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 September 30, 1999.
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 NOVEMBER 11, 1999
--------------------- -----------------------------------
Par value $0.01 per share 21,709,542
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Financial Statements
Condensed Consolidated Income Statements (unaudited)for the
Three and Nine Months Ended September 30, 1998 and 1999 ...........3
Condensed Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999 (unaudited) ................................4
Condensed Consolidated Statement of Changes in Shareholders'
Equity (unaudited) for the Nine Months Ended September 30, 1999 .....5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 30, 1998 and 1999 .............6
Notes to Condensed Consolidated Financial Statements (unaudited) ..........7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ...14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................14
ITEM 5. Other Information ............................................14
ITEM 6. Exhibits and Reports on Form 8-K .............................15
SIGNATURES ...................................................................16
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STAFF LEASING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
UNAUDITED
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
(in $000's, except share and per share data)
<S> <C> <C> <C> <C>
Revenues $ 607,342 $ 680,502 $ 1,729,169 $ 1,992,108
----------- ----------- ----------- -----------
Cost of services:
Salaries, wages and payroll taxes 551,885 619,858 1,568,875 1,811,232
Benefits, workers' compensation, state unemployment
taxes and other costs 26,681 27,211 77,089 86,110
----------- ----------- ----------- -----------
Total cost of services 578,566 647,069 1,645,964 1,897,342
----------- ----------- ----------- -----------
Gross profit 28,776 33,433 83,205 94,766
----------- ----------- ----------- -----------
Operating expenses:
Salaries, wages and commissions 12,858 15,546 37,115 43,994
Other general and administrative 5,407 6,550 15,973 19,320
Depreciation and amortization 1,525 1,988 4,207 5,556
----------- ----------- ----------- -----------
Total operating expenses 19,790 24,084 57,295 68,870
----------- ----------- ----------- -----------
Operating income 8,986 9,349 25,910 25,896
Interest income 909 958 2,441 2,329
Interest expense (20) -- (69) (21)
Other non operating expense -- -- -- (850)
----------- ----------- ----------- -----------
Income before income tax provision 9,875 10,307 28,282 27,354
Income tax provision 3,701 3,897 10,604 10,341
----------- ----------- ----------- -----------
Net income $ 6,174 $ 6,410 $ 17,678 $ 17,013
=========== =========== =========== ===========
Net income per share
- Basic $ .26 $ .30 $ .75 $ .78
- Diluted $ .26 $ .29 $ .72 $ .76
=========== =========== =========== ===========
Weighted average shares outstanding
- Basic 23,321 21,725 23,488 21,802
- Diluted 24,133 22,147 24,478 22,284
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
STAFF LEASING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
--------------------------------------------
(in $000's, except share and per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,412 $ 17,874
Certificates of deposit - restricted 8,379 7,781
Marketable securities 32,022 46,251
Accounts receivable, net of allowance for
doubtful accounts of $802 and $934, respectively 38,637 61,676
Other current assets 6,182 3,929
--------- ---------
Total current assets 100,632 137,511
Property and equipment, net 25,071 26,287
Goodwill, net of accumulated amortization
of $3,779 and $4,329 respectively 10,892 10,342
Deferred income tax asset 2,898 2,676
Other assets, net of accumulated amortization
of $245 and $0, respectively 285 180
--------- ---------
$ 139,778 $ 176,996
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued insurance premiums and health $ 22,757 $ 22,577
Accrued payroll and payroll taxes 38,748 61,818
Accounts payable and other accrued liabilities 5,515 4,477
Income taxes payable -- 3,111
Deferred income tax liabilities 5,729 5,089
Customer deposits and prepayments 2,741 2,594
--------- ---------
Total current liabilities 75,490 99,666
Long-term liabilities 1,499 1,254
Commitments and contingencies (See notes)
Shareholders' equity :
Common stock, $.01 par value 221 217
Shares authorized:
Shares issued and outstanding: 100,000,000
December 31, 1998 - 33,131,267
September 30, 1999 - 31,709,542
