<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1999.
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)
<TABLE>
<S> <C>
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)
</TABLE>
(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 (3) 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 6, 1999: 13,645,691 shares.
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TABLE OF CONTENTS
Part I
Item 1. Financial Statements ............................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 13
Part II
Item 1. Legal Proceedings................................................... 20
<PAGE> 3
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 23,521 $ 15,383
Marketable securities.......................................................... 49,670 36,664
Accounts receivable:
Trade....................................................................... 4,663 1,209
Unbilled.................................................................... 19,719 32,321
Related parties............................................................. 67 61
Other....................................................................... 1,601 1,272
Prepaid expenses............................................................... 2,469 4,123
Income taxes receivable........................................................ 1,426 3,004
----------- ---------
Total current assets..................................................... 103,136 94,037
Property and equipment:
Land........................................................................... 2,913 2,922
Buildings and improvements..................................................... 9,915 10,282
Computer equipment............................................................. 15,078 16,558
Furniture and fixtures......................................................... 10,378 11,089
Vehicles....................................................................... 1,308 1,342
----------- ---------
39,592 42,193
Accumulated depreciation....................................................... (8,552) (9,822)
----------- ---------
Total property and equipment............................................. 31,040 32,371
Other assets:
Notes receivable from employees................................................ 1,181 1,201
Intangible assets.............................................................. 3,010 3,580
Other assets................................................................... 4,432 4,264
----------- ---------
Total other assets....................................................... 8,623 9,045
----------- ---------
Total assets............................................................. $ 142,799 $ 135,453
=========== =========
</TABLE>
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<PAGE> 4
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Accounts payable.............................................................. $ 2,555 $ 856
Payroll taxes and other payroll deductions payable............................ 26,607 17,438
Accrued worksite employee payroll expense..................................... 19,161 35,162
Other accrued liabilities..................................................... 2,190 3,396
Deferred income taxes......................................................... 148 212
----------- ---------
Total current liabilities............................................... 50,661 57,064
Noncurrent liabilities:
Other accrued liabilities..................................................... 2,558 2,558
Deferred income taxes......................................................... 2,723 2,955
----------- ---------
Total noncurrent liabilities............................................ 5,281 5,513
Commitments and contingencies
Stockholders' equity:
Common stock.................................................................. 149 149
Additional paid-in capital.................................................... 64,293 64,454
Treasury stock, at cost....................................................... (1,968) (13,914)
Accumulated other comprehensive income........................................ 342 204
Retained earnings............................................................. 24,041 21,983
----------- ---------
Total stockholders' equity.............................................. 86,857 72,876
----------- ---------
Total liabilities and stockholders' equity.............................. $ 142,799 $ 135,453
=========== =========
</TABLE>
See accompanying notes.
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<PAGE> 5
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
1998 1999
--------- ---------
<S> <C> <C>
Revenues............................................................... $ 362,396 $ 475,853
Direct costs:
Salaries and wages of worksite employees............................ 299,522 395,092
Benefits and payroll taxes.......................................... 51,701 67,206
--------- ---------
Gross profit........................................................... 11,173 13,555
Operating expenses:
Salaries, wages and payroll taxes................................... 6,306 8,783
General and administrative expenses................................. 3,931 5,085
Commissions......................................................... 1,357 1,469
Advertising......................................................... 854 919
Depreciation and amortization....................................... 773 1,361
--------- ---------
13,221 17,617
--------- ---------
Operating loss......................................................... (2,048) (4,062)
Other income:
Interest income..................................................... 812 730
Other, net.......................................................... 10 66
--------- ---------
822 796
--------- ---------
Loss before income taxes............................................... (1,226) (3,266)
Income tax benefit .................................................... 484 1,208
--------- ---------
Net loss............................................................... $ (742) $ (2,058)
========= =========
Basic and diluted net loss per
share of common stock.......................................... $ (0.05) $ (0.14)
========= =========
</TABLE>
See accompanying notes.
