<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1997
-------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period ended from to
--------------- -----------------
Commission file number 0-28148
---------
STAFF LEASING, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0735612
------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 301 BLVD. W., SUITE 202,
BRADENTON, FL 34205 (941) 748-4540
- ------------------------------------ ------------------------------------
(Registrant's address) (Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of common stock Outstanding as of August 12, 1997
--------------------- ---------------------------------
$.01 par value 23,131,013
Page 1 of 18
<PAGE> 2
STAFF LEASING, INC.
INDEX
<TABLE>
<CAPTION>
Page
------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31,
1996, and June 30, 1997 ....................... 3
Unaudited Consolidated Statements of Operations
for the three and the six months ended
June 30, 1996 and 1997 ........................ 4
Unaudited Consolidated Statement of Changes
in Shareholders' Equity (Deficit) for the
six months ended June 30, 1997 ................ 5
Unaudited Consolidated Statements of Cash
Flows for the six months ended June 30, 1996
and 1997 ...................................... 6
Notes to Consolidated Financial Statements .... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................ 10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ......................... 16
Item 6. Exhibits and Reports on Form 8-K .......... 16
SIGNATURES ......................................... 17
</TABLE>
Page 2 of 18
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ --------
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12 $ 14
Restricted cash - 3,500
Accounts receivable, net of allowance for doubtful
accounts of $440 and $718, respectively 33,956 43,880
Other receivables 660 1,838
Other current assets 770 2,037
-------- -------
Total current assets 35,398 51,269
Property and equipment, net 16,812 17,637
Goodwill, net of accumulated amortization of $2,313 and
$2,680, respectively 12,358 11,991
Other assets, net of accumulated amortization of
$1,762 and $2,092, respectively 1,414 1,219
-------- -------
$ 65,982 $82,116
======== =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 7,092 $ 5,509
Accrued workers' compensation premiums and health
reserves 13,697 16,686
Accrued payroll and payroll taxes 35,280 45,915
Accounts payable and other accrued liabilities 10,113 13,823
Customer deposits and prepayments 1,396 1,437
-------- -------
Total current liabilities 67,578 83,370
Long-term debt 14,354 9,719
Other long-term liabilities 2,056 2,371
Commitments and contingencies (Note 8) - -
Redeemable preferred partnership interests 17,674 15,939
Shareholders' deficit:
Common stock, $.01 par value, authorized 100,000,000
shares; issued and outstanding, 19,196,472 and
19,186,035 shares, respectively 192 192
Additional paid in capital 2,573 1,406
Accumulated deficit (37,194) (29,527)
Other (1,251) (1,354)
-------- -------
Total shareholders' deficit (35,680) (29,283)
-------- -------
$ 65,982 $82,116
======== =======
</TABLE>
See notes to consolidated financial statements.
Page 3 of 18
<PAGE> 4
STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
---------------------- ----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 350,472 $ 448,075 $ 675,192 $ 850,530
--------- ---------- --------- ----------
Cost of services:
Salaries, wages and payroll taxes 313,673 405,309 604,311 768,146
Benefits, workers' compensation, state
unemployment taxes and other costs 21,897 20,150 42,690 39,873
--------- ---------- --------- ----------
Total cost of services 335,570 425,459 647,001 808,019
--------- ---------- --------- ----------
Gross profit 14,902 22,616 28,191 42,511
--------- ---------- --------- ----------
Operating expenses:
Salaries, wages and commissions 9,123 10,413 18,079 20,652
Other general and administrative 4,518 5,509 8,763 10,896
Depreciation and amortization 771 1,037 1,527 1,882
--------- ---------- --------- ----------
Total operating expenses 14,412 16,959 28,369 33,430
--------- ---------- --------- ----------
Operating income (loss) 490 5,657 (178) 9,081
Interest expense, net 932 647 1,948 1,322
Other expenses 23 54 34 92
--------- ---------- --------- ----------
Net income (loss) $ (465) $ 4,956 $ (2,160) $ 7,667
========= ========== ========= ==========
Return on preferred interests $ 498 $ 774 $ 558 $ 1,429
========= ========== ========= ==========
Net income (loss) attributable to common
shareholders $ (963) $ 4,182 $ (2,718) $ 6,238
========= ========== ========= ==========
Net income (loss) per share attributable to common
shareholders $ (0.05) $ 0.21 $ (0.14) $ 0.31
========= ========== ========= ==========
Weighted average shares outstanding 19,973 19,973 19,973 19,973
========= ========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
Page 4 of 18
<PAGE> 5
STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Paid Deferred Share- Accumu-
Stock Common In Compen- holder lated
(shares) Stock Capital sation Notes Deficit Total
---------- --------- --------- --------- --------- --------- ---------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 19,196,472 $ 192 $ 2,573 $ (296) $ (955) $(37,194) $(35,680)
Return on preferred
partnership interests (1,429) (1,429)
Repurchase of shareholder
interests (10,437) (116) 47 (69)