Additional paid in capital 46,804 42,987
Retained earnings 16,051 33,064
Other (287) (192)
--------- ---------
Total shareholders' equity 62,789 76,076
--------- ---------
$ 139,778 $ 176,996
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
STAFF LEASING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
UNAUDITED
ACCUMULATED
COMMON ADDITIONAL DEFERRED SHARE- OTHER
STOCK COMMON PAID IN COMPEN- HOLDER COMPREHENSIVE RETAINED
(SHARES) STOCK CAPITAL SATION NOTES INCOME EARNINGS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in $000's except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 22,121,267 $ 221 $ 46,804 $ (282) $ (61) $ 56 $ 16,051 $ 62,789
Repurchase of common stock (411,725) (4) (4,287) (4,291)
Tax benefit of restricted
stock plan vesting 470 470
Other 214 5 219
Unrealized loss on marketable
securities,
net of tax (124)
Net income 17,013
Total comprehensive income 16,889
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1999 21,709,542 $ 217 $ 42,987 $ (68) $ (56) $ (68) $ 33,064 $ 76,076
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
STAFF LEASING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1999
-------- --------
(in $000's)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,678 $ 17,013
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,207 5,556
Deferred taxes, net 9,292 126
Provision for bad debts 500 425
Other 117 71
Changes in operating working capital:
(Increase) decrease in certificates of deposit -
restricted 85 598
Increase in accounts receivable (28,872) (23,464)
(Increase) decrease in other current assets (2,891) 2,253
(Decrease) in accounts payable and other accrued
liabilities (1,388) (1,038)
Increase in accrued payroll and payroll taxes 22,449 23,070
Increase in accrued insurance premiums and health
reserves 3,088 (180)
Increase (decrease) in income taxes payable -- 3,111
Increase (decrease) in customer deposits and
prepayments 651 (147)
Increase in other long-term assets (159) 105
Increase (decrease) in long term liabilities 8 (245)
-------- --------
Net cash provided by operating activities 24,765 27,254
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities, net (21,900) (14,450)
Capital expenditures (7,809) (6,197)
-------- --------
Net cash used in investing activities (29,709) (20,647)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common shares 1,094 --
Repayment of shareholders' notes receivable 134 7
Repurchase and retirement of common stock (17,318) (4,152)
-------- --------
Net cash provided by (used in) financing activities (16,090) (4,145)
-------- --------
Net increase (decrease) in cash (21,034) 2,462
Cash and cash equivalents - beginning of period 21,051 15,412
======== ========
Cash and cash equivalents - end of period $ 17 $ 17,874
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 2,894 $ 5,200
======== ========
Interest paid $ 56 $ 21
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
STAFF LEASING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(in $000's, except share and per share data)
1. GENERAL
The accompanying unaudited condensed 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 condensed consolidated financial statements and
notes thereto for the year ended December 31, 1998, 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 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. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------- ---------
<S> <C> <C>
Billed to clients ...................................... $ 15,391 $ 9,936
Unbilled revenues ...................................... 24,048 52,674
-------- ---------
39,439 62,610
Less: Allowance for doubtful accounts............ (802) (934)
-------- ---------
$ 38,637 $ 61,676
======== =========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment (at cost) was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------- ---------
<S> <C> <C>
Leasehold improvements .................................. $ 1,484 $ 1,725
Furniture and fixtures .................................. 2,508 2,806
Vehicles ................................................ 103 103
Equipment ............................................... 1,799 1,730
Computer hardware and software .......................... 29,490 35,237
-------- --------
Total property and equipment ............................ 35,384 41,601
Less accumulated depreciation ..................... (10,313) (15,314)
-------- --------
$ 25,071 $ 26,287
======== ========
</TABLE>
For the nine months ended September 30, 1999 depreciation expense was $5,001.
