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 September 30, 1998
or
o 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)
10200 Sunset Drive Miami, Florida 33173
(Address of principal executive offices) (Zip Code)
(305) 630-1000
(Registrant's telephone number, including area code)
2850 Douglas Road Coral Gables, Florida 33134 (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 November 10, 1998, The Vincam Group, Inc. had 15,695,557 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................. 15
Part II Other Information
Item 5. Other Information..................................... 25
Item 6. Exhibits and Reports on Form 8-K...................... 25
Signatures ...................................................... 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
The Vincam Group, Inc.
Unaudited Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997................................... 4
Unaudited Consolidated Statements of Operations for the
Three and the Nine Months Ended September 30, 1998 and 1997.. 5
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1998.......... 6
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997................ 7
Notes to Consolidated Financial Statements (Unaudited)......... 8
3
THE VINCAM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
-------------- --------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents .............. $ 9,129,004 $ 4,934,755
Investments ............................ -- 1,766,737
Accounts receivable, net ............... 59,718,401 48,924,247
Due from affiliates .................... 130,168 561,673
Income tax receivable .................. -- 1,536,371
Deferred taxes ......................... 735,488 735,488
Reinsurance recoverable ................ 641,867 1,692,513
Prepaid workers' compensation
insurance premium ..................... 7,403,878 14,467,403
Prepaid expenses and other current
assets ................................ 6,861,282 3,020,745
------------- -------------
Total current assets ............ 84,620,088 77,639,932
Property and equipment, net ............ 8,445,414 7,852,498
Deferred taxes ......................... 640,735 640,735
Goodwill and client contracts, net ..... 7,024,008 7,384,323
Other assets ........................... 1,509,902 1,498,438
------------- -------------
$102,240,147 $ 95,015,926
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses .. $ 3,961,515 $ 4,712,931
Accrued salaries, wages and payroll
taxes ................................. 51,050,338 39,887,369
Reserve for claims ..................... 2,734,745 4,106,734
Income tax payable ..................... 2,254,214 --
Current portion of borrowings .......... 385,410 11,061,009
Deferred gain .......................... 83,894 460,294
------------- -------------
Total current liabilities ....... 60,470,116 60,228,337
Long term borrowings, less current
portion ............................... 1,537,495 36,818
Reserve for claims ..................... -- 402,000
Other liabilities ...................... 891,548 1,038,037
------------- -------------
Total liabilities ............... 62,899,159 61,705,192
------------- -------------
Commitments and contingencies (Note 6) . -- --
------------- -------------
Stockholders' equity:
Common stock, $.001 par value,
60,000,000 shares authorized,
15,695,557 shares issued and ........ 15,695 15,391
Additional paid in capital ........... 35,523,926 35,142,798
Retained earnings (accumulated deficit) 3,801,367 (1,847,455)
------------- -------------
Total stockholders' equity ...... 39,340,988 33,310,734
------------- -------------
$102,240,147 $ 95,015,926
============= =============
4
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Revenues ................................ $ 314,839,415 $ 244,716,560 $ 910,630,869 $ 699,820,528
-------------- -------------- -------------- --------------
Direct costs:
Salaries, wages and employment
taxes of worksite employees ....... 282,406,566 218,754,338 816,350,786 623,585,116
Health care and workers' compensation 13,178,070 9,655,768 35,946,344 27,291,317
State unemployment taxes and other .. 2,472,245 2,430,250 9,527,310 7,499,031
-------------- -------------- -------------- --------------
Total direct costs ............ 298,056,881 230,840,356 861,824,440 658,375,464
-------------- -------------- -------------- --------------
Gross profit ............................ 16,782,534 13,876,204 48,806,429 41,445,064
-------------- -------------- -------------- --------------
Operating expenses:
Administrative personnel ............ 6,688,140 6,324,973 19,638,749 18,342,361
Other general and administrative .... 3,002,714 3,047,544 9,541,393 10,934,117
Sales and marketing ................. 2,074,037 1,663,650 5,936,573 5,107,920
Provision for doubtful accounts ..... 276,830 326,454 695,458 883,710
Depreciation and amortization ....... 754,899 895,227 2,211,103 2,648,177
-------------- -------------- -------------- --------------
Total operating expenses ...... 12,796,620 12,257,848 38,023,276 37,916,285
-------------- -------------- -------------- --------------
Operating income ........................ 3,985,914 1,618,356 10,783,153 3,528,779
Interest (expense) income, net .......... (24,815) 9,486 (98,599) 268,877
-------------- -------------- -------------- --------------
Income before taxes ..................... 3,961,099 1,627,842 10,684,554 3,797,656
Provision for income taxes .............. (1,470,000) (599,609) (4,034,000) (1,653,107)
-------------- -------------- -------------- --------------
Net income .............................. $ 2,491,099 $ 1,028,233 $ 6,650,554 $ 2,144,549
============== ============== ============== ==============
Basic net income per common share ....... $ 0.16 $ 0.07 $ 0.43 $ 0.14
============== ============== ============== ==============
Weighted average number of shares
outstanding used in basic earnings
per share calculation ............... 15,682,656 15,309,704 15,625,365 15,164,651
============== ============== ============== ==============
Diluted net income per common share ..... $ 0.16 $ 0.06 $ 0.41 $ 0.14
============== ============== ============== ==============
Weighted average number of shares
outstanding used in diluted earnings
per share calculation ............... 16,057,480 15,962,787 16,092,736 15,964,380
