UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d)
--- of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1997
Transition Report Pursuant to Section 13 or 15 (d)
--- of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 0-28148
THE VINCAM GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2452823
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2850 Douglas Road Coral Gables, Florida 33134
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(305) 460-2350
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
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 ____
As of August 13, 1997, The Vincam Group, Inc. had 9,002,936 shares of
common stock, $.001 par value, outstanding.
1
THE VINCAM GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
Part I Financial Information
Item 1. Financial Statements.......... ............ 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 16
Part II Other Information
Item 1. Legal Proceedings.......................... 28
Item 2. Changes in Securities...................... 28
Item 4. Submission of Matters to a Vote of
Securities Holders....................... 28
Item 5. Other Information.......................... 28
Item 6. Exhibits and Reports on Form 8-K........... 29
Signatures ........................................... 30
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
The Vincam Group, Inc.
Unaudited Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996................................................. 4
Unaudited Consolidated Statements of Operations for the Three
and the Six Months Ended June 30, 1997 and 1996................... 5
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the Six Months Ended June 30, 1997..................... 6
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996........................... 7
Notes to Consolidated Financial Statements (Unaudited).............. 9
3
THE VINCAM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
------------ ------------
Assets
Current assets:
Cash and cash equivalents .................... $13,282,136 $17,522,030
Investments .................................. 731,218 149,626
Restricted cash .............................. 2,331,917 2,331,917
Accounts receivable .......................... 31,515,367 24,391,893
Due from affiliates .......................... 286,845 292,957
Deferred taxes ............................... 1,625,246 1,457,280
Reinsurance recoverable ...................... 1,695,169 1,728,000
Prepaid workers' compensation insurance
premium...................................... 3,270,943 5,483,972
Prepaid expenses and other current assets .... 2,022,796 1,170,282
------------ ------------
Total current assets .................. 56,761,637 54,527,957
Property and equipment, net .................. 6,295,661 4,601,868
Deferred taxes ............................... 606,404 628,626
Reinsurance recoverable ...................... 2,332,200 1,472,000
Client contracts and other assets ............ 1,667,153 1,430,951
Goodwill ..................................... 5,249,503 4,791,836
Other assets ................................. 186,839 255,225
------------ ------------
$73,099,397 $67,708,463
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ........ $ 7,149,167 $ 6,311,503
Accrued salaries, wages and payroll taxes .... 23,126,662 17,926,012
Amounts due under acquisition agreement ...... 2,210,937 2,623,437
Reserve for claims ........................... 4,089,411 5,541,766
Income taxes payable ......................... 1,765,266 1,326,700
Current portion of long term borrowings ...... 121,638 136,053
Deferred compensation ........................ 6,617 242,013
Deferred gain ................................ 277,862 323,157
------------ ------------
Total current liabilities ............. 38,747,560 34,430,641
Long term borrowings, less current portion ....... 808,977 883,689
Reserve for claims ............................... 2,603,166 3,064,438
Income taxes payable ............................. -- 672,818
Deferred compensation ............................ -- 41,200
Deferred gain .................................... 528,744 275,275
Other liabilities ................................ 434,009 365,954
------------ ------------
Total liabilities ..................... 43,122,456 39,734,015
------------ ------------
Commitments and contingencies (Note 6) ........... -- --
------------ ------------
Stockholders' equity:
Common stock, $.001 par value, 60,000,000
shares authorized, 8,956,271 shares
issued and outstanding .................... 8,956 8,013
Additional paid in capital ................... 34,147,536 33,241,867
Accumulated deficit .......................... (4,179,551) (5,275,432)
------------ ------------
Total stockholders' equity ............ 29,976,941 27,974,448
------------ ------------
$73,099,397 $67,708,463
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Revenues ......................................... $206,117,844 $124,524,173 $397,090,254 $236,454,486
------------- ------------- ------------- -------------
Direct costs:
Salaries, wages and employment
taxes of worksite employees ................ 183,907,859 110,293,861 353,445,530 209,642,983
Health care and workers' compensation ........ 7,496,050 5,934,150 15,346,930 11,123,737
State unemployment taxes and other ........... 2,137,847 1,088,082 4,040,504 2,323,433
------------- ------------- ------------- -------------
Total direct costs ..................... 193,541,756 117,316,093 372,832,964 223,090,153
------------- ------------- ------------- -------------
Gross profit ..................................... 12,576,088 7,208,080 24,257,290 13,364,333
------------- ------------- ------------- -------------
Operating expenses:
Administrative personnel ..................... 5,372,402 3,287,995 10,494,619 6,319,490
Other general and administrative ............. 4,479,396 1,901,597 7,084,355 3,508,886
Sales and marketing .......................... 1,875,790 1,147,796 3,409,270 2,008,464
Provision for doubtful accounts .............. 185,916 108,889 426,416 252,889
Depreciation and amortization ................ 591,878 181,241 990,482 335,016
------------- ------------- ------------- -------------
Total operating expenses ............... 12,505,382 6,627,518 22,405,142 12,424,745
------------- ------------- ------------- -------------
Operating income ................................. 70,706 580,562 1,852,148 939,588
Interest (expense) income, net ................... 96,027 175,108 285,922 179,206
------------- ------------- ------------- -------------
Income before taxes .............................. 166,733 755,670 2,138,070 1,118,794
Provision for income taxes ....................... (249,091) (137,251) (1,041,624) (344,315)
------------- ------------- ------------- -------------
Net (loss) income ................................ $ (82,358) $ 618,419 $ 1,096,446 $ 774,479
============= ============= ============= =============
Net (loss) income per common and common
equivalent share ............................. $ (0.01) $ 0.07 $ 0.12 $ 0.10
============= ============= ============= =============
Weighted average number of shares
outstanding used in earnings per
share calculation ............................ 9,428,223 8,566,126 9,424,281 7,959,962
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Retained
Common Stock Additional Earnings
------------------------- Paid in (Accumulated
Shares Par Value Capital Deficit) Total
----------- ------------ ------------ ------------ ------------
Balance at December 31, 1996 ..................... 8,013,332 $ 8,013 $33,241,867 $(5,275,432) $27,974,448
Issuance of common stock under
acquisition agreements .......................... 885,162 885 868,169 (565)
868,489
Issuance of common stock to
employees under stock option plans .............. 57,777 58 173,273 -- 173,331
Initial public offering costs charged to paid
in capital ..................................... -- -- (135,773) -- (135,773)
Net income ....................................... -- -- -- 1,096,446 1,096,446
----------- ------------ ------------ ------------ ------------
Balance at June 30, 1997 ......................... 8,956,271 $ 8,956 $34,147,536 $(4,179,551) $29,976,941
=========== ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
1997 1996
------------ ------------
Cash flows from operating activities:
Net income ................................................. $ 1,096,446 $ 774,479
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization ............................ 631,878 335,016
Provision for doubtful accounts .......................... 185,916 252,889
Deferred gain ............................................ 208,174 --
Deferred income tax benefit .............................. (145,744) (610,410)
Changes in assets and liabilities:
Increase in restricted cash ............................ -- (136,324)
Increase in accounts receivable ........................ (7,309,390) (4,073,595)
Decrease (increase) in due from affiliates ............. 6,112 (408,178)
Increase in reinsurance recoverable .................... (827,369) --
Decrease in prepaid workers' compensation
insurance premium .................................... 2,213,029 --
Increase in prepaid expenses and other current assets . (852,514) (465,311)
Decrease in other assets ............................... 68,386 18,646
Increase in accounts payable and accrued expenses ...... 837,664 1,010,414
Increase in accrued salaries, wages and payroll taxes .. 5,200,650 2,178,777
(Decrease) increase in reserve for claims .............. (1,913,627) 1,752,788
(Decrease) increase in income taxes payable ............ (234,252) 816,319
Decrease in deferred compensation ...................... (276,596) (274,087)
Increase in other liabilities .......................... 68,055 9,000
------------ ------------
Net cash (used in) provided by operating activities ........... (1,043,182) 1,180,423
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ........................ (2,151,051) (908,003)
Purchases (redemption) of short term investments ........... (581,592) 244,039
Collection of notes receivable from stockholders ........... -- 123,078
Payment of amounts due under acquisition agreement ......... (412,500) --
------------ ------------
Net cash used in investing activities ......................... (3,145,143) (540,886)
------------ ------------
Cash flows from financing activities:
Principal payments on borrowings ........................... (89,127) (1,277,771)
Payment of distribution payable to shareholders ............ -- (935,358)
Initial public offering costs charged to paid in capital ... (135,773) --
Issuance of common stock ................................... -- 27,041,315
Issuance of common stock to employees under stock plans .... 173,331 --
------------ ------------
Net cash provided by (used in) financing activities ........... (51,569) 24,828,186
------------ ------------
Net decrease in cash and cash equivalents ..................... (4,239,894) 25,467,723
Cash and cash equivalents, beginning of period ................ 17,522,030 1,964,581
------------ ------------
Cash and cash equivalents, end of period ...................... $13,282,136 $27,432,304
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
7
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
ACQUISITION OF MINORITY INTEREST OF STAFF ADMINISTRATORS OF WESTERN COLORADO,
INC.
