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, 2001.
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 3, 2001, 27,372,932 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

TABLE OF CONTENTS

PART I
	ITEM 1. FINANCIAL STATEMENTS.
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
PART II
	ITEM 1. LEGAL PROCEEDINGS.
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
SIGNATURES

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	24
Item 4.	Submission of Matters to a Vote of Security Holders	24

PART I

ITEM 1. FINANCIAL STATEMENTS.

ADMINISTAFF, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands)

ASSETS
				June 30,			December 31,
				2001			2000
				(Unaudited)
Current assets:
	Cash and cash equivalents			$	59,312		$	69,733
	Marketable securities				31,353			38,953
	Accounts receivable:
		Trade			1,425			7,311
		Unbilled			60,075			57,084
		Other			818			820
	Prepaid expenses				3,645			6,785
	Income tax receivable				2,123			—
	Deferred income tax benefit				852			694
			Total current assets		159,603			181,380
Property and equipment:
	Land				2,920			2,920
	Buildings and improvements				16,574			14,047
	Computer hardware and software				34,565			28,679
	Software development costs				13,653			11,556
	Furniture and fixtures				20,210			18,756
	Vehicles				1,964			1,863
	Construction in progress				1,391			195
					91,277			78,016
	Accumulated depreciation				(33,233	)		(25,649	)
			Total property and equipment		58,044			52,367
Other assets:
	Notes receivable from employees				694			994
	Other assets				7,709			8,076
			Total other assets		8,403			9,070
			Total assets	$	226,050		$	242,817

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ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY
			June 30,			December 31,
			2001			2000
			(Unaudited)
Current liabilities:
	Accounts payable		$	2,727		$	1,496
	Payroll taxes and other payroll deductions payable			39,147			57,919
	Accrued worksite employee payroll expense			60,111			57,354
	Other accrued liabilities			16,438			10,819
	Revolving line of credit			500			—
	Income taxes payable			—			2,613
		Total current liabilities		118,923			130,201
Noncurrent liabilities:
	Deferred income taxes			7,086			7,106
		Total noncurrent liabilities		7,086			7,106
Commitments and contingencies
Stockholders’ equity:
	Common stock			305			304
	Additional paid-in capital			86,397			75,378
	Treasury stock, at cost			(36,711	)		(20,643	)
	Accumulated other comprehensive income			314			172
	Retained earnings			49,736			50,299
		Total stockholders’ equity		100,041			105,510
		Total liabilities and stockholders’ equity	$	226,050		$	242,817

See accompanying notes.

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ADMINISTAFF, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

			Three Months Ended					Six Months Ended
			June 30,					June 30,
			2001		2000			2001			2000
Revenues			$	1,044,776	$	864,450		$	2,088,195		$	1,619,995
Direct costs:
	Salaries and wages of worksite employees			869,821		721,984			1,742,101			1,351,921
	Benefits and payroll taxes			133,416		111,124			276,726			216,027
Gross profit				41,539		31,342			69,368			52,047
Operating expenses:
	Salaries, wages and payroll taxes			16,818		12,283			32,982			24,351
	General and administrative expenses			11,071		9,028			22,916			16,590
	Commissions			2,914		2,165			6,047			4,377
	Advertising			1,849		1,502			3,307			2,432
	Depreciation and amortization			4,108		2,884			7,840			5,516
				36,760		27,862			73,092			53,266
Operating income (loss)				4,779		3,480			(3,724	)		(1,219	)
Other income (expense):
	Interest income			965		931			2,359			1,730
	Other, net			439		(2	)		442			7
				1,404		929			2,801			1,737
Income (loss) before income taxes				6,183		4,409			(923	)		518
Income tax expense (benefit)				2,409		1,609			(360	)		189
Net income (loss)			$	3,774	$	2,800		$	(563	)	$	329
Basic net income (loss)
		per share of common stock	$	0.14	$	0.10		$	(0.02	)	$	0.01
Diluted net income (loss)
		per share of common stock	$	0.13	$	0.10		$	(0.02	)	$	0.01

See accompanying notes.

