UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 1, 1997
THE VINCAM GROUP, INC.
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(Exact name of registrant as specified in its charter)
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<S> <C> <C>
FLORIDA 0-28148 59-2452823
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(State or other jurisdiction of (Commission File Number) (I.R.S. Employer Identification No.)
incorporation or organization)
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2850 DOUGLAS ROAD CORAL GABLES, FLORIDA 33134
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(Address of principal executive offices) (Zip Code)
(305) 460-2350
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address, and former fiscal year, if changed since last
report)
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ITEM 5. OTHER EVENTS
On December 1, 1997, The Vincam Group, Inc. (the "Company") acquired
Staffing Network, Inc. ("SNI"), a privately held professional employer
organization ("PEO") headquartered in Manchester, New Hampshire (the "SNI
Acquisition"). The Company issued 1,800,000 shares of its common stock (after
adjusting for the effect of the Company's three for two stock split declared in
November 1997) in exchange for all of the outstanding shares of common stock of
SNI. The transaction has been accounted for in accordance with the pooling of
interests accounting treatment; accordingly, all prior period financial
statements of The Vincam Group, Inc. presented herein include the assets and
liabilities and results of operations of SNI.
The following information presents the supplementary consolidated
financial statements of The Vincam Group, Inc. giving retroactive effect to the
acquisition of SNI by the Company for the years ended December 31, 1994, 1995
and 1996.
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INDEX TO FINANCIAL STATEMENTS
PAGE
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THE VINCAM GROUP, INC.
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Report of Independent Certified Public Accountants..................................... 3
Balance Sheets as of December 31, 1995 and 1996........................................ 5
Consolidated Statements of Income for the Years Ended
December 31, 1994, 1995 and 1996..................................................... 6
Consolidated Statement of Changes in Stockholders' (Deficit)
Equity for the Years Ended December 31, 1994, 1995 and 1996.......................... 7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996..................................................... 8
Notes to Consolidated Financial Statements............................................. 10
Supplementary Balance Sheets as of December 31, 1995 and 1996.......................... 31
Supplementary Consolidated Statements of Income for the Years Ended
December 31, 1994, 1995 and 1996..................................................... 32
Supplementary Consolidated Statement of Changes in Stockholders' (Deficit)
Equity for the Years Ended December 31, 1994, 1995 and 1996.......................... 33
Supplementary Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996..................................................... 34
Notes to Supplementary Consolidated Financial Statements............................... 36
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................................ 57
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The Vincam Group, Inc.
In our opinion, based upon our audits and the report of the other
auditors, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of The Vincam Group, Inc. and its subsidiaries at December 31, 1995 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Amstaff, Inc. which statements reflect total assets of
$2,530,044 and $4,308,304 at December 31, 1995 and 1996, respectively, and total
revenues of $23,253,911, $43,665,424 and $66,542,568 for the years ended
December 31, 1994, 1995 and 1996, respectively. We did not audit the financial
statements of Staff Administrators, Inc., which statements reflect total assets
of $4,791,571 and $5,723,717 at December 31, 1995 and 1996, respectively, and
total revenues of $33,310,475, $55,824,216 and $77,975,919 for the years ended
December 31, 1994, 1995 and 1996, respectively. Those statements were audited by
other auditors whose reports thereon have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Amstaff,
Inc. and Staff Administrators, Inc. is based solely on the report of the other
auditors. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 2, on December 1, 1997, The Vincam Group, Inc.
acquired Staffing Network, Inc. in a transaction accounted for as a pooling of
interests. The accompanying supplementary consolidated financial statements give
retroactive affect to the merger of The Vincam Group, Inc. with Staffing
Network, Inc.
In our opinion, based upon our audits and the reports of other
auditors, the accompanying supplementary consolidated balance sheets and the
related supplementary consolidated statements of income, of changes in
stockholders' equity (deficit) and of cash flows present fairly, in all material
respects, the financial position of The Vincam Group, Inc. and its subsidiaries
at December 31, 1995 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Staffing Network, Inc.
which statements reflect total assets of $5,488,845 and $7,534,927 at December
31, 1995 and 1996, respectively, and total revenues of $70,467,904, $80,315,215
and $114,619,766 for the years ended December 31, 1994, 1995 and 1996,
respectively. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Staffing Network, 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
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statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Miami, Florida
February 21, 1997
except as to the pooling of interest with Amstaff, Inc.
which is as of June 30, 1997, except as to the 3 for 2 stock split
which is as of November 21, 1997, and except as to the pooling
of interest with Staffing Network, Inc. which is as of December 1, 1997
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THE VINCAM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1995 1996
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ASSETS
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CURRENT ASSETS:
Cash and cash equivalents .............................. $ 1,964,581 $ 17,522,030
Investments ............................................ 639,232 149,626
Restricted cash ........................................ 5,290,955 2,331,917
Accounts receivable .................................... 10,808,048 24,391,893
Due from affiliates .................................... 301,373 292,957
Deferred taxes ......................................... 1,844,386 2,279,226
Reinsurance recoverable ................................ -- 1,728,000
Prepaid workers' compensation insurance premium ........ -- 5,483,972
Prepaid expenses and other current assets .............. 598,934 1,170,282
------------ ------------
Total current assets ............................ 21,447,509 55,349,903
Property and equipment, net ............................ 2,960,188 4,601,868
Deferred taxes ......................................... 703,475 733,431
Reinsurance recoverable ................................ -- 1,472,000
Client contracts ....................................... 117,440 1,430,951
Goodwill ............................................... -- 4,791,836
Other assets ........................................... 324,295 255,225
------------ ------------
$ 25,552,907 $ 68,635,214
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses .................. $ 3,120,775 $ 4,102,765
Accrued salaries, wages and payroll taxes .............. 9,577,391 17,926,012
Amounts due under acquisition agreement ................ -- 2,623,437
Reserve for claims ..................................... 3,750,376 5,651,766
Reserve for other state taxes .......................... 1,243,738 2,208,738
Income taxes payable ................................... 650,044 1,395,899
Current portion of long term borrowings ................ 1,445,167 136,053
Distribution payable ................................... 700,000 --
Deferred compensation .................................. 263,000 242,013
Deferred gain .......................................... -- 323,157
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Total current liabilities ....................... 20,750,491 34,609,840
Long term borrowings, less current portion ................. 1,308,062 883,689
Reserve for claims ......................................... 1,556,615 3,154,438
Income taxes payable ....................................... 1,386,323 672,818
Deferred compensation ...................................... 294,300 41,200
Deferred gain .............................................. -- 275,275
Other liabilities .......................................... 223,655 365,954
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Total liabilities ............................... 25,519,446 40,003,214
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Preferred Stock,$.01 par value, 20,000,000 shares authorized
165.376 shares mandatorily redeemable Series A Preferred
Stock issued and outstanding in 1995 ................... 6,263,610 --
------------ ------------
Commitments and contingencies (Note 14) .................... -- --
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Stockholders' (deficit) equity:
Common stock, $.001 par value, 60,000,000 shares
authorized, 4,956,066 and 8,013,332 shares issued and
outstanding in 1995 and 1996, respectively .......... 4,956 8,013
Additional paid in capital ............................. -- 33,241,867
Accumulated deficit .................................... (6,235,105) (4,617,880)
------------ ------------
Total stockholders' (deficit) equity ............ (6,230,149) 28,632,000
------------ ------------
$ 25,552,907 $ 68,635,214
============ ============
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The accompanying notes are an integral part of these consolidated
financial statements.
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THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
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1994 1995 1996
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<S> <C> <C> <C>
Revenues ................................ $ 248,096,954 $ 338,897,350 $ 540,138,025
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Direct costs:
Salaries, wages and employment
taxes of worksite employees ....... 218,378,461 301,037,190 477,738,190
Health care and workers' compensation 13,812,921 17,336,493 25,677,179
State unemployment taxes and other .. 2,172,881 2,688,969 5,285,246
------------- ------------- -------------
Total direct costs ............ 234,364,263 321,062,652 508,700,615
------------- ------------- -------------
Gross profit ............................ 13,732,691 17,834,698 31,437,410
------------- ------------- -------------
Operating expenses:
Administrative personnel ............ 5,426,114 9,151,610 15,290,256
Other general and administrative .... 3,579,438 5,280,626 7,795,686
Sales and marketing ................. 1,783,425 2,739,016 4,976,681
Provision for doubtful accounts ..... 52,000 278,969 416,193
Depreciation and amortization ....... 284,362 451,796 889,920
------------- ------------- -------------
Total operating expenses ...... 11,125,339 17,902,017 29,368,736
------------- ------------- -------------
Operating income ........................ 2,607,352 (67,319) 2,068,674
Interest (expense) income, net .......... (3,720) 151,498 699,652
------------- ------------- -------------
Income before taxes ..................... 2,603,632 84,179 2,768,326
Provision for income taxes .............. (858,759) (53,496) (890,386)
------------- ------------- -------------
Net income .............................. $ 1,744,873 $ 30,683 $ 1,877,940
============= ============= =============
Net income per common and common
equivalent share .................... $ 0.23 $ 0.00 $ 0.22
============= ============= =============
Weighted average number of shares
outstanding used in earnings per
share calculation ................... 7,594,819 7,359,180 8,695,973
============= ============= =============
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The accompanying notes are an integral part of these consolidated
financial statements.
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THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK RETAINED
---------------------------- ADDITIONAL EARNINGS
PAID IN (ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT) TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 ...................... 6,249,341 $ 6,249 $ 42,156 $ 219,963 $ 268,368
Purchase of a business .......................... -- -- -- (8,105) (8,105)
Net income ...................................... -- -- -- 1,744,873 1,744,873
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 .................... 6,249,341 6,249 42,156 1,956,731 2,005,136
Acquisition of shares ........................... (249,342) (249) (42,156) (1,457,595) (1,500,000)
Recapitalization, including transaction costs
of $445,150 charged to retained earnings ...... (1,043,933) 1,044) -- (6,707,716) (6,708,760)
Distributions to shareholders ................... -- -- -- (57,208) (57,208)
Net income ...................................... -- -- -- 30,683 30,683
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 .................... 4,956,066 4,956 -- (6,235,105) (6,230,149)
Issuance of common stock, net of transaction
costs of $3,058,685 charged to paid in capital . 2,000,000 2,000 26,939,315 -- 26,941,315
Conversion of preferred stock into common
Stock .......................................... 1,043,933 1,044 6,262,566 -- 6,263,610
Issuance of common stock to employees
under stock option plans ....................... 13,333 13 39,986 -- 39,999
Distributions to shareholders ................... -- -- -- (260,715) (260,715)
Net income ...................................... -- -- -- 1,877,940 1,877,940
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 .................... 8,013,332 $ 8,013 $ 33,241,867 $ (4,617,880) $ 28,632,000
============ ============ ============ ============ ============
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The accompanying notes are an integral part of these consolidated
financial statements.
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THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
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Cash flows from operating activities:
Net income ..................................................... $ 1,744,873 $ 30,683 $ 1,877,940
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................ 284,362 451,796 889,920
Provision for doubtful accounts .............................. 52,000 278,969 416,193
Deferred gain ................................................ -- -- 598,432
Deferred income tax benefit .................................. (403,944) (768,410) (464,795)
Changes in assets and liabilities:
(Increase) decrease in restricted cash ..................... (3,399,328) 79,579 4,209,038
Increase in accounts receivable ............................ (2,381,834) (3,526,683) (13,116,851)
Decrease (increase) in due from affiliates ................. (66,698) 52,680 8,416
Increase in reinsurance recoverable ........................ -- -- (3,200,000)
Increase in prepaid workers' compensation
insurance premium ........................................ -- -- (5,483,972)
Increase in prepaid expenses and other current assets ..... (70,433) (363,253) (569,392)
Increase in other assets ................................... (138,208) (41,361) (197,460)
Increase in accounts payable and accrued expenses .......... (534,782) 1,920,708 1,584,769
Increase in accrued salaries, wages and payroll taxes ...... 2,989,258 2,489,740 7,123,833
Increase in reserve for claims ............................. 2,012,216 1,737,559 3,068,743
Increase (decrease) in income taxes payable ................ 225,158 355,938 32,350
Increase (decrease) in deferred compensation ............... 41,200 -- (274,087)
Increase (decrease) in other liabilities ................... 30,501 (15,757) 142,299
------------ ------------ ------------
Net cash provided by (used in) operating activities ............... 384,341 2,682,188 (3,354,624)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ............................ (971,345) (1,001,256) (2,365,784)
Redemption (purchases) of short term investments .............. 202,580 (639,232) 489,606
Cash placed in escrow in connection with acquisition of SMG .... -- -- (1,250,000)
Cash paid in acquisition of SMG, net of cash acquired
of $137,748 .................................................. -- -- (2,219,566)
(Issuance) collection of notes receivable from stockholders .... (123,078) 123,078 --
Acquisition of client contracts ................................ (8,105) (117,440) (29,295)
------------ ------------ ------------
Net cash used in investing activities ............................. (899,948) (1,634,850) (5,375,039)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on borrowings ............................... (224,837) (30,000) (1,733,487)
Proceeds from borrowings ....................................... 241,684 251,812 --
Recapitalization costs ......................................... -- (445,150) --
Cash paid in connection with acquisition of stock .............. -- (300,000) --
Payment of distribution payable to shareholders ................ -- -- (700,000)
Distributions to shareholders .................................. -- (57,208) (260,715)
Issuance of common stock, net of transaction costs of $3,058,685 -- -- 26,941,315
Issuance of common stock to employees under stock option plans . -- -- 39,999
------------ ------------ ------------
Net cash provided by (used in) financing activities ............... 16,847 (580,546) 24,287,112
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents .............. (498,760) 466,792 15,557,449
Cash and cash equivalents, beginning of year ...................... 1,996,549 1,497,789 1,964,581
------------ ------------ ------------
Cash and cash equivalents, end of year ............................ $ 1,497,789 $ 1,964,581 $ 17,522,030
============ ============ ============
SUPPLEMENTAL DISCLOSURES INFORMATION OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ....................................................... $ 96,572 $ 183,242 $ 147,131
============ ============ ============
Income taxes ................................................... $ 1,026,396 $ 481,421 $ 1,181,997
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Acquisition of Assets and Liabilities of The Stone Mountain Group, Inc.
On August 30, 1996, the Company acquired substantially all of the
assets and liabilities of The Stone Mountain Group, Inc. ("SMG") in a
transaction accounted for as a purchase. The fair value of the assets acquired
and liabilities assumed, and the consideration paid or to be paid were as
follows:
Fair value of net assets acquired:
Client contracts ........................... $1,300,000
Accounts receivable ........................ 883,187
Prepaid expenses and other assets .......... 10,231
----------
Total non-cash assets ...................... 2,193,418
Accounts payable and accrued expenses ...... 362,221
Accrued salaries, wages and payroll taxes .. 1,224,788
Reserves for claims ........................ 430,470
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Total liabilities assumed .................. 2,017,479
----------
Net assets acquired, excluding cash ........ 175,939
Cash acquired .............................. 137,748
----------
Net assets acquired ........................ $ 313,687
==========
Promissory notes payable to SMG shareholders $1,373,437
Cash placed in escrow ...................... 1,250,000
Cash paid for acquisition of SMG ........... 2,357,314
----------
Purchase price ............................. $4,980,751
==========
The following is a reconciliation of the purchase price to the excess
of costs associated with the acquisition over the estimated fair value of net
assets acquired allocated to goodwill:
Purchase price ............................ $ 4,980,751
Net assets acquired ....................... (313,687)
Costs associated with the acquisition ..... 189,000
-----------
Amount allocated to goodwill .............. $ 4,856,064
===========
In connection with the acquisition of the assets of SMG, the Company
issued promissory notes for $1,373,437 due in 1997 and placed in escrow
$1,250,000, in accordance with an escrow agreement for potential purchase price
adjustments in the event that, among other things, client retention fails to
meet certain targets.
In January 1995, the Company issued a subordinated note payable for
$1,200,000 as partial consideration for shares reacquired by the Company.
During February 1995, the Company and its stockholders entered into an
Agreement and Plan of Recapitalization whereby the Company's stockholders
exchanged a portion of their shares of common stock for approximately 166 shares
of Series A Participating Convertible Preferred Stock valued at approximately
$6,264,000.
During 1995, the Company acquired $334,054 of computer hardware and
software under a capital lease agreement.
The accompanying notes are an integral part of these consolidated
financial statements.
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THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 1- NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Vincam Group, Inc. and its subsidiaries (the "Company") are a
professional employer organization ("PEO") engaged primarily in the provision of
human resource management and personnel administration services. In addition,
the Company provides certain managed care services, including managed behavioral
health care, employee assistance programs, drug-free workplace programs,
utilization review services, comprehensive workers' compensation managed care,
risk management and loss containment services.
The Company provides PEO services primarily to small and medium sized
companies in a variety of industries, including manufacturing, retail, and
hospitality. Managed care services are provided to PEO clients and to health and
workers' compensation insurance companies, health maintenance organizations,
other managed care providers and large, self insured employers.
PEO service contracts with client companies are generally for one year
terms with automatic renewal options and subject to termination on 30 days'
notice by either party during the first year and annually thereafter. Managed
care contracts with clients are for terms of one or more years and are subject
to cancellation by either party upon 30 to 180 days' notice depending on the
nature of the services provided.
The Company does not have a concentration of customers in any one
industry; however, during 1994, 1995 and 1996, a significant portion of the
Company's revenues were generated in Florida, Michigan, Colorado and Georgia.
The Company's revenues are generated predominantly by PEO services.
A summary of the significant accounting policies followed in the
preparation of the accompanying consolidated financial statements is presented
below:
PRINCIPLES OF CONSOLIDATION. The accompanying financial statements
include the accounts of The Vincam Group, Inc. and its principal subsidiaries,
Vincam Human Resources, Inc. ("VHR"), Vincam/Staff Administrators, Inc.
("VSAI"), Vincam/Amstaff, Inc. ("VAMI"), Psych/Care, Inc. ("Psych/Care") and
Vincam Occupational Health Services, Inc. ("VOHS"). All material intercompany
balances and transactions have been eliminated.
REVENUE RECOGNITION. Revenues and the related costs of wages, salaries,
and employment taxes from professional employer services related to worksite
employees are recognized in the period in which the employee performs the
service. Because the Company is at risk for all of its direct costs,
independently of whether payment is received from its clients, and consistent
with industry practice, all amounts billed to clients for gross salaries and
wages, related employment taxes, and health care and workers' compensation
coverage are recognized as revenue by the Company. The Company establishes a
reserve for doubtful accounts when it determines that collection from a client
is unlikely.
Revenues from behavioral health services are recognized during the
period in which the Company is obligated to provide behavioral health services
to participants. Revenues from risk management, loss containment and workers'
compensation managed care services are recognized in the period in which the
services are performed.
ACCOUNTING ESTIMATES. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
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THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
revenues and expenses during the reporting period. The more significant
estimates relate to the Company's reserve for claims. Actual results could
differ from those estimates.
RESERVE FOR CLAIMS. The Company's workers' compensation benefits and
certain of its health care benefits are provided under large deductible insured
plans. The Company records reserves for workers' compensation and health care
claims costs based on actuarial calculations using the Company's loss history of
workers' compensation and health care claims, including estimates of incurred
but not reported claims. Prior to 1994, the Company's workers' compensation
insurance was under a loss-sensitive retrospectively rated plan which provided
for retroactive premium adjustments based on actual loss experience.
In December 1996, VHR entered into an agreement with a national
insurance company to provide guaranteed fixed cost workers' compensation
insurance coverage for 1997 through 1999, subject to a deductible of $2,000 per
medical only claim. Accordingly, effective January 1, 1997, the Company will
record workers' compensation costs based primarily on the fixed portion of the
premium of its workers' compensation insurance policy.
In addition, in December 1996, VHR entered an agreement to reinsure its
remaining claims under the Company's large deductible workers' compensation
insurance policies for the years 1994, 1995, and 1996, for an aggregate premium
of $3,200,000. As a result, the Company has recorded the premium as a
reinsurance recoverable at December 31, 1996 and a deferred gain in the amount
of approximately $600,000 which will be recognized to income in future periods
based on the proportion of cumulative claims paid to the total estimated
liability for claims.
Effective April 1, 1994, the VSAI began a workers' compensation policy
whereby the Company was self-insured for all claims up to an aggregate stop loss
amount. Accrued workers' compensation claims are based on an estimate of
reported and unreported losses, net of amounts covered under the applicable
insurance policy, for injuries occurring on or before the balance sheet date.
The loss estimates are based on several factors including the VSAI's current
experience, relative health care costs, regional influences and other factors.
While estimated losses may not be paid for several years, an accrual for the
estimated value of outstanding claims is maintained with changes in the accrual
reflected as a component of direct costs in the period of the change. Estimates
are based on actuarial amounts. These estimates are continually reviewed and any
adjustments are reflected in operations as they become known, and are subject to
material change. VSAI became insured under the Company's guaranteed fixed cost
workers' compensation insurance coverage effective January 7, 1997.
VAMI workers' compensation benefits and certain of its health care
benefits are provided under large deductible insured plans. VAMI records
reserves for workers' compensation and health care claims costs based on
calculations using VAMI's loss history of workers' compensation and health care
claims, respectively.
In all cases regarding workers' compensation and health care claims,
VAMI's reserves are established at the time a participant files a claim.
Furthermore, VAMI, in determining its reserves, includes reserves for estimated
claims incurred but not reported, respectively.
VAMI's estimates of its claims reserves, including its estimate of
incurred but not reported claims, are based on its loss history. The ultimate
costs of health care and workers' compensation claims will depend on actual
costs incurred in settling the claims and may differ from the amounts reserved
by VAMI for those claims. VAMI became insured under the Company's guaranteed
fixed cost workers' compensation insurance coverage effective June 30, 1997.
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THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
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.
RESERVE FOR OTHER STATE TAXES. The reserve for other state taxes has
been established for amounts expected to be due in connection with certain state
tax matters.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight line method over
the estimated useful lives of the respective assets. Repairs and maintenance are
charged to expense as incurred, while expenditures which extend the useful lives
of the assets are capitalized.
GOODWILL. Assets and liabilities acquired in connection with business
combinations accounted for under the purchase method are recorded at their
respective estimated fair values. Goodwill represents the excess of the purchase
price over the fair value of net assets acquired, including the recognition of
applicable deferred taxes, and is amortized on a straight-line basis over a 25
year period. The Company reviews long-lived assets, identifiable intangibles and
goodwill and reserves for impairment whenever events or changes in circumstances
indicate the carrying amount of the assets may not be fully recoverable. At
December 31, 1996, the Company had recorded goodwill of $4,791,836, net of
accumulated amortization of $64,228.
ADVERTISING COSTS. Advertising expenditures are charged to operations
as incurred. Advertising expense amounted to $333,600, $386,123 and $547,698 in
1994, 1995 and 1996, respectively.
CLIENT CONTRACTS. Costs incurred in connection with the acquisition of
client contracts from other professional employer organizations, as well as the
fair market value of contracts acquired in connection with purchase business
combinations, are capitalized and amortized using the straight line method over
a period of 5 to 15 years, based on the previous professional employer
organization client retention rate. The Company periodically assesses the status
of contracts acquired to determine the future realizability of the capitalized
costs. At December 31, 1995 and 1996, the Company had recorded client contracts
of $117,440 and $1,430,951, respectively (net of accumulated amortization of $0
in 1995 and $59,183 in 1996).
CASH AND CASH EQUIVALENTS. Cash equivalents include investments with
original maturities of three months or less and are stated at cost which
approximates market value.
INCOME TAXES. The Company records income tax expense using the
liability method of accounting for deferred income taxes. Under the liability
method, deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial statement
and income tax bases of the Company's assets and liabilities. An allowance is
recorded when it is more likely than not that any or all of a deferred tax asset
will not be realized. The provision for income taxes includes taxes currently
payable plus the net change during the year in deferred tax assets and
liabilities recorded by the Company.
The Company is subject to certain state taxes based on gross receipts,
payroll and taxable income within that state. Taxes based on gross receipts and
payroll are classified as salaries, wages and
-12-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
employment taxes of worksite employees in the accompanying consolidated
statements of income, while taxes based on income are included in the provision
for income taxes.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE. Net income per
common and common equivalent share has been computed based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during each of the three years ended December 31, 1996. The Company
has considered as outstanding common stock equivalents during each of the three
years ended December 31, 1996, options awarded to employees and directors of the
Company (see Notes 10 and 11), as well as the shares of common stock that have
been issued in connection with the SAI and AMI acquisitions. For purposes of the
calculation of net income per common and common equivalent share, the
mandatorily redeemable preferred stock is also considered a common stock
equivalent.