On January 7, 1997, the Company acquired the 49% minority interest in Staff
Administrators of Western Colorado, Inc., a subsidiary of Staff Administrators,
Inc. ("SAI"), in a transaction accounted for as a purchase. The fair value of
the interest acquired and the consideration paid were as follows:
Fair value of net assets acquired:
Client contracts.................................... $ 301,848
Accounts receivable................................. 220,643
Property and equipment.............................. 36,807
-----------
Fair value of non-cash assets acquired.............. 559,298
-----------
Accounts payable and accrued expenses............... 8,938
Accrued salaries, wages and payroll taxes........... 240,630
Other liabilities................................... 140,624
-----------
Fair value of liabilities assumed................... 390,192
-----------
Fair value of net assets acquired, excluding cash... 169,106
Cash acquired....................................... 124,253
-----------
Fair value of net assets acquired................... $ 293,359
===========
Purchase price (20,000 shares x $43.00)............. $ 860,000
===========
The following is a reconciliation of the purchase price to the excess of
costs associated with the acquisition over the estimated fair value of net
assets acquired allocated to goodwill:
Purchase price...................................... $ 860,000
Net assets acquired................................. (293,359)
-----------
Amount allocated to goodwill........................ $ 566,641
===========
In May 1996, the Company's mandatorily redeemable Series A Participating
Convertible Preferred Stock was converted into 1,043,933 shares of the Company's
common stock.
The accompanying notes are an integral part of these consolidated financial
statements.
8
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and December 31, 1996
Note 1 - Basis for Presentation of Consolidated Financial Statements
The accompanying unaudited consolidated financial statements of The Vincam
Group, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Rule 10-01 of Regulation S-X. They do not include
all information and notes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
audited consolidated financial statements and notes thereto for the year ended
December 31, 1996 included in the Company's Annual Report on Form 10-K and the
pooled consolidated financial statements for the year ended December 31, 1996,
included in the Company's Current Report on Form 8-K, dated May 8, 1997. The
unaudited financial information herein presented as of December 31, 1996, has
been derived from the audited pooled consolidated financial statements included
in the Company's Current Report on Form 8-K, dated May 8, 1997 and the audited
financial statements of Amstaff, Inc. to be included in the Company's Amendment
No. 2 to Current Report on Form 8-K, dated June 30, 1997. The unaudited
financial information herein presented for the three and six month periods ended
June 30, 1996, has been derived from the Company's unaudited quarterly financial
information included in the Company's Quarterly Report on Form 10-Q for the
three and six month periods ended June 30, 1996, and the unaudited quarterly
financial information of Staff Administrators, Inc. and Amstaff, Inc. for the
three and six months ended June 30, 1996. The unaudited financial information
herein presented for the three and six month periods ended June 30, 1997,
includes the assets and liabilities and results of operations of the Company and
Amstaff, Inc. for such periods. 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 of cash flows for the interim periods
presented. The results of operations for the periods presented are not
necessarily indicative of the results for the entire year.
The accompanying unaudited financial statements include the accounts of The
Vincam Group, Inc. and its subsidiaries ("Vincam" or the "Company"). All
material intercompany balances and transactions have been eliminated.
Note 2 - Acquisitions
On August 30, 1996, the Company acquired substantially all of the assets
and liabilities of The Stone Mountain Group, Inc. ("SMG"), a professional
employer organization ("PEO") in Snellville, Georgia for $4,980,751 in cash and
notes (the "SMG Acquisition"). Of the $4,980,751 purchase price, $2,357,314 was
paid at closing, $412,500 was paid in January 1997, $960,937 is payable in
August 1997, and $1,250,000 was placed in escrow for potential purchase price
adjustments in the event that, among other things, client retention fails to
meet certain targets. The SMG Acquisition was accounted for using the purchase
method of accounting. Excess of costs over the estimated fair value of net
assets acquired associated with the SMG Acquisition was allocated to goodwill
and is being amortized over a period of 25 years.
9
On January 7, 1997, the Company acquired Staff Administrators, Inc.
("SAI"), a privately held PEO headquartered in Denver, Colorado (the "SAI
Acquisition"). The Company issued 500,000 shares of its common stock in exchange
for all of the outstanding shares of common stock of SAI. The transaction has
been accounted for in accordance with the pooling of interests accounting
treatment; accordingly, all prior period financial statements presented herein
include the assets and liabilities and results of operations of SAI. In
connection with the acquisition of SAI, the Company also acquired, in a
transaction accounted for as a purchase, a 49% minority interest in Staff
Administrators of Western Colorado, Inc. ("SAWCI"), a 51% subsidiary of SAI (the
"SAWCI Acquisition"). The Company issued 20,000 shares of its common stock for
the 49% interest in SAWCI. The most significant adjustments to the balance sheet
resulting from the SAWCI Acquisition are disclosed in the supplemental
disclosure of non-cash investing and financing activities in the accompanying
consolidated statements of cash flows.
On June 30, 1997, the Company acquired Amstaff, Inc. ("AMI"), a privately
held PEO headquartered in Novi, Michigan (the "AMI Acquisition"). The Company
issued 365,162 shares of its common stock in exchange for all of the outstanding
shares of common stock of AMI and its subsidiaries. The transaction has been
accounted for in accordance with the pooling of interests accounting treatment;
accordingly, all prior period financial statements presented herein include the
assets and liabilities and results of operations of AMI.
The following combines unaudited selected historical financial information
of AMI and Vincam for the periods presented reflecting the most significant
adjustments resulting from the AMI Acquisition.
