-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B7AGSqgI4Hmy6wDN/AIrMmeQmhGweWyDjaSafvAafjuq7SJwYnGskLcKQSszPl1R BRwV75dE6l7tDj039g8O3Q== 0000950129-97-004674.txt : 19971113 0000950129-97-004674.hdr.sgml : 19971113 ACCESSION NUMBER: 0000950129-97-004674 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADMINISTAFF INC \DE\ CENTRAL INDEX KEY: 0001000753 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 760479645 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13998 FILM NUMBER: 97715775 BUSINESS ADDRESS: STREET 1: 19001 CRESCENT SPRINGS DR CITY: KINGWOOD STATE: TX ZIP: 77339 BUSINESS PHONE: 7133588986 MAIL ADDRESS: STREET 1: 19001 CRESCENT SPRINGS DR CITY: KINGWOOD STATE: TX ZIP: 77339 10-Q 1 ADMINISTAFF, INC. - 09/30/97 1 ================================================================================ 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, 1997. 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 October 30, 1997: 13,862,526 shares. ================================================================================ 2 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 . . . . . . . . . . . . . . . . . . . . . . . . 23 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 23
2 3 ADMINISTAFF, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
DECEMBER 31, SEPTEMBER 30, 1996 1997 ----------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 13,360 $ 28,644 Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 24,286 Accounts receivable: Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,490 2,095 Unbilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,742 21,531 Related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 197 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344 654 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,668 344 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 431 ----------- ---------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 33,043 78,182 Property and equipment: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817 817 Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . 6,564 7,115 Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,093 5,671 Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . 3,767 4,573 Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 761 870 ----------- ---------- 15,002 19,046 Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (3,359) (4,665) ----------- ---------- Total property and equipment . . . . . . . . . . . . . . . . . . . . 11,643 14,381 Other assets: Notes receivable from employees . . . . . . . . . . . . . . . . . . . . . 1,135 1,240 Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . 282 5 Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749 853 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,524 1,352 ----------- ---------- Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . 3,690 3,450 ----------- ---------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,376 $ 96,013 =========== ==========
- 3 - 4 ADMINISTAFF, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, SEPTEMBER 30, 1996 1997 ----------------- ---------------- (UNAUDITED) Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 594 $ 661 Payroll taxes and other payroll deductions payable . . . . . . . . . . . 10,099 7,735 Accrued worksite employee payroll expense . . . . . . . . . . . . . . . 13,385 21,065 Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,662 2,592 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 266 1,140 Current maturities of long-term debt . . . . . . . . . . . . . . . . . . 491 -- Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 917 -- ----------------- ---------------- Total current liabilities . . . . . . . . . . . . . . . . . . . . 28,414 33,193 Noncurrent liabilities: Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,558 2,558 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,112 -- Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . -- 189 ----------------- ---------------- Total noncurrent liabilities . . . . . . . . . . . . . . . . . . . 6,670 2,747 Commitments and contingencies Stockholders' equity: Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 138 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 5,706 50,594 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,479 11,329 Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . -- (1,999) Unrealized gain on marketable securities . . . . . . . . . . . . . . . . -- 11 ----------------- ---------------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 13,292 60,073 ----------------- ---------------- Total liabilities and stockholders' equity . . . . . . . . . . . . $ 48,376 $ 96,013 ================= ================
See accompanying notes. - 4 - 5 ADMINISTAFF, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1997 1996 1997 ---------- --------- ---------- --------- Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 231,190 $ 302,618 $ 635,252 $ 839,610 Direct costs: Salaries and wages of worksite employees . . . . . . 189,089 249,541 517,820 691,244 Benefits and payroll taxes . . . . . . . . . . . . . 30,816 39,049 91,307 113,902 ---------- --------- ---------- --------- Gross profit . . . . . . . . . . . . . . . . . . . . . 11,285 14,028 26,125 34,464 Operating expenses: Salaries, wages and payroll taxes . . . . . . . . . 3,543 4,397 10,475 13,014 General and administrative expenses . . . . . . . . 1,985 2,863 5,937 9,449 Commissions . . . . . . . . . . . . . . . . . . . . 1,013 1,192 2,939 3,361 Advertising . . . . . . . . . . . . . . . . . . . . 