<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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)
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 November 5, 1999: 13,425,085 shares.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
Item 1. Financial Statements ................................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 14
PART II
Item 1. Legal Proceedings.................................................... 27
Item 5. Other Information.................................................... 27
</TABLE>
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ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................. $ 23,521 $ 22,260
Marketable securities ................................................. 49,670 30,931
Accounts receivable:
Trade .............................................................. 4,663 2,526
Unbilled ........................................................... 19,719 34,589
Other .............................................................. 1,668 935
Prepaid expenses ...................................................... 2,469 6,247
Income taxes receivable ............................................... 1,426 776
Deferred income taxes ................................................. -- 55
--------- ---------
Total current assets ............................................ 103,136 98,319
Property and equipment:
Land .................................................................. 2,913 2,920
Buildings and improvements ............................................ 9,915 11,090
Computer equipment .................................................... 15,078 20,248
Furniture and fixtures ................................................ 10,378 13,432
Vehicles .............................................................. 1,308 1,338
--------- ---------
39,592 49,028
Accumulated depreciation .............................................. (8,552) (11,489)
--------- ---------
Total property and equipment .................................... 31,040 37,539
Other assets:
Notes receivable from employees ....................................... 1,181 1,045
Software development costs ............................................ 3,010 6,637
Other assets .......................................................... 4,432 4,335
--------- ---------
Total other assets .............................................. 8,623 12,017
--------- ---------
Total assets .................................................... $ 142,799 $ 147,875
========= =========
</TABLE>
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ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Accounts payable ..................................... $ 2,555 $ 917
Payroll taxes and other payroll deductions payable ... 26,607 16,895
Accrued worksite employee payroll expense ............ 19,161 43,181
Other accrued liabilities ............................ 2,190 5,493
Deferred income taxes ................................ 148 --
----------- -----------
Total current liabilities ...................... 50,661 66,486
Noncurrent liabilities:
Other accrued liabilities ............................ 2,558 2,558
Deferred income taxes ................................ 2,723 4,196
----------- -----------
Total noncurrent liabilities ................... 5,281 6,754
Commitments and contingencies
Stockholders' equity:
Common stock ......................................... 149 149
Additional paid-in capital ........................... 64,293 64,772
Treasury stock, at cost .............................. (1,968) (18,078)
Accumulated other comprehensive income (loss) ........ 342 (93)
Retained earnings .................................... 24,041 27,885
----------- -----------
Total stockholders' equity ..................... 86,857 74,635
----------- -----------
Total liabilities and stockholders' equity ..... $ 142,799 $ 147,875
=========== ===========
</TABLE>
See accompanying notes.
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ...................................... $ 431,511 $ 562,812 $1,187,550 $1,544,348
Direct costs:
Salaries and wages of worksite employees ... 357,827 466,409 982,781 1,281,094
Benefits and payroll taxes ................. 53,647 70,212 157,233 203,589
---------- ---------- ---------- ----------
Gross profit .................................. 20,037 26,191 47,536 59,665
Operating expenses:
Salaries, wages and payroll taxes .......... 6,672 9,223 19,229 26,849
General and administrative expenses ........ 4,711 6,152 12,736 16,458
Commissions ................................ 1,530 1,678 4,405 4,654
Advertising ................................ 911 932 2,777 2,861
Depreciation and amortization .............. 961 1,817 2,572 4,715
---------- ---------- ---------- ----------
14,785 19,802 41,719 55,537
---------- ---------- ---------- ----------
Operating income .............................. 5,252 6,389 5,817 4,128
Other income (expense):
Interest income ............................ 837 568 2,535 1,883
Other, net ................................. 17 7 47 92
---------- ---------- ---------- ----------
854 575 2,582 1,975
---------- ---------- ---------- ----------
Income before income taxes .................... 6,106 6,964 8,399 6,103
Income tax expense ............................ 2,320 2,577 3,192 2,259
---------- ---------- ---------- ----------
Net income .................................... $ 3,786 $ 4,387 $ 5,207 $ 3,844
========== ========== ========== ==========
Basic net income per share of common stock .... $ 0.26 $ 0.32 $ 0.36 $ 0.28
========== ========== ========== ==========
Diluted net income per share of common stock .. $ 0.26 $ 0.32 $ 0.35 $ 0.28
========== ========== ========== ==========
</TABLE>
See accompanying notes.
