<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, 2000.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
--------- ---------
Commission File No. 1-13998
ADMINISTAFF, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 76-0479645
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19001 Crescent Springs Drive
Kingwood, Texas 77339
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(Registrant's Telephone Number, Including Area Code): (281) 358-8986
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of October 31, 2000, 27,443,849 shares of the registrant's common
stock, par value $0.01 per share, were outstanding.
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<PAGE> 2
TABLE OF CONTENTS
PART I
<TABLE>
<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 6. Exhibits and Reports on Form 8-K................................ 23
</TABLE>
<PAGE> 3
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents .................. $ 47,244 $ 25,451
Marketable securities ...................... 32,632 30,717
Accounts receivable:
Trade ................................... 2,409 1,578
Unbilled ................................ 51,989 31,286
Other ................................... 1,133 1,342
Prepaid expenses ........................... 7,760 8,332
Deferred income taxes ...................... 273 --
--------- ---------
Total current assets ................. 143,440 98,706
Property and equipment:
Land ....................................... 2,920 2,920
Buildings and improvements ................. 12,571 11,222
Computer hardware and software ............. 26,640 22,232
Software development costs ................. 10,953 6,951
Furniture and fixtures ..................... 16,774 13,886
Vehicles ................................... 1,699 1,386
--------- ---------
71,557 58,597
Accumulated depreciation ................... (22,444) (14,223)
--------- ---------
Total property and equipment ......... 49,113 44,374
Other assets:
Notes receivable from employees ............ 994 994
Other assets ............................... 8,519 3,624
--------- ---------
Total other assets ................... 9,513 4,618
--------- ---------
Total assets ......................... $ 202,066 $ 147,698
========= =========
</TABLE>
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<PAGE> 4
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Accounts payable ........................................... $ 3,212 $ 2,787
Payroll taxes and other payroll deductions payable ......... 35,841 21,518
Accrued worksite employee payroll expense .................. 51,601 31,367
Other accrued liabilities .................................. 9,207 5,737
Income taxes payable ....................................... 2,586 1,364
Deferred income taxes ...................................... -- 141
--------- ---------
Total current liabilities ............................ 102,447 62,914
Deferred income taxes ......................................... 6,372 4,316
Commitments and contingencies
Stockholders' equity:
Common stock ............................................... 304 298
Additional paid-in capital ................................. 70,075 65,210
Treasury stock, at cost .................................... (18,067) (18,072)
Accumulated other comprehensive loss ....................... (56) (218)
Retained earnings .......................................... 40,991 33,250
--------- ---------
Total stockholders' equity ........................... 93,247 80,468
--------- ---------
Total liabilities and stockholders' equity ........... $ 202,066 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ............................................. $ 962,039 $ 562,812 $2,582,034 $1,544,348
Direct costs:
Salaries and wages of worksite employees .......... 804,525 466,409 2,156,446 1,281,094
Benefits and payroll taxes ........................ 117,447 70,212 333,474 203,589
---------- ---------- ---------- ----------
Gross profit ......................................... 40,067 26,191 92,114 59,665
Operating expenses:
Salaries, wages and payroll taxes ................. 13,905 9,223 38,256 26,849
General and administrative expenses ............... 9,022 6,152 25,612 16,458
Commissions ....................................... 2,331 1,678 6,708 4,654
Advertising ....................................... 1,249 932 3,681 2,861
Depreciation and amortization ..................... 2,987 1,817 8,503 4,715
---------- ---------- ---------- ----------
29,494 19,802 82,760 55,537
---------- ---------- ---------- ----------
Operating income ..................................... 10,573 6,389 9,354 4,128
Other income (expense):
Interest income ................................... 1,107 568 2,837 1,883
Other, net ........................................ (3) 7 4 92
---------- ---------- ---------- ----------
1,104 575 2,841 1,975
---------- ---------- ---------- ----------
Income before income taxes ........................... 11,677 6,964 12,195 6,103
Income tax expense ................................... 4,262 2,577 4,451 2,259
---------- ---------- ---------- ----------
Net income ........................................... $ 7,415 $ 4,387 $ 7,744 $ 3,844
========== ========== ========== ==========
Basic net income per share of common stock ........... $ 0.27 $ 0.16 $ 0.29 $ 0.14
========== ========== ========== ==========
Diluted net income per share of common stock ......... $ 0.25 $ 0.16 $ 0.27 $ 0.14
========== ========== ========== ==========
</TABLE>
See accompanying notes.
