10-Q 1 e10-q.txt ADMINISTAFF, INC. - DATED JUNE 30, 2000 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 June 30, 2000. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------- ------------- Commission File No. 1-13998 ADMINISTAFF, INC. (Exact name of registrant as specified in its charter) Delaware 76-0479645 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 19001 Crescent Springs Drive Kingwood, Texas 77339 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (Registrant's Telephone Number, Including Area Code): (281) 358-8986 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of August 4, 2000, 13,588,641 shares of the registrant's common stock, par value $0.01 per share, were outstanding. ================================================================================ 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....................................................................... 13 PART II Item 1. Legal Proceedings.................................................................................. 23 Item 4. Submission of Matters to a Vote of Security Holders................................................ 23 Item 6. Exhibits and Reports on Form 8-K................................................................... 24
3 ADMINISTAFF, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
JUNE 30, DECEMBER 31, 2000 1999 ------------ ------------ (UNAUDITED) Current assets: Cash and cash equivalents ................ $ 37,163 $ 25,451 Marketable securities .................... 30,790 30,717 Accounts receivable: Trade ................................. 1,486 1,578 Unbilled .............................. 42,974 31,286 Other ................................. 1,039 1,342 Prepaid expenses ......................... 8,999 8,332 Income taxes receivable .................. 615 -- Deferred income taxes .................... 58 -- ------------ ------------ Total current assets ............... 123,124 98,706 Property and equipment: Land ..................................... 2,920 2,920 Buildings and improvements ............... 11,833 11,222 Computer hardware and software ........... 25,018 22,232 Software development costs ............... 9,828 6,951 Furniture and fixtures ................... 15,190 13,886 Vehicles ................................. 1,489 1,386 ------------ ------------ 66,278 58,597 Accumulated depreciation ................. (19,517) (14,223) ------------ ------------ Total property and equipment ....... 46,761 44,374 Other assets: Notes receivable from employees .......... 994 994 Other assets ............................. 8,618 3,624 ------------ ------------ Total other assets ................. 9,612 4,618 ------------ ------------ Total assets ....................... $ 179,497 $ 147,698 ============ ============
-3- 4 ADMINISTAFF, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31, 2000 1999 ------------ ------------ (UNAUDITED) Current liabilities: Accounts payable ....................................................................... $ 1,356 $ 2,787 Payroll taxes and other payroll deductions payable ..................................... 38,498 21,518 Accrued worksite employee payroll expense .............................................. 41,459 31,367 Other accrued liabilities .............................................................. 9,244 5,737 Income taxes payable ................................................................... -- 1,364 Deferred income taxes .................................................................. -- 141 ------------ ------------ Total current liabilities ........................................................ 90,557 62,914 Deferred income taxes ..................................................................... 5,777 4,316 Commitments and contingencies Stockholders' equity: Common stock ........................................................................... 150 149 Additional paid-in capital ............................................................. 67,546 65,210 Treasury stock, at cost ................................................................ (18,067) (18,072) Accumulated other comprehensive loss ................................................... (194) (218) Retained earnings ...................................................................... 33,728 33,399 ------------ ------------ Total stockholders' equity ....................................................... 83,163 80,468 ------------ ------------ Total liabilities and stockholders' equity ....................................... $ 179,497 $ 147,698 ============ ============
See accompanying notes. -4- 5 ADMINISTAFF, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Revenues ...................................... $ 864,450 $ 505,683 $ 1,619,995 $ 981,536 Direct costs: Salaries and wages of worksite employees ... 721,984 419,593 1,351,921 814,685 Benefits and payroll taxes ................. 111,124 66,171 216,027 133,377 ----------- ----------- ----------- ----------- Gross profit .................................. 31,342 19,919 52,047 33,474 Operating expenses: Salaries, wages and payroll taxes .......... 12,283 8,843 24,351 17,626 General and administrative expenses ........ 9,028 5,221 16,590 10,306 Commissions ................................ 2,165 1,507 4,377 2,976 Advertising ................................ 1,502 1,010 2,432 1,929 Depreciation and amortization .............. 2,884 1,537 5,516 2,898 ----------- ----------- ----------- ----------- 27,862 18,118 53,266 35,735 ----------- ----------- ----------- ----------- Operating income (loss) ....................... 3,480 1,801 (1,219) (2,261) Other income (expense): Interest income ............................ 931 585 1,730 1,315 Other, net ................................. (2) 19 7 85 ----------- ----------- ----------- ----------- 929 604 1,737 1,400 ----------- ----------- ----------- ----------- Income (loss) before income taxes ............. 4,409 2,405 518 (861) Income tax expense (benefit) .................. 1,609 890 189 (318) ----------- ----------- ----------- ----------- Net income (loss) ............................. $ 2,800 $ 1,515 $ 329 $ (543) =========== =========== =========== =========== Basic net income (loss) per share of common stock ................ $ 0.21 $ 0.11 $ 0.02 $ (0.04) =========== =========== =========== =========== Diluted net income (loss) per share of common stock ................ $ 0.20 $ 0.11 $ 0.02 $ (0.04) =========== =========== =========== ===========
