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, 2000.
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 9, 2000
--------------------- ----------------------------------
Par value $0.01 per share 20,962,507
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
------
<S> <C>
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operation (unaudited)for the
Three and Nine Months Ended September 30, 1999 and 2000 . . . . . . . 3
Condensed Consolidated Balance Sheets as of December 31, 1999 and September
30, 2000 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statement of Changes in Shareholders'
Equity (unaudited) for the Nine Months Ended September 30, 2000 . . . . . 5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 30, 1999 and 2000 . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements (unaudited) . . . . . . . . 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 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 15
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STAFF LEASING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
UNAUDITED
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------------------- -----------------------------------
1999 2000 1999 2000
--------------- --------------- ---------------- -----------------
(in $000's, except share and per share data)
<S> <C> <C> <C> <C>
Revenues $680,502 $783,645 $1,992,108 $2,294,802
--------------- --------------- ---------------- -----------------
Cost of services:
Salaries, wages and payroll taxes 619,858 714,623 1,811,232 2,088,629
Benefits, workers' compensation, state unemployment
taxes and other costs 27,211 44,825 86,110 134,462
--------------- --------------- ---------------- -----------------
Total cost of services 647,069 759,448 1,897,342 2,223,091
--------------- --------------- ---------------- -----------------
Gross profit 33,433 24,197 94,766 71,711
--------------- --------------- ---------------- -----------------
Operating expenses:
Salaries, wages and commissions 15,546 14,570 43,994 45,620
Other general and administrative 6,550 7,733 19,320 23,236
Depreciation and amortization 1,988 2,142 5,556 6,551
--------------- --------------- ---------------- -----------------
Total operating expenses 24,084 24,445 68,870 75,407
--------------- --------------- ---------------- -----------------
Operating income (loss) 9,349 (248) 25,896 (3,696)
Interest income, net 958 1,330 2,329 3,469
Interest expense - - (21) (1)
Other non operating expense - (26) (850) (1,378)
--------------- --------------- ---------------- -----------------
Income (loss) before income tax provision 10,307 1,056 27,354 (1,606)
Income tax provision (benefit) 3,897 396 10,341 (602)
--------------- --------------- ---------------- -----------------
Net income (loss) $ 6,410 $ 660 $ 17,013 $ (1,004)
=============== =============== ================ =================
Net income (loss) per share
- Basic $ .30 $ .03 $ .78 $ (.05)
- Diluted $ .29 $ .03 $ .76 $ (.05)
=============== =============== ================ =================
Weighted average shares outstanding
- Basic 21,725 21,284 21,802 21,524
- Diluted 22,147 21,330 22,284 21,540
=============== =============== ================ =================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
STAFF LEASING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
unaudited
---------------------- -------------------------
(in $000's, except share and per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,081 $ 36,582
Certificates of deposit - restricted 7,777 7,781
Marketable securities 34,914 51,965
Accounts receivable, net 41,631 63,277
Other current assets 11,494 5,820
--------------- -------------
Total current assets 118,897 165,425
Property and equipment, net 28,833 24,901
Goodwill, net of accumulated amortization
of $4,513 and $5,062 respectively 10,159 9,609
Deferred income tax asset 1,950 1,199
Other assets 3,731 4,912
-------------- ---------------
$ 163,570 $ 206,046
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued insurance premiums and health
reserves $ 22,724 $ 44,662
Accrued payroll and payroll taxes 35,574 65,586
Accounts payable and other accrued liabilities 10,888 6,524
Deferred income tax liabilities 8,770 6,776
Customer deposits and prepayments 3,523 3,741
-------------- ---------------
Total current liabilities 81,479 127,289
Long-term liabilities 1,335 1,373
Commitments and contingencies (See notes)
Shareholders' equity :
Common stock, $.01 par value 217 211
Shares authorized: 100,000,000
Shares issued and outstanding:
December 31, 1999 - 21,709,542
September 30, 2000 - 21,106,007
Additional paid in capital 42,987 40,551
Retained earnings 37,701 36,697
Other (149) (75)
--------------- -------------
Total shareholders' equity 80,756 77,384
--------------- --------------
$ 163,570 $ 206,046
=============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
STAFF LEASING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
UNAUDITED
<TABLE>
<CAPTION>
Accumulated
Common Additional Other
Stock Common Paid In Comprehensive Retained
(shares) Stock Capital Other Income (Loss) Earnings Total
---------- -------- ------------ -------- ------------- ---------- ----------
(in $000's except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 21,709,542 $ 217 $ 42,987 $ (109) $ (40) $ 37,701 $ 80,756
Repurchase and retirement of
common stock (628,735) (6) (2,495) (2,501)
Tax benefit of restricted