============== ============== ============== ==============
5
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Retained
Common Stock Additional Earnings
---------------------------- Paid in (Accumulated
Shares Par Value Capital Deficit) Total
------------- ------------- ------------- -------------- -------------
Balance at December 31, 1997 ...... 15,390,880 $ 15,391 $ 35,142,798 $ (1,847,455) $ 33,310,734
Issuance of common stock under
acquisition agreements ........... 150,000 150 (1,001,732) (1,001,582)
Issuance of common stock to
employees under stock option plans 154,677 154 381,128 -- 381,282
Net income ........................ -- -- -- 6,650,554 6,650,554
------------- ------------- ------------- -------------- -------------
Balance at September 30, 1998 ..... 15,695,557 $ 15,695 $ 35,523,926 $ 3,801,367 $ 39,340,988
============= ============= ============= ============== =============
6
THE VINCAM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------------------
1998 1997
------------- -------------
Cash flows from operating activities:
Net income ................................................ $ 6,650,554 $ 2,144,549
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................... 2,211,103 2,648,177
Provision for doubtful accounts ......................... 695,458 883,710
Deferred gain ........................................... (376,400) 100,108
Deferred income tax expense ............................. -- 1,631,482
Changes in assets and liabilities:
Increase in restricted cash ........................... -- (204,651)
Increase in accounts receivable ....................... (11,489,612) (14,222,841)
Decrease in due from affiliates ....................... 431,505 543,300
Decrease in income tax receivable ..................... 1,536,371 --
Decrease in reinsurance recoverable ................... 1,050,646 143,049
Decrease in prepaid workers' compensation
insurance premium ................................... 7,063,525 3,746,188
Increase in prepaid expenses and other current assets . (3,840,537) (982,950)
Increase in other assets .............................. (88,514) (792,866)
Decrease in accounts payable and accrued expenses ..... (751,416) (918,555)
Increase in accrued salaries, wages and payroll taxes . 10,853,099 8,314,005
Decrease in reserve for claims ........................ (2,465,704) (4,550,811)
Increase (decrease) in income taxes payable ........... 2,254,214 (530,250)
Decrease in deferred compensation ..................... -- (276,596)
Decrease in other liabilities ......................... (146,489) (554,846)
------------- -------------
Net cash provided by (used in) operating activities .......... 13,587,803 (2,879,798)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment ....................... (2,366,654) (3,434,770)
Redemption (purchases) of short term investments .......... 1,766,737 (415,227)
------------- -------------
Net cash used in investing activities ........................ (599,917) (3,849,997)
------------- -------------
Cash flows from financing activities:
Principal payments on borrowings .......................... (10,560,576) (92,598)
Borrowings to finance insurance premiums ................... 1,385,657 --
Notes payable to affiliate ................................ -- (1,018,000)
Payment of amounts due under acquisition agreements ....... -- (1,721,050)
Initial public offering costs charged to paid in capital .. -- (66,035)
Issuance of common stock to employees under stock plans ... 381,282 387,225
------------- -------------
Net cash used in financing activities ........................ (8,793,637) (2,510,458)
------------- -------------
Net increase (decrease) in cash and cash equivalents ......... 4,194,249 (9,240,253)
Cash and cash equivalents, beginning of period ............... 4,934,755 18,884,531)
------------- -------------
Cash and cash equivalents, end of period ..................... $ 9,129,004 $ 9,644,278
============= =============
Supplemental disclosure of non-cash financing activities:
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 net assets acquired amounted to $293,359. The excess of $566,641 of the
purchase price over the net assets acquired was allocated to goodwill.
7
THE VINCAM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and December 31, 1997
(Unaudited)
Note 1 - Basis for Presentation of Consolidated Financial Statements
The accompanying unaudited consolidated financial statements of The Vincam
Group, Inc. and its subsidiaries ("Vincam" or 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, 1997 included in The Vincam
Group, Inc.'s Annual Report on Form 10-K, as amended by Form 10-K/A No.1. 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. All material intercompany balances and
transactions have been eliminated.
Certain reclassifications have been made to the consolidated financial
statements of prior periods presented to conform to the current period
presentation.
Note 2 - Accounts Receivable
At September 30, 1998 and December 31, 1997, accounts receivable consisted
of the following:
1998 1997
------------- -------------
Billed to clients ................... $ 12,527,065 $ 16,149,364
Unbilled revenues ................... 49,567,416 34,801,470
------------- -------------
62,094,481 50,950,834
Less: allowance for doubtful accounts (2,376,080) (2,026,587)
------------- -------------
$ 59,718,401 $ 48,924,247
============= =============
Note 4 - Reserve for Claims
In December 1996, the Company entered into an arrangement with a national
insurance company to provide workers' compensation insurance coverage at a cost
which is equal to a fixed percentage of the average standard premium for 1997
through 1999, subject to a deductible of only $2,000 per medical claim. The
workers' compensation arrangement, originally covering the years 1997 through
1999, now includes coverage through the year 2000 under certain revised terms
and conditions. The arrangement remains a guaranteed cost program. Accordingly,
effective January 1, 1997, the Company recorded workers' compensation costs
based primarily on the fixed percentage of the average standard premium under
such policy, rather than through the previous practice of applying actuarial
estimates to claims.
