<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee required]
For the transition period from __________ to ___________
Commission File No. 1-13998
ADMINISTAFF, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0479645
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19001 Crescent Springs Drive
Kingwood, Texas 77339
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code): (281) 358-8986
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
--- ---
Number of shares outstanding of each of the issuer's classes of common
stock, as of October 30, 1997: 13,862,526 shares.
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<PAGE> 2
TABLE OF CONTENTS
Part I
<TABLE>
<S> <C>
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 14
Part II
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 23
</TABLE>
2
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ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 13,360 $ 28,644
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 24,286
Accounts receivable:
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,490 2,095
Unbilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,742 21,531
Related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 197
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344 654
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,668 344
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 431
----------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 33,043 78,182
Property and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817 817
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . 6,564 7,115
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,093 5,671
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . 3,767 4,573
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 761 870
----------- ----------
15,002 19,046
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (3,359) (4,665)
----------- ----------
Total property and equipment . . . . . . . . . . . . . . . . . . . . 11,643 14,381
Other assets:
Notes receivable from employees . . . . . . . . . . . . . . . . . . . . . 1,135 1,240
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . 282 5
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749 853
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,524 1,352
----------- ----------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . 3,690 3,450
----------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,376 $ 96,013
=========== ==========
</TABLE>
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<PAGE> 4
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 594 $ 661
Payroll taxes and other payroll deductions payable . . . . . . . . . . . 10,099 7,735
Accrued worksite employee payroll expense . . . . . . . . . . . . . . . 13,385 21,065
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,662 2,592
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 266 1,140
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . 491 --
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 917 --
----------------- ----------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 28,414 33,193
Noncurrent liabilities:
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,558 2,558
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,112 --
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . -- 189
----------------- ----------------
Total noncurrent liabilities . . . . . . . . . . . . . . . . . . . 6,670 2,747
Commitments and contingencies
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 138
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 5,706 50,594
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,479 11,329
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . -- (1,999)
Unrealized gain on marketable securities . . . . . . . . . . . . . . . . -- 11
----------------- ----------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 13,292 60,073
----------------- ----------------
Total liabilities and stockholders' equity . . . . . . . . . . . . $ 48,376 $ 96,013
================= ================
</TABLE>
See accompanying notes.
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996 1997
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 231,190 $ 302,618 $ 635,252 $ 839,610
Direct costs:
Salaries and wages of worksite employees . . . . . . 189,089 249,541 517,820 691,244
Benefits and payroll taxes . . . . . . . . . . . . . 30,816 39,049 91,307 113,902
---------- --------- ---------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . 11,285 14,028 26,125 34,464
Operating expenses:
Salaries, wages and payroll taxes . . . . . . . . . 3,543 4,397 10,475 13,014
General and administrative expenses . . . . . . . . 1,985 2,863 5,937 9,449
Commissions . . . . . . . . . . . . . . . . . . . . 1,013 1,192 2,939 3,361
Advertising . . . . . . . . . . . . . . . . . . . . 884 1,083 2,488 2,752
Depreciation and amortization . . . . . . . . . . . 384 572 1,063 1,495
---------- --------- ---------- ---------
7,809 10,107 22,902 30,071
---------- --------- ---------- ---------
Operating income . . . . . . . . . . . . . . . . . . . 3,476 3,921 3,223 4,393
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . 180 793 449 2,171
Interest expense . . . . . . . . . . . . . . . . . . (197) (23) (747) (363)
Other, net . . . . . . . . . . . . . . . . . . . . . (1,404) (1) (1,398) (13)
---------- --------- ---------- ---------
(1,421) 769 (1,696) 1,795
---------- --------- ---------- ---------
Income before income tax expense . . . . . . . . . . . 2,055 4,690 1,527 6,188
Income tax expense . . . . . . . . . . . . . . . . . . 1,084 1,767 913 2,338
---------- --------- ---------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 971 $ 2,923 $ 614 $ 3,850
========== ========= ========== =========
Net income per share of common stock . . . . . . . . . $ 0.09 $ 0.21 $ 0.06 $ 0.28
========== ========= ========== =========
Weighted average common shares outstanding . . . . . . 10,962 14,175 10,921 13,586
========== ========= ========== =========
</TABLE>
See accompanying notes.
