<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, 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 August 10, 1999
--------------------- ---------------------------------
Par value $0.01 per share 21,761,829
<PAGE> 2
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
ITEM 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Income Statements for the
Six Months Ended June 30, 1998 and 1999 (unaudited) . . . . . . . . . . 3
Condensed Consolidated Balance Sheets as of December 31, 1998
and June 30, 1999 (unaudited) . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statement of Changes in Shareholders'
Equity for the Six Months Ended June 30, 1999 (unaudited) . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1999 (unaudited) . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
2
<PAGE> 3
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 six months
ended June 30, ended June 30,
-------------------------- ------------------------------
1998 1999 1998 1999
--------- --------- ----------- -----------
(in $000's, except share and per share data)
<S> <C> <C> <C> <C>
Revenues $ 582,211 $ 664,264 $ 1,121,827 $ 1,311,605
--------- --------- ----------- -----------
Cost of services:
Salaries, wages and payroll taxes 528,490 604,159 1,016,785 1,191,374
Benefits, workers' compensation, state unemployment
taxes and other costs 25,525 29,405 50,613 58,898
--------- --------- ----------- -----------
Total cost of services 554,015 633,564 1,067,398 1,250,272
--------- --------- ----------- -----------
Gross profit 28,196 30,700 54,429 61,333
--------- --------- ----------- -----------
Operating expenses:
Salaries, wages and commissions 12,448 14,265 24,207 28,448
Other general and administrative 5,334 6,590 10,616 12,770
Depreciation and amortization 1,377 1,790 2,682 3,568
--------- --------- ----------- -----------
Total operating expenses 19,159 22,645 37,505 44,786
--------- --------- ----------- -----------
Operating income 9,037 8,055 16,924 16,547
Interest income 826 826 1,532 1,371
Interest expense (17) (10) (48) (21)
Other non operating expense -- (850) -- (850)
--------- --------- ----------- -----------
Income before income tax provision 9,846 8,021 18,408 17,047
Income tax provision 3,692 3,032 6,903 6,444
--------- --------- ----------- -----------
Net income $ 6,154 $ 4,989 $ 11,505 $ 10,603
========= ========= =========== ===========
Net income per share
- Basic $ .26 $ .23 $ .49 $ .49
- Diluted $ .25 $ .22 $ .47 $ .47
========= ========= =========== ===========
Weighted average shares outstanding
- Basic 23,638 21,765 23,574 21,842
- Diluted 24,744 22,296 24,634 22,353
========= ========= =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
STAFF LEASING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
----------------- -------------
(in $000's, except share and per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,412 $ 25,035
Certificates of deposit - restricted 8,379 7,781
Marketable securities 32,022 35,123
Accounts receivable, net of allowance for
doubtful accounts of $802 and $856,
respectively 38,637 67,668
Other current assets 6,182 2,834
--------- ---------
Total current assets 100,632 138,441
Property and equipment, net 25,071 24,208
Goodwill, net of accumulated amortization
of $3,779 and $4,416, respectively 10,892 10,525
Deferred income tax asset 2,898 2,588
Other assets, net of accumulated amortization
of $245 and $0, respectively 285 165
--------- ---------
$ 139,778 $ 175,927
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued insurance premiums and health
reserves $ 22,757 $ 23,281
Accrued payroll and payroll taxes 38,748 68,787
Accounts payable and other accrued liabilities 5,515 4,061
Income taxes payable -- 966
Deferred income tax liabilities 5,729 5,190
Customer deposits and prepayments 2,741 2,704
--------- ---------
Total current liabilities 75,490 104,989
Long-term liabilities 1,499 1,270
Commitments and contingencies (See notes)
Shareholders' equity:
Common stock, $.01 par value 221 218
Shares authorized: 100,000,000
Shares issued and outstanding:
December 31, 1998 - 22,121,267
June 30, 1999 - 21,761,829
Additional paid in capital 46,804 43,087
Retained earnings 16,051 26,654
Other (287) (291)
--------- ---------
Total shareholders' equity 62,789 69,668
--------- ---------
$ 139,778 $ 175,927
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