884 1,083 2,488 2,752 Depreciation and amortization . . . . . . . . . . . 384 572 1,063 1,495 ---------- --------- ---------- --------- 7,809 10,107 22,902 30,071 ---------- --------- ---------- --------- Operating income . . . . . . . . . . . . . . . . . . . 3,476 3,921 3,223 4,393 Other income (expense): Interest income . . . . . . . . . . . . . . . . . . 180 793 449 2,171 Interest expense . . . . . . . . . . . . . . . . . . (197) (23) (747) (363) Other, net . . . . . . . . . . . . . . . . . . . . . (1,404) (1) (1,398) (13) ---------- --------- ---------- --------- (1,421) 769 (1,696) 1,795 ---------- --------- ---------- --------- Income before income tax expense . . . . . . . . . . . 2,055 4,690 1,527 6,188 Income tax expense . . . . . . . . . . . . . . . . . . 1,084 1,767 913 2,338 ---------- --------- ---------- --------- Net income . . . . . . . . . . . . . . . . . . . . . . $ 971 $ 2,923 $ 614 $ 3,850 ========== ========= ========== ========= Net income per share of common stock . . . . . . . . . $ 0.09 $ 0.21 $ 0.06 $ 0.28 ========== ========= ========== ========= Weighted average common shares outstanding . . . . . . 10,962 14,175 10,921 13,586 ========== ========= ========== =========
See accompanying notes. - 5 - 6 ADMINISTAFF, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS) (UNAUDITED)
COMMON STOCK UNREALIZED ISSUED ADDITIONAL GAIN ON -------------------- PAID-IN RETAINED TREASURY MARKETABLE SHARES AMOUNT CAPITAL EARNINGS STOCK SECURITIES TOTAL ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1996 10,726 $ 107 $ 5,706 $ 7,479 $ -- $ -- $ 13,292 Issuance of common stock through initial public offering, net of offering costs of $5,669 3,000 30 45,301 -- -- -- 45,331 Purchase of treasury stock, at cost -- -- -- -- (1,999) -- (1,999) Repurchase of common stock purchase warrants -- -- (542) -- -- -- (542) Exercise of common stock purchase warrants 70 1 47 -- -- -- 48 Exercise of stock options 11 -- 82 -- -- -- 82 Unrealized gain on marketable securities -- -- -- -- -- 11 11 Net income -- -- -- 3,850 -- -- 3,850 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at September 30, 1997 13,807 $ 138 $ 50,594 $ 11,329 $ (1,999) $ 11 $ 60,073 ---------- ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes. - 6 - 7 ADMINISTAFF, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 1997 ------------ ------------ Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 614 $ 3,850 Adjustments to reconcile net income to net cash provided by operating activities : Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 1,231 1,815 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 1,096 (1,159) Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 1,659 Loss (gain) on disposal of assets . . . . . . . . . . . . . . . . . . (9) 13 Changes is operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . (3,482) (9,121) Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 2,043 332 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,224) 164 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 75 67 Payroll taxes and other payroll deductions payable . . . . . . . . . (4,111) (2,364) Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 7,287 7,610 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 2,992 874 ------------ ------------ Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . 6,085 (110) ------------ ------------ Net cash provided by operating activities . . . . . . . . . . . . 6,699 3,740 Cash flows from investing activities: Marketable securities: Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (35,287) Proceeds from dispositions . . . . . . . . . . . . . . . . . . . . . . 728 10,986 Property and equipment: Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,372) (4,238) Proceeds from dispositions . . . . . . . . . . . . . . . . . . . . . . 19 33 Increases in intangible assets . . . . . . . . . . . . . . . . . . . . . . (185) (160) ------------ ------------ Net cash used in investing activities . . . . . . . . . . . . . . (2,810) (28,666)
- 7 - 8 ADMINISTAFF, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 1997 ------------ ------------ Cash flows from financing activities: Long-term debt and short-term borrowings: Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,500 $ -- Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,531) (4,603) Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . (3) -- Proceeds from the issuance of common stock . . . . . . . . . . . . . . . -- 47,430 Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . -- (1,999) Repurchase of common stock purchase warrants. . . . . . . . . . . . . . . -- (542) Prepaid expenses - initial public offering costs . . . . . . . . . . . . (368) (107) Proceeds from the exercise of stock options . . . . . . . . . . . . . . . -- 82 Proceeds from the exercise of common stock purchase warrants . . . . . . . . . . . . . . . . . . . . . . . . . . -- 48 Loans to employees . . . . . . . . . . . . . . . . . . . . . . . . . . . (353) (99) ------------ ------------ Net cash provided by (used in) financing activities . . . . . . . (755) 40,210 ------------ ------------ Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . 3,134 15,284 Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 6,460 13,360 ------------ ------------ Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 9,594 $ 28,644 ============ ============