Sale of shareholder
interests 319 (274) (45) 0
Other 59 69 100 228
Net income 7,667 7,667
---------- --------- -------- -------- -------- -------- --------
Balance at June 30, 1997 19,186,035 $ 192 $ 1,406 $ (501) $ (853) $(29,527) $(29,283)
========== ========= ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
Page 5 of 18
<PAGE> 6
STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months ended
June 30,
--------------------------
1996 1997
-------------- ----------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (2,160) $ 7,667
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 1,527 1,882
Amortization of debt issuance costs 286 243
Provision for bad debts 332 460
Other 40 (7)
Changes in assets and liabilities:
Increase in restricted cash - (3,500)
Increase in accounts receivable (9,137) (10,384)
Increase in other receivables (232) (1,178)
(Increase)decrease in other current assets 166 (1,267)
Increase(decrease) in accounts payable and other (4,931) 3,710
accrued liabilities
Increase in accrued payroll and payroll taxes 5,074 10,635
Increase(decrease) in accrued insurance premiums (231) 2,989
and health reserves
Increase in customer deposits and prepayments 857 41
Increase in other long-term liabilities 22 315
-------------- -----------
Net cash provided by(used in) operating activities (8,387) 11,606
-------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 17 9
Capital expenditures (2,439) (2,243)
Other assets (20) (150)
-------------- -----------
Net cash used in investing activities (2,442) (2,384)
-------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of revolving credit - net (2,500) -
Proceeds from sale-leaseback of fixed assets 597 -
Preferred partners' contributions, net of partners' notes
receivable and capital issuance fees 17,763 370
General partner contributions 219 -
Repayment of shareholders' notes receivable - 232
Repurchase of common shareholders' interest - (69)
Repurchase of preferred partners' interest, including fixed return - (3,535)
Repayments of capital leases (939) (3,718)
Repayments of long-term debt (4,250) (2,500)
Debt issuance costs (60) -
-------------- ----------
Net cash provided by(used in) financing activities 10,830 (9,220)
-------------- ----------
Net increase in cash 1 2
Cash - beginning of period 13 12
-------------- ----------
Cash - end of period $ 14 $ 14
============== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 1,472 $ 973
============== ==========
</TABLE>
See notes to consolidated financial statements.
Page 6 of 18
<PAGE> 7
STAFF LEASING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. GENERAL:
The accompanying unaudited consolidated financial statements of Staff
Leasing, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1996 included in the Company's
Registration Statement on Form S-1 (File No. 333-22933), as amended. The
financial information furnished reflects all adjustments, consisting only of
normal recurring accruals, which are, in the opinion of management, necessary
for a fair presentation of the financial position, results of operations and of
cash flows for the interim periods presented.
The Company's operations are currently conducted through Staff Capital,
L.P. (the "Partnership") and a number of subsidiary limited partnerships (the
"OLPs"). The consolidated operations of the Company exclude intercompany
accounts and transactions. Certain reclassifications have been made to the
consolidated financial statements of prior periods to conform to the current
period presentation.
2. REORGANIZATION AND INITIAL PUBLIC OFFERING:
Effective July 1, 1997, a reorganization (the "Reorganization") was
consummated whereby the Company became the sole limited partner of the
Partnership. Staff Acquisition, Inc. ("Staff Acquisition") is the sole general
partner of the Partnership and each of the OLPs. The general partnership
interest of Staff Acquisition in the Partnership and in each of the OLPs is a
1% interest (for an aggregate ownership of 1.99% of the consolidated group).
Pursuant to the Reorganization all of the holders of the common limited
partnership interests in the Partnership exchanged their partnership interests
for 17,122,205 shares of common stock, certain of the preferred limited
partnership interests were exchanged for 2,074,267 shares of common stock and
warrants to purchase an aggregate of 1,352,253 shares of common stock with an
exercise price of $7.24 per share. This transaction was accounted for as a
purchase among entities in common control and accordingly, for financial
statement presentation purposes, the Reorganization is being treated as a
pooling of interests of the Company and the Partnership as of and for the
periods presented.
Additionally, in conjunction with the Reorganization, on July 1, 1997, the
Company completed an initial public offering (the "IPO") of 3,500,000 of its
$.01 par value common stock. The Company subsequently issued an additional
444,978 shares resulting from the exercise of certain overallotment provisions
for a total issuance of 3,944,978 shares. Net proceeds raised from the IPO,
including overallotment, amounted to approximately $61,070. The proceeds from
the IPO were used to repay outstanding redeemable preferred partnership
interests of $16,294, including accrued fixed return of $2,552 and to repay
outstanding long-term debt of $15,200. The remainder will be used for general
corporate purposes.