stock plan vesting 76 76
Other (17) 45 28
Unrealized gain on marketable
securities 29
Net loss (1,004)
Total comprehensive loss (975)
--------------- -------- ------------ ------------ -------------- ----------- -------------
Balance, September 30,2000 21,106,007 $ 211 $ 40,551 $ (64) $ (11) $ 36,697 $ 77,384
=============== ======== ============ ============ ============== =========== =============
</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,
-----------------------------------------
1999 2000
-------------------- ------------------
(in $000's)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 17,013 $ (1,004)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 5,556 6,551
Deferred taxes, net 126 (1,151)
Provision for bad debts 425 350
Other 71 (452)
Changes in operating working capital:
Decrease (increase) in certificates of deposit -
restricted 598 (4)
Increase in accounts receivable (23,464) (21,996)
Decrease in other current assets 2,253 5,675
Decrease in accounts payable and other accrued
liabilities (1,038) (4,364)
Increase in accrued payroll and payroll taxes 23,070 30,011
(Decrease) increase in accrued insurance premiums and
health reserves (180) 21,938
Increase in income taxes payable 3,111 -
(Decrease) increase in customer deposits and
prepayments (147) 218
Decrease (increase) in other long-term assets 105 (1,181)
Decrease (increase) in long term liabilities (245) 38
-------------------- ------------------
Net cash provided by operating activities 27,254 34,629
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (42,950) (114,491)
Maturities of marketable securities 28,500 97,824
Capital expenditures (6,197) (1,963)
-------------------- ------------------
Net cash used in investing activities (20,647) (18,630)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of shareholders' notes receivable 7 3
Repurchase and retirement of common stock (4,152) (2,501)
-------------------- ------------------
Net cash used in financing activities (4,145) (2,498)
-------------------- ------------------
Net increase in cash 2,462 13,501
Cash and cash equivalents - beginning of period 15,412 23,081
-------------------- ------------------
Cash and cash equivalents - end of period $ 17,874 $ 36,582
==================== ==================
Supplemental disclosure of cash flow information:
Income taxes paid $ 5,200 $ 63
==================== ==================
Interest paid $ 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, 1999, 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.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities (later amended by
SFAS 138), which will be in effect on January 1, 2001 for the Company. SFAS 133
requires, among other things, that all derivatives be recognized in the
consolidated balance sheets as either assets or liabilities and measured at fair
value. The corresponding derivative gains and losses should be reported based
upon the hedge relationship, if such a relationship exists. Changes in the fair
value of derivatives that are not designated as hedges or that do not meet the
hedge accounting criteria in FAS 133 are required to be reported in income. The
Company is in the process of quantifying the impact of SFAS 133 on its financial
statements.
2. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
<S> <C> <C>
Billed to clients ...................................... $ 11,391 $ 5,260
Unbilled revenues ...................................... 30,980 59,023
------- -------
42,371 64,283
Less: Allowance for doubtful accounts............ (740) (1,006)
------- -------
$ 41,631 $63,277
======== =======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment (at cost) was comprised of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
<S> <C> <C>
Leasehold improvements.................................. $ 1,832 $2,065
Furniture and fixtures.................................. 2,944 3,189
Vehicles................................................ 103 66
Equipment............................................... 2,803 2,837
Computer hardware and software.......................... 38,066 39,434
------- -------
Total property and equipment............................ 45,748 47,591
Less accumulated depreciation..................... (16,915) (22,690)
-------- --------
$28,833 $24,901
======== ========
</TABLE>
For the nine months ended September 30, 2000 depreciation expense was $6,001.
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
On April 30, 1999, a shareholder of the Company brought a class action in the
Twelfth Judicial Division, Manatee County, Florida against the Company and
certain of its directors 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
parties have engaged in limited discovery and in settlement discussions. The
Company believes the lawsuit is without merit.
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, 1999 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 1999, the Company repurchased, for retirement, 412,000 shares
of its common stock for a total cost of approximately $4 million. In the nine
months ending September 30, 2000, the Company repurchased 620,955 of its shares
from the open market at a cost of $2.5 million, and 7,780 restricted shares from
a former employee in accordance with the terms of the Company's restricted plan.
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, 2000 was 37.5%, and a tax benefit was
recognized on the net loss from operations.
