<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(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, 1998.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------- ----------------
COMMISSION FILE NO. 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
incorporation or organization) Identification No.)
600 301 Blvd West, Suite 202
Bradenton, FL 34205
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code): (941) 748-4540
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 last practicable date.
Class of common stock Outstanding as of July 31, 1998
--------------------- -------------------------------
Par value $0.01 per share 23,683,067
<PAGE> 2
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
ITEM 1. Financial Statements ........................................... 3
Unaudited Consolidated Statements of Operations for the
Six Months Ended June 30, 1997 and 1998 ............................. 3
Unaudited Consolidated Balance Sheets as of December 31, 1997
and June 30, 1998 ................................................... 4
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Six Months Ended June 30, 1998 ....................... 5
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1998 ............................. 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 .............................................. 15
ITEM 6. Exhibits and Reports on Form 8-K ............................... 15
SIGNATURES ................................................................... 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
----------------------------- -----------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
(in $000's, except share and per share data)
<S> <C> <C> <C> <C>
Revenues $ 448,075 $ 582,211 $ 850,530 $ 1,121,827
----------- ----------- ----------- -----------
Cost of services:
Salaries, wages and payroll taxes 405,309 528,447 768,146 1,016,734
Benefits, workers' compensation, state
unemployment taxes and other costs 20,150 25,568 39,873 50,665
----------- ----------- ----------- -----------
Total cost of services 425,459 554,015 808,019 1,067,399
----------- ----------- ----------- -----------
Gross profit 22,616 28,196 42,511 54,428
----------- ----------- ----------- -----------
Operating expenses:
Salaries, wages and commissions 10,413 12,448 20,652 24,207
Other general and administrative 5,509 5,334 10,896 10,615
Depreciation and amortization 1,037 1,377 1,882 2,682
----------- ----------- ----------- -----------
Total operating expenses 16,959 19,159 33,430 37,504
----------- ----------- ----------- -----------
Operating income 5,657 9,037 9,081 16,924
Interest income 24 826 54 1,532
Interest expense (671) (17) (1,376) (48)
Other expense (54) -- (92) --
----------- ----------- ----------- -----------
Income before income tax provision 4,956 9,846 7,667 18,408
Income tax provision -- 3,692 -- 6,903
----------- ----------- ----------- -----------
Net income $ 4,956 $ 6,154 $ 7,667 $ 11,505
=========== =========== =========== ===========
Return on preferred interests $ 774 $ -- $ 1,429 $ --
=========== =========== =========== ===========
Net income attributable to common shareholders $ 4,182 $ 6,154 $ 6,238 $ 11,505
=========== =========== =========== ===========
Net income per share attributable
to common shareholders
- Basic $ .21 $ .26 $ .32 $ .49
- Diluted $ .21 $ .25 $ .31 $ .47
=========== =========== =========== ===========
Weighted average shares outstanding
- Basic 19,614 23,638 19,614 23,574
- Diluted 20,391 24,744 20,391 24,634
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
UNAUDITED
------------------- --------------------
(in $000's, except share and per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,051 $ 3,375
Marketable securities 19,910 50,493
Certificates of deposit - restricted 8,406 8,549
Accounts receivable, net of allowance for
doubtful accounts of $835 and $843,
respectively 34,814 57,583
Deferred income tax asset 4,494 3,110
Other current assets 1,154 3,075
------------- -------------
Total current assets 89,829 126,185
Property and equipment, net 19,487 20,353
Goodwill, net of accumulated amortization
of $3,046 and $3,413, respectively 11,625 11,258
Deferred income tax asset 6,635 6,382
Other assets, net of accumulated amortization
of $173 and $213, respectively 242 213
------------- -------------
$ 127,818 $ 164,391
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued insurance premiums and health $ 19,960 $ 21,773
reserves
Accrued payroll and payroll taxes 36,837 56,120
Accounts payable and other accrued liabilities 6,535 5,500
Customer deposits and prepayments 2,121 2,224
Deferred income tax liability -- 3,662
------------- -------------
Total current liabilities 65,453 89,279
Other long-term liabilities 1,518 1,583
Deferred income tax liability 2,699 2,605
Commitments and contingencies (See notes)
Shareholders' equity :
Common stock, $.01 par value 235 237
Shares authorized: 100,000,000
Shares issued and outstanding:
December 31, 1997 - 23,505,358
June 30, 1998 - 23,683,067
Additional paid in capital 65,877 66,940
Retained earnings/(Accumulated deficit) (7,344) 4,161
Other (620) (414)
------------- -------------