See accompanying notes. -5- 6 ADMINISTAFF, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS) (UNAUDITED)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER ISSUED PAID-IN TREASURY COMPREHENSIVE RETAINED SHARES AMOUNT CAPITAL STOCK LOSS EARNINGS TOTAL -------- -------- -------- -------- -------- -------- -------- Balance at December 31, 1999 14,909 $ 149 $ 65,210 $(18,072) $ (218) $ 33,399 $ 80,468 Exercise of stock options 122 1 2,189 -- -- -- 2,190 Sale of common stock put warrant -- -- 125 -- -- -- 125 Other -- -- 22 5 -- -- 27 Change in unrealized loss on marketable securities -- -- -- -- 24 -- 24 Net income -- -- -- -- -- 329 329 -------- Comprehensive income 353 -------- -------- -------- -------- -------- -------- -------- Balance at June 30, 2000 15,031 $ 150 $ 67,546 $(18,067) $ (194) $ 33,728 $ 83,163 ======== ======== ======== ======== ======== ======== ========
See accompanying notes. -6- 7 ADMINISTAFF, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 1999 -------- -------- Cash flows from operating activities: Net income (loss) ............................................ $ 329 $ (543) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ............................ 5,641 3,145 Bad debt expense ......................................... 1,134 314 Deferred income taxes .................................... 1,262 889 Loss (gain) on the disposition of assets ................. 97 (82) Changes in operating assets and liabilities: Accounts receivable ..................................... (12,427) (12,295) Prepaid expenses ........................................ (667) (3,583) Other assets ............................................ 582 152 Accounts payable ........................................ (1,431) (182) Payroll taxes and other payroll deductions payable ...... 16,980 (10,934) Accrued worksite employee payroll expense ............... 10,092 18,426 Other accrued liabilities ............................... 3,507 2,444 Income taxes payable/receivable ......................... (1,979) (1,398) -------- -------- Total adjustments ..................................... 22,791 (3,104) -------- -------- Net cash provided by (used in) operating activities ... 23,120 (3,647) Cash flows from investing activities: Marketable securities: Purchases ................................................. (9,885) (8,560) Proceeds from dispositions ................................ 9,696 27,587 Property and equipment: Purchases ................................................. (5,156) (5,556) Proceeds from dispositions ................................ 76 47 Investment in software development costs ..................... (2,877) (2,439) Investment in other companies ................................ (5,604) -- -------- -------- Net cash provided by (used in) investing activities ... (13,750) 11,079
-7- 8 ADMINISTAFF, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 1999 -------- -------- Cash flows from financing activities: Proceeds from the exercise of stock options ....................... $ 2,190 $ 47 Purchase of treasury stock ........................................ -- (12,330) Proceeds from the sale of common stock put warrant ................ 125 119 Loans to employees ................................................ -- 154 Other ............................................................. 27 48 -------- -------- Net cash provided by (used in) financing activities ......... 2,342 (11,962) -------- -------- Net increase (decrease) in cash and cash equivalents ................. 11,712 (4,530) Cash and cash equivalents at beginning of period ..................... 25,451 23,521 -------- -------- Cash and cash equivalents at end of period ........................... $ 37,163 $ 18,991 ======== ========
See accompanying notes. -8- 9 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 1. BASIS OF PRESENTATION Administaff, Inc. ("the Company") is a professional employer organization ("PEO") that provides a comprehensive Personnel Management System that encompasses a broad range of services, including benefits and payroll administration, medical and workers' compensation insurance programs, personnel records management, employer liability management, employee recruiting and selection, performance management, and training and development services to small and medium-sized businesses in strategically selected markets. For the six months ended June 30, 2000 and 1999, revenues from the Company's Texas markets represented 52% and 65% of the Company's total revenues, respectively. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accompanying consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1999. The consolidated balance sheet at December 31, 1999, has been derived from the audited financial statements at that date but does not include all of the information or footnotes required by generally accepted accounting principles for complete financial statements. The Company's consolidated balance sheet at June 30, 2000, and the consolidated statements of operations, cash flows and stockholders' equity for the interim periods ended June 30, 2000 and 1999, have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations. Historically, the Company's earnings pattern has included losses in the first quarter, followed by improved profitability in subsequent quarters throughout the year. This pattern is due to the effects of employment-related taxes which are based on each employee's cumulative earnings up to specified wage levels, causing employment-related taxes to be largest in the first quarter and then decline over the course of the year. Certain prior year amounts have been reclassified to conform with current year presentation. -9- 10 2. ACCOUNTING CHANGES During 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition. Additionally, the Emerging Issues Task Force ("EITF") reached consensus during 2000 on EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Each of these pronouncements is required to be adopted in the fourth quarter of 2000. The Company is currently evaluating its revenue recognition policies and the effect of adopting SAB No. 101 and EITF 99-19. 