See accompanying notes. - 8 - 9 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1997 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 programs, personnel records management, liability management, recruiting and selection, performance management, and training and development services to small to 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, 1996 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 consolidated balance sheet at September 30, 1997 and the consolidated statements of operations, cash flows and stockholders' equity for the interim periods ended September 30, 1997 and 1996 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 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 the individual employees' 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. 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, 1996. -9- 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) 2. PER SHARE INFORMATION Per share amounts have been computed based on the weighted average number of common shares and common stock equivalents outstanding during the respective periods. Common stock equivalent shares consist of the incremental shares issuable upon the exercise of stock options and warrants (using the treasury stock or if-converted method where applicable). For the three months and nine months ended September 30, 1996, shares for which options were granted between September 1994 (twelve months prior to the Company's initial filing on Form S-1 of an initial public offering) and the effective date of the offering are considered outstanding for purposes of the earnings per share calculation. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of common stock equivalents will be excluded. The impact of Statement No. 128 on primary and fully diluted earnings per share is not expected to be material for the three months and nine months ended September 30, 1997 and September 30, 1996. 3. INITIAL PUBLIC OFFERING The Company completed an initial public offering in January 1997. The net proceeds to the Company from the sale of the 3,000,000 shares of Common Stock offered by the Company (after deducting underwriting discounts and commissions of $3.6 million) were $47.4 million. In addition, during the registration process, the Company incurred $2.1 million in legal, accounting, printing and other costs, which were offset against the proceeds of the offering as a component of additional paid-in capital. 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 the offering was completed, (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 noteholder. Of the remaining proceeds, the Company has allocated approximately $12.0 million to support expansion of the Company's operations, including the opening of sales offices in new geographic markets as well as in established markets and, as favorable opportunities arise, expansion of the Company's client base in new or existing markets through acquisitions of existing PEO offices. For the nine months ended September 30, 1997, the Company has incurred $4.2 million in capital expenditures primarily related to the opening of sales offices and the necessary corporate infrastructure and technology to support this expansion. The balance of the proceeds will be used for working capital purposes. Pending the application of such funds, the Company has invested the net proceeds of the offering in diversified, highly-liquid, investment grade, interest-bearing instruments. -10- 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) 4. MARKETABLE SECURITIES At September 30, 1997, 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. 5. ALLOWANCE FOR DOUBTFUL ACCOUNTS During the second quarter of 1997 the Company recorded a $1.3 million reserve for the potential uncollectibility of an account receivable from a significant former customer. This reserve resulted from the customer's inability to pay the invoices related to a single payroll period in April 1997. The Company attempted to collect the amounts due or obtain a secured position on the amount owed by the customer; however, the Company was unable to collect the amounts or obtain such a position. In late June 1997, the customer filed for bankruptcy protection and the Company subsequently learned that the customer's ability to pay the amounts owed had become severely impaired, resulting in the recording of the reserve. The Company is currently pursuing all avenues of collection available through the bankruptcy proceedings. Prior to the second quarter of 1997, the allowance for doubtful accounts and bad debt expense were not material to the Company's financial position or results of operations. 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 -11- 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) 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 to the Technical Advice Request refutes the conclusions of the IRS Houston District. The Company also understands that, with respect to the Market Segment 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") is being referred to the IRS National Office. 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 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 -12- 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) 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 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 Sheet. 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 Sheet. 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, 1996. 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. -13- 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997. The following table presents certain information related to the Company's results of operations for the three months ended September 30, 1996 and 1997.
