<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 June 30, 2000.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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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
--- ---
As of August 4, 2000, 13,588,641 shares of the registrant's common
stock, par value $0.01 per share, were outstanding.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C>
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.................................................................................. 23
Item 4. Submission of Matters to a Vote of Security Holders................................................ 23
Item 6. Exhibits and Reports on Form 8-K................................................................... 24
</TABLE>
<PAGE> 3
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................ $ 37,163 $ 25,451
Marketable securities .................... 30,790 30,717
Accounts receivable:
Trade ................................. 1,486 1,578
Unbilled .............................. 42,974 31,286
Other ................................. 1,039 1,342
Prepaid expenses ......................... 8,999 8,332
Income taxes receivable .................. 615 --
Deferred income taxes .................... 58 --
------------ ------------
Total current assets ............... 123,124 98,706
Property and equipment:
Land ..................................... 2,920 2,920
Buildings and improvements ............... 11,833 11,222
Computer hardware and software ........... 25,018 22,232
Software development costs ............... 9,828 6,951
Furniture and fixtures ................... 15,190 13,886
Vehicles ................................. 1,489 1,386
------------ ------------
66,278 58,597
Accumulated depreciation ................. (19,517) (14,223)
------------ ------------
Total property and equipment ....... 46,761 44,374
Other assets:
Notes receivable from employees .......... 994 994
Other assets ............................. 8,618 3,624
------------ ------------
Total other assets ................. 9,612 4,618
------------ ------------
Total assets ....................... $ 179,497 $ 147,698
============ ============
</TABLE>
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ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Accounts payable ....................................................................... $ 1,356 $ 2,787
Payroll taxes and other payroll deductions payable ..................................... 38,498 21,518
Accrued worksite employee payroll expense .............................................. 41,459 31,367
Other accrued liabilities .............................................................. 9,244 5,737
Income taxes payable ................................................................... -- 1,364
Deferred income taxes .................................................................. -- 141
------------ ------------
Total current liabilities ........................................................ 90,557 62,914
Deferred income taxes ..................................................................... 5,777 4,316
Commitments and contingencies
Stockholders' equity:
Common stock ........................................................................... 150 149
Additional paid-in capital ............................................................. 67,546 65,210
Treasury stock, at cost ................................................................ (18,067) (18,072)
Accumulated other comprehensive loss ................................................... (194) (218)
Retained earnings ...................................................................... 33,728 33,399
------------ ------------
Total stockholders' equity ....................................................... 83,163 80,468
------------ ------------
Total liabilities and stockholders' equity ....................................... $ 179,497 $ 147,698
============ ============
</TABLE>
See accompanying notes.
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ...................................... $ 864,450 $ 505,683 $ 1,619,995 $ 981,536
Direct costs:
Salaries and wages of worksite employees ... 721,984 419,593 1,351,921 814,685
Benefits and payroll taxes ................. 111,124 66,171 216,027 133,377
----------- ----------- ----------- -----------
Gross profit .................................. 31,342 19,919 52,047 33,474
Operating expenses:
Salaries, wages and payroll taxes .......... 12,283 8,843 24,351 17,626
General and administrative expenses ........ 9,028 5,221 16,590 10,306
Commissions ................................ 2,165 1,507 4,377 2,976
Advertising ................................ 1,502 1,010 2,432 1,929
Depreciation and amortization .............. 2,884 1,537 5,516 2,898
----------- ----------- ----------- -----------
27,862 18,118 53,266 35,735
----------- ----------- ----------- -----------
Operating income (loss) ....................... 3,480 1,801 (1,219) (2,261)
Other income (expense):
Interest income ............................ 931 585 1,730 1,315
Other, net ................................. (2) 19 7 85
----------- ----------- ----------- -----------
929 604 1,737 1,400
----------- ----------- ----------- -----------
Income (loss) before income taxes ............. 4,409 2,405 518 (861)
Income tax expense (benefit) .................. 1,609 890 189 (318)
----------- ----------- ----------- -----------
Net income (loss) ............................. $ 2,800 $ 1,515 $ 329 $ (543)