Six Months Ended June 30, 1997
-----------------------------------------------------
Pooled
Vincam AMI Adjustments Results
------------- ------------- ----------- -------------
Revenues................. $350,505,151 $ 46,585,103 $ -- $397,090,254
============= ============= =========== =============
Net income............... $ 1,835,948 $ (739,502) $ -- $ 1,096,446
============= ============= =========== =============
Net income per common and
common equivalent share $ 0.20 $ -- $ -- $ 0.12
============= ============= =========== =============
Six Months Ended June 30, 1996
-----------------------------------------------------
Pooled
Vincam AMI Adjustments Results
------------- ------------- ----------- -------------
Revenues................. $205,543,298 $ 30,911,188 $ -- $236,454,486
============= ============= =========== =============
Net income............... $ 1,036,766 $ (262,287) $ -- $ 774,479
============= ============= =========== =============
Net income per common and
common equivalent share $ 0.14 $ -- $ -- $ 0.10
============= ============= =========== =============
These results are presented for informational purposes only and are not
necessarily indicative of the future results of operations or financial position
of the Company or the results of operations or financial position of the Company
that would have been achieved had the AMI Acquisition actually occurred at the
beginning of the periods presented.
Prior June 30, 1997, Amstaff, Inc. was taxed under the
10
Note 3 - Accounts Receivable
At June 30, 1997 and December 31, 1996, accounts receivable consisted of
the following:
1997 1996
------------- -------------
Billed to clients...................... $ 9,883,691 $ 8,187,375
Unbilled revenues...................... 22,288,121 16,781,168
------------- -------------
32,171,812 24,968,543
Less: allowance for doubtful accounts.. (656,445) (576,650)
------------- -------------
$ 31,515,367 $ 24,391,893
============= =============
Note 4 - Reserve for Claims
In December 1996, the Company entered into an agreement with a national
insurance company to provide workers' compensation insurance coverage for 1997
through 1999, subject to a deductible of $2,000 per medical only claim.
Accordingly, effective January 1, 1997, the Company records workers'
compensation costs based primarily on the fixed portion of its premium under
such policy, rather than through the previous practice of applying actuarial
estimates.
In addition, in December 1996 and March 1997, the Company entered into
agreements to reinsure substantially all of the remaining claims under the
Company's large deductible workers' compensation insurance policies for the
years 1994, 1995 and 1996 (including the remaining claims acquired upon the
acquisition of SAI under SAI's large deductible workers' compensation insurance
policies for the years 1994, 1995, and 1996), for an aggregate premium of
$5,070,000. Since reserves for claims for these years had been previously
provided, the Company has recorded the premium as a reinsurance recoverable and
a deferred gain in the amount of $1,149,451, of which $342,845 has been
recognized as a reduction of workers' compensation expense based on the
proportion of cumulative claims paid through June 30, 1997, to the total
estimated liability for claims.
In connection with the reinsurance of claims exposure from 1994 to 1996,
the insurance carrier has provided $4,100,959 in letters of credit in favor of
the Company to secure the insurance carrier's obligation for the payment of
workers' compensation claims.
As a consequence of the reinsurance agreements described above, the Company
has classified as current the estimated amounts of reserves for claims and
reinsurance recoverable expected to be paid and to be collected, respectively,
within one year, as well as the related deferred gain expected to be recognized
within one year.
11
At June 30, 1997 and December 31, 1996, the Company's reserves for claims
costs are as follows:
1997 1996
------------ ------------
Accrued workers' compensation claims............. $ 4,608,677 $ 6,961,630
Accrued health care claims....................... 998,117 1,119,109
Reserve for behavioral health care claims........ 1,085,783 525,465
------------ ------------
6,692,577 8,606,204
Less: workers' compensation claims expected
to be settled in more than one year.............. (2,603,166) (3,064,438)
------------ ------------
Reserve for claims--current $ 4,089,411 $ 5,541,766
============ ============
Note 5 - Borrowings
Borrowings at June 30, 1997 and December 31, 1996, are as follows:
1997 1996
---------- ----------
Note payable to bank, original amount of $1 million,
repayable in monthly instalments of $4,167, plus
interest at 8.5% per annum, through November 1998
when a balloon payment of $750,000 is due, secured
by land and building..................................... 816,559 841,561
Notes payable to bank, bearing interest at rates
ranging from 7.49% to 10.75%, payable in monthly
instalments ranging from $926 to $246, secured by
underlying equipment..................................... 78,149 122,692
Note payable for state unemployment taxes, maturing
in 1998 with monthly payments of $3,264.................. 35,907 55,489
---------- ----------
930,615 1,019,742
Less: current portion (121,638) (136,053)
---------- ----------
$ 808,977 $ 883,689
========== ==========
In April 1997, the Company entered into a revolving line of credit
agreement for an aggregate amount of $50,000,000 with a group of banks (the
"Credit Agreement"). The Credit Agreement provides for a revolving credit
facility with a sublimit of $15,000,000 to fund working capital advances and
standby letters of credit. The Credit Agreement also provides for advances to
finance acquisitions. Amounts outstanding under the revolving credit facility
mature on April 24, 2000. If, on April 24, 2000, certain conditions are
satisfied, any amounts outstanding under the revolving line of credit may be
converted into a term loan payable in eight quarterly instalments commencing on
August 1, 2000. The Company is required to pay an unused facility fee ranging
from .20% to .35% per annum on the facility, depending upon certain financial
covenants.
12
The Credit Agreement is secured by a pledge of shares of all of the
Company's subsidiaries. The Credit Agreement contains customary events of
default and covenants which prohibit, among other things, incurring additional
indebtedness in excess of a specified amount, paying dividends, creating liens
and engaging in certain mergers or combinations without the prior written
consent of the lender. The Credit Agreement also contains certain financial
covenants relating to current ratio, debt to capital ratio, debt and fixed
charges coverage and minimum tangible net worth, as defined in the Credit
Agreement.
Interest under the Credit Agreement accrues at rates based, at the
Company's option, on the Bank's Prime Rate plus a margin of as much as .25%, or
its Eurodollar Rate (as defined in the Credit Agreement) plus a margin of 1.00%
to 1.75%, depending on certain financial covenants.
Under the revolving credit facility, the Company had outstanding $6,250,000
in standby letters of credit at June 30, 1997, which guarantee the payment of
claims to the Company's former workers' compensation insurance carrier. As of
that date there were no other amounts outstanding under the revolving line of
credit.
The Company also has $1,275,000 in standby letters of credit with another
bank as of June 30, 1997, which guarantee the payment of workers' compensation
claims acquired upon the SAI Acquisition to SAI's former workers' compensation
insurance carrier.
As of June 30, 1997, the scheduled annual maturities of the Company's long
term debt are summarized as follows:
1997.............. $ 121,638
1998.............. 769,339
1999.............. 22,411
2000.............. 15,285
2001.............. 1,942
------------
$ 930,615
============
13
Note 6 - Commitments and Contingencies
The Company is a defendant in a lawsuit related to a wrongful death and
premises liability claim involving a worksite employee. The plaintiff's original
complaint sought damages in excess of $10,000,000; however, such complaint was
dismissed in part and amended to seek damages in excess of $15,000. The court
has sustained plaintiff's amended complaint alleging premises liability against
both the Company and its client as a result of a worksite accident at client's
premises. The Company is asserting that its liability under this claim, if any,
should be limited to $100,000 due to the immunity provisions of the Florida
workers' compensation statute involving worksite accidents. The Company's motion
for summary judgment on that basis was recently denied, and discovery in the
proceeding continues. While there can be no assurance that the ultimate outcome
of this lawsuit will not have a material adverse effect on the Company's
financial condition or results of operations, management believes, based on
consultations with the Company's counsel, that the ultimate outcome of this
lawsuit should not have such an effect.
