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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1998.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee required]
For the transition period from ______________ to ______________
Commission File No. 1-13998
Administaff, Inc.
(Exact name of registrant as specified in its charter)
Delaware 76-0479645
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19001 Crescent Springs Drive
Kingwood, Texas 77339
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(Registrant's Telephone Number, Including Area Code): (281) 358-8986
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares outstanding of each of the issuer's classes of common
stock, as of May 4, 1998: 14,467,691 shares.
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TABLE OF CONTENTS
PART I
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 14
PART II
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 20
3
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 40,561 $ 41,295
Marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 26,012 27,780
Accounts receivable:
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,324 837
Unbilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,371 26,834
Related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 149
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,208 872
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,585 1,480
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . -- 596
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 199 275
------------ -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 89,423 100,118
Property and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817 817
Buildings and improvements. . . . . . . . . . . . . . . . . . . . . . . . . 7,557 7,721
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,219 7,780
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . 6,342 6,919
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950 1,095
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . -- 44
------------ -----------
21,885 24,376
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (5,214) (5,949)
------------ -----------
Total property and equipment . . . . . . . . . . . . . . . . . . . . 16,671 18,427
Other assets:
Notes receivable from employees . . . . . . . . . . . . . . . . . . . . . 1,181 1,201
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822 1,128
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,358 1,334
------------ -----------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . 3,361 3,663
------------ -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 109,455 $ 122,208
============ ===========
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ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,421 $ 1,205
Payroll taxes and other payroll deductions payable . . . . . . . . . . . 19,190 12,822
Accrued worksite employee payroll expense . . . . . . . . . . . . . . . 18,153 26,836
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 3,319 2,659
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 729 --
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 42,812 43,522
Noncurrent liabilities:
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,558 2,558
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 322 492
------------ ------------
Total noncurrent liabilities . . . . . . . . . . . . . . . . . . . 2,880 3,050
Commitments and contingencies
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 148
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 50,670 63,249
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . (1,998) (1,983)
Unrealized gain on marketable securities. . . . . . . . . . . . . . . . . 31 46
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,918 14,176
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 63,763 75,636
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . $ 109,455 $ 122,208
============ ============
See accompanying notes.
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1997 1998
---------- ----------
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 262,200 $ 362,396
Direct costs:
Salaries and wages of worksite employees . . . . . . . . . . . . . . . . 215,659 299,522
Benefits and payroll taxes . . . . . . . . . . . . . . . . . . . . . . . 37,751 51,701
---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,790 11,173
Operating expenses:
Salaries, wages and payroll taxes . . . . . . . . . . . . . . . . . . . 4,198 6,306
General and administrative expenses . . . . . . . . . . . . . . . . . . 2,589 3,931
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,024 1,357
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 796 854
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 461 773
---------- ----------
9,068 13,221
---------- ----------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (278) (2,048)
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 590 812
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . (321) --
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) 10
---------- ----------
266 822
---------- ----------
Loss before income tax benefit . . . . . . . . . . . . . . . . . . . . . . (12) (1,226)
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 484
---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7) $ (742)
========== ==========
Basic and diluted net loss per share of common stock . . . . . . . . . . . $ 0.00 $ (0.05)
========== ==========
See accompanying notes.
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
COMMON STOCK UNREALIZED
ISSUED ADDITIONAL GAIN ON
---------------- PAID-IN TREASURY MARKETABLE RETAINED
SHARES AMOUNT CAPITAL STOCK SECURITIES EARNINGS TOTAL
------ ------ ------- ----- ---------- -------- -----
Balance at December 31, 1997 14,221 $ 142 $ 50,670 $ (1,998) $ 31 $ 14,918 $ 63,763
Purchase of treasury stock, at cost -- -- -- (6,101) -- -- (6,101)
Sale of units consisting of common
stock and common stock purchase
warrants, net of issuance costs
of $85 400 4 11,529 6,116 -- -- 17,649
Exercise of common stock
purchase warrants 141 1 634 -- -- -- 635
Exercise of stock options 50 1 416 -- -- -- 417
Unrealized gain on
marketable securities -- -- -- -- 15 -- 15
Net loss -- -- -- -- -- (742) (742)
------- ------ --------- --------- ------- --------- --------
Balance at March 31, 1998 14,812 $ 148 $ 63,249 $ (1,983) $ 46 $ 14,176 $75,636
======= ====== ========= ========= ======= ========= ========
See accompanying notes.