Net income per common and common equivalent share amounts for each of
the years presented have been calculated giving retroactive effect to an
approximate 8,417 to 1 stock split effected by the Company in June 1995 and a 3
for 4 split effected on February 21, 1996 (jointly, the "Stock Splits," see Note
10). All common and common equivalent share amounts have also been retroactively
adjusted to reflect the Stock Splits.
STOCK BASED COMPENSATION. Effective 1996, the Company adopted the
disclosure provisions of Statement of Financial Accounting Standard No. 123,
Accounting for Stock Based Compensation ("SFAS 123") and retained the intrinsic
value method of accounting for such stock based compensation (see Note 11).
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company estimates the fair
market value of financial instruments through the use of public market prices,
quotes from financial institutions and other available information. Considerable
judgment is required in interpreting data to develop estimates of market value
and, accordingly, amounts are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. At December 31, 1995 and
1996, the Company's financial instruments consist primarily of instruments
without extended maturities, the fair value of which, based on management's
estimates, equaled their carrying values.
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, $412,500 was paid
in January 1997, $960,937 was paid in August 1997, and $1,250,000 was placed in
escrow for potential purchase price adjustments in the event that, among other
things, client retention fails to meet certain targets. On November 11, 1997,
after the Company completed the evaluation of the SMG Acquisition purchase price
adjustment, $1,177,012 out of the $1,125,000 in escrow was paid to SMG
shareholders. The difference will be recorded as a reduction of goodwill. 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.
-13-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
Revenues ................ $380,814,255 $572,109,928
============ ============
Net income .............. $ (31,934) $ 1,693,222
============ ============
Net income per common and
common equivalent share $ 0.00 $ 0.19
============ ============
These results are presented for informational purposes only and are not
necessarily indicative of the future results of operations or financial position
of the Company or the results of operations or financial position of the Company
that would have been achieved had the acquisition actually occurred on January
1, 1995.
On January 7, 1997, the Company acquired Staff Administrators, Inc.
("SAI"), a privately held PEO headquartered in Denver, Colorado (the "SAI
Acquisition"). The Company issued 500,000 shares of its common stock in exchange
for all of the equity in SAI and its subsidiaries (other than Staff
Administrators of Western Colorado, Inc.). The transaction has been accounted
for in accordance with the pooling of interest accounting treatment;
accordingly, all prior period financial statements presented herein include the
assets and liabilities and results of operations of SAI. In connection with the
acquisition of SAI, the Company also acquired, in a transaction accounted for as
a purchase, 49% minority interest in Staff Administrators of Western Colorado,
Inc. ("SAWCI"), a 51% subsidiary of SAI (the "SAWCI Acquisition"). The Company
issued 20,000 shares of its common stock for the 49% interest in SAWCI. The most
significant adjustments to the balance sheet resulting from the SAWCI
Acquisition will be reflected on the Company's balance sheet as of January 7,
1997 and will primarily consist of approximately $570,000 increase in goodwill
and $300,000 increase in client contracts.
On June 30, 1997, the Company acquired Amstaff, Inc. ("AMI"), a
privately held PEO headquartered in Novi, Michigan (the "AMI Acquisition"). The
Company issued 365,162 shares of its common stock in exchange for all of the
outstanding shares of common stock of AMI and its subsidiaries. The transaction
has been accounted for in accordance with the pooling of interests accounting
treatment; accordingly, all prior period financial statements presented herein
include the assets and liabilities and results of operations of AMI.
The following combines audited selected historical financial
information of SAI, AMI and Vincam for the years ended December 31, 1994, 1995
and 1996, and reflects the most significant adjustments resulting from the SAI
and AMI acquisitions.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------------------
VINCAM SAI & AMI ADJUSTMENTS RESULTS
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues ................ $ 191,532,568 $ 56,564,386 $ -- $248,096,954
=============== =============== ============= ============
Net income .............. $ 1,799,950 $ (178,157) $ 123,080 $ 1,744,873
=============== =============== ============= ============
Net income per common and
common equivalent share $ 0.27 $ -- $ -- $ 0.23
=============== =============== ============= ============
</TABLE>
-14-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------------------
VINCAM SAI & AMI ADJUSTMENTS RESULTS
--------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues ................ $ 239,407,710 $ 99,489,640 $ -- $338,897,350
=============== =============== ============= ============
Net income .............. $ 809,837 $ (975,164) $ 196,010 $ 30,683
=============== =============== ============= ============
Net income per common and
common equivalent share $ 0.13 $ -- $ -- $ 0.00
=============== =============== ============= ============
DECEMBER 31, 1996
-----------------------------------------------------------------
VINCAM SAI & AMI ADJUSTMENTS RESULTS
--------------- --------------- ------------- ------------
Revenues ................ $ 395,619,538 $ 144,518,487 $ -- $540,138,025
=============== =============== ============= ============
Net income .............. $ 3,585,976 $ (2,222,286) $ 514,250 $ 1,877,940
=============== =============== ============= ============
Net income per common and
common equivalent share $ 0.46 $ -- $ -- $ 0.22
=============== =============== ============= ============
</TABLE>
The following unaudited pro forma financial information is presented to
reflect the effect of the merger of AMI with a wholly owned subsidiary of the
Company, which acquisition has been accounted for as a pooling of interest. The
pro forma financial information for each of the three years ended December 31,
1996, assume that the merger was consummated on January 1, 1994. The pro forma
financial information is presented for informational purposes only and is not
necessarily indicative of the results of operations that would have been
achieved had the merger actually been consummated on the date indicated or that
may be obtained in the future. The following pro forma adjustments to net income
as reflected in the consolidated statements of income herein presented relate to
the recording of the provision for income taxes as if AMI were taxed as "C"
corporation. The adjustments result from the fact that AMI was taxed under the
Subchapter S provisions of the Internal Revenue Code before its acquisition by
the Company. See Note 12.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------- ----------- -----------
<S> <C> <C> <C>
Net income reported in consolidated
statement of income ............... $ 1,744,873 $ 30,683 $ 1,877,940
Pro forma adjustment:
Provision for taxes - current .... (29,600) (20,400) (46,700)
------------- ----------- -----------
Pro forma net income ............... $ 1,175,273 $ 10,283 $ 1,831,240
============= =========== ===========
Net income per common and
common equivalent share .......... $ 0.23 $ -- $ 0.21
============= =========== ===========
</TABLE>
-15-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 3 - INITIAL PUBLIC OFFERING
In May 1996, the Company completed its initial public offering and
received proceeds of approximately $27,900,000, net of $2,100,000 underwriting
discounts and commissions, from the sale of 2,000,000 shares of common stock of
the Company. The Company used a portion of the proceeds to retire a subordinated
promissory note in the amount of $1,200,000 (see Note 8) and to pay a $700,000
distribution payable related to the Company's repurchase of an option to
purchase the Company's headquarters. In addition, the Company incurred
approximately $1,095,000 in other costs in connection with the offering.
Simultaneously with the completion of the initial public offering, the Company's
mandatorily redeemable Series A Participating Convertible Preferred Stock (the
"Series A Preferred Stock") was converted into 1,043,933 shares of the Company's
common stock (see Note 9).
Also in connection with the completion of the Company's initial public
offering, the Company amended and restated its Articles of Incorporation to
increase the authorized number of shares of the Company's common stock from
39,500,000 to 60,000,000, and to increase the authorized number of shares of
preferred stock from 500,000 to 20,000,000.
NOTE 4 - RESTRICTED CASH
The Company had cash deposits at December 31, 1995 and 1996 of
$5,290,955 and $1,081,917, respectively, which served as collateral on certain
standby letters of credit issued in connection with the Company's workers'
compensation insurance plan (see Note 7).
In connection with the SMG Acquisition, the Company has in escrow
$1,250,000. At December 31, 1996, the escrow funds have been classified as
restricted cash in the accompanying consolidated balance sheet (see Note 2).
NOTE 5 - ACCOUNTS RECEIVABLE
At December 31, 1995 and 1996, accounts receivable consisted of the
following:
1995 1996
------------ ------------
Billed to clients ................... $ 3,619,855 $ 8,187,375
Unbilled revenues ................... 7,372,784 16,781,168
------------ ------------
10,992,639 24,968,543
Less: allowance for doubtful account (184,591) (576,650)
------------ ------------
$ 10,808,048 $ 24,391,893
============ ============
-16-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
1995 1996 (IN YEARS)
------------- ------------- ------------
<S> <C> <C> <C>
Land................................................... $ 284,374 $ 284,374
Building............................................... 775,158 775,158 30
Building and leasehold improvements.................... 618,917 755,749 7
Furniture and fixtures................................. 470,137 809,585 5
Office and computer equipment.......................... 1,678,594 3,423,624 3-5
Vehicles............................................... 158,370 199,068 3
------------- ---------------
3,985,550 6,247,558
Less: accumulated depreciation and amortization........ (1,025,362) (1,645,690)
------------- -------------
$ 2,960,188 $ 4,601,868
============= =============
</TABLE>
At December 31, 1995 and 1996, gross fixed assets included $346,690 and
$0 of office and computer equipment under capital lease obligations. The Company
purchased these assets during 1996. See Notes 8, 10 and 14.
NOTE 7 - RESERVE FOR CLAIMS
In December 1996, VHR entered into an agreement with a national
insurance company to provide workers' compensation insurance coverage for 1997
through 1999, subject to a deductible of $2,000 per medical only claim.
Accordingly, effective January 1, 1997, the Company will record workers'
compensation costs based primarily on the fixed portion of its premium under
such policy, rather than through the previous practice of applying actuarial
estimates.
In addition, in December 1996, March 1997 and September 1997, the
Company entered into agreements to reinsure substantially all of the remaining
claims under the Company's large deductible worker's compensation insurance
policies for the years 1994, 1995 and 1996 (including the remaining claims
acquired upon the acquisition of SAI under its large deductible workers'
compensation insurance policies for the years 1994, 1995 and 1996, and those of
AMI for the years 1995 and 1996 and the first six months of 1997), for an
aggregate premium of $5,795,000. Since reserves for claims for these years have
been previously provided, the Company has recorded the premium as a reinsurance
recoverable at December 31, 1996 and a deferred gain in the amount of
approximately $600,000 which will be recognized to income in future periods
based on the proportion of cumulative claims paid to the total estimated
liability for claims.
In connection with the reinsurance of claims exposure from 1994 to
1996, the insurance carrier has agreed to provide letters of credit in favor of
the Company's lender to guarantee outstanding letters of credit under the
Company's credit agreement (see Note 8).
As a consequence of the reinsurance agreement described above, at
December 31, 1996, the Company has classified as current the estimated amounts
of reserves established for claims and reinsurance recoverable expected to be
paid and to be collected, respectively, within one year, as well as the related
deferred gain expected to be recognized within one year.
-17-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
At December 31, 1995 and 1996, the Company's reserves for claims costs
are as follows:
1995 1996
----------- -----------
Accrued workers' compensation claims ...... $ 4,226,424 $ 7,161,630
Accrued health care claims ................ 784,182 1,119,109
Reserve for behavioral health care claims . 296,385 525,465
----------- -----------
5,306,991 8,806,204
Less: workers' compensation claims expected
to be settled in more than one year ....... (1,556,615) (3,154,438)
----------- -----------
Reserve for claims--current ............... $ 3,750,376 $ 5,651,766
=========== ===========
-18
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
NOTE 8 - BORROWINGS
Borrowings at December 31, 1995 and 1996 are as follows: 1995 1996
----------- -----------
<S> <C> <C>
Subordinated note payable in quarterly instalments of $150,000
beginning in March 1998, interest due quarterly at the quoted
rate for 1 year U.S. Treasury Bills (7% at December 31, 1996),
paid in June 1996 ........................................... $ 1,200,000 --
Note payable to bank, original amount of $1 million, repayable
in monthly instalments of $4,167, plus interest at 8.50% per
annum, through November 1998 when a balloon payment of
$750,000 is due, secured by land and building ................ 895,732 841,561
Note payable for state unemployment taxes, maturing in 1998
with monthly payments of $3,264 .............................. 207,647 55,489
Capital lease obligation for computer hardware and software,
payable in monthly instalments of $7,479 through May 2000,
interest imputed at 12.30% per annum, paid in September 1996 . 310,602 --
Other notes payable, bearing interest at rates ranging from
7.50% to 10.75%, repayable in various monthly instalments .... 139,248 122,692
----------- -----------
2,753,229 1,019,742
Less: current portion ........................................ (1,445,167) (136,053)
----------- -----------
$ 1,308,062 $ 883,689
=========== ===========
</TABLE>
The Company incurred interest expense of approximately $102,000,
$214,000 and $149,000 during 1994, 1995 and 1996, respectively.
In April 1997, the Company entered into a revolving line of credit
agreement for an aggregate amount of $50,000,000 with a group of banks (the
"Credit Agreement"). The Credit Agreement provides for a revolving credit
facility with a sublimit of $15,000,000 to fund working capital advances and
standby letters of credit. The Credit Agreement also provides for advances to
finance acquisitions. Amounts outstanding under the revolving credit facility
mature on April 24, 2000. If, on April 24, 2000, certain conditions are
satisfied, any amounts outstanding under the revolving line of credit may be
converted into a term loan payable in eight quarterly instalments commencing on
August 1, 2000. The Company is required to pay an unused facility fee ranging
from .20% to .35% per annum on the facility, depending upon certain financial
covenants.
The Credit Agreement is secured by a pledge of shares of all of the
Company's subsidiaries. The Credit Agreement contains customary events of
default and covenants which prohibit, among other things, incurring additional
indebtedness in excess of a specified amount, paying dividends, creating liens
and engaging in certain mergers or combinations without the prior written
consent of the lender. The Credit Agreement also contains certain financial
covenants relating to current ratio, debt to capital ratio, debt and fixed
charges coverage and minimum tangible net worth, as defined in the Credit
Agreement.
-19-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
Interest under the Credit Agreement accrues at rates based, at the
Company's option, on the Bank's Prime Rate plus a margin of as much as .25%, or
its Eurodollar Rate (as defined in the Credit Agreement) plus a margin of 1.00%
to 1.75%, depending on certain financial covenants.
Under the Company's prior revolving credit facility, the Company had
outstanding $6,250,000 in standby letters of credit at December 31, 1996, which
guarantee the payment of claims to the Company's workers' compensation insurance
carrier. As of that date there were no amounts outstanding for working capital
or advances to finance acquisitions under the revolving credit facility.
The Company also has $1,200,000 in standby letters of credit with a
separate bank at December 31, 1996, which guarantee the payment of workers'
compensation claims acquired upon the SAI Acquisition.
As of December 31, 1996, the scheduled annual maturities of the
Company's debt are summarized as follows:
1997................................. $ 136,053
1998................................. 844,050
1999................................. 22,411
2000................................. 15,285
2001................................. 1,943
-------------
$ 1,019,742
=============
NOTE 9 - MANDATORILY REDEEMABLE PREFERRED STOCK
The Company has authorized 20,000,000 shares of preferred stock with a
par value of $.01 per share. These shares can be issued from time to time, in
one or more series as authorized by the Company's Board of Directors.
During February 1995, the Company and its stockholders entered into an
Agreement and Plan of Recapitalization whereby the Company's stockholders
exchanged 1,043,933 (after adjusting for the effect of the Stock Splits) shares
of common stock for 165.376 shares of Series A Participating Convertible
Preferred Stock ("Series A Preferred Stock").
The Series A Preferred Stock was recorded at $6,263,610 in the
accompanying balance sheet as of December 31, 1995 based on its fair market
value on the date of issuance, as evidenced by the sale of Series A Preferred
Stock by the Company's principal stockholders to an unaffiliated party. Both the
fair market value and the costs incurred of approximately $445,000 in connection
with the recapitalization were charged to retained earnings at the time of the
transaction.
In accordance with the Recapitalization Agreement, the Series A
Preferred Stock was converted upon completion of the Company's initial public
offering into 1,043,933 shares of common stock, after adjusting retroactively
for the effects of the Stock Splits (see Note 3).
-20-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 10 - STOCKHOLDERS' EQUITY
During June 1995, the Company increased its authorized common stock
from 500,000 shares to 39,500,000 shares and simultaneously effected an
approximate 8,417 to 1 stock split. On February 21, 1996, the Company effected a
3 for 4 reverse stock split. After the completion of the Company's initial
public offering, the Company amended and restated its Articles of Incorporation
to increase the authorized number of shares of the Company's common stock from
39,500,000 to 60,000,000, and to increase the authorized number of shares of
preferred stock from 500,000 to 20,000,000. All references in the financial
statements to per share amounts have been retroactively restated to reflect the
change in the number of common shares outstanding as a result of the Stock
Splits.
In connection with the stock split and increase in authorized shares
effected in June 1995, the Company reduced the par value of its common stock to
$.001 from $1.00.
In June 1993, CP Investments, Inc., an entity controlled by the
Company's principal stockholders, assigned to the Company an option which CP
Investments held to purchase, from a third party for $1,000,000, the land and
building which is owned by the Company and where the Company's headquarters are
located. In October 1993, the Company exercised the option and purchased the
land and building. As part of the assignment of the option, CP Investments
retained the right to purchase the land and building from the Company for
$1,000,000 for a ten year period.
Based on two independent appraisals of the land and building subject to
the previously described option, the Company valued the option at $700,000
(based on the difference between the market value of the building and its
November 1993 purchase price) and recorded a distribution to its principal
stockholders in June 1993. Because the transaction was entered into between
commonly controlled entities, the value of the option was not considered
additional basis in the building. Amounts due in connection with this
distribution have been recorded as distribution payable at December 31, 1995 and
paid in 1996 upon completion of the initial public offering.
In January 1995, the Company entered into an agreement to reacquire
certain of its outstanding shares from a minority shareholder. Under the terms
of the agreement, the Company acquired and canceled 249,342 shares of its common
stock, after adjusting for the effect of the Stock Splits, for $300,000 in cash
and a subordinated note for $1,200,000 (see Note 8). Simultaneously, the
Company's principal shareholders acquired 66,281 outstanding shares of the
Company's common stock, after adjusting for the effect of the Stock Splits, for
$400,000.
NOTE 11 - STOCK OPTION PLAN
In February 1996, the Company adopted the 1996 Long Term Incentive Plan
(the "1996 Plan") under which 800,000 shares of common stock, after adjusting
for the effect of the Stock Splits, were reserved for issuance upon exercise of
or in connection with stock options, stock appreciation rights, performance
awards, grants of restricted stock and other stock based or stock related
awards. The 1996 Plan provides for the grant of both incentive stock options and
nonqualified stock options, as well as other stock-based awards, to the
Company's directors, employees and consultants as determined in the discretion
of the Stock Option Committee. Under the 1996 Plan, incentive stock options and
nonqualified stock options may not be granted with an exercise price which is
less than 100% of the fair market value of the Company's shares of common stock
at the date of grant of the option.
-21-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
In May 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan") under which 666,665 shares of common stock, after adjusting for the
effect of the Stock Splits, were reserved for issuance upon exercise of stock
options. The 1995 Plan provides for the grant of both incentive stock options
intended to qualify as such under Section 422 of the Internal Revenue Code
("incentive stock options") and nonqualified stock options to the directors,
officers, key employees, consultants and other individual contributors of or to
the Company and its subsidiaries, as determined in the discretion of the Stock
Option Committee. Under the 1995 Plan, incentive stock options and nonqualified
stock options may not be granted with an exercise price which is less than 100%
and 85%, respectively, of the fair market value of the Company's shares of
common stock at the date of grant of the option.
Stock options normally have a term of ten years and generally become
exercisable 40% after the second year from the date of grant and in instalments
of 5% quarterly thereafter.
-22-
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
The following table summarizes stock option activity:
WEIGHTED
EXERCISE AVERAGE
STOCK OPTION PRICE EXERCISE PRICE
------------ ---------------- ---------------
<S> <C> <C> <C>
Outstanding at January 1, 1995............ -- -- --
Granted.............................. 514,997 $ 3.00 - $ 3.33 $ 3.05
Canceled............................. -- -- --
Exercised............................ -- -- --
----------- --------------- -------
Outstanding at December 31, 1995.......... 514,997 $ 3.00 - $ 3.33 $ 3.05
Granted.............................. 311,499 $ 4.67 - $33.13 $ 20.62
Canceled............................. (44,999) $ 3.00 - $ 8.05 $ 5.81
Exercised............................ (13,333) $ 3.00 $ 3.00
------------ --------------- -------
Outstanding at December 31, 1996.......... 768,164 $ 3.00 - $33.13 $ 9.81
============ =============== =======
Exercisable at:
December 31, 1995.................... 0 --
December 31, 1996.................... 40,000 $ 3.00
Available for grant at:
December 31, 1995.................... 951,668
December 31, 1996.................... 702,390
</TABLE>
The Company has adopted the disclosure provisions of SFAS 123. The
assumptions used in the calculation of the fair value of the options, using the
Black-Scholes method, issued to employees and directors of the Company during
1995 and 1996 were as follows:
1995 1996
----- ----
Expected life (years) 6.5 6.5
Interest rate......................... 6.20% 6.20%
Volatility............................ 55% 55%
Dividend yield........................ 0% 0%
-23-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
Had compensation cost for the Company's two option plans been
determined based on fair market value at the grant date for awards in 1995 and
1996 using the straight line method to recognize such cost, the Company's net
income and net income per common equivalent share would have been reduced to the
pro forma amounts indicated below:
1995 1996
----------- -----------
Pro forma net (loss) income .......... $ (68,265) $ 1,011,151
=========== ===========
Pro forma net (loss) income per common
and common equivalent share ........ $ (0.01) $ 0.12
============ ===========
These pro forma amounts may not be representative of the pro forma
effect on net income in future years, since the estimated fair value of stock
options is amortized over the vesting period, and additional options may be
granted in future years.
Weighted-average fair value of options granted during the year 1995 and
1996 was $1.86 and $14.05, respectively.
The following table summarizes stock option average grant date fair
value, and weighted average remaining contract life for options outstanding at
December 31, 1996:
WEIGHTED
AVERAGE REMAINING
RANGE OF NUMBER OF GRANT DATE CONTRACTUAL
EXERCISE PRICE OPTIONS FAIR VALUE LIFE
--------------- --------- ---------------- -----------
$ 3.00 - $ 3.33 481,665 $ 1.87 7.5
$ 4.67 - $ 8.05 103,999 $ 5.46 9.5
$21.00 - $28.50 63,500 $16.23 9.5
$33.13 - $37.13 119,000 $24.17 10.0
-------
Stock options outstanding as
of December 31, 1996 768,164
=======
-24-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 12 - INCOME TAXES
The provision for federal and state income taxes consists of the
following:
1994 1995 1996
----------- ----------- -----------
CURRENT
Federal ............. $ 1,363,629 $ 786,866 $ 1,294,182
State ............... 33,724 36,251 61,000
----------- ----------- -----------
1,397,353 823,117 1,355,182
----------- ----------- -----------
DEFERRED
Federal ............. (531,861) (741,880) (438,887)
State ............... (6,733) (27,741) (25,909)
----------- ----------- -----------
(538,594) (769,621) (464,796)
----------- ----------- -----------
Provision for income taxes $ 858,759 $ 53,496 $ 890,386
=========== =========== ===========
Subsequent to December 31, 1994, the Company requested and obtained a
change, for income tax purposes, in the method of accounting for its workers'
compensation loss reserves. As a result, the Company recorded a deferred tax
asset relating to the reserves and an increase in income taxes payable of
approximately $1,386,000. Also in December 1996, the Company requested a change,
for income tax purposes, in the method of accounting used by SAI for its
workers' compensation loss reserves. As a result, the Company recorded a
deferred tax asset relating to the reserves and an increase in income taxes
payable of approximately $775,000. Under the provisions of the Internal Revenue
Code ("IRC"), the Company can amortize over three years the payment of taxes due
for changes resulting in taxable income and can recognize currently deductions
resulting from the change in method. The Company has classified as long term
those taxes resulting from this change which it expects to pay in more than one
year.
Prior to June 30, 1997, Amstaff, Inc. was taxed under the Subchapter S
provisions of the IRC whereby its profits and losses flowed directly to its
former shareholders for U.S. federal income tax purposes. Upon the merger of
Amstaff, Inc. with the Company on June 30, 1997, Amstaff, Inc. no longer
qualified under the Subchapter S provisions of the IRC and became a taxable
entity. In connection with Amstaff, Inc.'s change in tax status, the Company
recorded approximately $123,000, $196,000 and $514,000 as of December 31, 1994,
1995 and 1996, respectively, in additional deferred tax assets, primarily
related to certain reserves for other state taxes and workers' compensation
claims.