Had the IPO occurred on June 30, 1997 pro forma consolidated assets would
have been $110,973, which includes the write-off of unamortized debt issuance
costs and organization costs of $714 and $163, respectively. Such costs will
be recorded in the Company's third quarter. Pro forma consolidated liabilities
would have been $80,260 and consolidated shareholders' equity would have been
$30,713, which includes the write-off of $962 in unamortized accretion
associated with the original issuance of preferred limited partnership
interests. The write-off of such accretion will be recorded in the Company's
third quarter. Had the IPO been consummated as of the beginning of the
respective periods, on a pro forma basis, net income (loss) and net income
(loss) per share attributable to common shareholders would have been $(2,438)
or $(.10) per share and $6,778 or $.28 per share for the year ended December
31, 1996 and six months ended
Page 7 of 18
<PAGE> 8
June 30, 1997, respectively. Pro forma net income (loss) per share
attributable to common shareholders is based upon pro forma weighted shares
outstanding of 23,917,996.
3. RESTRICTED CASH:
The Company had cash deposits at June 30, 1997 of $3,500 that serve as
collateral on certain standby letters of credit issued in connection with the
Company's health benefit plan. These cash deposits have been classified as
restricted cash in the accompanying consolidated balance sheets.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ -----------
<S> <C> <C>
Leasehold improvements $ 1,083 $ 1,234
Furniture and fixtures 1,337 1,386
Vehicles 163 155
Equipment 562 596
Computer hardware and software 16,746 18,451
----------- ----------
Total property and equipment 19,891 21,822
Less accumulated depreciation (3,079) (4,185)
----------- ----------
$ 16,812 $ 17,637
=========== ==========
</TABLE>
Gross fixed assets included $6,452 and $49 of computer hardware, software and
equipment under capital lease obligations at December 31, 1996, and June 30,
1997, respectively.
5. BORROWINGS:
Borrowings are summarized as follows:
<TABLE>
December 31, June 30,
1996 1997
------------ -----------
<S> <C> <C>
Bank credit facility, with a term loan amount of
$25,000 and a $10,000 letter of credit facility,
secured by substantially all the assets of Staff
Capital, L.P. and are guaranteed by each of the
subsidiaries $ 17,700 $ 15,200
Capital lease obligations 3,746 28
----------- ----------
21,446 15,228
Less: current portion (7,092) (5,509)
----------- ----------
$ 14,354 $ 9,719
=========== ==========
</TABLE>
The Company used a portion of the net proceeds of its IPO to repay the balance
of the bank credit facility on July 1, 1997.
6. EARNINGS PER SHARE:
Net income (loss) per common share attributable to common shareholders has
been computed based on the weighted average number of shares of common stock
and common stock equivalents outstanding during each of the periods presented
using the treasury stock method. Pursuant to the rules of the Securities and
Exchange Commission, all warrants granted at prices less than the IPO price
during the twelve months preceding the IPO date have been included as common
stock equivalents in the calculation of weighted shares outstanding for the
periods presented. The number of common stock equivalents included in weighted
shares outstanding were 776,546 and relate to the warrants issued in
connection with the Reorganization.
The Company will adopt Statement of Financial Accounting Standards No. 128
("FAS 128") in the fourth quarter of 1997, as required. The Company will
continue to apply Accounting Principles Board Opinion
Page 8 of 18
<PAGE> 9
No. 15, "Earnings Per Share" until the adoption of FAS 128. The pro forma
earnings (loss) per share ("EPS") attributable to common shareholders computed
under the provisions of FAS 128 for the three-months and six-months ended June
30, 1997 are as follows: Basic EPS of $.22 and $.32, respectively, and diluted
EPS of $.21 and $.31, respectively. Pro forma basic and diluted EPS
attributable to common shareholders for the three-months and six-months ended
June 30, 1996 are as follows: Basic EPS of $(.05) and $(.14), respectively, and
diluted EPS of $(.05) and $(.14), respectively.
7. INCOME TAXES:
For the periods presented, the Company operated as a limited partnership
for Federal and state income tax purposes. Accordingly, all earnings or losses
were passed directly to the partners and no provision for income taxes was
required. Following the Reorganization, the Company will continue to be
operated through the Partnership and the OLPs, and, for Federal and state
income tax purposes, future taxable income generated by the Partnership will be
allocated to Staff Acquisition and not to the Company until Staff Acquisition
has been allocated income equal to certain net losses previously allocated to
it, in accordance with the Partnership agreement and applicable tax rules and
regulations. As of December 31, 1996, the amount of such net losses was
approximately $12.9 million. Additionally, the Company will have deductible
temporary differences which could be utilized to offset future taxable income.