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1997 1998
-------- --------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7) $ (742)
Adjustments to reconcile net loss to net cash
used in operating activities :
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 730 858
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 190
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . (309) 95
Gain on the disposition of assets . . . . . . . . . . . . . . . . . . -- (5)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . (3,335) (7,815)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . (107) 105
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 21
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 1,115 (216)
Payroll taxes and other payroll deductions payable . . . . . . . . . (2,278) (6,370)
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 3,279 8,023
Income taxes payable/receivable . . . . . . . . . . . . . . . . . . . (82) (1,325)
-------- --------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . (861) (6,439)
-------- --------
Net cash used in operating activities . . . . . . . . . . . . . . (868) (7,181)
Cash flows from investing activities:
Marketable securities:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,469) (5,510)
Proceeds from dispositions . . . . . . . . . . . . . . . . . . . . . . 1,495 3,697
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . (1,181) (2,490)
Increases in intangible assets . . . . . . . . . . . . . . . . . . . . . . (77) (362)
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . (20,232) (4,665)
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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1997 1998
--------- -----------
Cash flows from financing activities:
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . $ (4,603) $ --
Proceeds from the sale of units consisting of common stock
and common stock purchase warrants . . . . . . . . . . . . . . . . . . . 47,430 17,649
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . (1,999) (6,101)
Repurchase of common stock purchase warrants . . . . . . . . . . . . . . . (542) --
Prepaid expenses - initial public offering costs . . . . . . . . . . . . . (22) --
Proceeds from the exercise of stock options . . . . . . . . . . . . . . . . 11 417
Proceeds from the exercise of common stock
purchase warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 635
Loans to employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19) (20)
--------- ----------
Net cash provided by financing activities . . . . . . . . . . . . . 40,304 12,580
--------- ----------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . 19,204 734
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . 13,360 40,561
--------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . $ 32,564 $ 41,295
========= ==========
See accompanying notes.
- 8 -
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ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
1. BASIS OF PRESENTATION
Administaff, Inc. ("the Company") is a professional employer organization
("PEO") that provides a comprehensive Personnel Management System which
encompasses a broad range of services, including benefits and payroll
administration, medical and workers' compensation insurance programs, personnel
records management, employer liability management, recruiting and selection,
performance management, and training and development services to small and
medium-sized businesses in several strategically selected markets. The Company
operates primarily in the state of Texas.
The consolidated financial statements include the accounts of Administaff,
Inc., and its wholly owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The consolidated balance sheet at December 31, 1997 has been derived
from the audited financial statements at that date but does not include all of
the information or footnotes required by generally accepted accounting
principles for complete financial statements. The Company's consolidated
balance sheet at March 31, 1998 and the consolidated statements of operations,
cash flows and stockholders' equity for the interim periods ended March 31,
1998 and 1997 have been prepared by the Company without audit. In the opinion
of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows have been made. The results of operations
for the interim periods are not necessarily indicative of the operating results
for a full year or of future operations. Historically, the Company's earnings
pattern has included losses in the first quarter, followed by improved
profitability in subsequent quarters throughout the year. This pattern is due
to the effects of employment-related taxes which are based on each employee's
cumulative earnings up to specified wage levels, causing employment-related
taxes to be largest in the first quarter and then decline over the course of
the year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31, 1997.
- 9 -
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2. NET LOSS PER SHARE
The numerator and denominator used in the calculations of both basic and
diluted net loss per share were net loss and the weighted average shares
outstanding, respectively. The weighted average shares outstanding for the
three months ended March 31, 1997 and 1998 were 12,478,000 and 14,021,000,
respectively. Had the Company incurred net income during the three months
ended March 31, 1997 or 1998, the denominator used in the calculation of
diluted earnings per share would have been 749,000 and 366,000 higher,
respectively, reflecting the dilutive effects of outstanding common stock
purchase warrants and stock options.
