<PAGE>
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): May 8,1996
------------
THE VINCAM GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 0-28148 59-2452823
- ------------------------------- ------------------------ -------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
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
--------------------------------------------------------------
(Former name and former address, if changed since last report)
1
<PAGE>
ITEM 5. OTHER EVENTS
On January 7, 1997, The Vincam Group, Inc. (the "Company") acquired Staff
Administrators, Inc. ("SAI"), a privately held professional employer
organization ("PEO") headquartered in Denver, Colorado (the "SAI Acquisition").
The Company issued 500,000 shares of its common stock in exchange for all of the
outstanding shares of common stock of SAI. The transaction has been accounted
for in accordance with the pooling of interests accounting treatment;
accordingly, all prior period financial statements presented herein have been
retroactively restated to include the assets and liabilities and results of
operations of SAI. In connection with the acquisition of SAI, the Company also
acquired, in a transaction accounted for as a purchase, a 49% minority interest
in Staff Administrators of Western Colorado, Inc. ("SAWCI"), a 51% subsidiary of
SAI (the "SAWCI Acquisition"). The Company issued 20,000 shares of its common
stock for the 49% interest in SAWCI.
The 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 SAI.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES
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
2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The Vincam Group, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index 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 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
each of the three years in the period ended December 31, 1996. Those statements
were audited by other auditors whose report thereon has been furnished to us,
and our opinion expressed herein, insofar as it relates to the amounts included
for 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.
PRICE WATERHOUSE LLP
Miami, Florida
February 21, 1997
3
<PAGE>
THE VINCAM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1995 1996
------------- -------------
Assets
Current assets:
Cash and cash equivalents.................... $ 1,169,570 $ 16,374,288
Investments.................................. 639,232 149,626
Restricted cash.............................. 5,290,955 2,331,917
Accounts receivable ........................ 9,569,376 22,111,756
Due from affiliates.......................... 187,323 235,927
Deferred taxes............................... 1,440,682 1,457,280
Reinsurance recoverable...................... -- 1,728,000
Prepaid worker' compensation insurance
premium..................................... -- 5,483,972
Prepaid expenses and other current assets.... 489,834 784,159
------------ -------------
Total current assets.................. 18,786,972 50,656,925
Property and equipment, net.................. 2,686,977 4,164,596
Deferred taxes............................... 694,678 628,626
Reinsurance recoverable...................... -- 1,472,000
Client contracts and other assets............ 441,735 1,686,176
Goodwill, net of accumulated amortization
of $64,228.................................. -- 4,791,836
------------- -------------
$ 22,610,362 $ 63,400,159
============= =============
Liabilities and Stockholders' (Deficit) Equity
Current liabilities:
Accounts payable and accrued expenses........ $ 2,857,208 $ 3,406,633
Accrued salaries, wages and payroll taxes.... 8,054,486 15,364,364
Amounts due under acquisition agreement ..... -- 2,623,437
Reserve for claims........................... 3,562,876 5,085,016
Income taxes payable......................... 638,487 1,307,576
Current portion of long term borrowings...... 1,412,121 89,167
Distribution payable......................... 700,000 --
Deferred compensation........................ 263,000 242,013
Deferred gain................................ -- 323,157
------------- -------------
Total current liabilities............. 17,488,178 28,441,363
Long term borrowings, less current portion..... 1,243,610 807,883
Reserve for claims............................. 1,556,615 2,846,188
Income taxes payable........................... 1,386,323 672,818
Deferred compensation, due principally
to stockholders............................... 294,300 41,200
Deferred gain.................................. -- 275,275
Other liabilities.............................. 45,338 45,338
------------- -------------
Total liabilities..................... 22,014,364 33,130,065
------------- -------------
Preferred stock, $.01 par value, 20,000,000
shares authoized, 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
and shares issued and outstanding in 1995
and 1996, respectively........................ 4,956 8,013
Additional paid in capital..................... -- 33,241,867
Accumulated deficit............................ (5,672,568) (2,979,786)
------------- -------------
Total stockholders' (deficit) equity.. (5,667,612) 30,270,094
------------- -------------
$ 22,610,362 $ 63,400,159
============= =============
4
<PAGE>
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues......................................... $224,843,043 $295,231,926 $473,595,457
------------- ------------- -------------
Direct costs:
Salaries, wages and employment
taxes of worksite employees................ 198,162,489 262,186,958 417,718,271
Health care and workers' compensation........ 12,212,883 15,330,888 22,861,174
State unemployment taxes and other........... 1,911,734 2,056,824 4,220,633
------------- ------------- -------------
Total direct costs.................... 212,287,106 279,574,670 444,800,078
------------- ------------- -------------
Gross profit..................................... 12,555,937 15,657,256 28,795,379
------------- ------------- -------------
Operating expenses:
Administrative personnel..................... 4,663,598 7,571,833 13,041,095
Other general and administrative............. 2,617,433 3,924,233 5,911,572
Sales and marketing.......................... 2,190,923 3,247,650 5,290,693
Provision for doubtful accounts.............. 40,000 189,090 434,300
Depreciation and amortization................ 217,977 375,078 805,331
------------- ------------- -------------
Total operating expenses.............. 9,729,931 15,307,884 25,482,991
------------- ------------- -------------
Operating income................................. 2,826,006 349,372 3,312,388
Interest (expense) income, net................... 911 142,834 696,707