THREE MONTHS ENDED SEPTEMBER 30, ------------------------- 1996 1997 CHANGE --------- -------- ------ (OPERATING RESULTS IN THOUSANDS) OPERATING RESULTS: Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 231,190 $ 302,618 30.9% Gross profit . . . . . . . . . . . . . . . . . . . . . 11,285 14,028 24.3% Gross profit margin . . . . . . . . . . . . . . . . . 4.9% 4.6% Operating income . . . . . . . . . . . . . . . . . . . 3,476 3,921 12.8% STATISTICAL DATA: Monthly revenue per worksite employee . . . . . . . . 3,157 3,509 11.1% Monthly payroll cost per worksite employee . . . . . . 2,560 2,873 12.2% Monthly gross markup per worksite employee . . . . . . 597 636 6.5% Average number of worksite employees paid per month during period . . . . . . . . . . . . . . 23,325 27,604 18.3%
REVENUES The Company's revenues for the three months ended September 30, 1997 increased 30.9% over the same period in 1996 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 three years is the primary factor contributing to the increased number of worksite employees. The average number of worksite employees paid during the third quarter of 1997 increased 7.3% over the second quarter of 1997, reflecting this continued growth. The Company's new markets (defined as markets opened after September 1993 - the commencement of the Company's national expansion plan) contributed approximately $113 million, or 37.3%, of the Company's total revenues for the third quarter of 1997 versus approximately $67 million, or 28.9%, during the same period of 1996. The increase in revenue per employee of 11.1% directly relates to the increase in payroll cost per employee of 12.2%. This increase reflects the continuing effects of the net addition, through the Company's sales efforts, of clients with worksite employees that have a higher average base pay than the existing client base. In addition, wage inflation within the Company's existing worksite employee -14- 15 base has contributed to the overall increase in payroll cost per worksite employee. The average payroll cost per worksite employee increased 2.7% versus the second quarter of 1997, reflecting the effects of these trends. GROSS PROFIT MARGIN The Company's gross profit margin decreased to 4.6% for the third quarter of 1997 versus 4.9% for the third quarter of 1996. This decrease was primarily the result of an unusually low level of benefits costs relative to the markup per employee as a percentage of revenue during the 1996 period. The continued addition of higher wage, less risk sensitive worksite employees resulted in a decrease in markup per employee as a percentage of revenue from 18.9% in the third quarter of 1996 to 18.1% in the third quarter of 1997. The Company attempts to match the lower overall rates charged on these employees with reductions in the cost of providing employee benefits and workers' compensation coverage as a percentage of revenue or payroll cost. The Company's group health insurance policy requires the Company to fund all claims and premiums up to a specified quarterly cap amount. If the claims experience during a quarter is lower than the cap amount, the Company's benefit plan premiums for that period are positively affected. If the claims experience during a quarter exceeds the cap amount, the insurance carrier is required to fund all claims and premiums in excess of the quarterly cap amount. During the third quarter of 1996, the Company's health insurance claims were significantly lower than the cap amount. As a result, benefit plan premiums for the third quarter of 1996 were 5.9% of revenue, a decrease from 6.6% during the first half of 1996. Benefit plan premiums for the third quarter of 1997 were 5.8% of revenues. Workers' compensation costs decreased from 2.0% of payroll cost in the third quarter of 1996 to 1.6% of payroll cost in the third quarter of 1997, primarily because the rate on the Company's fixed premium policy during the 1997 period was lower than the rate in place during the 1996 period. Employment related taxes as a percentage of payroll cost declined slightly from 7.0% in the third quarter of 1996 to 6.9% in the third quarter of 1997. This reduction reflects a net decrease in the weighted average state unemployment tax rates paid by the Company. OPERATING EXPENSES Operating expenses decreased as a percentage of revenue from 3.4% in the third quarter of 1996 to 3.3% in the third quarter of 1997. Compensation related costs (salaries, wages, payroll taxes and commissions) and advertising expenses increased at a lower rate than the increase in revenues. General and administrative expenses for the third quarter of 1997 were slightly higher as a percentage of revenue versus the 1996 period. This increase is primarily due to higher travel expenses associated with the Company's continued national expansion, higher legal, accounting, and -15- 16 professional fees, and increases in expenses associated with the growth in the number of corporate and worksite employees. Depreciation and amortization expense increased 49.0% versus the third quarter of 1996. This increase is primarily due to capital expenditures related to the opening of new sales offices and investments in technology and infrastructure related to increasing corporate service capacity. The factors noted above include the