<PAGE> 1
===============================================================================
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 March 31, 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 May 5, 1997: 13,448,498 shares.
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I
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...................................................................... 21
Item 6. Exhibits and Reports on Form 8-K....................................................... 21
</TABLE>
<PAGE> 3
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................... $ 13,360 $ 32,564
Marketable securities ......................... -- 18,917
Accounts receivable:
Trade ...................................... 3,490 1,822
Unbilled receivables ....................... 12,742 17,628
Related parties ............................ 439 360
Other ...................................... 344 441
Prepaid expenses .............................. 2,668 783
---------- ----------
Total current assets .................... 33,043 72,515
Property and equipment:
Land .......................................... 817 817
Buildings and improvements .................... 6,564 6,656
Computer equipment ............................ 3,093 3,517
Furniture and fixtures ........................ 3,767 4,309
Vehicles ...................................... 761 886
---------- ----------
15,002 16,185
Accumulated depreciation ...................... (3,359) (3,816)
---------- ----------
Total property and equipment ............ 11,643 12,369
Other assets:
Notes receivable from employees ............... 1,135 1,154
Deferred financing costs ...................... 282 28
Intangible assets ............................. 749 805
Other assets .................................. 1,524 1,497
---------- ----------
Total other assets ...................... 3,690 3,484
---------- ----------
Total assets ............................ $ 48,376 $ 88,368
========== ==========
</TABLE>
-3-
<PAGE> 4
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Accounts payable ................................. $ 594 $ 1,709
Payroll taxes and other payroll deductions payable 10,099 7,821
Accrued worksite employee payroll expense ........ 13,385 17,232
Other accrued liabilities ........................ 2,662 2,094
Income taxes payable ............................. 266 184
Current maturities of long-term debt ............. 491 --
Deferred income taxes ............................ 917 501
---------- ----------
Total current liabilities .................. 28,414 29,541
Noncurrent liabilities:
Other accrued liabilities ........................ 2,558 2,558
Long-term debt ................................... 4,112 --
Deferred income taxes ............................ -- 107
---------- ----------
Total noncurrent liabilities ............... 6,670 2,665
Commitments and contingencies
Stockholders' equity:
Common stock ..................................... 107 138
Additional paid-in capital ....................... 5,706 50,608
Retained earnings ................................ 7,479 7,472
Treasury stock, at cost .......................... -- (1,999)
Unrealized loss on marketable securities ......... -- (57)
---------- ----------
Total stockholders' equity ................. 13,292 56,162
---------- ----------
Total liabilities and stockholders' equity . $ 48,376 $ 88,368
========== ==========
</TABLE>
See accompanying notes.
-4-
<PAGE> 5
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1997
----------- -----------
<S> <C> <C>
Revenues ......................................... $ 194,336 $ 262,200
Direct costs:
Salaries and wages of worksite employees ...... 158,053 215,659
Benefits and payroll taxes .................... 30,094 37,751
----------- -----------
Gross profit ..................................... 6,189 8,790
Operating expenses:
Salaries, wages and payroll taxes ............. 3,516 4,198
General and administrative expenses ........... 2,006 2,589
Commissions ................................... 919 1,024
Advertising ................................... 749 796
Depreciation and amortization ................. 301 461
----------- -----------
7,491 9,068
----------- -----------
Operating loss ................................... (1,302) (278)
Other income (expense):
Interest income ............................... 129 590
Interest expense .............................. (261) (321)
Other, net .................................... -- (3)
----------- -----------
(132) 266
----------- -----------
Loss before income tax benefit ................... (1,434) (12)
Income tax benefit ............................... 525 5
----------- -----------
Net loss ......................................... $ (909) $ (7)
=========== ===========
Net loss per share of common stock ............... $ (0.08) $ 0.00
=========== ===========
Weighted average common shares outstanding ....... 10,839 12,478
=========== ===========
</TABLE>
See accompanying notes.