Such deductible temporary differences amounted to approximately $19.1 million
at December 31, 1996 and relate primarily to assets with tax basis in excess of
book basis and certain reserves which will be deductible in future periods. As
a result of the IPO, the Company generated additional deductible temporary
differences of approximately $21 million which can also be utilized to offset
future taxable income.
8. COMMITMENTS AND CONTINGENCIES:
The Company's employer and health care operations are subject to numerous
federal, state and local laws related to employment, taxes and benefit plan
matters. Generally, these regulations affect all companies in the United
States. However, the regulatory environment for professional employer
organizations ("PEOs") is an evolving area due to uncertainties resulting from
the non-traditional employment relationships. Many federal and state laws
relating to tax and employment matters were enacted prior to the development of
PEOs and do not specifically address the obligations and responsibilities of
these co-employer relationships. If the IRS concludes that PEOs, are not
"employers" of certain worksite employees for purposes of the Internal Revenue
Code of 1986, as amended (the "Code"), the tax qualified status of the
Company's 401 (k) retirement plan as in effect prior to April 1, 1997 could be
revoked, its cafeteria plan may lose its favorable tax status and the Company
may no longer be able to assume the clients' Federal employment tax withholding
obligations. Any adverse developments in the above noted areas could have a
material effect on the Company's financial condition and future results of
operations.
As disclosed in the Company's Form S-1 filing, dated June 25, 1997, as
amended, a complaint was filed by Taylor Bean & Whittaker Ltd., et al naming
the Company as defendant. On July 31, 1997, the plaintiffs voluntarily
dismissed this action without prejudice. The Company is party to certain other
pending claims which have arisen in the normal course of business, none of
which, in the opinion of management, are expected to have a material adverse
effect on the consolidated financial position or results of operations if
adversely resolved.
Page 9 of 18
<PAGE> 10
ITEM #2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands, except share and per share data)
Overview
The Company is the largest PEO ("Professional Employers Organization") in
the United States. At June 30, 1997, the Company served over 8,500 clients with
over 98,600 worksite employees. With 35 branches located in Florida, Texas,
Georgia and Arizona, the Company provides a broad range of services, including
payroll administration, risk management, benefits administration, unemployment
services and other human resource management services. The Company's
operations are currently conducted through Staff Capital, L.P. (the
"Partnership") and a number of operating limited partnerships ("OLPs").
Effective July 1, 1997, a reorganization (the "Reorganization") was
consummated whereby the Company became the sole limited partner of the
Partnership. Staff Acquisition, Inc. ("Staff Acquisition") is the sole general
partner of the Partnership and each of the OLPs. The general partnership
interest of Staff Acquisition in the Partnership and in each of the OLPs is a
1% interest (for an aggregate ownership of 1.99% of the consolidated group).
Pursuant to the Reorganization all of the holders of the common limited
partnership interests in the Partnership exchanged their partnership interests
for 17,122,205 shares of common stock, certain of the preferred limited
partnership interests were exchanged for 2,074,267 shares of common stock and
warrants to purchase an aggregate of 1,352,253 shares of common stock with an
exercise price of $7.24 per share. This transaction was accounted for as a
purchase among entities in common control and accordingly, for financial
statement presentation purposes, the Reorganization is being treated as a
pooling of interests of the Company and the Partnership as of and for the
periods presented.
Additionally, in conjunction with the Reorganization, on July 1, 1997, the
Company completed an initial public offering (the "IPO") of 3,500,000 of its
$.01 par value common stock. The Company subsequently issued an additional
444,978 shares resulting from the exercise of certain overallotment provisions
for a total issuance of 3,944,978 shares. Net proceeds raised from the IPO,
including overallotment, amounted to approximately $61,070. The proceeds from
the IPO were used to repay outstanding redeemable preferred partnership
interests of $16,294, including accrued fixed return of $2,552 and to repay
outstanding long-term debt of $15,200. The remainder will be used for general
corporate purposes.
Had the IPO occurred on June 30, 1997 pro forma consolidated assets would
have been $110,973, which includes the write-off of unamortized debt issuance
costs and organization costs of $714 and $163, respectively. Such costs will
be recorded in the Company's third quarter. Pro forma consolidated liabilities
would have been $80,260 and consolidated shareholders' equity would have been
$30,713, which includes the write-off of $962 in unamortized accretion
associated with the original issuance of preferred limited partnership
interests. The write-off of such accretion will be recorded in the Company's
third quarter. Had the IPO been consummated as of the beginning of the
respective periods, on a pro forma basis, net income (loss) and net income
(loss) per share attributable to common shareholders would have been $(2,438)
or $(.10) per share and $6,778 or $.28 per share for the year ended December
31, 1996 and six months ended June 30, 1997, respectively. Pro forma net
income (loss) per share attributable to common shareholders is based upon pro
forma weighted shares outstanding of 23,917,996.