3. STOCKHOLDERS' EQUITY
In March 1998, the Company completed a Securities Purchase Agreement with
American Express Travel Related Services Company, Inc. ("American Express")
whereby the Company sold units consisting of 693,126 shares of its common stock
(293,126 shares from Treasury Stock) and common stock purchase warrants for an
additional 2,065,515 shares of common stock to American Express for a total
purchase price of $17.7 million. The common stock purchase warrants have prices
ranging from $40 to $80 per share and terms ranging from three to seven years.
In January 1998, a third party warrant holder exercised warrants to
purchase 140,508 shares of common stock at a price of $4.52 per share. The
Company then repurchased the shares from the warrant holder at a price of $21
per share.
In March 1998 and prior to the closing of the transaction with American
Express, the Company completed the repurchase of 150,000 shares of common stock
from three stockholders for $21 per share. The three stockholders included two
former officers of the Company and a current director of the Company.
4. MARKETING AGREEMENT
In conjunction with the Securities Purchase Agreement with American
Express, the Company entered into a Marketing Agreement with American Express
to jointly market the Company's services to American Express's substantial
small business customer base across the country. Under the Marketing
Agreement, American Express will utilize its resources to generate
appointments with prospects for the Company's services. In addition, the
Company and American Express will work to jointly develop product offerings
that enhance the current PEO services offered by the Company. The Marketing
Agreement has a seven year term and provides that the Company will be the
exclusive PEO partner of American Express for the first three years. The
Company will pay a commission to American Express based upon the number of
worksite employees paid after being referred to the Company pursuant to the
Marketing Agreement.
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5. MARKETABLE SECURITIES
At March 31, 1998, the Company's marketable securities consisted of debt
securities issued by corporate and governmental entities, with contractual
maturities ranging from 91 days to two years from the date of purchase. All of
the Company's investments in marketable securities are classified as
available-for-sale and are carried at fair market value with unrealized gains
and losses recorded as a component of stockholders' equity.
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 would be applicable
to other years as well. In addition, the IRS has established an Employee
Leasing Market Segment Group for the purpose of identifying specific compliance
issues prevalent in certain segments of the PEO industry. Approximately 70
PEOs, including the Company, have been randomly selected by the IRS for audit
pursuant to this program. One issue that has arisen from these audits is
whether a PEO can be a co-employer of worksite employees, including officers
and owners of client companies, for various purposes under the Internal Revenue
Code of 1986, as amended (the "Code"), including participation in the PEO's
401(k) plan. With respect to the 401(k) Plan audit, the IRS Houston District
has sought technical advice (the "Technical Advice Request") from the IRS
National Office about (1) whether participation in the 401(k) Plan by worksite
employees, including officers of client companies, violates the exclusive
benefit rule under the Code because they are not employees of the Company, and
(2) whether the 401(k) Plan's failure to satisfy a nondiscrimination test
relating to contributions should result in disqualification of the 401(k) Plan
because the Company has failed to provide evidence that it satisfies an
alternative nondiscrimination test. A copy of the Technical Advice Request and
the Company's response have been sent to the IRS National Office for review.
The Technical Advice Request contains the conclusions of the IRS Houston
District with respect to the 1993 plan year that the 401(k) Plan should be
disqualified because it (1) covers worksite employees who are not employees of
the Company, and (2) failed a nondiscrimination test applicable to
contributions and the Company has not furnished evidence that the 401(k) Plan
satisfies an alternative test. The Company's response refutes the conclusions
of the IRS Houston District. The Company also understands that, with respect
to the Market Segment Group study, the issue of whether a PEO and a client
company may be treated as co-employers of worksite employees for certain
federal tax purposes (the "Industry Issue") has been referred to the IRS
National Office.
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Whether the National Office will address the Technical Advice Request
independently of the Industry Issue is unclear. Should the IRS conclude that
the Company is not a "co-employer" of worksite employees for purposes of the
Code, worksite employees could not continue to make salary deferral
contributions to the 401(k) Plan or pursuant to the Company's cafeteria plan or
continue to participate in certain other employee benefit plans of the Company.
