SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 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, 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 August 10, 2000
--------------------- ---------------------------------
Par value $0.01 per share 21,311,183
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
ITEM 1. Financial Statements . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations (unaudited) for
the three and six months ended June 30, 1999 and 2000. . . . . . . 3
Condensed Consolidated Balance Sheets as of December 31, 1999
and June 30, 2000. (unaudited) . . . . . . . . . . . . .. . . . . 4
Condensed Consolidated Statement of Changes in Shareholders'
Equity (unaudited) for the six months ended June 30, 2000. . . . . 5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1999 and 2000. . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 15
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . 15
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STAFF LEASING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
(in $000's, except share and per share data)
<S> <C> <C> <C> <C>
Revenues $ 664,264 $ 779,842 $ 1,311,605 $ 1,511,157
----------- ----------- ----------- -----------
Cost of services:
Salaries, wages and payroll taxes 604,159 710,296 1,191,374 1,374,005
Benefits, workers' compensation, state unemployment
taxes and other costs 29,405 45,438 58,898 89,638
----------- ----------- ----------- -----------
Total cost of services 633,564 755,734 1,250,272 1,463,643
----------- ----------- ----------- -----------
Gross profit 30,700 24,108 61,333 47,514
----------- ----------- ----------- -----------
Operating expenses:
Salaries, wages and commissions 14,265 15,659 28,448 31,050
Other general and administrative 6,590 8,067 12,770 15,503
Depreciation and amortization 1,790 2,188 3,568 4,409
----------- ----------- ----------- -----------
Total operating expenses 22,645 25,914 44,786 50,962
----------- ----------- ----------- -----------
Operating income (loss) 8,055 (1,806) 16,547 (3,448)
Interest income, net 816 1,181 1,350 2,137
Other non operating expense (850) (1,224) (850) (1,352)
----------- ----------- ----------- -----------
Income (loss) before income taxes 8,021 (1,849) 17,047 (2,663)
Income tax provision (benefit) 3,032 (693) 6,444 (999)
----------- ----------- ----------- -----------
Net income (loss) $ 4,989 $ (1,156) $ 10,603 $ (1,664)
=========== =========== =========== ===========
Net income (loss) per share
- Basic $ .23 $ (.05) $ .49 $ (.08)
- Diluted $ .22 $ (.05) $ .47 $ (.08)
=========== =========== =========== ===========
Weighted average common shares outstanding
- Basic 21,765 21,585 21,842 21,646
- Diluted 22,296 21,586 22,353 21,647
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
STAFF LEASING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
(in $000's, except share and per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,081 $ 34,594
Certificates of deposit - restricted 7,777 7,781
Marketable securities 34,914 51,039
Accounts receivable, net 41,631 51,935
Other current assets 11,494 5,559
------------- -------------
Total current assets 118,897 150,908
Property and equipment, net 28,833 26,249
Goodwill, net of accumulated amortization 10,159 9,792
of $4,513 and $4,879, respectively
Deferred income tax asset 1,950 1,562
Other assets 3,731 4,859
------------- -------------
$ 163,570 $ 193,370
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued insurance premiums and reserves $ 22,724 $ 40,580
Accrued payroll and payroll taxes 35,574 56,633
Accounts payable and other accrued liabilities 10,888 5,691
Deferred income tax liability 8,770 6,962
Customer deposits and prepayments 3,523 4,021
------------- -------------
Total current liabilities 81,479 113,887
Other long-term liabilities 1,335 1,325
Commitments and contingencies (See notes)
Shareholders' equity :
Common stock, $.01 par value 217 214
Shares authorized: 100,000,000
Shares issued and outstanding:
December 31, 1999 - 21,709,542
June 30, 2000 - 21,433,583
Additional paid in capital 42,987 41,990
Retained earnings 37,701 36,037
Other (149) (83)
------------- -------------
Total shareholders' equity 80,756 78,158
------------- -------------
$ 163,570 $ 193,370
============= =============
</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 (275,959) (3) (1,069) (1,072)
Tax benefit of restricted
stock plan vesting 72 72
Other 33 33
Unrealized gain on marketable
securities 33
Net loss (1,664)
Total comprehensive loss (1,631)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2000 21,433,583 $ 214 $ 41,990 $ (76) $ (7) $ 36,037 $ 78,158
=========== =========== =========== =========== =========== =========== ===========
</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 SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 2000
-------- --------
(in $000's)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,603 $ (1,664)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,568 4,409
Deferred taxes, net 211 (1,345)