=========== =========== =========== ===========
Basic net income (loss)
per share of common stock ................ $ 0.21 $ 0.11 $ 0.02 $ (0.04)
=========== =========== =========== ===========
Diluted net income (loss)
per share of common stock ................ $ 0.20 $ 0.11 $ 0.02 $ (0.04)
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
ISSUED PAID-IN TREASURY COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL STOCK LOSS EARNINGS TOTAL
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 14,909 $ 149 $ 65,210 $(18,072) $ (218) $ 33,399 $ 80,468
Exercise of stock options 122 1 2,189 -- -- -- 2,190
Sale of common stock
put warrant -- -- 125 -- -- -- 125
Other -- -- 22 5 -- -- 27
Change in unrealized loss
on marketable securities -- -- -- -- 24 -- 24
Net income -- -- -- -- -- 329 329
--------
Comprehensive income 353
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2000 15,031 $ 150 $ 67,546 $(18,067) $ (194) $ 33,728 $ 83,163
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................ $ 329 $ (543)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ............................ 5,641 3,145
Bad debt expense ......................................... 1,134 314
Deferred income taxes .................................... 1,262 889
Loss (gain) on the disposition of assets ................. 97 (82)
Changes in operating assets and liabilities:
Accounts receivable ..................................... (12,427) (12,295)
Prepaid expenses ........................................ (667) (3,583)
Other assets ............................................ 582 152
Accounts payable ........................................ (1,431) (182)
Payroll taxes and other payroll deductions payable ...... 16,980 (10,934)
Accrued worksite employee payroll expense ............... 10,092 18,426
Other accrued liabilities ............................... 3,507 2,444
Income taxes payable/receivable ......................... (1,979) (1,398)
-------- --------
Total adjustments ..................................... 22,791 (3,104)
-------- --------
Net cash provided by (used in) operating activities ... 23,120 (3,647)
Cash flows from investing activities:
Marketable securities:
Purchases ................................................. (9,885) (8,560)
Proceeds from dispositions ................................ 9,696 27,587
Property and equipment:
Purchases ................................................. (5,156) (5,556)
Proceeds from dispositions ................................ 76 47
Investment in software development costs ..................... (2,877) (2,439)
Investment in other companies ................................ (5,604) --
-------- --------
Net cash provided by (used in) investing activities ... (13,750) 11,079
</TABLE>
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from the exercise of stock options ....................... $ 2,190 $ 47
Purchase of treasury stock ........................................ -- (12,330)
Proceeds from the sale of common stock put warrant ................ 125 119
Loans to employees ................................................ -- 154
Other ............................................................. 27 48
-------- --------
Net cash provided by (used in) financing activities ......... 2,342 (11,962)
-------- --------
Net increase (decrease) in cash and cash equivalents ................. 11,712 (4,530)
Cash and cash equivalents at beginning of period ..................... 25,451 23,521
-------- --------
Cash and cash equivalents at end of period ........................... $ 37,163 $ 18,991
======== ========
</TABLE>
See accompanying notes.
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ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
1. BASIS OF PRESENTATION
Administaff, Inc. ("the Company") is a professional employer
organization ("PEO") that provides a comprehensive Personnel Management System
that encompasses a broad range of services, including benefits and payroll
administration, medical and workers' compensation insurance programs, personnel
records management, employer liability management, employee recruiting and
selection, performance management, and training and development services to
small and medium-sized businesses in strategically selected markets. For the six
months ended June 30, 2000 and 1999, revenues from the Company's Texas markets
represented 52% and 65% 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, 1999. The consolidated balance sheet at December 31,
1999, has been derived from the audited financial statements at that date but
does not include all of the information or footnotes required by generally
accepted accounting principles for complete financial statements. The Company's
consolidated balance sheet at June 30, 2000, and the consolidated statements of
operations, cash flows and stockholders' equity for the interim periods ended
June 30, 2000 and 1999, 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 prior year amounts have been reclassified to conform with
current year presentation.
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2. ACCOUNTING CHANGES
During 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition. Additionally, the
Emerging Issues Task Force ("EITF") reached consensus during 2000 on EITF 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent. Each of these
pronouncements is required to be adopted in the fourth quarter of 2000. The
Company is currently evaluating its revenue recognition policies and the effect
of adopting SAB No. 101 and EITF 99-19.