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ADMINISTAFF, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2001
(in thousands)
(Unaudited)

		Common Stock									Accumulated
		Issued				Additional					Other
						Paid-In		Treasury			Comprehensive		Retained
		Shares		Amount		Capital		Stock			Income		Earnings			Total
Balance at December 31, 2000			30,435	$	304	$	75,378	$	(20,643	)	$	172	$	50,299		$	105,510
	Purchase of treasury stock		—		—		—		(21,566	)		—		—			(21,566	)
	Exercise of common stock purchase warrants		—		—		10,520		5,480			—		—			16,000
	Exercise of stock options		51		1		474		—			—		—			475
	Other		—		—		25		18			—		—			43
	Change in unrealized gain on marketable securities		—		—		—		—			142		—			142
	Net loss		—		—		—		—			—		(563	)		(563	)
	Comprehensive loss																(421	)
Balance at June 30, 2001			30,486	$	305	$	86,397	$	(36,711	)	$	314	$	49,736		$	100,041

See accompanying notes.

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ADMINISTAFF, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

			Six Months Ended
			June 30,
			2001			2000
Cash flows from operating activities:
	Net (loss) income		$	(563	)	$	329
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization		7,852			5,641
		Bad debt expense		1,354			1,134
		Deferred income taxes		(178	)		1,262
		Loss (gain) on the disposition of assets		(9	)		97
		Changes in operating assets and liabilities:
		Accounts receivable		1,543			(12,427	)
		Prepaid expenses		3,140			(667	)
		Other assets		639			582
		Accounts payable		1,231			(1,431	)
		Payroll taxes and other payroll deductions payable		(18,772	)		16,980
		Accrued worksite employee payroll expense		2,757			10,092
		Other accrued liabilities		5,619			3,507
		Income taxes payable/receivable		(4,736	)		(1,979	)
		Total adjustments		440			22,791
		Net cash provided by (used in) operating activities		(123	)		23,120
Cash flows from investing activities:
	Marketable securities:
		Purchases		(35,274	)		(9,885	)
		Proceeds from maturities		34,445			7,684
		Proceeds from dispositions		8,600			2,012
	Property and equipment:
		Purchases		(11,467	)		(5,156	)
		Investment in software development costs		(2,137	)		(2,877	)
		Proceeds from dispositions		83			76
	Investment in other companies			—			(5,604	)
		Net cash used in investing activities		(5,750	)		(13,750	)

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ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
(Unaudited)

			Six Months Ended
			June 30,
			2001			2000
Cash flows from financing activities:
	Purchase of treasury stock		$	(21,566	)	$	—
	Proceeds from the exercise of common stock purchase warrants			16,000
	Proceeds from the sale of common stock put warrant			—			125
	Borrowings under revolving line of credit			500			—
	Proceeds from the exercise of stock options			475			2,190
	Other			43			27
		Net cash provided by (used in) financing activities		(4,548	)		2,342
Net increase (decrease) in cash and cash equivalents				(10,421	)		11,712
Cash and cash equivalents at beginning of period				69,733			25,451
Cash and cash equivalents at end of period			$	59,312		$	37,163

See accompanying notes.

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ADMINISTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2001

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, 2001 and 2000, revenues from the Company’s Texas markets represented 46% and 52% 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, 2000. The consolidated balance sheet at December 31, 2000, 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, 2001, and the consolidated statements of operations, cash flows and stockholders’ equity for the interim periods ended June 30, 2001 and 2000, 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 highest in the first quarter and then decline over the course of the year.

     Certain prior year amounts have been reclassified to conform with current year presentation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

2. Stockholders’ Equity

     On February 28, 2001, American Express Travel Related Services Company, Inc. (“American Express”) exercised warrants to purchase 800,000 shares of common stock at $20 per share. The shares were issued from treasury stock held by the Company. On March 12, 2001, the Company repurchased 800,000 shares of common stock from American Express for $19.6 million.

