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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 June 30, 1998.
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 August 7, 1998: 14,500,501 shares.
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TABLE OF CONTENTS
<TABLE>
PART I
<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........................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders......................................... 24
Item 5. Other Information........................................................................... 24
</TABLE>
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ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................. $ 40,561 $ 28,815
Marketable securities ................................................. 26,012 40,578
Accounts receivable:
Trade .............................................................. 4,324 1,499
Unbilled ........................................................... 15,371 28,248
Related parties .................................................... 163 102
Other .............................................................. 1,208 1,451
Prepaid expenses ...................................................... 1,585 783
Income taxes receivable ............................................... -- 7
Deferred income taxes ................................................. 199 256
------------ ------------
Total current assets ............................................ 89,423 101,739
Property and equipment:
Land .................................................................. 817 849
Buildings and improvements ............................................ 7,557 7,873
Computer equipment .................................................... 6,219 8,562
Furniture and fixtures ................................................ 6,342 7,493
Vehicles .............................................................. 950 1,131
Construction in progress .............................................. -- 155
------------ ------------
21,885 26,063
Accumulated depreciation .............................................. (5,214) (6,662)
------------ ------------
Total property and equipment .................................... 16,671 19,401
Other assets:
Notes receivable from employees ....................................... 1,181 1,221
Intangible assets ..................................................... 822 1,608
Other assets .......................................................... 1,358 1,400
------------ ------------
Total other assets .............................................. 3,361 4,229
------------ ------------
Total assets .................................................... $ 109,455 $ 125,369
============ ============
</TABLE>
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ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Accounts payable ............................................................ $ 1,421 $ 1,244
Payroll taxes and other payroll deductions payable .......................... 19,190 11,473
Accrued worksite employee payroll expense ................................... 18,153 28,188
Other accrued liabilities ................................................... 3,319 3,186
Income taxes payable ........................................................ 729 --
------------ ------------
Total current liabilities ............................................. 42,812 44,091
Noncurrent liabilities:
Other accrued liabilities ................................................... 2,558 2,558
Deferred income taxes ....................................................... 322 732
------------ ------------
Total noncurrent liabilities .......................................... 2,880 3,290
Commitments and contingencies
Stockholders' equity:
Common stock ................................................................ 142 148
Additional paid-in capital .................................................. 50,670 63,470
Treasury stock, at cost ..................................................... (1,998) (1,979)
Accumulated other comprehensive income ...................................... 31 10
Retained earnings ........................................................... 14,918 16,339
------------ ------------
Total stockholders' equity ............................................ 63,763 77,988
------------ ------------
Total liabilities and stockholders' equity ............................ $ 109,455 $ 125,369
============ ============
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ......................................... $ 274,792 $ 393,643 $ 536,992 $ 756,039
Direct costs:
Salaries and wages of worksite employees ...... 226,044 325,432 441,703 624,954
Benefits and payroll taxes .................... 37,102 51,885 74,853 103,586
--------- --------- --------- ---------
Gross profit ..................................... 11,646 16,326 20,436 27,499
Operating expenses:
Salaries, wages and payroll taxes ............. 4,419 6,251 8,617 12,557
General and administrative expenses ........... 3,976 4,094 6,586 8,025
Commissions ................................... 1,145 1,518 2,169 2,875
Advertising ................................... 894 1,012 1,669 1,866
Depreciation and amortization ................. 462 838 923 1,611
--------- --------- --------- ---------
10,896 13,713 19,964 26,934
--------- --------- --------- ---------
Operating income ................................. 750 2,613 472 565
Other income (expense):
Interest income ............................... 788 886 1,378 1,698
Interest expense .............................. (19) -- (340) --
Other, net .................................... (9) 20 (12) 30
--------- --------- --------- ---------
760 906 1,026 1,728
--------- --------- --------- ---------
Income before income tax expense ................. 1,510 3,519 1,498 2,293
Income tax expense ............................... 576 1,356 571 872
--------- --------- --------- ---------
Net income ....................................... $ 934 $ 2,163 $ 927 $ 1,421
========= ========= ========= =========
Basic and diluted net income
per share of common stock ................ $ 0.07 $ 0.15 $ 0.07 $ 0.10
========= ========= ========= =========
</TABLE>
See accompanying notes.