7
<PAGE>
STAFF LEASING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in $000's, except share and per share data)
4. 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.
On April 30, 1999, a shareholder of the Company brought a class action
alleging that the directors and senior officers of the Company breached their
fiduciary duty to shareholders in order to entrench themselves in the management
of the Company by failing to pursue a proposal from Paribas Principal Partners
to acquire the Company. Plaintiff seeks injunctive relief and unspecified
damages including attorneys' and experts' fees. The Company believes the lawsuit
is wholly without merit.
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, 1998 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.
5. EQUITY
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. In 1998, the Company repurchased 1.6 million shares of
its common stock for a total cost of $21.0 million. In January 1999, the
Company's board of Directors increased this share repurchase plan to three
million shares. In the nine months ending September 30, 1999, the Company
repurchased 411,725 shares at a cost of $4.3 million.
6. 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 nine months ended September 30, 1999 was 37.8%.
7. EARNINGS PER SHARE (EPS)
The number of common stock equivalents included in the diluted weighted
average shares outstanding for the three and nine months ended September 30,
1998 and 1999, related to warrants issued in connection with the Company's
reorganization and initial public offering, was 741,792 and 825,188 for the
three and nine months ended September 30, 1998, respectively, and totaled
421,518 and 462,465 for the three and nine months ended September 30, 1999,
respectively. Also included as common stock equivalents for diluted weighted
average shares outstanding were options granted in connection with the Company's
stock option plan, which totaled 70,099 and 164,922 for the three and nine
months ended September 30, 1998, respectively, and 449 and 19,326 for the three
and nine months ended September 30, 1999, respectively.
8
<PAGE>
STAFF LEASING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 and nine months ended September 30, 1998 and 1999 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 SEPTEMBER 30, 1998:
BASIC EPS :
Net income $ 6,174 23,321 $ .26
DILUTED EPS :
Effect of dilutive securities:
Warrants 742
Options 70
-----------
Net income $ 6,174 24,133 $ .26
========== =========== ===========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998:
BASIC EPS :
Net income $ 17,679 23,488 $ .75
DILUTED EPS :
Effect of dilutive securities:
Warrants 825
Options 165
-----------
Net income $ 17,679 24,478 $ .72
========== =========== ===========
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999:
BASIC EPS :
Net income $ 6,410 21,725 $ .30
DILUTED EPS :
Effect of dilutive securities:
Warrants 422
Options --
-----------
Net income $ 6,410 22,147 $ .29
========== =========== ===========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
BASIC EPS :
Net income $ 17,013 21,802 $ .78
DILUTED EPS :
Effect of dilutive securities:
Warrants 463
Options 19
-----------
Net income $ 17,013 22,284 $ .76
========== =========== ===========
</TABLE>
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents the Company's results of operations for the
three and nine months ended September 30, 1998 and 1999, expressed as a
percentage of revenues:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues ............................... 100.0% 100.0% 100.0% 100.0%
Cost of services:
Salaries, wages and payroll taxes .... 90.9 91.1 90.7 90.9
Benefits, workers' compensation, state
unemployment taxes and other costs 4.4 4.0 4.5 4.3
------- ------- ------- -------
Total cost of services ....... 95.3 95.1 95.2 95.2
------- ------- ------- -------
Gross profit ........................... 4.7 4.9 4.8 4.8
------- ------- ------- -------
Operating expenses:
Salaries, wages and commissions ...... 2.1 2.3 2.2 2.2
Other general and administrative ..... .9 1.0 .9 1.0
Depreciation and amortization ........ .2 .3 .2 .3
------- ------- ------- -------
Total operating costs .................. 3.2 3.5 3.3 3.5
------- ------- ------- -------
Operating income ....................... 1.5 1.4 1.5 1.3
Interest income ........................ .1 .1 .1 .1
Other expense .......................... -- -- -- --
------- ------- ------- -------
Income before income taxes ............. 1.6 1.5 1.6 1.4
Income tax provision ................... .6 .6 .6 .5
------- ------- ------- -------
Net income ............................. 1.0 .9 1.0 .9
======= ======= ======= =======
</TABLE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenues were $680.5 million for the three months ended September 30,
1999, compared to $607.3 million for the three months ended September 30, 1998,
representing an increase of $73.2 million, or 12.1%. This increase was due
primarily to an increased number of clients and worksite employees. From
September 30, 1998 to September 30, 1999, the number of clients increased 1.7%
from 10,406 to 10,581. The number of worksite employees increased 5.8%, from
122,809 to 129,900. Revenue growth exceeded headcount growth by 6.3% due
primarily to wage inflation and expansion in higher wage markets. 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 three new sales offices in the third quarter of
