<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 September 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 November 12, 1997
----------------------- -----------------------------------
$.01 par value 23,505,358
Page 1 of 21
<PAGE> 2
STAFF LEASING, INC.
INDEX
<TABLE>
<CAPTION>
Page
------
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Operations
for the three and the nine months ended
September 30, 1996 and 1997.............................................3
Consolidated Balance Sheets as of December 31,
1996, and September 30, 1997 (unaudited)................................4
Unaudited Consolidated Statement of Changes in
Shareholders' Equity (Deficit) for the nine
months ended September 30, 1997.........................................5
Unaudited Consolidated Statements of Cash Flows
for the nine months ended September 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..........................................................11
Part II. OTHER INFORMATION
Item 2. Changes in Securities.................................................18
Item 6. Exhibits and Reports on Form 8-K......................................18
SIGNATURES.....................................................................19
</TABLE>
Page 2 of 21
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------------------- -----------------------------------
1996 1997 1996 1997
--------------- --------------- ---------------- -----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 367,484 $480,902 $1,042,676 $1,331,432
---------- ---------- ------------- ----------
Cost of services:
Salaries, wages and payroll taxes 329,045 435,101 933,356 1,203,247
Benefits, workers' compensation, state unemployment taxes
and other costs 22,705 20,096 65,395 59,969
---------- ---------- ---------- ----------
Total cost of services 351,750 455,197 998,751 1,263,216
---------- ---------- ---------- ----------
Gross profit 15,734 25,705 43,925 68,216
---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and commissions 9,848 10,313 27,927 30,965
Other general and administrative 5,309 5,203 14,061 16,099
Depreciation and amortization 797 1,366 2,324 3,248
---------- ---------- ---------- ----------
Total operating expenses 15,954 16,882 44,312 50,312
---------- ---------- ---------- ----------
Operating income (loss) (220) 8,823 (387) 17,904
Interest expense, net 753 237 2,705 1,559
Other (income) expense (15) (1) 26 91
---------- ---------- ---------- ----------
Income (loss) before provision for income taxes (benefit)
(958) 8,587 (3,118) 16,254
Provision for income taxes (benefit) - - - -
---------- ---------- ---------- ----------
Net income (loss) $ (958) $ 8,587 $ (3,118) $ 16,254
========== ========== ========== ==========
Return on preferred interests $ 552 $ 962 $ 1,110 $ 2,391
========== ========== ========== ==========
Net income (loss) attributable to common shareholders
$ (1,510) $ 7,625 $ (4,228) $ 13,863
========== ========== ========== ==========
Net income (loss) per share attributable to common
shareholders
- Primary $ (0.07) $ 0.31 $ (0.21) $ 0.64
- Fully diluted $ (0.07) $ 0.31 $ (0.21) $ 0.63
========== ========== ========== ==========
Weighted average shares outstanding
- Primary 20,391 24,485 20,391 21,788
- Fully diluted 20,391 24,621 20,391 21,950
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
Page 3 of 21
<PAGE> 4
STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------- -------------
(in thousands, except share data)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12 $ 26,318
Certificates of deposit - restricted - 8,250
Marketable securities - 4,949
Accounts receivable, net of allowance for
doubtful accounts of $440 and $893, respectively 33,956 48,808
Other receivables 660 903
Other current assets 770 877
------------- -------------
Total current assets 35,398 90,105
Property and equipment, net 16,812 18,312
Goodwill, net of accumulated amortization
of $2,313 and $2,863, respectively 12,358 11,808
Other assets, net of accumulated amortization
of $1,762 and $153, respectively 1,414 340
------------- -------------
$ 65,982 $ 120,565
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 7,092 $ -
Accrued workers' compensation premiums and
health reserves 13,697 19,509
Accrued payroll and payroll taxes 35,280 49,223
Accounts payable and other accrued liabilities 10,113 7,465
Customer deposits and prepayments 1,396 2,024
------------- -------------
Total current liabilities 67,578 78,221
Long-term debt 14,354 -
Other long-term liabilities 2,056 1,808
Commitments and contingencies (Note 8) - -
Redeemable preferred partnership interests 17,674 -
Shareholders' equity (deficit):
Common stock, $.01 par value 192 235
Shares authorized: 100,000,000
Shares issued and outstanding:
1996 - 19,196,472
1997 - 23,528,517
Additional paid in capital 2,573 62,221
Accumulated deficit (37,194) (20,940)
Other (1,251) (980)
------------- -------------
Total shareholders' equity (deficit) (35,680) 40,536
------------- -------------
$ 65,982 $ 120,565
============= =============
</TABLE>
See notes to consolidated financial statements.