     On February 9, 2001, the Company’s Board of Directors authorized the repurchase of an additional 1,000,000 shares of common stock under the Company’s existing repurchase program. Of the 5,000,000 shares authorized for repurchase as of June 30, 2001, the Company has repurchased 3,242,000 shares at a total cost of approximately $40.3 million, including the 800,000 shares repurchased from American Express and 100,000 shares repurchased in the open market during 2001 for $2.0 million.

     On October 16, 2000, the Company effected a two-for-one stock split of its common stock in the form of a 100% stock dividend. All share and per share amounts presented in these financial statements have been retroactively restated to reflect this change in the Company’s capital structure.

3. Net Income Per Share

     The numerator used in the calculations of both basic and diluted net income per share for all periods presented was net income. The denominator for each period presented was determined as follows:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2001		2000		2001		2000
Basic net income per share — weighted average shares outstanding			27,355		27,052		27,432		27,000
Effect of dilutive securities:
	Common stock purchase warrants — treasury stock method		—		166		—		82
	Common stock options — treasury stock method		1,181		1,374		—		1,026
			1,181		1,540		—		1,108
Diluted net income per share — weighted average shares outstanding plus effect of dilutive securities			28,536		28,592		27,432		28,108
Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect			4,277		2,532		7,390		3,514

4. Marketable Securities

     At June 30, 2001, 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

classified as available-for-sale, and as a result, are reported at fair value. Unrealized gains and losses are reported as a component of accumulated other comprehensive income in stockholders’ equity.

5. Revolving Credit Agreement

     On May 25, 2001, the Company entered into a $21 million revolving credit agreement that expires on November 30, 2002. At the option of the Company, amounts borrowed under the agreement accrue interest at the bank’s prime rate or LIBOR plus 0.45% as determined at the time of the borrowing. The revolving line of credit is 100% secured by cash and marketable securities held in custody by the bank.

6. Commitments and Contingencies

     The Company is a defendant in various lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on the Company’s financial position or results of operations.

     The Company’s 401(k) plan is currently under audit by the Internal Revenue Service (the “IRS”) for the year ended December 31, 1993. Although the audit is for the 1993 plan year, certain conclusions of the IRS could be applicable to other years as well. In addition, the IRS has established an Employee Leasing Market Segment Group (the “Market Segment Group”) for the purpose of identifying specific compliance issues prevalent in certain segments of the PEO industry. Approximately 70 PEOs, including the Company, have been randomly selected by the IRS for audit pursuant to this program.

     The primary outstanding issue from these audits involves the Company’s rights under the Internal Revenue Code (the “Code”) as a co-employer of its worksite employees, including officers and owners of client companies. In conjunction with the 1993 401(k) plan year audit, the IRS Houston District has sought technical advice (the “Technical Advice Request”) from the IRS National Office about whether worksite employee participation in the 401(k) plan violates the exclusive benefit rule under the Code because they are not employees of the Company. The Technical Advice Request contains the conclusions of the IRS Houston District that the 401(k) plan should be disqualified because it covers worksite employees who are not employees of the Company. The Company’s response to the Technical Advice Request refutes the conclusions of the IRS Houston District. With respect to the Market Segment Group study, the Company understands that the issue of whether a PEO and a client company may be treated as co-employers for certain federal tax purposes (the “Industry Issue”) has been referred to the IRS National Office.

     Should the IRS conclude that the Company is not a “co-employer” of worksite employees for purposes of the Code, worksite employees could not continue to make salary deferral contributions to the 401(k) plan or pursuant to the Company’s cafeteria plan or continue to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

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 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 would also face the risk of client dissatisfaction and potential litigation. While the Company is not able to predict either the timing or the nature of any final decision that may be reached with respect to the 401(k) plan audit or with respect to the Technical Advice Request or the Market Segment Group study and the ultimate outcome of such decisions, the Company believes that a retroactive application of an unfavorable determination is unlikely. The Company also believes that a prospective application of an unfavorable determination would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

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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 2000 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, 2001 Compared to Three Months Ended June 30, 2000.