The Company believes that, although unfavorable to the Company, a prospective
application of such a conclusion (that is, one applicable only to periods after
the conclusion by the IRS is finalized) would not have a material adverse
effect on its financial position or results of operations, as the Company could
continue to make available comparable benefit programs to its client companies
at comparable costs to the Company. However, if the IRS National Office adopts
the conclusions of the IRS Houston District set forth in the Technical Advice
Request and any such conclusions were applied retroactively to disqualify the
401(k) Plan for 1993 and subsequent years, employees' vested account balances
under the 401(k) Plan would become taxable, the Company would lose its tax
deductions to the extent its matching contributions were not vested, the 401(k)
Plan's trust would become a taxable trust and the Company would be subject to
liability with respect to its failure to withhold applicable taxes with respect
to certain contributions and trust earnings. Further, the Company would be
subject to liability, including penalties, with respect to its cafeteria plan
for the failure to withhold and pay taxes applicable to salary deferral
contributions by employees, including worksite employees. In such a scenario,
the Company also would face the risk of client dissatisfaction and potential
litigation. While the Company is not able to predict either the timing or the
nature of any final decision that may be reached with respect to the 401(k)
Plan audit or with respect to the Technical Advice Request or the Market
Segment Group study and the ultimate outcome of such decisions, the Company
believes that a retroactive application of an unfavorable determination is
unlikely. The Company also believes that a prospective application of an
unfavorable determination will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
In addition to the 401(k) Plan audit and Market Segment Group study, the
Company notified the IRS of certain operational issues concerning
nondiscrimination test results for certain prior plan years. In 1991 the
Company engaged a third party vendor to be the 401(k) Plan's record keeper and
to perform certain required annual nondiscrimination tests for the 401(k) Plan.
Each year such record keeper reported to the Company that such
nondiscrimination tests had been satisfied. However, in August 1996 the 401(k)
Plan's record keeper advised the Company that certain of these tests had been
performed incorrectly for prior years and, in fact, that the 401(k) Plan had
failed certain tests for the 1993, 1994 and 1995 plan years. The Company has
subsequently determined that the 401(k) Plan also failed a nondiscrimination
test for 1991 and 1992, closed years for tax purposes. At the time the Company
received such notice, the period in which the Company could voluntarily "cure"
this operational defect had lapsed for all such years except 1995.
With respect to the 1995 plan year, the Company has caused the 401(k) Plan
to refund the required excess contributions and earnings thereon to the
affected employees. In connection with this correction, the Company paid
approximately $47,000 for an excise tax applicable to this plan year. With
respect to all other plan years, the Company has proposed a corrective action
to the IRS
- 12 -
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under which the Company would make additional contributions to certain plan
participants which bring the plan into compliance with the nondiscrimination
tests.
During 1996, the Company recorded an accrual for its estimate of the cost
of corrective measures and penalties for all of the affected plan years, which
accrual is reflected in Other accrued liabilities - noncurrent on the
Consolidated Balance Sheets. The Company calculated its estimates based on its
understanding of the resolution of similar issues with the IRS. Separate
calculations were made to determine the Company's estimate of both the cost of
corrective measures and penalties for each plan year. In addition, at the same
time, the Company recorded an asset for an amount recoverable from the 401(k)
Plan's record keeper should the Company ultimately be required to pay the
amount accrued for such corrective measures and penalties, which amount is
reflected in Other assets on the Consolidated Balance Sheets. The amount of
the accrual is the Company's estimate of the cost of corrective measures and
practices, although no assurance can be given that the actual amount that the
Company may be ultimately required to pay will not substantially exceed the
amount accrued. There has been no change in the amounts of the accrual or the
amount recoverable from the record keeper subsequent to December 31, 1997.
Based on its understanding of the settlement experience of other companies with
the IRS, the Company does not believe the ultimate resolution of this 401(k)
Plan matter will have a material adverse effect on the Company's financial
condition or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998.
The following table presents certain information related to the Company's
results of operations for the three months ended March 31, 1997 and 1998. The
following discussion should be read in conjunction with the 1997 annual report
on Form 10-K as well as with the consolidated financial statements and notes
thereto included in this quarterly report on Form 10-Q.