------------- ------------- -------------
Income before taxes.............................. 2,826,917 492,206 4,009,095
Provision for income taxes....................... (972,881) (239,417) (1,316,313)
------------- ------------- -------------
Net income ...................................... $ 1,854,036 $ 252,789 $ 2,692,782
============= ============= =============
Net income per common and common
equivalent share............................. $ 0.26 $ 0.04 $ 0.32
============= ============= =============
Weighted average number of shares
outstanding used in earnings per
share calculation............................ 7,229,657 6,994,018 8,330,811
============ ============= =============
</TABLE>
5
<PAGE>
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
------------------------- Paid in (Accumulated
Shares Par Value Capital Deficit) Total
----------- ----------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994....................... 6,249,341 $ 6,249 $ 42,156 $ 385,918 $ 434,323
Net income....................................... -- -- -- 1,854,036 1,854,036
----------- ----------- -------------- --------------- -------------
Balance at December 31, 1994..................... 6,249,341 6,249 42,156 2,239,954 2,288,359
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)
Net income....................................... -- -- -- 252,789 252,789
----------- ----------- -------------- --------------- -------------
Balance at December 31, 1995..................... 4,956,066 4,956 -- (5,672,568) (5,667,612)
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
Net income....................................... -- -- -- 2,692,782 2,692,782
------------ ----------- -------------- --------------- -------------
Balance at December 31, 1996..................... 8,013,332 $ 8,013 $ 33,241,867 $ (2,979,786) $ 30,270,094
============ =========== ============== =============== =============
</TABLE>
6
<PAGE>
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 1,854,036 $ 252,789 $ 2,692,782
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 217,977 375,078 805,331
Provision for doubtful accounts.......................... 40,000 189,090 434,300
Deferred gain............................................ -- -- 598,432
Deferred income tax (benefit) expense.................... (415,514) (573,611) 49,454
Changes in assets and liabilities:
(Increase) decrease in restricted cash................. (2,952,582) 79,579 4,209,038
Increase in accounts receivable........................ (2,312,498) (2,946,817) (12,093,493)
Increase in due from affiliates........................ (68,504) (8,350) (48,604)
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....................................... (51,204) (314,716) (292,369)
Increase in other assets............................... (81,658) (41,361) (197,460)
Increase in accounts payable and
accrued expenses..................................... 434,120 1,297,576 187,204
Increase in accrued salaries, wages and payroll taxes. 1,792,881 1,811,101 6,085,090
Increase in reserve for claims......................... 2,212,782 1,688,475 2,381,243
Increase (decrease) in income taxes payable............ 189,096 345,593 (44,416)
Decrease in deferred compensation...................... -- -- (274,087)
Increase (decrease) in other liabilities............... 25,104 (40,000) --
------------- ------------- -------------
Net cash provided by (used in) operating activities........... 884,036 2,114,426 (4,191,527)
------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment........................ (797,592) (519,775) (2,117,133)
Acquisition of client contracts............................ -- (117,440) (29,295)
(Issuance) collection of notes receivable from stockholders (123,078) 123,078 --
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)
Cash paid in acquisition of minority interest.............. (8,105) -- --
(Purchase) redemption of short term investments............ (271,166) (639,232) 489,606
------------- ------------- -------------
Net cash used in investing activities......................... (1,199,941) (1,153,369) (5,126,388)
------------- ------------- -------------
Cash flows from financing activities:
Principal payments on borrowings........................... (215,716) (107,157) (1,758,681)
Recapitalization costs..................................... -- (445,150) --
Cash paid in connection with acquisition of stock.......... -- (300,000) --
Issuance of common stock, net of transaction
costs of $3,058,685...................................... -- -- 26,941,315
Payment of distribution payable............................ -- -- (700,000)
Issuance of common stock to employees under stock plans.... -- -- 39,999
------------- ------------- -------------
Net cash (used in) provided by financing activities........... (215,716) (852,307) 24,522,633
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents.......... (531,621) 108,750 15,204,718
Cash and cash equivalents, beginning of year.................. 1,592,441 1,060,820 1,169,570
------------- ------------- -------------
Cash and cash equivalents, end of year........................ $ 1,060,820 $ 1,169,570 $ 16,374,288
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest............................................... $ 91,941 $ 183,242 $ 138,101
============= ============= =============
Income taxes........................................... $ 1,017,438 $ 473,010 $ 1,155,366
============= ============= =============
</TABLE>
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 were as follows:
Fair value of net assets acquired:
Client contracts.................................... $ 1,300,000
Accounts receivable................................. 883,187
Property and equipment.............................. 10,231
--------------
Fair value of non-cash assets acquired.............. 2,193,418
--------------
Accounts payable and accrued expenses............... 362,221
Accrued salaries, wages and payroll taxes........... 1,224,788
Other liabilities................................... 430,470
--------------
Fair value of liabilities assumed................... 2,017,479
--------------
Fair value of net assets acquired, excluding cash... 175,939
Cash acquired....................................... 137,748
--------------
Fair value of 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
==============
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.
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 ("Vincam" or 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 a 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. ("SAI"),
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 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.