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
ISSUED ADDITIONAL OTHER
------------------- PAID-IN TREASURY COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL STOCK INCOME EARNINGS TOTAL
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 14,221 $ 142 $ 50,670 $ (1,998) $ 31 $ 14,918 $ 63,763
Purchase of treasury stock, at cost -- -- -- (6,101) -- -- (6,101)
Sale of units consisting of common
stock and common stock purchase
warrants, net of issuance costs of $141 400 4 11,473 6,116 -- -- 17,593
Exercise of common stock
purchase warrants 141 1 634 -- -- -- 635
Exercise of stock options 81 1 673 -- -- -- 674
Other -- -- 20 4 -- -- 24
Unrealized loss on
marketable securities -- -- -- -- (21) -- (21)
Net income -- -- -- -- -- 1,421 1,421
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1998 14,843 $ 148 $ 63,470 $ (1,979) $ 10 $ 16,339 $ 77,988
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 927 $ 1,421
Adjustments to reconcile net income to net cash
provided by (used in) operating activities :
Depreciation and amortization ......................................... 1,211 1,817
Bad debt expense ...................................................... 1,545 303
Deferred income taxes ................................................. (825) 353
Loss (gain) on the disposition of assets .............................. 12 (25)
Changes in operating assets and liabilities:
Accounts receivable .................................................. (4,614) (10,537)
Prepaid expenses ..................................................... (298) 802
Other assets ......................................................... (20) (48)
Accounts payable ..................................................... 559 (177)
Payroll taxes and other payroll deductions payable ................... (2,555) (7,717)
Other accrued liabilities ............................................ 3,874 9,902
Income taxes payable/receivable ...................................... 539 (736)
-------- --------
Total adjustments ................................................. (572) (6,063)
-------- --------
Net cash provided by (used in) operating activities................ 355 (4,642)
Cash flows from investing activities:
Marketable securities:
Purchases .............................................................. (31,656) (22,493)
Proceeds from dispositions ............................................. 9,477 7,753
Property and equipment:
Purchases .............................................................. (2,621) (4,295)
Proceeds from dispositions ............................................. 8 44
Investment in intangible assets ........................................... (152) (898)
-------- --------
Net cash used in investing activities ............................. (24,944) (19,889)
</TABLE>
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Repayments of long-term debt ................................. $ (4,603) $ --
Proceeds from the sale of units consisting of common
stock and common stock purchase warrants .................. -- 17,593
Proceeds from the issuance of common stock ................... 47,430 --
Purchase of treasury stock ................................... (1,999) (6,101)
Repurchase of common stock purchase warrants ................. (542) --
Prepaid expenses - initial public offering costs ............. (22) --
Proceeds from the exercise of stock options .................. 11 674
Proceeds from the exercise of common stock
purchase warrants ......................................... 48 635
Loans to employees ........................................... (85) (40)
Other ........................................................ -- 24
--------- ---------
Net cash provided by financing activities .............. 40,238 12,785
--------- ---------
Net increase (decrease) in cash and cash equivalents ............ 15,649 (11,746)
Cash and cash equivalents at beginning of period ................ 13,360 40,561
--------- ---------
Cash and cash equivalents at end of period ...................... $ 29,009 $ 28,815
========= =========
</TABLE>
See accompanying notes.
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ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
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 insurance programs, personnel
records management, employer liability management, recruiting and selection,
performance management, and training and development services to small and
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, 1997 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
June 30, 1998 and the consolidated statements of operations, cash flows and
stockholders' equity for the interim periods ended June 30, 1998 and 1997 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 has included 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 each employee's 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, 1997.