3. NET INCOME (LOSS) PER SHARE The numerator used in the calculations of both basic and diluted net income (loss) per share for all periods presented was net income (loss). The denominator for each period presented was determined as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 ------ ------ ------ ------ Basic net income (loss) per share - weighted average shares outstanding .......................... 13,526 13,649 13,500 13,979 Effect of dilutive securities: Common stock purchase warrants - treasury stock method ...................................... 83 -- 41 -- Common stock options - treasury stock method ................. 687 24 513 -- ------ ------ ------ ------ 770 24 554 -- ------ ------ ------ ------ Diluted net income (loss) per share - weighted average shares outstanding plus effect of dilutive securities ........ 14,296 13,673 14,054 13,979 ====== ====== ====== ====== Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect ........ 1,266 2,561 1,757 2,774
4. MARKETABLE SECURITIES At June 30, 2000, the Company's marketable securities consisted of debt securities issued by corporate and governmental entities, with contractual maturities ranging from 91 days to five years from the date of purchase. All of the Company's investments in marketable securities are classified as available-for-sale, and as a result, are reported at fair value. Unrealized gains and losses, net of tax, are reported as a component of accumulated other comprehensive loss in stockholders' equity. 5. COMMITMENTS AND CONTINGENCIES The Company is a defendant in various lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations. -10- 11 ADMINISTAFF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED) The Company's 401(k) plan is currently under audit by the Internal Revenue Service (the "IRS") for the year ended December 31, 1993. Although the audit is for the 1993 plan year, certain conclusions of the IRS could be applicable to other years as well. In addition, the IRS has established an Employee Leasing Market Segment Group (the "Market Segment Group") for the purpose of identifying specific compliance issues prevalent in certain segments of the PEO industry. Approximately 70 PEOs, including the Company, have been randomly selected by the IRS for audit pursuant to this program. The primary outstanding issue from these audits involves the Company's rights under the Internal Revenue Code (the "Code") as a co-employer of its worksite employees, including officers and owners of client companies. In conjunction with the 1993 401(k) plan year audit, the IRS Houston District has sought technical advice (the "Technical Advice Request") from the IRS National Office about whether worksite employee participation in the 401(k) plan violates the exclusive benefit rule under the Code because they are not employees of the Company. The Technical Advice Request contains the conclusions of the IRS Houston District that the 401(k) plan should be disqualified because it covers worksite employees who are not employees of the Company. The Company's response to the Technical Advice Request refutes the conclusions of the IRS Houston District. With respect to the Market Segment Group study, the Company understands that the issue of whether a PEO and a client company may be treated as co-employers for certain federal tax purposes (the "Industry Issue") has been referred to the IRS National Office. Should the IRS conclude that the Company is not a "co-employer" of worksite employees for purposes of the Code, worksite employees could not continue to make salary deferral contributions to the 401(k) plan or pursuant to the Company's cafeteria plan or continue to participate in certain other employee benefit plans of the Company. The Company believes that, although unfavorable to the Company, a prospective application of such a conclusion (that is, one applicable only to periods subsequent to a final conclusion by the IRS) would not have a material adverse effect on its financial position or results of operations, as the Company could continue to make available comparable benefit programs to its client companies at comparable costs to the Company. However, if the IRS National Office adopts the conclusions of the IRS Houston District set forth in the Technical Advice Request and any such conclusions were applied retroactively to disqualify the 401(k) plan for 1993 and subsequent years, employees' vested account balances under the 401(k) plan would become taxable, the Company would lose its tax deductions to the extent its matching contributions were not vested, the 401(k) plan's trust would become a taxable trust and the Company would be subject to liability with respect to its failure to withhold applicable taxes with respect to certain contributions and trust earnings. Further, the Company may be subject to liability, including penalties, with respect to its cafeteria plan for the failure to withhold and pay taxes applicable to salary deferral contributions by employees, including worksite employees. In such a scenario, the Company would also face the risk of client dissatisfaction and potential litigation. While the Company is not able to predict either the timing or the nature of any final decision that may be reached with respect to the 401(k) plan audit or with respect to the Technical Advice Request -11- 12 or the Market Segment Group study and the ultimate outcome of such decisions, the Company believes that a retroactive application of an unfavorable determination is unlikely. The Company also believes that a prospective application of an unfavorable determination would not have a material adverse effect on the Company's consolidated financial position or results of operations. -12- 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The following discussion should be read in conjunction with the 1999 annual report on Form 10-K as well as with the consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q. THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999. The following table presents certain information related to the Company's results of operations for the three months ended June 30, 2000 and 1999.