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<PAGE> 6
ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
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, 1998 14,860 $ 149 $ 64,293 $ (1,968) $ 342 $ 24,041 $ 86,857
Purchase of treasury stock, at cost -- -- -- (11,949) -- -- (11,949)
Sale of common stock put warrant -- -- 119 -- -- -- 119
Exercise of stock options 2 -- 32 -- -- -- 32
Other -- -- 10 3 -- -- 13
Change in unrealized gain on
marketable securities -- -- -- -- (138) -- (138)
Net loss -- -- -- -- -- (2,058) (2,058)
--------
Comprehensive loss (2,196)
------ ------ ---------- -------- ------------- -------- --------
Balance at March 31, 1999 14,862 $ 149 $ 64,454 $(13,914) $ 204 $ 21,983 $ 72,876
====== ====== ========== ======== ============= ======== ========
</TABLE>
See accompanying notes.
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<PAGE> 7
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
Three Months Ended
March 31,
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................................................... $ (742) $ (2,058)
Adjustments to reconcile net loss to net cash
used in operating activities :
Depreciation and amortization.............................................. 858 1,500
Bad debt expense........................................................... 190 173
Deferred income taxes...................................................... 95 296
Gain on the disposition of assets.......................................... (5) (76)
Changes in operating assets and liabilities:
Accounts receivable....................................................... (7,815) (8,986)
Prepaid expenses ......................................................... 105 (1,654)
Other assets........................................................... 21 168
Accounts payable.......................................................... (216) (1,699)
Payroll taxes and other payroll deductions payable........................ (6,370) (9,169)
Accrued worksite employee payroll expense................................. 8,683 16,001
Other accrued liabilities................................................. (660) 1,206
Income taxes payable/receivable........................................... (1,325) (1,578)
-------- --------
Total adjustments...................................................... (6,439) (3,818)
-------- --------
Net cash used in operating activities ................................. (7,181) (5,876)
Cash flows from investing activities:
Marketable securities:
Purchases................................................................... (5,510) (5,321)
Proceeds from dispositions.................................................. 3,697 18,144
Property and equipment:
Purchases................................................................... (2,490) (2,626)
Proceeds from dispositions.................................................. -- 25
Investment in intangible assets................................................ (362) (679)
-------- --------
Net cash provided by (used in) investing activities.................... (4,665) 9,543
</TABLE>
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<PAGE> 8
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
Three Months Ended
March 31,
1998 1999
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from the sale of units consisting of common
stock and common stock purchase warrants..................................... 17,649 --
Purchase of treasury stock...................................................... (6,101) (11,949)
Proceeds from the sale of common stock put warrant.............................. -- 119
Proceeds from the exercise of stock options..................................... 417 32
Proceeds from the exercise of common stock
purchase warrants............................................................ 635 --
Loans to employees.............................................................. (20) (20)
Other .......................................................................... -- 13
-------- --------
Net cash provided by (used in) financing activities....................... 12,580 (11,805)
-------- --------
Net increase (decrease) in cash and cash equivalents............................... 734 (8,138)
Cash and cash equivalents at beginning of period................................... 40,561 23,521
-------- --------
Cash and cash equivalents at end of period......................................... $ 41,295 $ 15,383
======== ========
</TABLE>
See accompanying notes.
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<PAGE> 9
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
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. For the three
months ended March 31, 1998 and 1999, revenues from the Company's Texas markets
represented 73% and 67% of the Company's total revenues, respectively.
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, 1998, 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, 1999, and the consolidated statements of operations, cash
flows and stockholders' equity for the interim periods ended March 31, 1999 and
1998, 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, 1998.
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<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
2. NET LOSS PER SHARE
The numerator and denominator used in the calculations of both basic
and diluted net loss per share were net loss and the weighted average shares
outstanding, respectively. The weighted average shares outstanding for the three
months ended March 31, 1998 and 1999, were 14,021,000 and 14,313,000,
respectively. Had the Company incurred net income during the three months ended
March 31, 1998 or 1999, the denominator used in the calculation of diluted
earnings per share would have been 366,000 and 58,000 higher, respectively,
reflecting the dilutive effects of outstanding common stock purchase warrants
and stock options.