8
In addition, in December 1996, March 1997, September 1997 and December
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 those of
acquired companies), for an aggregate premium of $6,010,000. Since reserves for
claims for these years have been previously provided, the Company has recorded
the premium as a reinsurance receivable and a deferred gain which will be
recognized to income in future periods based on the proportion of cumulative
claims paid to the total estimated liability for claims.
As a consequence of the reinsurance agreement described above, at September
30, 1998 and December 31, 1997, the Company has classified as current the
estimated amounts of reserves established 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.
At September 30, 1998 and December 31, 1997, the Company's reserves for
claims costs are as follows:
1998 1997
------------ ------------
Reserve for workers' compensation claims .... $ 950,664 $ 2,035,477
Reserve for behavioral and health care claims 1,784,081 2,473,257
------------ ------------
2,734,745 4,508,734
Less: workers' compensation claims expected
to be settled in more than one year ......... -- (402,000)
------------ ------------
Reserve for claims--current ................. $ 2,734,745 $ 4,106,734
============ ============
9
Note 5 - Borrowings
Borrowings at September 30, 1998 and December 31, 1997 are as follows:
1998 1997
------------ ------------
Note payable for workers' compensation premiums,
maturing in 1998, with monthly payments of principal
and interest of $1,144,534, at a rate of 6.30% ....... $ -- $10,035,123
Notes payable for insurance premiums, with monthly
payments of principal and interest ranging from
$7,596 to $29,215, at rates ranging from 6.31%
to 6.95%, maturing through 2001 ...................... 1,140,763 173,526
Note payable to bank, original amount of
$1 million, repayable in monthly instalments
of $4,167, plus interest at 8.50% per annum,
through 1998 when a balloon payment of $750,000
is due, secured by land and building ................. 754,054 791,557
Note payable for state unemployment taxes,
maturing in 1998 with monthly payments of $3,264 ..... -- 16,326
Capital lease obligations for computer hardware
and software, payable in monthly instalments of
principal and interest ranging from $3,214 to
$7,479 through 2000, with interest rates ranging
from 9.80% to 12.30% per annum, collateralized
by computer hardware and software .................... -- 46,276
Other notes payable, bearing
interest at rates ranging from 7.50% to 10.75%,
repayable in various monthly instalments ............. 28,088 35,019
------------ ------------
1,922,905 11,097,827
Less: current portion ................................ (1,922,905) (11,061,009)
------------ ------------
$ -- $ 36,818
============ ============
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.
10
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 lenders. 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 agent 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 Company's revolving credit facility, the Company had outstanding
$5,494,700 in standby letters of credit at September 30, 1998, which guarantee
the payment of claims to the Company's former workers' compensation insurance
carrier. As of that date there were no amounts outstanding for working capital
or advances to finance acquisitions under the revolving credit facility.
Note 6 - Commitments and Contingencies
On December 9, 1997, the Company entered into a leasing arrangement with
respect to a new headquarters facility in Miami-Dade County which the Company
moved into in November 1998. The leasing arrangement has an initial expiration
date of four years after completion of the facility and allows the Company to
extend the term of the lease for up to three more years subject to compliance
with the terms and conditions of the credit agreement and related documents. The
lessor of the facility has financed 97% of the costs of acquiring the land and
constructing the facility. The financing agreement relating to the facility (the
"Facility Financing Agreement") contains certain covenants, including financial
covenants, of the Company and events of default with respect thereto, which
covenants are the same in all material respects as those contained in the
Company's Credit Agreement. Under the leasing arrangement, the Company's
commitment in future years will be based on (i) interest at a competitive rate
on all outstanding loan amounts with respect to the facility plus (ii) the
yield, at a competitive rate, in respect of the lessor's 3% equity investment.
Default under the Company's covenants contained in the Facility Financing
Agreement constitutes default under the Company's lease of the headquarters
facility. In the event of such default, the Company is obligated to either
purchase the facility for the Purchase Price (defined below) or pay a
termination fee in an amount approximately equal to the Purchase Price. The
maximum amount on which the lease payments will be based is currently limited to
$12,000,000, but will be increased to approximately $12,850,000 upon execution
of a pending amendment to the Facility Financing Agreement to accommodate
financing for certain miscellaneous expenditures related to the headquarter
facility. As of September 30, 1998, an aggregate of $9,148,375 in loans were
outstanding to the lessor.
The Company has an option to purchase the headquarters facility at any time
for an amount equal to the total of (i) the amount of loans outstanding with
respect to the property, (ii) the lessor's investment in the facility, (iii) any
accrued and unpaid interest on such outstanding loans, and (iv) all accrued and
unpaid yield on the lessor's equity investment (the "Purchase Price"). If the
Company determines not to purchase the facility, it will be required to make a
termination payment at the end of the lease term equal to approximately 85% of
the Purchase Price. The Company's lease payment obligations are secured by a
pledge of the stock of all of its subsidiaries.
11
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 a material adverse effect.