3. NET INCOME (LOSS) PER SHARE
The numerator used in the calculations of both basic and diluted net income
(loss) per share for all periods presented was net income (loss). The
denominator for each period presented was determined as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic net income (loss) per share -
weighted average shares outstanding .......................... 13,526 13,649 13,500 13,979
Effect of dilutive securities:
Common stock purchase warrants -
treasury stock method ...................................... 83 -- 41 --
Common stock options - treasury stock method ................. 687 24 513 --
------ ------ ------ ------
770 24 554 --
------ ------ ------ ------
Diluted net income (loss) per share - weighted average
shares outstanding plus effect of dilutive securities ........ 14,296 13,673 14,054 13,979
====== ====== ====== ======
Potentially dilutive securities not included in weighted
average share calculation due to anti-dilutive effect ........ 1,266 2,561 1,757 2,774
</TABLE>
4. MARKETABLE SECURITIES
At June 30, 2000, 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, and as a result, are reported at fair value. Unrealized
gains and losses, net of tax, are reported as a component of accumulated other
comprehensive loss in stockholders' equity.
5. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits and claims arising in
the normal course of business. Management believes it has valid defenses in
these cases and is defending them vigorously. While the results of litigation
cannot be predicted with certainty, management believes the final outcome of
such litigation will not have a material adverse effect on the Company's
financial position or results of operations.
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ADMINISTAFF, INC.
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 (the "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.
The primary outstanding issue from these audits involves the Company's
rights under the Internal Revenue Code (the "Code") as a co-employer of its
worksite employees, including officers and owners of client companies. In
conjunction with the 1993 401(k) plan year audit, the IRS Houston District has
sought technical advice (the "Technical Advice Request") from the IRS National
Office about whether worksite employee participation in the 401(k) plan violates
the exclusive benefit rule under the Code because they are not employees of the
Company. The Technical Advice Request contains the conclusions of the IRS
Houston District that the 401(k) plan should be disqualified because it covers
worksite employees who are not employees of the Company. The Company's response
to the Technical Advice Request refutes the conclusions of the IRS Houston
District. With respect to the Market Segment Group study, the Company
understands that the issue of whether a PEO and a client company may be treated
as co-employers for certain federal tax purposes (the "Industry Issue") has been
referred to the IRS National Office.
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 subsequent to a final conclusion by the IRS)
would not have a material adverse effect on its financial position or results of
operations, as the Company could continue to make available comparable benefit
programs to its client companies at comparable costs to the Company. However, if
the IRS National Office adopts the conclusions of the IRS Houston District set
forth in the Technical Advice Request and any such conclusions were applied
retroactively to disqualify the 401(k) plan for 1993 and subsequent years,
employees' vested account balances under the 401(k) plan would become taxable,
the Company would lose its tax deductions to the extent its matching
contributions were not vested, the 401(k) plan's trust would become a taxable
trust and the Company would be subject to liability with respect to its failure
to withhold applicable taxes with respect to certain contributions and trust
earnings. Further, the Company may 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 would also 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
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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 would not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
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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 1999
annual report on Form 10-K as well as with the consolidated financial statements
and notes thereto included in this quarterly report on Form 10-Q.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1999.
The following table presents certain information related to the
Company's results of operations for the three months ended June 30, 2000 and
1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, %
------------------------
2000 1999 CHANGE
------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C>
Revenues...................................................... $ 864,450 $ 505,683 70.9%
Gross profit................................................. 31,342 19,919 57.3%
Operating expenses............................................ 27,862 18,118 53.8%
Operating income.............................................. 3,480 1,801 93.2%
Other income.................................................. 929 604 53.8%
Net income.................................................... 2,800 1,515 84.8%
Diluted net income per share of common stock.................. 0.20 0.11 81.8%
STATISTICAL DATA:
Average number of worksite employees paid per month........... 60,934 40,401 50.8%
Fee revenue per worksite employee per month .................. $ 4,510 $ 3,983 13.2%
Fee payroll cost per worksite employee per month.............. 3,784 3,280 14.0%
Gross markup per worksite employee per month.................. 770 703 9.5%
Gross profit per worksite employee per month.................. 171 164 4.3%
Operating expenses per worksite employee per month............ 152 149 2.0%
Operating income per worksite employee per month.............. 19 15 26.7%
Net income per worksite employee per month.................... 15 13 15.4%
</TABLE>
REVENUES
The Company's revenues for the three months ended June 30, 2000
increased 70.9% over the same period in 1999 due to a 50.8% increase in the
average number of worksite employees paid per month, accompanied by a 13.2%
increase in fee revenue per worksite employee per month. 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 average number of
worksite employees paid. Worksite employee growth within the Company's existing
client base and slightly improved client retention also contributed to this
increase.
