<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 March 31, 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 May 8, 1998
--------------------- -----------------------------
Par value $0.01 per share 23,683,067
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 Financial Statements....................................... 3
Unaudited Consolidated Statements of Operations for the
Three months ended March 31, 1997 and 1998 ................... 3
Consolidated Balance Sheets as of December 31, 1997
and March 31, 1998 ........................................... 4
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the three months ended March 31, 1998 ............. 5
Unaudited Consolidated Statements of Cash Flows for the
Three months ended March 31, 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.......................................... 14
ITEM 2 Changes in Securities and Use of Proceeds.................. 14
ITEM 6 Exhibits and Reports on Form 8-K........................... 14
SIGNATURES .............................................................. 15
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
1997 1998
--------- ---------
(in 000's, except
per share data)
---------------------------
<S> <C> <C>
Revenues $ 402,455 $ 539,616
--------- ---------
Cost of services:
Salaries, wages and payroll taxes 362,837 488,286
Benefits, workers' compensation, state
unemployment taxes and other costs 19,723 25,097
--------- ---------
Total cost of services 382,560 513,383
--------- ---------
Gross profit 19,895 26,233
--------- ---------
Operating expenses:
Salaries, wages and commissions 10,239 11,760
Other general and administrative 5,387 5,281
Depreciation and amortization 845 1,305
--------- ---------
Total operating expenses 16,471 18,346
--------- ---------
Operating income 3,424 7,887
Interest income 31 706
Interest expense (706) (31)
Other income (expense) (38) --
--------- ---------
Income before income tax provision 2,711 8,562
Income tax provision -- 3,211
--------- ---------
Net income $ 2,711 $ 5,351
========= =========
Return on preferred interests $ 655 $ --
========= =========
Net income attributable to common shareholders $ 2,065 $ 5,351
========= =========
Net income per share attributable to common shareholders
- Basic $ .10 $ .23
========= =========
- Diluted $ .10 $ .22
========= =========
Weighted average common shares outstanding
- Basic 19,614 23,509
========= =========
- Diluted 20,391 24,653
========= =========
</TABLE>
See notes to consolidated financial statements.
3
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STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
(UNAUDITED)
---------------- -------------
(in $000's, except share and per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,051 $ 24,893
Certificates of deposit - restricted 8,406 8,526
Marketable securities 19,910 25,100
Accounts receivable, net of allowance for
doubtful accounts of $835 and $953, respectively 34,814 57,907
Deferred income tax asset 4,494 3,157
Other current assets 1,154 1,974
------------- -------------
Total current assets 89,829 121,557
Property and equipment, net 19,487 19,708
Goodwill, net of accumulated amortization
of $3,046 and $3,229, respectively 11,625 11,441
Deferred income tax asset 6,635 6,509
Other assets, net of accumulated amortization
of $173 and $193, respectively 242 219
------------- -------------
$ 127,818 $ 159,434
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued insurance premiums and health
reserves $ 19,960 $ 23,621
Accrued payroll and payroll taxes 36,837 57,319
Accounts payable and other accrued liabilities 6,535 6,154
Income taxes payable -- 1,651
Customer deposits and prepayments 2,121 2,634
------------- -------------
Total current liabilities 65,453 91,379
Deferred income taxes payable 2,699 2,793
Other long-term liabilities 1,518 1,524
Commitments and contingencies (See notes)
Shareholders' equity :
Common stock, $.01 par value 235 235
Shares authorized: 100,000,000
Shares issued and outstanding:
December 31, 1997 - 23,505,358
March 31, 1998 - 23,510,358
Additional paid in capital 65,877 66,071
Accumulated deficit (7,344) (1,993)
Other (620) (575)
------------- -------------
Total shareholders' equity 58,148 63,738
------------- -------------
$ 127,818 $ 159,434
============= =============
</TABLE>
See notes to consolidated financial statements.
4
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STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
UNAUDITED
<TABLE>
<CAPTION>
Common Additional
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 (5,000) -- (23) (23)
Issuance of common stock 10,000 -- 219 219
Other (2) 39 6 43
Net income 5,351 5,351
----------- --------- ---------- ----------- --------- ---------- ----------
Balance, March 31, 1998 23,510,358 $ 235 $66,071 $(392) $(183) $(1,993) $63,738
=========== ========= ========== =========== ========= ========== ==========
</TABLE>
See notes to consolidated financial statements.