The Company is a defendant in a lawsuit pending in the 11th Judicial
Circuit in Miami-Dade County, Florida related to a wrongful death and premises
liability claim involving a worksite employee. The plaintiff's complaint, which
was sustained by the court, alleges premises liability and negligence against
both the Company and its client as a result of a worksite accident on the
client's premises and seeks damages in excess of $15,000. 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 motions for summary judgment
on that basis were denied. Based on consultations with the Company's counsel,
management of the Company believes that it has meritorious defenses. The case
was set for trial in October 1998, but the parties have reached a tentative
settlement arrangement which has not yet been finalized. The Company believes
that if the lawsuit is adversely determined, the Company may be entitled to
indemnification from its client and/or the Company's liability insurance
carrier. Although management believes, based on consultations with the Company's
counsel, that the Company's ultimate liability in this matter should not be
material, there can be no assurance (i) that the case will in fact settle, (ii)
that, if the case does not settle, the Company will prevail in the litigation,
or in a related claim for indemnification, or (iii) that the liability of the
Company, if any, if the case does not settle, would not have a material adverse
effect on the Company's financial condition and results of operations.
In June 1995, the National Labor Relations Board ("Board") filed a
complaint charging Amstaff, Inc., with 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 are received or reasonably could have been 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 is vigorously defending 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.
12
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 on an individual basis, although adverse outcomes in a
significant number of such ordinary course legal proceedings could, in the
aggregate, have a material adverse effect on the Company's financial condition
and results of operations.
* * * * * * * * * *
13
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 1997 Annual Report on Form 10-K, as amended by Form
10-K/A No.1, filed by The Vincam Group, Inc. ("Vincam" or the "Company") with
the Securities and Exchange Commission.
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," "believes," "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 maintain or to further expand the range of
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; (x) the potential
disruption of the Company's operations due to failures or errors in the
operations of the Company's computer systems resulting from the year 2000 issue;
and (xi) other factors which are described in further detail in the Company's
filings with the Securities and Exchange Commission including this Form 10-Q.
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.
14
Overview
Vincam, one of the ten largest professional employer organization ("PEOs")
in the industry based on 1996 revenues (according to Staffing Industry Analysts,
Inc.), 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 and large 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
other state payroll-based and sales taxes, (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
dental care, 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, with third party insurers providing insurance with
respect to minimum premium and partially self-insured plans to the extent claims
exceed certain levels ("stop loss coverage"). 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 open claims 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. In addition, to the extent an insurer delays or denies the
payment of a claim for stop loss coverage, or the amount of stop loss coverage
proves to be inadequate, the Company's financial condition, results of
operations and liquidity could be materially adversely affected.
15
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 ranging from $150,000 to $1,000,000. In December 1996, the Company
entered into an arrangement with an insurance company under which the percentage
of the average standard premium to be paid by the Company for workers'
compensation coverage for the years 1997 to 1999 was fixed. The arrangement,
originally covering the years 1997 through 1999, now includes coverage through
the year 2000 under certain revised terms and conditions. The arrangement
remains a guaranteed cost program. Additionally, the Company entered into
agreements as of December 1996 whereby the Company reinsured substantially all
of the remaining claims under the Company's large deductible workers'
compensation insurance policies for the years 1994 through 1996, and in 1997
entered into similar agreements to reinsure the remaining claims under the prior
large deductible workers' compensation insurance policies of Staff
Administrators, Inc. ("SAI"), Amstaff, Inc. ("AMI") and Staffing Network, Inc.
("SNI"), companies acquired by Vincam.
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
representatives 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. For more information regarding such contingencies, see
Note 6 of Notes to Consolidated Financial Statements contained in Part 1, Item I
Financial Statements of this Form 10-Q.
16
Results of Operations
The following table sets forth, for September 30, 1998 and 1997, certain
selected income statement data expressed as a percentage of revenues:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Revenues............................................. 100.0% 100.0% 100.0% 100.0%
Direct costs:
Salaries, wages and employment taxes
of worksite employees........................... 89.7% 89.4% 89.7% 89.1%
Health care and workers' compensation............. 4.2% 4.0% 4.0% 3.9%
State unemployment taxes and other................ 0.8% 1.0% 1.0% 1.1%
-------- -------- --------- ---------
Total direct costs.............................. 94.7% 94.3% 94.6% 94.0%
-------- -------- --------- ---------
Gross profit......................................... 5.3% 5.7% 5.4% 6.0%
-------- -------- --------- ---------
Operating expenses:
Administrative personnel.......................... 2.1% 2.6% 2.1% 2.6%
Other general and administrative.................. 1.0% 1.3% 1.1% 1.7%
Sales and marketing............................... 0.7% 0.7% 0.7% 0.7%
Depreciation and amortization..................... 0.2% 0.4% 0.2% 0.4%
-------- -------- --------- ---------
Total operating expenses........................ 4.0% 5.0% 4.1% 5.4%
-------- -------- --------- ---------
Operating income..................................... 1.3% 0.7% 1.2% 0.5%
Interest income (expense), net....................... 0.0% 0.0% 0.0% 0.0%
-------- -------- --------- ---------
Income before taxes.................................. 1.3% 0.7% 1.2% 0.5%
Provision for income taxes........................... 0.5% 0.3% 0.5% 0.2%
-------- -------- --------- ---------
Net income........................................... 0.8% 0.4% 0.8% 0.3%
======== ======== ========= =========
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
The Company's revenues for the nine months ended September 30, 1998 were
$910.6 million compared to $699.8 million for the nine months ended September
30, 1997, representing an increase of $210.8 million, or 30.1%. This increase
was due primarily to internal growth in the number of PEO worksite employees and
to the increase in average revenue per worksite employee. The number of worksite
employees increased 16.7%, from 38,609 worksite employees at September 30, 1997
to 45,065 at September 30, 1998, while the average revenue per worksite employee
for the period increased 9.6%, from $2,125 in 1997 to $2,330 in 1998.