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Revenues from markets opened prior to 1993 (the commencement of the
Company's national expansion plan) increased 29% over the second quarter of
1999, while revenues from markets opened after 1993 increased 117%. For the
three months ended June 30, 2000, revenues from the state of Texas represented
51% of the Company's total revenues and Houston, the Company's original market,
represented 27% of the total.
The 13.2% increase in fee revenue per worksite employee per month
directly related to the 14.0% increase in fee payroll cost per worksite employee
per month, reflecting (i) compensation increases within the Company's existing
worksite employee base; (ii) the continued penetration of markets with generally
higher wage levels, such as San Francisco, New York and Washington, D.C.; (iii)
the addition of clients with worksite employees that have a higher average base
pay than the existing client base; and (iv) the attrition of clients with
worksite employees that have a lower average base pay than the existing client
base.
GROSS PROFIT
Gross profit for the second quarter of 2000 increased 57.3% over the
second quarter of 1999, primarily due to the 50.8% increase in the average
number of worksite employees paid per month accompanied by a 4.3% increase in
gross profit per worksite employee per month. Gross profit per worksite employee
increased to $171 per month in the 2000 period from $164 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.
Gross markup per worksite employee per month increased 9.5% to $770 in
the 2000 period versus $703 in the 1999 period. Approximately 60% of the $67
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 the result of 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.
The Company's primary direct costs, which include payroll taxes,
benefits and workers' compensation expenses, increased 11.4% to $608 per
worksite employee per month in the 2000 period versus $546 in the 1999 period.
Payroll taxes increased $41 per worksite employee per month over the second
quarter of 1999, primarily due to the increased average payroll cost per
worksite employee. The overall cost of payroll taxes as a percentage of payroll
cost increased to 7.63% in the 2000 period from 7.51% in the 1999 period due to
the significant growth in paid worksite employees during the year and a slight
increase in the Company's weighted average state unemployment tax rate. The cost
of health insurance and related employee benefits increased $14 per worksite
employee over the second quarter of 1999 due to a 3.0% increase in the cost per
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<PAGE> 15
covered employee and a slight increase in the percentage of worksite employees
covered under the Company's health insurance plans to 68.8% in the 2000 period
from 66.8% in the 1999 period. Workers' compensation costs increased $6 per
worksite employee per month over the second quarter of 1999, and remained
constant at 1.23% of fee payroll cost in both periods.
Gross profit, measured as a percentage of revenue, declined to 3.63% in
the 2000 period from 3.94% in the 1999 period. This decline was due primarily to
the increase in average payroll cost per worksite employee. Because payroll cost
is the largest single component of both revenues and direct costs, an increase
in the average payroll cost per worksite employee creates a mathematical
downward pressure on the calculation of gross profit as a percentage of revenue.
OPERATING EXPENSES
The following table presents certain information related to the
Company's operating expenses for the three months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
------- ------- -------- ------- ------- --------
(IN THOUSANDS) (PER WORKSITE EMPLOYEE PER MONTH)
<S> <C> <C> <C> <C> <C> <C>
Salaries, wages and payroll taxes ...... $12,283 $ 8,843 38.9% $ 67 $ 73 (8.2)%
General and administrative expenses .... 9,028 5,221 72.9% 49 43 39.5%
Commissions ............................ 2,165 1,507 43.7% 12 12 --
Advertising ............................ 1,502 1,010 48.7% 8 8 --
Depreciation and amortization .......... 2,884 1,537 87.6% 16 13 23.1%
------- ------- ------- -------
Total operating expenses .......... $27,862 $18,118 53.8% $ 152 $ 149 2.0%
======= ======= ======= =======
</TABLE>
Operating expenses increased 53.8% over the second quarter of 1999,
primarily due to the 50.8% growth in the average number of worksite employees
paid by the Company. Operating expenses per worksite employee increased 2.0% to
$152 per month in the 2000 period versus $149 in the 1999 period. During the
second quarter of 2000, the Company's operating expenses continued to be
impacted by several strategic initiatives, including its national sales and
service expansion, the enhancement of its proprietary professional employer
information system, the enhancement of its Internet-based service delivery
platform, Administaff Assistant, and the development and launch of its new
eCommerce portal, bizzport.
Salaries, wages and payroll taxes of corporate and sales staff
decreased to $67 per worksite employee per month in the 2000 period from $73 in
the 1999 period, as corporate and sales staff increased at a rate lower than the
Company's worksite employee growth.