Provision for bad debts 350 300
Other 59 (222)
Changes in operating working capital:
Decrease (increase) in certificates of deposit -
restricted 598 (4)
Increase in accounts receivable (29,381) (10,604)
Decrease in other current assets 3,348 5,935
Decrease in accounts payable and other accrued
liabilities (1,454) (5,197)
Increase in accrued payroll and payroll taxes 30,039 21,059
Increase in accrued insurance premiums and
reserves 524 17,856
Increase in income taxes payable 966 --
(Decrease) increase in customer deposits and
prepayments (37) 498
Decrease (increase) in other long-term assets 120 (1,128)
Decrease in other long-term liabilities (229) (10)
-------- --------
Net cash provided by operating activities 19,285 29,883
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (23,735) (84,791)
Maturities of marketable securities 20,535 68,809
Capital expenditures (2,335) (1,333)
-------- --------
Net cash used in investing activities (5,535) (17,315)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of shareholders' notes receivable 7 --
Repurchase and retirement of common stock (4,134) (1,055)
-------- --------
Net cash used in financing activities (4,127) (1,055)
-------- --------
Net increase in cash and cash equivalents 9,623 11,513
Cash and cash equivalents - beginning of period 15,412 23,081
-------- --------
Cash and cash equivalents - end of period $ 25,035 $ 34,594
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 3,305 $ 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 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. SUBSEQUENT EVENT
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.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
----------- --------
<S> <C> <C>
Billed to clients ...................................... $ 11,391 $ 5,777
Unbilled revenues ...................................... 30,980 47,084
-------- --------
42,371 52,861
Less: Allowance for doubtful accounts............ (740) (926)
-------- --------
$ 41,631 $ 51,935
======== ========
</TABLE>
7
<PAGE>
STAFF LEASING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -- (CONTINUED)
(in $000's, except share and per share data
4. PROPERTY AND EQUIPMENT
Property and equipment (at cost) was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
----------- --------
<S> <C> <C>
Leasehold improvements...................................... $ 1,832 $ 1,865
Furniture and fixtures...................................... 2,944 3,057
Vehicles.................................................... 103 71
Equipment................................................... 2,803 2,821
Computer hardware and software.............................. 38,066 39,221
-------- --------
Total property and equipment................................ 45,748 47,035
Less accumulated depreciation......................... (16,915) (20,786)
-------- --------
$ 28,833 $ 26,249
======== ========
</TABLE>
For the six months ended June 30, 2000 depreciation expense was $4,042.
5. 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
Company has moved to dismiss the action. To date, the parties have engaged in
limited discovery, and expect to continue discovery over the next several
months. 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, 1997 could be revoked, its cafeteria plan may
lose its favorable tax status and the Company may no longer be able to assume
the client's federal employment tax withholding obligations. Any adverse
developments in the above noted areas could have a material effect on the
Company's financial condition and future results of operations.
8
<PAGE>
STAFF LEASING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -- (CONTINUED)
(in $000's, except share and per share data
6. 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 six
months ending June 30, 2000, the Company repurchased 268,179 of its shares from
the open market at a cost of $1.1 million, and 7,780 restricted shares from a
former employee in accordance with the terms of the Company's restricted plan.
7. INCOME TAXES
The Company records income tax expense using the asset and liability
method of accounting for deferred income taxes. Under such method, deferred tax
assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the financial statements and the income tax
bases of the Company's assets and liabilities. The Company's effective tax rate
provides for federal and state income taxes. The effective tax rate for the six
months ended June 30, 2000 was 37.5% and a tax benefit was recognized on the net
loss from operations.
8. 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, 1999,
related to warrants issued in connection with the Company's reorganization and
initial public offering, was 493,731 and 482,939, respectively, and for the
three and six months ended June 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 37,082 and 28,764 for the
three and six months ended June 30, 1999 respectively, and 1,769 and 1,300 for
the three and six months ended June 30, 2000 respectively.