Revenues consist of charges by the Company for the salaries and wages of
the worksite employees (including the employee-paid portion of health and other
benefits), the service fee and the clients' portion of health and retirement
benefits provided to the worksite employees. These charges are invoiced to the
client at the time of each periodic payroll. The service fee covers the cost of
certain employment-related taxes, workers' compensation insurance coverage and
administrative and field services provided by the Company to the client,
including payroll administration and safety, human resource
Page 10 of 18
<PAGE> 11
and regulatory compliance consultation. Salaries and wages of worksite
employees are affected by the inflationary effects on wage levels, including
the effect of increases in the Federal minimum wage, and by competition in the
labor markets in which the Company operates. Fluctuations in salaries and wages
resulting from these factors have a proportionate impact on the Company's
service fee, which is invoiced as a percentage of salaries and wages.
Cost of services includes salaries and wages of worksite employees,
payroll taxes, employee benefit costs, workers' compensation insurance and
state unemployment taxes.
Operating expenses consist primarily of salaries, wages and commissions
associated with the Company's internal employees, and general and
administrative expenses. Over the past several years, the Company has
experienced an increase in its operating expenses as the Company has expanded
its senior management, sales and marketing staff, payroll processing operations
and client and worksite employee service functions. The Company expects that
future revenue growth will result in increasing net income margins, as the
Company's fixed operating expenses are leveraged over a larger revenue base.
For the periods presented, the Company operated as a limited partnership
for Federal and state income tax purposes. Accordingly, all earnings or losses
were passed directly to the partners and no provision for income taxes was
required. Following the Reorganization, the Company will continue to be
operated through the Partnership and the OLPs, and, for Federal and state
income tax purposes, future taxable income generated by the Partnership and
OLPs will be allocated to Staff Acquisition and not to the Company until Staff
Acquisition has been allocated income equal to certain net losses previously
allocated to it, in accordance with the Partnership agreement and applicable
tax rules and regulations. As of December 31, 1996, the amount of such net
losses was approximately $12.9 million. Additionally, the Company will have
deductible temporary differences which could be utilized to offset future
taxable income. Such deductible temporary differences amounted to approximately
$19.1 million at December 31, 1996 and relate primarily to assets with tax
basis in excess of book basis and certain reserves which will be deductible in
future periods. As a result of the IPO, the Company generated additional
deductible temporary differences of approximately $21 million which can also be
utilized to offset future taxable income.
Profitability is largely dependent upon the Company's success in managing
revenues and costs that are within its control. These controllable revenues and
costs primarily relate to workers' compensation, health benefits and state
unemployment taxes. The Company manages these controllable costs through its
use of: (i) its guaranteed workers' compensation cost arrangement with Liberty
Mutual Insurance Company; (ii) appropriately designed health benefit plans that
encourage worksite employee participation, high managed care utilization and
efficient risk pooling; and (iii) aggressive management of its state
unemployment tax exposure.
Page 11 of 18
<PAGE> 12
Results of Operations
The following table presents the Company's results of operations for the
three months ended June 30, 1996 and 1997, and for the six months ended June
30, 1996 and 1997, respectively, expressed as a percentage of revenues:
<TABLE>
For the three For the six
months ended months ended
June 30, June 30,
---------------- --------------
1996 1997 1996 1997
------- ------- ------ ------
<S> <C> <C> <C> <C>
Revenues
100.0% 100.0% 100.0% 100.0%
Cost of services:.......................
Salaries, wages and payroll taxes...... 89.5 90.5 89.5 90.3
Benefits, workers' compensation, state
unemployment taxes and other costs.. 6.2 4.5 6.3 4.7
------ ------ ----- -----
Total cost of services............... 95.7 95.0 95.8 95.0
------ ------ ----- -----
Gross profit............................ 4.3 5.0 4.2 5.0
------ ------ ----- -----
Operating expenses:.....................
Salaries, wages and commissions........ 2.6 2.3 2.7 2.4
Other general and administrative....... 1.3 1.2 1.3 1.3
Depreciation and amortization.......... 0.2 0.3 0.2 0.2
------ ------ ----- -----
Total operating costs................ 4.1 3.8 4.2 3.9
------ ------ ----- -----
Operating income........................ 0.2 1.2 0.0 1.1
Interest expense........................ 0.3 0.1 0.3 0.2
Other expenses 0.0 0.0 0.0 0.0
------ ------ ----- -----
Net income (loss) (0.1)% 1.1% (0.3)% 0.9%
====== ====== ===== =====
</TABLE>
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Revenues were $448.1 million for the three months ended June 30, 1997
compared to $350.5 million for the three months ended June 30, 1996,
representing an increase of $97.6 million, or 27.8%. This increase was due
primarily to an increased number of clients and worksite employees. From June
30, 1996 to June 30, 1997, the number of clients increased 23.2%, from 6,967 to
8,582, and the number of worksite employees increased 22.4%, from 80,596 to
98,622. The increase in the number of clients was the result of continuing
sales and marketing efforts in existing markets as well as the development of
new markets. Continued growth in revenues is primarily dependent upon
increasing the number of new clients, as well as limiting the attrition of the
current client base. The client referral program with Barnett Bank, which
accounted for approximately 500 new clients during the ten months ended
June 30, 1997, terminated June 30, 1997.