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
ISSUED PAID-IN TREASURY COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL STOCK INCOME (LOSS) 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 .. -- -- -- (16,132) -- -- (16,132)
Sale of common stock put warrant ..... -- -- 119 -- -- -- 119
Exercise of stock options ............ 25 -- 313 -- -- -- 313
Other ................................ -- -- 47 22 -- -- 69
Change in unrealized gain (loss)
on marketable securities .......... -- -- -- -- (435) -- (435)
Net income ........................... -- -- -- -- -- 3,844 3,844
--------
Comprehensive income ................. 3,409
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1999 ........... 14,885 $ 149 $ 64,772 $(18,078) $ (93) $ 27,885 $ 74,635
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 5,207 $ 3,844
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ........................... 2,950 5,088
Bad debt expense ........................................ 412 545
Deferred income taxes ................................... 691 1,270
Gain on the disposition of assets ....................... (47) (83)
Changes in operating assets and liabilities:
Accounts receivable ................................... (13,318) (12,545)
Prepaid expenses ...................................... (228) (3,778)
Other assets .......................................... (55) 117
Accounts payable ...................................... (157) (1,638)
Payroll taxes and other payroll deductions payable .... (8,123) (9,712)
Accrued worksite employee payroll expense ............. 14,155 24,020
Other accrued liabilities ............................. 817 3,303
Income taxes payable/receivable ....................... 632 650
----------- -----------
Total adjustments ................................... (2,271) 7,237
----------- -----------
Net cash provided by operating activities ........... 2,936 11,081
Cash flows from investing activities:
Marketable securities:
Purchases ............................................... (43,502) (13,439)
Proceeds from dispositions .............................. 19,450 31,517
Property and equipment:
Purchases ............................................... (12,638) (11,019)
Proceeds from dispositions .............................. 70 68
Investment in software development costs ................... (1,349) (3,975)
----------- -----------
Net cash provided by (used in) investing activities.. (37,969) 3,152
</TABLE>
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<PAGE> 8
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
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 ............... $ 17,588 $ --
Purchase of treasury stock ................................ (6,101) (16,132)
Proceeds from the sale of common stock put warrant ........ -- 119
Proceeds from the exercise of stock options ............... 801 313
Proceeds from the exercise of common stock
purchase warrants ...................................... 635 --
Loans to employees ........................................ (61) 137
Other ..................................................... 24 69
----------- -----------
Net cash provided by (used in) financing activities.. 12,886 (15,494)
----------- -----------
Net decrease in cash and cash equivalents .................... (22,147) (1,261)
Cash and cash equivalents at beginning of period ............. 40,561 23,521
----------- -----------
Cash and cash equivalents at end of period ................... $ 18,414 $ 22,260
=========== ===========
</TABLE>
See accompanying notes.
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ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 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 nine
months ended September 30, 1998 and 1999, revenues from the Company's Texas
markets represented 72.3% and 63.9% of the Company's total revenues,
respectively.
The consolidated financial statements include the accounts of the
Company 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 accompanying consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements for
the year ended December 31, 1998. 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 September 30, 1999, and the consolidated
statements of operations, cash flows and stockholders' equity for the interim
periods ended September 30, 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
2. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic net income per share -
weighted average shares outstanding ............. 14,504 13,547 14,335 13,834
Effect of dilutive securities:
Common stock purchase warrants -
treasury stock method ......................... -- -- 10 --
Common stock options - treasury stock method .... 301 38 328 40
----------- ----------- ----------- -----------
Diluted net income - weighted average shares
outstanding plus effect of dilutive securities .. 14,805 13,585 14,673 13,874
=========== =========== =========== ===========
</TABLE>
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. In May 1999, the Board authorized the repurchase of up
to one million additional shares under the repurchase program. 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
September 30, 1999, the Company had repurchased 1,121,000 shares at a total
cost of approximately $16.1 million, including 144,600 shares purchased from
affiliates of Mr. Lang Gerhard, a greater than 10% shareholder, in a private
transaction for approximately $2.3 million.