THREE MONTHS ENDED JUNE 30, % ------------------------ 2000 1999 CHANGE ------- ------- ------ (IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) Revenues...................................................... $ 864,450 $ 505,683 70.9% Gross profit................................................. 31,342 19,919 57.3% Operating expenses............................................ 27,862 18,118 53.8% Operating income.............................................. 3,480 1,801 93.2% Other income.................................................. 929 604 53.8% Net income.................................................... 2,800 1,515 84.8% Diluted net income per share of common stock.................. 0.20 0.11 81.8% STATISTICAL DATA: Average number of worksite employees paid per month........... 60,934 40,401 50.8% Fee revenue per worksite employee per month .................. $ 4,510 $ 3,983 13.2% Fee payroll cost per worksite employee per month.............. 3,784 3,280 14.0% Gross markup per worksite employee per month.................. 770 703 9.5% Gross profit per worksite employee per month.................. 171 164 4.3% Operating expenses per worksite employee per month............ 152 149 2.0% Operating income per worksite employee per month.............. 19 15 26.7% Net income per worksite employee per month.................... 15 13 15.4%
REVENUES The Company's revenues for the three months ended June 30, 2000 increased 70.9% over the same period in 1999 due to a 50.8% increase in the average number of worksite employees paid per month, accompanied by a 13.2% increase in fee revenue per worksite employee per month. The Company's continued expansion of its sales force through new market and sales office openings was the primary factor contributing to the increase in the average number of worksite employees paid. Worksite employee growth within the Company's existing client base and slightly improved client retention also contributed to this increase. -13- 14 Revenues from markets opened prior to 1993 (the commencement of the Company's national expansion plan) increased 29% over the second quarter of 1999, while revenues from markets opened after 1993 increased 117%. For the three months ended June 30, 2000, revenues from the state of Texas represented 51% of the Company's total revenues and Houston, the Company's original market, represented 27% of the total. The 13.2% increase in fee revenue per worksite employee per month directly related to the 14.0% increase in fee payroll cost per worksite employee per month, reflecting (i) compensation increases within the Company's existing worksite employee base; (ii) the continued penetration of markets with generally higher wage levels, such as San Francisco, New York and Washington, D.C.; (iii) the addition of clients with worksite employees that have a higher average base pay than the existing client base; and (iv) the attrition of clients with worksite employees that have a lower average base pay than the existing client base. GROSS PROFIT Gross profit for the second quarter of 2000 increased 57.3% over the second quarter of 1999, primarily due to the 50.8% increase in the average number of worksite employees paid per month accompanied by a 4.3% increase in gross profit per worksite employee per month. Gross profit per worksite employee increased to $171 per month in the 2000 period from $164 per month in the 1999 period, reflecting effective execution of the Company's pricing strategy. The Company's pricing objectives attempt to maintain or improve the gross profit per worksite employee by matching or exceeding changes in its primary direct costs with increases in the gross markup per worksite employee. Gross markup per worksite employee per month increased 9.5% to $770 in the 2000 period versus $703 in the 1999 period. Approximately 60% of the $67 increase in gross markup per employee was the result of increased service fees designed to match the increased payroll tax expense associated with the higher average payroll cost per worksite employee. The remaining increase in gross markup per employee was the result of other increases in the Company's comprehensive service fees, which were designed to match or exceed known trends in the Company's primary direct costs. The Company's primary direct costs, which include payroll taxes, benefits and workers' compensation expenses, increased 11.4% to $608 per worksite employee per month in the 2000 period versus $546 in the 1999 period. Payroll taxes increased $41 per worksite employee per month over the second quarter of 1999, primarily due to the increased average payroll cost per worksite employee. The overall cost of payroll taxes as a percentage of payroll cost increased to 7.63% in the 2000 period from 7.51% in the 1999 period due to the significant growth in paid worksite employees during the year and a slight increase in the Company's weighted average state unemployment tax rate. The cost of health insurance and related employee benefits increased $14 per worksite employee over the second quarter of 1999 due to a 3.0% increase in the cost per -14- 15 covered employee and a slight increase in the percentage of worksite employees covered under the Company's health insurance plans to 68.8% in the 2000 period from 66.8% in the 1999 period. Workers' compensation costs increased $6 per worksite employee per month over the second quarter of 1999, and remained constant at 1.23% of fee payroll cost in both periods. Gross profit, measured as a percentage of revenue, declined to 3.63% in the 2000 period from 3.94% in the 1999 period. This decline was due primarily to the increase in average payroll cost per worksite employee. Because payroll cost is the largest single component of both revenues and direct costs, an increase in the average payroll cost per worksite employee creates a mathematical downward pressure on the calculation of gross profit as a percentage of revenue. OPERATING EXPENSES The following table presents certain information related to the Company's operating expenses for the three months ended June 30, 2000 and 1999.