5
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STAFF LEASING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
1997 1998
--------- ---------
(in $000's)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,711 $ 5,351
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 845 1,305
Decrease in deferred tax assets -- 1,558
Provision for bad debts 180 120
Amortization of debt issuance costs 125 --
Other 20 33
Changes in operating working capital:
Increase in certificates of deposit - restricted -- (120)
Increase in accounts receivable (4,046) (23,213)
Increase in other current assets (1,218) (820)
Decrease in accounts payable and other accrued
liabilities (3,915) (381)
Increase in accrued payroll and payroll taxes 4,427 20,482
Increase in accrued insurance premiums and health
reserves 5,494 3,661
Increase in income taxes payable -- 1,651
(Decrease) increase in customer deposits and
prepayments (5) 513
(Increase) decrease in other long-term assets (95) 3
(Decrease) increase in other long-term
liabilities (38) 6
-------- --------
Net cash provided by operating activities 4,485 10,149
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) repurchase of marketable securities, net -- (5,190)
Capital expenditures (858) (1,323)
-------- --------
Net cash used in investing activities (858) (6,513)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions, net of shareholder notes receivable and
issuance costs 435 --
Proceeds from sales of common shares -- 219
Repayment of shareholders' notes receivable -- 10
Repurchase and retirement of common stock -- (23)
Repurchase of shareholders' interests, including fixed return (78) --
Repayments of capital leases (505) --
Repayments of long-term debt (1,250) --
-------- --------
Net cash provided by (used in) financing activities (1,398) 206
-------- --------
Net increase in cash 2,229 3,842
Cash and cash equivalents - beginning of period 12 21,051
-------- --------
Cash and cash equivalents - end of period $ 2,241 $ 24,893
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 498 $ 10
======== ========
</TABLE>
See notes to consolidated financial statements.
6
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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 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
$1,300 from the exercise of the warrants and will pay approximately $375 of
expenses associated with this secondary offering.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
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<S> <C> <C>
Billed to clients ...................................... $19,888 $ 7,535
Unbilled revenues ...................................... 15,761 51,325
------- -------
35,649 58,860
Less: Allowance for doubtful accounts............ (835) (953)
------- -------
$34,814 $57,907
======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment (at cost) was comprised of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
----------- --------
<S> <C> <C>
Leasehold improvements.................................... $ 1,318 $1,335
Furniture and fixtures.................................... 1,456 1,520
Vehicles.................................................. 120 120
Equipment................................................. 1,367 1,376
Computer hardware and software............................ 20,510 21,738
------- -------
Total property and equipment.............................. 24,771 26,089
Less accumulated depreciation....................... (5,284) (6,381)
------- -------
$19,487 $19,708
======= =======
</TABLE>
For the three months ended March 31, 1998 depreciation expense was $1,102.
7
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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 at the end of
1998. For the three months ended March 31, 1998, $91 of expense was recorded
under this agreement. In addition, $16 of lease expense related to certain
automobile leases was paid to an entity owned by this same shareholder.
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 months ended March 31, 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. EARNINGS PER SHARE (EPS)
The number of potential common stock equivalents included in the diluted
weighted average shares outstanding for the three months ended March 31, 1997
and 1998, related to warrants issued in connection with the Company's
reorganization and initial public offering, was 776,352 and 958,917,
respectively. Also included as potential common stock equivalents in diluted
weighted average shares outstanding were options granted in connection with the
Company's stock option plan, which totaled 184,936 for the three months ended
March 31, 1998.
8
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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 three months ending March 31, 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 March 31, 1997:
- ------------------------------------------
Net income $ 2,711
Less: return on preferred interests (655)
----------
Basic EPS :
- -----------
Net income attributable to common
Shareholders $ 2,056 19,614 $ .10
========== ======
Effect of dilutive securities:
Warrants 777
------------
Diluted EPS :
Net income attributable to common
shareholders $ 2,056 20,391 $ .10
========== ============ ======
For the Three Months Ended March 31, 1998:
- ------------------------------------------
Basic EPS :
- ----------
Net income $ 5,351 23,509 $ .23
========== ======
Effect of dilutive securities:
Warrants 959
Options 185
------------
Diluted EPS :
- -------------
Net income attributable to common
shareholders $ 5,351 24,653 $ .22
========== ============ ======
</TABLE>
9
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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 March 31, 1998, the Company served over 9,600 clients with
approximately 114,000 worksite employees. With 38 branches located in Florida,
Texas, Georgia, Arizona and Minnesota, 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 future revenue growth will result in increased net income, as the
Company's fixed operating expenses are leveraged over a larger revenue base.