4. MARKETABLE SECURITIES
At September 30, 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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
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. Copies 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
subject to liability, including penalties, with respect to its cafeteria plan
for the failure to withhold and pay taxes applicable to salary deferral
contributions by employees, including worksite employees. In such a scenario,
the Company also would face the risk of client dissatisfaction and potential
litigation. While the Company is not able to predict either the timing or the
nature of any final decision that may be reached with respect to the 401(k)
Plan audit or with respect to the Technical Advice Request or the Market
Segment Group study and the ultimate outcome of such decisions, the Company
believes that a retroactive application of an unfavorable determination is
unlikely. The Company also believes that a prospective application of an
unfavorable determination will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
In addition to the 401(k) Plan audit and Market Segment 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 that 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
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<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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> 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 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 SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999.
The following table presents certain information related to the
Company's results of operations for the three months ended September 30, 1998
and 1999 expressed on a dollar per worksite employee per month basis.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------- %
1998 1999 CHANGE CHANGE
--------- --------- --------- --------
($ PER WORKSITE EMPLOYEE PER MONTH)
<S> <C> <C> <C> <C>
Revenues:
Fee revenue ........................... $ 3,785 $ 4,090 $ 305 8.1%
Bonus revenue ......................... 187 179 (8) (4.3)%
Other revenue ......................... 6 9 3 50.0%
------- ------- -------
3,978 4,278 300 7.5%
Direct costs:
Fee payroll of worksite employees ..... 3,112 3,366 254 8.2%
Bonus payroll of worksite employees ... 187 179 (8) (4.3)%
Benefits and payroll taxes ............ 486 523 37 7.6%
Other direct costs .................... 8 11 3 37.5%
------- ------- -------
3,793 4,079 286 7.5%
------- ------- -------
Gross profit ............................. 185 199 14 7.6%
Operating expenses:
Salaries, wages and payroll taxes ..... 62 70 8 12.9%
General and administrative expenses ... 43 47 4 9.3%
Commissions ........................... 14 13 (1) (7.1)%
Advertising ........................... 8 7 (1) (12.5)%
Depreciation and amortization ......... 9 14 5 55.6%
------- ------- -------
136 151 15 10.3%
------- ------- -------
Operating income ......................... 49 48 (1) (2.0)%
Other income ............................. 7 5 (2) (28.6)%
------- ------- -------
Income before income taxes ............... 56 53 (3) (5.4)%
Income tax expense ....................... 21 20 1 (4.8)%
------- ------- -------
Net income ............................... $ 35 $ 33 $ (2) (5.7)%
======= ======= =======
Monthly gross markup per worksite
employee .............................. $ 673 $ 724 $ 51 7.6%
======= ======= =======
Average number of worksite employees
paid per month during period .......... 36,161 43,855 7,694 21.3%
======= ======= =======
</TABLE>
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<PAGE> 15
REVENUES
The Company's revenues for the three months ended September 30, 1999,
increased 30.4% over the same period in 1998 due to a 21.3% increase in
worksite employees paid accompanied by an 8.1% 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 12.2% over the third quarter of 1998, while revenues from markets
opened after 1993 increased 55.0%. Revenues from the state of Texas represented
61.5% of the Company's total revenues and Houston, the Company's original
market, represented 35.6% of the total.
The increase in fee revenue per worksite employee of $305, or 8.1%,
directly relates to the increase in payroll cost per worksite employee of $254,
or 8.2%. This increase reflects (i) compensation increases within the Company's
existing worksite employee base; (ii) the addition of clients with worksite
employees that have a higher average base pay than the existing client base;
(iii) the attrition of clients with worksite employees that have a lower
average base pay than the existing client base; and (iv) the penetration of
markets with generally higher wage levels, such as San Francisco, New York and
Washington, D.C.
GROSS PROFIT
Gross profit for the third quarter of 1999 increased 30.7% over the
third quarter of 1998, primarily due to the 21.3% increase in the number of
worksite employees paid and a 7.6% increase in gross profit per worksite
employee. Gross profit per worksite employee increased from $185 per month in
the 1998 period to $199 per month in the 1999 period, reflecting effective
execution of the Company's pricing strategy. The Company's pricing objectives
attempt to maintain or improve the gross profit per worksite employee by
matching or exceeding changes in its primary direct costs with increases in the
gross markup per worksite employee.
Approximately $18 of the $51 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 $33 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, including
$7 related to a change in the method used to calculate service fees for clients
who experience turnover within their workforce. The Company expects that this
change will continue to increase the gross markup per worksite employee
compared to 1998 for the remainder of 1999.
Payroll taxes increased $20 per worksite employee over the third
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
increased slightly from 6.92% in the 1998 period to 7.02% in the 1999 period.