Page 4 of 21
<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 (1,744) (1,744)
Repurchase of shareholder interests (30,833) (122) 53 (69)
Issuance of common stock through
initial public offering, net of
offering costs of $1,332 3,944,978 39 60,999 61,038
Issuance of common stock upon
exercise of Company option
for all capital stock of
Staff Acquisition, Inc. 417,900 4 137 141
Sale of shareholder
interests 319 (274) (45) -
Other 59 104 433 596
Net income 16,254 16,254
---------- ---- ------- ----- ------ -------- -------
Balance, September 30, 1997 23,528,517 $235 $62,221 $(466) $(514) $(20,940) $40,536
========== ==== ======= ===== ====== ======== =======
</TABLE>
See notes to consolidated financial statements.
Page 5 of 21
<PAGE> 6
STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-------------------------------------
1996 1997
------------------ -----------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (3,118) $ 16,254
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 2,324 3,248
Amortization and write-off of debt issuance costs 426 957
Fixed asset obsolescence - 783
Provision for bad debts 341 640
Other (104) 152
Changes in assets and liabilities:
Increase in certificates of deposit - restricted - (8,250)
Increase in accounts receivable (11,625) (15,492)
Increase in other receivables (320) (243)
(Increase)decrease in other current assets 177 (107)
Decrease in accounts payable and other accrued liabilities (812) (2,648)
Increase in accrued payroll and payroll taxes 7,721 13,943
Increase(decrease) in accrued insurance premiums
and health reserves (341) 5,812
Increase in customer deposits and prepayments 606 628
Increase(decrease) in other long-term liabilities 17 (201)
--------- ---------
Net cash provided by(used in) operating activities (4,708) 15,476
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities, net - (4,949)
Capital expenditures (4,573) (4,702)
Other assets (41) (168)
--------- ---------
Net cash used in investing activities (4,614) (9,819)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of revolving credit - net (2,500) -
Proceeds from sale-leaseback of fixed assets 597 -
Proceeds from sale of common shares from IPO, net - 61,038
Preferred partners' contributions, net of partners'
notes receivable and capital issuance fees 20,838 370
General partner contributions 250 -
Repayment of shareholders' notes receivable - 544
Repurchase of common shareholders' interest (3,051) (69)
Repurchase of preferred partners' interest,
including fixed return (139) (19,788)
Repayments of capital leases (1,422) (3,746)
Repayments of long-term debt (5,250) (17,700)
--------- ---------
Net cash provided by financing activities 9,323 20,649
--------- ---------
Net increase in cash 1 26,306
Cash - beginning of period 13 12
--------- ---------
Cash - end of period $ 14 $ 26,318
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 2,010 $ 1,020
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 6 of 21
<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. In addition, Charles S. Craig, the
Chairman and CEO of the Company and owner of all the issued and outstanding
capital stock of Staff Acquisition, granted to the Company an option to exchange
the stock of Staff Acquisition for 417,900 shares of the Company's common stock.
The number of shares of common stock issuable to Mr. Craig in connection with
the exercise of such option was determined on the same basis used to determine
the number of shares of common stock issued in exchange for the common interest.
On September 30, 1997, the Company exercised this option.
The Reorganization 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.
In conjunction with the Reorganization, on July 1, 1997, the Company
completed an initial public offering (the "IPO") of 3,500,000 shares of its
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 $61,038. The net 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 has been allocated for general
corporate purposes. Non-recurring expenses as of July 1, 1997, included: (i)
the write-off of $714 in unamortized deferred financing costs associated with
the repayment of the Company's long-term debt; (ii) the write-off of $163 in
unamortized organization costs associated with the
Page 7 of 21
<PAGE> 8
reorganization of the structure of the limited partnerships; and (iii) $962 of
accelerated accretion associated with the early redemption of the preferred
partnership interests.
3. CERTIFICATES OF DEPOSIT - RESTRICTED:
As of September 30, 1997, the Company had certificates of deposit,
with original maturities of less than one year, that serve as collateral on
certain standby letters of credit issued in connection with the Company's
health benefit plans. These certificates of deposit have been classified as
restricted in the accompanying consolidated balance sheets.