THREE MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30, --------------------------------- --------------------------------- 2000 1999 % CHANGE 2000 1999 % CHANGE ------- ------- -------- ------- ------- -------- (IN THOUSANDS) (PER WORKSITE EMPLOYEE PER MONTH) Salaries, wages and payroll taxes ...... $12,283 $ 8,843 38.9% $ 67 $ 73 (8.2)% General and administrative expenses .... 9,028 5,221 72.9% 49 43 39.5% Commissions ............................ 2,165 1,507 43.7% 12 12 -- Advertising ............................ 1,502 1,010 48.7% 8 8 -- Depreciation and amortization .......... 2,884 1,537 87.6% 16 13 23.1% ------- ------- ------- ------- Total operating expenses .......... $27,862 $18,118 53.8% $ 152 $ 149 2.0% ======= ======= ======= =======
Operating expenses increased 53.8% over the second quarter of 1999, primarily due to the 50.8% growth in the average number of worksite employees paid by the Company. Operating expenses per worksite employee increased 2.0% to $152 per month in the 2000 period versus $149 in the 1999 period. During the second quarter of 2000, the Company's operating expenses continued to be impacted by several strategic initiatives, including its national sales and service expansion, the enhancement of its proprietary professional employer information system, the enhancement of its Internet-based service delivery platform, Administaff Assistant, and the development and launch of its new eCommerce portal, bizzport. Salaries, wages and payroll taxes of corporate and sales staff decreased to $67 per worksite employee per month in the 2000 period from $73 in the 1999 period, as corporate and sales staff increased at a rate lower than the Company's worksite employee growth. General and administrative expenses increased $6 per worksite employee per month over the second quarter of 1999, primarily due to increased consulting expenses associated with the Company's technology initiatives, an increase in the bad debt reserve, and increased travel expenses related to a change in the timing of the Company's annual sales conference and incentive trip. -15- 16 Depreciation and amortization expense increased $3 per worksite employee per month over the 1999 period as a result of the increased capital assets placed in service in 2000 and 1999, including (i) the implementation of a national technology infrastructure; (ii) the implementation of certain new components of Administaff Assistant, primarily the web payroll and web reporting capabilities, which included both internal software development costs and externally purchased software and hardware; (iii) the opening of new sales offices; (iv) the opening of the Atlanta operations center; and (v) the expansion of corporate headquarters. Commissions expense and advertising costs remained constant on a per worksite employee basis versus the second quarter of 1999. NET INCOME The Company's provision for income taxes differed from the U.S. statutory rate of 34% primarily due to state income taxes and tax-exempt interest income. The effective income tax rate for the 2000 period was consistent with the 1999 period. Operating income and net income per worksite employee per month improved to $19 and $15 in the 2000 period, versus $15 and $13 in the 1999 period. The Company's net income and diluted net income per share for the quarter ended June 30, 2000, increased to $2.8 million and $0.20, versus $1.5 million and $0.11 for the quarter ended June 30, 1999. -16- 17 SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999. The following table presents certain information related to the Company's results of operations for the six months ended June 30, 2000 and 1999.