     The following table presents certain information related to the Company’s results of operations for the three months ended June 30, 2001 and 2000.

	Three months ended
	June 30,
					%
	2001		2000		Change
	(in thousands, except per share and statistical data)
Revenues	$	1,044,776	$	864,450		20.9	%
Gross profit		41,539		31,342		32.5	%
Operating expenses		36,760		27,862		31.9	%
Operating income		4,779		3,480		37.3	%
Other income		1,404		929		51.1	%
Net income		3,774		2,800		34.8	%
Diluted net income per share of common stock		0.13		0.10		30.0	%
Statistical Data:
Average number of worksite employees paid per month		67,878		60,934		11.4	%
Fee revenue per worksite employee per month	$	4,871	$	4,510		8.0	%
Fee payroll cost per worksite employee per month		4,021		3,740		7.5	%
Gross markup per worksite employee per month		850		770		10.4	%
Gross profit per worksite employee per month		204		171		19.3	%
Operating expenses per worksite employee per month		181		152		19.1	%
Operating income per worksite employee per month		23		19		21.1	%
Net income per worksite employee per month		19		15		26.7	%

     Revenues

     The Company’s revenues for the three months ended June 30, 2001 increased 20.9% over the same period in 2000 due to an 11.4% increase in the average number of worksite employees paid per month, accompanied by an 8.0% 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.

     The 8.0% increase in fee revenue per worksite employee per month directly related to the 7.5% increase in fee payroll cost per worksite employee per month, reflecting (i) compensation

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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.; and (iii) the addition of clients with worksite employees that have a higher average base pay than the existing client base.

     By region, the Company’s revenue growth over the second quarter of 2000 and revenue distribution for the quarter ended June 30, 2001 were as follows:

				% of
	Revenue			Total
	Growth			Revenues
Northeast		41.9	%		10.9	%
Southeast		6.6	%		9.7	%
Central		38.5	%		13.6	%
Southwest		10.1	%		46.4	%
West		38.9	%		19.4	%

     Gross Profit

     Gross profit for the second quarter of 2001 increased 32.5% over the second quarter of 2000, primarily due to the 11.4% increase in the average number of worksite employees paid per month accompanied by a 19.3% increase in gross profit per worksite employee per month. Gross profit per worksite employee increased to $204 per month in the 2001 period from $171 per month in the 2000 period. 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 10.4% to $850 in the 2001 period versus $770 in the 2000 period. Approximately 28% of the $80 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 7.7% to $655 per worksite employee per month in the 2001 period versus $608 in the 2000 period. Payroll taxes increased $15 per worksite employee per month over the second quarter of 2000, primarily due to the increased average payroll cost per worksite employee. The overall cost of payroll taxes as a percentage of payroll cost decreased to 7.41% in the 2001 period from 7.63% in the 2000 period. This decrease was the result of an increase in bonus payroll cost per worksite employee and the Company’s lower growth rate, which allowed a larger proportion of the Company’s worksite employees to meet their state unemployment tax limits earlier in the first half of 2001 compared to the 2000 period. The cost of health insurance and related

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employee benefits increased $28 per worksite employee per month over the second quarter of 2000 due to a 6.1% increase in the cost per covered employee and an increase in the percentage of worksite employees covered under the Company’s health insurance plans to 72.1% in the 2001 period from 68.8% in the 2000 period. Workers’ compensation costs increased $4 per worksite employee per month over the second quarter of 2000, and increased slightly to 1.24% of fee payroll cost in the 2001 period from 1.23% in the 2000 period.

     Gross profit, measured as a percentage of revenue, increased to 3.98% in the 2001 period from 3.63% in the 2000 period. This increase was due to the decrease in the effective payroll tax rate and an increase in gross markup per employee which exceeded the increase in fee payroll cost per employee.