The Company is a defendant in a lawsuit brought in Dade County Circuit
Court in November 1995 by an individual who alleges that he was injured by a
worksite employee of a client of the Company, which owns and operates a hotel
and was a co-defendant in the litigation. The plaintiff recently settled with
the Company's client worksite employee who had been a co-defendant in the
lawsuit. The plaintiff alleges that the employee, while he was working as a
valet parking attendant, was negligent in a motor vehicle collision and severely
and permanently injured the plaintiff. The plaintiff alleged damages in excess
of $50,000 in his amended complaint for, among other things, bodily injury,
medical costs, pain and suffering, and lost ability to earn income. A jury trial
is currently scheduled for March 1998. Based on consultations with the Company's
counsel, management of the Company believes that it has meritorious defenses to
the plaintiff's claims and that if the lawsuit is adversely determined, the
Company may be entitled to indemnification from its client and/or its liability
insurance carrier. Although management believes that the Company's ultimate
liability in this matter should not be material, there can be no assurance that
the Company will prevail in the litigation, in a related claim for
indemnification, or that the liability of the Company, if any, would not have a
material adverse effect on the Company's financial condition and results of
operations.
In October 1996, the Company received a notice of assessment in the
discounted amount of approximately $53,500 from The Treasurer of the State of
Florida Department of Insurance as Receiver of United States Employer Consumer
Self Insurance Fund of Florida, a workers' compensation insurance fund which was
declared insolvent (the "Fund"). The Company paid the discounted assessment in
January 1997. The Company had certain worksite employees covered by the Fund
during the fiscal years ended December 31, 1992, 1993 and 1994. The court order
authorizing the assessment provides that the Company, by paying the discounted
assessment, is deemed to have paid its assessment in full and is not subject to
any further assessment for policyholder loss claims. The Company may be subject
to additional liability for the assessments of other Fund members. The Company
believes that there are approximately 700 members of the Fund which have been
assessed $37,000,000 in the aggregate. Although the amount of the potential
exposure, if any, for such additional liability is not yet determinable,
management believes that the Company would have meritorious defenses to such
additional liability and that its ultimate liability in this matter will not
have a material adverse effect on the Company's financial condition or results
of operations. There cannot, however, be any assurance that any such liability
will not have such material adverse effect.
14
On June 30, 1997, the Company entered into an agreement with a health
insurance company to purchase a managed care provider network and to terminate
the strategic alliance with such health insurance company under which the
Company provided its workers' compensation managed care services. In connection
with the agreement, the Company made a payment of $1,000,000 and accounted for
such cost as a termination fee. The balance due under the agreement of
approximately $1,400,000 will be payable in the fourth quarter of 1997 upon
delivery of the managed care provider network, and will be capitalized. The
payment of $1,000,000 was recorded as other general and administrative expense
in the accompanying statements of income.
In June 1995, the National Labor Relations Board (the "Board") filed a
complaint charging Amstaff, Inc., with a refusal to bargain with respect to a
collective bargaining agreement, under which a now former client's employees
were employed, in violation of the National Labor Relations Act. Vincam acquired
Amstaff, Inc. in June 1997. The charge was initially dismissed by a Detroit
office of the Board, but has since been reinstated following a union appeal to
the general counsel for the Board. If the Board rules against the Company, the
Company could be held liable for lost wages and benefits of such employees for a
period of almost four years. Any award would be reduced by any earnings of such
employees which received or reasonably could have received from other employment
during the relevant time period. The Company cannot currently estimate its
potential liability if the Board were to rule against it. The Company intends to
vigorously defend this case, but there can be no assurance that the Company will
prevail in the proceedings or that the liability of the Company, if any, would
not have a material adverse effect on the Company's financial condition and
results of operations.
The Company is also involved in other legal and administrative proceedings
arising in the ordinary course of business. The outcomes of these actions are
not expected to have a material effect on the Company's financial position or
results of operations.
Note 7 - Income Taxes
Prior to June 30, 1997, an entity (the "subsidiary") acquired by the
Company was taxed under the Sub Chapter S provisions of the Internal Revenue
Code ("IRC") whereby its profits and losses flowed directly to its former
shareholders for U.S. federal income tax purposes. Upon the merger of the
subsidiary with the Company on June 30, 1997, the subsidiary no longer qualify
under the Sub Chapter S provisions of the IRC and became a taxable entity. In
connection with the subsidiary change in tax status, the Company recorded
approximately $1,100,000 in deferred tax assets primarily related to certain
accrued expenses not currently deductible. The Company has recorded a valuation
allowance in connection with such deferred tax assets due to the uncertainty of
its realization.
* * * * * * * * * *
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
(i) the Consolidated Financial Statements and Notes thereto contained herein,
(ii) the Consolidated Financial Statements and the Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing in the 1996 Annual Report on Form 10-K,and the Current
Report on Form 8-K dated May 8, 1997, each as filed by The Vincam Group, Inc.
("Vincam" or the "Company") with the Securities and Exchange Commissions, and
(iii) the Amendment No. 2 to Current Report on Form 8-K, dated June 30, 1997 to
be filed by the Company.
The following discussion contains forward-looking statements. The Company's
actual results could differ materially from those discussed in such
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below and elsewhere in this Form 10-Q. 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," "is
anticipated," "estimated," "projection" and "outlook") are not historical facts
and may be forward-looking and, accordingly, such statements involve estimates,
assumptions, and uncertainties which could cause actual results to differ
materially from those expressed in the forward-looking statements. Such
uncertainties include, among others, the following: (i) potential for
unfavorable interpretation of government regulations relating to labor, taxes,
insurance, employment matters and the provision of managed care services; (ii)
the Company's ability to obtain or maintain all required licenses or
certifications required to further expand the range of specialized managed care
services offered by the Company; (iii) potential increases in the Company's
costs, such as health care costs, that the Company may not be able to reflect
immediately in its service fees; (iv) the Company's ability to offer its
services to prospective clients in additional states where it has less or no
market penetration; (v) the level of acquisition opportunities available to the
Company and the Company's ability to efficiently price and negotiate such
acquisitions on a favorable basis; (vi) the financial condition of the Company's
clients; (vii) additional regulatory requirements affecting the Company; (viii)
the impact of competition from existing and new professional employer
organizations; (ix) the failure to properly manage growth and successfully
integrate acquired companies and operations, and to achieve synergies and other
cost savings in the operation of acquired companies; and (x) 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.
16
Overview
Vincam, one of the largest professional employer organizations ("PEOs") in
the industry, provides small and medium-sized businesses with an outsourcing
solution to the complexities and costs related to employment and human
resources. The Company's continuum of integrated employment-related services
consists of human resource administration, employment regulatory compliance
management, workers' compensation coverage, health care and other employee
benefits. The Company establishes a co-employer relationship with its clients
and contractually assumes substantial employer responsibilities with respect to
worksite employees. In addition, the Company offers certain specialty managed
care services on a stand-alone basis to health and workers' compensation
insurance companies, HMOs, managed care providers and large, self-insured
employers.
The Company's revenues include all amounts billed to clients for gross
salaries and wages, related employment taxes, and health care and workers'
compensation coverage of worksite employees. The Company is obligated to pay the
gross salaries and wages, related employment taxes and health care and workers'
compensation costs of its worksite employees whether or not the Company's
clients pay the Company on a timely basis or at all. The Company believes that
including such amounts as revenues appropriately reflects the responsibility
which the Company bears for such amounts and is consistent with industry
practice. In addition, the Company's revenues are subject to fluctuations as the
result of (i) changes in the volume of worksite employees serviced by the
Company; (ii) changes in the wage base and employment tax rates of worksite
employees; and (iii) changes in the mark-up charged by the Company for its
services.