Cost of services were $425.5 million for the three months ended June 30,
1997 compared to $335.6 million for the three months ended June 30, 1996,
representing an increase of $89.9 million, or 26.8%.
Salaries, wages and payroll taxes of worksite employees were $405.3
million for the three months ended June 30, 1997, compared to $313.7 million
for the three months ended June 30, 1996, representing an increase of $91.6
million, or 29.2%. The increase was larger than the increase in the number of
worksite employees on a percentage basis from the comparable period, due at
least in part to the effect of wage inflation.
Benefits, workers' compensation, state unemployment taxes and other costs
were $20.2 million for the three months ended June 30, 1997, compared to $21.9
million for the three months ended June 30, 1996, representing a decrease of
($1.7) million, or (7.8%). This decrease was due primarily to: (i) a 26.8%
reduction in the workers' compensation expense rate; and (ii) the
implementation of the Company's comprehensive health benefits action
Page 12 of 18
<PAGE> 13
plan, leading to a reduction in the health benefit plan subsidy, from $2.5
million for the three months ended June 30, 1996 to zero for the three months
ended June 30, 1997.
Gross profit was $22.6 million for the three months ended June 30, 1997,
compared to $14.9 million for the three months ended June 30, 1996,
representing an increase of $7.7 million, or 51.7%. The increase was due to the
reduction in benefits, workers' compensation, state unemployment taxes and
other costs as a percentage of revenues as described above.
Operating expenses were $17.0 million for the three months ended June 30,
1997, compared to $14.4 million for the three months ended June 30, 1996,
representing an increase of $2.6 million, or 18.1%.
Salaries, wages and commissions were $10.4 million for the three months
ended June 30, 1997, compared to $9.1 million for the three months ended June
30, 1996, representing an increase of $1.3 million, or 14.3%. This increase was
due primarily to: (i) $1.0 million of costs attributable to an increase in
corporate personnel hired to support the Company's expanded operations and
additional sales and sales support personnel located at its branch offices; and
(ii) $.3 million increase in sales commissions attributable to the growth in
the number of clients and worksite employees.
Other general and administrative expenses were $5.5 million for the three
months ended June 30, 1997, compared to $4.5 million for the three months ended
June 30, 1996, representing an increase of $1.0 million, or 22.2%. This
increase was primarily a result of expanded sales and marketing programs for
1997. The balance of the increase was attributable to the growth in the number
of clients and worksite employees.
Depreciation and amortization expenses increased by $0.3 million for the
three months ended June 30, 1997, compared to the three months ended June 30,
1996, representing an increase of 34.7%. This increase was primarily the result
of the Company's investment in management information systems hardware.
Amortization of capitalized software costs associated with the Company's
development of new payroll processing and management information systems began
July 1997, when the systems became operational. These costs will be amortized
over a seven-year period.
Interest expense was $.6 million for the three months ended June 30, 1997,
compared to $.9 million for the three months ended June 30, 1996, representing
a decrease of $.3 million, or 33.3%. This decrease was primarily the result of
the reduction in the Company's long-term borrowings.
Net income was $5.0 million for the three months ended June 30, 1997,
compared to a loss of ($0.5) million for the three months ended June 30, 1996,
representing an increase of $5.5 million, as a result of the factors discussed
above.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues were $850.5 million for the six months ended June 30, 1997
compared to $675.2 million for the six months ended June 30, 1996, representing
an increase of $175.3 million, or 26.0%. This increase was due primarily to an
increased number of clients and worksite employees. From June 30, 1996 to June
30, 1997, the number of clients increased 23.2%, from 6,967 to 8,582, and the
number of worksite employees increased 22.4%, from 80,596 to 98,622. The
increase in the number of clients was the result of continuing sales and
marketing efforts in existing markets as well as the development of new
markets. Continued growth in revenues is primarily dependent upon increasing
the number of new clients, as well as limiting the attrition of the current
client base. In January 1997, the Company reduced the service fees charged on
average to its Florida clients in response to a reduction in workers'
compensation rates in the State of Florida. While the Company believes this
reduction in service fees has not adversely affected the Company's
profitability to date because the Company has been able to offset the effect of
this action by controlling expenses, it is possible that future service fee
reductions could adversely affect the Company's operations.