- 5 -
<PAGE> 6
ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
ISSUED ADDITIONAL LOSS ON
------------------- PAID-IN RETAINED TREASURY MARKETABLE
SHARES AMOUNT CAPITAL EARNINGS STOCK SECURITIES TOTAL
-------- -------- -------- -------- -------- -------- --------
<S> <C> <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 $5,584 3,000 30 45,386 -- -- -- 45,416
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 1 -- 11 -- -- -- 11
Change in unrealized loss
on marketable securities -- -- -- -- -- (57) (57)
Net loss -- -- -- (7) -- -- (7)
-------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1997 13,797 $ 138 $ 50,608 $ 7,472 $ (1,999) $ (57) $ 56,162
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
- 6 -
<PAGE> 7
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ..................................................... $ (909) $ (7)
Adjustments to reconcile net loss to net cash
used in operating activities :
Depreciation and amortization ............................ 359 730
Deferred income taxes .................................... (21) (309)
Changes is operating assets and liabilities:
Accounts receivable and unbilled revenues ............... (509) (3,236)
Workers' compensation deposits .......................... 430 --
Prepaid expenses ........................................ 795 (107)
Other assets ............................................ 69 27
Accounts payable ........................................ (265) 1,115
Payroll taxes and other payroll deductions payable ...... (1,603) (2,278)
Other accrued liabilities ............................... 1,673 3,279
Income taxes payable .................................... (513) (82)
---------- ----------
Total adjustments .................................... 415 (861)
---------- ----------
Net cash used in operating activities ................ (494) (868)
---------- ----------
Cash flows from investing activities:
Marketable securities:
Purchases ................................................. -- (20,469)
Dispositions .............................................. -- 1,495
Purchases of property and equipment .......................... (2,689) (1,181)
Increases in intangible assets ............................... (45) (77)
---------- ----------
Net cash used in investing activities ................ (2,734) (20,232)
---------- ----------
</TABLE>
- 7 -
<PAGE> 8
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1997
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Long-term debt and short-term borrowings:
Proceeds ...................................................................... $ 1,500 $ --
Repayments .................................................................... (12) (4,603)
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 ................................. 178 (22)
Proceeds from the exercise of stock options ...................................... -- 11
Proceeds from the exercise of common stock
purchase warrants ............................................................. -- 48
Loans to employees ............................................................... -- (19)
---------- ----------
Net cash provided by financing activities .................................. 1,666 40,304
---------- ----------
Net increase (decrease) in cash and cash equivalents ................................ (1,562) 19,204
Cash and cash equivalents at beginning of period .................................... 6,460 13,360
---------- ----------
Cash and cash equivalents at end of period .......................................... $ 4,898 $ 32,564
========== ==========
</TABLE>
See accompanying notes.
- 8 -
<PAGE> 9
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 Company's consolidated balance sheet at
March 31,1997 and the consolidated statements of operations, cash flows and
stockholders' equity for the interim periods ended March 31, 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 largest 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.
- 9 -
<PAGE> 10
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 ended March 31, 1997, common stock equivalent shares
have been excluded from the computation of loss per share as their effect is
antidilutive.
For the three months ended March 31, 1996, shares for which options were
granted subsequent to September 1994 (twelve months prior to the Company's
initial public offering) are considered outstanding for purposes of the loss
per share calculation. Common stock equivalent shares from stock options and
warrants granted prior to September 1994 have been excluded from the
computation as their effect is antidilutive.
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 loss per share is not expected
to be material for the three months ended March 31, 1997 and March 31, 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 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 $2.0 million in legal, accounting, printing and other costs in
connection with the offering, 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 currently
expects to allocate 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. The balance of the proceeds will
be used for working capital
- 10 -
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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.
4. MARKETABLE SECURITIES
At March 31, 1997, the Company's marketable securities consisted of debt
securities issued by corporate and governmental entities, with contractual
maturities ranging from 91 days to 18 months 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. 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 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 has
been sent to the Company for its response to the IRS National Office. 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 also understands that, with respect to the Market
Segment study, the issue of whether a PEO and a client
- 11 -
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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 conclusion was 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 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.