SIX MONTHS ENDED JUNE 30, ------------------------ % 2000 1999 CHANGE ------- ------- ------ (IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) Revenues...................................................... $ 1,619,995 $ 981,536 65.0% Gross profit.................................................. 52,047 33,474 55.5% Operating expenses............................................ 53,266 35,735 49.1% Operating loss................................................ (1,219) (2,261) 46.1% Other income.................................................. 1,737 1,400 24.1% Net income (loss)............................................. 329 (543) 160.6% Diluted net income (loss) per share of common stock........... 0.02 (0.04) 150.0% STATISTICAL DATA: Average number of worksite employees paid per month........... 57,416 39,396 45.7% Fee revenue per worksite employee per month .................. $ 4,452 $ 3,955 12.6% Fee payroll cost per worksite employee per month.............. 3,684 3,257 13.1% Gross markup per worksite employee per month.................. 768 698 10.0% Gross profit per worksite employee per month.................. 151 142 6.3% Operating expenses per worksite employee per month............ 155 151 2.6% Operating loss per worksite employee per month................ (4) (9) 55.6% Net income (loss) per worksite employee per month............. 1 (2) 150.0%
REVENUES The Company's revenues for the six months ended June 30, 2000 increased 65.0% over the same period in 1999 due to a 45.7% increase in the average number of worksite employees paid per month, accompanied by a 12.6% increase in fee revenue per worksite employee per month. The Company's continued expansion of its sales force through new market and sales office openings was the primary factor contributing to the increase in the average number of worksite employees paid. Worksite employee growth within the Company's existing client base and slightly improved client retention also contributed to this increase. Revenues from markets opened prior to 1993 (the commencement of the Company's national expansion plan) increased 28% over the first six months of 1999, while revenues from markets opened after 1993 increased 107%. For the six months ended June 30, 2000, revenues from the state of Texas represented 52% of the Company's total revenues and Houston, the Company's original market, represented 28% of the total. The 12.6% increase in fee revenue per worksite employee per month directly related to the 13.1% increase in fee payroll cost per worksite employee per month, reflecting (i) compensation -17- 18 increases within the Company's existing worksite employee base; (ii) the continued penetration of markets with generally higher wage levels, such as San Francisco, New York and Washington, D.C.; (iii) the addition of clients with worksite employees that have a higher average base pay than the existing client base; and (iv) the attrition of clients with worksite employees that have a lower average base pay than the existing client base. GROSS PROFIT Gross profit for the first six months of 2000 increased 55.5% over the first six months of 1999, primarily due to the 45.7% increase in the average number of worksite employees paid per month accompanied by a 6.3% increase in gross profit per worksite employee per month. Gross profit per worksite employee increased to $151 per month in the 2000 period from $142 per month in the 1999 period, reflecting effective execution of the Company's pricing strategy. The Company's pricing objectives attempt to maintain or improve the gross profit per worksite employee by matching or exceeding changes in its primary direct costs with increases in the gross markup per worksite employee. Gross markup per worksite employee per month increased 10.0% to $768 in the 2000 period versus $698 in the 1999 period. Approximately 49% of the $70 increase in gross markup per employee was the result of increased service fees designed to match the increased payroll tax expense associated with the higher average payroll cost per worksite employee. The remaining increase in gross markup per employee was the result of other increases in the Company's comprehensive service fees, which were designed to match or exceed known trends in the Company's primary direct costs. The Company's primary direct costs, which include payroll taxes, benefits and workers' compensation expenses, increased 11.2% to $627 per worksite employee per month in the 2000 period versus $564 in the 1999 period. Payroll taxes increased $44 per worksite employee per month over the first six months of 1999, primarily due to the increased average payroll cost per worksite employee. The overall cost of payroll taxes as a percentage of payroll cost increased to 8.20% in the 2000 period from 8.07% in the 1999 period due to the significant growth in paid worksite employees during the year and a slight increase in the Company's weighted average state unemployment tax rate. The cost of health insurance and related employee benefits increased $12 per worksite employee over the first six months of 1999 due to a 2.8% increase in the cost per covered employee and a slight increase in the percentage of worksite employees covered under the Company's health insurance plans to 68.6% in the 2000 period from 67.2% in the 1999 period. Workers' compensation costs increased $6 per worksite employee per month over the first six months of 1999, and increased slightly to 1.23% of fee payroll cost in the 2000 period from 1.22% in the 1999 period. Gross profit, measured as a percentage of revenue, declined to 3.21% in the 2000 period from 3.41% in the 1999 period. This decline was due primarily to the increase in average payroll -18- 19 cost per worksite employee. Because payroll cost is the largest single component of both revenues and direct costs, an increase in the average payroll cost per worksite employee creates a mathematical downward pressure on the calculation of gross profit as a percentage of revenue. OPERATING EXPENSES The following table presents certain information related to the Company's operating expenses for the six months ended June 30, 2000 and 1999.