4. MARKETABLE SECURITIES:
As of September 30, 1997, the Company had marketable securities which
consisted of debt securities issued by corporate and government entities, with
contractual maturities of less than one year from the date of purchase. All of
the Company's investments in marketable securities are classified as
available-for-sale and are carried at fair market value. Unrealized gains and
losses are recorded as a component of shareholders' equity, net of related tax
effects.
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------------- ---------------------
<S> <C> <C>
Leasehold improvements $ 1,083 $ 1,299
Furniture and fixtures 1,337 1,415
Vehicles 163 139
Equipment 562 628
Computer hardware and software 16,746 19,387
-------------------- ---------------------
Total property and equipment 19,891 22,868
Less accumulated depreciation (3,079) (4,556)
==================== =====================
$ 16,812 $ 18,312
==================== =====================
</TABLE>
Gross fixed assets included $6,452 and $-0- of computer hardware, software and
equipment under capital lease obligations at December 31, 1996 and September
30, 1997, respectively. Fully depreciated assets of $444 were written-off
against accumulated depreciation in 1997. Depreciation expense was $2,414 for
the nine months ended September 30, 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, for the three months and nine months
ended September 30, 1997, related to the warrants issued in connection with the
Reorganization were 881,188 and 816,249 for primary amounts, respectively, and
954,810 for fully diluted amounts for both periods. Primary and fully diluted
amounts for the three months and nine months ended September 30, 1996 were
776,546.
In addition, upon consummation of the IPO, the Company, under the
terms of its stock option plan, granted options to purchase an aggregate of
approximately 500,000 shares of common stock at an exercise price equal to
$17.00, the IPO price for the shares sold in the Offering, to all full time
employees and non-management directors of the Company. The number of common
stock equivalents included in weighted shares outstanding,
Page 8 of 21
<PAGE> 9
for the three months and nine months ended September 30, 1997, related to
the stock options issued in connection with the IPO were 88,942 and 30,590 for
primary amounts, respectively, and 151,517 and 53,836 for fully diluted
amounts, respectively.
Also included in weighted shares outstanding for all periods ended
September 30, 1996 and 1997, were contingently issuable shares totaling 417,900
associated with the exchange of all the stock of Staff Acquisition.
The Company will adopt Statement of Financial Accounting Standards ("SFAS")
No. 128 in the fourth quarter of 1997, as required. The Company will continue to
apply Accounting Principles Board Opinion No. 15, "Earnings Per Share" until the
adoption of SFAS No. 128. The pro forma earnings per share ("EPS") attributable
to common shareholders computed under the provisions of SFAS No. 128 for the
three months and nine months ended September 30, 1997, are as follows: Basic EPS
of $.32 and $.66, respectively, and diluted EPS of $.31 and $.64, respectively.
Pro forma basic and diluted EPS attributable to common shareholders for the
three months and nine months ended September 30, 1996, are as follows: Basic EPS
of ($.08) and ($.22), respectively, and diluted EPS of ($.08) and ($.22),
respectively.
7. INCOME TAXES:
The Company records income tax expense using the asset and liability
method of accounting for deferred income taxes. Under such method, deferred tax
assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the financial statements and the income tax
bases of the Company's assets and liabilities.
Prior to the Reorganization, the Company operated through limited
partnerships 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, taxable income
generated by the partnerships was allocated to Staff Acquisition and not to the
Company. This amount approximates the amount of excess net losses previously
allocated to Staff Acquisition in accordance with the Partnership agreement and
applicable tax rules and regulations. The Company estimates that all of such net
losses were exhausted on or about September 30, 1997. Accordingly, the Company
has not recorded any provision or benefit for Federal and state income taxes.
Additionally, the Company has deductible temporary differences that can be
utilized to offset future taxable income. Such deductible temporary differences
amounted to approximately $40 million at September 30, 1997, and relate
primarily to assets with tax basis in excess of book basis and certain reserves
which will be deductible in future periods. A 100% valuation allowance has been
recorded, based upon the Company's insufficient levels of taxable income
available to recognize benefits of such deductible temporary differences.
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.
Page 9 of 21
<PAGE> 10
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,
is expected to have a material adverse effect on the consolidated financial
position or results of operations if adversely resolved.
9. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS:
In June of 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which requires a statement of
comprehensive income to be included in the financial statements for fiscal years
beginning after December 15, 1997. The Company will include such statement, if
applicable, beginning with the first quarter of 1998.