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,
1999, related to warrants issued in connection with the Company's reorganization
and initial public offering, was 421,518 and 462,465, respectively, and for the
three and nine months ended September 30, 2000 was 0. Also included as common
stock equivalents in diluted weighted average shares outstanding were options
granted under the Company's stock option plan, which totaled 449 and 19,326 for
the three and nine months ended September 30, 1999 respectively, and 45,736 and
16,112 for the three and nine months ended September 30, 2000 respectively.
8
<PAGE>
STAFF LEASING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of net income (loss) 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, 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
Income Shares Per Share
(Loss)
(Numerator) (Denominator) Amount
-------------- ----------------- ------------
(in $000's) (in 000's)
<S> <C> <C> <C>
For the Three Months Ended September 30, 1999:
----------------------------------------------
Basic EPS:
Net income $ 6,410 21,725 $ .30
Effect of dilutive securities:
Warrants 422
Options -
---------------
Diluted EPS:
Net income $ 6,410 22,147 $ .29
============== =============== ============
For the Nine Months Ended September 30, 1999:
---------------------------------------------
Basic EPS:
Net income $ 17,013 21,802 $ .78
Effect of dilutive securities:
Warrants 463
Options 19
---------------
Diluted EPS:
Net income $ 17,013 22,284 $ .76
============== =============== ============
For the Three Months Ended September 30, 2000:
----------------------------------------------
Basic EPS:
Net Income $ 660 21,284 $ .03
Effect of dilutive securities:
Warrants -
Options 46
---------------
Diluted EPS:
Net Income $ 660 21,330 $ .03
============ ================ ===========
For the Nine Months Ended September 30, 2000:
---------------------------------------------
Basic EPS:
Net Loss $ (1,004) 21,524 $ (.05)
============= ================ ==============
Effect of dilutive securities:
Warrants -
Options 16
----------------
Diluted EPS:
Net Loss $ (1,004) 21,540 $ (.05)
============== ================ =============
</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, 1999 and 2000, expressed as a
percentage of revenues:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- --------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues................................... 100.0% 100.0% 100.0% 100.0%
Cost of services:
Salaries, wages and payroll taxes........ 91.1 91.2 90.9 91.0
Benefits, workers' compensation, state
unemployment taxes and other costs.... 4.0 5.7 4.3 5.9
------ ------ ----- -----
Total cost of services........... 95.1 96.9 95.2 96.9
------ ------ ----- -----
Gross profit............................... 4.9 3.1 4.8 3.1
------ ------ ----- -----
Operating expenses:
Salaries, wages and commissions.......... 2.3 1.9 2.2 2.0
Other general and administrative......... 1.0 1.0 1.0 1.0
Depreciation and amortization............ .3 .3 .3 .3
------ ------ ----- -----
Total operating costs...................... 3.5 3.2 3.5 3.3
------ ------ ----- -----
Operating income (loss) ................... 1.4 - 1.3 (.2)
Interest income, net ...................... .1 .2 .1 .2
Other non-operating expenses .............. - - - -
------ ------- ----- -----
Income (loss) before income taxes ......... 1.5 .1 1.4 -
Income tax (provision) benefit ............ .6 - .5 -
----- ------- ------ -----
Net income (loss) ......................... .9 .1 .9 -
====== ====== ===== =====
</TABLE>
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Revenues were $783.6 million for the three months ended September 30,
2000, compared to $680.5 million for the three months ended September 30, 1999,
representing an increase of $103.1 million, or 15.2%. This increase was due
primarily to increased wages of worksite employees. From September 30, 1999 to
September 30, 2000, the number of clients decreased 10.4% from 10,581 to 9,479.
The number of worksite employees decreased 2.8%, from 129,900 to 126,213.
Revenue growth exceeded headcount growth by 18.0%, due primarily to wage
inflation, expansion in higher wage markets and industry segments, and the
Company's new client selection criteria initiated in the first three quarters of
2000 which encourages solicitation of businesses paying better than average
wages for their trade or business. During the third quarter of 2000, the Company
terminated client relationships with approximately 3,700 employees that were
unprofitable or running low payroll volumes per employee. The Company did not
open any new sales offices in the third quarter of 2000. Three new sales offices
were opened in the third quarter of 1999.
Cost of services was $759.4 million for the three months ended September
30, 2000, compared to $647.1 million for the three months ended September 30,
1999, representing an increase of $112.4 million, or 17.4%. Cost of services was
96.9% of revenues for the three months ended September 30, 2000, compared to
95.1% of revenues for the three months ended September 30, 1999.