3. STOCKHOLDERS' EQUITY
In January 1999, the Company's Board of Directors (the "Board")
authorized a program to repurchase up to one million shares of the Company's
outstanding common stock. The purchases are to be made from time to time in the
open market or directly from stockholders at prevailing market prices based on
market conditions or other factors. As of May 7, 1999, the Company had
repurchased 875,000 shares on the open market at a total cost of approximately
$12.3 million. In addition, as part of the repurchase program, the Company has
sold a put warrant which, if exercised, obligates the Company to purchase
125,000 shares for a net cost of approximately $1.6 million. In May 1999, the
Board authorized the repurchase of up to one million additional shares under the
repurchase program.
4. MARKETABLE SECURITIES
At March 31, 1999, 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.
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 could 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
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<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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 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.
The Company does not know whether the IRS National Office will address
the Technical Advice Request independently of the Industry Issue. 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 for 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
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<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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 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 the record keeper reported to the Company that the 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 the 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 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 would bring the plan into compliance with the
nondiscrimination tests.
The Company has recorded an accrual for its estimate of the cost of
corrective measures and penalties for all of the affected plan years. The
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, 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. This 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, 1998. 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> 13
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 1998
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 MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH
31, 1999.
The following table presents certain information related to the
Company's results of operations for the three months ended March 31, 1998 and
1999 expressed on a dollar per worksite employee per month basis.
<TABLE>
THREE MONTHS ENDED
MARCH 31,
------------------------ %
1998 1999 CHANGE CHANGE
-------- -------- ------ ------
($ PER WORKSITE EMPLOYEE PER MONTH)
<S> <C> <C> <C> <C>
Revenues:
Fee revenue..................................... $ 3,639 $ 3,926 $ 287 7.9%
Bonus revenue................................... 186 199 13 7.0%
Other revenue................................... 8 7 (1) (12.5)%
------- ------- ----- ------
3,833 4,132 299 7.8%
Direct costs:
Fee payroll of worksite employees............... 2,982 3,232 250 8.4%
Bonus payroll of worksite employees............. 186 199 13 7.0%
Benefits and payroll taxes...................... 537 574 37 6.9%
Other direct costs.............................. 10 9 (1) (10.0)%
------- ------- ----- ------
3,715 4,014 299 8.0%
------- ------- ----- ------
Gross profit....................................... 118 118 -- --
Operating expenses:
Salaries, wages and payroll taxes............... 67 76 9 13.4%
General and administrative expenses............. 42 44 2 4.8%
Commissions..................................... 14 13 (1) (7.1)%
Advertising..................................... 9 8 (1) (11.1)%
Depreciation and amortization................... 8 12 4 50.0%
------- ------- ----- ------
140 153 13 9.3%
------- ------- ----- ------
Operating loss..................................... (22) (35) (13) (59.1)%
Other income....................................... 9 7 (2) (22.2)%
------- ------- ----- ------
Loss before income taxes........................... (13) (28) (15) (115.4)%
Income tax benefit................................. 5 10 (5) 100.0%
------- ------- ----- ------
Net loss ......................................... $ (8) $ (18) $ (10) (125.0)%
======= ======= ===== ======
Monthly gross markup per worksite employee......... $ 657 $ 694 $ 37 5.6%
======= ======= ===== ======
Average number of worksite employees
paid per month during period.................... 31,512 38,392 6,880 21.8%
======= ======= ===== ======
</TABLE>
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<PAGE> 14
REVENUES
The Company's revenues for the three months ended March 31, 1999,
increased 31.3% over the same period in 1998 due to a 21.8% increase in worksite
employees paid accompanied by a 7.9% increase in fee revenue per worksite
employee. The Company's continued expansion of its sales force through new
market and sales office openings was the primary factor contributing to the
increase in the number of worksite employees paid. Revenues from markets opened
prior to 1993 (the commencement of the Company's national expansion plan)
increased 18.2% over the first quarter of 1998, while revenues from markets
opened after 1993 increased 51.1%. Revenues from the state of Texas represented
67% of the Company's total revenues and Houston, the Company's original market,
represented 41% of the total. Revenues for the Texas markets as a whole and the
Houston market both increased 20% over 1998.