Total shareholders' equity 58,148 70,924
------------- -------------
$ 127,818 $ 164,391
============= =============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
UNAUDITED
Retained
Common Additional Earnings/
Stock Common Paid In Deferred Shareholder (Accumulated
(shares) Stock Capital Compensation Notes Deficit) Total
-------------- --------- -------------- ---------------- ------------ ------------- -------
(in $000's except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 23,505,358 $235 $65,877 $(431) $(189) $(7,344) $58,148
Repurchase of common
stock (10,000) - (25) (25)
Issuance of common stock 10,000 - 257 257
Issuance of common
stock through exercise
of warrants, net of
offering costs of $450 177,709 2 835 837
Other (4) 77 129 202
Net income 11,505 11,505
---------- ----- ------- ----- ---- ------ -------
Balance, June 30, 1998 23,683,067 $ 237 $66,940 $(354) $(60) $4,161 $70,924
========== ===== ======= ===== ==== ====== =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
For the six months ended
June 30,
-----------------------
1997 1998
-------- --------
(in $000's)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,667 $ 11,505
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,882 2,682
Decrease in deferred taxes, net -- 5,206
Provision for bad debts 460 340
Amortization of debt issuance costs 243 --
Other (7) 73
Changes in operating working capital:
Increase in certificates of deposit - restricted (3,500) (143)
Increase in accounts receivable (10,384) (23,109)
Increase in other current assets (2,445) (1,921)
Increase (decrease) in accounts payable and other
accrued liabilities 3,710 (1,035)
Increase in accrued payroll and payroll taxes 10,635 19,283
Increase in accrued insurance premiums and health
reserves 2,989 1,813
Increase in customer deposits and prepayments 41 103
Increase in other long-term assets (150) (11)
Increase in other long-term liabilities 315 65
-------- --------
Net cash provided by operating activities 11,456 14,851
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities, net -- (30,583)
Capital expenditures (2,243) (3,147)
Proceeds from sale of assets 9 --
-------- --------
Net cash used in investing activities (2,234) (33,730)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions, net of shareholder notes receivable and 370 --
issuance costs
Proceeds from sales of common shares -- 1,094
Repayment of shareholders' notes receivable 232 134
Repurchase and retirement of common stock -- (25)
Repurchase of shareholders' interests, including fixed return (3,604) --
Repayments of capital leases (3,718) --
Repayments of long-term debt (2,500) --
-------- --------
Net cash provided by (used in) financing activities (9,220) 1,203
-------- --------
Net increase (decrease) in cash 2 (17,676)
Cash and cash equivalents - beginning of period 12 21,051
-------- --------
Cash and cash equivalents - end of period $ 14 $ 3,375
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ -- $ 2,181
======== ========
Interest paid $ 973 $ 10
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
STAFF LEASING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in $000's, 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, 1997, included in the Company's Form
10-K. 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 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. SUBSEQUENT EVENT
In August 1998, the Company's Board of Directors approved a program to
repurchase up to two million shares of the Company's common stock. Purchases
may be made from time to time depending upon the Company's stock price, and
will be made primarily in the open market, but may also be made through
privately negotiated transactions.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------- --------
<S> <C> <C>
Billed to clients .......................................... $ 19,888 $ 10,789
Unbilled revenues .......................................... 15,761 47,637
-------- --------
35,649 58,426
Less: Allowance for doubtful accounts ................ (835) (843)
-------- --------
$ 34,814 $ 57,583
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment (at cost) was comprised of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------- --------
<S> <C> <C>
Leasehold improvements ..................................... $ 1,318 $ 1,356
Furniture and fixtures ..................................... 1,456 1,717
Vehicles ................................................... 120 120
Equipment .................................................. 1,367 1,559
Computer hardware and software ............................. 20,510 23,085
-------- --------
Total property and equipment ............................... 24,771 27,837
Less accumulated depreciation ........................ (5,284) (7,484)
-------- --------
$ 19,487 $ 20,353
======== ========
</TABLE>
For the three and six months ended June 30, 1998 depreciation expense was
$1,174 and $2,275, respectively.
7
<PAGE> 8
STAFF LEASING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in $000's, except share and per share data)
5. COMMITMENTS AND CONTINGENCIES
The Company is a party to certain 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.