-25-
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
The gross amounts of deferred tax assets and liabilities recorded in
the accompanying consolidated balance sheets at December 31, 1995 and 1996 are
as follows:
1995 1996
-------------- --------------
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts........................ $ 59,361 $ 167,301
Accrued health care claims............................. 222,422 315,897
Reserve for workers' compensation claims,
net of reinsurance recoverable....................... 973,788 934,078
Reserve for other state taxes.......................... 392,951 693,851
Accrued bonuses........................................ 47,088 --
Net operating losses................................... -- 142,826
Deferred compensation.................................. 89,420 --
Other.................................................. 59,356 25,273
-------------- --------------
$ 1,844,386 $ 2,279,226
============== ==============
Long term deferred tax assets and (liabilities):
Deferred compensation.................................. $ 100,062 8,878
Reserve for workers' compensation claims,
net of reinsurance recoverable....................... 566,505 737,158
Depreciation and amortization.......................... (20,498) (26,948)
Other.................................................. 57,406 14,343
-------------- --------------
$ 703,475 $ 733,431
============== ==============
</TABLE>
Realization of the above deferred tax assets is dependent on generating
sufficient taxable income in the future to offset the deductible temporary
differences generating the deferred tax assets. Although realization is not
assured, management believes that it is more likely than not that all of the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced if estimates of future taxable
income are reduced.
A reconciliation of the differences between income taxes computed at
the federal statutory tax rate and the income tax provisions reflected in the
accompanying consolidated statements of income is as follows:
1994 1995 1996
-------- --------- ---------
Income taxes computed at the federal
statutory tax rate of 34% .......... $ 885,235 $ 28,621 $ 941,230
State income taxes, net of federal
income tax effect .................. 22,258 23,925 40,260
Other, net ......................... (48,734) 950 (91,104)
--------- --------- ---------
Provision for income taxes ......... $ 858,759 $ 53,496 $ 890,386
========= ========= =========
-26-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution plan covering certain of
its worksite employees for a number of client companies. The Company
contributes, on behalf of each participating client, varying amounts based on
client company elections. Total Company contributions for the years ended
December 31, 1994, 1995 and 1996 were $416,922, $550,776 and $1,065,072,
respectively. The Company also has a deferred savings plan covering all internal
and worksite employees of a subsidiary for which contributions are funded by the
Company based on the lesser of 20% of the employee deferrals or 1% of the
employee gross wages. Total Company contributions for the years ended December
31, 1994, 1995 and 1996 were $35,000, $73,000 and $108,000, respectively.
In August 1996, the Company received a favorable determination letter
from the Internal Revenue Service ("IRS") regarding the qualified status of its
defined contribution plan under Section 401(k) of the IRC. In its application to
the IRS, the Company informed the IRS that the Company is involved in the
business of leasing employees to client companies and that the 401(k) plan
covered worksite or leased employees who satisfied the plan's eligibility
requirements.
The Company sponsors an unfunded deferred compensation plan (the
"Deferred Plan"). The Deferred Plan covers a selected group of employees as
determined by the Company's Board of Directors. The amounts due under the
Deferred Plan are based on bonuses granted by the Board of Directors, at its
discretion at each year end for that year's performance by the employee. Based
on the awards granted, the Company recorded compensation expense of $41,200
during 1994. No deferred compensation expense was recognized during 1995 and
1996.
The amount of compensation subject to the Deferred Plan and the vesting
period for individual grants, or any changes thereto, is established by the
Company's Board of Directors. Deferred compensation amounts generally vest at
the end of three years from the date of award, provided the participant is
employed by the Company on such date. At December 31, 1996 the vesting schedule
under the Plan is as follows:
1997 $242,013
1998 41,200
--------
$283,213
========
The Company has included these amounts within other liabilities in the
accompanying balance sheets as short term or long term based on the applicable
vesting dates. Of the above amounts approximately $200,000 at December 31, 1996,
relate to deferred compensation to the Company's principal stockholders. All
deferred compensation is expected to be paid in cash.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company has entered into non-compete agreements with its Chairman
and Vice-Chairman, who are also the Company's principal stockholders. The
agreements are for a term to be specified by the Company, not to exceed two
years, in the event of the Chairman's or Vice-Chairman's termination. The
non-compete agreements require payment to the Chairman and Vice-Chairman of
their full salary and benefits during the term of the agreement.
The Company leases certain office space, automobiles and office
equipment under non-cancelable operating leases expiring on various dates
through the year 2018. Total rent expense
-27-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
charged to operations during the years ended December 31, 1994, 1995 and 1996
was approximately $292,200, $508,300 and $638,200 respectively.
At December 31, 1996, the minimum annual rental commitments under the
previously described operating leases are as follows:
FOR THE YEAR ENDING
DECEMBER 31,
---------------------------------------------
1997........................ $ 977,776
1998........................ 788,860
1999........................ 547,959
2000........................ 373,699
2001........................ 324,025
Thereafter.................. 4,218,048
-------------
$ 7,230,367
=============
The Company is a defendant in a lawsuit related to a wrongful death and
premises liability claim involving a worksite employee. The plaintiff's original
complaint sought damages in excess of $10,000,000; however, such complaint was
dismissed in part and amended to seek damages in excess of $15,000. The court
has sustained plaintiff's amended complaint alleging premises liability against
both the Company and its client as a result of a worksite accident at client's
premises. The Company is asserting that its liability under this claim, if any,
should be limited to $100,000 due to the immunity provisions of the Florida
workers' compensation statute involving worksite accidents. The Company's
motions for summary judgment on that basis were denied, and discovery in the
proceeding continues. While there can be no assurance that the ultimate outcome
of this lawsuit will not have a material adverse effect on the Company's
financial condition or results of operations, management believes, based on
consultations with the Company's counsel, that the ultimate outcome of this
lawsuit should not have such an effect.
The Company is a defendant in a lawsuit brought in Dade County Circuit
Court in November 1995 by an individual who alleges that he was injured by a
worksite employee of a client of the Company, which owns and operates a hotel
and was a co-defendant in the litigation. The plaintiff settled with the
Company's client worksite and the employee who were co-defendants in the
lawsuit. The plaintiff alleges that the employee, while he was working as a
valet parking attendant, was negligent in a motor vehicle collision and severely
and permanently injured the plaintiff. The plaintiff alleged damages in excess
of $50,000 in his amended complaint for, among other things, bodily injury,
medical costs, pain and suffering, and lost ability to earn income. A jury trial
is currently scheduled for March 1998. Based on consultations with the Company's
counsel, management of the Company believes that it has meritorious defenses to
the plaintiff's claims and that if the lawsuit is adversely determined, the
Company may be entitled to indemnification from its client and/or its liability
insurance carrier. Although management believes that the Company's ultimate
liability in this matter should not be material, there can be no assurance that
the Company will prevail in the litigation, in a related claim for
indemnification, or that the liability of the Company, if any, would not have a
material adverse effect on the Company's financial condition and results of
operations.
In October 1996, the Company received a notice of assessment in the
discounted amount of approximately $53,500 from The Treasurer of the State of
Florida Department of Insurance as Receiver of United States Employer Consumer
Self Insurance Fund of Florida, a workers' compensation insurance
-28-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
fund which was declared insolvent (the "Fund"). The Company paid the discounted
assessment in January 1997. The Company had certain worksite employees covered
by the Fund during the fiscal years ended December 31, 1992, 1993 and 1994. The
court order authorizing the assessment provides that the Company, by paying the
discounted assessment, is deemed to have paid its assessment in full and is not
subject to any further assessment for policyholder loss claims. The Company may
be subject to additional liability for the assessments of other Fund members.
The Company believes that there are approximately 700 members of the Fund which
have been assessed $37,000,000 in the aggregate. Although the amount of the
potential exposure, if any, for such additional liability is not yet
determinable, management believes that the Company would have meritorious
defenses to such additional liability and that its ultimate liability in this
matter will not have a material adverse effect on the Company's financial
condition or results of operations. There cannot, however, be any assurance that
any such liability will not have such material adverse effect.
In June 1995, the National Labor Relations Board ("Board") filed a
complaint charging Amstaff, Inc., with a refusal to bargain with respect to a
collective bargaining agreement, under which a now former client's employees
were employed, in violation of the National Labor Relations Act. Vincam acquired
Amstaff, Inc. in June 1997. The charge was initially dismissed by a Detroit
office of the Board, but has since been reinstated following a union appeal to
the general counsel for the Board. If the Board rules against the Company, the
Company could be held liable for lost wages and benefits of such employees for a
period of almost four years. Any award would be reduced by any earnings of such
employees which are received or reasonably could have received from other
employment during the relevant time period. The Company cannot currently
estimate its potential liability if the Board were to rule against it. The
Company intends to vigorously defend this case, but there can be no assurance
that the Company will prevail in the proceedings or that the liability of the
Company, if any, would not have a material adverse effect on the Company's
financial condition and results of operations.
The Company is also involved in other legal and administrative
proceedings arising in the ordinary course of business. The outcomes of these
actions are not expected to have a material effect on the Company's financial
position or results of operations.
NOTE 15 - SUBSEQUENT EVENTS (UNAUDITED)
In March 1997, the Company entered into agreements with national
insurance companies to reinsure substantially all of the Company's
responsibility for remaining claims acquired upon the SAI Acquisition under
SAI's large deductible workers' compensation insurance policies for the years
1994, 1995, and 1996 for an aggregate premium of $1,870,000. As a result, the
Company has recorded a deferred gain in the amount of approximately $600,000
which will be recognized to income in future periods based on the proportion of
cumulative claims paid to the total estimated liability for claims.
In September 1997, the Company entered into agreements with national
insurance companies to reinsure substantially all of the Company's
responsibility for remaining claims acquired upon the AMI Acquisition under
AMI's large deductible workers' compensation insurance policies for the years
1995, and 1996 for an aggregate premium of $725,000. No gain resulted from this
transaction.
On June 30, 1997, the Company entered into an agreement with a health
insurance company to purchase a managed care provider network and to terminate
the strategic alliance with such health insurance company under which the
Company provided its workers' compensation managed care services. In connection
with the agreement, the Company made a payment of $1,000,000 and accounted for
such cost as a termination fee. The balance due under the agreement of
approximately $1,400,000
-29-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
will be payable in the fourth quarter of 1997 upon delivery of the managed care
provider network, and will be capitalized.
On October 27, 1997, the Company announced that it has entered into a
definitive merger agreement with Staffing Network, Inc. ("SNI"), a privately
held PEO headquartered in Manchester, New Hampshire with approximately 525
clients and more than 5,000 worksite employees. The Company will issue 1,200,000
million shares of its common stock in exchange for all of the equity of SNI. The
merger will be accounted as a pooling of interest transaction and is expected to
close in the fourth quarter of 1997 following receipt of required regulatory
approvals.
* * * * * *
-30-
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
SUPPLEMENTARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1995 1996
----------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 2,773,207 $ 18,884,531
Investments ............................................. 639,232 149,626
Restricted cash ......................................... 5,290,955 2,331,917
Accounts receivable ..................................... 13,102,794 28,001,888
Due from affiliates ..................................... 312,664 304,553
Deferred taxes .......................................... 2,130,556 2,579,534
Reinsurance recoverable ................................. -- 1,728,000
Prepaid workers' compensation insurance premium ......... -- 5,483,972
Prepaid expenses and other current assets ............... 1,164,495 1,456,646
------------ ------------
Total current assets ............................. 25,413,903 60,920,667
Property and equipment, net ............................. 3,192,171 4,945,195
Deferred taxes .......................................... 743,450 771,135
Reinsurance recoverable ................................. -- 1,472,000
Client contracts ........................................ 1,569,565 3,242,921
Goodwill ................................................ -- 4,791,836
Other assets ............................................ 448,808 364,399
------------ ------------
$ 31,367,897 $ 76,508,153
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ................... $ 3,352,304 $ 4,430,416
Accrued salaries, wages and payroll taxes ............... 11,380,112 21,161,185
Amounts due under acquisition agreement ................. 1,200,772 3,411,050
Reserve for claims ...................................... 4,592,054 6,535,025
Reserve for other state taxes ........................... 1,243,738 2,208,738
Income taxes payable .................................... 684,134 1,423,854
Current portion of long term borrowings ................. 1,464,930 179,971
Distribution and notes payable to affiliate ............. 980,000 --
Deferred compensation ................................... 263,000 242,013
Deferred gain ........................................... -- 323,157
------------ ------------
Total current liabilities ........................ 25,161,044 39,915,409
Long term borrowings, less current portion .................. 1,413,834 925,929
Notes payable to stockholders................................ -- 1,018,000
Reserve for claims .......................................... 1,674,187 3,265,332
Income taxes payable ........................................ 1,386,323 672,818
Deferred compensation ....................................... 294,300 41,200
Deferred gain ............................................... -- 275,275
Other liabilities ........................................... 353,552 499,091
------------ ------------
Total liabilities ................................ 30,283,240 46,613,054
------------ ------------
Preferred Stock, $.01 par value, 20,000,000 shares authorized
165.376 shares mandatorily redeemable Series A Preferred
Stock issued and outstanding in 1995 .................... 6,263,610 --
------------ ------------
Commitments and contingencies (Note 14) ..................... -- --
------------ ------------
Stockholders' (deficit) equity:
Common stock, $.001 par value, 60,000,000 shares
authorized, 7,434,098 and 12,019,996 shares issued and
outstanding in 1995 and 1996, respectively ........... 7,434 12,020
Additional paid in capital .............................. -- 33,240,338
Accumulated deficit ..................................... (5,186,387) (3,357,259)
------------ ------------
Total stockholders' (deficit) equity ............. (5,178,953) 29,895,099
------------ ------------
$ 31,367,897 $ 76,508,153
============ ============
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
-31-
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues ................................ $ 318,564,858 $ 419,370,972 $ 654,757,791
------------- ------------- -------------
Direct costs:
Salaries, wages and employment
taxes of worksite employees ....... 280,602,278 372,520,644 579,116,425
Health care and workers' compensation 19,594,657 21,453,168 31,125,994
State unemployment taxes and other .. 2,244,053 4,026,388 7,325,496
------------- ------------- -------------
Total direct costs ............ 302,440,988 398,000,200 617,567,915
------------- ------------- -------------
Gross profit ............................ 16,123,870 21,370,772 37,189,876
------------- ------------- -------------
Operating expenses:
Administrative personnel ............ 6,911,806 11,151,590 19,223,096
Other general and administrative .... 4,259,370 6,408,849 9,121,403
Sales and marketing ................. 1,870,058 2,796,102 5,046,770
Provision for doubtful accounts ..... 55,111 278,969 423,206
Depreciation and amortization ....... 327,916 564,371 1,190,114
------------- ------------- -------------
Total operating expenses ...... 13,424,261 21,199,881 35,004,589
------------- ------------- -------------
Operating income ........................ 2,699,609 170,891 2,185,287
Interest (expense) income, net .......... (15,297) 282,012 801,279
------------- ------------- -------------
Income before taxes ..................... 2,684,312 452,903 2,986,566
Provision for income taxes .............. (837,508) (82,290) (896,723)
------------- ------------- -------------
Net income .............................. $ 1,846,804 $ 370,613 $ 2,089,843
============= ============= =============
Net income per common and common
equivalent share .................... $ 0.14 $ 0.03 $ 0.14
============= ============= =============
Weighted average number of shares
outstanding used in earnings per
share calculation ................... 13,192,229 12,838,770 14,843,960
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
-32-
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)
COMMON STOCK RETAINED
----------------------------- ADDITIONAL EARNINGS
PAID IN (ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT) TOTAL
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 .................. 9,374,011 $ 9,374 $ 39,031 $ 829,298 $ 877,703
Purchase of a business ...................... -- -- -- (8,105) (8,105)
Net income .................................. -- -- -- 1,846,804 1,846,804
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 ................ 9,374,011 9,374 39,031 2,667,997 2,716,402
Acquisition of shares ....................... (374,013) (374) (39,031) (1,460,595) (1,500,000)
Recapitalization, including transaction costs
of $445,150 charged to retained earnings .. (1,565,900) (1,566) -- (6,707,194) (6,708,760)
Distributions to shareholders ............... -- -- -- (57,208) (57,208)
Net income .................................. -- -- -- 370,613 370,613
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 ................ 7,434,098 7,434 -- (5,186,387) (5,178,953)
Issuance of common stock, net of
transaction costs of $3,058,685
charged to paid in capital ................. 3,000,000 3,000 26,938,315 -- 26,941,315
Conversion of preferred stock into common
Stock ...................................... 1,565,899 1,566 6,262,044 -- 6,263,610
Issuance of common stock to employees
under stock option plans ................... 19,999 20 39,979 -- 39,999
Distributions to shareholders ............... -- -- -- (260,715) (260,715)
Net income .................................. -- -- -- 2,089,843 2,089,843
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 ................ 12,019,996 $ 12,020 $ 33,240,338 $ (3,357,259) $ 29,895,099
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
-33-
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 1,846,804 $ 370,613 $ 2,089,843
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................ 327,916 564,371 1,190,114
Provision for doubtful accounts .............................. 55,111 278,969 423,206
Deferred gain ................................................ -- -- 598,432
Deferred income tax benefit .................................. (1,335,070) (773,688) (476,663)
Changes in assets and liabilities:
(Increase) decrease in restricted cash ..................... (3,399,328) 79,579 4,209,038
Increase in accounts receivable ............................ (2,568,651) (5,277,042) (14,439,113)
(Increase) decrease in due from affiliates ................. (73,928) 52,680 8,111
Increase in reinsurance recoverable ........................ -- -- (3,200,000)
Increase in prepaid workers' compensation
insurance premium ........................................ -- -- (5,483,972)
Decrease (increase) in prepaid expenses and other current
assets ................................................... 463,406 (842,414) (290,195)
Increase in other assets ................................... (190,079) (113,003) (182,121)
(Decrease) increase in accounts payable and accrued expenses (1,054,050) 1,553,627 715,891
Increase in accrued salaries, wages and payroll taxes ...... 2,964,284 4,128,721 8,556,285
Increase in reserve for claims ............................. 2,096,558 1,753,083 3,103,646
Increase in reserve for other state taxes .................. 392,000 559,000 965,000
Increase in income taxes payable ........................... 1,135,040 315,056 26,215
Increase (decrease) in deferred compensation ............... 41,200 -- (274,087)
Increase in other liabilities .............................. 36,893 60,169 145,539
------------ ------------ ------------
Net cash provided by (used in) operating activities ............... 738,106 2,709,721 (2,314,831)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ............................ (1,165,623) (1,104,039) (2,572,166)
Redemption (purchases) of short term investments ............... 202,580 (639,232) 489,606
Cash placed in escrow in connection with acquisition of SMG .... -- -- (1,250,000)
Cash paid in acquisitions, net of cash acquired of $137,748 .... -- -- (2,784,566)
(Issuance) collection of notes receivable from stockholders .... (123,078) 123,078 --
Acquisition of client contracts ................................ (8,105) (317,440) (29,295)
------------ ------------ ------------
Net cash used in investing activities ............................. (1,094,226) (1,937,633) (6,146,421)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on borrowings ............................... (340,320) (30,000) (2,302,864)
Proceeds from borrowings ....................................... 497,602 213,657 --
Proceeds from borrowings from affiliates ....................... -- 280,000 1,268,000
Recapitalization costs ......................................... -- (445,150) --
Cash paid in connection with acquisition of stock .............. -- (300,000) --
Payment of amounts due under acquisition agreements ............ -- (99,228) (413,159)
Payment of distribution payable to shareholders ................ -- -- (700,000)
Distributions to shareholders .................................. -- (57,208) (260,715)
Issuance of common stock, net of transaction costs of $3,058,685 -- -- 26,941,315
Issuance of common stock to employees under stock option plans . -- -- 39,999
------------ ------------ ------------
Net cash provided by (used in) financing activities ............... 157,282 (437,929) 24,572,576
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents .............. (198,838) 334,159 16,111,324
Cash and cash equivalents, beginning of year ...................... 2,637,886 2,439,048 2,773,207
------------ ------------ ------------
Cash and cash equivalents, end of year ............................ $ 2,439,048 $ 2,773,207 $ 18,884,531
============ ============ ============
SUPPLEMENTAL DISCLOSURES INFORMATION OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ....................................................... $ 125,795 $ 222,035 $ 223,979
============ ============ ============
Income taxes ................................................... $ 1,033,821 $ 493,511 $ 1,206,336
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
-34-
<PAGE>
THE VINCAM GROUP, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Acquisition of Assets and Liabilities of The Stone Mountain Group, Inc.
On August 30, 1996, the Company acquired substantially all of the
assets and liabilities of The Stone Mountain Group, Inc. ("SMG") in a
transaction accounted for as a purchase. The fair value of the assets acquired
and liabilities assumed, and the consideration paid or to be paid were as
follows:
Fair value of net assets acquired:
Client contracts........................................ $ 1,300,000
Accounts receivable..................................... 883,187
Prepaid expenses and other assets....................... 10,231
----------------
Total non-cash assets................................... 2,193,418
Accounts payable and accrued expenses................... 362,221
Accrued salaries, wages and payroll taxes............... 1,224,788
Reserves for claims..................................... 430,470
---------------
Total liabilities assumed............................... 2,017,479
---------------
Net assets acquired, excluding cash..................... 175,939
Cash acquired........................................... 137,748
---------------
Net assets acquired..................................... $ 313,687
================
Promissory notes payable to SMG shareholders............ $ 1,373,437
Cash placed in escrow................................... 1,250,000
Cash paid for acquisition of SMG........................ 2,357,314
---------------
Purchase price.......................................... $ 4,980,751
================
The following is a reconciliation of the purchase price to the excess
of costs associated with the acquisition over the estimated fair value of net
assets acquired allocated to goodwill:
Purchase price......................................... $ 4,980,751
Net assets acquired.................................... (313,687)
Costs associated with the acquisition.................. 189,000
-----------------
Amount allocated to goodwill........................... $ 4,856,064
=================
In connection with the acquisition of the assets of SMG, the Company
issued promissory notes for $1,373,437 due in 1997 and placed in escrow
$1,250,000, in accordance with an escrow agreement for potential purchase price
adjustments in the event that, among other things, client retention fails to
meet certain targets.
In January 1995, the Company issued a subordinated note payable for
$1,200,000 as partial consideration for shares reacquired by the Company.
During February 1995, the Company and its stockholders entered into an
Agreement and Plan of Recapitalization whereby the Company's stockholders
exchanged a portion of their shares of common stock for approximately 166 shares
of Series A Participating Convertible Preferred Stock valued at approximately
$6,264,000.
During 1995, the Company acquired $334,054 of computer hardware and
software under a capital lease agreement.
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
-35-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 1- NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Vincam Group, Inc. and its subsidiaries (the "Company") are a
professional employer organization ("PEO") engaged primarily in the provision of
human resource management and personnel administration services. In addition,
the Company provides certain managed care services, including managed behavioral
health care, employee assistance programs, drug-free workplace programs,
utilization review services, comprehensive workers' compensation managed care,
risk management and loss containment services.
The Company provides PEO services primarily to small and medium sized
companies in a variety of industries, including manufacturing, retail, and
hospitality. Managed care services are provided to PEO clients and to health and
workers' compensation insurance companies, health maintenance organizations,
other managed care providers and large, self insured employers.
PEO service contracts with client companies are generally for one year
terms with automatic renewal options and subject to termination on 30 days'
notice by either party during the first year and annually thereafter. Managed
care contracts with clients are for terms of one or more years and are subject
to cancellation by either party upon 30 to 180 days' notice depending on the
nature of the services provided.
The Company does not have a concentration of customers in any one
industry; however, during 1994, 1995 and 1996, a significant portion of the
Company's revenues were generated in Florida, Michigan, New Hampshire, Colorado
and Georgia. The Company's revenues are generated predominantly by PEO services.
A summary of the significant accounting policies followed in the
preparation of the accompanying consolidated financial statements is presented
below:
PRINCIPLES OF CONSOLIDATION. The accompanying financial statements
include the accounts of The Vincam Group, Inc. and its principal subsidiaries,
Vincam Human Resources, Inc. ("VHR"), Vincam/Staff Administrators, Inc.
("VSAI"), Vincam/Amstaff, Inc. ("VAMI"), Vincam/Staffing Network, Inc. ("VSNI"),
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
-36-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
revenues and expenses during the reporting period. The more significant
estimates relate to the Company's reserve for claims. Actual results could
differ from those estimates.