effects of continued significant operating expenses in new markets. Operating expenses incurred directly in new markets (which include salaries, payroll taxes, recruiting and training costs of newly hired sales associates, advertising and public relations costs and general office expenses) totaled $2.1 million in the third quarter of 1997 versus $1.5 million during the third quarter of 1996. NET INCOME Interest income increased $613,000 over the third quarter of 1996 due to the investment of the proceeds from the Company's initial public offering received in early February 1997. Interest expense decreased $174,000 due to the repayment of the Company's outstanding indebtedness with a portion of the initial public offering proceeds. Other expense for the 1996 period includes a non-recurring charge of $1.4 million relating to certain compliance issues involving the Company's 401(k) Plan, net of amounts recoverable from the Plan's record keeper. The Company's provision for income taxes differs from the U.S. statutory rate of 34% for the third quarter of 1997 due primarily to state income taxes. For the third quarter of 1996, the provision for incomes taxes differed from the statutory rate primarily because certain portions of the non-recurring charge were not deductible for tax purposes. The Company's net income for the three months ended September 30, 1997 increased to $2.9 million, or $0.21 per share, versus $971,000, or $0.09 per share, for the three months ended September 30, 1996. -16- 17 RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997. The following table presents certain information related to the Company's results of operations for the nine months ended September 30, 1996 and 1997.
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1996 1997 CHANGE --------- -------- ------ (OPERATING RESULTS IN THOUSANDS) OPERATING RESULTS: Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 635,252 $ 839,610 32.2% Gross profit . . . . . . . . . . . . . . . . . . . . . 26,125 34,464 31.9% Gross profit margin . . . . . . . . . . . . . . . . . 4.1% 4.1% Operating income . . . . . . . . . . . . . . . . . . 3,223 4,393 36.3% STATISTICAL DATA: Monthly revenue per worksite employee . . . . . . . . 3,117 3,423 9.8% Monthly payroll cost per worksite employee . . . . . . 2,522 2,797 10.9% Monthly gross markup per worksite employee . . . . . . 595 626 5.2% Average number of worksite employees paid per month during period . . . . . . . . . . . . . . 21,721 26,121 20.3%
REVENUES The Company's revenues for the nine months ended September 30, 1997 increased 32.2% over the same period in 1996 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 three years is the primary factor contributing to the increased number of worksite employees. The Company's new markets (defined as markets opened after September 1993 - the commencement of the Company's national expansion plan) contributed approximately $295 million, or 35.1%, of the Company's total revenues for the first nine months of 1997 versus approximately $166 million, or 26.1%, during the same period of 1996. The Company expanded its sales force in the Houston market in January 1997, entered the Los Angeles market with two sales office openings during the second quarter and early third quarter of 1997, and entered the Charlotte market in the third quarter of 1997. The Company expects continued growth in the number of worksite employees during the remainder of 1997 versus 1996 due to the effect of sales in existing markets and the Company's national expansion plan. The increase in revenue per employee of 9.8% directly relates to the increase in payroll cost per employee of 10.9%. This increase reflects the continuing effects of the net addition, through the Company's sales efforts, of clients with worksite employees that have a higher average base pay than the existing client base. In addition, wage inflation within the Company's existing worksite employee base has contributed to the overall increase in payroll cost per worksite employee. -17- 18 GROSS PROFIT MARGIN The Company's gross profit margin was unchanged at 4.1% for the first nine months of 1997 and 1996. This reflects the Company's success in matching changes in the risk sensitivity of its employee base with changes in its direct cost structure. The continued addition of higher wage, less risk sensitive worksite employees resulted in a decrease in markup per employee as a percentage of revenue from 19.1% in the first nine months of 1996 to 18.3% in the first nine months of 1997. The Company attempts to match the lower overall rates charged on these employees with reductions in the cost of providing employee benefits and workers' compensation coverage as a percentage of revenue or payroll cost. The cost of providing employee benefits, which includes workers' compensation costs and benefit plan premiums, was lower in the first nine months of 1997 than in the first nine months of 1996 as a percentage of revenue. Workers' compensation costs decreased from 2.2% of payroll cost in the first nine months of 1996 to 1.7% of payroll cost in the first nine months of 1997. This reduction was due to the rate on the Company's fixed premium policy in effect during the 1997 period being lower than the rate in place during the first nine months of 