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<PAGE> 6
ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 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 29,818 $ 298 $ 65,210 $(18,072) $ (218) $ 33,250 $ 80,468
Exercise of stock options 536 6 4,718 -- -- (3) 4,721
Sale of common stock
put warrant -- -- 125 -- -- -- 125
Other -- -- 22 5 -- -- 27
Change in unrealized loss
on marketable securities -- -- -- -- 162 -- 162
Net income -- -- -- -- -- 7,744 7,744
--------
Comprehensive income 7,906
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2000 30,354 $ 304 $ 70,075 $(18,067) $ (56) $ 40,991 $ 93,247
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
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<PAGE> 7
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 7,744 $ 3,844
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ................................... 8,558 5,088
Bad debt expense ................................................ 1,306 545
Deferred income taxes ........................................... 1,643 1,270
Loss (gain) on the disposition of assets ........................ 46 (83)
Changes in operating assets and liabilities:
Accounts receivable ............................................ (22,631) (12,545)
Prepaid expenses ............................................... 572 (3,778)
Other assets ................................................... 698 117
Accounts payable ............................................... 426 (1,638)
Payroll taxes and other payroll deductions payable ............. 14,322 (9,712)
Accrued worksite employee payroll expense ...................... 20,234 24,020
Other accrued liabilities ...................................... 3,469 3,303
Income taxes payable/receivable ................................ 1,222 650
-------- --------
Total adjustments ............................................ 29,865 7,237
-------- --------
Net cash provided by operating activities .................... 37,609 11,081
Cash flows from investing activities:
Marketable securities:
Purchases ...................................................... (17,240) (13,439)
Proceeds from dispositions ..................................... 15,416 31,517
Property and equipment:
Purchases ...................................................... (9,376) (11,019)
Proceeds from dispositions ..................................... 147 68
Investment in software development costs ............................ (4,002) (3,975)
Investment in other companies ....................................... (5,634) --
-------- --------
Net cash provided by (used in) investing activities .......... (20,689) 3,152
</TABLE>
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from the exercise of stock options ....................... $ 4,721 $ 313
Purchase of treasury stock ........................................ -- (16,132)
Proceeds from the sale of common stock put warrant ................ 125 119
Loans to employees ................................................ -- 137
Other ............................................................. 27 69
-------- --------
Net cash provided by (used in) financing activities ......... 4,873 (15,494)
-------- --------
Net increase (decrease) in cash and cash equivalents ................. 21,793 (1,261)
Cash and cash equivalents at beginning of period ..................... 25,451 23,521
-------- --------
Cash and cash equivalents at end of period ........................... $ 47,244 $ 22,260
======== ========
</TABLE>
See accompanying notes.
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<PAGE> 9
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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
nine months ended September 30, 2000 and 1999, revenues from the Company's Texas
markets represented 50.8% 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, 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 September 30, 2000, and the consolidated
statements of operations, cash flows and stockholders' equity for the interim
periods ended September 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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<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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. STOCKHOLDERS' EQUITY
On October 16, 2000, the Company effected a two-for-one stock split of
its common stock in the form of a 100% stock dividend. All share and per share
amounts presented in these financial statements have been retroactively restated
to reflect this change in the Company's capital structure.
4. 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,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic net income per share -
weighted average shares outstanding ............................. 27,295 27,094 27,099 27,668
Effect of dilutive securities:
Common stock purchase warrants -
treasury stock method ......................................... 773 -- 313 --
Common stock options - treasury stock method .................... 1,712 76 1,300 80
------ ------ ------ ------
2,485 76 1,613 80
------ ------ ------ ------
Diluted net income per share - weighted average
shares outstanding plus effect of dilutive securities ........... 29,780 27,170 28,712 27,748
====== ====== ====== ======
Potentially dilutive securities not included in weighted
average share calculation due to anti-dilutive effect ........... 1,130 5,094 2,720 5,397
====== ====== ====== ======
</TABLE>
5. MARKETABLE SECURITIES
At September 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.