     Operating Expenses

     The following table presents certain information related to the Company’s operating expenses for the three months ended June 30, 2001 and 2000.

		Three months ended June 30,							Three months ended June 30,
		2001		2000		% change			2001		2000		% change
		(in thousands)							(per worksite employee per month)
Salaries, wages and payroll taxes		$	16,818	$	12,283		36.9	%	$	83	$	67		23.9	%
General and administrative expenses			11,071		9,028		22.6	%		55		49		12.2	%
Commissions			2,914		2,165		34.6	%		14		12		16.7	%
Advertising			1,849		1,502		23.1	%		9		8		12.5	%
Depreciation and amortization			4,108		2,884		42.4	%		20		16		25.0	%
	Total operating expenses	$	36,760	$	27,862		31.9	%	$	181	$	152		19.1	%

     Operating expenses increased 31.9% over the second quarter of 2000 to $36.8 million. Operating expense per worksite employee increased 19.1% to $181 per month in the 2001 period versus $152 in the 2000 period. During the second quarter of 2001, the Company’s operating expenses continued to be impacted by strategic initiatives. The Company continued its national sales expansion in 2001 with the opening of two new sales markets (Boston and San Diego), the opening of three new sales offices in existing markets and a change in its sales compensation plan. As a result of these initiatives, the Company’s average number of trained sales representatives increased 39% over the second quarter of 2000. In addition, the Company continued its technology initiatives such as the enhancement of its Internet-based service delivery platform, Administaff Assistant, and the enhancement of its eCommerce portal, bizzport.

     Salaries, wages and payroll taxes of corporate and sales staff increased to $83 per worksite employee per month in the 2001 period from $67 in the 2000 period. This increase was primarily due to a 34% increase in sales personnel, a 40% increase in service personnel in the Company’s service centers, a 117% increase in service personnel located in the Company’s sales markets and a 21% increase in corporate personnel.

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     General and administrative expenses increased to $55 per worksite employee per month from $49 in the second quarter of 2000. The increase primarily resulted from rent expense and travel expense associated with the Company’s national expansion plan, including the opening of a new service center and additional sales offices in new and existing markets.

     Depreciation and amortization expense increased $4 per worksite employee per month over the 2000 period as a result of the increased capital assets placed in service in 2001 and late 2000, including (i) the implementation of the fifth generation of the Company’s proprietary PEO information system; (ii) the implementation and enhancement of certain components of Administaff Assistant, such as 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 relocation of the Houston service center; and (v) the expansion of corporate headquarters.

     Commissions expense increased by $2 per worksite employee per month from the 2000 period due to a restructuring of the sales representative compensation plan effective January 1, 2001. Advertising costs also increased $1 per month on a per worksite employee basis versus the second quarter of 2000.

     Net Income

     Other income increased 51.1% and included approximately $400,000 of proceeds from the settlement of a short-swing profit violation by an outside shareholder. Excluding this item, other income increased by 6.4% over the 2000 period.

     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 2001 period increased to 39% versus the effective rate of 36.5% during the 2000 period. This increase was a result of (i) a 1% increase in the federal rate to 35%; and (ii) an increase in the Company’s effective state income tax rate due to a broader geographic distribution of revenue into states with higher income tax rates such as California, New York and Illinois.

     Operating income and net income per worksite employee per month increased to $23 and $19 in the 2001 period, versus $19 and $15 in the 2000 period. The Company’s net income and diluted net income per share for the quarter ended June 30, 2001 increased to $3.8 million and $0.13, versus $2.8 million and $0.10 for the quarter ended June 30, 2000.

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     Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000.

     The following table presents certain information related to the Company’s results of operations for the six months ended June 30, 2001 and 2000.