Salaries, wages and employment taxes of worksite employees were $816.4
million for the nine months ended September 30, 1998, compared to $623.6 million
for the same period in 1997, representing an increase of $192.8 million, or
30.9%. Salaries, wages and employment taxes of worksite employees were 89.7% of
revenues for the nine months ended September 30, 1998, compared to 89.1% for the
same period in 1997. The increase of salaries, wages and employment taxes of
worksite employees as a percentage of revenues resulted from a change in the
Company's worksite employee mix towards worksite employees having a lower
17
workers' compensation classification and lower workers' compensation rates in
several states where the Company operates, which resulted in lower markups being
charged by the Company. In addition the fact that the Company's revenue increase
was entirely in PEO operations, which have a lower margin than the Company's
managed care business, contributed to such percentage increase.
Health care and workers' compensation costs were $35.9 million for the nine
months ended September 30, 1998, compared to $27.3 million for the same period
in 1997, representing an increase of $8.7 million, or 31.7%. This increase was
due mainly to the higher number of PEO worksite employees. Health care and
workers' compensation costs were 4.0% of revenues for the nine months ended
September 30, 1998, compared to 3.9% for the same period in 1997.
State unemployment taxes and other direct costs were $9.5 million for the
nine months ended September 30, 1998, compared to $7.5 million for the same
period in 1997, representing an increase of $2.0 million or 27.0%. This increase
was due mainly to the higher volume of salaries and wages paid during the nine
months ended September 30, 1998, which was a direct function of the increase in
the number of PEO worksite employees. State unemployment taxes and other direct
costs were 1.0% of revenues for the nine months ended September 30, 1998 and
1997.
Gross profit was $48.8 million for the nine months ended September 30,
1998, compared to $41.5 million for the same period in 1997, representing an
increase of $7.3 million, or 17.8%, due mainly to the increase in revenues
during the nine months ended September 30, 1998, which was a direct function of
the increased number of PEO worksite employees. Gross margin was 5.4% for the
nine months ended September 30, 1998, compared to 6.0% for the same period in
1997. The decrease in gross margin was due mainly to the shift in the Company's
employee mix, which resulted in lower markups being charged by the Company and
to the fact that the Company's revenue increase was entirely in PEO operations,
which have a lower margin than the Company's managed care business.
Administrative personnel expenses were $19.6 million for the nine months
ended September 30, 1998, compared to $18.3 million for the same period in 1997,
representing an increase of $1.3 million, or 7.1%. This increase was primarily
attributable to increased staffing to support the Company's growth, including
management and executive personnel. Administrative personnel expenses were 2.1%
of revenues for the nine months ended September 30, 1998, compared to 2.6% for
the same period in 1997. This decrease in administrative personnel expenses as a
percentage of revenue resulted primarily from higher compensation paid during
1997 to former owners of AMI and SNI before their respective acquisitions by the
Company. Such compensation was reduced after their respective acquisitions by
the Company.
Other general and administrative expenses, including the provision for
doubtful accounts, were $10.2 million for the nine months ended September 30,
1998, compared to $11.8 million for the same period in 1997, representing a
decrease of $1.6 million, or 13.3%. This decrease in other general and
administrative expenses was primarily attributable to transaction expenses of
approximately $1.3 million incurred in 1997 in connection with the SAI and AMI
acquisitions and a $1.0 million charge related to the termination in 1997 of a
managed care provider network under which the Company previously operated its
workers' compensation managed care business, partially offset by $0.7 million
increase in other general and administrative expenses to support the Company's
growth. Other general and administrative expenses, including the provision for
doubtful accounts, were 1.3% of revenues for the nine months ended September 30,
1998, compared to 2.1% for the same period in 1997. The decrease in other
general and administrative expenses, including the provision for doubtful
accounts, as a percentage of revenues was due mainly to $2.3 million of
transaction related charges incurred in 1997.
18
Sales and marketing costs were $5.9 million for the nine months ended
September 30, 1998, compared to $5.1 million for the same period in 1997,
representing an increase of $0.8 million, or 16.2%. The increase reflects the
addition of sales representatives and marketing personnel, consistent with the
Company's strategy to increase its client base in its existing markets and
acquired markets. Sales and marketing costs were 0.7% of revenues for the nine
months ended September 30, 1998 and 1997.
Operating income was $10.8 million for the nine months ended September 30,
1998, compared to $3.5 million for the same period in 1997, representing an
increase of $7.3 million, or 205.6%. The increase in operating income was due
mainly to increase in revenues resulting from an increase in worksite employees
during the first nine months of 1998, and to non-recurring charges of $2.3
million incurred in the same period in 1997. Excluding the non-recurring charges
of $2.3 million during 1997, operating income increased by $4.9 million or
83.0%.