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<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits and claims arising in
the normal course of business. Management believes it has valid defenses in
these cases and is defending them vigorously. While the results of litigation
cannot be predicted with certainty, management believes the final outcome of
such litigation will not have a material adverse effect on the Company's
financial position or results of operations.
The Company's 401(k) plan is currently under audit by the Internal
Revenue Service (the "IRS") for the year ended December 31, 1993. Although the
audit is for the 1993 plan year, certain conclusions of the IRS could be
applicable to other years as well. In addition, the IRS has established an
Employee Leasing Market Segment Group (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
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<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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 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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<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the 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 SEPTEMBER 30, 2000 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, 2000
and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------ %
2000 1999 CHANGE
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C>
Revenues .................................................... $962,039 $562,812 70.9%
Gross profit ................................................ 40,067 26,191 53.0%
Operating expenses .......................................... 29,494 19,802 48.9%
Operating income ............................................ 10,573 6,389 65.5%
Other income ................................................ 1,104 575 92.0%
Net income .................................................. 7,415 4,387 69.0%
Diluted net income per share of common stock ................ 0.25 0.16 56.3%
STATISTICAL DATA:
Average number of worksite employees paid per month ......... 65,722 43,855 49.9%
Fee revenue per worksite employee per month ................. $ 4,655 $ 4,090 13.8%
Fee payroll cost per worksite employee per month ............ 3,865 3,366 14.8%
Gross markup per worksite employee per month ................ 790 724 9.1%
Gross profit per worksite employee per month ................ 203 199 2.0%
Operating expenses per worksite employee per month .......... 150 151 (0.7)%
Operating income per worksite employee per month ............ 54 48 12.5%
Net income per worksite employee per month .................. 38 33 15.2%
</TABLE>
REVENUES
The Company's revenues for the three months ended September 30, 2000
increased 70.9% over the same period in 1999 due to a 49.9% increase in the
average number of worksite employees paid per month, accompanied by a 13.8%
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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<PAGE> 14
Revenues from markets opened prior to 1993 (the commencement of the
Company's national expansion plan) increased 33% over the third quarter of 1999,
while revenues from markets opened after 1993 increased 109%. For the three
months ended September 30, 2000, revenues from the state of Texas represented
49% of the Company's total revenues and Houston, the Company's original market,
represented 26% of the total.
The 13.8% increase in fee revenue per worksite employee per month
directly related to the 14.8% 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 third quarter of 2000 increased 53.0% over the
third quarter of 1999, primarily due to the 49.9% increase in the average number
of worksite employees paid per month accompanied by a 2.0% increase in gross
profit per worksite employee per month. Gross profit per worksite employee
increased to $203 per month in the 2000 period from $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.
The year-over-year growth rate in gross profit per worksite employee
per month slowed during the third quarter of 2000 compared to the previous two
quarters primarily because of the Company's rapid growth in worksite employees
and its resulting impact on payroll tax expense. Because payroll taxes are based
on each employee's cumulative earnings up to specified wage levels, significant
worksite employee growth during the latter half of the year has resulted in
increased payroll taxes associated with these new worksite employees and a
corresponding reduction in gross profit per worksite employee. As these
employees reach their payroll tax wage limits, payroll tax expense and gross
profit per employee are expected to return to historical trends. See
"Seasonality, Inflation and Quarterly Fluctuations" on p.21 for a more detailed
discussion of the impact of payroll taxes on the Company's financial results.
Gross markup per worksite employee per month increased 9.1% to $790 in
the 2000 period versus $724 in the 1999 period. Approximately 61% of the $66
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.
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<PAGE> 15
The Company's primary direct costs, which include payroll taxes,
benefits and workers' compensation expenses, increased 11.7% to $584 per
worksite employee per month in the 2000 period versus $523 in the 1999 period.
Payroll taxes increased $40 per worksite employee per month over the third
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 7.08% in the 2000 period from 7.02% in the 1999 period due
primarily to the significant growth in paid worksite employees during the year.