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<PAGE> 16
The cost of health insurance and related employee benefits increased
$5 per worksite employee over the third quarter of 1998 due to a 0.7% 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
66.1% in the 1998 period to 67.0% in the 1999 period.
Workers' compensation costs increased $12 per worksite employee per
month over the third quarter of 1998, and increased from 0.92% of payroll cost
in the 1998 period to 1.19% in the 1999 period. During the 1998 period, the
Company received net proceeds of $475,000 from the settlement of a class action
lawsuit related to premiums paid in a prior policy year.
Gross profit, measured as a percentage of revenue, increased slightly
from 4.64% in the 1998 period to 4.65% in the 1999 period, as the mathematical
downward pressure associated with the increase in average payroll cost per
worksite employee was offset in the third quarter of 1999 by the increase in
gross profit per worksite employee.
OPERATING EXPENSES
Operating expenses increased 33.9% over the third quarter of 1998,
primarily due to the 21.3% growth in worksite employees paid by the Company and
the continuing investment in sales, service and technology infrastructure.
Operating expenses per worksite employee increased from $136 in the 1998 period
to $151 in the 1999 period.
Salaries, wages and payroll taxes of corporate and sales staff
increased from $62 per worksite employee in the 1998 period to $70 per worksite
employee in the 1999 period. Approximately $5 of this increase was the result of
a 23.5% increase in corporate and sales staff, combined with a 7.3% increase in
the average payroll cost per employee. The remaining $3 increase was the result
of increased 401(k) plan employer matching contributions and other incentive
compensation.
General and administrative expenses increased $4 per worksite employee
over the third quarter of 1998. The increase resulted from (i) hardware and
software maintenance fees and communications costs associated with the Company's
Internet development and national technology platform; (ii) higher legal fees
associated with corporate activities such as the ongoing 401(k) plan audit; and
(iii) higher rent expense due to recent openings of sales offices in St. Louis,
San Francisco and New York and the new Atlanta operations center.
Depreciation and amortization expense increased $5 per worksite
employee as a result of the increased capital expenditures placed in service in
1998 and 1999, including (i) the implementation of a national technology
infrastructure; (ii) the opening of new sales offices; (iii) the expansion and
relocation of the Dallas operations center and opening of the Atlanta
operations center; and (iv) the expansion of corporate headquarters.
Commissions expense was slightly lower per worksite employee versus
the third quarter of 1998 due to lower sales agency commissions. Advertising
costs also declined slightly per worksite
- 16 -
<PAGE> 17
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.
NET INCOME
Interest and other income decreased 32.7% from the third quarter of
1998 to the third quarter of 1999 due to a lower level of cash and marketable
securities resulting from the repurchase of 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 income and net income per worksite employee were $48 and $33
in the 1999 period, versus $49 and $35 in the 1998 period. The Company's net
income and diluted net income per share for the quarter ended September 30,
1999, increased to $4.4 million and $0.32, versus $3.8 million and $0.26 for
the quarter ended September 30, 1998.
- 17 -
<PAGE> 18
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999.