9
<PAGE>
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, the Company 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, the Company entered into an agreement to
reinsure its remaining claims, other than those acquired upon the SAI
Acquisition (see Note 2), 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 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.
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.
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.
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 term of the client contracts and/or the
previous professional employer organization client retention rate. 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
10
<PAGE>
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). 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 for 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.
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 will be
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.
11
<PAGE>
On January 7, 1997, the Company acquired Staff Administrators, Inc.
("SAI"), a privately held PEO headquartered in Denver, Colorado. The Company
issued 500,000 shares of its common stock in exchange for all of the outstanding
shares of common stock of SAI. The transaction has been accounted for in
accordance with the pooling of interests accounting treatment; accordingly, all
prior period financial statements presented herein have been retroactively
restated to include the assets and liabilities and results of operations of SAI.
In connection with the acquisition of SAI, the Company also acquired, in a
transaction accounted for as a purchase, a 49% minority interest in Staff
Administrators of Western Colorado, Inc. ("SAWCI"), a 51% subsidiary of SAI (the
"SAWCI Acquisition"). The Company also 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 include an increase in goodwill of
$566,641 and an increase in client contracts of $301,848.
The following combines audited selected historical financial information of
SAI and Vincam for the years ended December 31, 1994, 1995 and 1996, and
reflects the most significant adjustments resulting from the SAI Acquisition.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------------------
POOLED
VINCAM SAI ADJUSTMENTS RESULTS
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues..................... $191,532,568 $ 33,310,475 $ -- $224,843,043
============= ============= ============= =============
Net income................... $ 1,799,950 $ 54,086 $ -- $ 1,854,036
============= ============= ============= =============
Net income per common and
common equivalent share.... $ 0.27 $ -- $ -- $ 0.26
============= ============= ============= =============
DECEMBER 31, 1995
-------------------------------------------------------------
POOLED
VINCAM SAI ADJUSTMENTS RESULTS
------------- ------------- ------------- -------------
Revenues..................... $239,407,710 $ 55,824,216 $ -- $295,231,926
============= ============= ============= =============
Net income................... $ 809,837 $ (557,048) $ -- $ 252,789
============= ============= ============= =============
Net income per common and
common equivalent share.... $ 0.13 $ -- $ -- $ 0.04
============= ============= ============= =============
DECEMBER 31, 1996
-------------------------------------------------------------
POOLED
VINCAM SAI ADJUSTMENTS RESULTS
------------- ------------- ------------- -------------
Revenues..................... $395,619,538 $ 77,9754,919 $ -- $473,595,457
============= ============= ============= =============
Net income................... $ 3,585,976 $ (893,194) $ -- $ 2,692,782
============= ============= ============= =============
Net income per common and
common equivalent share.... $ 0.46 $ -- $ -- $ 0.32
============= ============= ============= =============
</TABLE>
12
<PAGE>
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 $960,000 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 Notes 7 and 8).
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 ........................ $ 3,188,922 $ 7,935,584
Unbilled revenues ........................ 6,565,045 14,752,822
------------ ------------
9,753,967 22,688,406
Less: allowance for doubtful accounts.... (184,591) (576,650)
------------ ------------
$ 9,569,376 $22,111,756
============ ============
13
<PAGE>
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
Estimated
Useful
Lives
1995 1996 (In Years)
------------ ------------ ----------
Land................................ $ 284,374 $ 284,374
Building............................ 775,158 775,158 30
Building improvements............... 529,146 551,012 7
Furniture and fixtures.............. 369,782 747,227 5
Office and computer equipment....... 1,512,077 3,240,515 3-5
Vehicles............................ 43,188 20,249 3
------------ ------------
3,513,725 5,618,535
Less: accumulated depreciation
and amortization (826,748) (1,453,939)
------------ ------------
$ 2,686,977 $ 4,164,596
============ ============
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, the Company entered into an agreement with a national
insurance company to provide workers' compensation insurance coverage for 1997
through 1999, subject to a deductible of $2,000 per medical only claim.
Accordingly, effective January 1, 1997, the Company 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, the Company entered into agreements to
reinsure substantially all of the remaining claims, other than those acquired
upon the SAI Acquisition, 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. 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 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 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 to the Company's
previous workers' compensation insurance provider 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:
1995 1996
----------- -----------
Accrued workers' compensation claims.................. $4,168,924 $6,476,630
Accrued health care claims............................ 654,182 929,109
Reserve for behavioral health care claims............. 296,385 525,465
----------- -----------
5,119,491 7,931,204
Less: workers' compensation claims expected
to be settled in more than one year (1,556,615) (2,846,188)
----------- -----------
Reserve for claims--current $3,562,876 $5,085,016
=========== ===========
14
<PAGE>
Note 8 - Borrowings
Borrowings at December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Subordinated note payable in quarterly installments 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 8.5% 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
Notes payable to an affiliate................................................ 41,750 --
Capital lease obligation for computer hardware and software,
payable in monthly instalments of $7,479 through May 2000,
interest imputed at 12.3% per annum, paid in September 1996.................. 310,602 --
-------------- --------------
2,655,731 897,050
Less: current portion (1,412,121) (89,167)
-------------- --------------
$ 1,243,610 $ 807,883
============== ==============
</TABLE>
The Company incurred interest expense of approximately $97,000, $205,000
and $142,000 during 1994, 1995 and 1996, respectively.