General and administrative expenses increased $6 per worksite employee
per month over the second quarter of 1999, primarily due to increased consulting
expenses associated with the Company's technology initiatives, an increase in
the bad debt reserve, and increased travel expenses related to a change in the
timing of the Company's annual sales conference and incentive trip.
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<PAGE> 16
Depreciation and amortization expense increased $3 per worksite
employee per month over the 1999 period as a result of the increased capital
assets placed in service in 2000 and 1999, including (i) the implementation of a
national technology infrastructure; (ii) the implementation of certain new
components of Administaff Assistant, primarily the web payroll and web reporting
capabilities, which included both internal software development costs and
externally purchased software and hardware; (iii) the opening of new sales
offices; (iv) the opening of the Atlanta operations center; and (v) the
expansion of corporate headquarters.
Commissions expense and advertising costs remained constant on a per
worksite employee basis versus the second quarter of 1999.
NET INCOME
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 2000 period was
consistent with the 1999 period.
Operating income and net income per worksite employee per month
improved to $19 and $15 in the 2000 period, versus $15 and $13 in the 1999
period. The Company's net income and diluted net income per share for the
quarter ended June 30, 2000, increased to $2.8 million and $0.20, versus $1.5
million and $0.11 for the quarter ended June 30, 1999.
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<PAGE> 17
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
The following table presents certain information related to the
Company's results of operations for the six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------ %
2000 1999 CHANGE
------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C>
Revenues...................................................... $ 1,619,995 $ 981,536 65.0%
Gross profit.................................................. 52,047 33,474 55.5%
Operating expenses............................................ 53,266 35,735 49.1%
Operating loss................................................ (1,219) (2,261) 46.1%
Other income.................................................. 1,737 1,400 24.1%
Net income (loss)............................................. 329 (543) 160.6%
Diluted net income (loss) per share of common stock........... 0.02 (0.04) 150.0%
STATISTICAL DATA:
Average number of worksite employees paid per month........... 57,416 39,396 45.7%
Fee revenue per worksite employee per month .................. $ 4,452 $ 3,955 12.6%
Fee payroll cost per worksite employee per month.............. 3,684 3,257 13.1%
Gross markup per worksite employee per month.................. 768 698 10.0%
Gross profit per worksite employee per month.................. 151 142 6.3%
Operating expenses per worksite employee per month............ 155 151 2.6%
Operating loss per worksite employee per month................ (4) (9) 55.6%
Net income (loss) per worksite employee per month............. 1 (2) 150.0%
</TABLE>
REVENUES
The Company's revenues for the six months ended June 30, 2000
increased 65.0% over the same period in 1999 due to a 45.7% increase in the
average number of worksite employees paid per month, accompanied by a 12.6%
increase in fee revenue per worksite employee per month. 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 average number of
worksite employees paid. Worksite employee growth within the Company's existing
client base and slightly improved client retention also contributed to this
increase.
Revenues from markets opened prior to 1993 (the commencement of the
Company's national expansion plan) increased 28% over the first six months of
1999, while revenues from markets opened after 1993 increased 107%. For the six
months ended June 30, 2000, revenues from the state of Texas represented 52% of
the Company's total revenues and Houston, the Company's original market,
represented 28% of the total.
The 12.6% increase in fee revenue per worksite employee per month
directly related to the 13.1% increase in fee payroll cost per worksite employee
per month, reflecting (i) compensation
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<PAGE> 18
increases within the Company's existing worksite employee base; (ii) the
continued penetration of markets with generally higher wage levels, such as San
Francisco, New York and Washington, D.C.; (iii) the addition of clients with
worksite employees that have a higher average base pay than the existing client
base; and (iv) the attrition of clients with worksite employees that have a
lower average base pay than the existing client base.
GROSS PROFIT
Gross profit for the first six months of 2000 increased 55.5% over the
first six months of 1999, primarily due to the 45.7% increase in the average
number of worksite employees paid per month accompanied by a 6.3% increase in
gross profit per worksite employee per month. Gross profit per worksite employee
increased to $151 per month in the 2000 period from $142 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.
Gross markup per worksite employee per month increased 10.0% to $768 in
the 2000 period versus $698 in the 1999 period. Approximately 49% of the $70
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 the result of 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.
The Company's primary direct costs, which include payroll taxes,
benefits and workers' compensation expenses, increased 11.2% to $627 per
worksite employee per month in the 2000 period versus $564 in the 1999 period.