The Company's primary direct costs are (i) salaries, wages, the employer's
portion of social security, Medicare premiums, federal unemployment taxes and
the compensation portion of the Michigan Single Business Tax, (ii) health care
and workers' compensation costs, and (iii) state unemployment taxes and other
direct costs. The Company can significantly impact its gross profit margin by
actively managing the direct costs described in clauses (ii) and (iii).
The Company's health care costs consist of medical insurance premiums,
payments of and reserves for claims subject to deductibles and the costs of
vision care, disability, employee assistance and other similar benefit plans.
The Company's health care benefit plans consist of a mixture of fully insured,
minimum premium arrangements, partially self-insured plans and guaranteed cost
programs. Under minimum premium arrangements and partially self-insured plans,
liabilities for health care claims are recorded based on the Company's health
care loss history. The Company maintains reserves for medical and behavioral
health claims which reserves are estimates based on periodic reviews of open
claims, past claims experience and other factors deemed relevant by management.
While the Company believes that such reserves are adequate, the Company cannot
predict with certainty the ultimate liability associated with health care costs
and past claims experience may not be indicative of future results. Accordingly,
if estimated reserve amounts prove to be less than the ultimate liability with
respect to such claims, the Company's financial condition, results of operations
and liquidity could be materially adversely affected.
17
Workers' compensation costs include medical costs and indemnity payments
for lost wages, administrative costs and insurance premiums related to the
Company's workers' compensation coverage. Prior to 1997, the Company was insured
under a large deductible insurance plan. Under this plan, the Company was
obligated to reimburse its insurance carrier for a portion of the insurance risk
related to workers' compensation claims up to a predetermined deductible per
occurrence of $500,000 (or $1,000,000 in the case of SAI). Workers' compensation
costs for 1994, 1995 and 1996 also include reserves for claims which have been
incurred but not reported and for anticipated loss development. The Company has
recently entered into an arrangement with an insurance company under which
substantially all of the cost of the Company's workers' compensation coverage
for the years 1997 to 1999 is fixed. Additionally, the Company entered into
agreements whereby the Company reinsured substantially all of the remaining
claims under the Company's large deductible workers' compensation insurance
policies for the years 1994, 1995, and 1996, other than claims of AMI.
The Company's primary operating expenses are administrative personnel
expenses, other general and administrative expenses, and sales and marketing
expenses. Administrative personnel expenses include compensation, fringe
benefits and other personnel expenses related to internal administrative
employees. Other general and administrative expenses include rent, office
supplies and expenses, legal and accounting fees, insurance and other operating
expenses. Sales and marketing expenses include compensation of sales executives
and the marketing staff, as well as marketing and advertising expenses.
The Company's financial condition and results of operations are subject to
several contingencies including the resolutions of certain pending legal
proceedings. For more information regarding such contingencies see Note 6 of
Notes to Consolidated Financial Statements contained in Part I, Item 1,
Financial Statements of this Form 10-Q.
Recent Developments
On June 30, 1997, the Company acquired Amstaff, Inc. ("AMI"), a privately
held PEO headquartered in Novi, Michigan (the "AMI Acquisition"). The Company
issued 365,162 shares of its common stock in exchange for all of the outstanding
shares of common stock of AMI and its subsidiaries. The transaction has been
accounted for in accordance with the pooling of interests accounting treatment;
accordingly, all prior period financial statements presented herein include the
assets and liabilities and results of operations of AMI. In connection with this
transaction, the Company has recognized transaction expenses of approximately
$1.1 million.
18
The following combines unaudited selected historical financial information
of AMI and Vincam for the periods presented reflecting the most significant
adjustments resulting from the AMI Acquisition.
Six Months Ended June 30, 1997
-----------------------------------------------------
Pooled
Vincam AMI Adjustments Results
------------- ------------- ----------- -------------
Revenues................. $350,505,151 $ 46,585,103 $ -- $397,090,254
============= ============= =========== =============
Net income............... $ 1,835,948 $ (739,502) $ -- $ 1,096,446
============= ============= =========== =============
Net income per common and
common equivalent share $ 0.20 $ -- $ -- $ 0.12
============= ============= =========== =============
Six Months Ended June 30, 1996
-----------------------------------------------------
Pooled
Vincam AMI Adjustments Results
------------- ------------- ----------- -------------
Revenues................. $205,543,298 $ 30,911,188 $ -- $236,454,486
============= ============= =========== =============
Net income............... $ 1,036,766 $ (262,287) $ -- $ 774,479
============= ============= =========== =============
Net income per common and
common equivalent share $ 0.14 $ -- $ -- $ 0.10
============= ============= =========== =============
These results are presented for informational purposes only and are not
necessarily indicative of the future results of operations or financial position
of the Company or the results of operations or financial position of the Company
that would have been achieved had the AMI Acquisition actually occurred at the
beginning of the periods presented.
On June 30, 1997, the Company entered into an agreement with a health
insurance company to purchase a managed care provider network and to terminate
the strategic alliance with such health insurance company under which the
Company provided its workers' compensation managed care services. In connection
with the purchase of the provider network and the related termination of the
strategic alliance, the Company made a payment of $1,000,000. The balance of the
purchase price of approximately $1,400,000 will be payable in the fourth quarter
of 1997 and will be capitalized. The payment of $1,000,000 was recorded as other
general and administrative expense in the accompanying statements of income.
19
The Company's results of operations for the periods presented excluding
AMI's operations, the transaction charges incurred in connection with the AMI
Acquisition and the charges related to the termination of the strategic alliance
under which the Company operated its workers' compensation managed care
services, for the periods presented would have been as follows:
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 1997 June 30, 1996
--------------------------- ---------------------------
Vincam Vincam Vincam Vincam
------------- ------------- ------------- -------------
Revenues................ $180,429,648 $350,505,151 $108,573,700 $205,543,298
============= ============= ============= =============
Net income.............. $ 1,597,368 $ 2,912,607 $ 666,379 $ 1,036,766
============= ============= ============= =============
Net income per common
and common equivalent
share................. $ 0.18 $ 0.32 $ 0.8 $ 0.14
============= ============= ============= =============
These results are presented for informational purposes only and are not
indicative of the future results of operations or financial position of the
Company.
20
Results of Operations
The following table sets forth, for June 30, 1997 and 1996, certain
selected income statement data expressed as a percentage of revenues:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues ............................... 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
Direct cost:
Salaries, wages and employment
taxes of worksite employees ....... 89.2% 88.6% 89.0% 88.7%
Health care and workers' compensation 3.6% 4.8% 3.9% 4.7%
State unemployment taxes and other .. 1.0% 0.9% 1.0% 1.0%
--------- --------- --------- ---------
Total direct costs ................ 93.8% 94.3% 93.9% 94.4%
--------- --------- --------- ---------
Gross profit ........................... 6.2% 5.7% 6.1% 5.6%
--------- --------- --------- ---------
Operating expenses:
Administrative personnel ............ 2.6% 2.6% 2.6% 2.7%
Other general and administrative,
including provision for doubtful
accounts .......................... 2.3% 1.6% 1.9% 1.6%
Sales and marketing ................. 0.9% 0.9% 0.9% 0.9%
Depreciation and amortization ....... 0.3% 0.1% 0.2% 0.1%
--------- --------- --------- ---------
Total operating expenses .......... 6.1% 5.2% 5.6% 5.3%
--------- --------- --------- ---------
Operating income ....................... 0.1% 0.5% 0.5% 0.3%
Interest income (expense), net ......... 0.0% 0.1% 0.1% 0.2%
--------- --------- --------- ---------
Income before taxes .................... 0.1% 0.6% 0.6% 0.5%
Provision for income taxes ............. 0.1% 0.1% 0.3% 0.2%
--------- --------- --------- ---------
Net income ............................. 0.0% 0.5% 0.3% 0.3%
========= ========= ========= =========
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
The Company's revenues for the six months ended June 30, 1997 were $397.1
million compared to $236.5 million for the six months ended June 30, 1996,
representing an increase of $160.6 million, or 67.9%. This increase was due
primarily to an increased number of PEO clients and worksite employees. In
addition, $24.6 million of the increase is attributable to the operations of SMG
which were acquired by the Company in August 1996. Between June 30, 1996 and
June 30, 1997, the number of PEO clients increased by 43.0%, from 849 to 1,214,
of which 137 were acquired from SMG. The number of worksite employees increased
59.5% over the same period, from 20,142 worksite employees to 32,117, of which
1,987 were acquired from SMG.