The increase in fee revenue per worksite employee of $287, or 7.9%,
directly relates to the increase in payroll cost per worksite employee of $250,
or 8.4%. This increase reflects the continuing effects of the net addition of
clients with worksite employees that have a 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
Gross profit for the first quarter of 1999 increased 21.3% over the
first quarter of 1998 due to the 21.8% increase in the number of worksite
employees paid. Gross profit per worksite employee remained constant at $118 per
month in both periods. The Company's pricing objectives attempt to maintain or
improve the gross profit per worksite employee by matching or exceeding changes
in the overall cost of its primary direct costs with increases in the gross
markup per worksite employee. There can be no assurances that the Company will
be able to achieve these results in the future.
Approximately $20 of the $37 increase in gross markup per employee was
the result of increased service fees designed to match the increased payroll tax
expense associated with the higher average payroll cost per worksite employee.
The remaining increase in gross markup per employee was related to other
increases in the Company's comprehensive service fees, which were designed to
match or exceed known trends in the Company's primary direct costs.
Payroll taxes increased $21 per worksite employee over the first
quarter of 1998, primarily due to the increased average payroll per worksite
employee. The overall cost of payroll taxes as a percentage of payroll cost was
8.7% in both periods.
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<PAGE> 15
The cost of health insurance and related employee benefits increased
$15 per worksite employee over the first quarter of 1998 due to a 6.0% increase
in the cost per covered employee and a slight increase in the percentage of
worksite employees covered under the Company's health insurance plans from 67.0%
in the 1998 period to 67.6% in the 1999 period.
Workers' compensation costs remained constant at $39 per worksite
employee per month in both periods, and declined from 1.3% of payroll cost in
the 1998 period to 1.2% in the 1999 period.
Gross profit, measured as a percentage of revenue, declined from 3.08%
in the 1998 period to 2.85% in the 1999 period. This decline was due primarily
to the increase in average payroll cost per worksite employee, which had a
corresponding effect on revenue, thus decreasing the gross profit margin.
OPERATING EXPENSES
Operating expenses increased 33.3% over the first quarter of 1998
compared to an increase in revenue and gross profit of 31.3% and 21.3%,
respectively. The overall increase in operating expenses was the result of the
21.8% growth in worksite employees paid by the Company and the continuing
investment in sales, service and technology infrastructure. Operating expenses
per worksite employee were $153 in the 1999 period versus $140 for the 1998
period.
Salaries, wages and payroll taxes of corporate and sales staff
increased from $67 per worksite employee in the 1998 period to $76 per worksite
employee in the 1999 period. Approximately $5 of this increase related to a 39%
increase in corporate staff. The remainder of this increase was due to a 28%
increase in sales office staff, which includes district sales management, office
administrators and sales representatives, and a 14% increase in the average
payroll cost per sales office staff.
General and administrative expenses increased $2 per worksite employee
over the first quarter of 1998. The increase resulted from (i) higher rent
expense due to recent openings of sales offices in St. Louis, San Francisco and
New York and the new Dallas operations center; (ii) higher legal and accounting
fees related to corporate activities such as the ongoing 401(k) plan audit and
corporate entity changes; and (iii) consulting and maintenance fees associated
with the continued investment in technology infrastructure.
Depreciation and amortization expense increased $4 per worksite
employee as a result of the increased capital expenditures placed in service in
1998.
Commissions expense was slightly lower per worksite employee versus
the first quarter of 1998 due to lower sales agency commissions. Advertising
costs also declined slightly per worksite employee as the Company was able to
increase its advertising coverage while incurring lower rates for much of its
radio advertising. In addition, the Company utilized resources available through
its marketing agreement with American Express to generate leads and appointments
for its sales representatives.