- 12 -
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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 MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997.
The following table presents certain information related to the Company's
results of operations for the three months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1997 CHANGE
-------- -------- ----------
(OPERATING RESULTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING RESULTS:
Revenues ...................................... $ 194,336 $ 262,200 34.9%
Gross profit .................................. 6,189 8,790 42.0%
Gross profit margin ........................... 3.2% 3.4%
Operating loss ................................ (1,302) (278) 78.6%
STATISTICAL DATA:
Monthly revenue per worksite employee ......... 3,060 3,326 8.7%
Monthly payroll cost per worksite employee .... 2,469 2,710 9.8%
Monthly gross markup per worksite employee .... 591 616 4.2%
Average number of worksite employees paid
per month during period .................... 20,302 25,026 23.3%
</TABLE>
REVENUES
The Company's revenues for the three months ended March 31, 1997
increased 34.9% 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 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 $80 million of the Company's total revenues for the first quarter
of 1997 versus approximately $37 million during the same period of 1996. The
Company added to its sales force in the Houston market in January 1997 and
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 8.7% directly relates to the
increase in payroll cost per employee of 9.8%. This increase reflects the
continuing effects of the net addition, through the
- 14 -
<PAGE> 15
Company's sales efforts, of clients with worksite employees with higher average
base pay to the existing client base.
GROSS PROFIT MARGIN
The Company's gross profit margin increased to 3.4% for the first
quarter of 1997 versus 3.2% for the first quarter of 1996. The primary factor
resulting in the increase in gross profit margin was a decrease in the cost of
providing employee benefits and worker's compensation coverage as a percent of
revenue. In addition, employment related taxes decreased slightly as a percent
of payroll cost as compared to the first quarter of 1996. These factors were
partially offset by a decrease in the gross markup per person as a percent of
revenue.
The cost of providing employee benefits, which includes workers'
compensation costs and benefit plan premiums, was slightly lower in the first
quarter of 1997 than in the first quarter of 1996. Workers' compensation costs
decreased from 2.4% of payroll cost during the first quarter of 1996 to 1.9% of
payroll cost during the first quarter 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 quarter of 1996. Benefit
plan premiums declined from 6.6% of revenue during the first quarter of 1996 to
6.0% of revenue during the first quarter 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 percent of payroll cost declined slightly
from 8.5% during the first quarter of 1996 to 8.3% 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.
The continued addition of higher wage, less risk sensitive worksite
employees resulted in a decrease in markup per employee as a percent of revenue
from 19.3% in 1995 to 18.5% in 1996. The Company generally charges lower
overall rates as a percentage of gross payroll on higher wage, less risk
sensitive employees. The Company attempts to match the lower overall rates
charged on these employees with reductions in its cost of providing employee
benefits and workers' compensation coverage as a percent of revenue or payroll
cost. The improvement in gross profit margin for the first quarter of 1997 as
compared to the first quarter of 1996 reflects the results of these efforts.
OPERATING EXPENSES
Operating expenses decreased as a percent of revenue from 3.9% in the
first quarter of 1996 to 3.5% in the first quarter of 1997. Total operating
expenses increased 21.1% while revenues and gross profit increased 34.9% and
42.0%, respectively. The overall increase in operating expenses can be
attributed principally to increased compensation related costs (salaries, wages
and payroll taxes and commissions) which increased at a lower rate than the
increase in revenues; increased general and
- 15 -
<PAGE> 16
administrative expenses and increased depreciation and amortization expense.
General and administrative expenses were comparable at 1.0% of revenue in both
periods; the overall increase being attributable to the continued growth of the
Company. Advertising expenses were only slightly higher than the 1996 period.