9
<PAGE>
STAFF LEASING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -- (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 six months ended June 30, 1999 and 2000 is as
follows:
<TABLE>
<CAPTION>
INCOME
(LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- ---------
(in $000's) (in 000's)
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30, 1999:
-----------------------------------------
BASIC EPS :
Net income $ 4,989 21,765 $ .23
Effect of dilutive securities:
Warrants 494
Options 37
-------
DILUTED EPS :
Net income $ 4,989 22,296 $ .22
======= ======= =======
FOR THE SIX MONTHS ENDED JUNE 30, 1999:
---------------------------------------
BASIC EPS :
Net income $10,603 21,842 $ .49
Effect of dilutive securities:
Warrants 483
Options 29
-------
DILUTED EPS :
Net income $10,603 22,353 $ .47
======= ======= =======
FOR THE THREE MONTHS ENDED JUNE 30, 2000:
-----------------------------------------
BASIC EPS :
Net loss $(1,156) 21,585 $ (.05)
Effect of dilutive securities:
Warrants
Options 1
-------
DILUTED EPS :
Net loss $(1,156) 21,586 $ (.05)
======= ======= =======
FOR THE SIX MONTHS ENDED JUNE 30, 2000:
---------------------------------------
BASIC EPS :
Net loss $(1,664) 21,646 $ (.08)
Effect of dilutive securities:
Warrants
Options 1
-------
DILUTED EPS :
Net loss $(1,664) 21,647 $ (.08)
======= ======= =======
</TABLE>
10
<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 six months ended June 30, 1999 and 2000, expressed as a percentage of
revenues:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 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........ 91.0 91.1 90.8 90.9
Benefits, workers' compensation, state
unemployment taxes and other costs.... 4.4 5.8 4.5 5.9
----- ----- ----- -----
Total cost of services........... 95.4 96.9 95.3 96.8
----- ----- ----- -----
Gross profit............................... 4.6 3.1 4.7 3.2
----- ----- ----- -----
Operating expenses:
Salaries, wages and commissions.......... 2.1 2.0 2.2 2.1
Other general and administrative......... 1.0 1.0 1.0 1.0
Depreciation and amortization............ .3 .3 .2 .3
----- ----- ----- -----
Total operating expenses................... 3.4 3.3 3.4 3.4
----- ----- ----- -----
Operating income (loss).................... 1.2 (.2) 1.3 (.2)
Interest income, net....................... .1 .2 .1 .1
Other non-operating expenses............... (.1) (.2) (.1) (.1)
----- ----- ----- -----
Income (loss) before income taxes.......... 1.2 (.2) 1.3 (.2)
Income tax (provision) benefit............. (.5) .1 (.5) .1
----- ----- ----- -----
Net income (loss).......................... .7 (.1) .8 (.1)
----- ----- ----- -----
</TABLE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues were $779.8 million for the three months ended June 30, 2000,
compared to $664.3 million for the three months ended June 30, 1999,
representing an increase of $115.5 million, or 17.4%. This increase was due
primarily to increased wages of worksite employees. From June 30, 1999 to June
30, 2000, the number of clients decreased 6.0% from 10,437 to 9,809. The number
of worksite employees increased .3%, from 128,965 to 129,394. Revenue growth
exceeded headcount growth by 17.1%, 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 half of 2000 which encourages
solicitation of businesses paying better than average wages for their trade or
business. During the second quarter of 2000, the Company terminated client
relationships with approximately 5,200 employees that were unprofitable or
running low payroll volumes per employee. The Company opened one new sales
office in the second quarter of 2000 and one new sales office was opened in the
second quarter of 1999.
Cost of services was $755.7 million for the three months ended June 30,
2000, compared to $633.6 million for the three months ended June 30, 1999,
representing an increase of $122.1 million, or 19.3%. Cost of services was 96.9%
of revenues for the three months ended June 30, 2000, compared to 95.4% of
revenues for the three months ended June 30, 1999.
11
<PAGE>
Salaries, wages and payroll taxes of worksite employees were $710.3
million for the three months ended June 30, 2000, compared to $604.2 million for
the three months ended June 30, 1999, representing an increase of $106.1
million, or 17.6%.
Benefits, workers' compensation, state unemployment taxes and other costs
were $45.4 million for the three months ended June 30, 2000, compared to $29.4
million for the three months ended June 30, 1999, representing an increase of
$16.0 million, or 54.4%. 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 $24.1 million for the three months ended June 30, 2000,
compared to $30.7 million for the three months ended June 30, 1999, representing
a decrease of $6.6 million, or 21.5%. 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 June 30, 2000, compared to 4.6% for the
three months ended June 30, 1999.
Operating expenses were $25.9 million for the three months ended June 30,
2000, compared to $22.6 million for the three months ended June 30, 1999,
representing an increase of $3.3 million, or 14.6%. Operating expenses were 3.3%
of revenues for the three months ended June 30, 2000 compared to 3.4% for the
three months ended June 30, 1999. Operating expenses in the three months ended
June 30, 2000, included unusual expenses of $.9 million related to management
reorganization.