	Six months ended
	June 30,
							%
	2001			2000			Change
	(in thousands, except per share and statistical data)
Revenues	$	2,088,195		$	1,619,995			28.9	%
Gross profit		69,368			52,047			33.3	%
Operating expenses		73,092			53,266			37.2	%
Operating loss		(3,724	)		(1,219	)		205.5	%
Other income		2,801			1,737			61.3	%
Net income (loss)		(563	)		329			(271.1	)%
Diluted net income (loss) per share of common stock		(0.02	)		0.01			(300.0	)%
Statistical Data:
Average number of worksite employees paid per month		67,669			57,416			17.9	%
Fee revenue per worksite employee per month	$	4,835		$	4,452			8.6	%
Fee payroll cost per worksite employee per month		3,991			3,684			8.3	%
Gross markup per worksite employee per month		844			768			9.9	%
Gross profit per worksite employee per month		171			151			13.2	%
Operating expenses per worksite employee per month		180			155			16.1	%
Operating loss per worksite employee per month		(9	)		(4	)		(125.0	)%
Net income (loss) per worksite employee per month		(1	)		1			(200.0	)%

     Revenues

     The Company’s revenues for the six months ended June 30, 2001 increased 28.9% over the same period in 2000 due to a 17.9% increase in the average number of worksite employees paid per month, accompanied by an 8.6% 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.

     The 8.6% increase in fee revenue per worksite employee per month directly related to the 8.3% 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.; and (iii) the addition of clients with worksite employees that have a higher average base pay than the existing client base.

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     By region, the Company’s revenue growth over the first half of 2000 and revenue distribution for the six months ended June 30, 2001 were as follows:

				% of
	Revenue			Total
	Growth			Revenues
Northeast		73.8	%		11.3	%
Southeast		10.9	%		9.6	%
Central		45.6	%		13.4	%
Southwest		14.3	%		46.2	%
West		52.9	%		19.5	%

     Gross Profit

     Gross profit for the first six months of 2001 increased 33.3% over the first six months of 2000, primarily due to the 17.9% increase in the average number of worksite employees paid per month accompanied by a 13.2% increase in gross profit per worksite employee per month. Gross profit per worksite employee increased to $171 per month in the 2001 period from $151 per month in the 2000 period. 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 9.9% to $844 in the 2001 period versus $768 in the 2000 period. Approximately 32.3% of the $76 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 8.8% to $682 per worksite employee per month in the 2001 period versus $627 in the 2000 period. Payroll taxes increased $23 per worksite employee per month over the first six months of 2000, primarily due to the increased average payroll cost per worksite employee. The overall cost of payroll taxes as a percentage of payroll cost decreased to 8.0% in the 2001 period from 8.2% in the 2000 period. This decrease was the result of an increase in bonus payroll cost per worksite employee and the Company’s lower growth rate, which allowed a larger portion of the Company’s worksite employees to meet their state unemployment tax limits earlier in the first half of 2001 compared to the 2000 period. The cost of health insurance and related employee benefits increased $27 per worksite employee over the first six months of 2001 due to a 5.3% 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 72.3% in the 2001 period from 68.6% in the 2000 period. Workers’ compensation costs increased $5 per worksite employee per

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month over the first six months of 2000, and increased slightly to 1.25% of fee payroll cost in the 2001 period from 1.23% in the 2000 period.

     Gross profit, measured as a percentage of revenue, increased to 3.32% in the 2001 period from 3.21% in the 2000 period due to the decrease in the effective payroll tax rate.

     Operating Expenses

     The following table presents certain information related to the Company’s operating expenses for the six months ended June 30, 2001 and 2000.