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2. ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The requirements of SOP 98-1 are materially
consistent with the Company's existing capitalization policy, and as a result,
the adoption of SOP 98-1 did not have a significant impact on the Company's
financial position or results of operations.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of SFAS No. 130 had no impact
on the Company's net income or stockholders' equity. SFAS No. 130 requires
unrealized gains and losses on the Company's available-for-sale marketable
securities to be included in other comprehensive income. Prior to the adoption
of SFAS No. 130, these amounts were reported as a separate component of
stockholders' equity. Prior year financial statements have been reclassified to
conform with the requirements of SFAS No. 130.
3. NET INCOME PER SHARE
The numerator used in the calculations of both basic and diluted net income
per share for all periods presented was net income. The denominator for each
period presented was determined as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic earnings per share -
weighted average shares outstanding ................ 13,449 14,476 12,966 14,249
Effect of dilutive securities:
Common stock purchase warrants -
treasury stock method ........................... 501 10 553 14
Common stock options - treasury stock method ....... 150 338 147 343
-------- -------- -------- --------
651 348 700 357
-------- -------- -------- --------
Diluted earnings per share - weighted average shares
outstanding plus effect of dilutive securities ..... 14,100 14,824 13,666 14,606
======== ======== ======== ========
</TABLE>
4. STOCKHOLDERS' EQUITY
In March 1998, the Company completed a Securities Purchase Agreement with
American Express Travel Related Services Company, Inc. ("American Express")
whereby the Company sold units consisting of 693,126 shares of its common stock
(293,126 shares from Treasury Stock) and common stock purchase warrants for an
additional 2,065,515 shares of common stock to American Express for a total
purchase price of $17.7 million. The common stock purchase warrants have prices
ranging from $40 to $80 per share and terms ranging from three to seven years.
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In January 1998, a third party warrant holder exercised warrants to
purchase 140,508 shares of common stock at a price of $4.52 per share. The
Company then repurchased the shares from the warrant holder at a price of $21
per share.
In March 1998 and prior to the closing of the transaction with American
Express, the Company completed the repurchase of 150,000 shares of common stock
from three stockholders for $21 per share. The three stockholders included two
former officers of the Company and a current director of the Company.
5. MARKETING AGREEMENT
In conjunction with the Securities Purchase Agreement with American
Express, the Company entered into a Marketing Agreement with American Express to
jointly market the Company's services to American Express's substantial small
business customer base across the country. Under the Marketing Agreement,
American Express will utilize its resources to generate appointments with
prospects for the Company's services. In addition, the Company and American
Express will work to jointly develop product offerings that enhance the current
PEO services offered by the Company. The Marketing Agreement has a seven year
term and provides that the Company will be the exclusive PEO partner of American
Express for the first three years. The Company will pay a commission to American
Express based upon the number of worksite employees paid from clients referred
to the Company pursuant to the Marketing Agreement.
6. MARKETABLE SECURITIES
At June 30, 1998, the Company's marketable securities consisted of debt
securities issued by corporate and governmental entities, with contractual
maturities ranging from 91 days to five years from the date of purchase. All of
the Company's investments in marketable securities are classified as
available-for-sale.
7. 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.
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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 for the
1993 Plan year. 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 refutes the conclusions of the IRS Houston District. The
Company also understands that, with respect to the Market Segment Group 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")
has been 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
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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 Group 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.
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 Sheets. 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 Sheets. 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, 1997. 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.
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the 1997 annual
report on Form 10-K as well as with the consolidated financial statements and
notes thereto included in this quarterly report on Form 10-Q.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30,
1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
1997 1998 CHANGE
-------- -------- --------
(OPERATING RESULTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING RESULTS:
Revenues ...................................... $274,792 $393,643 43.3%
Gross profit .................................. 11,646 16,326 40.2%
Gross profit margin ........................... 4.2% 4.1%
Operating income .............................. 750 2,613 248.4%
STATISTICAL DATA:
Monthly revenue per worksite employee ......... 3,423 3,708 8.3%
Monthly payroll cost per worksite employee .... 2,797 3,043 8.8%
Monthly gross markup per worksite employee .... 626 665 6.2%
Average number of worksite employees paid
per month during period .................... 25,731 33,849 31.5%
</TABLE>
REVENUES
The Company's revenues for the three months ended June 30, 1998 increased
43.3% over the same period in 1997 due to an increase in worksite employees paid
accompanied by an increase in revenue per worksite employee. The Company's
expansion of its sales force through new market and sales office openings over
the past five years is the primary factor contributing to the increased number
of worksite employees. Revenues from markets opened prior to 1993 (the
commencement of the Company's national expansion plan) increased 30.8% over the
second quarter of 1997, while revenues from markets opened after 1993 increased
66.5%. The Company expects continued growth in the number of worksite employees
during the remainder of 1998 versus 1997 due to the effect of sales in existing
markets and the Company's national expansion plan.