Page 13 of 18
<PAGE> 14
Cost of services were $808.0 million for the six months ended June 30,
1997 compared to $647.0 million for the six months ended June 30, 1996,
representing an increase of $161.0 million, or 24.9%.
Salaries, wages and payroll taxes of worksite employees were $768.1
million for the six months ended June 30, 1997, compared to $604.3 million for
the six months ended June 30, 1996, representing an increase of $163.8 million,
or 27.1%. The increase was slightly larger than the increase in the number of
worksite employees on a percentage basis from the comparable period, due at
least in part to the effect of wage inflation.
Benefits, workers' compensation, state unemployment taxes and other costs
were $39.9 million for the six months ended June 30, 1997, compared to $42.7
million for the six months ended June 30, 1996, representing a decrease of $2.8
million, or 6.6%. This decrease was due primarily to: (i) a 26.8% reduction in
the workers' compensation expense rate commencing January 1, 1997; and (ii) the
implementation of the Company's comprehensive health benefits action plan,
leading to a reduction in the health benefit plan subsidy, from $5.0 million
for the six months ended June 30, 1996 to $1.0 million for the six months ended
June 30, 1997.
Gross profit was $42.5 million for the six months ended June 30, 1997,
compared to $28.2 million for the six months ended June 30, 1996, representing
an increase of $14.3 million, or 50.8%. The increase was due to the reduction
in benefits, workers' compensation, state unemployment taxes and other costs as
a percentage of revenues as described above.
Operating expenses were $33.4 million for the six months ended June 30,
1997, compared to $28.4 million for the six months ended June 30, 1996,
representing an increase of $5.0 million, or 17.6%.
Salaries, wages and commissions were $20.7 million for the six months
ended June 30, 1997, compared to $18.1 million for the six months ended June
30, 1996, representing an increase of $2.6 million, or 14.4%. This increase was
due primarily to: (i) $1.9 million of costs attributable to an increase in
corporate personnel hired to support the Company's expanded operations and
additional sales and sales support personnel located at its branch offices; and
(ii) $.7 million increase in sales commissions attributable to the growth in
the number of clients and worksite employees.
Other general and administrative expenses were $10.9 million for the six
months ended June 30, 1997, compared to $8.8 million for the six months ended
June 30, 1996, representing an increase of $2.1 million, or 23.9%. This
increase was primarily a result of expanded sales and marketing programs for
1997. The balance of the increase was attributable to the growth in the
numbers of clients and worksite employees.
Depreciation and amortization expenses increased by $0.4 million for the
six months ended June 30, 1997, compared to the six months ended June 30, 1996,
representing an increase of 23.2%. This increase was primarily the result of
the Company's investment in management information systems hardware.
Amortization of capitalized software costs associated with the Company's
development of new payroll processing and management information systems began
July 1997, when the systems became operational. These costs will be amortized
over a seven-year period.
Interest expense was $1.3 million for the six months ended June 30, 1997,
compared to $1.9 million for the six months ended June 30, 1996, representing a
decrease of $0.6 million, or 31.6%. This decrease was primarily the result of
the reduction in the Company's long-term borrowings.
Net income was $7.7 million for the six months ended June 30, 1997,
compared to a loss of $2.2 million for the six months ended June 30, 1996,
representing an increase of $9.9 million, as a result of the factors discussed
above.
The Company will adopt the Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("FAS 128") in the fourth quarter of 1997, as
required. The Company
Page 14 of 18
<PAGE> 15
will continue to apply APB Opinion No. 15, "Earnings Per Share" until the
adoption of FAS 128. The standard specifies the computation, presentation and
disclosure requirements for earnings per share.
Liquidity and Capital Resources
The Company periodically evaluates its liquidity requirements, capital
needs and availability of capital resources in view of its plans for expansion,
including potential acquisitions, anticipated levels of health benefit plan
subsidies and other operating cash needs. The Company has in the past sought,
and may in the future seek, to raise additional capital or take other measures
to increase its liquidity and capital resources. Historically, these funds have
been raised from the Company's partners, as well as from bank financing and
operations. The Company currently believes that the proceeds from the IPO, cash
flow from operations, and vendor financing arrangements will be sufficient to
meet its liquidity requirements through 1998. The Company may rely on these
same sources, as well as public or private debt and/or equity financing, to
meet its long-term liquidity needs.
At June 30, 1997 and December 31, 1996, the Company had negative working
capital of $32.1 million, and $32.2 million, respectively, an improvement at
June 30, 1997 of $0.1 million. The improvement was primarily due to an increase
in current assets offset by a lesser increase in current liabilities. In
anticipation of the IPO, the Company prepaid certain capital lease obligations
in the amount of $2.7 million, of which $2.1 million was current. The negative
working capital at each such balance sheet date was the result of the Company's
investment of $19.7 million in its facilities and technology infrastructure as
well as its subsidy of $31.7 million of costs related to the Company's health
benefit plans during the period January 1995 through June 1997. The Company's
primary short-term liquidity requirements relate to the payment of accrued
payroll and payroll taxes of its internal and worksite employees, accounts
payable for capital expenditures and the payment of accrued workers'
compensation expense and health benefit plan premiums. At June 30, 1997, the
Company had $10.0 million available under its vendor financing arrangements.
