 for 1995, representing an increase of $0.22,
or 2,200.0%.
34
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's revenues were $338.9 million for the year ended December 31,
1995, compared to $248.1 million for the year ended December 31, 1994,
representing an increase of $90.8 million, or 36.6%. This increase was due
primarily to an increased number of PEO clients and worksite employees. Between
December 31, 1994 and December 31, 1995, the number of PEO clients increased
36.9%, from 11,541 to 15,800. The number of worksite employees increased 32.0%
over the same period, from 488 worksite employees to 644.
Salaries, wages and employment taxes of worksite employees were $301.0
million for 1995, compared to $218.4 million for 1994, representing an increase
of $82.6 million, or 37.8%. Salaries, wages and employment taxes of worksite
employees were 88.8% of revenues for 1995, compared to 88.0% for 1994. Salaries,
wages and employment taxes of worksite employees increased as a percentage of
revenues as a result of a change in the Company's client mix towards clients
having more favorable workers' compensation risk profiles which allows the
Company to charge a lower markup.
Health care and workers' compensation costs were $17.3 million for 1995,
compared to $13.8 million for 1994, representing an increase of $3.5 million, or
25.4%. Health care and workers' compensation costs were 5.1% of revenues for
1995, compared to 5.6% for 1994. This decrease was due primarily to improved
efficiency in managing the frequency and severity of workers' compensation
claims.
State unemployment taxes and other direct costs were $2.7 million for 1995,
compared to $2.2 million for 1994, representing and increase of $0.5 million, or
22.7%. This increase was due mainly to the increase in revenues. State
unemployment taxes and other direct costs were 0.8% of revenues for 1995,
compared to 0.9% for 1994. This decrease of state unemployment taxes and other
direct costs as a percentage of revenues was due primarily to improved
efficiency in managing state unemployment insurance claims.
Gross profit was $17.8 million for 1995, compared to $13.7 million for
1994, representing an increase of $4.1 million, or 29.9%. Gross profit was 5.3%
of revenues for 1995, compared to 5.5% for 1994. This decrease was due primarily
to the loss of a high margin contract with a significant behavioral health
client in the third quarter of 1994 as a result of that client's acquisition by
a third party. This contract represented approximately $0.8 million in gross
profit during 1994.
Administrative personnel expenses were $9.2 million for 1995, compared to
$5.4 million for 1994, representing an increase of $3.8 million, or 70.4%. Of
this increase, approximately $1.4 million was primarily attributable to
increased staffing for the Company's workers' compensation managed care
services, which were made available to external clients for the first time in
1995. The balance was primarily attributable to an increase in corporate
management personnel and other general and administrative expenses related to
the growth described above. Administrative personnel expenses were 2.7% of
revenues for 1995, compared to 2.2% for 1994.
Other general and administrative expenses, including provision for doubtful
accounts, were $5.6 million for 1995, compared to $3.6 million for 1994,
representing an increase of $2.0 million, or 55.6%. Other general and
administrative expenses, including provision for doubtful accounts, were 1.3% of
revenues for 1995, compared to 1.5% for 1994.
Sales and marketing costs were $2.7 million for 1995, compared to $1.8
million for 1994, representing an increase of $0.9 million, or 50.0%. The
increase reflects the addition of sales executives and a senior vice president
of sales and marketing. Sales and marketing cost were 0.8% of revenues for 1996,
compared to 0.7% for 1994.