In June 1996, the Company amended its existing credit agreement with a bank
(as amended, the "Credit Agreement") and increased the amount available under
the Credit Agreement to $13,000,000. The Credit Agreement provides for a
revolving credit facility with a sublimit of $8,000,000 to fund working capital
advances and standby letters of credit. Working capital advances under the
revolving credit facility are limited to the lesser of $2,000,000 or the
Borrowing Base, primarily composed of current accounts receivable from unrelated
parties. Amounts outstanding under the revolving credit facility mature December
31, 1997.
The Credit Agreement also has an acquisition loan facility with a sublimit
of $5,000,000. Draws under the acquisition loan facility are available through
June 5, 1998, and are repayable in 36 equal monthly instalments from starting on
June 5, 1998. The Company is charged fees of .25% to .375% per annum on any
unused portion of the acquisition loan facility.
The Credit Agreement is collateralized by substantially all of the assets
of the Company and $4,100,959 in letters of credit issued by an insurance
company in connection with the Company's reinsurance of prior years' claims (see
Note 7). 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 and interest coverage, net worth and other financial ratios.
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 1.50%
to 2.00%, depending on certain financial covenants.
15
<PAGE>
Under the 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 under the working capital advance or
under the acquisition loan facilities. All amounts under these facilities were
available at December 31, 1996.
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
long term debt are summarized as follows:
1997............. $ 89,167
1998............. 807,883
----------
$ 897,050
==========
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).
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 for 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 million, 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.
16
<PAGE>
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.
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.
17
<PAGE>
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.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
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%
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 income $ 190,097 $1,379,222
=========== ===========
Pro forma net income per common
and common equivalent share $ 0.03 $ 0.17
=========== ===========
Weighted-average fair value of options granted during the year 1995 and
1996 was $1.86 and $14.05, respectively.
18
<PAGE>
The following table summarizes stock option average grant date fair value,
and weighted average remaining contract life for options outstanding at December
31, 1996:
<TABLE>
<CAPTION>
Weighted Average Remaining
Range of Number of Grant Date Contractual
Exercise Price Options Fair Value Life
--------------------- --------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
$ 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
===============
</TABLE>
Note 12 - Income Taxes
The provision for federal and state income taxes consists of the following:
1994 1995 1996
------------- ------------- -------------
Current
Federal.............. $ 1,354,671 $ 776,777 $ 1,205,859
State................ 33,724 36,251 61,000
------------- ------------- -------------
1,388,395 813,028 1,266,859
------------- ------------- -------------
Deferred
Federal.............. (408,781) (545,870) 75,363
State...... ......... (6,733) (27,741) (25,909)
------------- ------------- -------------
(415,514) (573,611) 49,454
------------- ------------- -------------
Provision for income taxes $ 972,881 $ 239,417 $ 1,316,313
============= ============= =============
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.
19
<PAGE>
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:
1995 1996
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 ............ 963,035 805,983
Accrued bonuses ............................. 47,088 --
Net operating losses ........................ -- 142,826
Deferred compensation ....................... 89,420 --
Other ....................................... 59,356 25,273
------------ ------------
$ 1,440,682 $ 1,457,280
============ ============
Long term deferred tax assets and (liabilities):
Deferred compensation ....................... $ 100,062 8,878
Reserve for workers' compensation claims,
net of reinsurance recoverable ............ 557,708 632,353
Depreciation and amortization ............... (20,498) (26,948)
Other ....................................... 57,406 14,343
------------ ------------
$ 694,678 $ 628,626
============ ============
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:
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes computed at federal statutory
rate of 34% ..................................... $ 961,151 $ 167,350 $ 1,390,290
State income taxes, net of federal income tax effect 19,599 (12,766) (3,675)
Other, net ......................................... (7,869) 84,833 (70,302)
------------ ------------ ------------
Provision for income taxes ......................... $ 972,881 $ 239,417 $ 1,316,313
============ ============ ============
</TABLE>
20
<PAGE>
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.
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.
21
<PAGE>
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
2000. Total rent expense charged to operations during the years ended
December 31, 1994, 1995 and 1996 was approximately $224,000, $385,000 and
$427,100, 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......................... $ 605,884
1998......................... 434,319
1999......................... 220,072
2000......................... 62,183
2001......................... 28,497
--------------
Total $ 1,350,955
==============
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. Discovery in the
22
<PAGE>
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 is a co-defendant in the litigation. 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. Based on consultations with the Company's counsel,
management of the Company believes that it has meritorious defenses to the
plaintiff's claims and that if the lawsuit is adversely determined, the Company
may be entitled to indemnification from its client and/or its liability
insurance carrier. Although management believes that the Company's ultimate
liability in this matter should not be material, there can be no assurance that
the Company will prevail in the litigation, in a related claim for
indemnification, or that the liability of the Company, if any, would not have a
material adverse effect on the Company's financial condition and results of
operations.