The following table presents certain information related to the
Company's results of operations for the nine months ended September 30, 1998
and 1999 expressed on a dollar per worksite employee per month basis.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------- %
1998 1999 CHANGE CHANGE
--------- --------- --------- --------
($ PER WORKSITE EMPLOYEE PER MONTH)
<S> <C> <C> <C> <C>
Revenues:
Fee revenue .............................. $ 3,714 $ 4,003 $ 289 7.8%
Bonus revenue ............................ 178 186 8 4.5%
Other revenue ............................ 7 8 1 14.3%
--------- --------- ---------
3,899 4,197 298 7.6%
Direct costs:
Fee payroll of worksite employees ........ 3,049 3,296 247 8.1%
Bonus payroll of worksite employees ...... 178 186 8 4.5%
Benefits and payroll taxes ............... 507 543 36 7.1%
Other direct costs ....................... 9 10 1 11.1%
--------- --------- ---------
3,743 4,035 292 7.8%
--------- --------- ---------
Gross profit ................................ 156 162 6 3.8%
Operating expenses:
Salaries, wages and payroll taxes ........ 63 73 10 15.9%
General and administrative expenses ...... 42 45 3 7.1%
Commissions .............................. 14 12 (2) (42.9)%
Advertising .............................. 9 8 (1) (11.1)%
Depreciation and amortization ............ 9 13 4 44.4%
--------- --------- ---------
137 151 14 10.2%
--------- --------- ---------
Operating income ............................ 19 11 (8) (42.1)%
Other income ................................ 8 5 (3) (37.5)%
--------- --------- ---------
Income before income taxes .................. 27 16 (11) (40.7)%
Income tax expense .......................... 10 6 (4) (40.0)%
--------- --------- ---------
Net income .................................. $ 17 $ 10 $ (7) (41.2)%
========= ========= =========
Monthly gross markup per worksite employee .. $ 665 $ 707 $ 42 6.3%
========= ========= =========
Average number of worksite employees
paid per month during period ............. 33,840 40,883 7,043 20.8%
========= ========= =========
</TABLE>
REVENUES
The Company's revenues for the nine months ended September 30, 1999,
increased 30.0% over the same period in 1998 due to a 20.8% increase in
worksite employees paid accompanied by a 7.8% 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
- 18 -
<PAGE> 19
(the commencement of the Company's national expansion plan) increased 14.4%
over the first nine months of 1998, while revenues from markets opened after
1993 increased 52.5%. Revenues from the state of Texas represented 63.9% of
the Company's total revenues and Houston, the Company's original market,
represented 38.1% of the total.
The increase in fee revenue per worksite employee of $289, or 7.8%,
directly relates to the increase in payroll cost per worksite employee of $247,
or 8.1%. This increase reflects (i) compensation increases within the Company's
existing worksite employee base; (ii) the addition of clients with worksite
employees that have a higher average base pay than the existing client base;
(iii) the attrition of clients with worksite employees that have a lower
average base pay than the existing client base; and (iv) the penetration of
markets with generally higher wage levels, such as San Francisco, New York and
Washington, D.C.
GROSS PROFIT
Gross profit for the first nine months of 1999 increased 25.5% over
the first nine months of 1998, primarily due to the 20.8% increase in the
number of worksite employees paid and a 3.8% increase in gross profit per
worksite employee. Gross profit per worksite employee increased from $156 per
month in the 1998 period to $162 per month in the 1999 period, reflecting
effective execution of the Company's pricing strategy. The Company's pricing
objectives attempt to maintain or improve the gross profit per worksite
employee by matching or exceeding changes in its primary direct costs with
increases in the gross markup per worksite employee.
Approximately $20 of the $42 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 nine
months 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
7.7% in both periods.
The cost of health insurance and related employee benefits increased
$11 per worksite employee over the first nine months of 1998 due to a 3.7%
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 66.4% in the 1998 period to 67.1% in the 1999 period.
Workers' compensation costs increased $5 per worksite employee per
month, and increased from 1.15% of payroll cost in the 1998 period to 1.21% in
the 1999 period.
Gross profit, measured as a percentage of revenue, declined from 4.00%
in the 1998 period to 3.86% in the 1999 period. This decline was due primarily
to the increase in average payroll cost
- 19 -
<PAGE> 20
per worksite employee, which had a corresponding effect on revenue, thus
decreasing the gross profit margin.
OPERATING EXPENSES
Operating expenses increased 33.1% over the first nine months of 1998
as a result of the 20.8% growth in worksite employees paid by the Company and
the continuing investment in sales, service and technology infrastructure.
Operating expenses per worksite employee increased from $137 in the 1998 period
to $151 in the 1999 period.
Salaries, wages and payroll taxes of corporate and sales staff
increased from $63 per worksite employee in the 1998 period to $73 per worksite
employee in the 1999 period. Approximately $7 of this increase was the result
of a 28.8% increase in corporate and sales staff, combined with a 6.6% increase
in the average payroll cost per employee. The remaining increase was related to
higher payroll tax rates and the adoption of an employer matching contribution
feature in the Company's 401(k) retirement plan.
General and administrative expenses increased $3 per worksite employee
over the first nine months of 1998. The increase resulted from (i) hardware and
software maintenance fees and communications costs associated with the Company's
Internet development and national technology platform; (ii) higher legal and
accounting fees associated with corporate activities such as the ongoing 401(k)
plan audit and corporate entity changes; and (iii) higher rent expense due to
recent openings of sales offices in St. Louis, San Francisco and New York and
the new Dallas and Atlanta operations centers.