Net income was $6.7 million for the nine months ended September 30, 1998,
compared to $2.1 million for the same period in 1997, representing an increase
of $4.5 million. Diluted earnings per share were $0.41 for the nine months ended
September 30, 1998, compared to $0.14 for the same period in 1997, representing
an increase of $0.27 or 192.9%.
The Company anticipates that administrative personnel expenses, other
general and administrative expenses, sales and marketing expenses and interest
expense will continue to increase in future periods to the extent that the
Company continues to experience growth and to expand its service offerings.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
The Company's revenues for the three months ended September 30, 1998 were
$314.8 million compared to $244.7 million for the three months ended September
30, 1997, representing an increase of $70.1 million, or 28.7%. This increase was
due primarily to internal growth in the number of PEO worksite employees and to
the increase in average revenue per worksite employee. The number of worksite
employees increased 16.7%, from 38,609 worksite employees at September 30, 1997
to 45,065 at September 30, 1998, while the average revenue per worksite employee
for the period increased 9.6%, from $2,128 in 1997 to $2,333 in 1998.
Salaries, wages and employment taxes of worksite employees were $282.4
million for the three months ended September 30, 1998, compared to $218.8
million for the same period in 1997, representing an increase of $63.6 million,
or 29.1%. The increase in salaries, wages and employment taxes of worksite
employees was due primarily to an increased number of PEO worksite employees.
Salaries, wages and employment taxes of worksite employees were 89.7% of
revenues for the three months ended September 30, 1998, compared to 89.4% for
the same period in 1997. The increase of salaries, wages and employment taxes of
worksite employees as a percentage of revenues resulted from a change in the
Company's worksite employee mix towards worksite employees having a lower
workers' compensation classification and lower workers' compensation rates in
several states where the Company operates, which resulted in lower markups being
charged by the Company. In addition, the fact that the Company's revenue
increase was entirely in PEO operations, which have a lower margin than the
Company's managed care business, contributed to such percentage increase.
19
Health care and workers' compensation costs were $13.2 million for the
three months ended September 30, 1998, compared to $9.7 million for the same
period in 1997, representing an increase of $3.5 million, or 36.5%. This
increase was due mainly to the higher volume of PEO worksite employees. Health
care and workers' compensation costs were 4.2% of revenues for the three months
ended September 30, 1998, compared to 4.0% for the same period in 1997.
State unemployment taxes and other direct costs were $2.5 million for the
three months ended September 30, 1998, compared to $2.4 million for the same
period in 1997, representing an increase of $0.1 million or 1.7%. This increase
was due mainly to the higher volume of salaries and wages paid during the three
months ended September 30, 1998, which was a direct function of the increase in
the number of PEO worksite employees, an increased number of client companies
using other services and products and an increase in other direct costs related
to the Company's services. State unemployment taxes and other direct costs were
0.8% of revenues for the three months ended September 30, 1998, compared to 1.0%
for the same period in 1997.
Gross profit was $16.8 million for the three months ended September 30,
1998, compared to $13.9 million for the same period in 1997, representing an
increase of $2.9 million, or 20.9%. Gross margin was 5.3% for the three months
ended September 30, 1998, compared to 5.7% for the same period in 1997. The
decrease in gross margin was due mainly to the shift in the Company's employee
mix, which resulted in lower markups being charged by the Company and to the
fact that the Company's revenue increase was entirely in PEO operations, which
have a lower margin than the Company's managed care business.
Administrative personnel expenses were $6.7 million for the three months
ended September 30, 1998, compared to $6.3 million for the same period in 1997,
representing an increase of $0.4 million, or 5.7%. This increase was primarily
attributable to increased staffing to support the Company's growth, including
management and senior executive personnel. Administrative personnel expenses
were 2.1% of revenues for the three months ended September 30, 1998, compared to
2.6% for the same period in 1997. This decrease in administrative personnel
expenses as a percentage of revenue resulted primarily from higher compensation
paid during 1997 to former owners of AMI and SNI before their respective
acquisitions by the Company. Such compensation was reduced after their
respective acquisitions by the Company.
Other general and administrative expenses, including the provision for
doubtful accounts were $3.3 million for the three months ended September 30,
1998, compared to $3.4 million for the same period in 1997, representing a
decrease of $0.1 million, or 2.8%. Other general and administrative expenses,
including the provision for doubtful accounts, were 1.0% of revenues for the
three months ended September 30, 1998, compared to 1.3% for the same period in
1997.
20
Sales and marketing costs were $2.1 million for the three months ended
September 30, 1998, compared to $1.7 million for the same period in 1997,
representing an increase of $0.4 million, or 24.7%. The increase reflects the
addition of sales representatives and marketing personnel, consistent with the
Company's strategy to increase its client base in its existing and acquired
markets. Sales and marketing costs were 0.7% of revenues for the three months
ended September 30, 1998 and 1997.
Operating income was $4.0 million for the three months ended September 30,
1998, compared to $1.6 million for the same period in 1997, representing an
increase of $2.4 million, or 149.2%. The increase in operating income was due
mainly to the increase in revenues resulting from an increase in worksite
employees.
Net income was $2.5 million for the three months ended September 30, 1998,
compared to net income of $1.0 million for the same period in 1997, representing
an increase of $1.5 million. Diluted and basic earnings per share were $0.16 for
the three months ended September 30, 1998, compared to diluted earnings of $0.06
and basic earnings of $0.07 for the same period in 1997.