<TABLE>
<CAPTION>
For the six months
ended June 30,
--------------------
1996 1997
--------- ---------
(in millions)
<S> <C> <C>
Cash provided by (used in) operating activities $ (8.4) $ 11.6
Cash used in investing activities.............. (2.4) (2.4)
Cash provided by (used in) financing activities 10.8 (9.2)
-------- --------
Net increase in cash and cash equivalents...... $ .0 $ .0
======== ========
</TABLE>
Net cash from operating activities increased by $20.0 million or 238.1%
for the six months ended June 30, 1997, as compared to the six months ended
1996. The change was due primarily to a $9.8 million increase in net income
and a $8.6 million increase in accounts payable and other accrued liabilities.
The increase in accounts payable and other accrued liabilities is due primarily
to the timing of payments to vendors.
Net cash used in investing activities during the six months ended June 30,
1997, and 1996, was not significantly different. Capital expenditures,
primarily technology infrastructure, totaled $2.2 million for the six months
ended June 30, 1997.
Net cash from financing activities decreased by $20.0 million or 185.2%
for the six months ended June 30, 1997, as compared to the six month period
ended 1996. During the six month period ended June 30, 1996, the Company
received $17.8 million in preferred partner contributions. During the six
month period ended June 30, 1997, $3.5 million of preferred partnership
interests were repurchased.
On July 1, 1997, $15.2 million of the proceeds from the IPO were used to
repay in full amounts borrowed under the Company's existing credit agreement,
at which time the Company terminated the agreement. The Company is currently
in discussions with several lenders concerning a new credit facility with rates
and terms more favorable than the
Page 15 of 18
<PAGE> 16
previous credit agreement. Of the proceeds from the IPO $13.6 million was used
to repurchase the remaining preferred partnership interests that were not
converted to common stock at the IPO.
Certain statements in this Form 10-Q constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. For this purpose, any statements contained herein that are not
statements of historical facts may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," "intends" and similar expressions are intended to identify
forward-looking statements. Such foreward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause the actual
results, performance or achievements expressed or implied by such
forward-looking statements. Historical results are not necessarily indicative
of trends in operating results for any future period.
Inflation
The Company believes that inflation in salaries and wages of worksite
employees has a positive impact on its results of operations as its service fee
is proportional to such changes in salaries and wages.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in the Company's Form S-1 filing, dated June 25, 1997, as
amended, a complaint was filed by Taylor Bean & Whittaker Ltd., et al naming
the Company as defendant. On July 31, 1997, the plaintiffs voluntarily
dismissed this action without prejudice.
While the Company is involved from time to time in routine legal matters
incidental to its business, there are presently no other material legal
proceedings pending against the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - 27 Financial Data Schedule (for SEC use only).
Exhibit
No.
-------
27 Financial Data Schedule (for SEC use only).
Page 16 of 18
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAFF LEASING, INC.
----------------------
Registrant
Dated: August 12, 1997 BY /s/ Richard A. Goldman
-----------------------------
Richard A. Goldman
President
Dated: August 12, 1997 BY /s/ John E. Panning
-----------------------------
John E. Panning
Chief Financial Officer
Page 17 of 18
<PAGE> 18
STAFF LEASING, INC.
INDEX TO PART II, ITEM 6(A)
EXHIBITS
Exhibit
No.
-------
27 Financial Data Schedule (for SEC use only).
Page 18 of 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF STAFF LEASING, INC. FOR THE SIX MONTHS
ENDED JUNE 30, 1997 INCLUDED IN FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,514
<SECURITIES> 0
<RECEIVABLES> 44,598
<ALLOWANCES> 718
<INVENTORY> 0
<CURRENT-ASSETS> 51,269
<PP&E> 21,822
<DEPRECIATION> 4,185
<TOTAL-ASSETS> 82,116
<CURRENT-LIABILITIES> 83,370
<BONDS> 0
0
15,939
<COMMON> 192
<OTHER-SE> (29,475)
<TOTAL-LIABILITY-AND-EQUITY> 82,116
<SALES> 850,530
<TOTAL-REVENUES> 850,530
<CGS> 0
<TOTAL-COSTS> 808,019
<OTHER-EXPENSES> 33,430
<LOSS-PROVISION> 460
<INTEREST-EXPENSE> 1,322
<INCOME-PRETAX> 7,667
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,667
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
</TABLE>