RESERVE FOR CLAIMS. The Company's workers' compensation benefits and
certain of its health care benefits are provided under large deductible insured
plans. The Company records reserves for workers' compensation and health care
claims costs based on actuarial calculations using the Company's loss history of
workers' compensation and health care claims, including estimates of incurred
but not reported claims. Prior to 1994, the Company's workers' compensation
insurance was under a loss-sensitive retrospectively rated plan which provided
for retroactive premium adjustments based on actual loss experience.
In December 1996, VHR entered into an agreement with a national
insurance company to provide guaranteed fixed cost workers' compensation
insurance coverage for 1997 through 1999, subject to a deductible of $2,000 per
medical only claim. Accordingly, effective January 1, 1997, the Company will
record workers' compensation costs based primarily on the fixed portion of the
premium of its workers' compensation insurance policy.
In addition, in December 1996, VHR entered an agreement to reinsure its
remaining claims under the Company's large deductible workers' compensation
insurance policies for the years 1994, 1995, and 1996, for an aggregate premium
of $3,200,000. As a result, the Company has recorded the premium as a
reinsurance recoverable at December 31, 1996 and a deferred gain in the amount
of approximately $600,000 which will be recognized to income in future periods
based on the proportion of cumulative claims paid to the total estimated
liability for claims.
Effective April 1, 1994, the VSAI began a workers' compensation policy
whereby the Company was self-insured for all claims up to an aggregate stop loss
amount. Accrued workers' compensation claims are based on an estimate of
reported and unreported losses, net of amounts covered under the applicable
insurance policy, for injuries occurring on or before the balance sheet date.
The loss estimates are based on several factors including the VSAI's current
experience, relative health care costs, regional influences and other factors.
While estimated losses may not be paid for several years, an accrual for the
estimated value of outstanding claims is maintained with changes in the accrual
reflected as a component of direct costs in the period of the change. Estimates
are based on actuarial amounts. These estimates are continually reviewed and any
adjustments are reflected in operations as they become known, and are subject to
material change. VSAI became insured under the Company's guaranteed fixed cost
workers' compensation insurance coverage effective January 7, 1997.
VAMI workers' compensation benefits and certain of its health care
benefits are provided under large deductible insured plans. VAMI records
reserves for workers' compensation and health care claims costs based on
calculations using VAMI's loss history of workers' compensation and health care
claims, respectively.
In all cases regarding workers' compensation and health care claims,
VAMI's reserves are established at the time a participant files a claim.
Furthermore, VAMI, in determining its reserves, includes reserves for estimated
claims incurred but not reported, respectively.
VAMI's estimates of its claims reserves, including its estimate of
incurred but not reported claims, are based on its loss history. The ultimate
costs of health care and workers' compensation claims will depend on actual
costs incurred in settling the claims and may differ from the amounts reserved
by VAMI for those claims. VAMI became insured under the Company's guaranteed
fixed cost workers' compensation insurance coverage effective June 30, 1997.
-37-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
VSNI has a partially self-insured plan to provide health and welfare
benefits to its eligible employees. The plan is subject to the provisions of the
Employee Retirement Income Security Act of 1974 (ERISA). The plan provides
health benefits for hospital, surgical and major medical up to a maximum
lifetime benefit of $2,000,000 per individual covered, dental benefits up to a
maximum $750 per individual per year and vision benefits up to a maximum of
approximately $200 per individual per year. Eligible employees are regular
full time employees of the Company in active service, completing at least 90
days of active service and working a minimum of 30 hours per week. The Company
has secured stop-loss insurance which pays for health claims paid in excess of
$35,000 per covered individual per year.
VSNI's accrual for medical claims has been estimated based upon an
actuarial study and past paid claims experience. The accrual includes estimated
expenses to be incurred in connection with processing and paying the accrued
medical claims. Such estimates may be more or less than the amount ultimately
paid when the claims are settled, and it is reasonably possible that the
Company's estimates may change in the near term.
VSNI has, from time to time, been insured under various types of
workers' compensation policies. These have included a retrospective rating plan,
whereby premiums were paid to the insurance carrier based on estimated actual
losses plus an administrative fee; a guaranteed cost plan, whereby monthly
premiums are paid for complete coverage of all claims under the policy; and,
currently, a high deductible paid loss plan, whereby premiums are based on a
$150,000 deductible per person or occurrence.
VSNI workers' compensation claims accrual is an estimate based on past
claims experience as well as an estimate of reported and unreported losses, net
of amounts covered under applicable insurance policies, for injuries occurring
on or before the balance sheet date. The loss estimates are based on several
factors, including the Company's current experience, relative health care costs,
regional influences and other factors. Such estimates may be more or less than
the amount ultimately paid when the claims are settled and it is reasonably
possible that the Company's estimates may change in the near term. VSNI became
insured under the Company's guaranteed fixed cost workers' compensation
insurance coverage effective December 1, 1997.
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.
RESERVE FOR OTHER STATE TAXES. The reserve for other state taxes has
been established for amounts expected to be due in connection with certain state
tax matters.
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
-38-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
reviews long-lived assets, identifiable intangibles and goodwill and reserves
for impairment whenever events or changes in circumstances indicate the carrying
amount of the assets may not be fully recoverable. At December 31, 1996, the
Company had recorded goodwill of $4,791,836, net of accumulated amortization of
$64,228.
ADVERTISING COSTS. Advertising expenditures are charged to operations
as incurred. Advertising expense amounted to approximately $420,200, $443,200
and $617,800 in 1994, 1995 and 1996, respectively.
CLIENT CONTRACTS. Costs incurred in connection with the acquisition of
client contracts from other professional employer organizations, as well as the
fair market value of contracts acquired in connection with purchase business
combinations, are capitalized and amortized using the straight line method over
a period of 5 to 15 years, based on the previous professional employer
organization client retention rate. 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 $1,569,565 and $3,242,921, respectively (net of accumulated amortization of
$46,875 in 1995 and $311,213 in 1996).
CASH AND CASH EQUIVALENTS. Cash equivalents include investments with
original maturities of three months or less and are stated at cost which
approximates market value.
INCOME TAXES. The Company records income tax expense using the
liability method of accounting for deferred income taxes. Under the liability
method, deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial statement
and income tax bases of the Company's assets and liabilities. An allowance is
recorded when it is more likely than not that any or all of a deferred tax asset
will not be realized. The provision for income taxes includes taxes currently
payable plus the net change during the year in deferred tax assets and
liabilities recorded by the Company.
The Company is subject to certain state taxes based on gross receipts,
payroll and taxable income within that state. Taxes based on gross receipts and
payroll are classified as salaries, wages and employment taxes of worksite
employees in the accompanying consolidated statements of income, while taxes
based on income are included in the provision for income taxes.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE. Net income per
common and common equivalent share has been computed based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during each of the three years ended December 31, 1996. The Company
has considered as outstanding common stock equivalents during each of the three
years ended December 31, 1996, options awarded to employees and directors of the
Company (see Notes 10 and 11), as well as the shares of common stock that have
been issued in connection with the acquisitions of Staffing Network, Inc.,
Amstaff, Inc. and Staff Administrators, Inc. For purposes of the calculation of
net income per common and common equivalent share, the mandatorily redeemable
preferred stock is also considered a common stock equivalent.
Net income per common and common equivalent share amounts for each of
the years presented have been calculated giving retroactive effect to an
approximate 8,417 to 1 stock split effected by the Company in June 1995, a 3 for
4 split effected on February 21, 1996, and a 3 for 2 stock split effected on
November 21, 1997, (jointly, the "Stock Splits," see Notes 10 and 15). All
common and common equivalent share amounts have also been retroactively adjusted
to reflect the Stock Splits.
-39-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
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 is
payable in 1997, and $1,250,000 was placed in escrow for potential purchase
price adjustments in the event that, among other things, client retention fails
to meet certain targets. The SMG Acquisition was accounted for by the Company
using the purchase method of accounting. Excess of costs over the estimated fair
value of net assets acquired of $4,856,064 associated with the SMG Acquisition
was allocated to goodwill, and is being amortized over a period of 25 years. The
most significant adjustments to the balance sheet resulting from the SMG
Acquisition are disclosed in the supplemental disclosure of non-cash investing
and financing activities in the accompanying statement of cash flows.
The following information presents the unaudited pro forma consolidated
results of operations of the Company for the years ended December 31, 1995 and
1996 as if the SMG Acquisition had occurred on January 1, 1995, after giving
effect to certain adjustments.
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
Revenues ................ $461,287,877 $686,729,694
============ ============
Net income .............. $ 572,293 $ 1,905,125
============ ============
Net income per common and
common equivalent share $ 0.04 $ 0.13
============ ============
These results are presented for informational purposes only and are not
necessarily indicative of the future results of operations or financial position
of the Company or the results of operations or financial position of the Company
that would have been achieved had the acquisition actually occurred on January
1, 1995.
On January 7, 1997, the Company acquired Staff Administrators, Inc.
("SAI"), a privately held PEO headquartered in Denver, Colorado (the "SAI
Acquisition"). The Company issued 750,000 shares of its common stock (after
adjusting for the effect of the Stock Splits, see Notes 10 and 15) in exchange
for all of the equity in SAI and its subsidiaries (other than Staff
Administrators of Western Colorado,
-40-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
Inc.). The transaction has been accounted for in accordance with the pooling of
interest accounting treatment; accordingly, all prior period financial
statements presented herein include the assets and liabilities and results of
operations of SAI. In connection with the acquisition of SAI, the Company also
acquired, in a transaction accounted for as a purchase, 49% minority interest in
Staff Administrators of Western Colorado, Inc. ("SAWCI"), a 51% subsidiary of
SAI (the "SAWCI Acquisition"). The Company issued 30,000 shares of its common
stock (after adjusting for the effect of the Stock Splits, see Notes 10 and 15)
for the 49% interest in SAWCI. The most significant adjustments to the balance
sheet resulting from the SAWCI Acquisition will be reflected on the Company's
balance sheet as of January 7, 1997 and will primarily consist of approximately
$570,000 increase in goodwill and $300,000 increase in client contracts.
On June 30, 1997, the Company acquired Amstaff, Inc. ("AMI"), a
privately held PEO headquartered in Novi, Michigan (the "AMI Acquisition"). The
Company issued 547,743 shares of its common stock (after adjusting for the
effect of the Stock Splits, see Notes 10 and 15) in exchange for all of the
outstanding shares of common stock of AMI and its subsidiaries. The transaction
has been accounted for in accordance with the pooling of interests accounting
treatment; accordingly, all prior period financial statements presented herein
include the assets and liabilities and results of operations of AMI.
On December 1, 1997, the Company acquired Staffing Network, Inc.
("SNI"), a privately held PEO headquartered in Manchester, New Hampshire (the
"SNI Acquisition"). The Company issued 1,800,000 shares of its common stock
(after adjusting for the effect of the Stock Splits, see Notes 10 and 15) in
exchange for all of the outstanding shares of common stock of SNI. The
transaction has been accounted for in accordance with the pooling of interests
accounting treatment; accordingly, all prior period financial statements
presented herein include the assets and liabilities and results of operations of
SNI.
The following combines audited selected historical financial
information of SAI, AMI, SNI and Vincam for the years ended December 31, 1994,
1995 and 1996, and reflects the most significant adjustments resulting from the
SAI, AMI and SNI acquisitions.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------------------
VINCAM SAI, AMI & SNI ADJUSTMENTS RESULTS
--------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues ................ $ 191,532,568 $ 127,032,290 $ -- $318,564,858
=============== =============== ============= ============
Net income .............. $ 1,799,950 $ (104,902) $ 151,756 $ 1,846,804
=============== =============== ============= ============
Net income per common and
common equivalent share $ 0.18 $ -- $ -- $ 0.14
=============== =============== ============= ============
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
DECEMBER 31, 1995
--------------------------------------------------------------------------
VINCAM SAI, AMI & SNI ADJUSTMENTS RESULTS
--------------- ------------------ ------------------ ------------
<S> <C> <C> <C> <C>
Revenues ................ $ 239,407,710 $ 179,963,262 $ -- $419,370,972
=============== ================== ================== ============
Net income .............. $ 809,837 $ (640,513) $ 201,289 $ 370,613
=============== ================== ================== ============
Net income per common and
common equivalent share $ 0.08 $ $ -- $ 0.03
=============== ================== ================== ============
DECEMBER 31, 1996
---------------------------------------------------------------------------
VINCAM SAI, AMI & SNI ADJUSTMENTS RESULTS
-------------- ----------------- ----------------- ------------
Revenues ................ $ 395,619,538 $ 259,138,253 $ -- $654,757,791
=============== ================== ================== ============
Net income .............. $ 3,585,976 $ (2,022,250) $ 526,117 $ 2,089,843
=============== ================== ================== ============
Net income per common and
common equivalent share $ 0.31 $ -- $ -- $ 0.14
=============== ================== ================== ============
</TABLE>
The following unaudited pro forma financial information is presented to
reflect the effect of the merger of AMI and SNI with wholly owned subsidiaries
of the Company, which acquisitions have been accounted for as pooling of
interest. The pro forma financial information for each of the three years ended
December 31, 1996, assume that the mergers were consummated on January 1, 1994.
The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of the results of operations that would have
been achieved had the mergers actually been consummated on the date indicated or
that may be obtained in the future. The following pro forma adjustments to net
income as reflected in the consolidated statements of income herein presented
relate to the recording of the provision for income taxes as if AMI and SNI were
taxed as "C" corporations. The adjustments result from the fact that AMI and SNI
were taxed under the Subchapter S provisions of the Internal Revenue Code before
its acquisition by the Company. See Note 12.
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
Net income reported in consolidated
statement of income ............... $ 1,846,804 $ 370,613 $ 2,089,843
Pro forma adjustment:
Provision for taxes - current .... (56,100) (130,600) (86,100)
----------- ----------- -----------
Pro forma net income ............... $ 1,790,704 $ 240,013 $ 2,003,743
=========== =========== ===========
Net income per common and
common equivalent share .......... $ 0.14 $ 0.02 $ 0.14
=========== =========== ===========
-42-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
On September 23, 1996, VSNI acquired certain assets, both tangible and
intangible, of Row Concept, Inc. and Row Management Services, Inc., both New
York corporations, at a purchase price of $566,000. In connection with the
acquisition, the Company acquired tangible assets with a fair value of
approximately $1,000. No liabilities were assumed. The acquisition was accounted
for as a purchase. The excess of the purchase price over the fair market value
of tangible assets acquired ($565,000) has been allocated to client contracts
and is being amortized on a straight-line basis over a period of 8 years, the
estimated average of a service contract.
On September 20, 1995, VSNI acquired certain assets, both tangible and
intangible, of Business Contract Staffing, Inc. and Complete Temporary Service,
Inc., both New York corporations, at a purchase price of $1,500,000. The payment
terms specified that $200,000 be paid at the purchase date, with the remainder
payable by the execution of four promissory notes. The notes, which are
unsecured, carry an annual interest rate of 6 1/2% and are payable in 36 equal
consecutive monthly installments of principal and interest beginning November
1995. In connection with the acquisition, the Company acquired tangible assets
with a fair market value of approximately $1,000. No liabilities were assumed.
The acquisition was accounted for as a purchase. The excess of the purchase
price over the fair market value of tangible assets acquired ($1,499,000) has
been allocated to client contracts and is being amortized on a straight-line
basis over a period of 8 years, the estimated average life of a service
contract.
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 3,000,000 shares of common stock of
the Company (after adjusting for the effect of the Stock Splits, see Notes 10
and 15). The Company used a portion of the proceeds to retire a subordinated
promissory note in the amount of $1,200,000 (see Note 8) and to pay a $700,000
distribution payable related to the Company's repurchase of an option to
purchase the Company's headquarters. In addition, the Company incurred
approximately $1,095,000 in other costs in connection with the offering.
Simultaneously with the completion of the initial public offering, the Company's
mandatorily redeemable Series A Participating Convertible Preferred Stock (the
"Series A Preferred Stock") was converted into 1,565,899 shares of the Company's
common stock (after adjusting for the effect of the Stock Splits, see Notes 10
and 15). See also Note 9.
Also in connection with the completion of the Company's initial public
offering, the Company amended and restated its Articles of Incorporation to
increase the authorized number of shares of the Company's common stock from
39,500,000 to 60,000,000, and to increase the authorized number of shares of
preferred stock from 500,000 to 20,000,000.
NOTE 4 - RESTRICTED CASH
The Company had cash deposits at December 31, 1995 and 1996 of
$5,290,955 and $1,081,917, respectively, which served as collateral on certain
standby letters of credit issued in connection with the Company's workers'
compensation insurance plan (see Note 7).
In connection with the SMG Acquisition, the Company has in escrow
$1,250,000. At December 31, 1996, the escrow funds have been classified as
restricted cash in the accompanying consolidated balance sheet (see Note 2).
-43-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 5 - ACCOUNTS RECEIVABLE
At December 31, 1995 and 1996, accounts receivable consisted of the
following:
1995 1996
------------ ------------
Billed to clients ................... $ 4,269,654 $ 9,132,079
Unbilled revenues ................... 9,047,731 19,466,459
------------ ------------
13,317,385 28,598,538
Less: allowance for doubtful account (214,591) (596,650)
------------ ------------
$ 13,102,794 $ 28,001,888
============ ============
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
1995 1996 (IN YEARS)
------------- ------------- ------------
<S> <C> <C> <C>
Land................................................... $ 284,374 $ 284,374
Building............................................... 775,158 775,158 30
Building and leasehold improvements.................... 637,092 773,924 7
Furniture and fixtures................................. 633,600 1,059,580 5
Office and computer equipment.......................... 1,851,233 3,704,396 3-5
Vehicles............................................... 199,812 251,010 3
------------- -------------
4,381,269 6,848,442
Less: accumulated depreciation and amortization........ (1,189,098) (1,903,247)
------------- ------------
$ 3,192,171 $ 4,945,195
============= =============
</TABLE>
At December 31, 1995 and 1996, gross fixed assets included $498,690 and
$152,000 of office and computer equipment under capital lease obligations. The
Company purchased $346,690 of these assets during 1996. See Notes 8, 10 and 14.
NOTE 7 - RESERVE FOR CLAIMS
In December 1996, VHR entered into an agreement with a national
insurance company to provide workers' compensation insurance coverage for 1997
through 1999, subject to a deductible of $2,000 per medical only claim.
Accordingly, effective January 1, 1997, the Company will record workers'
compensation costs based primarily on the fixed portion of its premium under
such policy, rather than through the previous practice of applying actuarial
estimates.
In addition, in December 1996, March 1997 (unaudited, see Note 15),
September 1997 (unaudited, see Note 15) and December 1997 (unaudited, see Note
15), the Company entered into agreements to reinsure substantially all of the
remaining claims under the Company's large deductible worker's compensation
insurance policies for the years 1994, 1995 and 1996 (including the remaining
claims acquired upon the acquisition of SAI under its large deductible workers'
compensation insurance policies for the years 1994, 1995 and 1996, those of AMI
for the years 1995 and 1996 and the first six months of 1997, and those of SNI
for the years 1995 and 1996 and the first three months of 1997), for an
aggregate premium of $6,010,000. Since reserves for claims for these years have
been previously provided, the Company has recorded the premium as a reinsurance
recoverable at December 31, 1996 and a deferred gain in the amount of
approximately $600,000 which will be
-44-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
recognized to income in future periods based on the proportion of cumulative
claims paid to the total estimated liability for claims.
In connection with the reinsurance of claims exposure from 1994 to
1996, the insurance carrier has agreed to provide letters of credit in favor of
the Company's lender to guarantee outstanding letters of credit under the
Company's credit agreement (see Note 8).
As a consequence of the reinsurance agreement described above, at
December 31, 1996, the Company has classified as current the estimated amounts
of reserves established for claims and reinsurance recoverable expected to be
paid and to be collected, respectively, within one year, as well as the related
deferred gain expected to be recognized within one year.
At December 31, 1995 and 1996, the Company's reserves for claims costs
are as follows:
1995 1996
----------- -----------
Accrued workers' compensation claims ...... $ 4,487,695 $ 7,408,060
Accrued health care claims ................ 1,482,161 1,866,832
Reserve for behavioral health care claims . 296,385 525,465
----------- -----------
6,266,241 9,800,357
Less: workers' compensation claims expected
to be settled in more than one year ....... (1,674,187) (3,265,332)
----------- -----------
Reserve for claims--current ............... $ 4,592,054 $ 6,535,025
=========== ===========
NOTE 8 - BORROWINGS
<TABLE>
<CAPTION>
Borrowings at December 31, 1995 and 1996 are as follows: 1995 1996
--------------- -------------
<S> <C> <C>
Subordinated note payable in quarterly instalments of $150,000
beginning in March 1998, interest due quarterly at the quoted
rate for 1 year U.S. Treasury Bills (7% at December 31, 1996),
paid in June 1996.......................................................... $ 1,200,000 --
Note payable to bank, original amount of $1 million, repayable
in monthly instalments of $4,167, plus interest at 8.50% per
annum, through November 1998 when a balloon payment of
$750,000 is due, secured by land and building.............................. 895,732 841,561
Note payable for state unemployment taxes, maturing in 1998
with monthly payments of $3,264............................................ 207,647 55,489
-45-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
Capital lease obligations for computer hardware and software,
payable in monthly instalments of principal and interest ranging
from $3,214 to $7,479 through May 2000, with interests
ranging from 9.80% to 12.30% per annum, collaterilized
by computer hardware and software.......................................... 418,444 78,566
Other notes payable, bearing interest at rates ranging from
7.50% to 10.75%, repayable in various monthly instalments.................. 156,941 130,284
--------------- -------------
2,878,764 1,105,900
Less: current portion...................................................... (1,464,930) (179,971)
--------------- -------------
$ 1,413,834 $ 925,929
=============== =============
</TABLE>
The Company incurred interest expense of approximately $131,300,
$252,800 and $225,900 during 1994, 1995 and 1996, respectively.
In April 1997, the Company entered into a revolving line of credit
agreement for an aggregate amount of $50,000,000 with a group of banks (the
"Credit Agreement"). The Credit Agreement provides for a revolving credit
facility with a sublimit of $15,000,000 to fund working capital advances and
standby letters of credit. The Credit Agreement also provides for advances to
finance acquisitions. Amounts outstanding under the revolving credit facility
mature on April 24, 2000. If, on April 24, 2000, certain conditions are
satisfied, any amounts outstanding under the revolving line of credit may be
converted into a term loan payable in eight quarterly instalments commencing on
August 1, 2000. The Company is required to pay an unused facility fee ranging
from .20% to .35% per annum on the facility, depending upon certain financial
covenants.
The Credit Agreement is secured by a pledge of shares of all of the
Company's subsidiaries. The Credit Agreement contains customary events of
default and covenants which prohibit, among other things, incurring additional
indebtedness in excess of a specified amount, paying dividends, creating liens
and engaging in certain mergers or combinations without the prior written
consent of the lender. The Credit Agreement also contains certain financial
covenants relating to current ratio, debt to capital ratio, debt and fixed
charges coverage and minimum tangible net worth, as defined in the Credit
Agreement.
Interest under the Credit Agreement accrues at rates based, at the
Company's option, on the Bank's Prime Rate plus a margin of as much as .25%, or
its Eurodollar Rate (as defined in the Credit Agreement) plus a margin of 1.00%
to 1.75%, depending on certain financial covenants.
Under the Company's prior revolving credit facility, the Company had
outstanding $6,250,000 in standby letters of credit at December 31, 1996, which
guarantee the payment of claims to the Company's workers' compensation insurance
carrier. As of that date there were no amounts outstanding for working capital
or advances to finance acquisitions under the revolving credit facility.
The Company also has $1,200,000 in standby letters of credit with a
separate bank at December 31, 1996, which guarantee the payment of workers'
compensation claims acquired upon the SAI Acquisition.
-46-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
As of December 31, 1996, the scheduled annual maturities of the
Company's debt are summarized as follows:
1997................................. $ 179,971
1998................................. 883,236
1999................................. 25,465
2000................................. 15,285
2001................................. 1,943
-------------
$ 1,105,900
=============
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 1,565,900 (after adjusting for the effect of the Stock Splits, see
Notes 10 and 15) 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 1,565,900 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 to 1 stock split. On February 21, 1996, the Company effected a
3 for 4 reverse stock split. . On November 21, 1997, the Company effected a 3
for 2 stock split. After the completion of the Company's initial public
offering, the Company amended and restated its Articles of Incorporation to
increase the authorized number of shares of the Company's common stock from
39,500,000 to 60,000,000, and to increase the authorized number of shares of
preferred stock from 500,000 to 20,000,000. All references in the financial
statements to per share amounts have been retroactively restated to reflect the
change in the number of common shares outstanding as a result of the Stock
Splits.