Salaries, wages and commissions were $15.7 million for the three months
ended June 30, 2000, compared to $14.3 million for the three months ended June
30, 1999, representing an increase of $1.4 million, or 9.8%. This increase was
due to increased average salary and wages per employee, and to $.5 million of
usual expenses related related to management reorganization. Salaries, wages and
commissions were 2.0% of revenues for the three months ended June 30, 2000
compared to 2.1% for the three months ended June 30, 1999.
Other general and administrative expenses were $8.1 million for the three
months ended June 30, 2000, compared to $6.6 million for the three months ended
June 30, 1999, representing an increase of $1.5 million, or 22.7%. Other general
and administrative expenses were 1.0% of revenues for the three months ended
June 30, 2000, and 1999. Other general and administrative expenses included
unusual expenses of $.4 million related to management reorgainzation in the
three months ended June 30, 2000.
Depreciation and amortization expenses increased by $.4 million for the
three months ended June 30, 2000 compared to the three months ended June 30,
1999, representing an increase of 22.2%. This increase was primarily the result
of the Company's investment in management information systems.
Interest income, net was $1.2 million for the three months ended June 30,
2000, compared to $.8 million in the second quarter of 1999 due to the increase
in cash available for investment.
Other non-operating expense was $1.2 million for the three months ended
June 30, 2000 compared to $.9 million for the three months ended June 30, 1999.
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. Other expense in the
second quarter of 2000 was related to the conclusion of the strategic
alternative process and management reorganization.
Income tax benefit of $.7 million for the three months ended June 30, 2000
represented a provision at an effective tax rate of 37.5% compared to $3.0
million tax expense for the three months ended June 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.
12
<PAGE>
Net loss was $1.2 million for the three months ended June 30, 2000,
compared to net income of $5.0 million for the three months ended June 30, 1999,
representing a decrease of $6.2 million or 124.0%.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenues were $1,511.2 million for the six months ended June 30, 2000,
compared to $1,311.6 million for the six months ended June 30, 1999,
representing an increase of $199.6 million, or 15.2%. This increase was due
primarily to increased wages of worksite employees. From June 30, 1999 to June
30, 2000, the number of clients decreased 6.0% from 10,437 to 9,809. The number
of worksite employees increased .3%, from 128,965 to 129,349. Revenue growth
exceeded headcount growth by 14.9%, 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 half of 2000 which encourages
solicitation of businesses paying better than average wages for their trade or
business. During the first half of 2000, the Company terminated client
relationships with approximately 7,500 employees that were unprofitable or
running low payroll volumes per employee.
Cost of services was $1,463.6 million for the six months ended June 30,
2000, compared to $1,250.3 million for the six months ended June 30, 1999,
representing an increase of $213.3 million, or 17.1%. Cost of services was 96.8%
and 95.3% of revenues for the six months ended June 30, 2000 and 1999,
respectively.
Salaries, wages and payroll taxes of worksite employees were $1,374.0
million for the six months ended June 30, 2000, compared to $1,191.4 million for
the six months ended June 30, 1999, representing an increase of $182.6 million,
or 15.3%.
Benefits, workers' compensation, state unemployment taxes and other costs
were $89.6 million for the six months ended June 30, 2000, compared to $58.9
million for the six months ended June 30, 1999, representing an increase of
$30.7 million, or 52.1%. Benefits, workers' compensation, state unemployment
taxes and other costs were 5.9% of revenues for the six months ended June 30,
2000 and 4.5% for the six months ended June 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 $47.5 million for the six months ended June 30, 2000,
compared to $61.3 million for the six months ended June 30, 1999, representing a
decrease of $13.8 million, or 22.5%. This decrease is primarily due to the
increase in workers' compensation insurance costs. Gross profit was 3.2% of
revenues for the six months ended June 30, 2000, compared to 4.7% for the six
months ended June 30, 1999.
Operating expenses were $51.0 million for the six months ended June 30,
2000, compared to $44.8 million for the six months ended June 30, 1999,
representing an increase of $6.2 million, or 13.8%. Operating expenses were 3.4%
of revenues for the six months ended June 30, 2000, and 1999. Operating expenses
for the six months ended June 30, 2000, included unusual expenses of $1.0
million related to management reorganization.
Salaries, wages and commissions were $31.1 million for the six months
ended June 30, 2000, compared to $28.4 million for the six months ended June 30,
1999, representing an increase of $2.7 million, or 9.5%. This increase was due
primarily to an increase in average employee wages and unusual expenses of $.5
million of related to management reorganization. Salaries, wages and commissions
were 2.1% of revenues for the six months ended June 30, 2000 and 2.2% for the
six months ended June 30, 1999.