The increase in revenue per worksite employee of 8.3% directly relates to
the increase in payroll cost per worksite employee of 8.8%. This increase
reflects the continuing effects of the net addition of clients with worksite
employees that have higher average base pay than the existing client base,
primarily through the penetration of markets with generally higher wage levels,
such as Los Angeles,
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<PAGE> 15
Chicago and Washington, D.C. In addition, wage inflation within the Company's
existing worksite employee base has contributed to the increase in payroll cost
per worksite employee.
GROSS PROFIT
The Company's gross profit for the second quarter of 1998 increased 40.2%
over the second quarter of 1997, while the gross profit per worksite employee
increased from $151 per month in the second quarter of 1997 to $161 per month in
the second quarter of 1998. The increase in gross profit per worksite employee
reflects the Company's success in managing its pricing policy, which is designed
to match changes in the Company's direct cost structure with the comprehensive
service fees charged for its services. Gross profit margin decreased from 4.2%
in the 1997 period to 4.1% in the 1998 period, primarily due to an increase in
the gross payroll cost per worksite employee.
The continued addition of higher wage, less risk sensitive worksite
employees resulted in a decrease in gross markup per employee as a percentage of
revenue from 18.3% in the second quarter of 1997 to 17.9% in the second quarter
of 1998. However, gross mark-up per worksite employee increased 6.2% from $626
per month in the 1997 period to $665 per month in the 1998 period.
Employment-related taxes as a percentage of payroll cost increased
slightly from 7.46% during the second quarter of 1997 to 7.53% during the 1998
period, reflecting an increase in the weighted average state unemployment tax
rate paid by the Company as compared to the same period in 1997.
The cost of providing employee benefits, which includes benefit plan
premiums and workers' compensation costs, was slightly lower in the second
quarter of 1998 than in the second quarter of 1997. Benefit plan premiums
declined slightly from 5.9% of revenue during the second quarter of 1997 to 5.7%
of revenue during the second quarter of 1998. Workers' compensation costs
decreased from 1.6% of payroll cost during the second quarter of 1997 to 1.3% of
payroll cost during the second quarter of 1998, due to a rate decrease on the
Company's fixed premium policy.
OPERATING EXPENSES
Operating expenses decreased as a percentage of revenue from 3.97% in the
second quarter of 1997 to 3.48% in the second quarter of 1998, primarily due to
a $1.3 million bad debt charge taken in the 1997 period. Excluding the effects
of this charge, operating expenses were 3.48% of revenues in both periods. Total
operating expenses increased 25.9% (43.5% excluding the 1997 charge) while
revenues and gross profit increased 43.3% and 40.2%, respectively. The overall
increase in operating expenses can be attributed principally to increased
compensation-related costs (salaries, wages and payroll taxes and commissions),
increased general and administrative expenses and increased depreciation and
amortization expense.
-15-
<PAGE> 16
Compensation-related costs increased 39.6% from the second quarter of
1997 to the second quarter of 1998, and decreased from 2.03% of revenues in the
1997 period to 1.98% in the 1998 period. The overall increase is primarily
related to a 36.8% and 44.2% increase over the 1997 period in corporate and
sales office staff, respectively, as the Company has continued to increase its
sales and service capacity to accommodate its rapid growth.
General and administrative expenses decreased from 1.45% of revenues in
the second quarter of 1997 to 1.04% of revenues in the second quarter of 1998.