In addition, in June of 1997, the FASB issued SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information." SFAS No. 131 requires
disclosures of certain information about operating segments and about products
and services, the geographic areas in which a company operates, and their major
customers. The Company is presently in the process of evaluating the effect
this new standard will have on disclosures in the Company's financial
statements and the required information will be reflected in its financial
statements for the year ended December 31, 1998.
Page 10 of 21
<PAGE> 11
ITEM #2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is the largest professional employer organization ("PEO") in
the United States. At September 30, 1997, the Company served over 8,900 clients
with over 102,000 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. In addition, Charles S. Craig, the
Chairman and CEO of the Company and owner of all the issued and outstanding
capital stock of Staff Acquisition, granted to the Company an option to exchange
the stock of Staff Acquisition for 417,900 shares of the Company's common stock.
The number of shares of common stock issuable to Mr. Craig in connection with
the exercise of such option was determined on the same basis used to determine
the number of shares of common stock issued in exchange for the common interest.
On September 30, 1997, the Company exercised this option.
The Reorganization 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.
In conjunction with the Reorganization, on July 1, 1997, the Company
completed an initial public offering (the "IPO") of 3,500,000 shares of its
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 $61.0 million. The net proceeds from
the IPO were used to repay outstanding redeemable preferred partnership
interests of $16.3 million, including accrued fixed return of $2.6 million, and
to repay outstanding long-term debt of $15.2 million. The remainder has been
allocated for general corporate purposes. Non-recurring expenses as of July 1,
1997, included: (i) the write-off of $.7 million in unamortized deferred
financing costs associated with the repayment of the Company's long-term debt;
(ii) the write-off of $.2 million in unamortized organization costs associated
with the reorganization of the structure of the limited partnerships; and (iii)
$1.0 million of accelerated accretion associated with the early redemption of
the preferred partnership interests.
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,
Page 11 of 21
<PAGE> 12
workers' compensation insurance coverage and administrative and field services
provided by the Company to the client, including payroll administration and
safety, human resource 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.
Prior to the Reorganization, the Company operated through limited
partnerships 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, taxable income
generated by the partnerships was allocated to Staff Acquisition and not to the
Company. This amount approximates the amount of excess net losses previously
allocated to Staff Acquisition in accordance with the Partnership agreement and
applicable tax rules and regulations. The Company estimates that all of such
net losses were exhausted on or about September 30, 1997. Accordingly, the
Company has not recorded any provision or benefit for Federal and state income
taxes. Additionally, the Company has deductible temporary differences that can
be utilized to offset future taxable income. Such deductible temporary
differences amounted to approximately $40 million at September 30, 1997, and
relate primarily to assets with tax basis in excess of book basis and certain
reserves which will be deductible in future periods. A 100% valuation allowance
has been recorded, based upon the Company's insufficient levels of taxable
income available to recognize benefits of such deductible temporary
differences.
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 12 of 21
<PAGE> 13
Results of Operations
The following table presents the Company's results of operations for the
three months ended September 30, 1996 and 1997, and for the nine months ended
September 30, 1996 and 1997, respectively, expressed as a percentage of
revenues:
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended
September 30, September 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 90.4
Benefits, workers' compensation,
state unemployment taxes and
other costs 6.2 4.2 6.3 4.5
------ ------ ------ ------
Total cost of services 95.7 94.7 95.8 94.9
------ ------ ------ ------
Gross profit 4.3 5.3 4.2 5.1
------ ------ ------ ------
Operating expenses:
Salaries, wages and commissions 2.7 2.1 2.7 2.3
Other general and administrative 1.5 1.1 1.3 1.2
Depreciation and amortization 0.2 0.3 0.2 0.3
------ ------ ------ ------
Total operating expenses 4.4 3.5 4.2 3.8
------ ------ ------ ------
Operating income (loss) (0.1) 1.8 (0.0) 1.3
Interest expense, net 0.2 0.0 0.3 0.1
------ ------ ------ ------
Net income(loss) (0.3)% 1.8% (0.3)% 1.2%
====== ====== ====== ======
</TABLE>
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Revenues were $480.9 million for the three months ended September 30,
1997, compared to $367.5 million for the three months ended September 30, 1996,
representing an increase of $113.4 million, or 30.9%. This increase was due
primarily to an increased number of clients and worksite employees. From
September 30, 1996, to September 30, 1997, the number of clients increased
23.3%, from 7,245 to 8,933, and the number of worksite employees increased
25.7%, from 81,320 to 102,233. 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.