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 U.S. 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 PEO
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 client's 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.
6. RELATED PARTIES
Staff Leasing has a five-year employment contract with a shareholder,
which requires annual payments of $362. This agreement will terminate in
November of 1998. For the three and six months ended June 30, 1998, $85 and $171
respectively, of expense was recorded under this agreement. In addition, lease
expense related to certain automobile leases was paid to an entity owned by this
same shareholder totaling $16 and $21 respectively, for the three and six months
ended June 30, 1998.
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.
The Company's effective tax rate provides for Federal and state income
taxes. The effective tax rate for the three and six months ended June 30, 1998
was 37.5%. Prior to July 1997, 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.
8. EQUITY
In April 1998, certain shareholders of the Company completed an
underwritten secondary offering of 3.1 million shares of common stock of the
Company. In connection with this offering, 177,709 shares of common stock were
issued by the Company upon the exercise of warrants that were sold to the
underwriters by certain selling shareholders. The Company received approximately
$1,285 from the exercise of the warrants and paid approximately $450 of expenses
associated with this secondary offering.
9. EARNINGS PER SHARE ("EPS")
The potential common stock equivalents included in the diluted weighted
average shares outstanding for the three and six months ended June 30, 1997 and
1998, related to warrants issued in connection with the Company's reorganization
and initial public offering. The warrants calculated as common stock equivalents
totaled 776,352 for the three and six months ended June 30, 1997 and totaled
876,945, and 856,793 respectively, for the three and six months ended June 30,
1998. Also included as potential common stock equivalents for diluted weighted
average shares outstanding were options granted in connection with the Company's
stock option plan, which totaled 228,989 and 204,008, respectively, for the
three and six months ended June 30, 1998.
8
<PAGE> 9
STAFF LEASING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of net income attributable to common stock and shares
outstanding for the purposes of calculating basic and diluted earnings per share
for the six months ended June 30, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ----------------- ------------
(in $000's) (in 000's)
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30, 1997:
Net income $ 4,956
Less: Return on preferred interests (774)
-------
Basic EPS :
Net income attributable to common
shareholders $ 4,182 19,614 $.21
======= ====
Effect of dilutive securities:
Warrants 777
------
Diluted EPS :
Net income attributable to common
shareholders $ 4,182 20,391 $.21
======= ====== ====
FOR THE SIX MONTHS ENDED JUNE 30, 1997:
Net income $ 7,667
Less: Return on preferred interests (1,429)
-------
Basic EPS :
Net income attributable to common
shareholders $ 6,238 19,614 $.32
======= ====
Effect of dilutive securities:
Warrants 777
------
Diluted EPS :
Net income attributable to common
shareholders $ 6,238 20,391 $.31
======= ====== ====
FOR THE THREE MONTHS ENDED JUNE 30, 1998:
Basic EPS :
Net income $ 6,154 23,638 $.26
======= ====
Effect of dilutive securities:
Warrants 877
Options 229
------
Diluted EPS :
Net income attributable to common
shareholders $ 6,154 24,744 $.25
======= ====== ====
FOR THE SIX MONTHS ENDED JUNE 30, 1998:
Basic EPS :
Net income $11,505 23,574 $.49
======= ====
Effect of dilutive securities:
Warrants 856
Options 204
------
Diluted EPS :
Net income attributable to common
shareholders $11,505 24,634 $.47
======= ====== ====
</TABLE>
9
<PAGE> 10
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 June 30, 1998, the Company served over 9,900 clients with
approximately 120,000 worksite employees. With 40 branches located in Florida,
Texas, Georgia, Arizona, Minnesota and North Carolina, the Company provides a
broad range of services, including payroll administration, risk management,
benefits administration, unemployment and human resource consulting.
REVENUES. 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 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. Cost of services includes salaries and wages of worksite
employees, payroll taxes, employee benefit costs, workers' compensation
insurance and state unemployment taxes.
OPERATING EXPENSES. 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 its fixed operating expenses in the future will increase at less
than the rate of growth of revenues.
INCOME TAXES. The Company's effective tax rate for the three and six
months ended June 30, 1998 was 37.5%. Prior to July 1997, the Company operated
through limited partnerships for Federal and state income tax purposes, and
therefore, no income tax provision was required. The Company's 1998 estimated
effective tax rate for financial reporting purposes differs from the statutory
Federal rate of 35% primarily because of state income taxes and tax credits.