This decrease was primarily the result of the $1.3 million bad debt charge taken
in the 1997 period. Excluding the effects of the bad debt charge, general and
administrative expenses increased 55.3%, and increased from 0.96% of revenues in
the 1997 period to 1.04% in the 1998 period. This increase is primarily due to
consulting fees incurred to assist the Company in developing its technology and
telecommunications infrastructure plans. In addition, travel and
telecommunications expenses increased due to the Company's geographic expansion.
Depreciation and amortization expense increased 81.4% over the 1997
period. This increase is primarily due to a substantial increase in capital
expenditures, beginning in 1997, related to investments in technology and
infrastructure to increase corporate service capacity and the opening of new
sales offices as part of the Company's national expansion.
NET INCOME
Interest income increased 12.4% over the second quarter of 1997 due to
the investment of the proceeds from the sale of common stock to American Express
received in March 1998.
The Company's provision for income taxes in both periods differs from the
U.S. statutory rate of 34% due primarily to state income taxes.
The Company's net income for the three months ended June 30, 1998 was
$2.2 million or $0.15 per share (diluted), versus $934,000, or $0.07 per share
(diluted), for the three months ended June 30, 1997. Excluding the bad debt
charge in the 1997 period, net income and diluted earnings per share were $1.8
million and $0.13 per share, respectively. Historically, the Company's earnings
pattern has included 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 each employee's
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 the remaining 1998 results to be consistent with this
pattern.
-16-
<PAGE> 17
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1998 CHANGE
-------- -------- --------
(OPERATING RESULTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING RESULTS:
Revenues ...................................... $536,992 $756,039 40.8%
Gross profit .................................. 20,436 27,499 34.6%
Gross profit margin ........................... 3.8% 3.6%
Operating income .............................. 472 565 19.7%
STATISTICAL DATA:
Monthly revenue per worksite employee ......... 3,375 3,675 8.9%
Monthly payroll cost per worksite employee .... 2,754 3,014 9.4%
Monthly gross markup per worksite employee .... 621 661 6.4%
Average number of worksite employees paid
per month during period .................... 25,379 32,680 28.8%
</TABLE>
REVENUES
The Company's revenues for the six months ended June 30, 1998 increased
40.8% over the same period in 1997 due to an increase in worksite employees paid
accompanied by an increase in revenue per worksite employee. The Company's
expansion of its sales force through new market and sales office openings over
the past five years is the primary factor contributing to the increased number
of worksite employees. Revenues from markets opened prior to 1993 (the
commencement of the Company's national expansion plan) increased 27.2% over the
first six months of 1997, while revenues from markets opened after 1993
increased 67.1%. The Company expects continued growth in the number of worksite
employees during the remainder of 1998 versus 1997 due to the effect of sales in
existing markets and the Company's national expansion plan.
The increase in revenue per worksite employee of 8.9% directly relates to
the increase in payroll cost per worksite employee of 9.4%. This increase
reflects the continuing effects of the net addition of clients with worksite
employees that have higher average base pay than the existing client base,
primarily through the penetration of markets with generally higher wage levels,
such as Los Angeles, Chicago and Washington, D.C. In addition, wage inflation
within the Company's existing worksite employee base has contributed to the
increase in payroll cost per worksite employee.
GROSS PROFIT
The Company's gross profit for first six months of 1998 increased 34.6%
over the first six months of 1997, while the gross profit per worksite employee
increased from $134 per month in the 1997 period to $140 per month in the 1998
period. The increase in gross profit per worksite employee reflects the
Company's success in managing its pricing policy, which is designed to match
-17-
<PAGE> 18
changes in the Company's direct cost structure with the comprehensive service
fees charged for its services. Gross profit margin decreased from 3.8% in the
1997 period to 3.6% in the 1998 period, primarily due to an increase in the
gross payroll cost per worksite employee and an increase in the Company's
weighted average state unemployment tax rate as a percentage of payroll cost.