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<PAGE> 16
NET INCOME
Interest and other income decreased 3.2% from the first quarter of 1998
to the first quarter of 1999 due to the sale of marketable securities to
repurchase shares of the Company's common stock under the repurchase program
approved by the Company's Board of Directors in January 1999.
The Company's provision for income taxes differed from the U.S.
statutory rate of 34% primarily due to state income taxes and tax exempt
interest income. The effective income tax rate for the 1999 period was
consistent with the 1998 period.
Operating loss and net loss per worksite employee were $35 and $18 in
the 1999 period, versus $22 and $8 in the 1998 period. The Company's net loss
and diluted net loss per share for the quarter ended March 31, 1999, increased
to $2.1 million and $0.14, versus $742,000 and $0.05 for the quarter ended March
31, 1998.
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, 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 increase or manage its
liquidity and capital resources. The Company currently believes that its cash on
hand, marketable securities and cash flows from operations will be adequate to
meet its short-term liquidity requirements. The Company will rely on these same
sources, as well as public and private debt and equity financing, to meet its
long-term liquidity and capital needs.
The Company had $52.0 million in cash and cash equivalents and
marketable securities at March 31, 1999, of which approximately $17.4 million
was payable in early April 1999 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, service and technology infrastructure, capital expenditures and
the Company's stock repurchase program. At March 31, 1999, the Company had
working capital of $37.0 million compared to $52.5 million at December 31, 1998.
The decrease in working capital was due primarily to the use of $11.9 million to
repurchase shares of the Company's common stock and capital expenditures of $3.3
million, including investments in intangible assets. As of March 31, 1999, the
Company had no long-term debt.
CASH FLOWS FROM OPERATING ACTIVITIES
The Company's net cash used in operating activities improved slightly
from the first quarter of 1998 to the first quarter of 1999 primarily due to an
increase in customer prepayments of unbilled accounts receivable, partially
offset by larger payroll tax payments and a larger net loss.
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<PAGE> 17
CASH FLOWS FROM INVESTING ACTIVITIES
Net sales of marketable securities during the first quarter of 1999
represent funds used to repurchase shares of the Company's common stock.
Capital expenditures during the 1999 period primarily consist of
computer and telecommunications equipment, building improvements and furniture
and fixtures at the Company's headquarters, Dallas operations center and New
York sales offices.
Investments in intangible assets during the 1999 period primarily
represent capitalized software development costs related to the Company's
Internet service delivery platform, Administaff Assistant, and enhancements to
the Company's proprietary professional employer information system.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities during the 1999 period primarily
include the repurchase of 842,500 shares of the Company's common stock under the
stock repurchase program approved by the Company's Board of Directors in January
1999.
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
issue presents potentially significant operational issues if not properly
addressed. The Year 2000 issue generally describes the various problems that may
result from the failure of computer and other mechanical systems to properly
process certain dates and date sensitive information.
State of Readiness. The Company has concluded the assessment phase of
its Year 2000 preparations and has identified two primary risk areas. First, the
Company's operations rely heavily on its proprietary PEO information system,
which includes several applications such as payroll processing, benefits
enrollment, sales bid calculation, client invoicing and direct deposit payroll
transmission. Second, the Company relies on several third party vendors to
assist in delivering its PEO services to its clients and worksite employees. The
Company believes that it does not have material risks associated with Year 2000
issues for non-information technology systems due to the nature of its
operations.
In conjunction with the redesign and upgrade of the Company's PEO
information system in 1996 and 1997, the Company addressed Year 2000 programming
issues in a manner which it believes makes the system Year 2000 compliant. The
Company intends to perform testing on the system to ensure that it is able to
process all dates appropriately. In October 1998, the Company completed the
first phase of tests designed to assess the ability of its internal operating
environment to operate appropriately under Year 2000 dates. No significant
issues were detected during this
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<PAGE> 18
testing phase. The Company plans to test the system for data processing accuracy
through the use of test data on a wide variety of the Company's normal operating
transactions under various date conditions. The Company believes that these
tests can be completed in sufficient time to ensure that required modifications,
if any, can be made on a timely basis.