In connection with the stock split and increase in authorized shares
effected in June 1995, the Company reduced the par value of its common stock to
$.001 from $1.00.
In June 1993, CP Investments, Inc., an entity controlled by the
Company's principal stockholders, assigned to the Company an option which CP
Investments held to purchase, from a third party for $1,000,000, the land and
building which is owned by the Company and where the Company's
-47-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
headquarters are located. In October 1993, the Company exercised the option and
purchased the land and building. As part of the assignment of the option, CP
Investments retained the right to purchase the land and building from the
Company for $1,000,000 for a ten year period.
Based on two independent appraisals of the land and building subject to
the previously described option, the Company valued the option at $700,000
(based on the difference between the market value of the building and its
November 1993 purchase price) and recorded a distribution to its principal
stockholders in June 1993. Because the transaction was entered into between
commonly controlled entities, the value of the option was not considered
additional basis in the building. Amounts due in connection with this
distribution have been recorded as distribution payable at December 31, 1995 and
paid in 1996 upon completion of the initial public offering.
In January 1995, the Company entered into an agreement to reacquire
certain of its outstanding shares from a minority shareholder. Under the terms
of the agreement, the Company acquired and canceled 374,013 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 99,421 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 1,200,000 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 999,997 shares of common stock, after adjusting for the
effect of the Stock Splits, were reserved for issuance upon exercise of stock
options. The 1995 Plan provides for the grant of both incentive stock options
intended to qualify as such under Section 422 of the Internal Revenue Code
("incentive stock options") and nonqualified stock options to the directors,
officers, key employees, consultants and other individual contributors of or to
the Company and its subsidiaries, as determined in the discretion of the Stock
Option Committee. Under the 1995 Plan, incentive stock options and nonqualified
stock options may not be granted with an exercise price which is less than 100%
and 85%, respectively, of the fair market value of the Company's shares of
common stock at the date of grant of the option.
Stock options normally have a term of ten years and generally become
exercisable 40% after the second year from the date of grant and in instalments
of 5% quarterly thereafter.
-48-
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
The following table summarizes stock option activity:
WEIGHTED
EXERCISE AVERAGE
STOCK OPTION PRICE EXERCISE PRICE
------------ -------------- --------------
<S> <C> <C> <C>
Outstanding at January 1, 1995............ -- -- --
Granted.............................. 772,495 $2.00 - $ 2.22 $ 2.03
Canceled............................. -- -- --
Exercised............................ -- -- --
-------- -------------- -------
Outstanding at December 31, 1995.......... 772,495 $2.00 - $ 2.22 $ 2.03
Granted.............................. 467,249 $3.11 - $22.09 $ 13.75
Canceled............................. (67,499) $2.00 - $ 5.37 $ 3.87
Exercised............................ (19,999) $ 2.00 $ 2.00
--------- -------------- -------
Outstanding at December 31, 1996.......... 1,152,246 $2.00 - $22.09 $ 6.54
========= ============== =======
Exercisable at:
December 31, 1995.................... 0 --
December 31, 1996.................... 60,000 $ 2.00
Available for grant at:
December 31, 1995.................... 1,427,502
December 31, 1996.................... 1,053,585
</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%
-49-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
Had compensation cost for the Company's two option plans been
determined based on fair market value at the grant date for awards in 1995 and
1996 using the straight line method to recognize such cost, the Company's net
income and net income per common equivalent share would have been reduced to the
pro forma amounts indicated below:
1995 1996
----------- -----------
Pro forma net (loss) income .......... $ 165,211 $ 1,155,189
=========== ===========
Pro forma net (loss) income per common
and common equivalent share ........ $ 0.01 $ 0.08
=========== ===========
These pro forma amounts may not be representative of the pro forma
effect on net income in future years, since the estimated fair value of stock
options is amortized over the vesting period, and additional options may be
granted in future years.
Weighted-average fair value of options granted during the year 1995 and
1996 was $1.24 and $9.37, respectively.
The following table summarizes stock option average grant date fair
value, and weighted average remaining contract life for options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE REMAINING
RANGE OF NUMBER OF GRANT DATE CONTRACTUAL
EXERCISE PRICE OPTIONS FAIR VALUE LIFE
-------------- --------- ---------- -----------
<S> <C> <C> <C> <C>
$ 2.00 - $ 2.22 722,497 $ 1.25 7.5
$ 4.67 - $ 2.22 155,999 $ 3.64 9.5
$21.00 - $28.50 95,250 $10.82 9.5
$33.13 - $37.13 178,500 $16.11 10.0
Stock options outstanding as
of December 31, 1996 1,152,246
=========
</TABLE>
-50-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 12 - INCOME TAXES
The provision for federal and state income taxes consists of the
following:
1994 1995 1996
----------- ----------- -----------
CURRENT
Federal ............. $ 1,363,629 $ 786,866 $ 1,294,182
State ............... 41,149 70,324 79,204
----------- ----------- -----------
1,404,778 857,190 1,373,386
----------- ----------- -----------
DEFERRED
Federal ............. (560,537) (747,159) (450,754)
State ............... (6,733) (27,741) (25,909)
----------- ----------- -----------
(567,270) (774,900) (476,663)
----------- ----------- -----------
Provision for income taxes $ 837,508 $ 82,290 $ 896,723
=========== =========== ===========
Subsequent to December 31, 1994, the Company requested and obtained a
change, for income tax purposes, in the method of accounting for its workers'
compensation loss reserves. As a result, the Company recorded a deferred tax
asset relating to the reserves and an increase in income taxes payable of
approximately $1,386,000. Also in December 1996, the Company requested a change,
for income tax purposes, in the method of accounting used by SAI for its
workers' compensation loss reserves. As a result, the Company recorded a
deferred tax asset relating to the reserves and an increase in income taxes
payable of approximately $775,000. Under the provisions of the Internal Revenue
Code ("IRC"), the Company can amortize over three years the payment of taxes due
for changes resulting in taxable income and can recognize currently deductions
resulting from the change in method. The Company has classified as long term
those taxes resulting from this change which it expects to pay in more than one
year.
Prior to June 30, 1997, Amstaff, Inc. was taxed under the Subchapter S
provisions of the IRC whereby its profits and losses flowed directly to its
former shareholders for U.S. federal income tax purposes. Upon the merger of
Amstaff, Inc. with the Company on June 30, 1997, Amstaff, Inc. no longer
qualified under the Subchapter S provisions of the IRC and became a taxable
entity. In connection with Amstaff, Inc.'s change in tax status, the Company
recorded approximately $123,000, $196,000 and $514,000 as of December 31, 1994,
1995 and 1996, respectively, in additional deferred tax assets, primarily
related to certain reserves for other state taxes and workers' compensation
claims.
Prior to December 1, 1997, Staffing Network, Inc. was taxed under the
Subchapter S provisions of the IRC whereby its profits and losses flowed
directly to its former shareholders for U.S. federal income tax purposes. Upon
the merger of Staffing Network, Inc. with the Company on December 1, 1997,
Staffing Network, Inc. no longer qualified under the Subchapter S provisions of
the IRC and became a taxable entity. In connection with Staffing Network, Inc.'s
change in tax status, the Company recorded approximately $29,000, $5,000 and
$12,000 as of December 31, 1994, 1995 and 1996, respectively, in additional
deferred tax assets, primarily related to certain reserves for health care and
workers' compensation claims.
-51-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
The gross amounts of deferred tax assets and liabilities recorded in
the accompanying consolidated balance sheets at December 31, 1995 and 1996 are
as follows:
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts........................ $ 59,361 $ 167,301
Accrued health care claims............................. 459,735 570,123
Reserve for workers' compensation claims,
net of reinsurance recoverable....................... 1,022,645 980,160
Reserve for other state taxes.......................... 392,951 693,851
Accrued bonuses........................................ 47,088 --
Net operating losses................................... -- 142,826
Deferred compensation.................................. 89,420 --
Other.................................................. 59,356 25,273
---------------- --------------
$ 2,130,556 $ 2,579,534
================ ==============
Long term deferred tax assets and (liabilities):
Deferred compensation.................................. $ 100,062 8,878
Reserve for workers' compensation claims,
net of reinsurance recoverable....................... 606,480 774,862
Depreciation and amortization.......................... (20,498) (26,948)
Other.................................................. 57,406 14,343
---------------- --------------
$ 743,450 $ 771,135
================ ==============
</TABLE>
Realization of the above deferred tax assets is dependent on generating
sufficient taxable income in the future to offset the deductible temporary
differences generating the deferred tax assets. Although realization is not
assured, management believes that it is more likely than not that all of the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced if estimates of future taxable
income are reduced.
A reconciliation of the differences between income taxes computed at
the federal statutory tax rate and the income tax provisions reflected in the
accompanying consolidated statements of income is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
Income taxes computed at the federal
statutory tax rate of 34%..................... $ 912,666 $ 153,987 $ 1,015,433
State income taxes, net of federal
income tax effect............................. 27,158 46,414 52,275
Other, net.................................... (102,316) (118,111) (170,985)
--------------- -------------- ---------------
Provision for income taxes.................... $ 837,508 $ 82,290 $ 896,723
=============== =============== ===============
</TABLE>
-52-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution plan covering certain of
its worksite employees for a number of client companies. The Company
contributes, on behalf of each participating client, varying amounts based on
client company elections. Total Company contributions for the years ended
December 31, 1994, 1995 and 1996 were $416,922, $550,776 and $1,065,072,
respectively. The Company also has a deferred savings plan covering all internal
and worksite employees of a subsidiary for which contributions are funded by the
Company based on the lesser of 20% of the employee deferrals or 1% of the
employee gross wages. Total Company contributions under the deferred savings
plan for the years ended December 31, 1994, 1995 and 1996 were $35,000, $73,000
and $108,000, respectively.
In August 1996, the Company received a favorable determination letter
from the Internal Revenue Service ("IRS") regarding the qualified status of its
defined contribution plan under Section 401(k) of the IRC. In its application to
the IRS, the Company informed the IRS that the Company is involved in the
business of leasing employees to client companies and that the 401(k) plan
covered worksite or leased employees who satisfied the plan's eligibility
requirements.
The Company sponsors an unfunded deferred compensation plan (the
"Deferred Plan"). The Deferred Plan covers a selected group of employees as
determined by the Company's Board of Directors. The amounts due under the
Deferred Plan are based on bonuses granted by the Board of Directors, at its
discretion at each year end for that year's performance by the employee. Based
on the awards granted, the Company recorded compensation expense of $41,200
during 1994. No deferred compensation expense was recognized during 1995 and
1996.
The amount of compensation subject to the Deferred Plan and the vesting
period for individual grants, or any changes thereto, is established by the
Company's Board of Directors. Deferred compensation amounts generally vest at
the end of three years from the date of award, provided the participant is
employed by the Company on such date. At December 31, 1996 the vesting schedule
under the Plan is as follows:
1997......................... $242,013
1998 ........................ 41,200
--------
$283,213
========
The Company has included these amounts within other liabilities in the
accompanying balance sheets as short term or long term based on the applicable
vesting dates. Of the above amounts approximately $200,000 at December 31, 1996,
relate to deferred compensation to the Company's principal stockholders. All
deferred compensation is expected to be paid in cash.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company has entered into non-compete agreements with its Chairman
and Vice-Chairman, who are also the Company's principal stockholders. The
agreements are for a term to be specified by the Company, not to exceed two
years, in the event of the Chairman's or Vice-Chairman's termination. The
non-compete agreements require payment to the Chairman and Vice-Chairman of
their full salary and benefits during the term of the agreement.
The Company leases certain office space, automobiles and office
equipment under non-cancelable operating leases expiring on various dates
through the year 2018. Total rent expense
-53-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
charged to operations during the years ended December 31, 1994, 1995 and 1996
was approximately $292,200, $691,600 and $829,000 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........................ $ 1,011,772
1998........................ 798,280
1999........................ 554,959
2000........................ 373,699
2001........................ 324,025
Thereafter.................. 4,218,048
-------------
$ 7,280,783
=============
The Company is a defendant in a lawsuit related to a wrongful death and
premises liability claim involving a worksite employee. The plaintiff's original
complaint sought damages in excess of $10,000,000; however, such complaint was
dismissed in part and amended to seek damages in excess of $15,000. The court
has sustained plaintiff's amended complaint alleging premises liability against
both the Company and its client as a result of a worksite accident at client's
premises. The Company is asserting that its liability under this claim, if any,
should be limited to $100,000 due to the immunity provisions of the Florida
workers' compensation statute involving worksite accidents. The Company's
motions for summary judgment on that basis were denied, and discovery in the
proceeding continues. While there can be no assurance that the ultimate outcome
of this lawsuit will not have a material adverse effect on the Company's
financial condition or results of operations, management believes, based on
consultations with the Company's counsel, that the ultimate outcome of this
lawsuit should not have such an effect.
The Company is a defendant in a lawsuit brought in Dade County Circuit
Court in November 1995 by an individual who alleges that he was injured by a
worksite employee of a client of the Company, which owns and operates a hotel
and was a co-defendant in the litigation. The plaintiff settled with the
Company's client worksite and the employee who were co-defendants in the
lawsuit. The plaintiff alleges that the employee, while he was working as a
valet parking attendant, was negligent in a motor vehicle collision and severely
and permanently injured the plaintiff. The plaintiff alleged damages in excess
of $50,000 in his amended complaint for, among other things, bodily injury,
medical costs, pain and suffering, and lost ability to earn income. A jury trial
is currently scheduled for March 1998. Based on consultations with the Company's
counsel, management of the Company believes that it has meritorious defenses to
the plaintiff's claims and that if the lawsuit is adversely determined, the
Company may be entitled to indemnification from its client and/or its liability
insurance carrier. Although management believes that the Company's ultimate
liability in this matter should not be material, there can be no assurance that
the Company will prevail in the litigation, in a related claim for
indemnification, or that the liability of the Company, if any, would not have a
material adverse effect on the Company's financial condition and results of
operations.
In October 1996, the Company received a notice of assessment in the
discounted amount of approximately $53,500 from The Treasurer of the State of
Florida Department of Insurance as Receiver of United States Employer Consumer
Self Insurance Fund of Florida, a workers' compensation insurance
-54-
<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
fund which was declared insolvent (the "Fund"). The Company paid the discounted
assessment in January 1997. The Company had certain worksite employees covered
by the Fund during the fiscal years ended December 31, 1992, 1993 and 1994. The
court order authorizing the assessment provides that the Company, by paying the
discounted assessment, is deemed to have paid its assessment in full and is not
subject to any further assessment for policyholder loss claims. The Company may
be subject to additional liability for the assessments of other Fund members.
The Company believes that there are approximately 700 members of the Fund which
have been assessed $37,000,000 in the aggregate. Although the amount of the
potential exposure, if any, for such additional liability is not yet
determinable, management believes that the Company would have meritorious
defenses to such additional liability and that its ultimate liability in this
matter will not have a material adverse effect on the Company's financial
condition or results of operations. There cannot, however, be any assurance that
any such liability will not have such material adverse effect.
In June 1995, the National Labor Relations Board ("Board") filed a
complaint charging Amstaff, Inc., with a refusal to bargain with respect to a
collective bargaining agreement, under which a now former client's employees
were employed, in violation of the National Labor Relations Act. Vincam acquired
Amstaff, Inc. in June 1997. The charge was initially dismissed by a Detroit
office of the Board, but has since been reinstated following a union appeal to
the general counsel for the Board. If the Board rules against the Company, the
Company could be held liable for lost wages and benefits of such employees for a
period of almost four years. Any award would be reduced by any earnings of such
employees which are received or reasonably could have received from other
employment during the relevant time period. The Company cannot currently
estimate its potential liability if the Board were to rule against it. The
Company intends to vigorously defend this case, but there can be no assurance
that the Company will prevail in the proceedings or that the liability of the
Company, if any, would not have a material adverse effect on the Company's
financial condition and results of operations.
The Company is also involved in other legal and administrative
proceedings arising in the ordinary course of business. The outcomes of these
actions are not expected to have a material effect on the Company's financial
position or results of operations.
NOTE 15 - SUBSEQUENT EVENTS (UNAUDITED)
In March 1997, the Company entered into agreements with national
insurance companies to reinsure substantially all of the Company's
responsibility for remaining claims acquired upon the SAI Acquisition under
SAI's large deductible workers' compensation insurance policies for the years
1994, 1995, and 1996 for an aggregate premium of $1,870,000. As a result, the
Company has recorded a deferred gain in the amount of approximately $600,000
which will be recognized to income in future periods based on the proportion of
cumulative claims paid to the total estimated liability for claims.
In September 1997, the Company entered into agreements with national
insurance companies to reinsure substantially all of the Company's
responsibility for remaining claims acquired upon the AMI Acquisition under
AMI's large deductible workers' compensation insurance policies for the years
1995 and 1996 for an aggregate premium of $725,000. No gain or loss resulted
from this transaction.
In December 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 SNI Acquisition under
SNI's larger deductible workers' compensation insurance policies for the years
1995 and 1996 for an aggregate premium of $215,000. No gain or loss resulted
from this transaction.
On June 30, 1997, the Company entered into an agreement with a health
insurance company to purchase a managed care provider network and to terminate
the strategic alliance with such health insurance company under which the
Company provided its workers' compensation managed care services. In connection
with the agreement, the Company made a payment of $1,000,000 and accounted for
such cost as a termination fee. The balance due under the agreement of
approximately $1,400,000
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<PAGE>
THE VINCAM GROUP, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
will be payable in the fourth quarter of 1997 upon delivery of the managed care
provider network, and will be capitalized.
On November 21, 1997, the Company effected a 3 for 2 stock split,
payable on December 10, 1997.
* * * * * *
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<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 Supplementary Consolidated Financial Statements and Notes thereto
contained herein, the Consolidated Financial Statements and the Notes thereto
and the Management's Discussion and Analysis of Financial Condition and Results
of Operations appearing in the 1996 Annual Report on Form 10-K, the Current
Report on Form 8-K dated May 8, 1997 and the Current Report on Form 8-K dated
November 5, 1997, filed by The Vincam Group, Inc. ("Vincam" or the "Company").
The following discussion contains forward-looking statements. The
Company's actual results could differ materially from those discussed in such
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below and elsewhere in this Form 8-K. In
connection with the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"), the Company is hereby providing
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company herein or orally, whether in presentations, in
response to questions or otherwise. Any statements that express, or involve
discussions as to, expectations, beliefs, plans, objectives, assumptions or
future events or performance (often, but not always, through the use of words or
phrases such as "will result," "are expected to," "will continue," "is
anticipated," "estimated," "projection" and "outlook") are not historical facts
and may be forward-looking and, accordingly, such statements involve estimates,
assumptions, and uncertainties which could cause actual results to differ
materially from those expressed in the forward-looking statements. Such
uncertainties include, among others, the following: (i) potential for
unfavorable interpretation of government regulations relating to labor, taxes,
insurance, employment matters and the provision of managed care services; (ii)
the Company's ability to obtain or maintain all required licenses or
certifications required to further expand the range of specialized managed care
services offered by the Company; (iii) potential increases in the Company's
costs, such as health care costs, that the Company may not be able to reflect
immediately in its service fees; (iv) the Company's ability to offer its
services to prospective clients in additional states where it has less or no
market penetration; (v) the level of acquisition opportunities available to the
Company and the Company's ability to efficiently price and negotiate such
acquisitions on a favorable basis; (vi) the financial condition of the Company's
clients; (vii) additional regulatory requirements affecting the Company; (viii)
the impact of competition from existing and new professional employer
organizations; (ix) the failure to properly manage growth and successfully
integrate acquired companies and operations, and to achieve synergies and other
cost savings in the operation of acquired companies; and (x) other factors which
are described in further detail in the Company's filings with the Securities and
Exchange Commission.
The Company cautions that the factors described above could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
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<PAGE>
OVERVIEW
Vincam, one of the largest PEOs in the industry, provides small and
medium-sized businesses with an outsourcing solution to the complexities and
costs related to employment and human resources. The Company's continuum of
integrated employment-related services consists of human resource
administration, employment regulatory compliance management, workers'
compensation coverage, health care and other employee benefits. The Company
establishes a co-employer relationship with its clients and contractually
assumes substantial employer responsibilities with respect to worksite
employees. In addition, the Company offers certain specialty managed care
services on a stand-alone basis to health and workers' compensation insurance
companies, HMOs, managed care providers and large, self-insured employers.
The Company's standard PEO services agreement provides for an initial
one year term, subject to termination by the Company or the client at any time
during the first year upon 30 days' prior written notice. Thereafter, the
contract may be terminated upon 30 days' notice given prior to the expiration of
the renewal term or immediately for cause. Revenues from professional employer
services are based on a pricing model that takes into account the gross pay of
each employee and a mark-up which includes the estimated costs of federal and
state employment taxes, workers' compensation, employee benefits and the human
resource administrative services, as well as a provision for profit. The
specific mark-up varies by client based on the workers' compensation
classification of the worksite employees and their eligibility for health care
benefits. Accordingly, the Company's average mark-up percentage will fluctuate
based on client mix, which cannot be predicted with any degree of certainty.
Specialty managed care revenues are generated from a variety of risk-bearing,
capitated, and fee-based arrangements.
The Company's revenues include all amounts billed to clients for gross
salaries and wages, related employment taxes, and health care and workers'
compensation coverage of worksite employees. The Company is obligated to pay the
gross salaries and wages, related employment taxes and health care and workers'
compensation costs of its worksite employees whether or not the Company's
clients pay the Company on a timely basis or at all. The Company believes that
including such amounts as revenues appropriately reflects the responsibility
which the Company bears for such amounts and is consistent with industry
practice. In addition, the Company's revenues are subject to fluctuations as the
result of (i) changes in the volume of worksite employees serviced by the
Company; (ii) changes in the wage base and employment tax rates of worksite
employees; and (iii) changes in the mark-up charged by the Company for its
services.
The Company's primary direct costs are (i) salaries, wages, the
employer's portion of social security, Medicare premiums, federal unemployment
taxes and the compensation portion of the Michigan Single Business Tax, (ii)
health care and workers' compensation costs, and (iii) state unemployment taxes
and other direct costs. The Company can significantly impact its gross profit
margin by actively managing the direct costs described in clauses (ii) and
(iii).
The Company's health care costs consist of medical insurance premiums,
payments of and reserves for claims subject to deductibles and the costs of
vision care, disability, employee assistance and other similar benefit plans.
The Company's health care benefit plans consist of a mixture of fully insured,
minimum premium arrangements, partially self-insured plans and guaranteed cost
programs. Under minimum premium arrangements and partially self-insured plans,
liabilities for health care claims are recorded based on the Company's health
care loss history. The Company maintains reserves for medical and behavioral
health claims which reserves are estimates based on periodic reviews of open
claims, past claims experience and other factors deemed relevant by management.
See Notes 1 and 7 of the Notes to Supplementary 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
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<PAGE>
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 (or $1,000,000 in the case of SAI). Workers' compensation
costs for 1994, 1995 and 1996 also include reserves for claims which have been
incurred but not reported and for anticipated loss development.
State unemployment taxes are based on rates which vary from state to
state. Generally they are subject to certain minimum rates, but the aggregate
rates payable by an employer are affected by the employer's claims history. The
Company controls unemployment claims by aggressively contesting unfounded claims
and, when possible, quickly returning employees to work by reassigning them to
other worksites.
The Company's primary operating expenses are administrative personnel
expenses, other general and administrative expenses, and sales and marketing
expenses. Administrative personnel expenses include compensation, fringe
benefits and other personnel expenses related to internal administrative
employees. Other general and administrative expenses include rent, office
supplies and expenses, legal and accounting fees, insurance and other operating
expenses. Sales and marketing expenses include compensation of sales executives
and the marketing staff, as well as marketing and advertising expenses.
The Company's profitability is largely dependent upon its success in
managing its controllable direct costs. The Company manages its controllable
direct costs through its use of (i) its proprietary managed care system, which
includes provider networks, utilization review and case management, (ii)
educational programs designed to reduce the severity and frequency of workplace
accidents, and (iii) a variety of other techniques, including return to work
programs, drug-free workplace programs, involvement in hiring, disciplinary and
termination decisions, adjudication of unemployment claims, and reassignment of
laid off workers.
The Company's financial condition and results of operations are subject
to several contingencies including the resolutions of certain pending legal
proceedings. For more information regarding such contingencies see Note 14 of
Notes to Supplemantary Consolidated Financial Statements contained in this
Current Report on Form 8-K.