The continued addition of higher wage, less risk sensitive worksite
employees resulted in a decrease in gross markup per employee as a percentage of
revenue from 18.4% in the first six months of 1997 to 18.0% in the first six
months of 1998. However, gross mark-up per worksite employee increased 6.4% from
$621 per month in the 1997 period to $661 per month in the 1998 period.
Employment-related taxes as a percentage of payroll cost increased from
7.9% during the first six months of 1997 to 8.1% during the 1998 period,
reflecting an increase in the weighted average state unemployment tax rate paid
by the Company as compared to the same period in 1997.
The cost of providing employee benefits, which includes benefit plan
premiums and workers' compensation costs, was slightly lower in the first six
months of 1998 than in the first six months of 1997. Benefit plan premiums
declined slightly from 5.9% of revenue during the first six months of 1997 to
5.8% of revenue during the first six months of 1998. Workers' compensation costs
decreased from 1.8% of payroll cost during the first six months of 1997 to 1.3%
of payroll cost during the first six months of 1998, due to a rate decrease on
the Company's fixed premium policy.
OPERATING EXPENSES
Operating expenses decreased as a percentage of revenue from 3.72% in the
first six months of 1997 to 3.56% in the first six months of 1998, primarily due
to a $1.3 million bad debt charge in the 1997 period. Excluding the effects of
this charge, operating expenses were 3.47% of revenues in the 1997 period. Total
operating expenses increased 34.9% (44.6% excluding the charge) while revenues
and gross profit increased 40.8% and 34.6%, respectively. The overall increase
in operating expenses can be attributed principally to increased
compensation-related costs (salaries, wages and payroll taxes and commissions),
increased general and administrative expenses and increased depreciation and
amortization expense.
Compensation-related costs increased 43.1% from the first six months of
1997 to the first six months of 1998, and increased from 2.00% of revenues in
the 1997 period to 2.04% in the 1998 period. This increase is primarily related
to a 34.4% and 48.7% increase over the 1997 period in corporate and sales office
staff, respectively, as the Company has continued to increase its sales and
service capacity to accommodate its rapid growth.
General and administrative expenses decreased from 1.23% of revenues in
the first six months of 1997 to 1.06% of revenues in the first six months of
1998. This decrease was primarily the result of the $1.3 million bad debt charge
taken in the 1997 period. Excluding the effects of the bad debt charge, general
and administrative expenses increased 53.0%, and increased from 0.97% of
revenues in the 1997 period to 1.06% of revenues in the 1998 period. This
increase is due to consulting fees
-18-
<PAGE> 19
incurred to assist the Company in developing its technology and
telecommunications infrastructure plans, increased travel, telecommunications
and postage expenses related to the Company's geographic expansion, and higher
printing expenses related to the redesign of marketing brochures as part of the
Company's brand building strategy.
Depreciation and amortization expense increased 74.5% over the 1997
period. This increase is primarily due to a substantial increase in capital
expenditures, beginning in 1997, related to investments in technology and
infrastructure to increase corporate service capacity and the opening of new
sales offices as part of the Company's national expansion.
NET INCOME
Interest income increased 23.2% over the first six months of 1997 due to
the investment of the proceeds from the Company's initial public offering
("IPO") for the entire six months in 1998 and the investment of the proceeds
from the sale of common stock to American Express received in March 1998. The
Company incurred no interest expense in the first six months of 1998, while the
1997 period included a write-off of deferred financing costs relating to
long-term debt that was repaid using a portion of the proceeds from the IPO.
The Company's provision for income taxes in both periods differs from the
U.S. statutory rate of 34% due primarily to state income taxes.
The Company's net income for the six months ended June 30, 1998 was $1.4
million or $0.10 per share, versus $927,000, or $0.07 per share, for the six
months ended June 30, 1997. Excluding the effects of the bad debt charge in the
1997 period, net income and diluted earnings per share were $1.8 million and
$0.13 per share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, capital
expenditure plans, expansion costs including potential acquisitions 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 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 1999. 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 had $69.4 million in cash and cash equivalents and marketable
securities at June 30, 1998, of which approximately $11.5 million was payable in
early July 1998 for withheld federal and state income taxes, FICA and other
payroll deductions. The remainder is available to the Company for general
corporate purposes, including, but not limited to, current working capital
requirements, expenditures related to the continued expansion of the Company's
sales force through
-19-
<PAGE> 20
the opening of new sales offices and capital expenditures. At June 30, 1998 the
Company had net working capital of $57.6 million, which increased from $46.6
million at December 31, 1997 due to the receipt of the net proceeds from the
sale of common stock to American Express in March 1998. As of June 30, 1998, the
Company had no long-term debt.