35
<PAGE>
Net income was $30,683 for 1995, compared to $1.7 million for 1994,
representing a decrease of $1.7 million, or 5,529.0%. Earnings per share were
$0.00 for 1995, compared to $0.23 for 1994, representing a decrease of $0.23, or
2,300.0%.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $20.7 million,
compared to $0.7 million at December 31, 1995. The increase was due primarily to
the Company's initial public offering in May 1996 of 2,000,000 shares of common
stock from which the Company received proceeds of $26.9 million, net of $3.1
million of underwriting discounts, commissions and offering expenses. The
Company had $19.9 million in cash at December 31, 1996. Of this amount, $2.3
million is restricted. (See Note 4 of Notes to Consolidated Financial
Statements). Under the Company's prior credit facility, the Company had
outstanding $6.3 million in stand by letters of credit at December 31, 1996
which guaranteed the payment of claims to the Company's previous workers'
compensation carrier. As of that date, there were no amounts outstanding for
working capital advances or under the acquisition loan facility and are amounts
under these facilities were available at December 31, 1996. The Company entered
into a new Credit Agreement in April in 1997, replacing the one that was in
place at December 31, 1996.
The Company's current 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 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 had $1.2 million in standby letters of credit with
another bank at December 31, 1996, which guarantee the payment of workers'
compensation claims acquired upon the SAI Acquisition to SAI former workers'
compensation insurance carrier.
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
36
<PAGE>
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 $3.4 million for the year ended
December 31, 1996, compared to cash provided by operating activities of
approximately $2.7 million for the same period in 1995. The difference between
the Company's net income of $1.9 million for the year ended December 31, 1996,
and its negative operating cash flow was due primarily to a $13.1 million
increase in accounts receivable, a $3.2 million increase in reinsurance
recoverable, an increase in prepaid workers' compensation insurance premium of
$5.5 million, partially reduced by noncash items such as depreciation and
amortization of $0.9 million, provision for doubtful accounts of $0.4 million
and recognition of deferred gain of $0.6 million, a decrease in restricted cash
of $4.2 million, an increase in accrued salaries, wages, and payroll taxes of
$7.1 million, and a decrease in accounts payable and accrued expenses of $1.6
million. The increase in accounts receivable resulted from both a higher number
of PEO clients and worksite employees served during 1996 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 increase
in reinsurance recoverable was due mainly to the transfer of substantially all
of the Company's responsibility for remaining claims under its large deductible
workers' compensation policies for 1994, 1995 and 1996.
Net cash used in investing activities was $5.4 million for the year ended
December 31, 1996, compared to $1.6 million used in investing activities in the
same period in 1995. This reflects payment of $2.2 million due under the SMG
Acquisition agreement, and $2.4 million in expenditures for property and
equipment to support the Company's growth.
Net cash provided by financing activities was $24.3 million for the year
ended December 31, 1996, compared to $0.6 million used in financing activities
in the same period in 1995. The 1996 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.
37
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
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.
38
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
(c) Exhibits
EXHIBIT
NO. DESCRIPTION
------- -----------
11 Statement re Computation of Per Share Earnings
23.1 Consent of Price Waterhouse LLP
27.1 Restated Financial Data Schedule for the year ended December
31, 1996
27.2 Restated Financial Data Schedule for the nine months ended
September 30, 1996
27.3 Restated Financial Data Schedule for the six months ended
June 30, 1996
27.4 Restated Financial Data Schedule for the three months ended
March 31, 1996
27.5 Restated Financial Data Schedule for the year ended December
31, 1995
27.6 Restated Financial Data Schedule for the year ended December
31, 1994
39
<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, hereunto duly authorized.
THE VINCAM GROUP, INC.
NOVEMBER 5, 1997 By: /s/ JOHN CARLEN
- ---------------- --------------------------------------------------
Date John Carlen, President and Chief Operating Officer
(Principal Executive Officer)
NOVEMBER 5, 1997 By: /s/ STEPHEN L. WAECHTER
- ---------------- --------------------------------------------------
Date Stephen L. Waechter, Chief Financial Officer,
Senior Vice President Finance and Administration
(Principal Financial Officer)
40
<PAGE>
THE VINCAM GROUP, INC.