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 $1.8 million in the first quarter of 1997 versus $1.4
million during the first quarter of 1996. Excluding the impact of expenses
incurred directly in the new markets, operating expenses increased $1.2
million, or 16.6% as compared to the first quarter of 1996.
Depreciation and amortization expense increased 53.1% over the 1996
period. This increase is primarily due to capital expenditures related to a new
corporate facility, placed into service in February 1996, and capital
expenditures related to the opening of new sales offices and increases in
corporate service capacity.
NET INCOME
Interest income increased significantly over the first quarter of 1996
due to proceeds from the Company's initial public offering received in early
February 1997. Interest expense decreased $60,000 as reductions in interest
expense due to the repayment of the Company's outstanding indebtedness were
partially offset by the one-time write off of deferred financing costs relating
to the repaid indebtedness.
The Company's provision for income taxes differs from the U.S. statutory
rate of 34% due primarily to state income taxes in both periods.
As a result of the 34.9% increase in revenues, the 42.0% increase in
gross profit, the decline in operating expenses as a percent of revenue, and
the increase in net interest income, the Company's net loss for the three
months ended March 31, 1997 was $7,000, or $0.00 per share, versus a loss of
$909,000, or $0.08 per share, for the three months ended March 31, 1996.
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 largest in the first quarter and
then decline over the course of the year. The Company expects remaining 1997
results will be consistent with this pattern.
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, in the
past, sought and may, in the future, seek to raise additional capital or take
other steps to
- 16 -
<PAGE> 17
increase or manage its liquidity and capital resources. The Company currently
believes that its cash and marketable securities on hand, cash flows from
operations and available borrowing capacity under its Credit Agreement 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 $51.5 million in cash and cash equivalents and
marketable securities at March 31, 1997, of which approximately $4.2 million is
payable in early April 1997 for withheld federal and state income taxes and
FICA. The remainder is available to the Company for general corporate purposes,
including, but not limited to, current working capital requirements which may
include acquisitions of existing PEO operations should favorable acquisition
opportunities arise, expenditures related to the continued expansion of the
Company's sales force through the opening of new sales offices and capital
expenditures. 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 March 31, 1997. At March 31, 1997 the Company had net
working capital of $43.0 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 quarter
of 1997 and 1996 were not significantly different as an increase in accounts
receivable and unbilled receivables during the first quarter of 1997 versus the
first quarter of 1996 was offset by an increase in accounts payable and other
accrued liabilities for the same periods.
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of marketable securities during the first quarter 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 corporate and
government bonds.
Capital expenditures during the first quarter of 1997 were primarily
related to the opening of a new sales office in Houston in January, the opening
of a new sales office in Orange County, California in early April and
furniture, equipment and computer equipment at its corporate office facilities.
Capital expenditures for the first quarter of 1996 consist primarily of costs
to complete, furnish and equip a Company-owned facility which was opened in
February 1996.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities during the first quarter of 1997
consist primarily of items resulting from the completion of the Company's
initial public offering. Such offering was completed in January 1997. The net
proceeds to the Company from the offering (after deducting underwriting
- 17 -
<PAGE> 18
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 currently
expects to allocate 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. 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. Such Credit Agreement
includes an agreement to issue standby letters of credit (in an amount not to
exceed a sublimit of $5,000,000). The Company is a guarantor under the Credit
Agreement. The Credit Agreement includes, among other covenants, a limitation
on the declaration and payment of dividends, a change of control provision and
other covenants customary in lending transactions of this type. At March 31,
1997 no borrowings were outstanding under the Credit Agreement. Borrowings
under the Credit Agreement bear interest at rates based on the bank's Corporate
Base Rate or LIBOR plus an applicable margin at the time of the borrowing.
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 5 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 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.