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------- ----------------------------------- 2000 1999 % CHANGE 2000 1999 % CHANGE ---- ---- -------- ---- ---- -------- (IN THOUSANDS) (PER WORKSITE EMPLOYEE PER MONTH) Salaries, wages and payroll taxes $ 24,351 $ 17,626 38.2% $ 71 $ 74 (4.1)% General and administrative expenses 16,590 10,306 61.0% 48 44 9.1% Commissions 4,377 2,976 47.1% 13 13 -- Advertising 2,432 1,929 26.1% 7 8 (12.5)% Depreciation and amortization 5,516 2,898 90.3% 16 12 33.3% --------- --------- ------ ----- Total operating expenses $ 53,266 $ 35,735 49.1% $ 155 $ 151 2.6% ========= ========= ====== =====
Operating expenses increased 49.1% over the first six months of 1999, primarily due to the 45.7% growth in the average number of worksite employees paid by the Company. Operating expenses per worksite employee increased 2.6% to $155 per month in the 2000 period versus $151 in the 1999 period. During the first six months of 2000, the Company's operating expenses continued to be impacted by several strategic initiatives, including its national sales and service expansion, the enhancement of its proprietary professional employer information system, the enhancement of its Internet-based service delivery platform, Administaff Assistant, and the development and launch of its new eCommerce portal, bizzport. Salaries, wages and payroll taxes of corporate and sales staff decreased to $71 per worksite employee per month in the 2000 period from $74 in the 1999 period, as corporate and sales staff increased at a rate lower than the Company's worksite employee growth. General and administrative expenses increased $4 per worksite employee per month over the first six months of 1999, primarily due to increased consulting expenses associated with the Company's technology initiatives and an increase in the bad debt reserve. Depreciation and amortization expense increased $4 per worksite employee per month over the 1999 period as a result of the increased capital assets placed in service in 2000 and 1999, including (i) the implementation of a national technology infrastructure; (ii) the implementation of certain new components of Administaff Assistant, primarily the web payroll and web reporting capabilities, which included both internal software development costs and externally purchased software and hardware; (iii) the opening of new sales offices; (iv) the opening of the Atlanta operations center; and (v) the expansion of corporate headquarters. -19- 20 Commissions expense on a per worksite employee basis was constant in both periods. Advertising costs declined $1 per worksite employee as efficiency gains achieved under the American Express Marketing Agreement allowed the Company to increase its volume of sales leads and appointments with minimal changes in its advertising strategy. NET INCOME (LOSS) The Company's provision for income taxes differed from the U.S. statutory rate of 34% primarily due to state income taxes and tax-exempt interest income. The effective income tax rate for the 2000 period was consistent with the 1999 period. Operating loss per worksite employee per month improved to $4 in the 2000 period versus $9 in the 1999 period. Net income per worksite employee was $1 in the 2000 period compared to a loss of $(2) in the 1999 period. The Company's net income and diluted net income per share for the six months ended June 30, 2000, was $329,000 and $0.02, versus a loss of $(543,000) and $(0.04) for the six months ended June 30, 1999. LIQUIDITY AND CAPITAL RESOURCES The Company periodically evaluates its liquidity requirements, capital needs and availability of resources in view of, among other things, expansion plans, debt service requirements and other operating cash needs. As a result of this process, the Company has, in the past, sought and may, in the future, seek to raise additional capital or take other steps to increase or manage its liquidity and capital resources. The Company currently believes that its cash on hand, marketable securities and cash flows from operations will be adequate to meet its short-term liquidity requirements. The Company will rely on these same sources, as well as public and private debt and equity financing, to meet its long-term liquidity and capital needs. The Company had $68.0 million in cash and cash equivalents and marketable securities at June 30, 2000, of which approximately $38.5 million was payable in July 2000 for withheld federal and state income taxes, employment taxes and other payroll deductions. The remainder is available to the Company for general corporate purposes, including, but not limited to, current working capital requirements, expenditures related to the continued expansion of the Company's sales, service and technology infrastructure, capital expenditures and the Company's stock repurchase program. At June 30, 2000, the Company had working capital of $32.6 million compared to $35.8 million at December 31, 1999. As of June 30, 2000, the Company had no long-term debt. CASH FLOWS FROM OPERATING ACTIVITIES The $26.8 million increase in net cash provided by operating activities was primarily the result of the timing of payroll tax payments surrounding the December 31 and June 30 payroll periods of each period. The timing and amounts of such payments can vary significantly based on -20- 21 various factors, including the day of the week on which a period ends and the existence of holidays on or immediately following a period end. CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures during the 2000 period primarily related to software development, hardware and software costs related to the enhancement of the Company's proprietary professional employer information system, the enhancement of Administaff Assistant and the initial development of bizzport. In addition, capital expenditures included building improvements and furniture and fixtures related to the expansion of corporate headquarters, service centers and sales offices to accommodate the Company's growth. Investments in other companies during the 2000 period include strategic investments in Virtual Growth, Inc. and eProsper, Inc., which are designed to add complementary functionality to Administaff's core