FORM 8-K
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
11 Statement re Computation of Per Share Earnings
23 Consent of Price Waterhouse LLP
27.1 Restated Financial Data Schedule for the year ended December 31, 1996
27.2 Restated Financial Data Schedule for the nine months ended September 30, 1996
27.3 Restated Financial Data Schedule for the six months ended June 30, 1996
27.4 Restated Financial Data Schedule for the three months ended March 31, 1996
27.5 Restated Financial Data Schedule for the year ended December 31, 1995
27.6 Restated Financial Data Schedule for the year ended December 31, 1994
</TABLE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
THE VINCAM GROUP, INC.
CALCULATION OF NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE
1994 1995 1996
---------- ---------- ----------
Net income ............................. $1,744,873 $ 30,683 $1,877,940
========== ========== ==========
Weighted average number of common
shares outstanding during the period . 7,134,503 5,971,450 7,725,055
Assumed exercise of stock options, net
of treasury shares acquired .......... 460,316 460,316 516,164
Issuance of mandatorily redeemable
preferred stock deemed a common
stock equivalent ..................... -- 927,414 454,754
---------- ---------- ----------
Weighted average number of shares
used in earnings per share calculation 7,594,819 7,359,180 8,695,973
========== ========== ==========
Net income per common and common
equivalent share ..................... $ 0.23 $ 0.00 $ 0.22
========== ========== ==========
Fully diluted net income per common
and common equivalent share* .......... $ 0.23 $ 0.00 $ 0.22
========== ========== ==========
- ----------------
* 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%.
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-08003) and the Registration Statement on
Form S-3 (File No. 333-26929) of The Vincam Group, Inc. of our report dated
February 21, 1997, except as to the pooling of interest with Amstaff, Inc.
which is as of June 30, 1997, which appears on page 3 of The Vincam Group,
Inc.'s Current Report on Form 8-K dated November 5, 1997.
/s/ PRICE WATERHOUSE LLP
--------------------
Miami, Florida
November 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE VINCAM GROUP, INC. FOR YEAR ENDED
DECEMBER 31, 1996 INCLUDED IN THIS CURRENT REPORT ON FORM 8-K AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,522,030
<SECURITIES> 149,626
<RECEIVABLES> 24,968,543
<ALLOWANCES> 576,650
<INVENTORY> 0
<CURRENT-ASSETS> 55,349,903
<PP&E> 6,247,558
<DEPRECIATION> 1,645,690
<TOTAL-ASSETS> 68,635,214
<CURRENT-LIABILITIES> 34,609,840
<BONDS> 0
0
0
<COMMON> 8,013
<OTHER-SE> 28,623,987
<TOTAL-LIABILITY-AND-EQUITY> 68,635,214
<SALES> 540,138,025
<TOTAL-REVENUES> 540,138,025
<CGS> 0
<TOTAL-COSTS> 508,700,615
<OTHER-EXPENSES> 29,368,736
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147,131
<INCOME-PRETAX> 2,768,326
<INCOME-TAX> 890,386
<INCOME-CONTINUING> 1,877,940
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,877,940
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 6,919,549
<SECURITIES> 733,653
<RECEIVABLES> 12,521,901
<ALLOWANCES> 328,591
<INVENTORY> 0
<CURRENT-ASSETS> 22,674,457
<PP&E> 4,426,904
<DEPRECIATION> 1,168,629
<TOTAL-ASSETS> 27,259,963
<CURRENT-LIABILITIES> 23,350,813
<BONDS> 0
0
0
<COMMON> 4,956
<OTHER-SE> (6,626,864)