1999. Two new sales offices were opened in the third quarter of 1998.
Cost of services was $647.1 million for the three months ended September
30, 1999, compared to $578.6 million for the three months ended September 30,
1998, representing an increase of $68.5 million, or 11.8%. Cost of services was
95.1% and 95.3% of revenues for the three months ended September 30, 1999 and
1998, respectively.
Salaries, wages and payroll taxes of worksite employees were $619.9
million for the three months ended September 30, 1999, compared to $551.9
million for the three months ended September 30, 1998, representing an increase
of $68.0 million, or 12.3%.
Benefits, workers' compensation, state unemployment taxes and other costs
were $27.2 million for the three months ended September 30, 1999, compared to
$26.7 million for the three months ended September 30, 1998, representing an
increase of $.5 million, or 1.9%. Benefits, workers' compensation, state
unemployment taxes and other costs were 4.0% of revenues for the three months
ended September 30, 1999, compared to 4.4% for the three months ended September
30, 1998. In third quarter 1999, the Company recorded a $2.2 million
10
<PAGE>
reduction in the estimate of prior year health care reserves. In the third
quarter 1998, the Company recorded a $.7 million reduction in the estimate of
1997 health care reserves.
Gross profit was $33.4 million for the three months ended September 30,
1999, compared to $28.8 million for the three months ended September 30, 1998,
representing an increase of $4.6 million, or 16.0%. Gross profit was 4.9% and
4.7% of revenues for the three months ended September 30, 1999 and 1998,
respectively.
Operating expenses were $24.1 million for the three months ended September
30, 1999, compared to $19.8 million for the three months ended September 30,
1998, representing an increase of $4.3 million, or 21.7%. Operating expenses
were 3.5% of revenues for the three months ended September 30, 1999, compared to
3.2% for the three months ended September 30, 1998.
Salaries, wages and commissions were $15.5 million for the three months
ended September 30, 1999, compared to $12.9 million for the three months ended
September 30, 1998, representing an increase of $2.6 million, or 20.2%. 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 2.3% of revenues for the
three months ended September 30, 1999, compared to 2.1% for the three months
ended September 30, 1998.
Other general and administrative expenses were $6.6 million for the three
months ended September 30, 1999, compared to $5.4 million for the three months
ended September 30, 1998, representing a increase of $1.2 million, or 22.2%.
Other general and administrative expenses were 1.0% of revenues for the three
months ended September 30, 1999, compared to .9% for the three months ended
September 30, 1998.
Depreciation and amortization expenses increased by $.5 million for the
three months ended September 30, 1999 compared to the three months ended
September 30, 1998, representing an increase of 30.4%. This increase was
primarily the result of the Company's investment in management information
systems.
Interest income was $1.0 million for the three months ended September 30,
1999 and $.9 million for the three months ended September 30, 1998.
Income tax expense of $3.9 million for the three months ended September
30, 1999 represented a provision at an effective tax rate of 37.8% compared to
$3.7 million for the three months ended September 30, 1998 at an effective tax
rate of 37.5%. The Company's effective tax rate for financial reporting purposes
differs from the statutory federal rate of 35% primarily because of state income
taxes and tax credits.