PEO service. CASH FLOWS FROM FINANCING ACTIVITIES Cash flows from financing activities during the 2000 period primarily include proceeds from the exercise of employee stock options. OTHER MATTERS During the second quarter of 2000, the Company and American Express Travel Related Services Company, Inc. ("American Express") amended their marketing agreement. This amendment expanded the alliance to include more broad-based marketing and eCommerce initiatives. It also changed the American Express commission rate and the term of such commission payments. SEASONALITY, INFLATION AND QUARTERLY FLUCTUATIONS Historically, the Company's earnings pattern includes losses in the first quarter, followed by improved profitability in subsequent quarters throughout the year. This pattern is due to the effects of employment-related taxes which are based on each employee's cumulative earnings up to specified wage levels, causing employment-related taxes to be highest in the first quarter and then decline over the course of the year. Since the Company's revenues related to an individual employee are generally earned and collected at a relatively constant rate throughout each year, payment of such employment-related tax obligations has a substantial impact on the Company's financial condition and results of operations during the first six months of each year. Other factors that affect direct costs could mitigate or enhance this trend. The Company believes the effects of inflation have not had a significant impact on its results of operations or financial condition. FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE MARKET PRICE OF COMMON STOCK The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of the federal securities laws (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). You can identify such forward-looking statements by the words "expects," "intends," "plans," "projects," "believes," -21- 22 "estimates," and similar expressions. Forward-looking statements involve a number of risks and uncertainties. In the normal course of business, Administaff, Inc., in an effort to help keep its stockholders and the public informed about the Company's operations, may from time to time issue such forward-looking statements, either orally or in writing. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, or projections involving anticipated revenues, earnings or other aspects of operating results. Administaff bases the forward-looking statements on its current expectations, estimates and projections. Administaff cautions you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that Administaff cannot predict. In addition, Administaff has based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Therefore, the actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: (i) regulatory and tax developments including the ongoing audit of the Company's 401(k) plan and related compliance issues, and possible adverse application of various federal, state and local regulations; (ii) changes in the Company's direct costs and operating expenses including increases in health insurance premiums, workers' compensation rates and state unemployment tax rates, liabilities for employee and client actions or payroll-related claims, changes in the costs of expanding into new markets, and failure to manage growth of the Company's operations; (iii) the estimated costs and effectiveness of capital projects and investments in technology and infrastructure; (iv) the Company's ability to effectively implement its eBusiness strategy; (v) the effectiveness of the Company's sales and marketing efforts, including the Company's marketing agreements with American Express and other companies; and (vi) changes in the competitive environment in the PEO industry, including the entrance of new competitors and the Company's ability to renew or replace client companies. These factors are discussed in detail in the Company's 1999 annual report on Form 10-K. Any of these factors, or a combination of such factors, could materially affect the results of the Company's operations and whether forward-looking statements made by the Company ultimately prove to be accurate. -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. The Company believes that its pending legal proceedings would not have a material adverse effect on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. An Annual Meeting of Stockholders of the Company was held on May 2, 2000. At the Meeting, holders of 12,499,880 shares of common stock were present in person or by proxy, which constituted a quorum thereof. The vote of stockholders in respect of the two proposals voted on at the Meeting, both of which were approved, is set forth below: 1. Election of Class II Directors to serve until the Annual Meeting of Stockholders in 2003. For Withheld --- -------- Paul J. Sarvadi 12,337,839 162,041 Steven Alesio 12,164,110 335,770 Directors continuing in office were Richard G. Rawson, Linda Fayne Levinson and Jack M. Fields, Jr. 2. Ratification of Ernst & Young, LLP as the Company's independent auditors for the year ending December 31, 2000. Broker For Against Abstain Non-Votes ---------- ------- ------- --------- 12,487,293 9,637 2,950 -- -23- 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits 10.1 Second Amendment to the Marketing Agreement between American Express Travel Related Services Company, Inc., Administaff, Inc., Administaff Companies, Inc. and Administaff of Texas, Inc., dated April 11, 2000. 27 Financial Data Schedule (b) Reports on Form 8-K None -24- 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Administaff, Inc. Date: August 11, 2000 By: /s/ Richard G. Rawson ------------------------------------------- Richard G. Rawson Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: August 11, 2000 By: /s/ Douglas S. Sharp ------------------------------------------- Douglas S. Sharp Vice President, Finance (Principal Accounting Officer) -25- 26 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.1 Second Amendment to the Marketing Agreement between American Express Travel Related Services Company, Inc., Administaff, Inc., Administaff Companies, Inc. and Administaff of Texas, Inc., dated April 11, 2000. 27 Financial Data Schedule