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Other general and administrative expenses were $15.5 million for the six
months ended June 30, 2000, compared to $12.8 million for the six months ended
June 30, 1999, representing an increase of $2.7 million, or 21.1%. Other general
and administrative expenses were 1.0% of revenues for the six months ended June
30, 2000, and 1999.
Depreciation and amortization expenses increased by $.8 million for the
six months ended June 30, 2000 compared to the six months ended June 30, 1999,
representing an increase of 23.6%. This increase was primarily the result of the
Company's investment in management information systems.
Interest income was $2.1 million for the six months ended June 30, 2000,
compared to $1.4 million of interest income for the first half of 1999,
representing an increase of $.7 million.
Other non-operating expense was $1.4 million for the six months ended June
30, 2000 compared to $.9 million for the six months ended June 30, 1999. 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. Other expense in the
second quarter of 2000 was related to the conclusion of the strategic
alternative process and management reorganization.
Income tax benefit of $1.0 million for the six months ended June 30, 2000
at an effective tax rate of 37.5% compared to tax expense of $6.4 million for
the six months ended June 30, 1999 at an effective tax rate of 37.8%.
Net loss was $1.7 million for the six months ended June 30, 2000, compared
to net income of $10.6 million for the six months ended June 30, 1999,
representing a decrease of $12.3 million or 116.0%.
Liquidity and Capital Resources
The Company had approximately $93.4 million in cash, cash equivalents,
restricted cash and marketable securities at June 30, 2000.
The Company had no long-term debt as of June 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 June 30, 2000, the Company had net working capital
of $37.0 million versus $37.4 million as of December 31, 1999, representing a
decrease of $.4 million, or 1.0%.
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,
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 $29.9 million for the six
months ended June 30, 2000 compared to $19.3 million for the six months ended
June 30, 1999, representing an increase of $10.6 million, or 54.9%.
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
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performance expressed or implied by such forward-looking statements. Such known
and unknown risks, uncertainties and other factors include, but are not limited
to, the following: (i) the potential for additional subsidies for health benefit
plans; (ii) volatility in workers' compensation rates and unemployment taxes;
(iii) possible adverse application of certain federal and state laws and the
possible enactment of unfavorable laws or regulation; (iv) impact of competition
from existing and new professional employer organizations; (v) risks associated
with expansion into additional states where the Company does not have a presence
or significant market penetration; (vi) risks associated with the Company's
dependence on key vendors; (vii) the possibility for client attrition; (viii)
risks associated with geographic market concentration and concentration of
clients in the construction industry; (ix) the financial condition of clients;
(x) the failure to properly manage growth and successfully integrate acquired
companies and operations; and (xi) other factors which are described in further
detail in the Company's filings with the Securities and Exchange Commission.
The Company cautions that the factors described above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held May 22, 2000. Holders
of 16,521,828 shares of common stock were present in person or by proxy which
constituted a quorum. The two proposals voted on at the meeting were approved.
The vote of the stockholders was as follows:
1. Election of two Class I Directors to serve until the annual meeting of
shareholders in 2003 or until their successors are duly elected and
qualified.
BROKER
FOR WITHHELD NON-VOTES
--- -------- ---------
George B. Beitzel 10,849,228 5,672,600 0
Charles S. Craig 15,102,608 1,419,220 0
2. Approval of Amendment to the Staff Leasing, Inc. 1997 Stock Incentive
Plan, as amended, to increase the number of shares of common stock
reserved for issuance thereunder by 2,000,000 shares. As stated in the
Proxy statement dated April 24, 2000, approval of the amendment
required the affirmative vote of a majority of the shares present and
entitled to vote at the meeting. Abstentions had the same effect as
negative votes, but Broker Non-Votes, had no effect on the voting of
this proposal. Therefore, Broker Non-Votes were not included in the
denominator when calculating a majority.
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
7,398,634 3,841,858 40,074 5,241,262
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
------- -----------
10.19 Employment and Severance Agreement dated April 19,2000 between
Richard Goldman and Staff Leasing, Inc.
10.20 Employment Agreement dated June 15, 2000 between Michael Phippen
and Staff Leasing, Inc.
27.1 Financial Data Schedule for the six months ended June 30, 2000.
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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 14, 2000 BY /s/ MICHAEL PHIPPEN
--------------------------------------------------------------------------------
Michael Phippen
Officer and Chairman of the Board
(Principal Executive Officer)
Dated: August 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)
17