PROFITABILITY. 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.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following table presents the Company's results of operations for the three
and six months ended June 30, 1997 and 1998, expressed as a percentage of
revenues:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues .................................... 100.0% 100.0% 100.0% 100.0%
Cost of services:
Salaries, wages and payroll taxes ......... 90.5 90.8 90.3 90.6
Benefits, workers' compensation, state
unemployment taxes and other costs ...... 4.5 4.4 4.7 4.5
----- ----- ----- -----
Total cost of services ............. 95.0 95.2 95.0 95.1
----- ----- ----- -----
Gross profit ................................ 5.0 4.8 5.0 4.9
----- ----- ----- -----
Operating expenses:
Salaries, wages and commissions ........... 2.3 2.1 2.4 2.2
Other general and administrative .......... 1.2 .9 1.3 1.0
Depreciation and amortization ............. .2 .3 .2 .2
----- ----- ----- -----
Total operating costs .............. 3.7 3.3 3.9 3.4
----- ----- ----- -----
Operating (loss) income ..................... 1.3 1.5 1.1 1.5
Interest income ............................. -- .1 -- .1
Interest expense ............................ (.2) -- (.2) --
----- ----- ----- -----
Income (loss) before income taxes ........... 1.1 1.6 .9 1.6
Income tax provision ........................ -- .6 -- .6
----- ----- ----- -----
Net income (loss) ........................... 1.1 1.0 .9 1.0
===== ===== ===== =====
</TABLE>
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Revenues were $582.2 million for the three months ended June 30, 1998,
compared to $448.1 million for the three months ended June 30, 1997,
representing an increase of $134.1 million, or 29.9%. This increase was due
primarily to an increased number of clients and worksite employees. From June
30, 1997 to June 30, 1998, the number of clients increased 16.2% from 8,582 to
9,972. The number of worksite employees increased 21.6%, from 98,622 to 119,895.
Revenue growth exceeded headcount growth by 8.3%, due in part, to the effects of
wage inflation caused by tightened labor markets, which encourage clients to
utilize more fully their existing employee base, and higher average wages in the
Company's expansion states. The increase in the number of clients and worksite
employees was the result of continuing sales and marketing efforts in existing
markets, as well as the development of new markets. The Company opened two new
sales offices in the second quarter of 1998. Three new sales offices were opened
in the second quarter of 1997.
Cost of services was $554.0 million for the three months ended June 30,
1998, compared to $425.5 million for the three months ended June 30, 1997,
representing an increase of $128.5 million, or 30.2%. Cost of services was 95.2%
and 95.0% of revenues for the three months ended June 30, 1998 and 1997,
respectively.
Salaries, wages and payroll taxes of worksite employees were $528.4
million for the three months ended June 30, 1998, compared to $405.3 million for
the three months ended June 30, 1997, representing an increase of $123.1
million, or 30.4%.
Benefits, workers' compensation, state unemployment taxes and other costs
were $25.6 million for the three months ended June 30, 1998, compared to $20.2
million for the three months ended June 30, 1997, representing an increase of
$5.4 million, or 26.7%. Benefits, workers' compensation, state unemployment
taxes and other costs were 4.4% of revenues for the three months ended June 30,
1998, compared to 4.5% for the three months ended June 30, 1997. The rate of
increase was lower than the growth in revenues due to: (i) a 2.7% reduction in
the workers' compensation premium rate implemented in the fourth quarter of 1997
and (ii) state unemployment tax rate reductions effective in 1998 for various
states.
11
<PAGE> 12
Gross profit was $28.2 million for the three months ended June 30, 1998,
compared to $22.6 million for the three months ended June 30, 1997, representing
an increase of $5.6 million, or 24.8%. This increase is less than the increase
in revenues due to the Company's continued expansion into states with lower
gross profit margins than Florida, including competitive workers' compensation
pricing in Texas and Georgia. Gross profit per employee for the three months
ended June 30, 1998 was $235, versus $229 for the three months ended June 30,
1997, an increase of 2.6%. Gross profit was 4.8% and 5.0% of revenues for the
three months ended June 30, 1998 and 1997, respectively.
Operating expenses were $19.2 million for the three months ended June 30,
1998, compared to $17.0 million for the three months ended June 30, 1997,
representing an increase of $2.2 million, or 12.9%. Operating expenses were 3.3%
of revenues for the three months ended June 30, 1998, compared to 3.7% for the
three months ended June 30, 1997.