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1998 CHANGE
--------- --------- ------
(OPERATING RESULTS IN THOUSANDS)
OPERATING RESULTS:
Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 262,200 $ 362,396 38.2%
Gross profit . . . . . . . . . . . . . . . . . . . . . 8,790 11,173 27.1%
Gross profit margin . . . . . . . . . . . . . . . . . 3.4% 3.1%
Operating loss . . . . . . . . . . . . . . . . . . . . (278) (2,048) NM
STATISTICAL DATA:
Monthly revenue per worksite employee . . . . . . . . 3,326 3,639 9.4%
Monthly payroll cost per worksite employee . . . . . . 2,710 2,982 10.0%
Monthly gross markup per worksite employee . . . . . . 616 657 6.7%
Average number of worksite employees paid
per month during period . . . . . . . . . . . . . . 25,026 31,512 25.9%
- -------------------------
NM - Not meaningful
REVENUES
The Company's revenues for the three months ended March 31, 1998
increased 38.2% over the same period in 1997 due to an increase in worksite
employees paid accompanied by an increase in the revenue per employee. The
Company's expansion of its sales force through new market and sales office
openings over the past five years is the primary factor contributing to the
increased number of worksite employees. Revenues from markets opened prior to
1993 (the commencement of the Company's national expansion plan) increased by
24% over the first quarter of 1997, while revenues from markets opened after
1993 increased by 68%. The Company expects continued growth in the number of
worksite employees during the remainder of 1998 versus 1997 due to the effect
of sales in existing markets and the Company's national expansion plan.
- 14 -
15
The increase in revenue per employee of 9.4% directly relates to the
increase in payroll cost per employee of 10.0%. This increase reflects the
continuing effects of the net addition, through the Company's sales efforts, of
clients with worksite employees that have higher average base pay than the
existing client base and through the penetration of markets with generally
higher wage levels, such as Los Angeles, Chicago and Washington, D.C. In
addition, wage inflation within the Company's existing worksite employee base
has contributed to the increase in payroll cost per worksite employee.
GROSS PROFIT
The Company's gross profit for the first quarter of 1998 increased by
27.1% over the first quarter of 1997, while the gross profit margin decreased
from 3.4% in the 1997 period to 3.1% in the 1998 period. The primary factors
which caused the decrease in gross profit margin were an increase in the
Company's weighted average state unemployment tax rate as a percentage of
payroll cost and an increase in the gross payroll cost per worksite employee.
Employment-related taxes as a percentage of payroll cost increased from
8.3% during the first quarter of 1997 to 8.7% during the 1998 period, reflecting
an increase in the weighted average state unemployment tax rate paid by the
Company as compared to the same period in 1997. The effects of changes in
employment-related tax rates on gross profit margin are more pronounced in the
first quarter of the year because employment-related taxes are based on the each
employee's cumulative earnings up to specified wage levels, causing them to be
highest in the first quarter and then decline over the course of the year.
The continued addition of higher wage, less risk sensitive worksite
employees resulted in a decrease in gross markup per employee as a percentage
of revenue from 18.5% in the first quarter of 1997 to 18.1% in the first
quarter of 1998. The Company attempts to match changes in the overall gross
markup percentage charged for its services with changes in its direct cost
structure while improving the overall gross profit per worksite employee.
Gross profit per worksite employee improved slightly from $117 in the first
quarter of 1997 to $118 in the first quarter of 1998.
The cost of providing employee benefits, which includes benefit plan
premiums and workers' compensation costs, was slightly lower in the first
quarter of 1998 than in the first quarter of 1997. Benefit plan premiums
declined from 6.0% of revenue during the first quarter of 1997 to 5.8% of
revenue during the first quarter of 1998. Workers' compensation costs
decreased from 1.9% of payroll cost during the first quarter of 1997 to 1.3% of
payroll cost during the first quarter of 1998. This reduction was due to the
rate on the Company's fixed premium policy in effect during the 1998 period
being lower than the rate in place during the first quarter of 1997.
OPERATING EXPENSES
Operating expenses increased as a percentage of revenue from 3.5% in the
first quarter of 1997 to 3.6% in the first quarter of 1998. Total operating
expenses increased 45.8% while revenues and
- 15 -
16
gross profit increased 38.2% and 27.1%, respectively. The overall increase in
operating expenses can be attributed principally to increased
compensation-related costs (salaries, wages and payroll taxes and commissions),
increased general and administrative expenses and increased depreciation and
amortization expense.
Compensation-related costs increased by 46.7% from the first quarter of
1997 to the first quarter of 1998, and increased from 2.0% of revenues in the
1997 period to 2.1% of revenues in the 1998 period. This increase is primarily
related to a 25.9% and 54.4% increase over the 1997 period in corporate and
sales staff, respectively, as the Company has continued to invest in sales and
service capacity to accommodate its rapid growth.