<TOTAL-LIABILITY-AND-EQUITY> 27,259,963
<SALES> 111,930,313
<TOTAL-REVENUES> 111,930,313
<CGS> 0
<TOTAL-COSTS> 105,774,060
<OTHER-EXPENSES> 5,797,227
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,565
<INCOME-PRETAX> 363,124
<INCOME-TAX> 119,703
<INCOME-CONTINUING> 243,421
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 243,421
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 32,859,583
<SECURITIES> 395,193
<RECEIVABLES> 15,013,532
<ALLOWANCES> 384,775
<INVENTORY> 0
<CURRENT-ASSETS> 51,473,698
<PP&E> 4,872,412
<DEPRECIATION> 1,339,237
<TOTAL-ASSETS> 56,438,227
<CURRENT-LIABILITIES> 24,371,186
<BONDS> 0
0
0
<COMMON> 8,000
<OTHER-SE> 27,307,977
<TOTAL-LIABILITY-AND-EQUITY> 56,438,227
<SALES> 236,454,486
<TOTAL-REVENUES> 236,454,486
<CGS> 0
<TOTAL-COSTS> 223,090,153
<OTHER-EXPENSES> 12,424,745
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,436
<INCOME-PRETAX> 1,118,794
<INCOME-TAX> 142,373
<INCOME-CONTINUING> 976,421
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 976,421
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 28,920,031
<SECURITIES> 402,735
<RECEIVABLES> 16,759,911
<ALLOWANCES> 370,833
<INVENTORY> 0
<CURRENT-ASSETS> 49,612,825
<PP&E> 5,358,485
<DEPRECIATION> 1,522,589
<TOTAL-ASSETS> 61,138,517
<CURRENT-LIABILITIES> 28,416,914
<BONDS> 0
0
0
<COMMON> 8,000
<OTHER-SE> 27,480,019
<TOTAL-LIABILITY-AND-EQUITY> 61,138,517
<SALES> 371,954,723
<TOTAL-REVENUES> 371,954,723
<CGS> 0
<TOTAL-COSTS> 350,513,017
<OTHER-EXPENSES> 20,154,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148,685
<INCOME-PRETAX> 1,805,702
<INCOME-TAX> 529,979
<INCOME-CONTINUING> 1,275,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,275,723
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE VINCAM GROUP, INC. FOR YEAR ENDED
DECEMBER 31, 1995 INCLUDED IN THIS CURRENT REPORT ON FORM 8-K AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,964,581
<SECURITIES> 639,232
<RECEIVABLES> 10,992,639
<ALLOWANCES> 184,591
<INVENTORY> 0
<CURRENT-ASSETS> 21,447,509
<PP&E> 3,985,550
<DEPRECIATION> 1,025,362
<TOTAL-ASSETS> 25,552,907
<CURRENT-LIABILITIES> 20,750,491
<BONDS> 0
0
0
<COMMON> 4,956
<OTHER-SE> (6,235,105)
<TOTAL-LIABILITY-AND-EQUITY> 25,552,907
<SALES> 338,897,350
<TOTAL-REVENUES> 338,897,350
<CGS> 0
<TOTAL-COSTS> 321,062,652
<OTHER-EXPENSES> 17,902,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 183,242
<INCOME-PRETAX> 84,179
<INCOME-TAX> 53,496
<INCOME-CONTINUING> 30,683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,683
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE VINCAM GROUP, INC. FOR YEAR ENDED
DECEMBER 31, 1995 INCLUDED IN THIS CURRENT REPORT ON FORM 8-K AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,497,789
<SECURITIES> 0
<RECEIVABLES> 7,645,081
<ALLOWANCES> 84,747
<INVENTORY> 0
<CURRENT-ASSETS> 16,035,722
<PP&E> 2,990,051
<DEPRECIATION> 579,324
<TOTAL-ASSETS> 19,614,582
<CURRENT-LIABILITIES> 12,772,027
<BONDS> 0
0
0
<COMMON> 6,249
<OTHER-SE> 1,998,887
<TOTAL-LIABILITY-AND-EQUITY> 19,614,582
<SALES> 248,096,954
<TOTAL-REVENUES> 248,096,954
<CGS> 0
<TOTAL-COSTS> 234,364,263
<OTHER-EXPENSES> 11,125,339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96,572
<INCOME-PRETAX> 2,603,632
<INCOME-TAX> 858,759
<INCOME-CONTINUING> 1,744,873
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,744,873
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