RECENT DEVELOPMENTS
In December 1996, the Company entered into an arrangement with Reliance
National Insurance Company ("Reliance National") to provide workers'
compensation insurance coverage for 1997 through 1999, at a substantially fixed
cost, subject to a deductible of only $2,000 per medical only claim. Management
believes that under this policy, the Company's workers' compensation costs will
be at a rate which is lower than that historically incurred by the Company under
its large deductible workers' compensation insurance policy. In addition, the
policy is anticipated to enhance the predictability of the Company's workers'
compensation costs because it substantially eliminates the sensitivity of such
costs
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<PAGE>
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 $6.2 million subject to
adjustment depending on changes in the Company's payroll and other factors. The
premium paid by the Company in December 1996 is reflected as prepaid workers'
compensation insurance premium in the Company's balance sheet at December 31,
1996 and will be amortized over the 1997 policy year. The Company intends to
continue to manage its workers' compensation costs in order to permit it to take
advantage of its right to elect to assume Reliance National's responsibility for
claims up to the first $250,000. In the event of such assumption, the Company
would be paid the excess of a loss fund, if any, which is calculated each year,
over amounts paid by Reliance National with respect to such claims. Also, in
December 1996, March 1997 and September 1997, the Company entered into
agreements with Reliance National and Commercial Risk Re-Insurance Company to
reinsure substantially all of the Company's responsibility for remaining claims
under the Company's large deductible workers' compensation insurance policies
for the years 1994, 1995, and 1996 (including remaining claims of SAI and AMI,
but not those of SMG prior to the date of its acquisition by the Company) for an
aggregate premium of $5.8 million. As a result, the Company has recorded a
deferred gain in the amount of approximately $1.2 million which will be
recognized to income in future periods based on the proportion of cumulative
claims paid to the total estimated liability for claims. See Notes 1 and 7 of
the Notes to Consolidated Financial Statements.
In April 1997, the Company entered into a three-year revolving $50
million credit facility (the "Credit Agreement") with a groups of banks for
which Fleet National Bank acted as an agent. See "Liquidity and Capital
Resources" below and Note 8 of the Notes to Supplementary Consolidated Financial
Statements.
In August 1996, the Company acquired substantially all of the assets
and liabilities of SMG in an acquisition accounted for as a purchase. In January
1997, in June 1997 and in December 1997, the Company acquired SAI, AMI and SNI,
respectively, by merger in acquisitions accounted for as pooling of interests.
See Note 2 of Notes to Supplementary Consolidated Financial Statements. The
financial condition and results of operations discussed below include the
results of operations since September 1, 1996 of the business acquired from SMG
and, accordingly, affects the comparability of the Company's 1996 results of
operations to those of prior years. The financial information discussed below in
"Results of Operations" and "Liquidity and Capital Resources" includes the
operations of SAI, AMI and SNI for periods prior to the their acquisitions. The
Company recognized nonrecurring transaction expenses of approximately $165,000
in the first quarter of 1997 resulting from the SAI Acquisition and $1.1 million
in the second quarter of 1997 resulting from the AMI Acquisition. Summary
financial information for SAI, AMI and SNI on an historical basis, and a
combined basis with the Company is set forth below:
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<PAGE>
<TABLE>
<CAPTION>
SAI SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
---------- --------- ------------
(IN THOUSANDS, EXCEPT STATISTICAL DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues........................................................ $ 33,310 $ 55,824 $ 77,976
========== ========= ===========
Gross profit.................................................... $ 1,841 $ 2,714 $ 3,212
========== ========= ===========
Operating income (loss) (1)..................................... $ 74 $ (891) $ (1,490)
========== ========= ===========
Net income (loss) (1)........................................... $ 54 $ (557) $ (893)
========== ========= ===========
STATISTICAL DATA:
Worksite employees at period end................................ 1,617 2,669 3,464
PEO clients at period end....................................... 118 189 231
Average number of worksite employees per PEO
client company at period end.................................. 14 14 15
Gross profit margin............................................. 5.53% 4.84% 4.12%
<FN>
- ----------
(1) SAI losses are primarily attributable to workers' compensation and health
care costs and general and administrative expenses. Commencing on the date of
acquisition, SAI worksite employees are covered under the Company's fixed cost
workers' compensation policy.
</FN>
</TABLE>
<TABLE>
<CAPTION>
AMI SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
---------- --------- ------------
(IN THOUSANDS, EXCEPT STATISTICAL DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues........................................................ $ 23,253 $ 43,665 $ 66,542
========== ========= ===========
Gross profit.................................................... $ 1,177 $ 2,177 $ 2,642
========== ========= ===========
Operating loss (1).............................................. $ (219) $ (417) $ (1,244)
========= ========= ===========
Net loss (1).................................................... $ (232) $ (418) $ (1,329)
========= ========= ===========
STATISTICAL DATA:
Worksite employees at period end................................ 1,334 1,740 2,839
PEO clients at period end....................................... 85 116 150
Average number of worksite employees per PEO
client company at period end.................................. 15 15 18
Gross profit margin............................................. 4.27% 4.99% 5.06%
<FN>
- ----------
(1) AMI losses are primarily attributable to workers' compensation and health
care costs and general and administrative expenses and to high salary expense
payable primarily to AMI's former president and sole shareholder. Commencing on
the date of acquisition, AMI worksite employees are covered under the Company's
fixed cost workers' compensation policy.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SNI SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
----------- --------- -----------
(IN THOUSANDS, EXCEPT STATISTICAL DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues........................................................ $ 70,468 $ 80,315 $ 114,620
========== ========= ===========
Gross profit.................................................... $ 2,391 $ 3,378 $ 5,752
========== ========= ===========
Operating income................................................ $ 92 $ 80 $ 117
========== ========= ===========
Net income...................................................... $ 73 $ 335 $ 200
========== ========= ===========
STATISTICAL DATA:
Worksite employees at period end................................ 3,290 4,076 5,348
PEO clients at period end....................................... 334 477 644
Average number of worksite employees per PEO
client company at period end.................................. 9 8 8
Gross profit margin............................................. 3.39% 4.21% 5.02%
</TABLE>
<TABLE>
<CAPTION>
SAI, AMI, SNI AND THE COMPANY SUMMARY COMBINED FINANCIAL AND OPERATING DATA
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
---------- ----------- ----------
(IN THOUSANDS, EXCEPT STATISTICAL DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues........................................................ $ 318,565 $ 419,371 $ 654,758
========== =========== =========
Gross profit.................................................... $ 16,124 $ 21,371 $ 37,190
========== ============ =========
Operating income................................................ $ 2,700 $ 171 $ 2,185
========== =========== =========
Net income...................................................... $ 1,847 $ 371 $ 2,090
========== =========== =========
Net income per common and common equivalent share............... $ 0.14 $ 0.03 $ 0.14
========== =========== =========
STATISTICAL DATA:
Worksite employees at period end................................ 14,831 19,876 32,757
PEO client companies at period end.............................. 822 1,121 1,703
Average number of worksite employees per PEO
client company at period end.................................. 18 17 19
Gross profit margin............................................. 5.06% 5.10% 5.68%
</TABLE>
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<PAGE>
On June 30, 1997, the Company entered into an agreement with a health
insurance company to purchase a managed care provider network and to terminate
the strategic alliance with such health insurance company under which the
Company provided its workers' compensation managed care services. In connection
with the purchase of the provider network and the related termination of the
strategic alliance, the Company made a payment of $1,000,000. The balance of the
purchase price of approximately $1,300,000 was paid during the fourth quarter
of 1997 and was capitalized.
On December 9, 1997, the Company entered into financing and leasing
arrangements with respect to a new headquarters facility of approximately 90,000
square feet that the Company expects will be completed in the summer of 1998.
The new headquarters facility will be situated on 8-1/2 acres of land in
unincorporated Miami-Dade County.
RESULTS OF OPERATIONS
The following table sets forth, for each of 1994, 1995 and 1996,
certain selected income statement data expressed as a percentage of revenues:
<TABLE>
<CAPTION>
AS A PERCENT OF REVENUES
-----------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- --------- --------
<S> <C> <C> <C>
Revenues.......................................... 100.0% 100.0% 100.0%
--------- --------- --------
Direct costs:
Salaries, wages and employment taxes of
worksite employees........................... 88.0% 88.8% 88.5%
Health care and workers' compensation.......... 6.2% 5.1% 4.8%
State unemployment taxes and other............. 0.7% 1.0% 1.0%
--------- --------- --------
Total direct costs........................... 94.9% 94.9% 94.3%
--------- --------- --------
Gross profit...................................... 5.1% 5.1% 5.7%
--------- --------- --------
Operating expenses:
Administrative personnel....................... 2.2% 2.7% 2.9%
Other general and administrative, including
provision for doubtful accounts.............. 1.3% 1.5% 1.5%
Sales and marketing............................ 0.6% 0.7% 0.8%
Depreciation and amortization.................. 0.1% 0.1% 0.2%
--------- --------- --------
Total operating expenses..................... 4.2% 5.0% 5.4%
--------- --------- --------
Operating income.................................. 0.9% 0.1% 0.3%
Interest income (expense), net.................... 0.0% 0.0% 0.1%
--------- --------- --------
Income before taxes............................... 0.9% 0.1% 0.4%
Provision for income taxes........................ 0.3% 0.0% 0.1%
--------- --------- --------
Net income........................................ 0.6% 0.1% 0.3%
========= ========= ========
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's revenues for the year ended December 31, 1996 were $654.8
million compared to $419.4 million for the year ended December 31, 1995,
representing an increase of $235.4 million, or 56.1%. 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 51.9%, from 1,121 to 1,703, of which 137 were acquired from SMG.
The number of worksite employees increased 64.8% over the same period, from
19,876 worksite employees to 32,757, of which 1,987 were acquired from SMG.
Salaries, wages and employment taxes of worksite employees were $579.1
million for 1996, compared to $372.5 million for 1995, representing an increase
of $206.6 million, or 55.5%. Salaries,
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<PAGE>
wages and employment taxes of worksite employees were 88.5% 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 $31.1 million for
1996, compared to $21.5 million for 1995, representing an increase of $9.6
million, or 45.1%. 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
5.1% for 1995. The decrease of health care and workers' compensation costs as a
percentage of revenues was due mainly to improved effectiveness in managing the
frequency and severity of workers' compensation and health care costs and
incremental revenues from the Company's specialty managed care services.
State unemployment taxes and other direct costs were $7.3 million for
1996, compared to $4.0 million for 1995, representing an increase of $3.3
million or 82.0%. This increase was due mainly to the higher volume of salaries
and wages paid during 1996 which was a direct function of the increase of PEO
clients and worksite employees, an increased number of client companies using
other services and products (e.g., 401(k), the drug free workplace program,
etc.), as well as an increase in other direct costs related to the Company's
specialty managed care services. State unemployment taxes and other direct costs
were 1.0% of revenues for 1996 and 1995.
Gross profit was $37.2 million for 1996, compared to $21.4 million for
1995, representing an increase of $15.8 million, or 74.0%, due mainly to the
increase in revenues resulting from an increase of PEO clients and worksite
employees. Gross profit was 5.7% of revenues for 1996, compared to 5.1% 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 $19.2 million for 1996, compared
to $11.2 million for 1995, representing an increase of $8.0 million, or 72.4%.
This increase was primarily attributable to increased staffing to support the
Company's future growth, including management and senior executive personnel.
Administrative personnel expenses were 2.9% of revenues for the 1996, compared
to 2.7% for 1995. The Company anticipates that this trend in administrative
personnel expenses will continue in future periods as a result of the Company's
growth and the expansion of its service offerings.
Other general and administrative expenses, including the provision for
doubtful accounts, were $9.5 million for 1996, compared to $6.7 million for
1995, representing an increase of $2.8 million, or 41.8%. 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 1.5% of revenues for 1996 and 1995.
Sales and marketing costs were $5.0 million for 1996, compared to $2.8
million for 1995, representing an increase of $2.3 million, or 80.5%. The
increase reflects the addition of sales executives and marketing personnel,
consistent with the Company's strategy to increase its client base in its
existing and acquired markets. Sales and marketing costs were 0.8% of revenues
for 1996, compared to 0.7% for 1995.
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<PAGE>
Net income was $2.1 million for 1996, compared to $0.4 million for
1995, representing an increase of $1.7 million, or 463.9%. Earnings per share
were $0.14 for 1996, compared to $0.03 for 1995, representing an increase of
$0.11, or 387.7%.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's revenues were $419.4 million for the year ended December
31, 1995, compared to $318.6 million for the year ended December 31, 1994,
representing an increase of $100.8 million, or 31.6%. This increase was due
primarily to an increased number of PEO clients and worksite employees. Between
December 31, 1994 and December 31, 1995, the number of PEO clients increased
36.4%, from 822 to 1,121. The number of worksite employees increased 34.0% over
the same period, from 14,831 worksite employees to 19,876.
Salaries, wages and employment taxes of worksite employees were $372.5
million for 1995, compared to $280.6 million for 1994, representing an increase
of $91.9 million, or 32.8%. Salaries, wages and employment taxes of worksite
employees were 88.8% of revenues for 1995, compared to 88.0% for 1994. Salaries,
wages and employment taxes of worksite employees increased as a percentage of
revenues as a result of a change in the Company's client mix towards clients
having more favorable workers' compensation risk profiles which allows the
Company to charge a lower markup.
Health care and workers' compensation costs were $21.5 million for
1995, compared to $19.6 million for 1994, representing an increase of $1.9
million, or 9.5%. Health care and workers' compensation costs were 5.1% of
revenues for 1995, compared to 6.2% 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 $4.0 million for
1995, compared to $2.2 million for 1994, representing and increase of $1.8
million, or 79.4%. This increase was due mainly to the increase in revenues.
State unemployment taxes and other direct costs were 1.0% of revenues for 1995,
compared to 0.7% for 1994. This decrease of state unemployment taxes and other
direct costs as a percentage of revenues was due primarily to improved
efficiency in managing state unemployment insurance claims.
Gross profit was $21.4 million for 1995, compared to $16.1 million for
1994, representing an increase of $5.2 million, or 32.5%. Gross profit was 5.1%
of revenues for 1995, compared to 5.1% for 1994.
Administrative personnel expenses were $11.2 million for 1995, compared
to $6.9 million for 1994, representing an increase of $4.2 million, or 61.3%. Of
this increase, approximately $1.4 million was primarily attributable to
increased staffing for the Company's workers' compensation managed care
services, which were made available to external clients for the first time in
1995. The balance was primarily attributable to an increase in corporate
management personnel and other general and administrative expenses related to
the growth described above. Administrative personnel expenses were 2.7% of
revenues for 1995, compared to 2.2% for 1994.
Other general and administrative expenses, including provision for
doubtful accounts, were $6.7 million for 1995, compared to $4.3 million for
1994, representing an increase of $2.4 million, or 55.8%. Other general and
administrative expenses, including provision for doubtful accounts, were 1.5% of
revenues for 1995, compared to 1.3% for 1994.
Sales and marketing costs were $2.8 million for 1995, compared to $1.9
million for 1994, representing an increase of $0.9 million, or 50.4%. The
increase reflects the addition of sales executives
-65-
<PAGE>
and a senior vice president of sales and marketing. Sales and marketing cost
were 0.7% of revenues for 1996, compared to 0.6% for 1994.
Net income was $0.4 million for 1995, compared to $1.8 million for
1994, representing a decrease of $1.5 million, or 79.9%. Earnings per share were
$0.03 for 1995, compared to $0.14 for 1994, representing a decrease of $0.11, or
79.4%.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $21.0 million,
compared to $0.3 million at December 31, 1995. The increase was mainly due to
the Company's initial public offering in May 1996 of 3,000,000 shares of common
stock (after adjusting for the effect of the stock splits) 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 $21.4 million in
cash at December 31, 1996. Of this amount, $2.3 million is restricted. (See Note
4 of Notes to Consolidated Financial Statements). Under the Company's prior
credit facility, the Company had outstanding $6.3 million in stand by letters of
credit at December 31, 1996 which guaranteed the payment of claims to the
Company's previous workers' compensation carrier. As of that date, there were no
amounts outstanding for working capital advances or under the acquisition loan
facility and all amounts under these facilities were available at December 31,
1996. The Company entered into a new Credit Agreement in April in 1997,
replacing the one that was in place at December 31, 1996.
The Company's current Credit Agreement with a group of banks for which
Fleet National Bank ("Fleet Bank") acted as agent provides for a $50.0 million
revolving line of credit with a sublimit of $15.0 million for standby letters of
credit and revolving credit loans for working capital purposes. The Credit
Agreement also provides for advances to finance acquisitions. The Company uses
letters of credit primarily to secure its obligations to reimburse its former
workers' compensation insurance carrier for workers' compensation payments
subject to the policy deductible. Borrowings bear interest at rates based, at
the Company's option, on Fleet Bank's Prime Rate plus a margin of as much as
0.25% or its Eurodollar Rate (as defined in the Credit Agreement) plus a margin
of 1.00% to 1.75%, depending on certain financial covenants. The facility is
secured by a pledge of the shares of all of the Company's subsidiaries. The
revolving line of credit matures on April 24, 2000. If, on April 24, 2000,
certain conditions are satisfied, any amounts outstanding under the revolving
line of credit may be converted into a term loan payable in eight quarterly
instalments commencing on August 1, 2000. The Credit Agreement contains
customary events of default and covenants which prohibit, among other things,
incurring additional indebtedness in excess of a specified amount, paying
dividends, creating liens and engaging in certain mergers or combinations
without the prior written consent of the lender. The Credit Agreement also
contains certain financial covenants relating to current ratio, debt to capital
ratio, debt and fixed charges coverage and minimum tangible net worth, as
defined in the Credit Agreement. The Company is required to pay an unused
facility fee ranging from .20% to .35% per annum on the facilities, depending
upon certain financial covenants.
Under the Company's large deductible workers' compensation insurance
policies for 1994, 1995 and 1996, the Company is required to provide its former
insurance carriers with $7.6 million in letters of credit, of which $6.3 million
has been issued by the lenders under the Credit Agreement. In connection with
the reinsurance of the Company's responsibility for remaining claims (the
"Remaining Claims"), Commercial Risk Re-Insurance Company ("Commercial Risk")
has provided a $4.1 million letter of credit in favor of the Company to secure
Commercial Risk's obligation for the payment of Remaining Claims.
-66-
<PAGE>
The Company also had $1.2 million in standby letters of credit with
another bank at December 31, 1996, which guarantee the payment of workers'
compensation claims acquired upon the SAI Acquisition to SAI former workers'
compensation insurance carrier.
The Company anticipates that available cash, cash flows from operations
and borrowing availability under the Credit Agreement will be sufficient to
satisfy the Company's liquidity and working capital requirements for the
foreseeable future; however, to the extent that the Company should desire to
increase its financial flexibility and capital resources or require or choose to
fund future capital 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 $2.3 million for the year
ended December 31, 1996, compared to cash provided by operating activities of
approximately $2.7 million for the same period in 1995. The difference between
the Company's net income of $2.1 million for the year ended December 31, 1996,
and its negative operating cash flow was due primarily to a $14.4 million
increase in accounts receivable, a $3.2 million increase in reinsurance
recoverable, an increase in prepaid workers' compensation insurance premium of
$5.5 million, partially reduced by noncash items such as depreciation and
amortization of $1.2 million, provision for doubtful accounts of $0.4 million
and recognition of deferred gain of $0.6 million, a decrease in restricted cash
of $4.2 million, an increase in accrued salaries, wages, and payroll taxes of
$8.6 million, an increase in accounts payable and accrued expenses of $0.7
million, an increase in reserves for claims of $3.1 million, and an increase of
$1.0 million in reserve for other state taxes. The increase in accounts
receivable resulted from both a higher number of PEO clients and worksite
employees served during 1996 and the timing of the payroll cycle. The Company's
accounts receivable and accrued salaries, wages, and payroll taxes are subject
to fluctuations depending on the proximity of the closing date of the reporting
period to that of the payroll cycle. The increase in reinsurance recoverable was
due mainly to the transfer of substantially all of the Company's responsibility
for remaining claims under its large deductible workers' compensation policies
for 1994, 1995 and 1996.
Net cash used in investing activities was $6.1 million for the year
ended December 31, 1996, compared to $1.9 million used in investing activities
in the same period in 1995. This reflects payment of $2.8 million due under
acquisition agreements, as well as the allocation of $1.3 million as restricted
cash for future payments of amounts due under acquisition agreements, and $2.6
million in expenditures for property and equipment to support the Company's
growth.
Net cash provided by financing activities was $24.6 million for the
year ended December 31, 1996, compared to $0.4 million used in financing
activities in the same period in 1995. The 1996 cash flow reflects the Company's
issuance of 3,000,000 shares of common, partially offset by principal payment on
borrowings and additional costs incurred in connection with the Company's
initial public offering.
NEW ACCOUNTING PRONOUNCEMENTS
The FASB 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
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<PAGE>
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.
In January 1997 the Financial Accounting Standards Board issued
Statement of Financial Standard ("SFAS") No. 128, "Earnings Per Share" which
requires dual presentation of basic and fully diluted earnings per share. The
adoption of SFAS No. 128 is not expected to have a material effect on the
Company's earnings per share computation.
INFLATION
The Company believes the effects of inflation have not had a
significant impact on its results of operations or financial condition.
-68-
<PAGE>
<TABLE>
<CAPTION>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
(a) Financial Statements
The following audited financial statements of Staffing Network, Inc.
are filed with this Amendment No. 1 to this Current Report on Form 8-K:
STAFFING NETWORK, INC.
<S> <C>
Report of Independent Certified Public Accountants........................................... F-1
Balance Sheets as of December 31, 1995 and 1996.............................................. F-2
Statements of Income and Retained Earnings for the Years Ended
December 31, 1995 and 1996................................................................. F-4
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996...................... F-5
Notes to Financial Statements................................................................ F-7
Report of Independent Certified Public Accountants........................................... F-14
Balance Sheet as of December 31, 1994........................................................ F-15
Statement of Income and Retained Earnings for the Year Ended
December 31, 1994.......................................................................... F-17
Statement of Cash Flows for the Year Ended December 31, 1994................................. F-18
Notes to Financial Statements................................................................ F-20
(b) Pro Forma Financial Information
The following unaudited pooled combined pro forma information of The
Vincam Group, Inc. and Staffing Network, Inc. is filed with this Amendment No.1
to this Current Report on Form 8-K:
PAGE
----
Pooled Combined Pro Forma Financial Information.............................................. F-27
Pooled Combined Pro Forma Balance Sheet as of September 30, 1997............................. F-28
Pooled Combined Pro Forma Statement of Income for the Three Month
Period Ended September 30, 1997............................................................ F-29
Pooled Combined Pro Forma Statement of Income for the Nine Month
Period Ended September 30, 1997............................................................ F-30
Notes to Pooled Combined Pro Forma Financial Information..................................... F-31
</TABLE>
-69-
<PAGE>
Pooled combined pro forma financial information for the three years
ended December 31, 1996, is not included herein. The supplementary audited
consolidated financial statements of The Vincam Group, Inc. included in Item 5
Other Events of this Amendment No. 1 to Current report of Form 8-K replaces the
pro forma information required by this Item 7(b), with respect to the pooling of
interest transaction with Staffing Network, Inc.
(c) Exhibits
EXHIBIT
NO. DESCRIPTION
- -------- ------------
11 Statement re Computation of Per Share Earnings
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Howe, Riley & Howe Professional Corporation
27.1 Restated Financial Data Schedule for the year ended December 31, 1996
27.2 Restated Financial Data Schedule for the year ended December 31, 1995
27.3 Restated Financial Data Schedule for the year ended December 31, 1994
-70-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
THE VINCAM GROUP, INC.
JANUARY 20, 1998 By: /s/ JOHN CARLEN
Date ---------------
John Carlen, President and Chief Operating Officer
(Principal Executive Officer)
JANUARY 20, 1998 By: /s/ CARLOS A. RODRIGUEZ
Date -----------------------
Carlos A. Rodriguez, Chief Financial Officer,
Senior Vice President Finance and Administration
(Principal Financial Officer)
JANUARY 20, 1998 By: /s/ MARTINIANO J. PEREZ
Date -----------------------
Martiniano J. Perez, Vice President & Controller
(Principal Accounting Officer)
-71-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Staffing Network, Inc.
We have audited the accompanying balance sheets of Staffing Network, Inc. as of
December 31, 1995 and 1996, and the related statements of income and retained
earnings, and cash flows for the years then ended. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Staffing Network, Inc. at
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 8 to the financial statements, in 1995 the Company changed
its method of accounting for professional employer fees and worksite employee
payroll costs.
ERNST & YOUNG LLP
Manchester, New Hampshire
March 11, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
STAFFING NETWORK, INC.