INCOME TAXES. The Company's effective tax rate for the three months ended
March 31, 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
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RESULTS OF OPERATIONS
The following table presents the Company's results of operations for the
three months ended March 31, 1997 and 1998, expressed as a percentage of
revenues:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1998
---- ----
<S> <C> <C>
Revenues................................... 100.0% 100.0%
Cost of services:
Salaries, wages and payroll taxes........ 90.2 90.5
Benefits, workers' compensation, state
unemployment taxes and other costs.... 4.9 4.6
----- -----
Total cost of services........... 95.1 95.1
----- -----
Gross profit............................... 4.9 4.9
----- -----
Operating expenses:
Salaries, wages and commissions.......... 2.6 2.2
Other general and administrative......... 1.3 1.0
Depreciation and amortization............ .2 .2
----- -----
Total operating costs............ 4.1 3.4
----- -----
Operating (loss) income.................... .8 1.5
Interest income ........................... - .1
Interest expense........................... (.2) --
----- -----
Income (loss) before income taxes.......... .6 1.6
Income tax provision............. - .6
----- -----
Net income (loss).......................... .6 1.0
===== =====
</TABLE>
Three Months Ended March 31, 1998 Compared to Year Ended March 31, 1997
Revenues were $539.6 million for the three months ended March 31, 1998,
compared to $402.5 million for the three months ended March 31, 1997,
representing an increase of $137.1 million, or 34.1%. This increase was due
primarily to an increased number of clients and worksite employees. From March
31, 1997 to March 31, 1998, the number of clients increased 19.6% from 8,073 to
9,659. The number of worksite employees increased 23.2%, from 92,463 to 113,880.
Revenue growth exceeded headcount growth by 10.9%, 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. 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. The increase in the number of 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
first quarter of 1998. No new branches were opened in the first quarter of 1997.
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 $513.4 million for the three months ended March 31,
1998, compared to $382.6 million for the three months ended March 31, 1997,
representing an increase of $130.8 million, or 34.2%. Cost of services was 95.1%
of revenues for the three months ended March 31, 1998 and 1997.
Salaries, wages and payroll taxes of worksite employees were $488.3 million
for the three months ended March 31, 1998, compared to $362.8 million for the
three months ended March 31, 1997, representing an increase of $125.5 million,
or 34.6%.
Benefits, workers' compensation, state unemployment taxes and other costs
were $25.1 million for the three months ended March 31, 1998, compared to $19.7
million for the three months ended March 31, 1997, representing an increase of
$5.4 million, or 27.4%. Benefits, workers' compensation, state unemployment
taxes and other costs were 4.6% of revenues for the three months ended March 31,
1998, compared to 4.9% for the three months ended March 31, 1997. The rate of
increase was lower than the growth in revenues due to: (i) a 2.7% reduction in
11
<PAGE> 12
the workers' compensation premium rate implemented in the fourth quarter of
1997, primarily as a result of the renegotiation of the workers' compensation
policy; and (ii) a reduction in the health benefit plan subsidy for the three
months ended March 31, 1998 over March 31, 1997.
Gross profit was $26.2 million for the three months ended March 31, 1998,
compared to $19.9 million for the three months ended March 31, 1997,
representing an increase of $6.3 million, or 31.7%. 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 three months ended March 31,
1998 and 1997.
Operating expenses were $18.3 million for the three months ended March 31,
1998, compared to $16.5 million for the three months ended March 31, 1997,
representing an increase of $1.8 million, or 10.9%. This increase is less than
the growth in gross profit due to the Company's continued leverage of its
corporate management and decreased reliance on outside vendors and consultants.
Operating expenses were 3.4% of revenues for the three months ended March 31,
1998, compared to 4.1% for the three months ended March 31, 1997.