The cost of health insurance and related employee benefits increased $15 per
worksite employee over the third quarter of 1999 due to a 2.6% 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 69.6% in the
2000 period from 67.0% in the 1999 period. Workers' compensation costs increased
$6 per worksite employee per month over the third quarter of 1999, and remained
constant at 1.19% of fee payroll cost in both periods.
Gross profit, measured as a percentage of revenue, declined to 4.16% in
the 2000 period from 4.65% 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 September 30, 2000 and
1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 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 $13,905 $ 9,223 50.8% $ 71 $ 70 1.4%
General and administrative expenses 9,022 6,152 46.7% 46 47 (2.1)%
Commissions 2,331 1,678 38.9% 12 13 (7.7)%
Advertising 1,249 932 34.0% 6 7 (14.3)%
Depreciation and amortization 2,987 1,817 64.4% 15 14 7.1%
------- ------- ------- -------
Total operating expenses $29,494 $19,802 48.9% $ 150 $ 151 (0.7)%
======= ======= ======= =======
</TABLE>
Operating expenses increased 48.9% over the third quarter of 1999,
primarily due to the 49.9% growth in the average number of worksite employees
paid by the Company. Operating expenses per worksite employee decreased 0.7% to
$150 per month in the 2000 period versus $151 in the 1999 period. During the
third 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.
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<PAGE> 16
Salaries, wages and payroll taxes of corporate and sales staff
increased to $71 per worksite employee per month in the 2000 period from $70 in
the 1999 period. Corporate and sales staff increased at a rate lower than the
Company's worksite employee growth, but increased incentive compensation expense
more than offset this decrease.
General and administrative expenses decreased to $46 per worksite
employee per month from $47 in the third quarter of 1999, as reductions in legal
fees, repairs and maintenance costs and bad debt expenses were partially offset
by increased human resources expenses, consulting fees and travel expenses.
Depreciation and amortization expense increased $1 per worksite
employee per month over the 1999 period as a result of the increased capital
assets placed in service in 2000 and late 1999, including (i) 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; (ii) the
opening of new sales offices; (iii) the expansion of the Atlanta operations
center and opening of the Houston operations center; and (iv) the expansion of
corporate headquarters.
Commissions expense decreased by $1 per worksite employee per month
from the 1999 period due to reduced sales agency commissions. Advertising costs
also decreased $1 per month on a per worksite employee basis versus the third
quarter of 1999 because the Company's rapid growth has outpaced the Company's
advertising plan in new and existing markets.
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 $54 and $38 in the 2000 period, versus $48 and $33 in the 1999
period. The Company's net income and diluted net income per share for the
quarter ended September 30, 2000, increased to $7.4 million and $0.25, versus
$4.4 million and $0.16 for the quarter ended September 30, 1999.
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<PAGE> 17
NINE MONTHS ENDED SEPTEMBER 30, 2000 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, 2000 and
1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------- %
2000 1999 CHANGE
------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C>
Revenues .................................................... $2,582,034 $1,544,348 67.2%
Gross profit ................................................ 92,114 59,665 54.4%
Operating expenses .......................................... 82,760 55,537 49.0%
Operating income ............................................ 9,354 4,128 126.6%
Other income ................................................ 2,841 1,975 43.8%
Net income .................................................. 7,744 3,844 101.5%
Diluted net income per share of common stock ................ 0.27 0.14 92.9%
STATISTICAL DATA:
Average number of worksite employees paid per month ......... 60,184 40,883 47.2%
Fee revenue per worksite employee per month ................. $ 4,526 $ 4,003 13.1%
Fee payroll cost per worksite employee per month ............ 3,750 3,296 13.8%
Gross markup per worksite employee per month ................ 776 707 9.8%
Gross profit per worksite employee per month ................ 170 162 4.9%
Operating expenses per worksite employee per month .......... 153 151 1.3%
Operating income per worksite employee per month ............ 17 11 54.5%
Net income per worksite employee per month .................. 14 10 40.0%
</TABLE>
REVENUES
The Company's revenues for the nine months ended September 30, 2000
increased 67.2% over the same period in 1999 due to a 47.2% increase in the
average number of worksite employees paid per month, accompanied by a 13.1%
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 30% over the first nine months of
1999, while revenues from markets opened after 1993 increased 108%. For the nine
months ended September 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 13.1% increase in fee revenue per worksite employee per month
directly related to the 13.8% 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 nine months of 2000 increased 54.4% over the
first nine months of 1999, primarily due to the 47.2% increase in the average
number of worksite employees paid per month accompanied by a 4.9% increase in
gross profit per worksite employee per month. Gross profit per worksite employee
increased to $170 per month in the 2000 period from $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.