STAFF LEASING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
UNAUDITED
<TABLE>
<CAPTION>
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 (359,438) (3) (4,157) (4,160)
Tax benefit of restricted
stock plan vesting 440 440
Other 86 6 92
Unrealized loss on
marketable securities, (96)
net of tax
Net income 10,603
Total comprehensive income 10,507
---------- ----- -------- ------ ----- ----- -------- --------
Balance, June 30, 1999 21,761,829 $ 218 $ 43,087 $ (196) $ (55) $ (40) $ 26,654 $ 69,668
========== ===== ======== ====== ===== ===== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
STAFF LEASING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
For the six months ended
June 30,
------------------------
1998 1999
-------- --------
(in $000's)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,505 $ 10,603
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,682 3,568
Deferred taxes, net 5,206 211
Provision for bad debts 340 350
Other 73 59
Changes in operating working capital:
(Increase) decrease in certificates of deposit
- restricted (143) 598
Increase in accounts receivable (23,109) (29,381)
(Increase) decrease in other current assets (1,445) 3,348
Increase (decrease) in accounts payable and other
accrued liabilities (1,035) (1,454)
Increase in accrued payroll and payroll taxes 19,283 30,039
Increase in accrued insurance premiums and health
reserves 1,813 524
Increase (decrease) in income taxes payable (476) 966
Increase (decrease) in customer deposits and
prepayments 103 (37)
Increase in other long-term assets (11) 120
Increase (decrease) in long term liabilities 65 (229)
-------- --------
Net cash provided by operating activities 14,851 19,285
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities, net (30,583) (3,200)
Capital expenditures (3,147) (2,335)
-------- --------
Net cash used in investing activities (33,730) (5,535)
-------- --------
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 (25) (4,134)
-------- --------
Net cash provided by (used in) financing activities 1,203 (4,127)
-------- --------
Net increase (decrease) in cash (17,676) 9,623
Cash and cash equivalents - beginning of period 21,051 15,412
-------- --------
Cash and cash equivalents - end of period $ 3,375 $ 25,035
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 2,181 $ 3,305
======== ========
Interest paid $ 10 $ 21
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
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, June 30,
1998 1999
-------- --------
<S> <C> <C>
Billed to clients .............................. $ 15,391 $ 6,833
Unbilled revenues .............................. 24,048 61,691
-------- --------
39,439 68,524
Less: Allowance for doubtful accounts.... (802) (856)
-------- --------
$ 38,637 $ 67,668
======== ========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment (at cost) was comprised of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
-------- --------
<S> <C> <C>
Leasehold improvements ........................... $ 1,484 $ 1,714
Furniture and fixtures ........................... 2,508 2,726
Vehicles ......................................... 103 103
Equipment ........................................ 1,799 1,869
Computer hardware and software ................... 29,490 31,306
-------- --------
Total property and equipment ..................... 35,384 37,718
Less accumulated depreciation .............. (10,313) (13,510)
-------- --------
$ 25,071 $ 24,208
======== ========
</TABLE>
For the six months ended June 30, 1999 depreciation expense was $3,197.
7
<PAGE> 8
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 six months ending June 30, 1999, the Company repurchased
359,438 shares at a cost of $4.1 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 six months ended June 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 six months ended June 30, 1998 and
1999, related to warrants issued in connection with the Company's reorganization
and initial public offering. The warrants calculated as common stock equivalents
totaled 876,945 and 856,793 for the three and six months ended June 30, 1998,
respectively, and totaled 493,731 and 482,939 for the three and six months ended
June 30, 1999, respectively. 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 for the three and six months ended June 30, 1998, respectively, and
37,082 and 28,764 for the three and six months ended June 30, 1999,
respectively.