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<PAGE> 6
ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
ISSUED ADDITIONAL GAIN ON
-------------------- PAID-IN RETAINED TREASURY MARKETABLE
SHARES AMOUNT CAPITAL EARNINGS STOCK SECURITIES TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 10,726 $ 107 $ 5,706 $ 7,479 $ -- $ -- $ 13,292
Issuance of common stock through
initial public offering, net of
offering costs of $5,669 3,000 30 45,301 -- -- -- 45,331
Purchase of treasury stock, at cost -- -- -- -- (1,999) -- (1,999)
Repurchase of common stock
purchase warrants -- -- (542) -- -- -- (542)
Exercise of common stock
purchase warrants 70 1 47 -- -- -- 48
Exercise of stock options 11 -- 82 -- -- -- 82
Unrealized gain on
marketable securities -- -- -- -- -- 11 11
Net income -- -- -- 3,850 -- -- 3,850
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1997 13,807 $ 138 $ 50,594 $ 11,329 $ (1,999) $ 11 $ 60,073
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
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<PAGE> 7
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 614 $ 3,850
Adjustments to reconcile net income to net cash
provided by operating activities :
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 1,231 1,815
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 1,096 (1,159)
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 1,659
Loss (gain) on disposal of assets . . . . . . . . . . . . . . . . . . (9) 13
Changes is operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . (3,482) (9,121)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 2,043 332
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,224) 164
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 75 67
Payroll taxes and other payroll deductions payable . . . . . . . . . (4,111) (2,364)
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 7,287 7,610
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 2,992 874
------------ ------------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . 6,085 (110)
------------ ------------
Net cash provided by operating activities . . . . . . . . . . . . 6,699 3,740
Cash flows from investing activities:
Marketable securities:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (35,287)
Proceeds from dispositions . . . . . . . . . . . . . . . . . . . . . . 728 10,986
Property and equipment:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,372) (4,238)
Proceeds from dispositions . . . . . . . . . . . . . . . . . . . . . . 19 33
Increases in intangible assets . . . . . . . . . . . . . . . . . . . . . . (185) (160)
------------ ------------
Net cash used in investing activities . . . . . . . . . . . . . . (2,810) (28,666)
</TABLE>
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<PAGE> 8
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Long-term debt and short-term borrowings:
Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,500 $ --
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,531) (4,603)
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . (3) --
Proceeds from the issuance of common stock . . . . . . . . . . . . . . . -- 47,430
Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . -- (1,999)
Repurchase of common stock purchase warrants. . . . . . . . . . . . . . . -- (542)
Prepaid expenses - initial public offering costs . . . . . . . . . . . . (368) (107)
Proceeds from the exercise of stock options . . . . . . . . . . . . . . . -- 82
Proceeds from the exercise of common stock
purchase warrants . . . . . . . . . . . . . . . . . . . . . . . . . . -- 48
Loans to employees . . . . . . . . . . . . . . . . . . . . . . . . . . . (353) (99)
------------ ------------
Net cash provided by (used in) financing activities . . . . . . . (755) 40,210
------------ ------------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . 3,134 15,284
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 6,460 13,360
------------ ------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 9,594 $ 28,644
============ ============
</TABLE>
See accompanying notes.
- 8 -
<PAGE> 9
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
Administaff, Inc. (the Company) is a professional employer organization
(PEO) that provides a comprehensive Personnel Management System which
encompasses a broad range of services, including benefits and payroll
administration, medical and workers' compensation programs, personnel records
management, liability management, recruiting and selection, performance
management, and training and development services to small to medium sized
businesses in several strategically selected markets. The Company operates
primarily in the State of Texas.
The consolidated financial statements include the accounts of Administaff,
Inc., and its wholly owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The consolidated balance sheet at December 31, 1996 has been derived from
the audited financial statements at that date but does not include all of the
information or footnotes required by generally accepted accounting principles
for complete financial statements. The consolidated balance sheet at September
30, 1997 and the consolidated statements of operations, cash flows and
stockholders' equity for the interim periods ended September 30, 1997 and 1996
have been prepared by the Company without audit. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of operations and
cash flows have been made. The results of operations for the interim periods
are not necessarily indicative of the operating results for a full year or of
future operations. Historically, the Company's earnings pattern includes
losses in the first quarter, followed by improved profitability in subsequent
quarters throughout the year. This pattern is due to the effects of employment
related taxes which are based on the individual employees' cumulative earnings
up to specified wage levels, causing employment related taxes to be highest in
the first quarter and then decline over the course of the year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31, 1996.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
2. PER SHARE INFORMATION
Per share amounts have been computed based on the weighted average number
of common shares and common stock equivalents outstanding during the respective
periods. Common stock equivalent shares consist of the incremental shares
issuable upon the exercise of stock options and warrants (using the treasury
stock or if-converted method where applicable). For the three months and nine
months ended September 30, 1996, shares for which options were granted between
September 1994 (twelve months prior to the Company's initial filing on Form S-1
of an initial public offering) and the effective date of the offering are
considered outstanding for purposes of the earnings per share calculation.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of common stock equivalents will be excluded. The impact of
Statement No. 128 on primary and fully diluted earnings per share is not
expected to be material for the three months and nine months ended September
30, 1997 and September 30, 1996.
3. INITIAL PUBLIC OFFERING
The Company completed an initial public offering in January 1997. The net
proceeds to the Company from the sale of the 3,000,000 shares of Common Stock
offered by the Company (after deducting underwriting discounts and commissions
of $3.6 million) were $47.4 million. In addition, during the registration
process, the Company incurred $2.1 million in legal, accounting, printing and
other costs, which were offset against the proceeds of the offering as a
component of additional paid-in capital. The Company utilized approximately
$7.1 million of the proceeds as follows: (i) $4.6 million to repay certain
subordinated notes and other secured notes comprising all of the company's
outstanding indebtedness at the time the offering was completed, (ii)
approximately $2.0 million to exercise its option to repurchase 348,945 shares
of Common Stock from one of its stockholders, which is now held in treasury by
the Company, and (iii) approximately $0.5 million to exercise its option to
repurchase 173,609 warrants to purchase shares of Common Stock from the
subordinated noteholder. Of the remaining proceeds, the Company has allocated
approximately $12.0 million to support expansion of the Company's operations,
including the opening of sales offices in new geographic markets as well as in
established markets and, as favorable opportunities arise, expansion of the
Company's client base in new or existing markets through acquisitions of
existing PEO offices. For the nine months ended September 30, 1997, the
Company has incurred $4.2 million in capital expenditures primarily related to
the opening of sales offices and the necessary corporate infrastructure and
technology to support this expansion. The balance of the proceeds will be used
for working capital purposes. Pending the application of such funds, the
Company has invested the net proceeds of the offering in diversified,
highly-liquid, investment grade, interest-bearing instruments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
4. MARKETABLE SECURITIES
At September 30, 1997, the Company's marketable securities consisted of
debt securities issued by corporate and governmental entities with contractual
maturities ranging from 91 days to two years from the date of purchase. All of
the Company's investments in marketable securities are classified as
available-for-sale and are carried at fair market value with unrealized gains
and losses recorded as a component of stockholders' equity.