Cost of services was $455.2 million for the three months ended
September 30, 1997, compared to $351.8 million for the three months ended
September 30, 1996, representing an increase of $103.4 million, or 29.4%.
Salaries, wages and payroll taxes of worksite employees were $435.1
million for the three months ended September 30, 1997, compared to $329.0
million for the three months ended September 30, 1996, representing an increase
of $106.1 million, or 32.2%. This increase was larger than the increase in
revenues on a percentage basis from the comparable period, due primarily to the
reduction in service fees discussed above.
Benefits, workers' compensation, state unemployment taxes and other costs
were $20.1 million for the three months ended September 30, 1997, compared to
$22.7 million for the
Page 13 of 21
<PAGE> 14
three months ended September 30, 1996, representing a decrease of $2.6 million,
or (11.5%). 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 plan, leading to a reduction in
the health benefit plan subsidy, from $2.4 million for the three months ended
September 30, 1996, to a surplus of $1.5 million for the three months ended
September 30, 1997. The current quarter's surplus is primarily attributable to
favorable experience on the maturation or run-out of 1996 health claims. The
recognition of income related to the 1996 health benefit plan year represents a
change in estimate for the adequacy of the Company's health reserves.
Gross profit was $25.7 million for the three months ended September
30, 1997, compared to $15.7 million for the three months ended September 30,
1996, representing an increase of $10.0 million, or 63.7%.
Operating expenses were $16.9 million for the three months ended
September 30, 1997, compared to $16.0 million for the three months ended
September 30, 1996, representing an increase of $.9 million, or 5.6%.
Salaries, wages and commissions were $10.3 million for the three months
ended September 30, 1997, compared to $9.8 million for the three months ended
September 30, 1996, representing an increase of $.5 million, or 5.1%. This
increase was due primarily to an increase in sales commissions attributable to
the growth in the number of clients and worksite employees.
Other general and administrative expenses were $5.2 million for the three
months ended September 30, 1997, compared to $5.3 million for the three months
ended September 30, 1996, representing a decrease of $.1 million, or (1.9%).
This decrease reflects the reduction in the Company's reliance on outside
vendors and consultants during the period, offset by a fixed asset obsolescence
charge of $.5 million for personal computer upgrades.
Depreciation and amortization expenses increased by $.6 million for the
three months ended September 30, 1997, compared to the three months ended
September 30, 1996, representing an increase of 75.0%. This increase was
primarily the result of the Company's investment in management information
systems. 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 are
being amortized over a seven year period.
Interest expense, net, was $.2 million for the three months ended
September 30, 1997, compared to $.8 million for the three months ended
September 30, 1996, representing a decrease of $.6 million, or (75.0%). The
decrease was due primarily to the write-off of unamortized debt issuance costs
associated with the repayment of the Company's long-term borrowings, partially
offset by interest income earned on the net proceeds of the IPO.
Net income was $8.6 million for the three months ended September 30,
1997, compared to a loss of $1.0 million for the three months ended September
30, 1996, representing an increase of $9.6 million.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues were $1,331.4 million for the nine months ended September 30,
1997, compared to $1,042.7 million for the nine months ended September 30,
1996, representing an increase of $288.7 million, or 27.7%. This increase was
due primarily to an increased number of clients and worksite employees. From
September 30, 1996, to September 30, 1997, the number of clients increased
23.3%, from 7,245 to 8,933, and the number of worksite employees increased
25.7%, from 81,320 to 102,233. 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
Page 14 of 21
<PAGE> 15
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.
Cost of services was $1,263.2 million for the nine months ended
September 30, 1997, compared to $998.8 million for the nine months ended
September 30, 1996, representing an increase of $264.4 million, or 26.5%.
Salaries, wages and payroll taxes of worksite employees were $1,203.2
million for the nine months ended September 30, 1997, compared to $933.4
million for the nine months ended September 30, 1996, representing an increase
of $269.8 million, or 28.9%. This increase was larger than the increase in
revenues on a percentage basis from the comparable period, due primarily to the
reduction in service fees discussed above.