Payroll taxes increased $44 per worksite employee per month over the first six
months of 1999, primarily due to the increased average payroll cost per worksite
employee. The overall cost of payroll taxes as a percentage of payroll cost
increased to 8.20% in the 2000 period from 8.07% in the 1999 period due to the
significant growth in paid worksite employees during the year and a slight
increase in the Company's weighted average state unemployment tax rate. The cost
of health insurance and related employee benefits increased $12 per worksite
employee over the first six months of 1999 due to a 2.8% 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 to 68.6% in the
2000 period from 67.2% in the 1999 period. Workers' compensation costs increased
$6 per worksite employee per month over the first six months of 1999, and
increased slightly to 1.23% of fee payroll cost in the 2000 period from 1.22% in
the 1999 period.
Gross profit, measured as a percentage of revenue, declined to 3.21% in
the 2000 period from 3.41% in the 1999 period. This decline was due primarily to
the increase in average payroll
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<PAGE> 19
cost per worksite employee. Because payroll cost is the largest single component
of both revenues and direct costs, an increase in the average payroll cost per
worksite employee creates a mathematical downward pressure on the calculation of
gross profit as a percentage of revenue.
OPERATING EXPENSES
The following table presents certain information related to the
Company's operating expenses for the six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
---- ---- -------- ---- ---- --------
(IN THOUSANDS) (PER WORKSITE EMPLOYEE PER MONTH)
<S> <C> <C> <C> <C> <C> <C>
Salaries, wages and payroll taxes $ 24,351 $ 17,626 38.2% $ 71 $ 74 (4.1)%
General and administrative expenses 16,590 10,306 61.0% 48 44 9.1%
Commissions 4,377 2,976 47.1% 13 13 --
Advertising 2,432 1,929 26.1% 7 8 (12.5)%
Depreciation and amortization 5,516 2,898 90.3% 16 12 33.3%
--------- --------- ------ -----
Total operating expenses $ 53,266 $ 35,735 49.1% $ 155 $ 151 2.6%
========= ========= ====== =====
</TABLE>
Operating expenses increased 49.1% over the first six months of 1999,
primarily due to the 45.7% growth in the average number of worksite employees
paid by the Company. Operating expenses per worksite employee increased 2.6% to
$155 per month in the 2000 period versus $151 in the 1999 period. During the
first six months of 2000, the Company's operating expenses continued to be
impacted by several strategic initiatives, including its national sales and
service expansion, the enhancement of its proprietary professional employer
information system, the enhancement of its Internet-based service delivery
platform, Administaff Assistant, and the development and launch of its new
eCommerce portal, bizzport.
Salaries, wages and payroll taxes of corporate and sales staff
decreased to $71 per worksite employee per month in the 2000 period from $74 in
the 1999 period, as corporate and sales staff increased at a rate lower than the
Company's worksite employee growth.
General and administrative expenses increased $4 per worksite employee
per month over the first six months of 1999, primarily due to increased
consulting expenses associated with the Company's technology initiatives and an
increase in the bad debt reserve.
Depreciation and amortization expense increased $4 per worksite
employee per month over the 1999 period as a result of the increased capital
assets placed in service in 2000 and 1999, including (i) the implementation of a
national technology infrastructure; (ii) the implementation of certain new
components of Administaff Assistant, primarily the web payroll and web reporting
capabilities, which included both internal software development costs and
externally purchased software and hardware; (iii) the opening of new sales
offices; (iv) the opening of the Atlanta operations center; and (v) the
expansion of corporate headquarters.
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<PAGE> 20
Commissions expense on a per worksite employee basis was constant in
both periods. Advertising costs declined $1 per worksite employee as efficiency
gains achieved under the American Express Marketing Agreement allowed the
Company to increase its volume of sales leads and appointments with minimal
changes in its advertising strategy.
NET INCOME (LOSS)
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 2000 period was
consistent with the 1999 period.
Operating loss per worksite employee per month improved to $4 in the
2000 period versus $9 in the 1999 period. Net income per worksite employee was
$1 in the 2000 period compared to a loss of $(2) in the 1999 period. The
Company's net income and diluted net income per share for the six months ended
June 30, 2000, was $329,000 and $0.02, versus a loss of $(543,000) and $(0.04)
for the six months ended June 30, 1999.