21
Salaries, wages and employment taxes of worksite employees were $353.4
million for the six months ended June 30, 1997, compared to $209.6 million for
the same period in 1996, representing an increase of $143.8 million, or 68.6%.
Salaries, wages and employment taxes of worksite employees were 89.0% of
revenues for the six months ended June 30, 1997, compared to 88.7% for the same
period in 1996. The increase of salaries, wages and employment taxes of worksite
employees as a percentage of revenues is a result of a change in the Company's
client mix towards clients having more favorable workers' compensation risk
profiles for which the Company charges a lower fee.
Health care and workers' compensation costs were $15.3 million for the six
months ended June 30, 1997, compared to $11.1 million for the same period in
1996, representing an increase of $4.2 million, or 38.0%. This increase was due
mainly to the higher volume of health care and workers' compensation claims paid
and/or reserved during the six months ended June 30, 1997, which was a direct
function of the increase in the number of PEO clients and worksite employees.
Health care and workers' compensation costs were 3.9% of revenues for the six
months ended June 30, 1997, compared to 4.7% for the same period in 1996. The
decrease of health care and workers' compensation costs as a percentage of
revenues was due mainly to a reduction of workers' compensation costs resulting
from the Company's guaranteed fixed premium insurance program, as well as the
recognition of part of the deferred gain resulting from the Company's
reinsurance of the remaining claims under its previous workers' compensation
large deductible insurance plans.
State unemployment taxes and other direct costs were $4.0 million for the
six months ended June 30, 1997, compared to $2.3 million for the same period in
1996, representing an increase of $1.7 million or 73.9%. This increase was due
mainly to the higher volume of salaries and wages paid during the six months
ended June 30, 1997, which was a direct function of the increase in the number
of PEO clients and worksite employees, an increased number of client companies
using other services and products (e.g., 401(k), the drug free workplace
program, etc.), as well as an increase in other direct costs related to the
Company's specialty managed care services. State unemployment taxes and other
direct costs were 1.0% of revenues for the six months ended June 30, 1997 and
1996.
Gross profit was $24.3 million for the six months ended June 30, 1997,
compared to $13.4 million for the same period in 1996, representing an increase
of $10.9 million, or 81.5%. Gross profit was 6.1% of revenues for the six months
ended June 30, 1997, compared to 5.6% for the same period in 1996. The increase
in gross profit was due mainly to the increase in revenues resulting from an
increase in the number of PEO clients and worksite employees. The increase in
gross profit as a percentage of revenues was due mainly to the Company's
elimination of the sensitivity of workers' compensation costs to the ongoing
loss development of historical claims as a result of the Company's guaranteed
fixed premium insurance program and its reinsurance of substantially all of its
responsibility for prior periods claims, as well as the recognition of part of
the deferred gain resulting from the Company's reinsurance of the remaining
claims under its previous workers' compensation large deductible insurance
plans.
Administrative personnel expenses were $10.5 million for the six months
ended June 30, 1997, compared to $6.3 million for the same period in 1996,
representing an increase of $4.2 million, or 66.1%. This increase was primarily
attributable to increased staffing to support the Company's growth, including
management and senior executive personnel. The Company anticipates that this
trend in administrative personnel expenses will continue in future periods as a
result of the Company's growth and the expansion of its service offerings.
Administrative personnel expenses were 2.6% of revenues for the six months ended
June 30, 1997, compared to 2.7% for the same period in 1996.
22
Other general and administrative expenses for the six months ended June 30,
1997, including the provision for doubtful accounts and $2.1 million of
transaction expenses, were $7.5 million for the six months ended June 30, 1997,
compared to $3.8 million for the same period in 1996, representing an increase
of $3.7 million, or 99.7%. This increase in other general and administrative
expenses was primarily attributable to transaction expenses of approximately
$1.2 million in connection with the SAI and AMI acquisitions and an $1.0 million
charge related to the termination of the strategic alliance of a managed care
provider network under which the Company previously operated its workers'
compensation managed care business. Other general and administrative expenses,
including the provision for doubtful accounts, were 1.9% of revenues for the six
months ended June 30, 1997, compared to 1.6% for the same period in 1996. The
increase in other general and administrative expenses, including the provision
for doubtful accounts as a percentage of revenues was due mainly to the
non-recurring charges of $2.1 million above described.
Sales and marketing costs were $3.4 million for the six months ended June
30, 1997, compared to $2.0 million for the same period in 1996, representing an
increase of $1.4 million, or 69.7%. The increase reflects the addition of sales
executives and marketing personnel, consistent with the Company's strategy to
increase its client base in its existing markets and also as a result of its
recent acquisitions. Sales and marketing costs were 0.9% of revenues for the six
months ended June 30, 1997 and 1996.
The effective income tax rate of the Company for the six months ended June
30, 1997 increase to 48.7%, from 30.8% for the same period in 1996. This
increase was attributable to the recognition of a valuation allowance in
connection with deferred taxes recorded as a result of an acquisition and change
in tax status of an entity previously taxed under the Sub Chapter S provisions
of the Internal Revenue Code. See more information related to income taxes see
Note 7 of Notes to Consolidated Financial Statements contained in Part I, Item
1, Financial Statements of this Form 10-Q.
Net income was $1.1 million for the six months ended June 30, 1997,
compared to $0.8 million for the same period in 1996, representing an increase
of $0.3 million, or 41.6%. Earnings per share were $0.12 for the six months
ended June 30, 1997, compared to $0.10 for the same period in 1996, representing
an increase of $0.02, or 20.0%.
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
The Company's revenues for the three months ended June 30, 1997 were $206.1
million compared to $124.5 million for the three months ended June 30, 1996,
representing an increase of $81.6 million, or 65.5%. This increase was due
primarily to an increased number of PEO clients and worksite employees. In
addition, $12.8 million of the increase is attributable to the operations of SMG
which were acquired by the Company in August 1996. Between June 30, 1996 and
June 30, 1997, the number of PEO clients increased by 43.0%, from 849 to 1,214,
of which 137 were acquired from SMG. The number of worksite employees increased
59.5% over the same period, from 20,142 worksite employees to 32,117, of which
1,987 were acquired from SMG.
Salaries, wages and employment taxes of worksite employees were $183.9
million for the three months ended June 30, 1997, compared to $110.3 million for
the same period in 1996, representing an increase of $73.6 million, or 66.7%.