The Company has also assessed its third party vendor relationships and
has identified approximately 40 vendors that it considers critical to the
operations of the Company. These critical vendors primarily include third party
hardware and software vendors, financial institutions and benefit providers. The
Company has requested written information from each of these vendors regarding
their Year 2000 plans and state of readiness. The Company has received responses
to most of the requests and is evaluating the responses. Upon completion of the
evaluation, and upon completion of the testing of its PEO information system,
the Company intends to test significant data interfaces with third party vendors
to verify their compliant status.
Costs to Address Year 2000 Issues. 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 Company's Year 2000 plans.
Risks Associated with Year 2000 Issues. 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. Among the problems which might occur without
appropriate planning and testing are: the inability to transmit direct deposit
payroll through banking systems to deposit funds into worksite employees' bank
accounts; the inability to collect funds electronically in payment of the
Company's service fees; the failure to properly calculate payroll information;
the untimely transmission of benefits enrollment or claims data to and from
benefit providers; and the inability to deliver payroll checks to employees due
to failure in transportation or courier systems. As a result, the Company's
plans, including the testing of its systems, vendor assessment and contingency
planning, will be focused in these areas.
Contingency Planning. The Company has previously developed a disaster
recovery plan to be used in the event of unexpected business interruptions. The
Company is currently developing specific contingency plans, to complement its
disaster recovery plan, for those processes that are considered critical in
preventing an interruption of business operations as a result of Year 2000
issues.
The Company's Year 2000 plans, as discussed above, represent an
ongoing process which will continue throughout 1999. Although the Company
believes it is taking the appropriate courses of action to ensure that material
interruptions in business operations do not occur as a result of the Year 2000
conversion, there can be no assurances that the actions discussed herein will
have the anticipated results or that the Company's financial condition or
results of operations will not be adversely affected as a result of Year 2000
issues. Among the factors which might affect the success of the Company's Year
2000 plans are: (i) the Company's ability to properly identify deficient
systems; (ii) the ability of third parties to adequately address Year 2000
issues or to notify the
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<PAGE> 19
Company of potential deficiencies; (iii) the Company's ability to adequately
address any such internal or external deficiencies; (iv) the Company's ability
to complete its Year 2000 plans in a timely manner; and (v) unforseen expenses
related to the Company's Year 2000 plans.
SEASONALITY, INFLATION AND QUARTERLY FLUCTUATIONS
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 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE MARKET PRICE OF COMMON STOCK
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 operations; (iii) the effectiveness of the
Company's sales and marketing efforts, including the Company's marketing
agreement with American Express, American Express' ability to set qualified
appointments and the Company's ability to convert those appointments into sales;
(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. Any of
-19-
<PAGE> 20
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.
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. The Company
believes that its pending legal proceedings would not have a material adverse
effect on its financial position or results of operations.
-20-
<PAGE> 21
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 13, 1999 By: /s/ Richard G. Rawson
---------------------------------
Richard G. Rawson
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: May 13, 1999 By: /s/ Samuel G. Larson
---------------------------------
Samuel G. Larson
Vice President, Finance
(Principal Accounting Officer)
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<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 13,583
<SECURITIES> 36,664
<RECEIVABLES> 35,457
<ALLOWANCES> (594)
<INVENTORY> 0
<CURRENT-ASSETS> 94,037
<PP&E> 42,193
<DEPRECIATION> (9,822)
<TOTAL-ASSETS> 135,453
<CURRENT-LIABILITIES> 57,064
<BONDS> 0
0
0
<COMMON> 149
<OTHER-SE> 72,727
<TOTAL-LIABILITY-AND-EQUITY> 135,453
<SALES> 475,853
<TOTAL-REVENUES> 475,853
<CGS> 462,298
<TOTAL-COSTS> 462,298
<OTHER-EXPENSES> 16,821
<LOSS-PROVISION> 190
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,266)
<INCOME-TAX> (1,208)
<INCOME-CONTINUING> (2,058)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,058)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