10
<PAGE>
Salaries, wages and payroll taxes of worksite employees were $714.6
million for the three months ended September 30, 2000, compared to $619.9
million for the three months ended September 30, 1999, representing an increase
of $94.7 million, or 15.3%.
Benefits, workers' compensation, state unemployment taxes and other costs
were $44.8 million for the three months ended September 30, 2000, compared to
$27.2 million for the three months ended September 30, 1999, representing an
increase of $17.6 million, or 64.7%. The Company has a new workers' compensation
program with CNA and the Texas Workers' Compensation Insurance Fund (Texas Fund)
which commenced on January 1, 2000. The Texas Fund is the provider of workers'
compensation insurance for clients based in Texas. The Texas Fund program is a
guaranteed cost insurance arrangement with a term of one year. The cost of the
premium is determined based on the industries serviced by the Company in Texas.
For the remainder of the country, the Company's workers' compensation carrier is
CNA. This program is an insured loss sensitive program for a term of one year.
The Company's workers' compensation costs increased in 2000 as a result of these
workers' compensation arrangements. The accrual for workers' compensation costs
is based upon payroll dollars paid to worksite employees. The accrual rate is
based upon the historical actuarial model of the Company, which is reflective of
prior loss experience, business mix and actual claims data. Accruals for
subsequent periods will be affected by changes in the Company's business mix and
actual claims experience. The final costs of coverage will be determined by the
actual claims experience over time as claims close and by the administrative
costs of the program. In 1999, the Company's workers' compensation coverage was
provided by Liberty Mutual. This contract, which expired on December 31, 1999,
provided coverage on a guaranteed cost basis. Amounts due under this arrangement
were a fixed percentage of the Company's workers' compensation payroll.
Gross profit was $24.2 million for the three months ended September 30,
2000, compared to $33.4 million for the three months ended September 30, 1999,
representing a decrease of $9.2 million, or 27.6%. This decrease is primarily
due to the increase in workers' compensation insurance costs. Gross profit was
3.1% of revenues for the three months ended September 30, 2000, compared to 4.9%
for the three months ended September 30, 1999.
Operating expenses were $24.4 million for the three months ended September
30, 2000, compared to $24.1 million for the three months ended September 30,
1999, representing an increase of $.3 million, or 1.5%. Operating expenses were
3.2% of revenues for the three months ended September 30, 2000 compared to 3.5%
for the three months ended September 30, 1999.
Salaries, wages and commissions were $14.6 million for the three months
ended September 30, 2000, compared to $15.5 million for the three months ended
September 30, 1999, representing a decrease of $1 million, or 6.3%. This
decrease was due in part to a reduction of the sales force as the Company
repositions the sales force to new targeted clients. Salaries, wages and
commissions were 1.9% of revenues for the three months ended September 30, 2000
compared to 2.3% for the three months ended September 30, 1999.
Other general and administrative expenses were $7.7 million for the three
months ended September 30, 2000, compared to $6.6 million for the three months
ended September 30, 1999, representing an increase of $1.1 million, or 18.1%.
Other general and administrative expenses were 1.0% of revenues for the three
months ended September 30, 2000, and 1999.
Depreciation and amortization expenses increased by $.2 million for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999, representing an increase of 7.8%. This increase was
primarily the result of the Company's investment in management information
systems.
Interest income, net was $1.3 million for the three months ended September
30, 2000, compared to $1.0 million in the third quarter of 1999 due to the
increase in cash available for investment.
Income tax expense of $.4 million for the three months ended September 30,
2000 represented a provision at an effective tax rate of 37.5% compared to $3.9
million tax expense for the three months ended September 30, 1999 at an
effective tax rate of 37.8%. 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 million for the three months ended September 30, 2000,
compared to net income of $6.4 million for the three months ended September 30,
1999, representing a decrease of $5.8 million or 89.7%.
11
<PAGE>
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Revenues were $2,294.8 million for the nine months ended September 30,
2000, compared to $1,992.1 million for the nine months ended September 30, 1999,
representing an increase of $302.7 million, or 15.2%. This increase was due
primarily to increased wages of worksite employees. From September 30, 1999 to
September 30, 2000, the number of clients decreased 10.4% from 10,581 to 9,479.
The number of worksite employees decreased 2.8%, from 129,900 to 126,213.