Salaries, wages and employment taxes of worksite employees were 89.2% of
revenues for the three months ended June 30, 1997, compared to 88.6% for the
same period in 1996. The increase of salaries, wages and employment taxes of
worksite employees as a percentage of revenues is a result of a change in the
Company's client mix towards clients having more favorable workers' compensation
risk profiles for which the Company charges a lower fee.
23
Health care and workers' compensation costs were $7.5 million for the three
months ended June 30, 1997, compared to $5.9 million for the same period in
1996, representing an increase of $1.6 million, or 26.3%. This increase was due
mainly to the higher volume of health care and workers' compensation claims paid
and/or reserved during the three months ended June 30, 1997, which was a direct
function of the increase in the number of PEO clients and worksite employees.
Health care and workers' compensation costs were 3.6% of revenues for the three
months ended June 30, 1997, compared to 4.8% for the same period in 1996. The
decrease of health care and workers' compensation costs as a percentage of
revenues was due mainly to a reduction of workers' compensation costs resulting
from the Company's guaranteed fixed premium insurance program, as well as the
recognition of part of the deferred gain resulting from the Company's
reinsurance of the remaining claims under its previous workers' compensation
large deductible insurance plans.
State unemployment taxes and other direct costs were $2.1 million for the
three months ended June 30, 1997, compared to $1.1 million for the same period
in 1996, representing an increase of $1.0 million or 96.5%. This increase was
due mainly to the higher volume of salaries and wages paid during the three
months ended June 30, 1997, which was a direct function of the increase in the
number of PEO clients and worksite employees, an increased number of client
companies using other services and products (e.g., 401(k), the drug free
workplace program, etc.), as well as an increase in other direct costs related
to the Company's specialty managed care services. State unemployment taxes and
other direct costs were 1.0% of revenues for the three months ended June 30,
1997, compared to 0.9% for the same period in 1996.
Gross profit was $12.6 million for the three months ended June 30, 1997,
compared to $7.2 million for the same period in 1996, representing an increase
of $5.4 million, or 74.5%. Gross profit was 6.1% of revenues for the three
months ended June 30, 1997, compared to 5.8% for the same period in 1996. The
increase in gross profit was due mainly to the increase in revenues resulting
from an increase in the number of PEO clients and worksite employees. The
increase in gross profit as a percentage of revenues was due mainly to the
Company's elimination of the sensitivity of workers' compensation costs to the
ongoing loss development of historical claims as a result of the Company's
guaranteed fixed premium insurance program and its reinsurance of substantially
all of its responsibility for prior periods claims, as well as the recognition
of part of the deferred gain resulting from the Company's reinsurance of the
remaining claims under its previous workers' compensation large deductible
insurance plans.
Administrative personnel expenses were $5.4 million for the three months
ended June 30, 1997, compared to $3.3 million for the same period in 1996,
representing an increase of $2.1 million, or 63.4%. This increase was primarily
attributable to increased staffing to support the Company's growth, including
management and senior executive personnel. The Company anticipates that this
trend in administrative personnel expenses will continue in future periods as a
result of the Company's growth and the expansion of its service offerings.
Administrative personnel expenses were 2.6% of revenues for the three months
ended June 30, 1997, compared to 2.6% for the same period in 1996.
24
Other general and administrative expenses for the three months ended June
30, 1997, including the provision for doubtful accounts and $0.4 million of
transaction expenses, , were $4.7 million for the three months ended June 30,
1997, compared to $2.0 million for the same period in 1996, representing an
increase of $2.7 million, or 132.0%. This increase in other general and
administrative expenses was primarily attributable to transaction expenses of
approximately $1.1 million in connection with the AMI acquisition and an $1.0
million charge related to the termination of a strategic alliance of a managed
care provider network under which the Company previously operated its workers'
compensation managed care business. Other general and administrative expenses,
including the provision for doubtful accounts, were 2.3% of revenues for the
three months ended June 30, 1997, compared to 1.6% for the same period in 1996.
The increase in other general and administrative expenses, including the
provision for doubtful accounts as a percentage of revenues was due mainly to
the non-recurring charges of $2.1 million described above.
Sales and marketing costs were $1.9 million for the three months ended June
30, 1997, compared to $1.2 million for the same period in 1996, representing an
increase of $0.7 million, or 63.4%. The increase reflects the addition of sales
executives and marketing personnel, consistent with the Company's strategy to
increase its client base in its existing markets and also as a result of its
recent acquisitions. Sales and marketing costs were 0.9% of revenues for the
three months ended June 30, 1997 and 1996.
The effective income tax rate of the Company for the three months ended
June 30, 1997 increase to 149.4%, from 18.2% for the same period in 1996. This
increase was attributable to the recognition of a valuation allowance in
connection with deferred taxes recorded as a result of an acquisition and change
in tax status of an entity previously taxed under the Sub Chapter S provisions
of the Internal Revenue Code. See more information related to income taxes see
Note 7 of Notes to Consolidated Financial Statements contained in Part I, Item
1, Financial Statements of this Form 10-Q.
Net loss was $0.1 million for the three months ended June 30, 1997,
compared to net income of $0.6 for the same period in 1996, representing a
decrease of $0.7, or 113.3%. Loss per share were $0.01 for the three months
ended June 30, 1997, compared to $0.07 for the same period in 1996, representing
a decrease of $0.08, or 114.3%.
Liquidity and Capital Resources
At June 30, 1997, the Company had working capital of $18.0 million,
compared to $20.1 million at December 31, 1996. The Company had $14.0 million in
cash at June 30, 1997. Of this amount, $2.3 million is restricted.
The Company's Credit Agreement with a group of banks for which Fleet
National Bank ("Fleet Bank") acted as agent provides for a $50.0 million
revolving line of credit with a sublimit of $15.0 million for standby letters of
credit and revolving credit loans for working capital purposes. The Credit
Agreement also provides for advances to finance acquisitions. The Company uses
letters of credit primarily to secure its obligations to reimburse its former
workers' compensation insurance carrier for workers' compensation payments
subject to the policy deductible. Borrowings bear interest at rates based, at
the Company's option, on Fleet Bank's Prime Rate plus a margin of as much as
0.25% or its Eurodollar Rate (as defined in the Credit Agreement) plus a margin
of 1.00% to 1.75%, depending on certain financial covenants. The facility is
secured by a pledge of the shares of all of the Company's subsidiaries. The
revolving line of credit matures on April 24, 2000. If, on April 24, 2000,
certain conditions are satisfied, any amounts outstanding under the revolving
line of credit may be converted into a term loan payable in eight quarterly
instalments commencing on August 1, 2000. The Credit Agreement contains
customary events of default and covenants which prohibit, among other things,
incurring additional indebtedness in excess of a specified amount, paying
dividends, creating liens and engaging in certain mergers or combinations
without the prior written consent of the lender. The Credit Agreement also
contains certain financial covenants relating to current ratio, debt to capital
ratio, debt and fixed charges coverage and minimum tangible net worth, as
defined in the Credit Agreement. The Company is required to pay an unused
facility fee ranging from .20% to .35% per annum on the facilities, depending
upon certain financial covenants. Under the revolving credit facility, the
Company had outstanding approximately $6.3 million in standby letters of credit
at June 30, 1997 which guarantee the payment of claims to the Company's previous
workers' compensation insurance carrier. As of that date, there were no other
amounts outstanding under the revolving line of credit.