CASH FLOWS FROM OPERATING ACTIVITIES
The Company's cash flows from operating activities decreased for the
first six months of 1998 versus the first six months of 1997 due primarily to
the timing of payroll tax payments and higher income tax payments.
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of marketable securities during the first six months of
1998 reflect the investment of the proceeds from the Company's sale of common
stock to American Express in highly liquid marketable securities with maturities
ranging from 91 days to five years from the date of purchase, consisting
primarily of corporate and government bonds. Net purchases of marketable
securities in the 1997 period reflect a similar investment of a portion of the
proceeds from the Company's IPO.
Capital expenditures during the first six months of 1998 consisted
primarily of computer equipment, furniture and fixtures, and telecommunications
equipment at the Company's headquarters and its new sales offices in Los
Angeles, Dallas and St. Louis.
Investments in intangible assets during the first six months of 1998
primarily represent capitalized software development costs related to the
initial release of the Company's new Internet-based service platform,
Administaff Assistant, and enhancements to the Company's proprietary
professional employer information system.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities for the first six months of 1998
consist primarily of items relating to the sale of units consisting of 693,126
shares of common stock (293,126 shares from Treasury Stock) and common stock
purchase warrants for an additional 2,065,515 shares to American Express for a
total cost of $17.7 million. Other significant cash flows from financing
activities during the first six months of 1998 included the exercise of warrants
to purchase 140,508 shares of common stock by a third party warrant holder at a
price of $4.52 per share, the repurchase of 140,508 shares of common stock from
the third party warrant holder at a price of $21 per share, and the repurchase
of 150,000 shares of common stock from three shareholders at a price of $21 per
share.
Cash flows from financing activities during the first six months of 1997
consist primarily of items resulting from the completion of the Company's IPO.
Such offering was completed in January
-20-
<PAGE> 21
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 note holder.
YEAR 2000
As the Company's operations rely on several internal computer systems and
third party vendor relationships, the Company believes that the Year 2000
presents potentially significant operational issues, if not properly addressed.
As a result, the Company is preparing for the Year 2000 conversion in several
ways. First, concurrent with the redesign and upgrade of its proprietary PEO
information system in 1996 and 1997, the Company addressed Year 2000 programming
issues in a manner which it believes will make that system Year 2000 compliant.
Secondly, the Company has identified its critical third party vendors, including
third party hardware and software vendors, and is in the process of obtaining
information from those vendors on their Year 2000 state of readiness and their
ability to provide assurances regarding the continuity of business operations.
The most significant of these vendors include the Company's banks and benefits
providers. Third, the Company plans to test both its internal systems and its
critical data interfaces with third parties during late 1998 and early 1999 to
verify the compliant status of critical systems and vendors. Finally, the
Company plans to develop contingency plans for those processes that are
considered critical in preventing an interruption of business operations
surrounding the Year 2000 conversion.
The Company believes that the risks associated with Year 2000 issues
would primarily affect the areas of payroll processing, electronic funds
transfers and the dissemination of benefits information electronically. As such,
the Company's plans, including its contingency planning, will be focused in
these areas.
The Company has not incurred and does not expect to incur significant
costs related to Year 2000 issues other than the time of internal personnel to
complete the planned processes referred to above.
While the Company is not aware of any significant Year 2000 issues for
which it will not be adequately prepared, there can be no assurances that the
Company's financial condition or results of operations will not be adversely
affected by issues surrounding the Year 2000 conversion.