Revenue growth exceeded headcount growth by 18.0%, due primarily to wage
inflation, expansion in higher wage markets and industry segments, and the
Company's new client selection criteria initiated in the first nine months of
2000 which encourages solicitation of businesses paying better than average
wages for their trade or business. During the first nine months of 2000, the
Company terminated client relationships with approximately 11,200 employees that
were unprofitable or running low payroll volumes per employee.
Cost of services was $2,223.1 million for the nine months ended September
30, 2000, compared to $1,897.3 million for the nine months ended September 30,
1999, representing an increase of $325.8 million, or 17.2%. Cost of services was
96.9% and 95.2% of revenues for the nine months ended September 30, 2000 and
1999, respectively.
Salaries, wages and payroll taxes of worksite employees were $2,088.6
million for the nine months ended September 30, 2000, compared to $1,811.2
million for the nine months ended September 30, 1999, representing an increase
of $277.4 million, or 15.3%.
Benefits, workers' compensation, state unemployment taxes and other costs
were $134.5 million for the nine months ended September 30, 2000, compared to
$86.1 million for the nine months ended September 30, 1999, representing an
increase of 56.2%. Benefits, workers' compensation, state unemployment taxes and
other costs were 5.9% of revenues for the nine months ended September 30, 2000
and 4.3% for the nine months ended September 30, 1999. The Company has a new
workers' compensation program with CNA and the Texas Workers' Compensation
Insurance Fund (Texas Fund) which commenced on January 1, 2000. The Texas Fund
is the provider of workers' compensation insurance for clients based in Texas.
The Texas Fund program is a guaranteed cost insurance arrangement with a term of
one year. The cost of the premium is determined based on the industries serviced
by the Company in Texas. For the remainder of the country, the Company's
workers' compensation carrier is CNA. This program is an insured loss sensitive
program for a term of one year. The Company's workers' compensation costs
increased in 2000 as a result of these workers' compensation arrangements. The
accrual for workers' compensation costs is based upon payroll dollars paid to
worksite employees. The accrual rate is based upon the historical actuarial
model of the Company, which is reflective of prior loss experience, business mix
and actual claims data. Accruals for subsequent periods will be affected by
changes in the Company's business mix and actual claims experience. The final
costs of coverage will be determined by the actual claims experience over time
as claims close and by the administrative costs of the program. In 1999, the
Company's workers' compensation coverage was provided by Liberty Mutual. This
contract, which expired on December 31, 1999, provided coverage on a guaranteed
cost basis. Amounts due under this arrangement were a fixed percentage of the
Company's workers' compensation payroll.
Gross profit was $71.7 million for the nine months ended September 30,
2000, compared to $94.8 million for the nine months ended September 30, 1999,
representing a decrease of $23.1 million, or 24.3%. This decrease is primarily
due to the increase in workers' compensation insurance costs. Gross profit was
3.1% of revenues for the nine months ended September 30, 2000, compared to 4.8%
for the nine months ended September 30, 1999.
Operating expenses were $75.4 million for the nine months ended September
30, 2000, compared to $68.9 million for the nine months ended September 30,
1999, representing an increase of $6.5 million, or 9.5%. Operating expenses were
3.3% of revenues for the nine months ended September 30, 2000, and 3.5% of
revenues for the nine months ending September 30, 1999. Operating expenses for
the nine months ended September 30, 2000, included unusual expenses of $1.0
million related to management reorganization.
Salaries, wages and commissions were $45.6 million for the nine months
ended September 30, 2000, compared to $44.0 million for the nine months ended
September 30, 1999, representing an increase of $1.6 million, or 3.7%. This
increase was due primarily to an increase in average employee wages and unusual
expenses of $.5 million related to management reorganization. Salaries, wages
and commissions were 2.0% of revenues for the nine months ended September 30,
2000 and 2.2% for the nine months ended September 30, 1999.
Other general and administrative expenses were $23.2 million for the nine
months ended September 30, 2000, compared to $19.3 million for the nine months
ended September 30, 1999, representing an increase of $3.9 million, or 20.3%.
Other general and administrative expenses were 1.0% of revenues for the nine
months ended September 30, 2000, and 1999. Other general and administrative
expenses for the nine months ended September 30, 2000, included $.5 million in
unusual expenses related to management reorganization.
12
<PAGE>
Depreciation and amortization expenses increased by $1.0 million for the
nine months ended September 30, 2000 compared to the nine months ended September
30, 1999, representing an increase of 17.9%. This increase was primarily the
result of the Company's investment in management information systems.