Benefits, workers' compensation, state unemployment taxes and other costs
were $60.0 million for the nine months ended September 30, 1997, compared to
$65.4 million for the nine months ended September 30, 1996, representing a
decrease of $5.4 million, or (8.3%). 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
$7.4 million for the nine months ended September 30, 1996, to a surplus of $.5
million for the nine months ended September 30, 1997. The current year's surplus
is primarily attributable to favorable experience on the maturation or run-out
of 1996 health claims. The recognition of income related to the 1996 health
benefit plan year represents a change in estimate for the adequacy of the
Company's health reserves.
Gross profit was $68.2 million for the nine months ended September 30,
1997, compared to $43.9 million for the nine months ended September 30, 1996,
representing an increase of $24.3 million, or 55.4%.
Operating expenses were $50.3 million for the nine months ended
September 30, 1997, compared to $44.3 million for the nine months ended
September 30, 1996, representing an increase of $6.0 million, or 13.5%.
Salaries, wages and commissions were $31.0 million for the nine months
ended September 30, 1997, compared to $27.9 million for the nine months ended
September 30, 1996, representing an increase of $3.1 million, or 11.1%. This
increase was due primarily to: (i) $2.0 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) $1.1 million increase in sales commissions
attributable to the growth in the number of clients and worksite employees.
Other general and administrative expenses were $16.1 million for the nine
months ended September 30, 1997, compared to $14.1 million for the nine months
ended September 30, 1996, representing an increase of $2.0 million, or 14.2%.
This increase was primarily a result of expanded sales and marketing programs
for 1997 and a fixed asset obsolescence charge of $.8 million for personal
computer upgrades.
Depreciation and amortization expenses increased by $0.9 million for
the nine months ended September 30, 1997, compared to the nine months ended
September 30, 1996, representing an increase of 39.1%. This increase was
primarily the result of the Company's investment in management information
systems. 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 are
being amortized over a seven year period.
Page 15 of 21
<PAGE> 16
Interest expense, net, was $1.6 million for the nine months ended
September 30, 1997, compared to $2.7 million for the nine months ended
September 30, 1996, representing a decrease of $1.1 million, or (40.7%). The
decrease was due primarily to the write-off of unamortized debt issuance costs
associated with the repayment of the Company's long-term borrowings, partially
offset by interest income earned on the net proceeds of the IPO.
Net income was $16.3 million for the nine months ended September 30,
1997, compared to a loss of $3.1 million for the nine months ended September
30, 1996, representing an increase of $19.4 million.
The Company will adopt the Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share" in the fourth quarter of 1997, as
required. The Company will continue to apply APB Opinion No. 15, "Earnings Per
Share" until the adoption of SFAS No. 128. The standard specifies the
computation, presentation and disclosure requirements for earnings per share.
In June of 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income," which requires a
statement of comprehensive income to be included in the financial statements for
fiscal years beginning after December 15, 1997. The Company will include such
statement, if applicable, beginning with the first quarter of 1998.
In addition, in June of 1997, the FASB issued SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information." SFAS No. 131 requires
disclosures of certain information about operating segments and about products
and services, the geographic areas in which a company operates, and their major
customers. The Company is presently in the process of evaluating the effect this
new standard will have on disclosures in the Company's financial statements and
the required information will be reflected in its financial statements for the
year ended December 31, 1998.
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 were
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 September 30, 1997, and December 31, 1996, the Company had working
capital (deficit) of $11.9 million, and ($32.2) million, respectively, an
improvement at September 30, 1997, of $44.1 million. The improvement was due
primarily to net proceeds raised from the Company's IPO and an improvement in
cash flow from operations for the nine months ended September 30, 1997. The
negative working capital as of December 31, 1996, was the result of the
Company's investment of $17.5 million in its facilities and technology
infrastructure as well as its subsidy of $30.7 million related to the Company's
health benefit plans during the period January 1995 through December 1996. 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 September 30, 1997,
the Company had $10.0 million available under its vendor financing
arrangements.
Page 16 of 21
<PAGE> 17
<TABLE>
<CAPTION>
For the nine months
ended September 30,
----------------------------------------
1996 1997
------------------- -----------------
<S> <C> <C>
Cash provided by (used in) operating activities............................... $ (4.7) $ 15.5
Cash used in investing activities............................................. (4.6) (9.8)
Cash provided by financing activities......................................... 9.3 20.6
------- -------
Net increase in cash and cash equivalents..................................... $ .0 $ 26.3
======= =======
</TABLE>
Net cash from operating activities increased by $20.2 million or
429.8% for the nine months ended September 30, 1997, as compared to the nine
months ended 1996. The change was due primarily to a $19.4 million increase in
net income.