OTHER MATTERS
In July 1998, the Company announced plans to accelerate the development
of Administaff Assistant, the Company's Internet-based service platform, along
with other technology infrastructure projects. This decision was made based on
several factors, including the recent
-21-
<PAGE> 22
acceleration in the Company's organic growth rate, the previously announced
marketing agreement with American Express, and the initial response to the
Administaff Assistant project.
The Company currently expects to incur approximately $10 million of
capital expenditures and software development costs in excess of the Company's
previous capital expenditure plans. The Company anticipates that this amount
will be expended over the last half of 1998 and the first half of 1999, with
individual projects being placed into service during that time period. The
Company believes it has sufficient capital resources to accommodate this
investment in addition to its previously planned capital expenditures at least
through the end of 1999.
SEASONALITY, INFLATION AND QUARTERLY FLUCTUATIONS
Historically, the Company's earnings pattern has included 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 each employee's 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
employment-related 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, 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 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
-22-
<PAGE> 23
operations; (iii) the effectiveness of the Company's sales and marketing
efforts, including the Company's national expansion plan and its marketing
agreement with American Express; (iv) the estimated costs and effectiveness of
capital projects and investments in technology and infrastructure; (v) the
effectiveness and estimated costs of the Company's Year 2000 conversion and
contingency plans; and (vi) 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.
-23-
<PAGE> 24
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
An Annual Meeting of Stockholders of the Company was held on May 5, 1998.
At the Meeting, holders of 12,783,686 shares of common stock were present in
person or by proxy, which constituted a quorum thereof. The vote of stockholders
in respect of the two proposals voted on at the Meeting, both of which were
approved, are set forth below:
1. Election of Class III Directors with terms expiring at the Annual
Meeting of Stockholders in 2001.
<TABLE>
<CAPTION>
Broker
For Abstain Non-Votes
---------- --------- -----------
<S> <C> <C> <C>
Richard G. Rawson 12,208,440 575,246 --
Paul S. Lattanzio 12,779,561 4,125 --
Jack M. Fields, Jr 12,778,545 5,141 --
</TABLE>
2. Ratification of Ernst & Young LLP as the Company's independent
auditors for the 1998 fiscal year.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
---------- -------- ------- ---------
<S> <C> <C> <C>
12,732,428 51,258 -- --
</TABLE>
ITEM 5. OTHER INFORMATION.
Pursuant to the Company's Amended and Restated Bylaws, stockholder
proposals submitted for consideration at the Company's 1999 Annual Meeting of
Stockholders must be delivered to the Corporate Secretary, Administaff, Inc.,
19001 Crescent Springs Drive, Kingwood, Texas 77339, no later than November 27,
1998 but no earlier than October 28, 1998. If such timely notice of a
stockholder proposal is not given, the proposal may not be brought before the
Annual Meeting. If timely notice is given but is not accompanied by a written
statement to the extent required by applicable securities laws, the Company may
exercise discretionary voting authority over proxies with respect to such
proposal if presented at the Company's 1999 Annual Meeting of Stockholders.
-24-
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Administaff, Inc.
Date: August 14, 1998 By: /s/ Richard G. Rawson
-----------------------------
Richard G. Rawson
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 1998 By: /s/ Samuel G. Larson
-----------------------------
Samuel G. Larson
Vice President, Finance
(Principal Accounting Officer)
-25-
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 28,815
<SECURITIES> 40,578
<RECEIVABLES> 31,775
<ALLOWANCES> (475)
<INVENTORY> 0
<CURRENT-ASSETS> 101,739
<PP&E> 26,063
<DEPRECIATION> (6,662)
<TOTAL-ASSETS> 125,369
<CURRENT-LIABILITIES> 44,091
<BONDS> 0
0
0
<COMMON> 148
<OTHER-SE> 77,840
<TOTAL-LIABILITY-AND-EQUITY> 77,988
<SALES> 393,643
<TOTAL-REVENUES> 393,643
<CGS> 377,317
<TOTAL-COSTS> 377,317
<OTHER-EXPENSES> 12,807
<LOSS-PROVISION> 113
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,519
<INCOME-TAX> 1,356
<INCOME-CONTINUING> 2,163
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,163
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