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the second quarter of 1997 the Company recorded a $1.3 million
reserve for the potential uncollectibility of an account receivable from a
significant former customer. This reserve resulted from the customer's
inability to pay the invoices related to a single payroll period in April 1997.
The Company attempted to collect the amounts due or obtain a secured position
on the amount owed by the customer; however, the Company was unable to collect
the amounts or obtain such a position. In late June 1997, the customer filed
for bankruptcy protection and the Company subsequently learned that the
customer's ability to pay the amounts owed had become severely impaired,
resulting in the recording of the reserve. The Company is currently pursuing
all avenues of collection available through the bankruptcy proceedings. Prior
to the second quarter of 1997, the allowance for doubtful accounts and bad debt
expense were not material to the Company's financial position or results of
operations.
6. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits and claims arising in the
normal course of business. Management believes it has valid defenses in these
cases and is defending them vigorously. While the results of litigation cannot
be predicted with certainty, management believes the final outcome of such
litigation will not have a material adverse effect on the Company's financial
position or results of operations.
The Company's 401(k) plan is currently under audit by the Internal Revenue
Service (the "IRS") for the year ended December 31, 1993. Although the audit
is for the 1993 plan year, certain conclusions of the IRS would be applicable
to other years as well. In addition, the IRS has established an Employee
Leasing Market Segment Group for the purpose of identifying specific compliance
issues prevalent in certain segments of the PEO industry. Approximately 70
PEOs, including the Company, have been randomly selected by the IRS for audit
pursuant to this program. One issue that has arisen from these audits is
whether a PEO can be a co-employer of worksite employees, including officers
and owners of client companies, for various purposes under the Internal Revenue
Code of 1986, as amended (the "Code"), including participation in the PEO's
401(k) plan. With respect to the 401(k) Plan audit, the IRS Houston District
has sought technical advice (the "Technical Advice Request") from the IRS
National Office about (1) whether participation in the 401(k) Plan by worksite
employees, including officers of client companies, violates the exclusive
benefit rule under the Code because they are not employees of the Company, and
(2) whether the
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<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
401(k) Plan's failure to satisfy a nondiscrimination test relating to
contributions should result in disqualification of the 401(k) Plan because the
Company has failed to provide evidence that it satisfies an alternative
nondiscrimination test. A copy of the Technical Advice Request and the
Company's response have been sent to the IRS National Office for review. The
Technical Advice Request contains the conclusions of the IRS Houston District
with respect to the 1993 plan year that the 401(k) Plan should be disqualified
because it (1) covers worksite employees who are not employees of the Company,
and (2) failed a nondiscrimination test applicable to contributions and the
Company has not furnished evidence that the 401(k) Plan satisfies an
alternative test. The Company's response to the Technical Advice Request
refutes the conclusions of the IRS Houston District. The Company also
understands that, with respect to the Market Segment study, the issue of
whether a PEO and a client company may be treated as co-employers of worksite
employees for certain federal tax purposes (the "Industry Issue") is being
referred to the IRS National Office.
Whether the National Office will address the Technical Advice Request
independently of the Industry Issue is unclear. Should the IRS conclude that
the Company is not a "co-employer" of worksite employees for purposes of the
Code, worksite employees could not continue to make salary deferral
contributions to the 401(k) Plan or pursuant to the Company's cafeteria plan or
continue to participate in certain other employee benefit plans of the Company.