General and administrative expenses increased by 51.8% from the first
quarter of 1997 to the first quarter of 1998, and increased from 1.0% of
revenues in the 1997 period to 1.1% of revenues in the 1998 period. This
increase resulted primarily from the general services and support required to
accommodate the increase in corporate and sales staff. In addition, travel
expenses have increased substantially as a result of the Company's national
expansion.
Depreciation and amortization expense increased by 67.7% over the 1997
period. This increase is primarily due to capital expenditures related to the
opening of new sales offices as part of the Company's national expansion and
investments in technology and infrastructure related to increasing corporate
service capacity.
NET INCOME
Interest income increased significantly over the first quarter of 1997
due to the investment of the proceeds from the Company's initial public
offering ("IPO") for the entire quarter in 1998 and the investment of the
proceeds from the sale of common stock to American Express received in March
1998. The Company incurred no interest expense in the first quarter of 1998
while the 1997 period included a one-time write-off of deferred financing costs
relating to long-term debt that was repaid using a portion of the proceeds from
the IPO.
The Company's provision for income taxes in both periods differs from the
U.S. statutory rate of 34% due primarily to state income taxes.
The Company's net loss for the three months ended March 31, 1998 was
$742,000, or $0.05 per share, versus a loss of $7,000, or $0.00 per share, for
the three months ended March 31, 1997. Historically, the Company's earnings
pattern has included losses in the first quarter, followed by improved
profitability in subsequent quarters throughout the year. This pattern is due
to the effects of employment-related taxes which are based on each employee's
cumulative earnings up to specified wage levels, causing employment- related
taxes to be largest in the first quarter and then decline over the course of
the year. The Company expects the remaining 1998 results to be consistent with
this pattern.
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17
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 including potential acquisitions, 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 and marketable securities on hand and
cash flows from operations will be adequate to meet its liquidity requirements
through at least 1999. The Company will rely on these same sources, as well as
public and private debt and equity financing, to meet its long-term liquidity
needs.
The Company had $69.1 million in cash and cash equivalents and marketable
securities at March 31, 1998, of which approximately $12.8 million was payable
in early April 1998 for withheld federal and state income taxes, FICA and other
payroll deductions. The remainder is available to the Company for general
corporate purposes, including, but not limited to, current working capital
requirements, expenditures related to the continued expansion of the Company's
sales force through the opening of new sales offices and capital expenditures.
The Company had no long-term debt as of March 31, 1998. At March 31, 1998 the
Company had net working capital of $56.6 million which increased from $46.6
million at December 31, 1997 due to the receipt of proceeds from the sale of
common stock to American Express in March 1998.
CASH FLOWS FROM OPERATING ACTIVITIES
The Company's cash flows from operating activities decreased for the
first quarter of 1998 versus the first quarter of 1997 due to a larger net
loss, the timing of payroll tax payments, and higher income tax payments.
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of marketable securities during the first quarter of 1998
reflect the investment of a portion of the proceeds from the Company's sale of
common stock to American Express in short-term, highly liquid marketable
securities with maturities greater than 90 days consisting primarily of
corporate and government bonds. Net purchases of marketable securities in the
1997 period reflect a similar investment of a portion of the proceeds from the
Company's IPO.
Capital expenditures during the first quarter of 1998 were primarily
related to the opening of a new sales office in Los Angeles in January, the
opening of a new sales office in Dallas in early April and furniture, equipment
and computer equipment at its corporate office facilities.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities for the first quarter of 1998 consist
primarily of items relating to the sale of units consisting of 693,126 shares of
common stock (293,126 shares from Treasury Stock) and
- 17 -
18
common stock purchase warrants for an additional 2,065,515 shares to American
Express for a total cost of $17.7 million. Other significant cash flows from
financing activities during the first quarter of 1998 included the exercise of
warrants to purchase 140,508 shares of common stock by a third party warrant
holder at a price of $4.52 per share, the repurchase of 140,508 shares of
common stock from the third party warrant holder at a price of $21 per share,
and the repurchase of 150,000 shares of common stock from three shareholders at
a price of $21 per share.