Interest income was $3.5 million for the nine months ended September 30,
2000, compared to $2.3 million of interest income for the first three quarters
of 1999, representing an increase of $1.2 million due to the increase in cash
available for investment.
Other non-operating expense was $1.4 million for the nine months ended
September 30, 2000 compared to $.9 million for the nine months ended September
30, 1999. Other expense in the first nine months 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. Other
expense in the first nine months of 2000 was related to the conclusion of the
strategic alternative process and to management reorganization.
Income tax benefit of $.6 million was recorded for the nine months ended
September 30, 2000 at an effective tax rate of 37.5% compared to income tax
expense of $10.3 million for the nine months ended September 30, 1999 at an
effective tax rate of 37.8%.
Net loss was $1.0 million for the nine months ended September 30, 2000,
compared to net income of $17.0 million for the nine months ended September 30,
1999, representing a decrease of $18.0 million or 105.9%.
Liquidity and Capital Resources
The Company had approximately $96.3 million in cash, cash equivalents,
restricted cash and marketable securities at September 30, 2000.
The Company had no long-term debt as of September 30, 2000. In July 1999,
the Company entered into an agreement with Bank of America (formerly
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 lender's base rate or LIBOR. No borrowings have been
made against the credit line. At September 30, 2000, the Company had net working
capital of $38.2 million versus $37.4 million as of December 31, 1999,
representing a increase of $.8 million, or 2.2%.
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, 2000, 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 $34.5 million for the nine
months ended September 30, 2000 compared to $27.3 million for the nine months
ended September 30, 1999, representing an increase of $7.2 million, or 26.4%.
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"), 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
13
<PAGE>
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.
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
Michael K. Phippen was named Chief Executive Officer of Staff Leasing,
Inc. as of July 1, 2000. Mr. Phippen has over 20 years of experience in the
closely related staffing industry, most recently as Chief Executive Officer and
President of Westaff, a leading provider of staffing services in the United
States and Europe.
On July 7, 2000, the Company announced the election of Michael K. Phippen
to the position of Chairman of the Board of Directors. He succeeds Elliot B.
Ross, who resumed his role as an independent director
Michael W. Ehresman was hired September, 2000 as Senior Vice President of
Strategic Initiatives. Mr. Ehresman is a Certified Public Accountant with over
18 years of financial and business experience and spent the last eight years
with Westaff, Inc., most recently as its Senior Vice President and Treasurer.
Prior to joining Westaff, he spent ten years in public accounting with
PricewaterhouseCoopers, LLP and KPMG. Mr. Ehresman will be responsible for a
variety of initiatives that include strategic partnerships and strategic
planning.
Staff Leasing, Inc. loaned Michael K. Phippen, Chief Executive Officer,
$1.6 million on August 31, 2000 with an interest rate of 6.50% per annum. The
loan was to facilitate his purchase of a home in Bradenton, Florida pending the
sale of his residence in California. The loan and interest of $5,200 were paid
in full on September 18, 2000.
On August 30, 2000, the Board of Directors of Staff Leasing, Inc.
approved a resolution to amend the Company's contribution to the internal
employees' 401(k) retirement plan effective January 1, 2001. The contribution
was changed from a profit sharing to an employer matching contribution whereby
the Company will match 50% of the first 4% of any employee deferrals to the
401(k) plan to a maximum of 2% of eligible compensation. The service
requirement for internal employees will be reduced to six months from the
current one-year requirement. Richard Goldman was removed as a trustee of the
Staff Leasing 401(k) Retirement Trust and Michael K. Phippen was named
successor trustee of the plan.
The Company has committed to renewing the CNA workers' compensation loss
sensitive insurance program for 2001. The arrangement with The Texas Workers'
Compensation Insurance Fund will not be renewed for the year 2001 and the work
site employees previously covered under that program will be included in the
2001 CNA program.
14
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
------- -----------
10.21 Employment offer letter dated August 18, 2000 from Staff Leasing,
Inc., accepted by Michael Ehresman.
27.1 Financial Data Schedule for the nine months ended September
30, 2000.
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 14, 2000 BY /s/ Michael Phippen
-------------------------------------------------------------------------------
Michael Phippen
Officer and Chairman of
the Board
(Principal Executive Officer)
Dated: November 14, 2000 BY /s/ John E. Panning
-------------------------------------------------------------------------------
John E. Panning
Chief Financial Officer and
Chief Operating Officer
and a Director
(Principal Financial and
Accounting Officer)
16