In October 1996, the Company received a notice of assessment in the
discounted amount of approximately $53,500 from The Treasurer of the State of
Florida Department of Insurance as Receiver of United States Employer Consumer
Self Insurance Fund of Florida, a workers compensation insurance fund which was
declared insolvent (the "Fund"). The Company paid the discounted assessment in
January 1997. The Company had certain worksite employees covered by the Fund
during 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 $37.0 million 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 has meritorious defenses to the assessment
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.
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.
23
<PAGE>
Note 15 - Quarterly Information (Unaudited)
The following table presents unaudited quarterly operating results for the
two years ended December 31, 1996. The Company believes that all necessary
adjustments have been included in the amounts stated below to present fairly the
quarterly results when read in conjunction with the Consolidated Financial
Statements and Notes thereto for the years ended December 31, 1995 and 1996.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full year or predictive of future periods.
<TABLE>
<CAPTION>
1995 1996
Quarter Ended Quarter Ended
-------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Statement of Income Data:
Revenues..................... $ 66,481 $ 70,051 $ 72,940 $ 85,761 $ 96,970 $108,574 $118,794 $149,258
========= ========= ========= ========= ========= ========= ========= =========
Gross profit................. 3,585 3,735 3,537 4,801 5,696 6,330 7,454 9,315
========= ========= ========= ========= ========= ========= ========= =========
Operating income (loss)...... 226 1 (148) 272 554 610 786 1,364
========= ========= ========= ========= ========= ========= ========= =========
Net income (loss)............ $ 305 $ (71) $ (170) $ 189 $ 370 $ 666 $ 594 $ 1,062
========= ========= ========= ========= ========= ========= ========= =========
Net Income Per Common and
Common Equivalent Share..... $ 0.04 $ (0.01) $ (0.02) $ 0.03 $ 0.05 $ 0.08 $ 0.07 $ 0.12
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Note 16 - Subsequent Events (Unaudited)
In April 1997, the Company entered into a new three-year $50 million
revolving credit facility with a group banks.
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.
* * * * * *
24
<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 Notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations appering in the
1996 Annual Report on Form 10-K, 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 Current Report
on Form 8-K and the Company's 1996 Annual Report on Form 10-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 (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.
Overview
Vincam, one of the largest professional employer organizations ("PEOs") in
the industry, provides small and medium-sized businesses with an outsourcing
solution to the complexities and costs related to employment and human
resources. The Company's continuum of integrated employment-related services
consists of human resource administration, employment regulatory compliance
management, workers' compensation coverage, health care and other employee
benefits. The Company establishes a co-employer relationship with its clients
and contractually assumes substantial employer responsibilities with respect to
worksite employees. In addition, the Company offers certain specialty managed
care services on a stand-alone basis to health and workers' compensation
insurance companies, HMOs, managed care providers and large, self-insured
employers.
25
<PAGE>
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 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. Workers' compensation costs for 1994, 1995 and 1996 also
include reserves for claims which have been incurred but not reported and for
anticipated loss development. The Company has recently entered into an
arrangement with an insurance company under which substantially all of the cost
of the Company's workers' compensation coverage for the years 1997 to 1999 is
fixed. Additionally, the Company 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. See "Recent Developments" below.
26
<PAGE>
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.
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.
The Company's premium for 1997 is estimated at $5.5 million without giving
effect to the SAI Acquisition, 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. The amount of the loss fund for 1997 is currently
estimated at $4.2 million. Also in December 1996 and March 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 (other than claims of SMG
prior to the date of its acquisition by the Company) for an aggregate premium of
$5.1 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, 7 and 16 of the Notes to
Consolidated Financial Statements.
27
<PAGE>
During 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 the Company acquired SAI by merger in an acquisition accounted for as a
pooling of interests. See Item 1, "Business--Recent Acquisitions," and 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" has been retroactively restated to include the
assets and liabilities and results of operations of SAI for the periods
presented herein. The Company recognized nonrecurring transaction expenses of
approximately $165,000 in the first quarter of 1997 resulting from the SAI
Acquisition.
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:
Year Ended December 31,
1994 1995 1996
-------- -------- --------
Revenues ............................................ 100.0% 100.0% 100.0%
-------- -------- --------
Direct costs:
Salaries, wages and employment taxes of
worksite employees ............................. 88.1% 88.8% 88.2%
Health care and workers' compensation ............ 5.4% 5.2% 4.8%
State unemployment taxes and other ............... 0.9% 0.7% 0.9%
-------- -------- --------
Total direct costs ............................. 94.4% 94.7% 93.9%
-------- -------- --------
Gross profit ........................................ 5.6% 5.3% 6.1%
-------- -------- --------
Operating expenses:
Administrative personnel ......................... 2.1% 2.6% 2.8%
Other general and administrative, including
provision for doubtful accounts ................ 1.2% 1.4% 1.3%
Sales and marketing .............................. 0.9% 1.1% 1.1%
Depreciation and amortization .................... 0.1% 0.1% 0.2%
-------- -------- --------
Total operating expenses ....................... 4.3% 5.2% 5.4%
-------- -------- --------
Operating income .................................... 1.3% 0.1% 0.7%
Interest income (expense), net ...................... 0% 0.1% 0.2%
-------- -------- --------
Income before taxes ................................. 1.3% 0.2% 0.9%
Provision for income taxes .......................... 0.5% 0.1% 0.3%
-------- -------- --------
Net income .......................................... 0.8% 0.1% 0.6%
======== ======== ========
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
- ---------------------------------------------------------------------------
The Company's revenues for the year ended December 31, 1996 were $473.6
million compared to $295.2 million for the year ended December 31, 1995,
representing an increase of $178.4 million, or 60.4%. 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 72.2%, from 528 to 909, of which 137 were acquired from SMG. The
number of worksite employees increased 74.8% over the same period, from 14,060
worksite employees to 24,570, of which 1,987 were acquired from SMG. In
addition, the Company earned approximately $3.7 million of revenues from its
workers' compensation managed care services during 1996, compared to
approximately $570,000 during 1995. This increase in workers' compensation
managed care service revenues from year to year resulted from an increased
number of workers' compensation managed care clients. Of the Company's workers'
compensation managed care service revenues of $3.7 million, approximately $2.6
million resulted from services provided to one new client in 1996.