The Company believes that, although unfavorable to the Company, a prospective
application of such a conclusion (that is, one applicable only to periods after
the conclusion by the IRS is finalized) would not have a material adverse
effect on its financial position or results of operations, as the Company could
continue to make available comparable benefit programs to its client companies
at comparable costs to the Company. However, if the IRS National Office adopts
the conclusions of the IRS Houston District set forth in the Technical Advice
Request and any such conclusions were applied retroactively to disqualify the
401(k) Plan for 1993 and subsequent years, employees' vested account balances
under the 401(k) Plan would become taxable, the Company would lose its tax
deductions to the extent its matching contributions were not vested, the 401(k)
Plan's trust would become a taxable trust and the Company would be subject to
liability with respect to its failure to withhold applicable taxes with respect
to certain contributions and trust earnings. Further, the Company would be
subject to liability, including penalties, with respect to its cafeteria plan
for the failure to withhold and pay taxes applicable to salary deferral
contributions by employees, including worksite employees. In such a scenario,
the Company also would face the risk of client dissatisfaction and potential
litigation. While the Company is not able to predict either the timing or the
nature of any final decision that may be reached with respect to the 401(k)
Plan audit or with respect to the Technical Advice Request or the Market
Segment Group study and the ultimate outcome of such decisions, the Company
believes that a retroactive application of an unfavorable determination is
unlikely. The Company also believes that a prospective application of an
unfavorable determination will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
In addition to the 401(k) Plan audit and Market Segment Study, the Company
notified the IRS of certain operational issues concerning nondiscrimination
test results for certain prior plan years. In 1991 the Company engaged a third
party vendor to be the 401(k) Plan's record keeper and to perform certain
required annual nondiscrimination tests for the 401(k) Plan. Each year such
record
-12-
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
keeper reported to the Company that such nondiscrimination tests had been
satisfied. However, in August 1996 the 401(k) Plan's record keeper advised the
Company that certain of these tests had been performed incorrectly for prior
years and, in fact, that the 401(k) Plan had failed certain tests for the 1993,
1994 and 1995 plan years. The Company has subsequently determined that the
401(k) Plan also failed a nondiscrimination test for 1991 and 1992, closed
years for tax purposes. At the time the Company received such notice, the
period in which the Company could voluntarily "cure" this operational defect
had lapsed for all such years except 1995.
With respect to the 1995 plan year, the Company has caused the 401(k) Plan
to refund the required excess contributions and earnings thereon to the
affected employees. In connection with this correction, the Company paid
approximately $47,000 for an excise tax applicable to this plan year. With
respect to all other plan years, the Company has proposed a corrective action
to the IRS under which the Company would make additional contributions to
certain plan participants which bring the plan into compliance with the
nondiscrimination tests.
During 1996, the Company recorded an accrual for its estimate of the cost
of corrective measures and penalties for all of the affected plan years, which
accrual is reflected in Other accrued liabilities - noncurrent on the
Consolidated Balance Sheet. The Company calculated its estimates based on its
understanding of the resolution of similar issues with the IRS. Separate
calculations were made to determine the Company's estimate of both the cost of
corrective measures and penalties for each plan year. In addition, at the same
time, the Company recorded an asset for an amount recoverable from the 401(k)
Plan's record keeper should the Company ultimately be required to pay the
amount accrued for such corrective measures and penalties, which amount is
reflected in Other assets on the Consolidated Balance Sheet. The amount of the
accrual is the Company's estimate of the cost of corrective measures and
practices, although no assurance can be given that the actual amount that the
Company may be ultimately required to pay will not substantially exceed the
amount accrued. There has been no change in the amounts of the accrual or the
amount recoverable from the record keeper subsequent to December 31, 1996.
Based on its understanding of the settlement experience of other companies with
the IRS, the Company does not believe the ultimate resolution of this 401(k)
Plan matter will have a material adverse effect on the Company's financial
condition or results of operations.
-13-
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.
The following table presents certain information related to the Company's
results of operations for the three months ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1997 CHANGE
--------- -------- ------
(OPERATING RESULTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING RESULTS:
Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 231,190 $ 302,618 30.9%
Gross profit . . . . . . . . . . . . . . . . . . . . . 11,285 14,028 24.3%
Gross profit margin . . . . . . . . . . . . . . . . . 4.9% 4.6%
Operating income . . . . . . . . . . . . . . . . . . . 3,476 3,921 12.8%
STATISTICAL DATA:
Monthly revenue per worksite employee . . . . . . . . 3,157 3,509 11.1%
Monthly payroll cost per worksite employee . . . . . . 2,560 2,873 12.2%
Monthly gross markup per worksite employee . . . . . . 597 636 6.5%
Average number of worksite employees paid
per month during period . . . . . . . . . . . . . . 23,325 27,604 18.3%
</TABLE>
REVENUES
The Company's revenues for the three months ended September 30, 1997
increased 30.9% over the same period in 1996 due to an increase in worksite
employees paid accompanied by an increase in the revenue per employee. The
Company's expansion of its sales force through new market and sales office
openings over the past three years is the primary factor contributing to the
increased number of worksite employees. The average number of worksite
employees paid during the third quarter of 1997 increased 7.3% over the second
quarter of 1997, reflecting this continued growth. The Company's new markets
(defined as markets opened after September 1993 - the commencement of the
Company's national expansion plan) contributed approximately $113 million, or
37.3%, of the Company's total revenues for the third quarter of 1997 versus
approximately $67 million, or 28.9%, during the same period of 1996.
The increase in revenue per employee of 11.1% directly relates to the
increase in payroll cost per employee of 12.2%. This increase reflects the
continuing effects of the net addition, through the Company's sales efforts, of
clients with worksite employees that have a higher average base pay than the
existing client base. In addition, wage inflation within the Company's
existing worksite employee
-14-
<PAGE> 15
base has contributed to the overall increase in payroll cost per worksite
employee. The average payroll cost per worksite employee increased 2.7% versus
the second quarter of 1997, reflecting the effects of these trends.
GROSS PROFIT MARGIN
The Company's gross profit margin decreased to 4.6% for the third quarter
of 1997 versus 4.9% for the third quarter of 1996. This decrease was primarily
the result of an unusually low level of benefits costs relative to the markup
per employee as a percentage of revenue during the 1996 period.