The Company anticipates that administrative personnel expenses, other
general and administrative expenses, sales and marketing expenses and interest
expense will continue to increase in future periods to the extent that the
Company continues to experience growth and to expand its service offerings.
Liquidity and Capital Resources
At September 30, 1998, the Company had working capital of $24.2 million,
compared to $17.4 million at December 31, 1997. The Company had $9.1 million in
cash at September 30, 1998.
The Company's Credit Agreement with a group of banks for which Fleet
National Bank ("Fleet Bank") acts 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 lenders. 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
21
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 $5.5 million in standby letters of credit
at September 30, 1998 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.
On December 9, 1997, the Company entered into a leasing arrangement with
respect to a new headquarters facility in Miami-Dade County which the Company
moved into in November 1998. The leasing arrangement has an initial expiration
date of four years after completion of the facility and allows the Company to
extend the term of the lease for up to three more years subject to compliance
with the terms and conditions of the credit agreement and related documents. The
lessor of the facility has financed 97% of the costs of acquiring the land and
constructing the facility. The financing agreement relating to the facility (the
"Facility Financing Agreement") contains certain covenants, including financial
covenants, of the Company and events of default with respect thereto, which
covenants are the same in all material respects as those contained in the
Company's Credit Agreement. Under the leasing arrangement, the Company's
commitment in future years will be based on (i) interest at a competitive rate
on all outstanding loan amounts with respect to the facility plus (ii) the
yield, at a competitive rate, in respect of the lessor's 3% equity investment.
Default under the Company's covenants contained in the Facility Financing
Agreement constitutes default under the Company's lease of the headquarters
facility. In the event of such default, the Company is obligated to either
purchase the facility for the Purchase Price (defined below) or pay a
termination fee in an amount approximately equal to the Purchase Price. The
maximum amount on which the lease payments will be based is currently limited to
$12.0 million, but will be increased to approximately $12.85 million upon
execution of a pending amendment to the Facility Financing Agreement. As of
September 30, 1998, an aggregate of $9.1 million in loans were outstanding to
the lessor.
The Company has an option to purchase the headquarters facility at any time
for an amount equal to the total of (i) the amount of loans outstanding with
respect to the property, (ii) the lessor's investment in the facility, (iii) any
accrued and unpaid interest on such outstanding loans, and (iv) all accrued and
unpaid yield on the lessor's equity investment (the "Purchase Price"). If the
Company determines not to purchase the facility, it will be required to make a
termination payment at the end of the lease term equal to approximately 85% of
the Purchase Price. The Company's lease payment obligations are secured by a
pledge of the stock of all of its subsidiaries.
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.
The Company's primary short-term liquidity requirements for the remainder
of 1998 include the repayment of $0.4 million borrowed by the Company to finance
general liability and employment practice liability insurance premiums, payment
of $750,000 due on the mortgage of the Company's former headquarters facility,
investment in software development, expenditures for office and computer
equipment to support the Company's growth, and the payment of other expenses
related to the Company's growth. The Company anticipates capital expenditures
for 1998 of approximately $5.0 million, primarily for software development,
including the evaluation and implementation of changes to computer programs to
address the year 2000 issue.
22
Net cash provided by operating activities was $13.6 million for the nine
months ended September 30, 1998, compared to cash used in operations of
approximately $2.9 million for the same period in 1997. The difference between
the Company's net income of $6.7 million for the nine months ended September 30,
1998, and its operating cash flow was due primarily to a $10.9 million increase
in accrued salaries, wages, and payroll taxes, an increase of $2.3 million in
income tax payable, a decrease in reinsurance recoverable of $1.1 million, a
decrease in prepaid workers' compensation insurance premium of $7.1 million, a
decrease in income tax receivable of $1.5 million, and increases in noncash
items such as depreciation and amortization of $2.2 million and provision for
doubtful accounts of $0.7 million, partially reduced by an increase of $11.5
million in accounts receivable, an increase of $3.8 million in prepaid expenses
and other current assets, and a decrease in reserves for claims of $2.5 million.
The increase in accounts receivable and accrued salaries, wages and payroll
taxes resulted from both a higher number of PEO worksite employees served during
the nine months ended September 30, 1998 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.
Net cash used in investing activities was $0.6 million for the nine months
ended September 30, 1998, compared to $3.9 million used in investing activities
in the same period in 1997. This reflects the purchase of $2.4 million in
property and equipment to support the Company's growth, offset by the redemption
of short term investments of $1.8 million.
Net cash used in financing activities was $8.8 million for the nine months
ended September 30, 1998, compared to $2.5 million used in financing activities
in the same period in 1997. During 1998, the Company made principal payments on
borrowings of $9.2 million, mostly related to the financing of the Company's
workers' compensation insurance program premiums.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs using two digits
rather than four to define the applicable year. Any of the Company's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure,
disruption of operations (such as the disruption of payroll processing services
to the Company's clients or the disruption of employee information systems),
and/or a temporary inability to conduct normal business activities.
The Year 2000 project includes an assessment of telecommunications
equipment, computer equipment, software, database, data services, network
infrastructure, and telephone equipment. The Company's Year 2000 plan addresses
the Year 2000 issue in four phases: (1) Inventory and Assessment; (2) Impact
Analysis and Conversion Planning; (3) System Conversion and Testing; (4)
Implementation and Monitoring. As each phase is completed, project progress will
be tracked against planned targets, and resource adjustments made as necessary.