1996. Benefit plan premiums declined from 6.3% of revenue in the first nine months of 1996 to 5.9% of revenue in the first nine months of 1997. The lower costs relative to revenue and payroll cost in both worker's compensation and benefit plan premiums reflect the reduced risk sensitivity of the current composition of the Company's client base as compared to the 1996 period. Employment related taxes as a percentage of payroll cost declined slightly from 7.6% during the first nine months of 1996 to 7.5% during the 1997 period. This reduction reflects a net decrease in the weighted average state unemployment tax rates paid by the Company as compared to the same period in 1996. OPERATING EXPENSES Operating expenses were comparable as a percentage of revenue at 3.6% in the first nine months of both years; however, the first nine months of 1997 includes the effects of the previously reported $1.3 million bad debt charge in the second quarter of 1997. Excluding the effects of this charge, operating expenses for the first nine months of 1997 were approximately 3.4% of revenue. Compensation related costs (salaries, wages, payroll taxes and commissions) and advertising expenses increased at a lower rate than the increase in revenues. General and administrative expenses for the nine months ended September 30, 1997 were 1.1% of revenue in the 1997 period versus 0.9% of revenue in the 1996 period. This increase is primarily due to the bad debt charge, higher travel expenses associated with the Company's continued national expansion, higher legal, accounting, and professional fees associated with being a public company, and increases in expenses associated with the growth in the number of corporate and worksite employees. -18- 19 Depreciation and amortization expense increased 40.6% versus the first nine months of 1996. This increase is primarily due to capital expenditures related to the construction of an additional corporate facility which was placed into service in February 1996 and affected only part of the 1996 period, capital expenditures related to the opening of new sales offices and investments in technology and infrastructure related to increasing corporate service capacity. During the second quarter of 1997 the Company recorded a $1.3 million (approximately $800,000 after tax) reserve for the potential uncollectibility of an account receivable from a significant former customer. This reserve resulted from the customer's inability to pay the invoices related to a single payroll period in April 1997. The Company attempted to collect the amounts due or obtain a secured position on the amount owed by the customer; however, the Company was unable to collect the amounts or obtain such a position. In late June 1997, the customer filed for bankruptcy protection and the Company subsequently learned that the customer's ability to pay the amounts owed had become severely impaired, resulting in the recording of the reserve. The Company is currently pursuing all avenues of collection available through the bankruptcy proceedings. The factors noted above include the effects of continued significant operating expenses in new markets. Operating expenses incurred directly in new markets (which include salaries, payroll taxes, recruiting and training costs of newly hired sales associates, advertising and public relations costs and general office expenses) totaled $5.9 million in the first nine months of 1997 versus $4.5 million during the first nine months of 1996. NET INCOME Interest income increased $1.7 million over the first nine months of 1996 due to the investment of the proceeds from the Company's initial public offering received in early February 1997. Interest expense decreased $384,000 as reductions in interest expense due to the repayment of the Company's outstanding indebtedness were partially offset by the write off of deferred financing costs relating to the repaid indebtedness. Other expense for the 1996 period includes a non-recurring charge of $1.4 million relating to certain compliance issues involving the Company's 401(k) Plan, net of amounts recoverable from the Plan's record keeper. The Company's provision for income taxes differs from the U.S. statutory rate of 34% due primarily to state income taxes in the 1997 period. For the nine months ended September 30, 1996, the Company's provision for income tax benefit differed from the U.S. statutory rate primarily because certain portions of the non-recurring charge were not deductible for tax purposes. The Company's net income for the nine months ended September 30, 1997 increased to $3.9 million, or $0.28 per share, versus $614,000, or $0.06 per share, for the nine months ended September 30, 1996. -19- 20 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 sought in the past, and may seek in the future, 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 1998. 