The continued addition of higher wage, less risk sensitive worksite
employees resulted in a decrease in markup per employee as a percentage of
revenue from 18.9% in the third quarter of 1996 to 18.1% in the third quarter
of 1997. The Company attempts to match the lower overall rates charged on these
employees with reductions in the cost of providing employee benefits and
workers' compensation coverage as a percentage of revenue or payroll cost.
The Company's group health insurance policy requires the Company to fund
all claims and premiums up to a specified quarterly cap amount. If the claims
experience during a quarter is lower than the cap amount, the Company's benefit
plan premiums for that period are positively affected. If the claims
experience during a quarter exceeds the cap amount, the insurance carrier is
required to fund all claims and premiums in excess of the quarterly cap amount.
During the third quarter of 1996, the Company's health insurance claims were
significantly lower than the cap amount. As a result, benefit plan premiums
for the third quarter of 1996 were 5.9% of revenue, a decrease from 6.6% during
the first half of 1996. Benefit plan premiums for the third quarter of 1997
were 5.8% of revenues.
Workers' compensation costs decreased from 2.0% of payroll cost in the
third quarter of 1996 to 1.6% of payroll cost in the third quarter of 1997,
primarily because the rate on the Company's fixed premium policy during the
1997 period was lower than the rate in place during the 1996 period.
Employment related taxes as a percentage of payroll cost declined
slightly from 7.0% in the third quarter of 1996 to 6.9% in the third quarter of
1997. This reduction reflects a net decrease in the weighted average state
unemployment tax rates paid by the Company.
OPERATING EXPENSES
Operating expenses decreased as a percentage of revenue from 3.4% in the
third quarter of 1996 to 3.3% in the third quarter of 1997. Compensation
related costs (salaries, wages, payroll taxes and commissions) and advertising
expenses increased at a lower rate than the increase in revenues.
General and administrative expenses for the third quarter of 1997 were
slightly higher as a percentage of revenue versus the 1996 period. This
increase is primarily due to higher travel expenses associated with the
Company's continued national expansion, higher legal, accounting, and
-15-
<PAGE> 16
professional fees, and increases in expenses associated with the growth in the
number of corporate and worksite employees.
Depreciation and amortization expense increased 49.0% versus the third
quarter of 1996. This increase is primarily due to capital expenditures
related to the opening of new sales offices and investments in technology and
infrastructure related to increasing corporate service capacity.
The factors noted above include the effects of continued significant
operating expenses in new markets. Operating expenses incurred directly in new
markets (which include salaries, payroll taxes, recruiting and training costs
of newly hired sales associates, advertising and public relations costs and
general office expenses) totaled $2.1 million in the third quarter of 1997
versus $1.5 million during the third quarter of 1996.
NET INCOME
Interest income increased $613,000 over the third quarter of 1996 due to
the investment of the proceeds from the Company's initial public offering
received in early February 1997. Interest expense decreased $174,000 due to the
repayment of the Company's outstanding indebtedness with a portion of the
initial public offering proceeds.
Other expense for the 1996 period includes a non-recurring charge of $1.4
million relating to certain compliance issues involving the Company's 401(k)
Plan, net of amounts recoverable from the Plan's record keeper.
The Company's provision for income taxes differs from the U.S. statutory
rate of 34% for the third quarter of 1997 due primarily to state income taxes.
For the third quarter of 1996, the provision for incomes taxes differed from
the statutory rate primarily because certain portions of the non-recurring
charge were not deductible for tax purposes.
The Company's net income for the three months ended September 30, 1997
increased to $2.9 million, or $0.21 per share, versus $971,000, or $0.09 per
share, for the three months ended September 30, 1996.
-16-
<PAGE> 17
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997.
The following table presents certain information related to the Company's
results of operations for the nine months ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1997 CHANGE
--------- -------- ------
(OPERATING RESULTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING RESULTS:
Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 635,252 $ 839,610 32.2%
Gross profit . . . . . . . . . . . . . . . . . . . . . 26,125 34,464 31.9%
Gross profit margin . . . . . . . . . . . . . . . . . 4.1% 4.1%
Operating income . . . . . . . . . . . . . . . . . . 3,223 4,393 36.3%
STATISTICAL DATA:
Monthly revenue per worksite employee . . . . . . . . 3,117 3,423 9.8%
Monthly payroll cost per worksite employee . . . . . . 2,522 2,797 10.9%
Monthly gross markup per worksite employee . . . . . . 595 626 5.2%
Average number of worksite employees paid
per month during period . . . . . . . . . . . . . . 21,721 26,121 20.3%
</TABLE>
REVENUES
The Company's revenues for the nine months ended September 30, 1997
increased 32.2% over the same period in 1996 due to an increase in worksite
employees paid accompanied by an increase in the revenue per employee. The
Company's expansion of its sales force through new market and sales office
openings over the past three years is the primary factor contributing to the
increased number of worksite employees. The Company's new markets (defined as
markets opened after September 1993 - the commencement of the Company's
national expansion plan) contributed approximately $295 million, or 35.1%, of
the Company's total revenues for the first nine months of 1997 versus
approximately $166 million, or 26.1%, during the same period of 1996. The
Company expanded its sales force in the Houston market in January 1997, entered
the Los Angeles market with two sales office openings during the second quarter
and early third quarter of 1997, and entered the Charlotte market in the third
quarter of 1997. The Company expects continued growth in the number of
worksite employees during the remainder of 1997 versus 1996 due to the effect
of sales in existing markets and the Company's national expansion plan.