8
<PAGE> 9
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 six months ended June 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 JUNE 30, 1998:
Basic EPS:
Net income $ 6,154 23,638 $ .26
Diluted EPS:
Effect of dilutive securities:
Warrants 877
Options 229
------
Net income $ 6,154 24,744 $ .25
======= ====== =======
FOR THE SIX MONTHS ENDED JUNE 30, 1998:
Basic EPS:
Net income $11,505 23,574 $ .49
Diluted EPS:
Effect of dilutive securities:
Warrants 856
Options 204
------
Net income $11,505 24,634 $ .47
======= ====== =======
FOR THE THREE MONTHS ENDED JUNE 30, 1999:
Basic EPS:
Net income $ 4,989 21,765 $ .23
Diluted EPS:
Effect of dilutive securities:
Warrants 494
Options 37
------
Net income $ 4,989 22,296 $ .22
======= ====== =======
FOR THE SIX MONTHS ENDED JUNE 30, 1999:
Basic EPS:
Net income $10,603 21,842 $ .49
Diluted EPS:
Effect of dilutive securities:
Warrants 483
Options 29
------
Net income $10,603 22,353 $ .47
======= ====== =======
</TABLE>
9
<PAGE> 10
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 six months ended June 30, 1998 and 1999, expressed as a percentage
of revenues:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 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 ........ 90.8 91.0 90.6 90.8
Benefits, workers' compensation, state
unemployment taxes and other costs..... 4.4 4.4 4.5 4.5
----- ----- ----- -----
Total cost of services ........... 95.2 95.4 95.1 95.3
----- ----- ----- -----
Gross profit ............................... 4.8 4.6 4.9 4.7
----- ----- ----- -----
Operating expenses:
Salaries, wages and commissions .......... 2.1 2.1 2.2 2.2
Other general and administrative ......... .9 1.0 1.0 1.0
Depreciation and amortization ............ .3 .3 .2 .2
----- ----- ----- -----
Total operating costs ...................... 3.3 3.4 3.4 3.4
----- ----- ----- -----
Operating income ........................... 1.6 1.2 1.5 1.3
Interest income ............................ .1 .1 .1 .1
Other expense .............................. -- (.1) -- (.1)
----- ----- ----- -----
Income before income taxes ................. 1.7 1.2 1.6 1.3
Income tax provision ....................... .6 .5 .6 .5
----- ----- ----- -----
Net income ................................. 1.1 .7 1.0 .8
===== ===== ===== =====
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues were $664.3 million for the three months ended June 30, 1999,
compared to $582.2 million for the three months ended June 30, 1998,
representing an increase of $82.1 million, or 14.1%. This increase was due
primarily to an increased number of clients and worksite employees. From June
30, 1998 to June 30, 1999, the number of clients increased 4.7% from 9,972 to
10,437. The number of worksite employees increased 7.6%, from 119,895 to
128,965. Revenue growth exceeded headcount growth by 6.5% 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 one new sales office in the second quarter of 1999. Two new sales
offices were opened in the second quarter of 1998.
Cost of services was $633.6 million for the three months ended June 30,
1999, compared to $554.0 million for the three months ended June 30, 1998,
representing an increase of $79.6 million, or 14.4%. Cost of services was 95.4%
and 95.2% of revenues for the three months ended June 30, 1999 and 1998,
respectively.
Salaries, wages and payroll taxes of worksite employees were $604.2
million for the three months ended June 30, 1999, compared to $528.5 million for
the three months ended June 30, 1998, representing an increase of $75.7 million,
or 14.3%.
Benefits, workers' compensation, state unemployment taxes and other
costs were $29.4 million for the three months ended June 30, 1999, compared to
$25.5 million for the three months ended June 30, 1998, representing an increase
of $3.9 million, or 15.3%. Benefits, workers' compensation, state unemployment
taxes and other costs were 4.4% of revenues for the three months ended June 30,
1999, compared to 4.4% for the three months ended June 30, 1998.
10
<PAGE> 11
Gross profit was $30.7 million for the three months ended June 30,
1999, compared to $28.2 million for the three months ended June 30, 1998,
representing an increase of $2.5 million, or 8.9%. 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, as well as competitive pricing in
its current markets. Gross profit was 4.6% and 4.8% of revenues for the three
months ended June 30, 1999 and 1998, respectively. In 1998, gross profit
included $750 thousand of income from a change in estimate of a 1997 health care
reserve.