At this time, a majority of the Company's information systems and embedded
devices have been inventoried and assessed, and the Company has begun impact
analysis and conversion planning, as well as some system conversion and testing.
The project is estimated to be complete by the end 1999, prior to any
anticipated impact on the Company's operating systems. The Company believes that
with modifications to existing software, conversions to new software and
replacement or modification of certain embedded systems, the Year 2000 issue
23
will not pose significant operational problems. Based on its current
assessment efforts, the Company does not believe that Year 2000 issues will have
a material adverse effect on its financial condition or results of operations.
If, however, necessary modifications and conversions are not made or are not
completed on a timely basis, the Year 2000 issue may have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's Year 2000 issues and any potential business interruptions, costs,
damages or losses related thereto, are dependent, to a certain degree, upon the
Year 2000 readiness of third parties such as vendors and suppliers. As part of
the Company's Year 2000 efforts, formal communications with all significant
vendors and clients are being pursued to determine the extent to which related
interfaces with the Company's systems are vulnerable if these third parties fail
to remediate their Year 2000 issues. There cannot be no assurance that any such
third parties will address any Year 2000 issues that they have and that such
third parties' systems will not materially adversely affect the Company's
systems and operations.
The Company continues to assess the Year 2000 issue with respect to
internal business systems, and has initiated the implementation of corrective
measures to address the issue. The Company is evaluating the need for
contingency planning at this time of its systems and embedded devices. The
assessment of third parties external to the Company is underway, and may reveal
the need for contingency planning based on the progress and findings of the Year
2000 project.
The Company will utilize both internal and external resources to complete
and test the Year 2000 project. At the present time, the Company is estimating
the cost of this project. Through June 30, 1998, related costs incurred were not
material, and the Company does not expect that the total cost of its Year 2000
project will be material to the Company's financial position or results of
operations. Project costs and the targeted completion date will be based on
management's best estimates, which will be derived from utilizing numerous
assumptions of future events, including the continued availability of certain
resources, the ability to locate and correct all relevant computer codes, third
party modification plans and other factors. There can be no assurance these
estimates will be achieved or that the actual results will not differ materially
from those anticipated.
24
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
During the quarterly period ended June 30, 1998, the Company appointed
Steven R. Light to the position of Senior Vice President, Strategic Initiatives
and, during the quarterly period ended September 30, 1998, named Jeffrey D.
Lamb, who was previously Senior Vice President, Marketing and Business
Development, the Company's Area Executive Western States. Andrea Velazquez,
President of the Company's Managed Solutions Division, left the Company in
November 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
- - ------- ------------
10.1 The Vincam Group, Inc. 1996 Long Term Incentive Plan, as amended.
10.2 The Vincam Group, Inc. 1998 Long Term Incentive Plan.
10.3 Deductible Liability Insurance Policy, effective December 31, 1997,
issued by Reliance Insurance Company of Illinois,
Policy No. NXS 0133598-01.
10.4 First Amendment to Development Agreement, dated as of June 29, 1998,
by and between Codina Development Corporation and The Vincam Group,
Inc. as agent for Fleet Real Estate, Inc.
10.5 Deductible Liability Insurance Policy, effective December 31, 1997,
issued by Reliance Insurance Company of Illinois, Policy No. NGB
0133600-01 (confidential treatment has been requested for certain
portions of Exhibit 10.5).
11 Statement re Computation of Per Share Earnings
27.1 Financial Data Schedule as of and for the nine month period ended
September 30, 1998
27.2 Restated Financial Data Schedule as of and for the nine month period
ended September 30, 1997
(b) Reports on Form 8-K
None.
25
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.
November 16, 1998 By: /S/ CARLOS A. RODRIGUEZ
- - -------------------------- -----------------------
Date Carlos A. Rodriguez, Chief Financial Officer,
Senior Vice President Finance and Administration
(Principal Financial Officer)
November 16, 1998 By: /S/ MARTINIANO J. PEREZ
- - ----------------------- -----------------------
Date Martiniano J. Perez, Vice President & Controller
(Principal Accounting Officer)
26
THE VINCAM GROUP, INC.
EXHIBIT INDEX
Exhibit
No. Description
10.1 The Vincam Group, Inc. 1996 Long Term Incentive Plan, as amended.
10.2 The Vincam Group, Inc. 1998 Long Term Incentive Plan.
10.3 Deductible Liability Insurance Policy, effective December 31, 1997,
issued by Reliance Insurance Company of Illinois,
Policy No. NXS 0133598-01.
10.4 First Amendment to Development Agreement, dated as of June 29, 1998,
by and between Codina Development Corporation and The Vincam Group,
Inc. as agent for Fleet Real Estate, Inc.
10.5 Deductible Liability Insurance Policy, effective December 31, 1997,
issued by Reliance Insurance Company of Illinois, Policy No. NGB
0133600-01 (confidential treatment has been requested for certain
portions of Exhibit 10.5).
11 Statement re Computation of Per Share Earnings
27.1 Financial Data Schedule as of and for the nine month period ended
September 30, 1998
27.2 Restated Financial Data Schedule as of and for the nine month period
ended September 30, 1997