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 has $52.9 million in cash and cash equivalents and marketable securities at September 30, 1997 which is available to the Company for general corporate purposes, including, but not limited to, current working capital requirements which may include capital expenditures, expenditures related to the continued expansion of the Company's sales force through the opening of new sales offices, and acquisitions of existing PEO operations should favorable acquisition opportunities arise. The Company repaid all of its long-term debt during the first quarter of 1997 utilizing the proceeds from its initial public offering and has no long-term debt as of September 30, 1997. At September 30, 1997 the Company had net working capital of $45.0 million which is significantly increased from $4.6 million at December 31, 1996 due to the proceeds from the Company's initial public offering. CASH FLOWS FROM OPERATING ACTIVITIES The Company's cash flows from operating activities for the first nine months of 1997 decreased by $3.0 million compared to the first nine months of 1996 primarily because of a large tax refund received during the 1996 period. In addition, the timing of cash receipts for PEO service fees, the accrual of unbilled accounts receivable and accrued worksite employee payroll expense, and payments of payroll taxes and payroll deductions at the end of reporting periods can fluctuate significantly from period to period based on the timing of payroll cycles and the due dates of payroll related obligations relative to the end of the accounting period. CASH FLOWS FROM INVESTING ACTIVITIES Net purchases of marketable securities during the first nine months of 1997 reflect the investment of a portion of the proceeds from the Company's initial public offering in short-term, highly liquid marketable securities with maturities greater than 90 days consisting primarily of debt securities issued by corporate and governmental entities. Capital expenditures during the first nine months of 1997 were primarily related to the opening of a new sales office in Houston in January 1997, the opening of two new sales offices in the Los Angeles area in April and July 1997, the opening of a new sales office in Charlotte in September 1997, and furniture, equipment, computer equipment and building improvements at its corporate -20- 21 office facilities. Capital expenditures for the first nine months of 1996 consist primarily of costs to construct an additional corporate facility which was opened in February 1996. CASH FLOWS FROM FINANCING ACTIVITIES Cash flows from financing activities during the first nine months of 1997 consist primarily of items resulting from the completion of the Company's initial public offering 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 noteholder. Of the remaining proceeds, the Company has allocated approximately $12.0 million to support expansion of the Company's operations, including the opening of sales offices in new geographic markets as well as in established markets and, as favorable opportunities arise, expansion of the Company's client base in new or existing markets through acquisitions of existing PEO offices. For the nine months ended September 30, 1997, the Company has incurred $4.2 million in capital expenditures primarily related to the opening of sales offices and the necessary corporate infrastructure and technology to support this expansion. The balance of the proceeds will be used for working capital purposes. Pending the application of such funds, the Company has invested the net proceeds of the offering in diversified, highly-liquid, investment grade, interest-bearing instruments. CREDIT AGREEMENT In October 1995 the Company's wholly-owned subsidiary, Administaff of Texas, Inc. ("Administaff of Texas"), entered into a $10 million revolving credit agreement (the "Credit Agreement") with a bank. At September 30, 1997 no borrowings were outstanding under the Credit Agreement. In October 1997, the Credit Agreement expired. The Company elected not to exercise the Credit Agreement's extension provision because utilization of this credit facility was not expected within the one year extension term. The Company believes it could obtain a similar financing agreement with terms competitive with the Credit Agreement if the need for such an agreement were to arise. OTHER MATTERS During the third quarter of 1996, the Company recorded an accrual for its estimate of the cost of corrective measures and penalties relating to the 401(k) Plan's failure to comply with certain nondiscrimination tests required by the Code. See Note 6 of Notes to Consolidated Financial Statements. In addition, during the third quarter of 1996, 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. There has been no change in -21- 22 the amounts of the accrual or the amount recoverable from the record keeper subsequent to December 31, 1996. Based on its understanding of the settlement experience of other companies in similar situations, 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, results of operations or liquidity. SEASONALITY, QUARTERLY FLUCTUATIONS AND INFLATION 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 the individual employees' 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 unemployment 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, the Company, in an effort to help keep its stockholders and the public informed about its operations, may from time to time issue such forward-looking statements, either orally or in writing. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, or projections involving anticipated revenues, earnings or other aspects of operating results. All phases of the Company's operations are subject to a number of uncertainties, risks and other influences. Therefore, the actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: (i) regulatory and tax developments including the ongoing audit of the Company's 401(k) Plan and related compliance issues, and possible adverse application of various federal, state and local regulations; (ii) changes in the Company's direct costs and operating expenses including increases in health insurance premiums, workers' compensation rates and state unemployment tax rates, liabilities for employee and client actions or payroll related claims, changes in the costs of expanding into new markets, and failure to manage growth of the Company's operations; (iii) 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. -22- 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 that the Company believes 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 11.1 Statement Re: Computation of Per Share Income (b) Reports on Form 8-K None - 23 - 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 11, 1997 By: /s/ Richard G. Rawson ------------------------------------- Richard G. Rawson Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 11, 1997 By: /s/ Samuel G. Larson ------------------------------------- Samuel G. Larson Vice President, Finance (Principal Accounting Officer) - 24 - 25 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 11.1 Statement Re: Computation of Per Share Income 27 Financial Data Schedule
EX-11.1 2 STATEMENT RE: COMPUTATION OF PER SHARE INCOME 1 EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE INCOME OF ADMINISTAFF, INC.
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------- ---------------------- 1996 1997 1996 1997 -------- -------- -------- -------- PRIMARY Average shares outstanding .............................................. 10,726 13,451 10,726 13,126 Net effect of dilutive stock options - based on the treasury stock method using average market price ................... 54 210 36 121 Net effect of dilutive stock warrants - based on the treasury stock method using average market price ................... 124 514 82 339 Net effect of dilutive stock warrants - based on the if-converted method ................................................ * -- * -- Adjustment to give effect to shares optioned to employees within 12 months of the initial filing on Form S-1 of an initial public offering as outstanding as of the beginning of each period presented based on the treasury stock method using the offering price .................................... 58 -- 77 -- ------------------------------------------------ Total ................................................................... 10,962 14,175 10,921 13,586 ================================================ Net income .............................................................. $ 971 $ 2,923 $ 614 $ 3,850 Add interest from subordinated debt, net of taxes ....................... * -- * -- ------------------------------------------------ Net income available for common shareholders ............................ $ 971 $ 2,923 $ 614 $ 3,850 ================================================ Per share amount ........................................................ $ 0.09 $ 0.21 $ 0.06 $ 0.28 ================================================ FULLY DILUTED Average shares outstanding .............................................. 10,726 13,451 10,726 13,126 Net effect of dilutive stock options - based on the treasury stock method using ending market price .................... 54 213 36 138 Net effect of dilutive stock warrants - based on the treasury stock method using ending market price .................... 124 515 82 344 Net effect of dilutive stock warrants - based on the if-converted method ................................................ * -- * -- Adjustment to give effect to shares optioned to employees within 12 months of the initial filing on Form S-1 of an initial public offering as outstanding as of the beginning of each period presented based on the treasury stock method using the offering price ................................................. 58 -- 77 -- ------------------------------------------------ Total ................................................................... 10,962 14,179 10,921 13,608 ================================================ Net income .............................................................. $ 971 $ 2,923 $ 614 $ 3,850 Add interest from subordinated debt, net of taxes ....................... * -- * -- ------------------------------------------------ Net income available for common shareholders ............................ $ 971 $ 2,923 $ 614 $ 3,850 ================================================ Per share amount ........................................................ $ 0.09 $ 0.21 $ 0.06 $ 0.28 ================================================
* Conversion of the stock warrants is not assumed in the computation because their effect is antidilutive. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JUL-01-1997 SEP-30-1997 28,644 24,286 26,008 (1,531) 0 78,182 19,046 (4,665) 96,013 33,193 0 0 0 138 59,935 96,013 302,618 302,618 288,590 288,590 9,338 114 23 4,690 1,767 2,923 0 0 0 2,923 0.21 0.21
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