Operating expenses were $22.6 million for the three months ended June
30, 1999, compared to $19.2 million for the three months ended June 30, 1998,
representing an increase of $3.4 million, or 17.7%. Operating expenses were 3.4%
of revenues for the three months ended June 30, 1999, compared to 3.3 % for the
three months ended June 30, 1998.
Salaries, wages and commissions were $14.3 million for the three months
ended June 30, 1999, compared to $12.4 million for the three months ended June
30, 1998, representing an increase of $1.9 million, or 15.3%. 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, 1999, compared to 2.1% for the three months ended June 30, 1998.
Other general and administrative expenses were $6.6 million for the
three months ended June 30, 1999, compared to $5.3 million for the three months
ended June 30, 1998, representing a increase of $1.3 million, or 24.5%. Other
general and administrative expenses were 1.0% of revenues for the three months
ended June 30, 1999, compared to .9% for the three months ended June 30, 1998.
Depreciation and amortization expenses increased by $.4 million for the
three months ended June 30, 1999 compared to the three months ended June 30,
1998, representing an increase of 28.6%. This increase was primarily the result
of the Company's investment in management information systems.
Interest income was $.8 million for the three months ended June 30,
1999 and $.8 million for the three months ended June 30, 1998.
Other expense was $.9 million for the three months ended June 30, 1999
compared to $0 million for the three months ended June 30, 1998. Other expense
in the second quarter of 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 $3.0 million for the three months ended June 30,
1999 represented a provision at an effective tax rate of 37.8% compared to $3.7
million for the three months ended June 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 $5.0 million for the three months ended June 30, 1999,
compared to net income of $6.2 million for the three months ended June 30, 1998,
representing a decrease of $1.2 million or (19.4%).
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues were $1,311.6 million for the six months ended June 30, 1999,
compared to $1,121.8 million for the six months ended June 30, 1998,
representing an increase of $189.8 million, or 16.9%. This increase was due
primarily to an increased number of clients and worksite employees. From June
30, 1998 to June 30, 1999, the number of clients increased 4.7% from 9,972 to
10,437. The number of worksite employees increased 7.6%, from 119,895 to
128,965. Revenue growth exceeded headcount growth by 9.3%, due in part, to the
effects of wage inflation and higher average wages in the Company's expansion
states.
Cost of services was $1,250.3 million for the six months ended June 30,
1999, compared to $1,067.4 million for the six months ended June 30, 1998,
representing an increase of $182.9 million, or 17.1%. Cost of services was 95.3%
and 95.1% of revenues for the six months ended June 30, 1999 and 1998,
respectively.
Salaries, wages and payroll taxes of worksite employees were $1,191.4
million for the six months ended June 30, 1999, compared to $1,016.8 million for
the six months ended June 30, 1998, representing an increase of $174.6 million,
or 17.2%.
Benefits, workers' compensation, state unemployment taxes and other
costs were $58.9 million for the six months ended June 30, 1999, compared to
$50.6 million for the six months ended June 30, 1998, representing an increase
of $8.3 million, or 16.4%. Benefits, workers' compensation, state unemployment
taxes and other costs were 4.5% of revenues for the six months ended June 30,
1999 and 4.5% for the six months ended June 30, 1998.
Gross profit was $61.3 million for the six months ended June 30, 1999,
compared to $54.4 million for the six months ended June 30, 1998, representing
an increase of $6.9 million, or
11
<PAGE> 12
12.7%. 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 4.7% of revenues
for the six months ended June 30, 1999 and 4.9% of revenues for the six months
ended June 30, 1998. In 1998, gross profit included $750 thousand of income from
a change in estimate of a 1997 health care reserve.
Operating expenses were $44.8 million for the six months ended June 30,
1999, compared to $37.5 million for the six months ended June 30, 1998,
representing an increase of $7.3 million, or 19.5%. Operating expenses were 3.4%
of revenues for the six months ended June 30, 1999, compared to 3.4% for the six
months ended June 30, 1998.