28
<PAGE>
Salaries, wages and employment taxes of worksite employees were $417.7
million for 1996, compared to $262.2 million for 1995, representing an increase
of $155.5 million, or 59.3%. Salaries, wages and employment taxes of worksite
employees were 88.2% of revenues for 1996, compared to 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 $22.9 million for 1996,
compared to $15.3 million for 1995, representing an increase of $7.5 million, or
49.1%. 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 4.8% of revenues for 1996, compared to 5.2% 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 $4.2 million for 1996,
compared to $2.1 million for 1995, representing an increase of $2.2 million or
105.2%. 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 Compan's specialty managed
care services. State unemployment taxes and other direct costs were 0.9% of
revenues for 1996, compared to 0.7% for 1995, primarily due to increases in
other direct costs.
Gross profit was $28.8 million for 1996, compared to $15.7 million for
1995, representing an increase of $13.1 million, or 83.9%, due mainly to the
increase in revenues resulting from an increase in the number of PEO clients and
worksite employees. Gross profit was 6.1% 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 $13.1 million for 1996, compared to
$7.6 million for 1995, representing an increase of $5.5 million, or 72.2%. This
increase was primarily attributable to increased staffing to support the
Company's growth, including management and senior executive personnel. The
Company anticipates that this trend in administrative personnel expenses will
continue in future periods as a result of the Company's growth and the expansion
of its service offerings. Administrative personnel expenses were 2.8% of
revenues for the 1996, compared to 2.6% for 1995.
Other general and administrative expenses, including the provision for
doubtful accounts, were $6.3 million for 1996, compared to $4.1 million for
1995, representing an increase of $2.2 million, or 54.3%. 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 1.3% of revenues for 1996, compared to 1.4% for
1995.
Sales and marketing costs were $5.3 million for 1996, compared to $3.3
million for 1995, representing an increase of $2.0 million, or 62.3%. The
increase reflects the addition of sales executives and marketing personnel,
consistent with the Company's strategy to increase its client base in its
existing markets. Sales and marketing costs were 1.1% of revenues for 1996,
compared to 1.1% for 1995.
Net income was $2.7 million for 1996, compared to $0.3 million for 1995,
representing an increase of $2.4 million, or 965.2%. Earnings per share were
$0.32 for 1996, compared to $0.04 for 1995, representing an increase of $0.28,
or 700.0%.
29
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
- ---------------------------------------------------------------------
The Company's revenues were $295.2 million for the year ended December 31,
1995, compared to $224.8 million for the year ended December 31, 1994,
representing an increase of $70.4 million, or 31.3%. 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
31.0%, from 403 to 528. The number of worksite employees increased 32.6% over
the same period, from 10,207 worksite employees to 14,060. In addition, the
Company earned approximately $570,000 of revenues from its workers' compensation
managed care services in 1995, the first year such services were offered.
Salaries, wages and employment taxes of worksite employees were $262.2
million for 1995, compared to $198.2 million for 1994, representing an increase
of $64.0 million, or 32.3%. Salaries, wages and employment taxes of worksite
employees were 88.8% of revenues for 1995, compared to 88.1% 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 $15.3 million for 1995,
compared to $12.2 million for 1994, representing an increase of $3.1 million, or
25.5%. Health care and workers' compensation costs were 5.2% of revenues for
1995, compared to 5.4% 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 relatively unchanged
from 1994 to 1995. State unemployment taxes and other direct costs were 0.7% of
revenues for 1995, compared to 0.9% for 1994. This decrease is due primarily to
improved efficiency in managing state unemployment insurance claims.
Gross profit was $15.7 million for 1995, compared to $12.6 million for
1994, representing an increase of $3.1 million, or 24.7%. Gross profit was 5.3%
of revenues for 1995, compared to 5.6% 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 $7.6 million for 1995, compared to
$4.7 million for 1994, representing an increase of $2.9 million, or 62.4%. 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 2.6% of
revenues for 1995, compared to 2.1% for 1994.
Other general and administrative expenses, including provision for doubtful
accounts, were $4.1 million for 1995, compared to $2.7 million for 1994,
representing an increase of $1.5 million, or 54.8%. Other general and
administrative expenses were 1.4% of revenues for 1995, compared to 1.2% for
1994.