Net cash used in investing activities increased by $5.2 million, or
113.0% for the nine months ended September 30, 1997, as compared to the nine
months ended 1996. The increase was due primarily to the purchase of marketable
securities. Capital expenditures, primarily technology infrastructure, totaled
$4.7 million for the nine months ended September 30, 1997.
Net cash from financing activities increased by $11.3 million or
121.5% for the nine months ended September 30, 1997, as compared to the nine
month period ended 1996. During the nine month period ended September 30, 1996,
the Company received $20.8 million in net preferred partner contributions.
During the nine month period ended September 30, 1997, the Company received net
proceeds of $61.0 million from the IPO. Redeemable preferred partnership
interests of $16.3 million, including accrued fixed return of $2.6 million were
repaid with the proceeds from the IPO. In addition, the Company repaid $2.7
million of capital leases and the remaining $15.2 million of long-term debt
borrowed under the Company's then existing credit agreement, at which time the
Company terminated the agreement. On October 30, 1997, the Company signed a
commitment letter for a $20 million acquisition line of credit with NationsBank
NA. The line is available for strategic acquisitions of PEOs and related
businesses.
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.
Statements in this Form 10-Q relating to matters that are not
historical facts are forward-looking statements. Forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results or performance of the Company to be materially different
from any future results or performance expressed or implied by such
forward-looking statements. These known and unknown risks, uncertainties and
other factors include, but are not limited to, the following: (i) the potential
for additional subsidies for health benefit plans; (ii) volatility in workers'
compensation rates and unemployment taxes; (iii) possible adverse application
of certain federal and state laws and the possible enactment of unfavorable
laws or regulation; (iv) impact of competition from existing and new
professional employer organizations; (v) risks associated with expansion into
additional states where the Company does not have a presence or significant
market penetration; (vi) risks associated with the Company's dependence on key
vendors; (vii) the possibility for client attrition; (viii) risks associated
with geographic market concentration and concentration of clients in the
construction industry; (ix) the financial condition of clients; (x) the failure
to properly manage growth and successfully integrate acquired companies and
operations; and (xi) other factors described in further detail in the Company's
filings with the Securities and Exchange Commission.
Page 17 of 21
<PAGE> 18
Part II. OTHER INFORMATION
Item 2. Changes in Securities
On September 30, 1997, the Company issued 417,900 shares of common
stock to Charles S. Craig, the Chairman and CEO of the Company, upon exercise
of the Company's option to exchange all of the outstanding capital stock of
Staff Acquisition, Inc. See Note 2 of the Notes to Consolidated Financial
Statements. The shares were issued in reliance on exemptions from registration
available under Section 4(2) of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No.
- --------
27 Financial Data Schedule (for SEC use only).
Page 18 of 21
<PAGE> 19
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: November 12, 1997 BY /s/ Richard A. Goldman
-----------------------------
Richard A. Goldman
President
Dated: November 12, 1997 BY /s/ John E. Panning
-----------------------------
John E. Panning
Chief Financial Officer
Page 19 of 21
<PAGE> 20
STAFF LEASING, INC.
INDEX TO PART II, ITEM 6(A)
EXHIBITS
Exhibit
No.
- ---------
27 Financial Data Schedule (for SEC use only).
Page 20 of 21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF STAFF LEASING, INC. FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997 INCLUDED IN FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 26,318
<SECURITIES> 4,949
<RECEIVABLES> 49,701
<ALLOWANCES> 893
<INVENTORY> 0
<CURRENT-ASSETS> 90,105
<PP&E> 22,868
<DEPRECIATION> 4,556
<TOTAL-ASSETS> 120,565
<CURRENT-LIABILITIES> 78,221
<BONDS> 0
0
0
<COMMON> 235
<OTHER-SE> 40,301
<TOTAL-LIABILITY-AND-EQUITY> 120,565
<SALES> 1,331,432
<TOTAL-REVENUES> 1,331,432
<CGS> 0
<TOTAL-COSTS> 1,263,216
<OTHER-EXPENSES> 50,312
<LOSS-PROVISION> 640
<INTEREST-EXPENSE> 1,559
<INCOME-PRETAX> 16,254
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,254
<EPS-PRIMARY> .64
<EPS-DILUTED> .63
</TABLE>