In April 1997, the Company extended the payment terms on amounts due for
PEO services from a significant customer temporarily experiencing cash flow
difficulties. The Company agreed to the customer paying certain invoices
totalling approximately $1.3 million on an installment basis over
- 18 -
<PAGE> 19
a six month period. As of May 13, 1997, the customer has paid all current
invoices and has made the required payments on the unpaid prior invoices in
accordance with the installment plan. During the installment period, the
Company is charging interest to the customer at a rate of 10% on the remaining
outstanding balance. The customer has agreed, subject to final approval by its
Board of Directors, to pledge to the Company a note receivable from its
majority shareholder, which is secured by common stock of the customer, as
security for the outstanding invoices.
SEASONALITY, INFLATION AND QUARTERLY FLUCTUATIONS
The timing of the assessment of employment related taxes has a seasonal
effect on the Company's cash flows, with the Company generally having lower
cash flow from operations during the first six months of each year. As
individual worksite employees meet applicable wage limits for such taxes, the
Company's employment tax obligation declines which increases cash flows from
operations during the balance of the year.
The Company's operating results have historically fluctuated from
quarter to quarter. In addition, due to the timing of the assessment of
employment related taxes, the Company's gross profit margin typically improves
from quarter to quarter within each year with the first quarter generally being
the least favorable. Employment related taxes are based on the cumulative
earnings of individual employees up to a specified wage level. 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 or results of operations during the first six months of
each year.
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, Administaff, Inc.,
in an effort to help keep its stockholders and the public informed about the
Company's 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
- 19 -
<PAGE> 20
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.
- 20 -
<PAGE> 21
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 Loss
(b) Reports of Form 8-K
None
- 21 -
<PAGE> 22
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: May 14, 1997 By: /s/ Richard G. Rawson
-----------------------------------
Richard G. Rawson
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: May 14, 1997 By: /s/ Samuel G. Larson
-----------------------------------
Samuel G. Larson
Vice President, Finance
(Principal Accounting Officer)
- 22 -
<PAGE> 23
Index to Exhibits
11.1 Statement Re: Computation of Per Share Loss
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.1
Statement Re: Computation of Per Share Loss of Administaff, Inc.
<TABLE>
<CAPTION>
Three months
ended March 31,
--------------------
1996 1997
--------------------
<S> <C> <C>
Primary
Average shares outstanding........................... 10,726 12,478
Net effect of dilutive stock options -- based on the
treasury stock method using average market price... * *
Net effect of dilutive stock warrants -- based on the
treasury stock method using average market price... * *
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................................. 113 --
------------------------
Total................................................ 10,839 12,478
========================
Net loss............................................. ($909) ($7)
Add interest from subordinated debt, net of taxes.... * *
------------------------
Net loss available for common shareholders........... ($909) ($7)
========================
Per share amount..................................... ($0.08) $0.00
========================
Fully Diluted
Average shares outstanding........................... 10,726 12,478
Net effect of dilutive stock options -- based on the
treasury stock method using ending market price.... * *
Net effect of dilutive stock warrants -- based on the
treasury stock method using ending market price.... * *
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................................. 113 --
------------------------
Total................................................ 10,839 12,478
========================
Net loss............................................. ($909) ($7)
Add interest from subordinated debt, net of taxes.... * *
------------------------
Net loss available for common shareholders........... ($909) ($7)
========================
Per share amount..................................... ($0.08) $0.00
========================
</TABLE>
* Conversion of the stock warrants and options 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
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 32,564
<SECURITIES> 18,917
<RECEIVABLES> 20,251
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 72,515
<PP&E> 16,185
<DEPRECIATION> (3,816)
<TOTAL-ASSETS> 88,368
<CURRENT-LIABILITIES> 29,541
<BONDS> 0
0
0
<COMMON> 138
<OTHER-SE> 56,024
<TOTAL-LIABILITY-AND-EQUITY> 88,368
<SALES> 262,200
<TOTAL-REVENUES> 262,200
<CGS> 253,410
<TOTAL-COSTS> 253,410
<OTHER-EXPENSES> 8,802
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 321
<INCOME-PRETAX> (12)
<INCOME-TAX> (5)
<INCOME-CONTINUING> (7)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