		Six months ended June 30,							Six months ended June 30,
		2001		2000		% change			2001		2000		% change
		(in thousands)							(per worksite employee per month)
Salaries, wages and payroll taxes		$	32,982	$	24,351		35.4	%	$	81	$	71		14.1	%
General and administrative expenses			22,916		16,590		38.1	%		57		48		18.8	%
Commissions			6,047		4,377		38.2	%		15		13		15.4	%
Advertising			3,307		2,432		36.0	%		8		7		14.3	%
Depreciation and amortization			7,840		5,516		42.1	%		19		16		18.8	%
	Total operating expenses	$	73,092	$	53,266		37.2	%	$	180	$	155		16.1	%

     Operating expenses increased to $73.1 million, or 37.2% over the first six months of 2000. Operating expenses per worksite employee increased 16.1% to $180 per month in the 2001 period versus $155 in the 2000 period. During the first six months of 2001, the Company’s operating expenses continued to be impacted by several strategic initiatives, including its national sales expansion with the addition of new trained sales representatives, the continued expansion into new markets, and continued technology initiatives such as the enhancement of its Internet-based service delivery platform, Administaff Assistant, and the enhancement of its eCommerce portal, bizzport.

     Salaries, wages and payroll taxes of corporate and sales staff increased to $81 per worksite employee per month in the 2001 period from $71 in the 2000 period. This increase was primarily due to a 30% increase in sales personnel, a 51% increase in service personnel in the Company’s service centers, a 106% increase in service personnel located in the Company’s sales markets and a 23% increase in corporate personnel.

     General and administrative expenses increased to $57 per worksite employee per month from $48 in the first six months of 2000. The increase primarily resulted from rent expense and travel expense associated with the Company’s national expansion plan, including the opening of a new service center and additional sales offices in new and existing markets.

     Depreciation and amortization expense increased $3 per worksite employee per month over the 2000 period as a result of the increased capital assets placed in service in 2001 and late 2000, including (i) the implementation of the fifth generation of the Company’s proprietary PEO information system; (ii) the implementation and enhancement of certain components of Administaff

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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 Houston service center; and (v) the expansion of corporate headquarters.

     Commissions expense increased $2 per worksite employee per month over the first six months of 2000 due to a restructuring of the sales representative compensation plan effective January 1, 2001. Advertising costs increased $1 per month on a per worksite employee basis versus the first six months of 2000.

     Net Income (Loss)

     Other income increased 61.2% to $2.8 million. Interest income increased 36.4% to $2.4 million in the first half of 2001, due to a higher level of cash and marketable securities resulting from the Company’s strong performance in the second half of 2000. The remaining increase was primarily the result of the receipt of approximately $400,000 of proceeds from the settlement of a short-swing profit violation by an outside shareholder.

     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 2001 period increased to 39% versus the effective rate of 36.5% during the 2000 period. This increase was a result of (i) a 1% increase in the federal rate to 35%; and (ii) an increase in the Company’s effective state income tax rate due to a broader geographic distribution of revenue into states with higher income tax rates such as California, New York and Illinois.

     Operating loss per worksite employee per month declined to $9 in the 2001 period versus $4 in the 2000 period. Net loss per worksite employee was $1 in the 2001 period compared to net income per worksite employee of $1 in the 2000 period. The Company’s net loss and diluted net loss per share for the six months ended June 30, 2001, was $563,000 and $0.02, versus net income and diluted net income per share of $329,000 and $0.01 for the six months ended June 30, 2000.

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, cash flows from operations and its available revolving line of credit 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 needs and its capital needs.

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     The Company had $90.7 million in cash and cash equivalents and marketable securities at June 30, 2001, of which approximately $39.1 million was payable in July 2001 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, 2001, the Company had working capital of $40.7 million compared to $51.2 million at December 31, 2000. This decline was primarily due to a $5.6 million net repurchase of treasury stock and $13.6 million in capital expenditures during the period, which was partially offset by $9.8 million in earnings before interest, taxes, depreciation and amortization. As of June 30, 2001, the Company had no long-term debt and had borrowed $500,000 under its revolving line of credit.

     On May 25, 2001, the Company entered into a $21 million revolving credit agreement that expires on November 30, 2002. At the option of the Company, amounts borrowed under the agreement accrue interest at the bank’s prime rate or LIBOR plus 0.45% as determined at the time of the borrowing. The revolving line of credit is 100% secured by cash and marketable securities held in custody by the bank. The line of credit will be used to finance the construction of a new facility at the Company’s Kingwood, Texas headquarters. Construction of the new facility is expected to be completed late in 2002 and is expected to cost approximately $21 million. The Company intends to repay all amounts borrowed under the line of credit upon completion of the new facility.