The increase in revenue per employee of 9.8% directly relates to the
increase in payroll cost per employee of 10.9%. This increase reflects the
continuing effects of the net addition, through the Company's sales efforts, of
clients with worksite employees that have a higher average base pay than the
existing client base. In addition, wage inflation within the Company's
existing worksite employee base has contributed to the overall increase in
payroll cost per worksite employee.
-17-
<PAGE> 18
GROSS PROFIT MARGIN
The Company's gross profit margin was unchanged at 4.1% for the first
nine months of 1997 and 1996. This reflects the Company's success in matching
changes in the risk sensitivity of its employee base with changes in its direct
cost structure.
The continued addition of higher wage, less risk sensitive worksite
employees resulted in a decrease in markup per employee as a percentage of
revenue from 19.1% in the first nine months of 1996 to 18.3% in the first nine
months of 1997. The Company attempts to match the lower overall rates charged
on these employees with reductions in the cost of providing employee benefits
and workers' compensation coverage as a percentage of revenue or payroll cost.
The cost of providing employee benefits, which includes workers'
compensation costs and benefit plan premiums, was lower in the first nine
months of 1997 than in the first nine months of 1996 as a percentage of
revenue. Workers' compensation costs decreased from 2.2% of payroll cost in
the first nine months of 1996 to 1.7% of payroll cost in the first nine months
of 1997. This reduction was due to the rate on the Company's fixed premium
policy in effect during the 1997 period being lower than the rate in place
during the first nine months of 1996. Benefit plan premiums declined from 6.3%
of revenue in the first nine months of 1996 to 5.9% of revenue in the first
nine months of 1997. The lower costs relative to revenue and payroll cost in
both worker's compensation and benefit plan premiums reflect the reduced risk
sensitivity of the current composition of the Company's client base as compared
to the 1996 period.
Employment related taxes as a percentage of payroll cost declined
slightly from 7.6% during the first nine months of 1996 to 7.5% during the 1997
period. This reduction reflects a net decrease in the weighted average state
unemployment tax rates paid by the Company as compared to the same period in
1996.
OPERATING EXPENSES
Operating expenses were comparable as a percentage of revenue at 3.6% in
the first nine months of both years; however, the first nine months of 1997
includes the effects of the previously reported $1.3 million bad debt charge in
the second quarter of 1997. Excluding the effects of this charge, operating
expenses for the first nine months of 1997 were approximately 3.4% of revenue.
Compensation related costs (salaries, wages, payroll taxes and commissions) and
advertising expenses increased at a lower rate than the increase in revenues.
General and administrative expenses for the nine months ended September
30, 1997 were 1.1% of revenue in the 1997 period versus 0.9% of revenue in the
1996 period. This increase is primarily due to the bad debt charge, higher
travel expenses associated with the Company's continued national expansion,
higher legal, accounting, and professional fees associated with being a public
company, and increases in expenses associated with the growth in the number of
corporate and worksite employees.
-18-
<PAGE> 19
Depreciation and amortization expense increased 40.6% versus the first
nine months of 1996. This increase is primarily due to capital expenditures
related to the construction of an additional corporate facility which was
placed into service in February 1996 and affected only part of the 1996 period,
capital expenditures related to the opening of new sales offices and
investments in technology and infrastructure related to increasing corporate
service capacity.
During the second quarter of 1997 the Company recorded a $1.3 million
(approximately $800,000 after tax) reserve for the potential uncollectibility
of an account receivable from a significant former customer. This reserve
resulted from the customer's inability to pay the invoices related to a single
payroll period in April 1997. The Company attempted to collect the amounts due
or obtain a secured position on the amount owed by the customer; however, the
Company was unable to collect the amounts or obtain such a position. In late
June 1997, the customer filed for bankruptcy protection and the Company
subsequently learned that the customer's ability to pay the amounts owed had
become severely impaired, resulting in the recording of the reserve. The
Company is currently pursuing all avenues of collection available through the
bankruptcy proceedings.
The factors noted above include the effects of continued significant
operating expenses in new markets. Operating expenses incurred directly in new
markets (which include salaries, payroll taxes, recruiting and training costs
of newly hired sales associates, advertising and public relations costs and
general office expenses) totaled $5.9 million in the first nine months of 1997
versus $4.5 million during the first nine months of 1996.
NET INCOME
Interest income increased $1.7 million over the first nine months of 1996
due to the investment of the proceeds from the Company's initial public
offering received in early February 1997. Interest expense decreased $384,000
as reductions in interest expense due to the repayment of the Company's
outstanding indebtedness were partially offset by the write off of deferred
financing costs relating to the repaid indebtedness.
Other expense for the 1996 period includes a non-recurring charge of $1.4
million relating to certain compliance issues involving the Company's 401(k)
Plan, net of amounts recoverable from the Plan's record keeper.