Depreciation and amortization expense increased $4 per worksite
employee as a result of the increased capital expenditures placed in service in
1998 and 1999, including (i) the implementation of a national technology
infrastructure; (ii) the opening of new sales offices; (iii) the expansion and
relocation of the Dallas operations center and opening of the Atlanta
operations center; and (iv) the expansion of corporate headquarters.
Commissions expense was slightly lower per worksite employee versus
the first nine months 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.
NET INCOME
Interest and other income decreased 23.5% from the first nine months
of 1998 to the first nine months of 1999 due to a lower level of cash and
marketable securities resulting from the
- 20 -
<PAGE> 21
repurchase of 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 income and net income per worksite employee were $11 and $10
in the 1999 period, versus $19 and $17 in the 1998 period. The Company's net
income and diluted net income per share for the nine months ended September 30,
1999, were $3.8 million and $0.28, versus $5.2 million and $0.35 for the nine
months ended September 30, 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 $53.2 million in cash and cash equivalents and
marketable securities at September 30, 1999, of which approximately $16.9
million was payable in October 1999 for withheld federal and state income
taxes, employment taxes 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 September 30, 1999, the Company had working capital of $31.8
million compared to $52.5 million at December 31, 1998. The decrease in working
capital was due primarily to the use of $16.1 million to repurchase shares of
the Company's common stock and capital expenditures of $15.0 million, including
investments in intangible assets. These uses of cash were partially offset by
the generation of $10.7 million of net income adjusted for non-cash items. As
of September 30, 1999, the Company had no long-term debt.
CASH FLOWS FROM OPERATING ACTIVITIES
The Company's net cash provided by operating activities improved from
the first nine months of 1998 to the first nine months of 1999, primarily due
to a $12.8 million increase in customer prepayments of unbilled accounts
receivable, partially offset by larger payroll tax payments and a prepayment of
approximately $3.7 million of workers' compensation insurance premiums.
- 21 -
<PAGE> 22
CASH FLOWS FROM INVESTING ACTIVITIES
Net sales of marketable securities during the first nine months of
1999 represent funds used to repurchase shares of the Company's common stock
and replenish cash used to purchase property and equipment.
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, Atlanta
operations center, and New York, Austin and San Antonio sales offices.
Investments in software development costs during the 1999 period
relate primarily 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 1.1 million 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. 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 testing phase.
- 22 -
<PAGE> 23
During 1999, the Company has tested the hardware and software
components of its PEO information system in greater detail than the October
1998 tests. These tests included separate component tests of all hardware and
related operating systems, along with vendor certification of Year 2000
compliance, when available, followed by a system-wide test of the applications
within the PEO information system. The system-wide test was concluded in early
November 1999, and represented a comprehensive test of the critical
functionality of the PEO information system including the core processes of
payroll processing, electronic funds transfers and dissemination of benefits
information. This series of tests did not identify any issues that have not
already been remedied. The Company plans to conduct similar testing on January
1 and 2, 2000, to ensure that all applications and systems are available for
use on the first business day of 2000. The Company does not expect to encounter
any significant issues at that time based on the results of its testing thus
far.
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. With regard to
third-party hardware and software vendors, the Company has confirmed Year 2000
compliance with the vendors for all of the components defined as critical to
ongoing operations. With regard to financial institutions, the Company has
received periodic reports from its vendors on their Year 2000 compliance
efforts. The Company believes that each of these financial institutions is
preparing for the Year 2000 in accordance with milestones established by
federal banking regulatory authorities. With regard to benefit providers, the
Company has reviewed documentation that indicates that its vendors believe
their mission-critical systems are Year 2000 compliant. The Company tested its
ability to create data transmission files for its financial institutions and
benefit providers in conjunction with the testing of its proprietary PEO
information system, noting no significant issues. The Company is awaiting
responses from several vendors regarding their ability to process those test
files.
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
- 23 -
<PAGE> 24
of its systems, vendor assessment and contingency planning, have been and will
continue to 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. Among the components of the Company's Year 2000 contingency plans are
(i) the establishment of an emergency response team specifically assigned to
the Year 2000 issue; (ii) the testing of Year 2000 systems compliance by
information technology and client services staff immediately following the date
change; and (iii) the offering of alternatives to our normal operating
procedures to our clients, such as preparing payroll checks in advance of the
date change or suspending direct deposit payroll temporarily upon request.