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 $68.0 million in cash and cash equivalents and
marketable securities at June 30, 2000, of which approximately $38.5 million was
payable in July 2000 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 June 30, 2000, the Company had
working capital of $32.6 million compared to $35.8 million at December 31, 1999.
As of June 30, 2000, the Company had no long-term debt.
CASH FLOWS FROM OPERATING ACTIVITIES
The $26.8 million increase in net cash provided by operating activities
was primarily the result of the timing of payroll tax payments surrounding the
December 31 and June 30 payroll periods of each period. The timing and amounts
of such payments can vary significantly based on
-20-
<PAGE> 21
various factors, including the day of the week on which a period ends and the
existence of holidays on or immediately following a period end.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures during the 2000 period primarily related to
software development, hardware and software costs related to the enhancement of
the Company's proprietary professional employer information system, the
enhancement of Administaff Assistant and the initial development of bizzport. In
addition, capital expenditures included building improvements and furniture and
fixtures related to the expansion of corporate headquarters, service centers and
sales offices to accommodate the Company's growth.
Investments in other companies during the 2000 period include strategic
investments in Virtual Growth, Inc. and eProsper, Inc., which are designed to
add complementary functionality to Administaff's core PEO service.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities during the 2000 period primarily
include proceeds from the exercise of employee stock options.
OTHER MATTERS
During the second quarter of 2000, the Company and American Express
Travel Related Services Company, Inc. ("American Express") amended their
marketing agreement. This amendment expanded the alliance to include more
broad-based marketing and eCommerce initiatives. It also changed the American
Express commission rate and the term of such commission payments.
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 within the meaning of the
federal securities laws (Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934). You can identify such
forward-looking statements by the words "expects," "intends," "plans,"
"projects," "believes,"
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<PAGE> 22
"estimates," and similar expressions. Forward-looking statements 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.
Administaff bases the forward-looking statements on its current expectations,
estimates and projections. Administaff cautions you that these statements are
not guarantees of future performance and involve risks, uncertainties and
assumptions that Administaff cannot predict. In addition, Administaff has based
many of these forward-looking statements on assumptions about future events that
may prove to be inaccurate. 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 estimated costs
and effectiveness of capital projects and investments in technology and
infrastructure; (iv) the Company's ability to effectively implement its
eBusiness strategy; (v) the effectiveness of the Company's sales and marketing
efforts, including the Company's marketing agreements with American Express and
other companies; and (vi) changes in the competitive environment in the PEO
industry, including the entrance of new competitors and the Company's ability to
renew or replace client companies. These factors are discussed in detail in the
Company's 1999 annual report on Form 10-K. 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.
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<PAGE> 23
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any material pending legal proceedings,
other than ordinary routine litigation incidental to its business. The Company
believes that its pending legal proceedings would not have a material adverse
effect on its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
An Annual Meeting of Stockholders of the Company was held on May 2,
2000. At the Meeting, holders of 12,499,880 shares of common stock were present
in person or by proxy, which constituted a quorum thereof. The vote of
stockholders in respect of the two proposals voted on at the Meeting, both of
which were approved, is set forth below:
1. Election of Class II Directors to serve until the Annual
Meeting of Stockholders in 2003.
For Withheld
--- --------
Paul J. Sarvadi 12,337,839 162,041
Steven Alesio 12,164,110 335,770
Directors continuing in office were Richard G. Rawson, Linda
Fayne Levinson and Jack M. Fields, Jr.
2. Ratification of Ernst & Young, LLP as the Company's
independent auditors for the year ending December 31, 2000.
Broker
For Against Abstain Non-Votes
---------- ------- ------- ---------
12,487,293 9,637 2,950 --
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<PAGE> 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
10.1 Second Amendment to the Marketing Agreement between American
Express Travel Related Services Company, Inc., Administaff,
Inc., Administaff Companies, Inc. and Administaff of Texas,
Inc., dated April 11, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
-24-
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Administaff, Inc.
Date: August 11, 2000 By: /s/ Richard G. Rawson
-------------------------------------------
Richard G. Rawson
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: August 11, 2000 By: /s/ Douglas S. Sharp
-------------------------------------------
Douglas S. Sharp
Vice President, Finance
(Principal Accounting Officer)
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<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 Second Amendment to the Marketing Agreement between American
Express Travel Related Services Company, Inc., Administaff,
Inc., Administaff Companies, Inc. and Administaff of Texas,
Inc., dated April 11, 2000.
27 Financial Data Schedule
</TABLE>