BALANCE SHEETS
DECEMBER 31,
1995 1996
----------- -----------
<S> <C> <C>
ASSETS (NOTE 5)
Current assets:
Cash and cash equivalents $ 110,647 $ 605,117
Cash savings for medical claims 697,979 757,384
Accounts receivable:
Trade, net of allowance for uncollectible accounts of
$30,000 in 1995 and $20,000 in 1996 619,799 924,704
Unbilled (NOTE 8) 1,674,947 2,685,291
Affiliates (NOTE 7) 11,291 11,596
Other 15,181 171
----------- -----------
2,321,218 3,621,762
Prepaid expenses and other current assets 550,380 286,193
----------- -----------
Total current assets 3,680,224 5,270,456
Property and equipment:
Furniture and equipment 163,463 249,995
Computers and software 172,639 280,772
Automobiles 41,442 51,942
Leasehold improvements 18,175 18,175
----------- -----------
395,719 600,884
Accumulated depreciation and amortization (163,736) (257,557)
----------- -----------
231,983 343,327
Other assets:
Contract acquisition costs (NOTE 2) 1,452,125 1,811,970
Security deposits 124,513 109,174
----------- -----------
1,576,638 1,921,144
----------- -----------
Total assets $ 5,488,845 $ 7,534,927
=========== ===========
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
STAFFING NETWORK, INC.
BALANCE SHEETS (CONTINUED)
DECEMBER 31,
1995 1996
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 38,558 --
Accounts payable 34,037 $ 102,938
Accrued worksite employee payroll (NOTE 8) 1,494,344 2,442,199
Payroll taxes and other payroll deductions payable 308,377 792,974
Accrued medical claims (NOTE 3) 697,979 747,723
Accrued workers' compensation claims (NOTE 4) 261,271 246,430
State income taxes 34,090 27,955
Business enterprise tax 84,500 109,993
Other accrued liabilities 74,434 114,720
Notes payable to stockholders (NOTE 7) 280,000 --
Current portion of long-term debt and capital lease
obligations (NOTE 5) 453,095 477,250
---------- ----------
Total current liabilities 3,760,685 5,062,182
Long-term debt and capital lease obligations, less 873,212 396,521
current portion (NOTE 5)
Security deposits payable 129,897 133,137
Notes payable to stockholders (NOTE 7) -- 1,018,000
Commitments (NOTES 6 AND 7)
Stockholders' equity:
Common stock, no par value:
Authorized shares - 300
Issued and outstanding shares - 300 300 300
Retained earnings 724,751 924,787
---------- ----------
Total stockholders' equity 725,051 925,087
---------- ----------
Total liabilities and stockholders' equity $5,488,845 $7,534,927
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
<TABLE>
<CAPTION>
STAFFING NETWORK, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31,
1995 1996
------------- -------------
<S> <C> <C>
Revenues (NOTES 7 AND 8) $ 80,315,215 $ 114,619,766
Direct costs:
Salaries and wages of worksite employees (NOTE 8) 65,354,954 93,707,429
Benefits and payroll taxes 11,582,594 15,159,871
------------- -------------
76,937,548 108,867,300
------------- -------------
Gross profit 3,377,667 5,752,466
Operating expenses:
Salaries, wage and payroll taxes:
Officers 1,242,737 2,757,441
Other 757,243 1,175,399
------------- -------------
1,999,980 3,932,840
General and administrative 944,923 1,141,930
Rent 183,300 190,800
Advertising 57,086 70,089
Depreciation and amortization 112,575 300,194
------------- -------------
3,297,864 5,635,853
------------- -------------
Operating income 79,803 116,613
Other income (expense):
Interest income 64,219 130,248
Interest expense (38,793) (76,848)
Other, net 105,088 48,227
------------- -------------
130,514 101,627
------------- -------------
Income before state income taxes and cumulative effect of
change in accounting principle 210,317 218,240
State income taxes 19,500 18,204
------------- -------------
Income before cumulative effect of change in accounting
principle 190,817 200,036
Cumulative effect of change in accounting principle
(NOTE 8)
143,834 --
------------- -------------
Net income 334,651 200,036
Retained earnings at beginning of year 390,100 724,751
------------- -------------
Retained earnings at end of year $ 724,751 $ 924,787
============= =============
</TABLE>
SEE ACCOMPANYING NOTES
F-4
<PAGE>
<TABLE>
<CAPTION>
STAFFING NETWORK, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1995 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 334,651 $ 200,036
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 112,575 300,194
Changes in operating assets and liabilities:
Accounts receivable (1,765,540) (1,300,544)
Prepaid expenses and other current assets (412,829) 264,187
Accounts payable 34,037 68,901
Accrued worksite employee payroll 1,494,344 947,855
Payroll taxes and other payroll deductions payable 144,637 484,597
Accrued medical claims 102,228 49,744
Accrued workers' compensation claims (86,704) (14,841)
State income taxes 28,275 (6,135)
Other accrued liabilities 126,093 69,019
----------- -----------
Total adjustments (222,884) 862,977
----------- -----------
Net cash provided by operating activities 111,767 1,063,013
INVESTING ACTIVITIES
Acquisition of assets of Row Concept, Inc. and Row
Management Services, Inc. (NOTE 2) -- (566,000)
Acquisition of assets of Business Contract Staffing, Inc.
and Complete Temporary Service, Inc. (NOTE2) (200,000) --
Purchase of property and equipment (101,781) (205,999)
Other (72,642) 15,955
----------- -----------
Net cash used in investing activities (374,423) (756,044)
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
STAFFING NETWORK, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
1995 1996
----------- -----------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from notes payable to stockholders $ 280,000 $ 1,268,000
Payments on notes payable to stockholders -- (530,000)
Payments on borrowings (263,488) (491,094)
Proceeds from borrowings 113,511 --
----------- -----------
Net cash provided by financing activities 130,023 246,906
----------- -----------
Net increase (decrease) in cash and cash equivalents (132,633) 553,875
Cash and cash equivalents at beginning of year 941,259 808,626
----------- -----------
Cash and cash equivalents at end of year $ 808,626 $ 1,362,501
=========== ===========
Supplemental disclosures:
Cash paid for interest $ 38,793 $ 76,848
Cash paid for income taxes 12,090 24,339
Noncash financing activities -long-term debt assumed in
connection with acquisition of assets 1,300,000 --
</TABLE>
SEE ACCOMPANYING NOTES
F-6
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. ACCOUNTING POLICIES
ORGANIZATION
Staffing Network, Inc., (the "Company") is a New Hampshire-licensed professional
employer organization ("PEO") that provides a comprehensive personnel management
system which encompasses a broad range of services, including benefits and
payroll administration, medical and workers' compensation programs, tax filings,
personnel records management, and other human resource services. The Company is
an accredited member of the Institute for the Accreditation of Professional
Employer Organizations.
The Company provides PEO services to small businesses in a variety of
industries, including retail, restaurants and service providers. The Company
does not have a concentration of customers in any one industry. The Company
operates primarily in the New England and upstate New York areas. PEOs are
regulated by state law as to operating methods and insurance coverages.
PEO service contracts with client companies remain in force and effect from
month to month until either party gives thirty days written notice of
termination. As is customary in the industry, the Company does not typically
require collateral against its trade receivables; however, the risk is reduced
as the Company monitors its credit and collection procedures as a matter of
policy.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
The more significant estimates relate to the Company's accrual for medical
claims and workers' compensation claims. Actual results could differ from those
estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
F-7
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
1. ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Maintenance and repairs are charged
to expense as incurred. The cost of property and equipment is depreciated over
the estimated useful lives of the related assets using accelerated methods.
PEO SERVICE FEES AND WORKSITE EMPLOYEE PAYROLL COSTS
The Company's revenues consist of service fees paid by its clients under its PEO
service contracts. In consideration for payment of such service fees, the
Company agrees to pay the following direct costs associated with the worksite
employees: (i) salaries and wages, (ii) employment related taxes, (iii) employee
benefit plan premiums and (iv) workers' compensation insurance premiums. The
Company accounts for PEO service fees and the related direct payroll costs using
the accrual method. Under the accrual method, PEO service fees relating to
worksite employees with earned but unpaid wages at the end of each period are
recognized as unbilled revenues and the related direct payroll costs for such
wages are accrued as a liability during the period in which wages are earned by
the worksite employee. Subsequent to the end of each period, such wages are paid
and the related PEO service fees are billed.
CONTRACT ACQUISITION COSTS
Contract acquisition costs, which represent the excess of the purchase price
over the fair market value of tangible assets acquired, are being amortized on a
straight-line basis over a period of 8 years, the estimated average life of a
service contract.
ADVERTISING
The company expenses all advertising costs incurred.
F-8
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
1. ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under Subchapter S, the Company does not generally pay
Federal income taxes; rather, the income and credits are reported on the
individual stockholders' tax returns.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and income tax carrying amounts of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company has no significant
temporary differences which would give rise to deferred tax balances.
2. ACQUISITIONS
On September 23, 1996, the Company acquired certain assets, both tangible and
intangible, of Row Concept, Inc. and Row Management Services, Inc., both New
York corporations, at a purchase price of $566,000. In connection with the
acquisition, the Company acquired tangible assets with a fair value of
approximately $1,000. No liabilities were assumed. The excess of the purchase
price over the fair market value of tangible assets acquired ($565,000) has been
allocated to contract acquisition costs and is being amortized on a
straight-line basis over a period of 8 years, the estimated average of a service
contract.
On September 20, 1995, the Company acquired certain assets, both tangible and
intangible, of Business Contract Staffing, Inc. and Complete Temporary Service,
Inc., both New York corporations, at a purchase price of $1,500,000. The payment
terms specified that $200,000 be paid at the purchase date, with the remainder
payable by the execution of four promissory notes. The notes, which are
unsecured, carry an annual interest rate of 6 1/2% and are payable in 36 equal
consecutive monthly installments of principal and interest beginning November
1995. In connection with the acquisition, the Company acquired tangible assets
with a fair market value of approximately $1,000. No liabilities were assumed.
The excess of the purchase price over the fair market value of tangible assets
acquired ($1,499,000) has been allocated to contract acquisition costs and is
being amortized on a straight-line basis over a period of 8 years, the estimated
average life of a service contract.
F-9
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
3. HEALTH AND WELFARE BENEFITS PLAN/MEDICAL CLAIMS
The Company has a partially self-insured plan to provide health and welfare
benefits to its eligible employees. The plan is subject to the provisions of the
Employee Retirement Income Security Act of 1974 (ERISA). The plan provides
health benefits for hospital, surgical and major medical up to a maximum
lifetime benefit of $2,000,000 per individual covered, dental benefits up to a
maximum $750 per individual per year and vision benefits up to a maximum of
approximately $200 per individual per year. Eligible employees are permanent
full time employees of the Company in active service, completing at least 90
days of active service and working a minimum of 30 hours per week. The Company
has secured stop-loss insurance which pays for health claims paid in excess of
$35,000 per covered individual per year.
The accrual for medical claims has been estimated based upon an actuarial study
and past paid claims experience. The accrual includes estimated expenses to be
incurred in connection with processing and paying the accrued medical claims.
Such estimates may be more or less than the amount ultimately paid when the
claims are settled and it is reasonably possible that the Company's estimates
may change in the near term.
4. WORKERS' COMPENSATION
The Company has, from time to time, been insured under various types of workers'
compensation policies. These have included a retrospective rating plan, whereby
premiums were paid to the insurance carrier based on estimated actual losses
plus an administrative fee; a guaranteed cost plan, whereby monthly premiums are
paid for complete coverage of all claims under the policy; and, currently, a
high deductible paid loss plan, whereby premiums are based on a $150,000
deductible per person or occurrence.
The workers' compensation claims accrual is an estimate based on past claims
experience as well as an estimate of reported and unreported losses, net of
amounts covered under applicable insurance policies, for injuries occurring on
or before the balance sheet date. The loss estimates are based on several
factors, including the Company's current experience, relative health care costs,
regional influences and other factors. Such estimates may be more or less than
the amount ultimately paid when the claims are settled and it is reasonably
possible that the Company's estimates may change in the near term.
F-10
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
5. INDEBTEDNESS
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
---------- ----------
<S> <C> <C>
Notes payable in connection with acquisition of certain
assets of Business Contract Staffing, Inc. and Complete
Temporary Service, Inc. (SEE NOTE 2) $1,200,772 $ 787,613
Capital lease obligations payable in combined monthly
installments for principal and interest of $3,214 through
March 1999, and $1,223 in April 1999, with interest at
9.8%, collateralized by certain furniture, equipment and
computers 107,842 78,566
Other 17,693 7,592
---------- ----------
1,326,307 873,771
Less current portion 453,095 477,250
---------- ----------
$ 873,212 $ 396,521
========== ==========
</TABLE>
The Company has capital leases covering approximately $152,000 of furniture,
equipment and computers at December 31, 1995 and 1996. At December 31, 1995 and
1996, accumulated amortization on these assets was approximately $37,542 and
$84,589, respectively. Amortization under these leases is included in
depreciation and amortization in the accompanying financial statements. At
December 31, 1996, future minimum lease payments are as follows:
1997 $38,572
1998 39,186
1999 10,245
--------
Total minimum lease payments 88,003
Less amounts representing interest 9,437
--------
Present value of minimum lease payments $78,566
========
F-11
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
5. INDEBTEDNESS (CONTINUED)
At December 31, 1996, the future amount of maturities on the above indebtedness
is as follows:
YEAR DUE AMOUNT
-------- --------
1997 $477,250
1998 386,471
1999 10,050
--------
$873,771
========
LINE-OF-CREDIT
The Company has a revolving line-of-credit agreement with a bank. Under the
terms of the agreement, the Company can borrow up to $750,000. The sums advanced
under the line-of-credit accrue interest at a variable annual rate equal to the
bank's base rate plus .25% (8 5% at December 31, 1996). There were no advances
outstanding on this line-of credit at December 31, 1996.
The agreement contains certain covenants regarding acquisitions, distributions
and the incurrence of additional debt, among others. The Company must also
maintain certain financial ratios and measures as defined in the agreement. The
advances are collateralized by substantially aII of the assets of the Company.
6. COMMITMENTS AND CONTINGENCIES
The Company leases five automobiles under operating lease agreements with terms
of up to 3 years. The leases require monthly payments raging from $350 to
$1,250. The individual leases expire on various dates between July 1997 and
October 1999. Future lease payments are as follows: 1997 - $33,996; 1998 -
$9,420; and 1999 - $7,000.
The Company is a defendant in various lawsuits and claims arising in the normal
course of business. Management believes it has valid defenses in these cases and
is defending them vigorously. While the results of litigation cannot be
predicted with certainty, management believes the final outcome of such
litigation will not have a material adverse effect on the Company's financial
position or results of operations.
F-12
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
7. RELATED PARTY TRANSACTIONS
Three of the subscribing companies are owned by the stockholders of the Company.
For the years ended December 31, 1995 and 1996, the amounts billed to these
companies were $172,408 and $192,416, respectively, with $9,120 and $7,260,
respectively, included in trade accounts receivable at December 31, 1995 and
1996. The accounts receivable from affiliates represent operating expenses paid
by the Company on behalf of these affiliates as well as expenses paid by the
Company on behalf of a stockholder.
The Company leases its office facilities from Staffing Realty Limited Liability
Corp., which is wholly-owned by the stockholders of the Company. The Company is
a tenant at will under the lease agreement, which requires monthly rent of
$15,000. The amount charged to rent expense was $180,000 in 1995 and 1996. The
Company is required to pay all operating expenses of the facility.
The Company has guaranteed a $220,000 bank loan of Staffing Realty Limited
Liability Corp.
During 1995, the Company executed promissory notes to its two stockholders
aggregating $280,000. These notes were repaid in 1996. During, 1996, the Company
borrowed $1,268,000 from its two stockholders, of which $250,000 was repaid in
1996. The borrowings are due January 2, 1998 and accrue interest at an annual
rate based on the Internal Revenue Service applicable federal rate.
8. CHANGE IN ACCOUNTING PRINCIPLE
In 1995, the Company changed its method of accounting for professional employer
fees and the related direct payroll costs to the accrual method. Under the
accrual method, professional employer fees are recognized as unbilled revenue
and the related direct payroll costs are accrued as a liability during the
period in which wages are earned by the worksite employee. Previously, the
Company recorded the professional employer fees and direct payroll costs in the
period in which the payroll was disbursed. The new method of accounting for
these fees and expenses was adopted to comply with the accrual method of
accounting for revenues and expenses required by generally accepted accounting
principles, for which the difference was not previously material to the
financial position and results of operations of the Company.
The change was adopted effective January 1, 1995. The cumulative effect of the
change of $143,834 (after reduction for income taxes of $14,573) is included as
an increase to net income for the year ended December 31, 1995.
F-13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Staffing Network, Inc.
We have audited the accompanying balance sheet of STAFFING NETWORK,
INC. as of December 31, 1994 and the related statements of income and retained
earnings and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Staffing Network,
Inc. as of December 31, 1994 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
HOWE, RILEY & HOWE PROFESSIONAL CORPORATION
Manchester, New Hampshire
March 2, 1995
F-14
<PAGE>
STAFFING NETWORK, INC.
BALANCE SHEET
DECEMBER 31, 1994
ASSETS
CURRENT ASSETS
Cash $ 345,508
Cash savings for medical claims (NOTE 3) 595,751
Accounts receivable:
Trade (less allowance for doubtful accounts of $30,000)
(NOTE 7 544,387
Affiliate (NOTE 7) 11,291
Prepaid workers' compensation insurance 59,728
Prepaid insurance - other 24,522
Deposits 2,150
----------
Total current assets $1,583,337
----------
FIXED ASSETS, at cost (NOTES 1 AND 5)
Computers 111,493
Office furniture 89,102
Office equipment 38,101
Leasehold improvements 12,800
Automobiles 41,442
----------
292,938
Less: accumulated depreciation 98,037
----------
Net fixed assets 194,901
----------
CASH - SECURITY DEPOSITS 51,871
----------
Total $1,830,109
==========
F-15
<PAGE>
STAFFING NETWORK, INC.
BALANCE SHEET (CONTINUED)
DECEMBER 31, 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (NOTE 5) $ 38,590
Payroll tax and other withholdings payable 38,599
Accrued expenses:
Payroll taxes 125,141
State taxes (NOTE 1) 74,972
Medical claims (NOTES 2 AND 3) 595,751
Workers' compensation (NOTE 4) 347,975
Other 39,610
----------
Total current liabilities $1,260,638
LONG-TERM DEBT, less current portion shown above (NOTE 5) 125,100
SECURITY DEPOSITS PAYABLE 53,971
----------
Total liabilities $1,439,709
----------
COMMITMENTS (NOTES 2, 4, 6 AND 7)
STOCKHOLDERS' EQUITY
Common stock, no par value, 300 shares authorized, issued and
outstanding 300
Retained earnings (NOTE 8) 390,100
----------
Total stockholders' equity 390,400
----------
TOTAL $1,830,109
==========
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
STAFFING NETWORK, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
STAFF LEASING FEES (NOTE 7) $ 70,467,904
DIRECT COSTS (EXHIBIT I) 68,076,725
------------
Gross Profit 2,391,179
OPERATING EXPENSES, excluding compensation of officers
(EXHIBIT I) 1,282,280
------------
Income from operations before compensation of officers 1,108,899
COMPENSATION OF OFFICERS 1,016,642
------------
Income from operations 92,257
------------
OTHER INCOME (EXPENSE)
Interest income 17,646
Interest expense (29,223)
------------
Total other expense, net (11,577)
------------
Net income before provision for state taxes 80,680
PROVISION FOR STATE TAXES (NOTE 1) 7,425
------------
Net income 73,255
RETAINED EARNINGS - beginning of year 316,845
------------
RETAINED EARNINGS - end of year $ 390,100
============
The accompanying notes and Exhibit I are an integral part of these financial
statements.
F-17
<PAGE>
STAFFING NETWORK, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from subscribers $ 70,270,590
Cash paid to suppliers and employees (69,746,619)
Interest received 17,646
Interest paid (29,223)
Penalties paid (10,120)
State taxes paid (6,638)
------------
Net cash provided by operating activities 495,636
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (28,360)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on installment notes payable (25,483)
Payments on notes payable, stockholders (90,000)
------------
Net cash used for financing activities (115,483)
------------
NET INCREASE IN CASH 351,793
CASH - beginning of year 641,337
------------
CASH - end of year $ 993,130
============
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
STAFFING NETWORK, INC.
STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1994
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 73,255
---------
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation 43,554
Provision for bad debts 20,000
Change in assets and liabilities:
Increase in accounts receivable, trade (203,706)
Increase in accounts receivable, affiliate (7,230)
Increase in deposits (2,150)
Decrease in insurance premium refunds 122,455
Decrease in prepaid workers' compensation 417,190
Increase in prepaid insurance, other (3,656)
Decrease in accounts payable (20,302)
Increase in payroll tax and other withholdings payable 14,069
Decrease in accrued payroll taxes (39,043)
Increase in accrued state taxes 7,432
Increase in accrued medical claims 44,400
Increase in accrued workers' compensation 39,942
Decrease in accrued other (16,966)
Increase in security deposits payable 6,392
---------
Total adjustments 422,381
---------
Net cash provided by operating activities $ 495,636
=========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
During 1994, the company assumed long-term debt of $165,918 in
connection with the acquisition of certain fixed assets.
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
Note 1 - ACCOUNTING POLICIES
Staffing Network, Inc. is a Professional Employer Organization
with clients located throughout the United States. The majority of
its client base is located in the New England area. Professional
Employer Organizations are regulated by state law as to operating
methods and insurance coverages (see Note 8). The company does not
usually require collateral for its trade accounts receivable.
The financial statements reflect the application of the following
accounting policies:
(A) FIXED ASSETS AND RELATED DEPRECIATION
Major additions and betterments are charged to the property
accounts, while maintenance and repairs which do not improve
or extend the lives of the respective assets are charged to
expense currently. When properties are disposed of, the
related costs and accumulated depreciation are removed from
the respective accounts and any gain or loss is recognized
currently. Depreciation is provided over estimated useful
lives using accelerated methods.
(B) INCOME TAXES
The company provides for state income taxes in accordance
with the method of accounting prescribed in Statement No.
109 of the Financial Accounting Standards Board. The
statement provides that a deferred tax liability or asset be
recognized for the estimated future tax effects of temporary
differences in the timing of recognition of revenues and
expenses for financial reporting and income tax purposes and
carryforwards. The company has no significant timing
differences which would give rise to a deferred tax account.
The company elected on January 1, 1992 to be taxed under the
provisions of Subchapter S of the Internal Revenue Code.
Under Subchapter S, the company does not generally pay
Federal income taxes, rather the income and credits are
reported on the individual stockholders' tax returns.
(C) CASH
At December 31, 1994, the company had amounts on deposit in
one bank in excess of $100,000. The amounts credited in the
bank at December 31, 1994, prior to outstanding items
clearing the bank, was approximately $2,678,000.
F-20
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Note 1 - (C) CASH (CONTINUED)
The deposits are not collateralized except for the maximum
Federal deposit insurance coverage of $100,000. The company
customarily has amounts on deposit with this bank in excess
of $100,000 throughout the year.
(D) REVENUE RECOGNITION
Subscribers are billed on a weekly, biweekly, bimonthly or
monthly basis. Revenue is recognized during the period in
which the employment expenses were incurred.
(E) ADVERTISING
The company's policy is to charge advertising costs to
expense as incurred.
Note 2 - STAFFING NETWORK, INC. HEALTH AND WELFARE BENEFITS PLAN
On April 1, 1988, the company established a self-insured plan to
provide health and welfare benefits to its eligible employees. The
plan is subject to the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA). The plan provides health
benefits for hospital, surgical and major medical up to a maximum
life time benefit of $2,000,000 per individual covered, dental
benefits up to a maximum $750 per individual per year and vision
benefits up to a maximum of approximately $200 per person per
year. Eligible employees are permanent full-time employees of the
company in active service, completing at least 90 days of active
service and working a minimum of 30 hours per week. The company
has secured stop loss insurance which pays for health claims paid
in excess of $35,000 per covered individual per year. For the year
ended December 31, 1994 there were approximately 3,100 individuals
covered by the plan. The plan's fiscal year ends on March 31.
F-21
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Note 3 - MEDICAL CLAIMS RESERVE AND ACCRUAL
The accrued medical claims has been estimated based upon an
actuarial study and past paid claims experience. The accrued
expenses include estimated expenses to be incurred in connection
with processing and paying the accrued medical claims. Such
estimates may be more or less than the amount ultimately paid when
the claims are settled.