Salaries, wages and commissions were $28.4 million for the six months
ended June 30, 1999, compared to $24.2 million for the six months ended June 30,
1998, representing an increase of $4.2 million, or 17.4%. 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, 1999 and 2.2% for the six months ended June 30, 1998.
Other general and administrative expenses were $12.8 million for the
six months ended June 30, 1999, compared to $10.6 million for the six months
ended June 30, 1998, representing an increase of $2.2 million, or 20.8%. Other
general and administrative expenses were 1.0% of revenues for the six months
ended June 30, 1999, compared to 1.0% for the six months ended June 30, 1998.
Depreciation and amortization expenses increased by $.9 million for the
six months ended June 30, 1999 compared to the six months ended June 30, 1998,
representing an increase of 33.0%. This increase was primarily the result of the
Company's investment in management information systems.
Interest income was $1.4 million for the six months ended June 30,
1999, compared to $1.5 million of interest income for the first half of 1998, a
decrease of $.1 million.
Other expense was $.9 million for the six months ended June 30, 1999
compared to $0 million for the six months ended June 30, 1998. Other expense in
the second quarter of 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 $6.4 million for the six months ended June 30,
1999 represented a provision at an effective tax rate of 37.8% compared to $6.9
million for the six months ended June 30, 1998 at an effective tax rate of
37.5%.
Net income was $10.6 million for the six months ended June 30, 1999,
compared to net income of $11.5 million for the six months ended June 30, 1998,
representing a decrease of $.9 million or (7.8%).
Liquidity and Capital Resources
The Company had approximately $67.9 million in cash, cash equivalents,
restricted cash and marketable securities at June 30, 1999.
The Company had no long-term debt as of June 30, 1999. At June 30,
1999, the Company had net working capital of $33.5 million, versus $25.1 million
as of December 31, 1998, representing an improvement of $8.4 million, or 33.5%.
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 June 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 $19.3 million for the six
months ended June 30, 1999 compared to net cash provided by operating activities
of $14.9 million for the six months ended June 30, 1998, representing an
increase of $4.4 million, or 29.5%.
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 mechanism, including
12
<PAGE> 13
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. 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 of Oracle applications. As a result, the Company's Year
2000 compliance initiative is directed towards testing versus remediation. The
Company is in the process of testing custom modifications to its Oracle
software, to ensure that changes made are also Year 2000 compliant.
Certification of the Company's mission critical systems and applications
(packaged and custom) began in early 1999 and is expected to be completed in the
third quarter 1999.
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 expected to be
substantially complete by September 1999.
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. Approximately 65% of the Company's significant vendors
have responded that they are compliant. The remaining 35% of significant vendors
have indicated they will be compliant by third quarter 1999. The Company plans
to test the impact of any modifications made by these vendors on the Company's
internal systems in the third quarter of 1999.
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
13
<PAGE> 14
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
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.
ITEM 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -------------------------------
<S> <C>
27.3 (b) Financial Data Schedule for the six months ended June 30, 1999
</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: August 13, 1999 BY /s/ Richard A. Goldman
- --------------------------------------------------------------------------------
Richard A. Goldman
President
Dated: August 13, 1999 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 SIX MONTHS ENDED
JUNE 30, 1999 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 25,035
<SECURITIES> 35,123
<RECEIVABLES> 68,524
<ALLOWANCES> 856
<INVENTORY> 0
<CURRENT-ASSETS> 130,441
<PP&E> 37,718
<DEPRECIATION> 13,510
<TOTAL-ASSETS> 175,927
<CURRENT-LIABILITIES> 104,989
<BONDS> 0
0
0
<COMMON> 218
<OTHER-SE> 69,450
<TOTAL-LIABILITY-AND-EQUITY> 175,927
<SALES> 1,311,605
<TOTAL-REVENUES> 1,311,605
<CGS> 0
<TOTAL-COSTS> 1,250,272
<OTHER-EXPENSES> 44,786
<LOSS-PROVISION> 350
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 17,047
<INCOME-TAX> 6,444
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,603
<EPS-BASIC> .49
<EPS-DILUTED> .47
</TABLE>