Gross markup per worksite employee per month increased 9.8% to $776 in
the 2000 period versus $707 in the 1999 period. Approximately 52% of the $69
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 $604 per
worksite employee per month in the 2000 period versus $543 in the 1999 period.
Payroll taxes increased $42 per worksite employee per month over the first nine
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 7.78% in the 2000 period from 7.69% 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 $13 per worksite
employee over the first nine months of 1999 due to a 2.7% 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 to 68.9% in the
2000 period from 67.1% in the 1999 period. Workers' compensation costs increased
$6 per worksite employee per month over the first nine months of 1999, and
remained constant at 1.21% of fee payroll cost in the both periods.
Gross profit, measured as a percentage of revenue, declined to 3.57% in
the 2000 period from 3.86% 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
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<PAGE> 19
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 nine months ended September 30, 2000 and
1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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 $38,256 $26,849 42.5% $ 71 $ 73 (2.7)%
General and administrative expenses 25,612 16,458 55.6% 47 45 4.4%
Commissions 6,708 4,654 44.1% 12 12 --
Advertising 3,681 2,861 28.7% 7 8 (12.5)%
Depreciation and amortization 8,503 4,715 80.3% 16 13 23.1%
------- ------- ------- -------
Total operating expenses $82,760 $55,537 49.0% $ 153 $ 151 1.3%
======= ======= ======= =======
</TABLE>
Operating expenses increased 49.0% over the first nine months of 1999,
primarily due to the 47.2% growth in the average number of worksite employees
paid by the Company. Operating expenses per worksite employee increased 1.3% to
$153 per month in the 2000 period versus $151 in the 1999 period. During the
first nine 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 $73 in
the 1999 period, as corporate and sales staff increased at a rate lower than the
Company's worksite employee growth. This decrease was partially offset by
increased incentive compensation expense.
General and administrative expenses increased $2 per worksite employee
per month over the first nine months 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 associated with
the Company's national expansion.
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
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<PAGE> 20
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 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
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 per worksite employee per month improved to $17 in the
2000 period versus $11 in the 1999 period. Net income per worksite employee was
$14 in the 2000 period compared to $10 in the 1999 period. The Company's net
income and diluted net income per share for the nine months ended September 30,
2000, were $7.7 million and $0.27, versus $3.8 and $0.14 for the nine months
ended September 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 $79.9 million in cash and cash equivalents and
marketable securities at September 30, 2000, of which approximately $35.8
million was payable in October 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 September 30, 2000, the Company
had working capital of $41.0 million compared to $35.8 million at December 31,
1999. As of September 30, 2000, the Company had no long-term debt.
-20-
<PAGE> 21
CASH FLOWS FROM OPERATING ACTIVITIES
The $26.5 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 September 30 payroll periods of each period. The timing and
amounts of such payments can vary significantly based on 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. In addition, net income as
adjusted for non-cash items increased by $8.6 million. These increases were
partially offset by an $8 million decrease in customer prepayments of accounts
receivable that also fluctuate significantly depending on the day of the week on
which a period ends.
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.
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.
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<PAGE> 22
FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE MARKET PRICE OF COMMON STOCK
The statements contained herein 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," "estimates,"
"likely," "goal," and "assume," 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, unit growth, profit per worksite
employee, pricing, operating expenses 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On September 27, 2000, the Company filed a report on Form 8-K
which announced a two-for-one stock split in the form of a 100% stock
dividend.
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<PAGE> 24
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 14, 2000 By: /s/ Richard G. Rawson
-----------------------------------
Richard G. Rawson
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 2000 By: /s/ Douglas S. Sharp
-----------------------------------
Douglas S. Sharp
Vice President, Finance
(Principal Accounting Officer)
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