Net income was $6.4 million for the three months ended September 30, 1999,
compared to net income of $6.2 million for the three months ended September 30,
1998, representing a increase of $.2 million or 3.2%.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues were $1,992.1 million for the nine months ended September 30,
1999, compared to $1,729.2 million for the nine months ended September 30, 1998,
representing an increase of $262.9 million, or 15.2%. This increase was due
primarily to an increased number of clients and worksite employees. From
September 30, 1998 to September 30, 1999, the number of clients increased 1.7%
from 10,406 to 10,581. The number of worksite employees increased 5.8%, from
122,809 to 129,900. Revenue growth exceeded headcount growth by 9.4%, due in
part, to the effects of wage inflation and higher average wages in the Company's
expansion states.
Cost of services was $1,897.3 million for the nine months ended September
30, 1999, compared to $1,646.0 million for the nine months ended September 30,
1998, representing an increase of $251.3 million, or 15.3%. Cost of services was
95.2% and 95.2% of revenues for the nine months ended September 30, 1999 and
1998, respectively.
Salaries, wages and payroll taxes of worksite employees were $1,811.2
million for the nine months ended September 30, 1999, compared to $1,568.8
million for the nine months ended September 30, 1998, representing an increase
of $242.4 million, or 15.5%.
Benefits, workers' compensation, state unemployment taxes and other costs
were $86.1 million for the nine months ended September 30, 1999, compared to
$77.1 million for the nine months ended September 30, 1998, representing an
increase of $9.0 million, or 11.7%. Benefits, workers' compensation, state
unemployment taxes and other costs were 4.3% of revenues for the nine months
ended September 30, 1999 and 4.5% for the nine months ended September 30, 1998.
In 1999, the Company recorded $2.2 million due to a reduction in the estimate of
prior year health care reserves. In 1998, the Company recorded $1.4 million due
to a reduction in the estimate of 1997 health care reserves.
11
<PAGE>
Gross profit was $94.8 million for the nine months ended September 30,
1999, compared to $83.2 million for the nine months ended September 30, 1998,
representing an increase of $11.6 million, or 13.9%. Gross profit was 4.8% of
revenues for the nine months ended September 30, 1999 and 4.8% of revenues for
the nine months ended September 30, 1998.
Operating expenses were $68.9 million for the nine months ended September
30, 1999, compared to $57.3 million for the nine months ended September 30,
1998, representing an increase of $11.6 million, or 20.2%. Operating expenses
were 3.5% of revenues for the nine months ended September 30, 1999, compared to
3.3% for the nine months ended September 30, 1998.
Salaries, wages and commissions were $44.0 million for the nine months
ended September 30, 1999, compared to $37.1 million for the nine months ended
September 30, 1998, representing an increase of $6.9 million, or 18.6%. 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
nine months ended September 30, 1999 and 2.2% for the nine months ended
September 30, 1998.
Other general and administrative expenses were $19.3 million for the nine
months ended September 30, 1999, compared to $16.0 million for the nine months
ended September 30, 1998, representing an increase of $3.3 million, or 20.6%.
Other general and administrative expenses were 1.0% of revenues for the nine
months ended September 30, 1999, compared to .9% for the nine months ended
September 30, 1998.
Depreciation and amortization expenses increased by $1.3 million for the
nine months ended September 30, 1999 compared to the nine months ended September
30, 1998, representing an increase of 32.1%. This increase was primarily the
result of the Company's investment in management information systems.
Interest income was $2.3 million for the nine months ended September 30,
1999, compared to $2.4 million of interest income for the first half of 1998, a
decrease of $.1 million.
Other expense was $.9 million for the nine months ended September 30, 1999
compared to $0 million for the nine months ended September 30, 1998. Other
expense in 1999 was related to an acquisition proposal received from Paribas
Principal Partners in April 1999 and reserves for a shareholder lawsuit filed in
the second quarter of 1999.