The Company's provision for income taxes differs from the U.S. statutory
rate of 34% due primarily to state income taxes in the 1997 period. For the
nine months ended September 30, 1996, the Company's provision for income tax
benefit differed from the U.S. statutory rate primarily because certain
portions of the non-recurring charge were not deductible for tax purposes.
The Company's net income for the nine months ended September 30, 1997
increased to $3.9 million, or $0.28 per share, versus $614,000, or $0.06 per
share, for the nine months ended September 30, 1996.
-19-
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, expansion
plans including potential acquisitions, debt service requirements and other
operating cash needs. As a result of this process, the Company has sought in
the past, and may seek in the future, to raise additional capital or take other
steps to increase or manage its liquidity and capital resources. The Company
currently believes that its cash and marketable securities on hand and cash
flows from operations will be adequate to meet its liquidity requirements
through at least 1998. The Company will rely on these same sources, as well as
public and private debt and equity financing, to meet its long-term liquidity
needs.
The Company has $52.9 million in cash and cash equivalents and marketable
securities at September 30, 1997 which is available to the Company for general
corporate purposes, including, but not limited to, current working capital
requirements which may include capital expenditures, expenditures related to
the continued expansion of the Company's sales force through the opening of new
sales offices, and acquisitions of existing PEO operations should favorable
acquisition opportunities arise. The Company repaid all of its long-term debt
during the first quarter of 1997 utilizing the proceeds from its initial public
offering and has no long-term debt as of September 30, 1997. At September 30,
1997 the Company had net working capital of $45.0 million which is
significantly increased from $4.6 million at December 31, 1996 due to the
proceeds from the Company's initial public offering.
CASH FLOWS FROM OPERATING ACTIVITIES
The Company's cash flows from operating activities for the first nine
months of 1997 decreased by $3.0 million compared to the first nine months of
1996 primarily because of a large tax refund received during the 1996 period.
In addition, the timing of cash receipts for PEO service fees, the accrual of
unbilled accounts receivable and accrued worksite employee payroll expense, and
payments of payroll taxes and payroll deductions at the end of reporting
periods can fluctuate significantly from period to period based on the timing
of payroll cycles and the due dates of payroll related obligations relative to
the end of the accounting period.
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of marketable securities during the first nine months of
1997 reflect the investment of a portion of the proceeds from the Company's
initial public offering in short-term, highly liquid marketable securities with
maturities greater than 90 days consisting primarily of debt securities issued
by corporate and governmental entities.
Capital expenditures during the first nine months of 1997 were primarily
related to the opening of a new sales office in Houston in January 1997, the
opening of two new sales offices in the Los Angeles area in April and July
1997, the opening of a new sales office in Charlotte in September 1997, and
furniture, equipment, computer equipment and building improvements at its
corporate
-20-
<PAGE> 21
office facilities. Capital expenditures for the first nine months of 1996
consist primarily of costs to construct an additional corporate facility which
was opened in February 1996.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities during the first nine months of 1997
consist primarily of items resulting from the completion of the Company's
initial public offering in January 1997. The net proceeds to the Company from
the offering (after deducting underwriting discounts and commissions of $3.6
million) were $47.4 million. The Company utilized approximately $7.1 million
of the proceeds as follows: (i) $4.6 million to repay certain subordinated
notes and other secured notes comprising all of the Company's outstanding
indebtedness at the time, (ii) approximately $2.0 million to exercise its
option to repurchase 348,945 shares of Common Stock from one of its
stockholders, which is now held in treasury by the Company, and (iii)
approximately $0.5 million to exercise its option to repurchase 173,609
warrants to purchase shares of Common Stock from the subordinated noteholder.
Of the remaining proceeds, the Company has allocated approximately $12.0
million to support expansion of the Company's operations, including the opening
of sales offices in new geographic markets as well as in established markets
and, as favorable opportunities arise, expansion of the Company's client base
in new or existing markets through acquisitions of existing PEO offices. For
the nine months ended September 30, 1997, the Company has incurred $4.2 million
in capital expenditures primarily related to the opening of sales offices and
the necessary corporate infrastructure and technology to support this
expansion. The balance of the proceeds will be used for working capital
purposes. Pending the application of such funds, the Company has invested the
net proceeds of the offering in diversified, highly-liquid, investment grade,
interest-bearing instruments.
CREDIT AGREEMENT
In October 1995 the Company's wholly-owned subsidiary, Administaff of
Texas, Inc. ("Administaff of Texas"), entered into a $10 million revolving
credit agreement (the "Credit Agreement") with a bank. At September 30, 1997
no borrowings were outstanding under the Credit Agreement. In October 1997,
the Credit Agreement expired. The Company elected not to exercise the Credit
Agreement's extension provision because utilization of this credit facility was
not expected within the one year extension term. The Company believes it could
obtain a similar financing agreement with terms competitive with the Credit
Agreement if the need for such an agreement were to arise.