Cash flows from financing activities during the first quarter of 1997
consist primarily of items resulting from the completion of the Company's IPO.
Such offering was completed in January 1997. The net proceeds to the Company
from the offering (after deducting underwriting discounts and commissions of
$3.6 million) were $47.4 million. The Company utilized approximately $7.1
million of the proceeds as follows: (i) $4.6 million to repay certain
subordinated notes and other secured notes comprising all of the Company's
outstanding indebtedness at the time, (ii) approximately $2.0 million to
exercise its option to repurchase 348,945 shares of common stock from one of
its stockholders, which is now held in treasury by the Company, and (iii)
approximately $0.5 million to exercise its option to repurchase 173,609
warrants to purchase shares of common stock from the subordinated note holder.
SEASONALITY, INFLATION AND QUARTERLY FLUCTUATIONS
Historically, the Company's earnings pattern has included losses in the
first quarter, followed by improved profitability in subsequent quarters
throughout the year. This pattern is due to the effects of employment-related
taxes which are based on each employee's cumulative earnings up to specified
wage levels, causing employment-related taxes to be highest in the first
quarter and then decline over the course of the year. Since the Company's
revenues related to an individual employee are generally earned and collected
at a relatively constant rate throughout each year, payment of such
employment-related tax obligations has a substantial impact on the Company's
financial condition and results of operations during the first six months of
each year. Other factors that affect direct costs could mitigate or enhance
this trend.
The Company believes the effects of inflation have not had a significant
impact on its results of operations or financial condition.
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q which are
not historical facts are forward-looking statements that involve a number of
risks and uncertainties. In the normal course of business, Administaff, Inc.,
in an effort to help keep its stockholders and the public informed about the
Company's operations, may from time to time issue such forward-looking
statements, either orally or in writing. Generally, these statements relate to
business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, or projections involving anticipated
revenues, earnings or other aspects of operating results. All phases of the
Company's operations are subject to a number of uncertainties, risks and other
influences.
- 18 -
19
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) changes in the
competitive environment in the PEO industry or new market entrants. Any of
these factors, or a combination of such factors, could materially affect the
results of the Company's operations and whether forward-looking statements made
by the Company ultimately prove to be accurate.
- 19 -
20
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any material pending legal proceedings,
other than ordinary routine litigation incidental to its business that the
Company believes would not have a material adverse effect on its financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(b) On January 20, 1998, the Company's Board of Directors declared a
dividend distribution of one preferred stock purchase right (a "right") for
each outstanding share of common stock, par value $0.01 per share, of the
Company. The distribution was payable on February 9, 1998 to the stockholders
of record on that date. Each right entitles the registered holder thereof to
purchase from the Company one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $0.01 per share, of the Company at a
price of $125, subject to adjustment.
(c) In March 1998, the Company completed a Securities Purchase
Agreement with American Express Travel Related Services Company, Inc. ("American
Express") whereby the Company sold units consisting of 693,126 shares of its
common stock (293,126 shares from Treasury Stock) and common stock purchase
warrants for an additional 2,065,515 shares of common stock to American Express
for a total purchase price of $17.7 million. The common stock purchase warrants
have prices ranging from $40 to $80 per share and terms ranging from three to
seven years. All of the shares were sold pursuant to an exemption to
registration under Rule 506 of the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits
3.1 Certificate of Designations of Series A Junior Participating
Preferred Stock of Administaff, Inc. dated February 4, 1998
(incorporated by reference to Exhibit 2 to the Registrant's Form
8-A filed on February 5, 1998).
4.1 Rights Agreement dated as of February 4, 1998 between Administaff,
Inc. and Harris Trust and Savings Bank as Rights Agent
(incorporated by reference to Exhibit 1 to the Registrant's Form
8-A filed on February 5, 1998).
4.2 Securities Purchase Agreement between Administaff, Inc. and
American Express Travel Related Services Company, Inc., dated
January 27, 1998 and the Letter Agreement between Administaff,
Inc. and American Express Travel Related Services Company, Inc.,
dated March 10, 1998 amending the Securities Purchase Agreement.
- 20 -
21
4.3 Registration Rights Agreement between Administaff, Inc. and
American Express Travel Related Services Company, Inc., dated
March 10, 1998.