Income tax expense of $10.3 million for the nine months ended September
30, 1999 represented a provision at an effective tax rate of 37.8% compared to
$10.6 million for the nine months ended September 30, 1998 at an effective tax
rate of 37.5%.
Net income was $17.0 million for the nine months ended September 30, 1999,
compared to net income of $17.7 million for the nine months ended September 30,
1998, representing a decrease of $.7 million or (4.0%).
Liquidity and Capital Resources
The Company had approximately $71.9 million in cash, cash equivalents,
restricted cash and marketable securities at September 30, 1999.
The Company had no long-term debt as of September 30, 1999. At September
30, 1999, the Company had net working capital of $37.8 million, versus $25.1
million as of December 31, 1998, representing an improvement of $12.7 million,
or 50.6%. In July 1999, the Company entered into an agreement with NationsBank
for a $10 million revolving line of credit to provide for intraday working
capital needs. Borrowings under the credit facility bear interest at variable
rates based on the lenders' base rate or LIBOR. No borrowings have been made
against the credit line.
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 September
30, 1999, the Company had $7.8 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 $27.3 million for the nine
months ended September 30, 1999 compared to net cash provided by operating
activities of $24.8 million for the nine months ended September 30, 1998,
representing an increase of $2.5 million, or 10.1%.
Year 2000 Compliance
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates where the date is
stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any clock or
date recording mechanims, including date sensitive software which uses only two
digits to represent the year, may recognize a date using 00 as the year 1900
rather than the year 2000.
12
<PAGE>
In addition, the Year 2000 is a leap year, which also may not be addressed by
such systems. Either issue could result in a system failure or miscalculations
causing disruption of operations, including among other things, a temporary
inability to process transactions, send invoices, or engage in similar
activities.
CURRENT STATE OF READINESS - The Company's primary internal computer
applications were purchased from Microsoft and Oracle. These companies have
issued public documents affirming Year 2000 compliance for certain versions of
their applications. Staff Leasing is in the process of upgrading or migrating to
those specific versions. The Oracle application upgrade is substantially
complete. Certification of the Company's mission critical systems and
applications (packaged and custom) began in early 1999 and is expected to be
complete in November.
The Company has completed a Year 2000 inventory of its computer hardware,
supporting software, and non-IT systems; assessed non-compliance issues; and has
identified upgrades or replacements necessary to ensure Year 2000 compliance.
These upgrades and replacements are substantially complete.
In addition, the Company has initiated formal communications with its
significant vendors to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 issues. This
includes service vendors with IT interfaces to the Company's applications and
non-IT systems suppliers. The Company has been testing the impact of any
modifications made by these vendors on the Company's internal systems.
COSTS - At present, these Year 2000 remediation costs are estimated to be
$.5 million, and will be expensed as incurred in 1999. These costs are not
expected to have a material effect on the Company's financial position or
results of operations.
RISKS - It is the Company's belief that the most reasonably likely worst
case scenario from the Year 2000 issue is that a third party vendor will not
remediate its own Year 2000 issues in time, resulting in a disruption of
additional client services, such as the processing of insurance claims or the
direct deposit of payroll to a financial institution. The Company is focusing
the majority of its Year 2000 efforts to address these issues.
The Company can give no guarantee that current Year 2000 remediation cost
estimates will be achieved and actual results could differ materially from
existing plans. Factors that might cause material differences include the
availability and cost of personnel trained in this area, the ability to locate
and correct errors or defects in the technology used in internal IT and non-IT
systems, and the ability of the Company's significant suppliers, customers and
others with which it conducts business, including Federal and state government
agencies, to identify and resolve their own Year 2000 issues and similar
uncertainties. Further, the impact of a Year 2000 failure on the Company's
future results of operations, liquidity or financial condition cannot be
determined at this time, but is a risk which should be considered in evaluating
future growth of the Company.