The Company's Year 2000 plans, as discussed above, represent an
ongoing process that 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 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) unforeseen expenses related to the Company's Year 2000 plans.
OTHER MATTERS
During the third quarter, Administaff completed development and began
implementation of its comprehensive eBusiness strategy. The three-pronged
approach includes establishing a business-to-business eCommerce portal,
creating a small business community-of-interest site, and completing
Administaff Assistant, the Company's eService platform.
The eCommerce portal is intended to bring a broad range of product
and service offerings from best-of-class providers to the premium small
business community represented by the Administaff client base. The Company
intends to leverage its buying power and relationships into significant savings
for clients and new revenue streams for the Company.
The community-of-interest site will be designed to provide rich
content and services from the Company and the best-of-class provider network to
extend the Administaff brand and presence as the human resource department for
small business. The Company intends to join with alliance partners to market
the site to a broad audience of small business owners to develop new
relationships.
- 24 -
<PAGE> 25
Administaff Assistant development will continue to focus on providing
automated, personalized PEO services over the Internet, creating internal and
external efficiencies. The Company recently deployed a web reporting tool and
expects to deploy its web payroll application during the fourth quarter of
1999, both of which represent significant steps in the continuation of this
element of the Company's strategy.
On November 3, 1999, the Company announced a three-year strategic
alliance and services agreement with Luminant Worldwide Corporation. Under the
terms of the agreement, each company will provide its basic services to the
other, and both will serve as test sites for refining new service delivery
models.
Administaff will provide comprehensive PEO services to Luminant and
all of its worksite employees. Luminant expects to employ an average of 1,000
worksite employees in the first year of the agreement, increasing to an average
of 2,000 worksite employees in the third year of the agreement. In addition,
Administaff and Luminant will work together to refine the Company's service
model for clients with more than 500 employees.
As a strategic Internet professional services partner, Luminant will
provide Administaff with a broad range of eBusiness consulting services,
including strategic planning, development and implementation of Administaff's
aggressive eService and eCommerce strategies. Administaff estimates it will
incur costs of approximately $3 million in each of the first two years of the
contract, and $4 million in the third year.
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 that
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
- 25 -
<PAGE> 26
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 Company's ability to effectively implement its
eBusiness strategy, including identifying and reaching agreements with
strategic alliance partners, timely rollout of and attraction of visitors to
its eCommerce portal and community of interest sites, effective generation of
revenues from eBusiness initiatives and unanticipated development costs of
eBusiness initiatives; (vi) the effectiveness and estimated costs of the
Company's Year 2000 conversion and contingency plans; and (vii) changes in the
competitive environment in the PEO industry. 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.
- 26 -
<PAGE> 27
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.
ITEM 5. OTHER INFORMATION.
Pursuant to the Company's Amended and Restated Bylaws, stockholder
proposals submitted for consideration at the Company's 2000 Annual Meeting of
Stockholders must be delivered to the Corporate Secretary, Administaff, Inc.,
19001 Crescent Springs Drive, Kingwood, Texas 77339, no later than November 30,
1999, but no earlier than October 31, 1999. 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 2000 Annual Meeting of Stockholders.
- 27 -
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Administaff, Inc.
Date: November 12, 1999 By: /s/ Richard G. Rawson
-----------------------------
Richard G. Rawson
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1999 By: /s/ Samuel G. Larson
-----------------------------
Samuel G. Larson
Vice President, Finance
(Principal Accounting Officer)
- 28 -
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. 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> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 22,260
<SECURITIES> 30,931
<RECEIVABLES> 39,044
<ALLOWANCES> (994)
<INVENTORY> 0
<CURRENT-ASSETS> 98,319
<PP&E> 49,028
<DEPRECIATION> (11,489)
<TOTAL-ASSETS> 147,875
<CURRENT-LIABILITIES> 66,486
<BONDS> 0
0
0
<COMMON> 149
<OTHER-SE> 74,486
<TOTAL-LIABILITY-AND-EQUITY> 147,875
<SALES> 562,812
<TOTAL-REVENUES> 562,812
<CGS> 536,621
<TOTAL-COSTS> 536,621
<OTHER-EXPENSES> 19,227
<LOSS-PROVISION> 231
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,964
<INCOME-TAX> 2,577
<INCOME-CONTINUING> 4,387
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,387
<EPS-BASIC> 0.32
<EPS-DILUTED> 0.32
</TABLE>