The company is a member of the National Association of
Professional Employer Organizations, a trade association. In
connection with their accredited membership in this association,
the company must at all times maintain, in a separate identifiable
bank account, a daily cash balance of more than 25% of the medical
claims that the company paid during the preceding twelve month
period. At December 31, 1994 the company had $595,751 in this
restricted cash account which exceeded the requirements of the
Association by approximately $54,000.
Note 4 - ACCRUED WORKERS' COMPENSATION EXPENSES
Under a premium finance agreement, the company had financed
certain workers' compensation premiums of $1,337,701 due on
insurance policies with 1994 effective dates. The agreement
required payments to be made in equal monthly installments of
$118,684 which included a finance charge calculated at an annual
rate of 7% through October 1, 1994. As security for this finance
agreement, the company had assigned all unearned premiums, all
dividends under the policies and all loss payments which reduce
the unearned premiums.
On April 1, 1994, the company entered into a retrospective
insurance agreement with an insurance company for workers'
compensation coverage on all of Staffing Network's employees,
except those in the State of Maine. In connection with this new
agreement the above premium finance agreement was terminated.
Under the new workers' compensation agreement, effective April 1,
1994, the cost of the insurance is rated retrospectively. The
estimated standard premium for the first contract year (April 1,
1994 to March 31, 1995) is $1,744,213. Based on actual incurred
losses during the plan year, the actual premium may be as low as
$872,107 (the minimum retrospective premium) and as high as
$2,616,320 (the maximum retrospective premium). The stop loss
coverage is effective for losses paid in excess of $250,000 per
individual. After the calculation of the retrospective premium is
finalized, the company will either be liable for additional
premium to the insurance company or will receive a refund from the
insurance company.
F-22
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Note 4 - ACCRUED WORKERS' COMPENSATION EXPENSES (CONTINUED)
The accrued workers' compensation expense has been estimated based
upon past paid claims experience. The accrued expenses include
estimated expenses to be incurred in connection with processing
and paying the accrued claims. Such estimates may be more or less
than the amount ultimately paid when the claims are settled.
Under a premium finance agreement, the company has financed
certain Maine workers' compensation premiums of $166,585 due on
insurance policies effective May 1994 through May 1995. The
agreement requires payments to be made in equal monthly
installments of $17,280 which includes a finance charge calculated
at an annual rate of 8.06% through March 1995.
As security for this finance agreement, the company has assigned
all unearned premiums, all dividends under the policies and all
loss payments which reduce the unearned premiums.
Note 5 - LONG-TERM DEBT
Long-term debt at December 31, 1994 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Installment notes payable to a bank in combined equal monthly
installments for principal and interest of $1,148 through July
1996, and $520 thereafter through April 1999 with interest at 7%,
collateralized by certain automobiles $ 29,678
Installment notes payable to a finance company in combined monthly
installments for principal and interest of $3,178 through March
1999 and $637 thereafter through June 1999, with interest at 9.8%,
collateralized by certain furniture, equipment and leasehold
improvements 134,012
--------
163,690
Less: current portion 38,590
========
$125,100
========
</TABLE>
F-23
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Note 5 - LONG-TERM DEBT (CONTINUED)
At December 31, 1994, the future amount of maturities on the above
indebtedness is as follows:
YEAR DUE AMOUNT
-------- -------
1995 $38,590
1996 39,080
1997 38,205
1998 37,707
1999 10,108
--------
$163,690
========
Note 6 - LEASE OBLIGATIONS
The company leases three automobiles under the terms of 3-year
operating lease agreements. The company is responsible for
maintaining the automobiles in good working order, and if the
company doesn't purchase the vehicles at the end of their leases,
the company will be liable for any costs resulting from excess
wear and tear. The leases require monthly payments of $834, $930
and $1,250 through July 1995, August 1995 and July 1997,
respectively.
Note 7 - RELATED PARTY TRANSACTIONS
One of the subscribing companies is wholly-owned by the
stockholders of Staffing Network, Inc. For the year ended December
31, 1994, the revenues billed to this company were $183,923 with
$11,777 included in accounts receivable, trade at year end. The
accounts receivable, affiliate represents operating expenses paid
by the company on behalf of the affiliate. Also during 1994, the
company paid this affiliate $43,101 for advertising expenses.
The company rented office space from another affiliated company,
which is wholly-owned by the stockholders of Staffing Network,
Inc. The amount charged to rent expense was $15,000 in 1994.
Starting in December 1993, the company began renting new
facilities from Staffing Realty Limited Liability Corp. which is
wholly-owned by the stockholders of Staffing Network, Inc. In
March 1994, the company moved all of its operations to this new
location. The company is a tenant at will under the new agreement
which requires monthly rent of $15,000. The amount charged to rent
expense for this building was $120,000 in 1994. The company is
required to pay all operating expenses of the new facilities.
F-24
<PAGE>
STAFFING NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Note 7 - RELATED PARTY TRANSACTIONS (CONTINUED)
Staffing Network has guaranteed a $250,000 bank loan of Staffing
Realty Limited Liability Corp. Under terms of the agreement,
Staffing Network had pledged $100,000 as collateral which was
released by the bank on April 1, 1994. The loan agreement requires
that Staffing Network maintain a debt coverage ratio of at least 1
to 1 and a minimum tangible net worth, as defined, of $200,000.
Staffing Network did not require collateral for their guarantee.
Note 8 - NEW HAMPSHIRE STATE LEGISLATION
During 1994, the State of New Hampshire passed legislation to
regulate all professional employer organizations doing business in
the state (effective October 1, 1994). Under the statute, all
professional employer organizations, as defined, are required to
be licensed by the State of New Hampshire. In order to receive a
license, professional employer organizations must adhere to
various regulations as to operating methods and insurance
coverages. The law also requires that professional employer
organizations maintain a minimum net worth, as defined of $50,000.
F-25
<PAGE>
EXHIBIT I
STAFFING NETWORK, INC.
SCHEDULES OF DIRECT COSTS AND OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1994
DIRECT COSTS
Wages $56,936,835
Payroll taxes 5,286,982
Medical claims paid (NOTES 2 AND 3) 2,656,304
Workers' compensation premiums (NOTE 4) 2,492,309
Health and welfare insurance premiums 633,123
New Hampshire Business Enterprise tax 71,014
Other 158
-----------
Total direct costs $68,076,725
===========
OPERATING EXPENSES
Salaries $ 469,050
Advertising (NOTE 7) 86,633
Office and computer supplies 50,588
Postage and freight 75,085
Rent (NOTE 7) 135,000
Professional fees 117,368
Bad debt expense, net of recoveries 3,111
Telephone 50,217
Insurance 49,383
Contributions 1,002
Dues and Subscriptions 14,729
Travel expenses 32,739
Vehicle expenses 27,390
Depreciation 43,554
Repairs and maintenance 27,367
Miscellaneous 69,727
Utilities 25,260
Administrative commission fee 4,031
Equipment rental 46
-----------
Total operating expenses $ 1,282,280
===========
F-26
<PAGE>
POOLED COMBINED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statements of income of The Vincam
Group, Inc. ("Vincam") and Staffing Network, Inc. ("SNI") for the three and nine
month period ended September 30, 1997, are presented as if the acquisition had
occurred on January 1, 1997.
The pro forma data is presented for informational purposes only and may
not be indicative of future results of operations or financial position of
Vincam, or what the results of operations or financial position of Vincam would
have been had the acquisition occurred on the date set forth.
This pooled combined pro forma financial information should be read in
conjuction with the historical financial statements and notes thereto of SNI,
included herein, and the historical financial statements of Vincam described
below.
The unaudited pro forma financial information is derived from
historical financial statements of Vincam and SNI. The pooled combined pro forma
balance sheet statement combines Vincam's unaudited historical balance sheet
statement as of September 30, 1997, as included in Vincam's Quarterly Report on
Form 10-Q for the period ended September 30, 1997 (Commission File No. 0-28148),
with SNI's unaudited historical balance sheet statement as of September 30,
1997. The pooled combined pro forma statements of income combine Vincam's
unaudited historical statement of income for the three and nine month periods
ended September 30, 1997, as included in Vincam's Quarterly Report of Form 10-Q
for the period ended September 30, 1997 (Commission File No. 0-28148), with
SNI's unaudited historical statements of operations for the nine and three month
periods ended September 30, 1997.
F-27
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
POOLED COMBINED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
POOLED
COMBINED
PRO FORMA PRO FORMA
VINCAM SNI ADJUSTMENTS BALANCE SHEET
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,051,725 $ 1,592,553 $ 9,644,278
Investments............................................... 564,853 -- 564,853
Restricted cash........................................... 2,570,000 -- 2,570,000
Accounts receivable....................................... 38,716,592 2,765,224 41,481,816
Due from affiliates....................................... 294,955 3,370 298,325
Deferred taxes............................................ 1,851,184 -- $ 367,224 A 2,218,408
Reinsurance recoverable................................... 398,501 -- 398,501
Prepaid workers' compensation insurance premium........... 1,737,784 -- 1,737,784
Prepaid expenses and other current assets................. 2,273,164 194,623 2,467,787
------------ ------------ ----------- -----------
Total current assets................................. 56,458,758 4,555,770 367,224 61,381,752
Property and equipment, net............................... 6,751,966 385,677 7,137,643
Deferred taxes............................................ 1,533,155 -- 42,381 A 1,575,536
Reinsurance recoverable................................... 2,658,450 -- 2,658,450
Client contracts.......................................... 1,611,006 793,006 2,404,012
Goodwill.................................................. 5,195,277 -- 5,195,277
Other assets.............................................. 1,157,265 -- 1,157,265
------------ ------------ ----------- -----------
$ 75,365,877 $ 5,734,453 $ 409,605 $81,509,935
============ ============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 3,605,962 $ 570,347 $ 4,176,309
Accrued salaries, wages and payroll taxes................. 27,144,826 2,957,867 30,102,693
Amounts due under acquisition agreement .................. 1,250,000 440,000 1,690,000
Reserve for claims........................................ 1,486,895 1,080,073 2,566,968
Reserve for other state taxes............................. 3,003,456 -- 3,003,456
Income taxes payable...................................... 1,578,442 25,309 $ 330,000 B 1,933,751
Current portion of long term borrowings................... 84,407 31,250 115,657
Deferred compensation..................................... 6,617 -- 6,617
Deferred gain............................................. 169,796 -- 169,796
----------- ----------- ----------- -----------
Total current liabilities............................ 38,330,401 5,104,846 330,000 43,765,247
Long term borrowings, less current portion.................... 782,881 114,764 897,645
Reserve for claims............................................ 2,658,450 124,650 2,783,100
Deferred gain................................................. 528,744 -- 528,744
Other liabilities............................................. 460,961 103,018 563,979
------------ ------------ ----------- ------------
Total liabilities.................................... 42,761,437 5,447,278 330,000 48,538,715
------------ ------------ ----------- -----------
Stockholders' equity:
Common stock.............................................. 9,027 300 (300) 9,027
Additional paid in capital................................ 34,431,097 -- 34,431,097
(Accumulated deficit) retained earnings................... (1,835,684) 286,875 79,905 (1,468,904)
------------- ------ - --------- -----------
Total stockholders' equity......................... 32,604,440 287,175 79,605 32,971,220
------------ ----------- ----------- -----------
$75,365,877 $ 5,734,453 $ 409,605 $81,509,935
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these pooled combined pro forma
financial information.
F-28
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
POOLED COMBINED PRO FORMA STATEMENT OF INCOM
THREE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------
POOLED
COMBINED
PRO FORMA PRO FORMA
VINCAM SNI ADJUSTMENTS INCOME STATEMENT
------------- ------------- ------------- ----------------
<S> <C> <C> <C>
Revenues ................................ $ 215,053,257 $ 30,356,222 $ 245,409,479
------------- ------------- ------------- -------------
Direct costs:
Salaries, wages and employment
taxes of worksite employees ....... 191,862,901 26,862,920 218,725,821
Health care and workers' compensation 8,384,541 1,372,977 9,757,518
State unemployment taxes and other .. 1,980,250 1,069,686 3,049,936
------------- ------------- ------------- -------------
Total direct costs ............ 202,227,692 29,305,583 231,533,275
------------- ------------- ------------- -------------
Gross profit ............................ 12,825,565 1,050,639 13,876,204
------------- ------------- ------------- -------------
Operating expenses:
Administrative personnel ............ 5,551,132 773,841 6,324,973
Other general and administrative .... 2,646,740 402,413 3,049,153
Sales and marketing ................. 1,624,333 39,317 1,663,650
Provision for doubtful accounts ..... 243,845 82,609 326,454
Depreciation and amortization ....... 522,774 372,453 895,227
------------- ------------- ------------- -------------
Total operating expenses ...... 10,588,824 1,670,633 12,259,457
------------- ------------- ------------- -------------
Operating income ........................ 2,236,741 (619,994) 1,616,747
Interest (expense) income, net .......... 47,574 (38,088) 9,486
------------- ------------- ------------- -------------
Income before taxes ..................... 2,284,315 (658,082) 1,626,233
Provision for income taxes .............. (598,000) -- $ (4,760)C (602,760)
------------- ------------- ------------- -------------
Net income .............................. $ 1,686,315 $ (658,082) $ (4,760) $ 1,023,473
============= ============= ============= =============
Net income per common and common
equivalent share .................... $ 0.12 $ 0.10
============= =============
Weighted average number of shares
outstanding used in earnings per
share calculation ................... 14,162,787 15,962,787
============= =============
</TABLE>
The accompanying notes are an integral part of these pooled combined pro forma
financial information.
F-29
<PAGE>
<TABLE>
<CAPTION>
THE VINCAM GROUP, INC.
POOLED COMBINED PRO FORMA STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------
POOLED
COMBINED
PRO FORMA PRO FORMA
VINCAM SNI ADJUSTMENTS INCOME STATEMENT
------------- ------------- ----------- ----------------
<S> <C> <C> <C>
Revenues ................................ $ 612,143,511 $ 89,783,416 $ 701,926,927
------------- ------------- ---------- -------------
Direct costs:
Salaries, wages and employment
taxes of worksite employees ....... 545,308,431 78,197,656 623,506,087
Health care and workers' compensation 23,731,471 5,622,743 29,354,214
State unemployment taxes and other .. 6,020,754 1,600,806 7,621,560
------------- ------------- ---------- -------------
Total direct costs ............ 575,060,656 85,421,205 660,481,861
------------- ------------- ---------- -------------
Gross profit ............................ 37,082,855 4,362,211 41,445,066
------------- ------------- ---------- -------------
Operating expenses:
Administrative personnel ............ 16,045,751 2,296,608 18,342,359
Other general and administrative .... 9,731,095 1,220,056 10,951,151
Sales and marketing ................. 5,033,603 70,767 5,104,370
Provision for doubtful accounts ..... 670,261 238,365 908,626
Depreciation and amortization ....... 1,513,256 1,110,007 2,623,263
------------- ------------- ---------- -------------
Total operating expenses ...... 32,993,966 4,935,803 37,929,769
------------- ------------- ---------- -------------
Operating income ........................ 4,088,889 (573,592) 3,515,297
Interest (expense) income, net .......... 333,496 (64,619) 268,877
------------- ------------- ---------- -------------
Income before taxes ..................... 4,422,385 (638,211) 3,784,174
Provision for income taxes .............. (1,639,624) -- (175,106) (1,814,730)
------------- ------------- ---------- -------------
Net income .............................. $ 2,782,761 $ (638,211) $ (175,106)C $ 1,969,444
============= ============= ========== =============
Net income per common and common
equivalent share .................... $ 0.20 $ 0.23
============= =============
Weighted average number of shares
outstanding used in earnings per
share calculation ................... 13,683,491 15,483,491
============= =============
</TABLE>
The accompanying notes are an integral part of these pooled combined pro forma
financial information.
F-30
<PAGE>
NOTES TO UNAUDITED POOLED COMBINED PRO FORMA INFORMATION
A Prior to December 1, 1997, SNI. was taxed under the Sub-Chapter S
provisions of the Internal Revenue Code ("IRC") whereby its profits and
losses flowed directly to its former shareholders for U.S. federal income
tax purposes. Upon the acquisition of SNI by Vincam on December 1, 1997,
SNI no longer qualified under the Sub-Chapter S provisions of the IRC and
became a taxable entity. The adjustment of $367,224 as of September 30,
1997 relates to the recording of deferred taxes related to workers'
compensation and health care reserves, and allowance for bad debts, which
are expected to be realized by the Company in the future. The adjustments
give effect to the Company's present tax rate.
B Prior to December 1, 1997, SNI was taxed under the Sub-Chapter S provisions
of the IRC whereby its profits and losses flowed directly to its former
shareholders for U.S. federal income tax purposes. Upon the acquisition of
SNI by Vincam on December 1, 1997, SNI no longer qualified under the
Sub-Chapter S provisions of the IRC and became a taxable entity. The
adjustment of $330,000 as of September 30, 1997 relates to the recording of
income tax payable based on the pro forma results of operations for the
nine months ended September 30, 1997. The adjustments give effect to the
Company's present tax rate.
C Prior to December 1, 1997, SNI was taxed under the Sub-Chapter S provisions
of the IRC whereby its profits and losses flowed directly to its former
shareholders for U.S. federal income tax purposes. Upon the acquisition of
SNI by Vincam on December 1, 1997, SNI no longer qualified under the
Sub-Chapter S provisions of the IRC and became a taxable entity. The net
adjustments of $4,760 and $175,106, for the three month and nine month
periods ended September 30, 1997, respectively, reflect the income tax
expenses based on the pro forma results of operations of the Company, and
the recording of the deferred tax benefit resulting from the increase in
workers' compensation and health care reserves, and the allowance for bad
debts, for the periods presented. The adjustments give effect to the
Company's present tax rate.
F-31
<PAGE>
THE VINCAM GROUP, INC.
FORM 8-K
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- -------- ------------
11 Statement re Computation of Per Share Earnings
23.1 Consent of Price Waterhouse LLP 23.2 Consent of Ernst & Young LLP
23.3 Consent of Howe, Riley & Howe Professional Corporation
27.1 Restated Financial Data Schedule for the year ended December 31, 1996
27.2 Restated Financial Data Schedule for the year ended December 31, 1995
27.3 Restated Financial Data Schedule for the year ended December 31, 1994
<TABLE>
<CAPTION>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
THE VINCAM GROUP, INC.
CALCULATION OF NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income ............................. $ 1,846,804 $ 370,613 $ 2,089,843
=========== =========== ===========
Weighted average number of common
shares outstanding during the period . 12,501,755 10,757,175 13,387,583
Assumed exercise of stock options, net
of treasury shares acquired .......... 690,474 690,474 774,246
Issuance of mandatorily redeemable
preferred stock deemed a common
stock equivalent ..................... -- 1,391,121 682,131
----------- ----------- -----------
Weighted average number of shares
used in earnings per share calculation 13,192,229 12,838,770 14,843,960
=========== =========== ===========
Net income per common and common
equivalent share ..................... $ 0.14 $ 0.03 $ 0.14
=========== =========== ===========
Fully diluted net income per common
and common equivalent share* .......... $ 0.14 $ 0.03 $ 0.14
=========== =========== ===========
- ------------------------------
* In accordance with the provisions of the Accounting Principles Board
Opinion No. 15, Earnings per Share, fully diluted net income per common and
common equivalent share is not presented in the Company's consolidated
statements of income due to the fact that the aggregated dilution from the
Company's common stock equivalents outstanding during each of the periods
presented is less than 3%.
</TABLE>
EXHIBIT 23.1
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), the Registration Statement on Form
S-3 (File No. 333-26921) and the Registration Statement on Form S-3 (File No.
333-39681) of The Vincam Group, Inc. of our report dated February 21, 1997,
except as to the pooling of interest with Staffing Network, Inc., which is as of
December 1, 1997, the pooling of interest with Amstaff, Inc., which is as of
June 30, 1997, and except as to the 3 for 2 stock split, which is as of November
21, 1997, which appears on pages 3 and 4 of The Vincam Group, Inc.'s Amendment
No. 1 to Current Report on Form 8-K dated December 1, 1997 (Commission File No.
0-28148).
/s/ PRICE WATERHOUSE LLP
- ------------------------
Miami, Florida
January 16, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (File No. 333-08003), the Registration Statement on Form S-3 (File
No. 333-26921) and the Registration Statement on Form S-3 (File No. 333-39681)
of The Vincam Group, Inc. of our report dated March 11, 1997, with respect to
the financial statements of Staffing Network, Inc. at December 31, 1996 and
1995, and for the years then ended, which appears on page F-1 of The Vincam
Group, Inc.'s Amendment No. 1 to Current Report on Form 8-K dated December 1,
1997 (Commission File No. 0-28148).
/s/ ERNST & YOUNG LLP
---------------------
Manchester, New Hampshire
January 15, 1998
EXHIBIT 23.3
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), the Registration Statement on Form
S-3 (File No. 333-26921) and the Registration Statement on Form S-3 (File No.
333-39681) of The Vincam Group, Inc. of our report dated March 2, 1995, which
appears on page F-14 of The Vincam Group, Inc.'s Amendment No. 1 to Current
Report on Form 8-K dated December 1, 1997 (Commission File No. 0-28148).
/s/ HOWE, RILEY & HOWE PROFESSIONAL CORPORATION
- -----------------------------------------------
Manchester, New Hampshire
January 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED
FORM THE SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS OF THE VINCAM GROUP,
INC. FOR YEAR ENDED DECEMBER 31, 1996 INCLUDED IN THIS CURRENT REPORT ON FORM
8-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,884,531
<SECURITIES> 149,626
<RECEIVABLES> 28,598,538
<ALLOWANCES> 596,650
<INVENTORY> 0
<CURRENT-ASSETS> 60,920,667
<PP&E> 6,848,442
<DEPRECIATION> 1,903,247
<TOTAL-ASSETS> 76,508,153
<CURRENT-LIABILITIES> 39,915,409
<BONDS> 0
0
0
<COMMON> 12,020
<OTHER-SE> 29,883,079
<TOTAL-LIABILITY-AND-EQUITY> 76,508,153
<SALES> 654,757,791
<TOTAL-REVENUES> 654,757,791
<CGS> 0
<TOTAL-COSTS> 617,567,915
<OTHER-EXPENSES> 35,004,589
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223,979
<INCOME-PRETAX> 2,986,566
<INCOME-TAX> 896,723
<INCOME-CONTINUING> 2,089,843
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,089,843
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED
FORM THE SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS OF THE VINCAM GROUP,
INC. FOR YEAR ENDED DECEMBER 31, 1995 INCLUDED IN THIS CURRENT REPORT ON FORM
8-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,773,207
<SECURITIES> 639,232
<RECEIVABLES> 13,317,385
<ALLOWANCES> 214,591
<INVENTORY> 0
<CURRENT-ASSETS> 25,413,903
<PP&E> 4,381,269
<DEPRECIATION> 1,189,098
<TOTAL-ASSETS> 31,367,897
<CURRENT-LIABILITIES> 25,161,044
<BONDS> 0
0
6,263,610
<COMMON> 7,434
<OTHER-SE> (5,186,387)
<TOTAL-LIABILITY-AND-EQUITY> 31,367,897
<SALES> 419,370,972
<TOTAL-REVENUES> 419,370,972
<CGS> 0
<TOTAL-COSTS> 398,000,200
<OTHER-EXPENSES> 21,199,881
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 222,035
<INCOME-PRETAX> 452,903
<INCOME-TAX> 82,290
<INCOME-CONTINUING> 370,613
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 370,613
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED
FORM THE SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS OF THE VINCAM GROUP,
INC. FOR YEAR ENDED DECEMBER 31, 1994 INCLUDED IN THIS CURRENT REPORT ON FORM
8-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 2,439,048
<SECURITIES> 0
<RECEIVABLES> 8,219,508
<ALLOWANCES> 114,747
<INVENTORY> 0
<CURRENT-ASSETS> 17,886,685
<PP&E> 3,282,989
<DEPRECIATION> 677,361
<TOTAL-ASSETS> 21,765,557
<CURRENT-LIABILITIES> 13,876,076
<BONDS> 0
0
0
<COMMON> 9,374
<OTHER-SE> 2,707,028
<TOTAL-LIABILITY-AND-EQUITY> 21,765,557
<SALES> 318,564,858
<TOTAL-REVENUES> 318,564,858
<CGS> 0
<TOTAL-COSTS> 302,440,998
<OTHER-EXPENSES> 13,424,261
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125,795
<INCOME-PRETAX> 2,684,312
<INCOME-TAX> 837,508
<INCOME-CONTINUING> 1,846,804
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,846,804
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