     Cash Flows From Operating Activities

     The $23.2 million decrease 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 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. For the same reasons, the Company’s cash flows from operations were also affected by the timing of presentment of customer billings and the receipt of related customer payments.

     Cash Flows From Investing Activities

     The $8.0 million decrease in net cash used by investing activities is primarily the result of $7.8 million in net proceeds from marketable securities maturities and dispositions during the first half of 2001. The proceeds were converted to cash and cash equivalents to provide liquidity for the Company’s long-term strategic initiatives.

     Capital expenditures during the 2001 period primarily related to software development, hardware and software costs related to the enhancement of the Company’s proprietary professional employer information system, Administaff Assistant and bizzport. In addition, capital expenditures included building improvements and furniture and fixtures at the Company’s sales offices and

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corporate headquarters to accommodate the Company’s expansion plans, including $1.4 million related to the construction of new facilities at the Company’s corporate headquarters.

     Cash Flows From Financing Activities

     The $6.9 million decrease in cash provided by financing activities was primarily a result of the repurchase of $21.6 million in treasury stock, partially offset by $16 million in proceeds from the exercise of common stock purchase warrants by American Express.

     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 herein that are not historical facts are forward-looking statements within the meaning of the federal securities laws (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). You can identify such forward-looking statements by the words “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “likely,” “goal,” and “assume,” and similar expressions. Forward-looking statements involve a number of risks and uncertainties. In the normal course of business, Administaff, Inc., in an effort to help keep its stockholders and the public informed about the Company’s operations, may from time to time issue such forward-looking statements, either orally or in writing. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, or projections involving anticipated revenues, earnings, unit growth, profit per worksite employee, pricing, operating expenses or other aspects of operating results. Administaff bases the forward-looking statements on its current expectations, estimates and projections. Administaff cautions you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions that Administaff cannot predict. In addition, Administaff has based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Therefore, the actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: (i) changes in general economic

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conditions; (ii) 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; (iii) 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; (iv) the estimated costs and effectiveness of capital projects and investments in technology and infrastructure; (v) the Company’s ability to effectively implement its eBusiness strategy; (vi) the effectiveness of the Company’s sales and marketing efforts, including the Company’s marketing agreements with American Express and other companies; (vii) the potential for impairment of investments in other companies; and (viii) 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 2000 annual report on Form 10-K. Any of these factors, or a combination of such factors, could materially affect the results of the Company’s operations and whether forward-looking statements made by the Company ultimately prove to be accurate.

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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 8, 2001. At the meeting, holders of 24,659,834 shares of common stock were present in person or by proxy, which constituted a quorum thereof. The vote of stockholders in respect of the three proposals voted on at the Meeting, all of which were approved, is set forth below:

1. Election of Class III Directors to serve until the Annual Meeting of Stockholders in 2004.

	For		Withheld
Jack M. Fields, Jr.		24,136,857		522,977
Paul S. Lattanzio		24,137,307		522,527
Richard G. Rawson		24,137,257		522,577

	Directors continuing in office were Steven Alesio, Michael W. Brown, Linda Fayne Levinson and Paul J. Sarvadi.
2.	Approval of the adoption of the Administaff, Inc. 2001 Incentive Plan.

					Broker
For	Against		Abstain		Non-Votes
13,850,277		4,780,066		18,684		6,010,807

3. Ratification of Ernst & Young, LLP as the Company’s independent auditors for the year ending December 31, 2001.

For	Against		Abstain
24,628,913		29,811		1,110

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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 14, 2001 By: /s/   Richard G. Rawson
Richard G. Rawson
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)

Date: August 14, 2001 By: /s/   Douglas S. Sharp
Douglas S. Sharp
Vice President, Finance
(Principal Accounting Officer)

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