4.4 Warrant Agreement between Administaff, Inc. and American Express
Travel Related Services Company, Inc., dated March 10, 1998.
4.5 Warrant Certificate No. 1, evidencing that American Express Travel
Related Services Company, Inc. is the registered holder of 400,000
warrants to purchase 400,000 shares of the common stock of
Administaff, Inc.
4.6 Warrant Certificate No. 2, evidencing that American Express Travel
Related Services Company, Inc. is the registered holder of 400,000
warrants to purchase 400,000 shares of the common stock of
Administaff, Inc.
4.7 Warrant Certificate No. 3, evidencing that American Express Travel
Related Services Company, Inc. is the registered holder of 400,000
warrants to purchase 400,000 shares of the common stock of
Administaff, Inc.
4.8 Warrant Certificate No. 4, evidencing that American Express Travel
Related Services Company, Inc. is the registered holder of 400,000
warrants to purchase 400,000 shares of the common stock of
Administaff, Inc.
4.9 Warrant Certificate No. 5, evidencing that American Express Travel
Related Services Company, Inc. is the registered holder of 465,515
warrants to purchase 465,515 shares of the common stock of
Administaff, Inc.
10.1 Marketing Agreement between American Express Travel Related
Services Company, Inc., Administaff, Inc., and Administaff of
Texas, Inc. dated March 10, 1998.
27 Financial Data Schedule.
(b) Reports on Form 8-K
Form 8-K, dated January 20, 1998, filed February 5, 1998 relating to (i)
the Securities Purchase Agreement with American Express Travel Related
Services Company, Inc. and (ii) the adoption of a Preferred Share Rights
Plan by the Company's Board of Directors.
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22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Administaff, Inc.
Date: May 11, 1998 By: /s/ Richard G. Rawson
---------------------------------------
Richard G. Rawson
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: May 11, 1998 By: /s/ Samuel G. Larson
-----------------------------------------
Samuel G. Larson
Vice President, Finance
(Principal Accounting Officer)
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23
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Designations of Series A Junior Participating
Preferred Stock of Administaff, Inc. dated February 4, 1998
(incorporated by reference to Exhibit 2 to the Registrant's Form
8-A filed on February 5, 1998).
4.1 Rights Agreement dated as of February 4, 1998 between Administaff,
Inc. and Harris Trust and Savings Bank as Rights Agent
(incorporated by reference to Exhibit 1 to the Registrant's Form
8-A filed on February 5, 1998).
4.2 Securities Purchase Agreement between Administaff, Inc. and
American Express Travel Related Services Company, Inc., dated
January 27, 1998 and the Letter Agreement between Administaff,
Inc. and American Express Travel Related Services Company, Inc.,
dated March 10, 1998 amending the Securities Purchase Agreement.
4.3 Registration Rights Agreement between Administaff, Inc. and
American Express Travel Related Services Company, Inc., dated
March 10, 1998.
4.4 Warrant Agreement between Administaff, Inc. and American Express
Travel Related Services Company, Inc., dated March 10, 1998.
4.5 Warrant Certificate No. 1, evidencing that American Express Travel
Related Services Company, Inc. is the registered holder of 400,000
warrants to purchase 400,000 shares of the common stock of
Administaff, Inc.
4.6 Warrant Certificate No. 2, evidencing that American Express Travel
Related Services Company, Inc. is the registered holder of 400,000
warrants to purchase 400,000 shares of the common stock of
Administaff, Inc.
4.7 Warrant Certificate No. 3, evidencing that American Express Travel
Related Services Company, Inc. is the registered holder of 400,000
warrants to purchase 400,000 shares of the common stock of
Administaff, Inc.
4.8 Warrant Certificate No. 4, evidencing that American Express Travel
Related Services Company, Inc. is the registered holder of 400,000
warrants to purchase 400,000 shares of the common stock of
Administaff, Inc.
4.9 Warrant Certificate No. 5, evidencing that American Express Travel
Related Services Company, Inc. is the registered holder of 465,515
warrants to purchase 465,515 shares of the common stock of
Administaff, Inc.
10.1 Marketing Agreement between American Express Travel Related
Services Company, Inc., Administaff, Inc., and Administaff of
Texas, Inc. dated March 10, 1998.
27 Financial Data Schedule.