OTHER MATTERS
During the third quarter of 1996, the Company recorded an accrual for its
estimate of the cost of corrective measures and penalties relating to the
401(k) Plan's failure to comply with certain nondiscrimination tests required
by the Code. See Note 6 of Notes to Consolidated Financial Statements. In
addition, during the third quarter of 1996, the Company recorded an asset for
an amount recoverable from the 401(k) Plan's record keeper should the Company
ultimately be required to pay the amount accrued for such corrective measures
and penalties. There has been no change in
-21-
<PAGE> 22
the amounts of the accrual or the amount recoverable from the record keeper
subsequent to December 31, 1996. Based on its understanding of the settlement
experience of other companies in similar situations, the Company does not
believe the ultimate resolution of this 401(k) Plan matter will have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
SEASONALITY, QUARTERLY FLUCTUATIONS AND INFLATION
Historically, the Company's earnings pattern includes losses in the first
quarter, followed by improved profitability in subsequent quarters throughout
the year. This pattern is due to the effects of employment related taxes which
are based on the individual employees' cumulative earnings up to specified wage
levels, causing employment related taxes to be highest in the first quarter and
then decline over the course of the year. Since the Company's revenues related
to an individual employee are generally earned and collected at a relatively
constant rate throughout each year, payment of such unemployment tax
obligations has a substantial impact on the Company's financial condition and
results of operations during the first six months of each year. Other factors
that affect direct costs could mitigate or enhance this trend.
The Company believes the effects of inflation have not had a significant
impact on its results of operations or financial condition.
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q which are
not historical facts are forward-looking statements that involve a number of
risks and uncertainties. In the normal course of business, the Company, in an
effort to help keep its stockholders and the public informed about its
operations, may from time to time issue such forward-looking statements, either
orally or in writing. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies, or projections involving anticipated revenues, earnings or
other aspects of operating results. All phases of the Company's operations are
subject to a number of uncertainties, risks and other influences. Therefore,
the actual results of the future events described in such forward-looking
statements could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: (i) regulatory and tax developments including the ongoing audit
of the Company's 401(k) Plan and related compliance issues, and possible
adverse application of various federal, state and local regulations; (ii)
changes in the Company's direct costs and operating expenses including
increases in health insurance premiums, workers' compensation rates and state
unemployment tax rates, liabilities for employee and client actions or payroll
related claims, changes in the costs of expanding into new markets, and failure
to manage growth of the Company's operations; (iii) changes in the competitive
environment in the PEO industry or new market entrants. Any of these factors,
or a combination of such factors, could materially affect the results of the
Company's operations and whether forward-looking statements made by the Company
ultimately prove to be accurate.
-22-
<PAGE> 23
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any material pending legal proceedings,
other than ordinary routine litigation incidental to its business that the
Company believes would not have a material adverse effect on its financial
position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits
11.1 Statement Re: Computation of Per Share Income
(b) Reports on Form 8-K
None
- 23 -
<PAGE> 24
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.
Administaff, Inc.
Date: November 11, 1997 By: /s/ Richard G. Rawson
-------------------------------------
Richard G. Rawson
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: November 11, 1997 By: /s/ Samuel G. Larson
-------------------------------------
Samuel G. Larson
Vice President, Finance
(Principal Accounting Officer)
- 24 -
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
11.1 Statement Re: Computation of Per Share Income
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE INCOME OF ADMINISTAFF, INC.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding .............................................. 10,726 13,451 10,726 13,126
Net effect of dilutive stock options - based on the
treasury stock method using average market price ................... 54 210 36 121
Net effect of dilutive stock warrants - based on the
treasury stock method using average market price ................... 124 514 82 339
Net effect of dilutive stock warrants - based on the
if-converted method ................................................ * -- * --
Adjustment to give effect to shares optioned to employees
within 12 months of the initial filing on Form S-1 of an
initial public offering as outstanding as of the beginning of
each period presented based on the treasury stock
method using the offering price .................................... 58 -- 77 --
------------------------------------------------
Total ................................................................... 10,962 14,175 10,921 13,586
================================================
Net income .............................................................. $ 971 $ 2,923 $ 614 $ 3,850
Add interest from subordinated debt, net of taxes ....................... * -- * --
------------------------------------------------
Net income available for common shareholders ............................ $ 971 $ 2,923 $ 614 $ 3,850
================================================
Per share amount ........................................................ $ 0.09 $ 0.21 $ 0.06 $ 0.28
================================================
FULLY DILUTED
Average shares outstanding .............................................. 10,726 13,451 10,726 13,126
Net effect of dilutive stock options - based on the
treasury stock method using ending market price .................... 54 213 36 138
Net effect of dilutive stock warrants - based on the
treasury stock method using ending market price .................... 124 515 82 344
Net effect of dilutive stock warrants - based on the
if-converted method ................................................ * -- * --
Adjustment to give effect to shares optioned to employees
within 12 months of the initial filing on Form S-1 of
an initial public offering as outstanding as of the beginning
of each period presented based on the treasury stock method using
the offering price ................................................. 58 -- 77 --
------------------------------------------------
Total ................................................................... 10,962 14,179 10,921 13,608
================================================
Net income .............................................................. $ 971 $ 2,923 $ 614 $ 3,850
Add interest from subordinated debt, net of taxes ....................... * -- * --
------------------------------------------------
Net income available for common shareholders ............................ $ 971 $ 2,923 $ 614 $ 3,850
================================================
Per share amount ........................................................ $ 0.09 $ 0.21 $ 0.06 $ 0.28
================================================
</TABLE>
* Conversion of the stock warrants is not assumed in the computation because
their effect is antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
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0
0
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