Sales and marketing costs were $3.2 million for 1995, compared to $2.2
million for 1994, representing an increase of $1.1 million, or 48.2%. Sales and
marketing costs were 1.1% of revenues for 1995, compared to 0.9% of revenues for
1994. The increase reflects the addition of sales executives and a senior vice
president of sales and marketing.
Net income was $0.3 million for 1995, compared to $1.9 million for 1994,
representing a decrease of $1.6 million, or 86.4%. Earnings per share were $0.04
for 1995, compared to $0.26 for 1994, representing a decrease of $0.22, or
84.6%.
30
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At December 31, 1996, the Company had working capital of $22.2 million,
compared to $1.3 million at December 31, 1995. The increase was primarily due 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 $18.7 million in cash at December 31, 1996. Of this amount, $2.3
million was restricted (see Note 2 of Notes to Consolidated Financial
Statements).
The Company's Amended and Restated Credit Agreement with Fleet National
Bank ("Fleet Bank") provided for a $13.0 million revolving line of credit of
which (i) an aggregate of $8.0 million is available for standby letters of
credit and revolving credit loans for working capital purposes (which working
capital loans were limited to the lesser of $2.0 million or the "borrowing
base," an amount equal to 85% of current accounts receivable from unrelated
parties), and (ii) $5.0 million was available 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 bore interest at rates
based on Fleet Bank's Prime Rate plus a margin of as much as 0.25% or its
Eurodollar Rate (as defined in the Amended and Restated Credit Agreement) plus a
margin of 1.50% to 2.00%, depending on certain financial covenants, at the
Company's option. The facility was secured by substantially all of the Company's
assets other than the Company's headquarters building. Revolving credit loans
and standby letters of credit were scheduled to mature on December 31, 1997 and
acquisition loans were to be repayable in 36 equal monthly installments
commencing June 5, 1998. Draws against the acquisition line of credit could be
made through June 5, 1998 and were scheduled to mature not later than June 5,
2001. The credit facility contained covenants that, among other things, limited
the amount of total consolidated debt and liens, required the maintenance of
certain consolidated financial ratios, prohibited dividends and similar
payments, and restricted capital expenditures, mergers, dispositions of assets
and certain business acquisitions. The Company was required to pay an unused
facility fee ranging from .25% to .375% per annum on the facilities. See Note 8
of Notes to Consolidated Financial Statements. Under the revolving credit
facility, the Company had outstanding approximately $6.3 million in standby
letters of credit at December 31, 1996 which guaranteed the payment of claims to
the Company's previous workers' compensation insurance carrier. As of that date
there were no amounts outstanding for working capital advances or under the
acquisition loan facility, and all amounts under these facilities were available
at December 31, 1996.
In April 1997, the Company entered into a new credit facility providing for
a $50.0 million revolving line of credit. For more information regarding the new
credit facility, see the Company's Form 10-Q for the quarterly period ended
March 31, 1997.
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 $7.2 million in letters of credit, of which $6.3 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 Comercial
Risk's obligation for the payment of Remaining Claims. As a result, the Company
obtained a release of $4.0 million in restricted cash previously held by Fleet
Bank as collateral.
The Company's primary short-term liquidity requirements relate to the
Company's insurance premium requirements under its workers' compensation policy,
software development, acquisition of office and computer equipment to support
its growth, and the payment of current tax obligations and other expenditures
related to the Company's growth. The Company currently has no significant
capital commitments for 1997, except for the amounts due to SMG shareholders in
connection with the SMG Acquisition; however, the Company currently anticipates
capital expenditures for 1997 of approximately $7.0 million, primarily for
software development and computer and office equipment, and approximately $9.0
million for the prepayment of the workers' compensation insurance premium for
1998. The Company's long-term liquidity needs are currently limited to debt
service on the Company's outstanding long-term obligations and income taxes. See
Notes 8 and 12 of Notes to the Consolidated Financial Statements. The Company
continually evaluates potential acquisitions and the entrance into new markets,
and is considering the possible relocation of its corporate headquarters, any of
which, if undertaken, could require significant capital expenditures by the
Company.
31
<PAGE>
The Company anticipates that available cash, cash flows from operations and
borrowing availability under the Amended and Restated Credit Agreement will be
sufficient to satisfy the Company's liquidity and working capital requirements
for the foreseeable future; however, to the extent that the Company should
desire to increase its financial flexibility and capital resources or require or
choose to fund future capital commitments from sources other than operating cash
or from borrowings under its revolving line of credit or its acquisition loan
facility, the Company may consider raising capital through the offering of
equity and/or debt securities in the public or private markets, as well as from
banks.
Net cash used in operating activities was $4.2 million for 1996 compared to
cash provided by operating activities of $2.1 million for 1995. The difference
between the Company's 1996 net income of $2.7 million and its negative operating
cash flow was due primarily to a $12.1 million increase in accounts receivable,
a $5.5 million increase in prepaid workers' compensation insurance premium, an
increase in reinsurance recoverable of $3.2 million, and an increase in prepaid
expenses and other current assets of $292,000, partially reduced by an increase
in accrued salaries, wages, and payroll taxes of $6.1 million, a decrease in
restricted cash of $4.2 million, and an increase in reserve for claims of $2.4
million. The increase in accounts receivable resulted from both a higher number
of PEO clients and worksite employee 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. See "Recent
Developments" above.