Salaries, wages and commissions were $12.4 million for the three months
ended June 30, 1998, compared to $10.4 million for the three months ended June
30, 1997, representing an increase of $2.0 million, or 19.2%. This increase was
due primarily to an increase in corporate personnel that support the Company's
expanded operations and additional sales staff located in its branch offices.
Salaries, wages and commissions were 2.1% of revenues for the three months ended
June 30, 1998, compared to 2.3% for the three months ended June 30, 1997.
Other general and administrative expenses were $5.3 million for the three
months ended June 30, 1998, compared to $5.5 million for the three months ended
June 30, 1997, representing a decrease of $.2 million, or (3.6%). Other general
and administrative expenses were .9% of revenues for the three months ended June
30, 1998, compared to 1.2% for the three months ended June 30, 1997.
Depreciation and amortization expenses increased by $.3 million for the
three months ended June 30, 1998 compared to the three months ended June 30,
1997, representing an increase of 30.0%. 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 implementation 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 was minimal for the three months ended June 30, 1998,
compared to $.7 million for the three months ended June 30, 1997, a decrease of
$.7 million, or (100.0%). The decrease was due to the repayment of the Company's
long-term borrowings at the beginning of July 1997.
Interest income was $.8 million for the three months ended June 30, 1998,
compared to negligible interest income in the first quarter of 1997. Interest
income resulted from the continued investment of net proceeds from the Company's
initial public offering in July 1997 and net cash provided by operating
activities.
Income tax expense of $3.7 million for the three months ended June 30,
1998 represented a provision at an effective tax rate of 37.5%. The Company
operated through limited partnerships at June 30, 1997, and accordingly, no
provision for income taxes was required.
Net income was $6.2 million for the three months ended June 30, 1998,
compared to net income of $5.0 million for the three months ended June 30, 1997,
representing an increase of $1.2 million or 24.0%.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues were $1,121.8 million for the six months ended June 30, 1998,
compared to $850.5 million for the six months ended June 30, 1997, representing
an increase of $271.3 million, or 31.9%. This increase was due primarily to an
increased number of clients and worksite employees. From June 30, 1997 to June
30, 1998, the number of clients increased 16.2% from 8,582 to 9,972. The number
of worksite employees increased 21.6%, from 98,622 to 119,895. Revenue growth
exceeded headcount growth by 10.3%, due in part, to the effects of wage
inflation caused by tightened labor markets, which encourage clients to utilize
more fully their existing employee base, and higher average wages in the
Company's expansion states.
In January 1997 and to a much lesser extent, in January 1998, the Company
reduced the service fees charged on average to its Florida clients in response
to a reduction in workers' compensation rates in Florida. While the Company
believes these reductions in service fees have not adversely affected the
Company's profitability to date because the Company has been able to offset the
effect of these actions by controlling expenses, it is possible that future
service fee reductions could adversely affect the Company's operations.
Cost of services was $1,067.4 million for the six months ended June 30,
1998, compared to $808.0 million for the six months ended June 30, 1997,
representing an increase of $259.4 million, or 32.1%. Cost of services was 95.1%
and 95.0% of revenues for the six months ended June 30, 1998 and 1997,
respectively.
Salaries, wages and payroll taxes of worksite employees were $1,016.7
million for the six months ended June 30, 1998, compared to $768.1 million for
the six months ended June 30, 1997, representing an increase of $248.6 million,
or 32.4%.
12
<PAGE> 13
Benefits, workers' compensation, state unemployment taxes and other costs
were $50.7 million for the six months ended June 30, 1998, compared to $39.9
million for the six months ended June 30, 1997, representing an increase of
$10.8 million, or 27.1%.Benefits, workers' compensation, state unemployment
taxes and other costs were 4.5% of revenues for the six months ended June 30,
1998, compared to 4.7% for the six months ended June 30, 1997. The rate of
increase was lower than the growth in revenues due to: (i) a 2.7% reduction in
the workers' compensation premium rate implemented in the fourth quarter of 1997
and (ii) state unemployment tax rate reductions effective in 1998 for various
states.
Gross profit was $54.4 million for the six months ended June 30, 1998,
compared to $42.5 million for the six months ended June 30, 1997, representing
an increase of $11.9 million, or 28.0%. This increase is less than the increase
in revenues due to the Company's continued expansion into states with lower
margins than Florida, as well as competitive pricing in its current markets.