CONTINGENCY PLANS - A contingency plan for a possible Year 2000 failure of
any key internal hardware, software or non-IT systems is in development so that
the Company's critical business processes can be expected to continue to
function on January 1, 2000 and beyond.
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.
13
<PAGE>
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.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to market risk from exposure to changes in
interest rates based on its investing and cash management activities. The
Company utilizes U.S. government agency and other corporate debt with fixed
rates and maturities of less than one year to manage its exposures to interest
rates. The Company does not expect changes in interest rates to have a material
effect on income or cash flows in fiscal 1999, although there can be no
assurances that interest rates will not change.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
LAWRENCE E. EGLE V. STAFF LEASING, INC., ET AL. On April 30, 1999, the
plaintiff, a shareholder of the Company, brought this class action alleging that
the directors and senior officers of the Company breached their fiduciary duty
to shareholders by failing to pursue a proposal from Paribas Principal Partners
to acquire the company in order to entrench themselves in the management of the
Company. Plaintiff seeks injunctive relief and unspecified damages including
attorneys' and experts' fees. The Company believes the lawsuit is wholly without
merit.
The Company is not a party to any other 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 5. Other Information
In May 1999, Joyce Lillis McGill, Senior Vice President of Sales since
March 1997, resigned. Richard A. Goldman, President of Staff Leasing, has
assumed responsibility for sales.
In August 1999, the Company's Board of Directors announced its decision to
explore various strategic alternatives available to the Company in order to
maximize shareholder value. Such alternatives could include a sale of the
Company or a recapitalization. No timetable has been set for the completion of
the strategic alternatives review. There can be no assurance that any actions
taken by the Company will result in a transaction or, if any such transaction
were to occur, as to the value to be obtained by the Company or its
shareholders.
In August 1999, the Company announced the completion of a new workers'
compensation program with CNA and the Texas Workers' Compensation Insurance Fund
("Texas Fund") which commences on January 1, 2000. The Texas Fund will be the
provider of workers' compensation insurance in Texas. This program is a
guaranteed cost plan based on a percentage of manual premium. It is a one year
contract. For the remainder of the country, the Company's carrier will be CNA.
This program is an insured loss sensitive program that is based on a percentage
of manual premium. It is a one year contract. The Company anticipates that its
workers' compensation costs will increase beginning in 2000 as a result of this
workers' compensation arrangement; however, by shifting to a percentage of
manual premium program, the Company should be able to broaden its client base.
14
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a)
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27.1(b) Financial Data Schedule for the nine months ended September 30, 1999
(b) Form 8-K
None
15
<PAGE>
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: November 15, 1999 By /s/ RICHARD A. GOLDMAN
- --------------------------------------------------------------------------------
Richard A. Goldman
President
Dated: November 15, 1999 By /s/ JOHN E. PANNING
- --------------------------------------------------------------------------------
John E. Panning
Chief Financial Officer
(the Principal Financial and
Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1(b) Financial Data Schedule
<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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,874
<SECURITIES> 46,251
<RECEIVABLES> 62,610
<ALLOWANCES> 934
<INVENTORY> 0
<CURRENT-ASSETS> 137,511
<PP&E> 41,601
<DEPRECIATION> 15,314
<TOTAL-ASSETS> 176,996
<CURRENT-LIABILITIES> 99,667
<BONDS> 0
0
0
<COMMON> 217
<OTHER-SE> 75,859
<TOTAL-LIABILITY-AND-EQUITY> 176,996
<SALES> 1,992,108
<TOTAL-REVENUES> 1,992,108
<CGS> 0
<TOTAL-COSTS> 1,897,342
<OTHER-EXPENSES> 68,870
<LOSS-PROVISION> 425
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 27,354
<INCOME-TAX> 10,341
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,013
<EPS-BASIC> .78
<EPS-DILUTED> .76
</TABLE>