Net cash used in investing activities was $5.1 million for 1996 compared to
$1.2 million in 1995. This reflects $2.2 million of the SMG purchase price paid
in cash, net of cash acquired from SMG of $137,000, and $1.2 million placed in
escrow in accordance with an escrow agreement for potential purchase price
adjustments, $2.0 million in expenditures for property and equipment to support
the Company's growth, partially offset by redemption of short term investments
of $490,000.
Net cash provided by financing activities was $24.5 million for 1996
compared to $850,000 used in financing activities in 1995. The 1996 cash flow
reflects the Company's initial public offering which generated net offering
proceeds of $26.9 million, partially offset by retirement of a subordinated
promissory note in the amount of $1.2 million, payment of $311,000 of capital
lease obligation (see Note 8 of the Notes to Consolidated Financial Statements)
and the funding of a $700,000 distribution payable related to the Company's
repurchase of an option to purchase the Company's headquarters.
New Accounting Pronouncements
- -----------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS No. 121"). SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles, held and used by an
entity, be reviewed for impairment whenever events or changes in circumstance
indicate that the carrying amounts of an asset may not be recoverable. SFAS No.
121 has been adopted by the Company for the year ended December 31, 1996. The
adoption of SFAS No. 121 has not had, and is not expected to have, a material
impact on the Company's financial position or results of operations. The Company
reviews the carrying value of its long-lived and intangible assets on an ongoing
basis. If such review indicates that these values may not be recoverable, the
carrying value will be reduced to estimated fair value.
The FASB has also issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). This statement
defines a fair value based method of accounting for employee stock options. This
statement also permits a company to continue to measure compensation costs for
their stock option plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS No. 123 requires disclosure of the pro
forma net income and earnings per share that would be recorded if the fair value
method was utilized. The Company has adopted the disclosure provisions of SFAS
No. 123, and retained the intrinsic value method of accounting for stock based
compensation. See Note 11 of the Notes to Consolidated Financial Statements.
Inflation
- ---------
The Company believes the effects of inflation have not had a significant
impact on its results of operations or financial condition.
32
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
Exhibit
No. Description
11 Statement re Computation of Per Share Earnings.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 8th of
March, 1997.
THE VINCAM GROUP, INC.
May 8, 1997 By:/s/ STEPHEN L. WAECHTER
Date ------------------------------------------------
Stephen L. Waechter, Chief Financial Officer,
Senior Vice President Finance and Administration
(Principal Financial Officer)
May 8, 1997 By:/s/ MARTINIANO J. PEREZ
Date --------------------------------------------------
Martiniano J. Perez, Vice President and Controller
(Principal Accounting Officer)
34
<PAGE>
THE VINCAM GROUP, INC.
FORM 8-K
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
11 Statement re Computation of Per Share Earnings
23 Consent of Price Waterhouse LLP
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
THE VINCAM GROUP, INC.
CALCULATION OF NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income $ 1,854,036 $ 252,789 $ 2,692,782
============ ============ ============
Weighted average number of common shares
outstanding during the period 6,769,341 5,606,288 7,359,893
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 7,229,657 6,994,018 8,330,811
============ ============ ============
Net income per common and common
equivalent share $ 0.26 $ 0.04 $ 0.32
============ ============ ============
Fully diluted net income per common
and common equivalent share * $ 0.26 $ 0.04 $ 0.32
============ ============ ============
</TABLE>
- ------------------------------
* In accordance with the provisions of the Accounting Principles Board
Opinion No. 15, Earnings per Share, fully diluted net income per common and
common equivalent share is not presented in the Company's consolidated
statements of income due to the fact that the aggregated dilution from the
Company's common stock equivalents outstanding during each of the periods
presented is less than 3%.
<PAGE>
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) of The Vincam Group, Inc. of our
report dated February 21, 1997, which appears on page 3 of The Vincam Group,
Inc.'s Current Report on Form 8-K dated May 8, 1997 (Commission File No.
0-28148), relating to the pooled consolidated financial statements of The Vincam
Group, Inc.
/s/ PRICE WATERHOUSE LLP
Miami, Florida
May 8, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE VINCAM GROUP, INC. FOR YEAR ENDED
DECEMBER 31, 1996 INCLUDED IN THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,706,205
<SECURITIES> 149,626
<RECEIVABLES> 22,688,406
<ALLOWANCES> 576,650
<INVENTORY> 0
<CURRENT-ASSETS> 50,656,925
<PP&E> 5,618,535
<DEPRECIATION> 1,453,939
<TOTAL-ASSETS> 63,400,159
<CURRENT-LIABILITIES> 28,441,363
<BONDS> 0
0
0
<COMMON> 8,013
<OTHER-SE> 30,262,081
<TOTAL-LIABILITY-AND-EQUITY> 63,400,159
<SALES> 473,595,457
<TOTAL-REVENUES> 473,595,457
<CGS> 0
<TOTAL-COSTS> 444,800,078
<OTHER-EXPENSES> 25,482,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142,000
<INCOME-PRETAX> 4,009,095
<INCOME-TAX> 1,316,313
<INCOME-CONTINUING> 2,692,782
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,692,782
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