Gross profit was 4.9% of revenues for the six months ended June 30, 1998 and
5.0% of revenues for the six months ended June 30, 1997.
Operating expenses were $37.5 million for the six months ended June 30,
1998, compared to $33.4 million for the six months ended June 30, 1997,
representing an increase of $4.1 million, or 12.3%. This increase is less than
the growth in gross profit due to the Company's continued leverage of its
corporate management and operating infrastructure. Operating expenses were 3.3%
of revenues for the six months ended June 30, 1998, compared to 3.9% for the six
months ended June 30, 1997.
Salaries, wages and commissions were $24.2 million for the six months
ended June 30, 1998, compared to $20.7 million for the six months ended June 30,
1997, representing an increase of $3.5 million, or 16.9%. This increase was due
primarily to an increase in corporate personnel that support the Company's
expanded operations and additional sales staff located in its branch offices.
Salaries, wages and commissions were 2.2% of revenues for the six months ended
June 30, 1998, compared to 2.4% for the six months ended June 30, 1997.
Other general and administrative expenses were $10.6 million for the six
months ended June 30, 1998, compared to $10.9 million for the six months ended
June 30, 1997, representing a decrease of $.3 million, or (2.8%). Other general
and administrative expenses were .9% of revenues for the six months ended June
30, 1998, compared to 1.3% for the six months ended June 30, 1997.
Depreciation and amortization expenses increased by $.8 million for the
six months ended June 30, 1998 compared to the six months ended June 30, 1997,
representing an increase of 42.1%. 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 implementation 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 was minimal for the six months ended June 30, 1998,
compared to $1.4 million for the six months ended June 30, 1997, a decrease of
$1.4 million, or (100.0%). The decrease was due to the repayment of the
Company's long-term borrowings at the beginning of July 1997.
Interest income was $1.5 million for the six months ended June 30, 1998,
compared to $.1 million of interest income for the first half of 1997, an
increase of $1.4 million. Interest income resulted from the continued investment
of net proceeds from the Company's initial public offering in July 1997 and net
cash from operations.
Income tax expense of $6.9 million for the six months ended June 30, 1998
represented a provision at an effective tax rate of 37.5%. The Company operated
through limited partnerships at June 30, 1997, and accordingly, no provision for
income taxes was required.
Net income was $11.5 million for the six months ended June 30, 1998,
compared to net income of $7.7 million for the six months ended June 30, 1997,
representing an increase of $3.8 million or 49.4%.
Liquidity and Capital Resources
The Company had approximately $62.4 million in cash, cash equivalents,
restricted cash and marketable securities at June 30, 1998. 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. The Company currently believes that the
proceeds from the initial public offering in July 1997, the current cash flow
from operations, and its existing financing arrangements will be sufficient to
meet its 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
capital needs.
The Company had no long-term debt as of June 30, 1998. At June 30, 1998,
the Company had net working capital of $36.9 million, versus $24.4 million as of
December 31, 1997, representing an improvement of $12.5 million, or 51.4%.
13
<PAGE> 14
The Company's primary short-term capital 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. As of June 30,
1998, the Company had $8.5 million of restricted certificates of deposit, with
original maturities of less than one year, as collateral for certain standby
letters of credit issued in connection with the Company's health benefit plans.
Net cash provided by operating activities was $14.9 million for the six
months ended June 30, 1998 compared to net cash provided by operating activities
of $11.6 million for the six months ended June 30, 1997, representing an
increase of $3.3 million, or 28.4%. The increase was primarily due to the
increase in net income before income taxes for the six months ended June 30,
1998 compared to the six months ended June 30, 1997.
Net cash used in investing activities was $33.7 million for the six months
ended June 30, 1998. Of this amount, 30.6 million was for to the purchase of
interest-bearing marketable securities. During 1998, the Company anticipates
total capital expenditures of approximately $8 million, of which $3.1 million
has been spent year-to-date June 30, 1998.
Net cash provided by financing activities for the six months ended June
30, 1998 was $1.2 million, which primarily resulted from the exercise of
warrants in connection with the Company's secondary offering in the second
quarter.