Salaries, wages and commissions were $11.8 million for the three months
ended March 31, 1998, compared to $10.2 million for the three months ended March
31, 1997, representing an increase of $1.6 million, or 15.7%. 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 three months ended
March 31, 1998, compared to 2.6% for the three months ended March 31, 1997.
Other general and administrative expenses were $5.3 million for the three
months ended March 31, 1998, compared to $5.4 million for the three months ended
March 31, 1997, representing a decrease of $.1 million, or (1.9%). Other general
and administrative expenses were 1.0% of revenues for the three months ended
March 31, 1998, compared to 1.3% for the three months ended March 31, 1997.
Depreciation and amortization expenses increased by $.5 million for the
three months ended March 31, 1998 compared to the three months ended March 31,
1997, representing an increase of 62.5%. 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 March 31, 1998,
compared to $.7 million for the three months ended March 31, 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 $.7 million for the three months ended March 31, 1998,
compared to an absence of interest income in the first quarter of 1997. Interest
income earned was due to 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 $3.2 million for the three months ended March 31,
1998 represented a provision at an effective tax rate of 37.5%. The Company
operated through limited partnerships at March 31, 1997, and accordingly, no
provision for income taxes was required.
Net income was $5.4 million for the three months ended March 31, 1998,
compared to net income of $2.7 million for the three months ended March 31,
1997, representing an increase of $2.7 million or 100.0%.
Liquidity and Capital Resources
The Company had approximately $58.5 million in cash, cash equivalents,
restricted cash and marketable securities at March 31, 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.
12
<PAGE> 13
The Company had no long-term debt as of March 31, 1998. At March 31, 1998,
the Company had net working capital of $30.2 million, versus $24.4 million as of
December 31, 1997, representing an improvement of $5.8 million, or 23.8%.
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 March 31, 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 $10.1 million for the three
months ended March 31, 1998 compared to net cash provided by operating
activities of $4.5 million for the three months ended March 31, 1997,
representing an increase of $5.6 million, or 124.4%. The increase was primarily
due to the increase in net income before income taxes for the three months ended
March 31, 1998 compared to the three months ended March 31, 1997.
Net cash used in investing activities was $6.5 million for the three months
ended March 31, 1998, versus $.9 million the three months ended March 31, 1997.
The increase of $5.6 million was due to the purchase of marketable securities
and investments in the Company's facilities and technology infrastructure.
During 1998, the Company anticipates total capital expenditures of approximately
$8 million.
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.
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
13
<PAGE> 14
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
The Company is not a party to any material pending legal proceedings other
than routine legal matters incidental to its business. The Company believes that
the ultimate resolution of these matters would not have a material adverse
effect on its financial condition or results of operations.
ITEM 2. Changes in Securities and Use of Proceeds
In February 1998, Mr. E. Kirk Shelton acquired 10,000 shares of Common
Stock from the Company. Mr. Shelton paid a price per share of $21.89, which was
equal to 85% of the closing price ($25.75) of the Company's Common Stock on
February 23, 1998, the date the sale was approved by the Board of Directors of
the Company. The Company sold the shares to Mr. Shelton upon reliance on
exemptions from registration provided under Section 4 of the Securities Act of
1933.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
14
<PAGE> 15
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: May 15, 1998 BY /s/ Richard A. Goldman
- -----------------------------------------------------------------------------
Richard A. Goldman
President
Dated: May 15, 1998 BY /s/ John E. Panning
- -----------------------------------------------------------------------------
John E. Panning
Chief Financial Officer
(the Principal Financial and
Accounting Officer)
15
<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 MARCH 31, 1998 INCLUDED IN FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 24,893
<SECURITIES> 25,100
<RECEIVABLES> 57,907
<ALLOWANCES> 953
<INVENTORY> 0
<CURRENT-ASSETS> 121,557
<PP&E> 26,089
<DEPRECIATION> 6,381
<TOTAL-ASSETS> 159,434
<CURRENT-LIABILITIES> 91,379
<BONDS> 0
0
0
<COMMON> 235
<OTHER-SE> 63,503
<TOTAL-LIABILITY-AND-EQUITY> 159,434
<SALES> 539,616
<TOTAL-REVENUES> 539,616
<CGS> 0
<TOTAL-COSTS> 513,383
<OTHER-EXPENSES> 18,346
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 8,562
<INCOME-TAX> 3,211
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,351
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
</TABLE>