25
Under the Company's large deductible workers' compensation insurance
policies for 1994, 1995 and 1996, the Company is required to provide its former
insurance carriers with $7.6 million in letters of credit, of which $6.3 million
has been issued by the lenders under the Credit Agreement. In connection with
the reinsurance of the Company's responsibility for remaining claims (the
"Remaining Claims"), Commercial Risk Re-Insurance Company ("Commercial Risk")
has provided a $4.1 million letter of credit in favor of the Company to secure
Commercial Risk's obligation for the payment of Remaining Claims.
The Company also has $1.3 million in standby letters of credit with another
bank at June 30, 1997, which guarantee the payment of workers' compensation
claims acquired upon the SAI Acquisition to SAI's former workers' compensation
insurance carrier.
The Company anticipates that available cash, cash flows from operations and
borrowing availability under the Credit Agreement will be sufficient to satisfy
the Company's liquidity and working capital requirements for the foreseeable
future; however, to the extent that the Company should desire to increase its
financial flexibility and capital resources or require or choose to fund future
capital commitments from sources other than operating cash or from borrowings
under its revolving line of credit or its acquisition loan facility, the Company
may consider raising capital through the offering of equity and/or debt
securities in the public or private markets, as well as from banks.
Net cash used in operating activities was $1.0 million for the six months
ended June 30, 1997, compared to cash provided by operating activities of
approximately $1.2 million for the same period in 1996. The difference between
the Company's net income of $1.1 million for the six months ended June 30, 1997,
and its negative operating cash flow was due primarily to a $7.3 million
increase in accounts receivable, a $0.8 million increase in reinsurance
recoverable, an increase in prepaid expenses and other current assets of $0.9
million, a decrease in reserve for claims of $1.9 million, a decrease in
deferred compensation of $0.3 million, and a decrease in income taxes of $0.2
million, partially reduced by noncash items such as depreciation and
amortization of $0.6 million, provision for doubtful accounts of $0.2 million
and recognition of deferred gain of $0.2 million, an increase in prepaid
workers' compensation insurance premium of $2.2 million, an increase in accrued
salaries, wages, and payroll taxes of $5.2 million, and a decrease in accounts
payable and accrued expenses of $0.8 million. The increase in accounts
receivable resulted from both a higher number of PEO clients and worksite
employees served during 1997 and the timing of the payroll cycle. The Company's
accounts receivable and accrued salaries, wages, and payroll taxes are subject
to fluctuations depending on the proximity of the closing date of the reporting
period to that of the payroll cycle. The increase in reinsurance recoverable was
due mainly to the loss portfolio risk transfer of substantially all of the
Company's responsibility for remaining claims acquired upon the SAI Acquisition
under SAI's large deductible workers' compensation policies for 1994, 1995 and
1996.
Net cash used in investing activities was $3.1 million for the six months
ended June 30, 1997, compared to $0.5 million used in investing activities in
the same period in 1996. This reflects payment of $0.4 million due under the SMG
Acquisition agreement, an increase in cash investments maturing over three
months of $ 0.6 million and $2.2 million in expenditures for property and
equipment to support the Company's growth.
26
Net cash used in financing activities was $52,000 for the six months ended
June 30, 1997, compared to $24.8 million provided by financing activities in the
same period in 1996. The 1997 cash flow reflects the Company's issuance of
shares of common stock to employees under the Company's stock option plans,
partially offset by principal payment on borrowings and additional costs
incurred in connection with the Company's initial public offering.
New Accounting Pronouncement
In January 1997, the Financial Accounting Standards Board issued Statement
of Financial Standard ("SFAS") No. 128, "Earnings Per Share" which requires dual
presentation of basic and fully diluted earnings per share. The adoption of SFAS
No. 128 is not expected to have a material effect on the Company's earnings per
share computation.
Inflation
The Company believes the effects of inflation have not had a significant
impact on its results of operations or financial condition.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 6 of the Notes to Consolidated Financial
Statements contained in Part I, Item 1. Financial Statements of this Form 10-Q.
ITEM 2. CHANGES IN SECURITIES
On June 30, 1997, the Company issued an aggregate of 365,162 shares of its
common stock, par value $.001 per share, to Gregory J. Packer, James R. Mack,
Arthur F. Stefanski, John Gillis, Renee Mourad and Lynne Affolder as
consideration for all of the outstanding equity of Amstaff, Inc. and its
subsidiaries. The issuance of such shares of common stock was exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
the provisions of Section 4(2) thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on May 15, 1997
(the "Annual Meeting"). The holders of the Company's Common Stock, $.001 par
value, were entitled to elect a board of five directors to serve until the next
Annual Meeting and until their successors are elected and qualified. Proxies for
7,181,163 shares of the 8,574,442 shares of common stock entitled to vote were
received in connection with the Annual Meeting.
The following table sets forth the names of the five persons elected at the
Annual Meeting to serve as Directors until the next annual meeting of
shareholders of the Company and the number of votes cast for or withheld with
respect to each person.
DIRECTORS FOR WITHHELD
Carlos A. Saladrigas 7,166,003 15,160
Jose M. Sanchez 7,181,003 160
Howard E. Cox, Jr. 7,181,003 160
Charles M. Hazard, Jr. 7,110,755 70,408
John H. McArthur, Ph.D. 7,181,003 160
ITEM 5. OTHER INFORMATION
On June 30, 1997, the Company entered into an agreement with a health
insurance company to purchase a managed care provider network and to terminate
the strategic alliance with such health insurance company under which the
Company provided its workers' compensation managed care services. In connection
with the purchase of the provider network and the related termination of the
strategic alliance, the Company made a payment of $1,000,000. The balance of the
purchase price of approximately $1,400,000 will be payable in the fourth quarter
of 1997 and will be capitalized. The payment of $1,000,000 was recorded as other
general and administrative expense in the accompanying statements of income. See
Note 6 of Notes to Consolidated Financial Statements contained in Part I, Item
1, Financial Statements of this Form 10-Q.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
On June 24, 1997, the Company filed a current report on Form 8-K dated June
17, 1997 with the Commission reporting information under Item 5, Other Events.
29
SIGNATURES
Pursuant to the requirements 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.
THE VINCAM GROUP, INC.
----------------------
Registrant
August 14, 1997 By:/S/ STEPHEN L. WAECHTER
Date ------------------------------------
Stephen L. Waechter, Chief Financial
Officer, Senior Vice President
Finance and Administration
(Principal Financial Officer)
30
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
THE VINCAM GROUP, INC.
CALCULATION OF NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net (loss) income $ (82,358) $ 618,419 $ 1,096,446 $ 774,479
============ ============ ============ ============
Weighted average number of common shares
outstanding during the period 8,950,116 7,059,985 8,932,806 6,559,517
Assumed exercise of stock options, net of
treasury shares acquired 478,107 462,208 491,475 489,166
Issuance of mandatorily redeemable preferred
stock deemed a common stock equivalent -- 1,043,933 -- 911,279
------------ ------------ ------------ ------------
Weighted average number of shares used in
earnings per share calculation 9,428,223 8,566,126 9,424,281 7,959,962
============ ============ ============ ============
Net income per common and common
equivalent share $ (0.01) $ 0.07 $ 0.12 $ 0.10
============ ============ ============ ============
Fully diluted net income per common
and common equivalent share * $ (0.01) $ 0.07 $ 0.12 $ 0.10
============ ============ ============ ============
- ------------------------------
* In accordance with the provisions of the Accounting Principles Board
Opinion No. 15, Earnings per Share, fully diluted net income per common and
common equivalent share is not presented in the Company's consolidated
statements of income due to the fact that the aggregated dilution from the
Company's common stock equivalents outstanding during each of the periods
presented is less than 3%.