The Company has a $20 million revolving credit facility available for
acquisitions. Borrowings under the credit facility bear interest at variable
rates based on the lenders' base rate or LIBOR, and are payable in December
2000. The Company has not borrowed under this credit facility.
In addition, the Company has an arrangement to enable it to defer up to
$10 million of payments to a vendor, which must be repaid by September 30,
1999. The Company has not deferred any payments under this arrangement.
Cautionary Note Regarding Forward-looking Statements
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), Staff Leasing, Inc. (the
"Company") is hereby providing cautionary statements identifying important
factors that could cause the Company's actual results to differ materially from
those projected in forward-looking statements (as such term is defined in the
Reform Act) made by or on behalf of the Company herein or orally, whether in
presentations, in response to questions or otherwise. Any statements that
express, or involve discussions as to, expectations, beliefs, plans, objectives,
assumptions or future events or performance (often, but not always, through the
use of words or phrases such as "will result," "are expected to," "will
continue," "estimated," and "projection") are not historical facts and may be
forward-looking and, accordingly, such 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. Such 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 which are described in further detail in the Company's
filings with the Securities and Exchange Commission.
14
<PAGE> 15
The Company cautions that the factors described above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
While the Company is involved from time to time in routine legal matters
incidental to its business, there are presently no material litigation
proceedings pending against the Company.
ITEM 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------
<S> <C>
27.2 (a) Financial Data Schedule for the quarter ended June 30, 1997
27.2 (b) Financial Data Schedule for the six months ended June 30, 1997
27.3 (a) Financial Data Schedule for the quarter ended June 30, 1998
27.3 (b) Financial Data Schedule for the six months ended June 30, 1998
</TABLE>
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
STAFF LEASING, INC.
Dated: August 12, 1998 BY /s/ Richard A. Goldman
- -------------------------------------------------------------------------------
Richard A. Goldman
President
Dated: August 12, 1998 BY /s/ John E. Panning
- -------------------------------------------------------------------------------
John E. Panning
Chief Financial Officer
(the Principal Financial and
Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF STAFF LEASING, INC. FOR THE THREE MONTHS
ENDED JUNE 30, 1997 INCLUDED IN FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 14
<SECURITIES> 0
<RECEIVABLES> 43,880
<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
0
<COMMON> 192
<OTHER-SE> (29,475)
<TOTAL-LIABILITY-AND-EQUITY> 82,116
<SALES> 448,075
<TOTAL-REVENUES> 448,075
<CGS> 0
<TOTAL-COSTS> 425,459
<OTHER-EXPENSES> 16,959
<LOSS-PROVISION> 280
<INTEREST-EXPENSE> 671
<INCOME-PRETAX> 4,956
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,956
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
<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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 14
<SECURITIES> 0
<RECEIVABLES> 43,880
<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
0
<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> 1,376
<INCOME-PRETAX> 7,667
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,667
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF STAFF LEASING, INC. FOR THE THREE MONTHS
ENDED JUNE 30, 1998 INCLUDED IN FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,375
<SECURITIES> 50,493
<RECEIVABLES> 57,583
<ALLOWANCES> 843
<INVENTORY> 0
<CURRENT-ASSETS> 126,185
<PP&E> 27,837
<DEPRECIATION> 7,484
<TOTAL-ASSETS> 164,391
<CURRENT-LIABILITIES> 89,279
<BONDS> 0
0
0
<COMMON> 237
<OTHER-SE> 70,687
<TOTAL-LIABILITY-AND-EQUITY> 164,391
<SALES> 582,211
<TOTAL-REVENUES> 582,211
<CGS> 0
<TOTAL-COSTS> 554,015
<OTHER-EXPENSES> 19,159
<LOSS-PROVISION> 220
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 9,846
<INCOME-TAX> 3,692
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,154
<EPS-PRIMARY> .26
<EPS-DILUTED> .25
</TABLE>
<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, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,375
<SECURITIES> 50,493
<RECEIVABLES> 57,583
<ALLOWANCES> 843
<INVENTORY> 0
<CURRENT-ASSETS> 126,185
<PP&E> 27,837
<DEPRECIATION> 7,484
<TOTAL-ASSETS> 164,391
<CURRENT-LIABILITIES> 89,279
<BONDS> 0
0
0
<COMMON> 237
<OTHER-SE> 70,687
<TOTAL-LIABILITY-AND-EQUITY> 164,391
<SALES> 1,121,827
<TOTAL-REVENUES> 1,121,827
<CGS> 0
<TOTAL-COSTS> 1,067,399
<OTHER-EXPENSES> 37,504
<LOSS-PROVISION> 340
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> 18,408
<INCOME-TAX> 6,903
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,505
<EPS-PRIMARY> .49
<EPS-DILUTED> .47
</TABLE>
