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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950129-01-001482.txt : 20010319
<SEC-HEADER>0000950129-01-001482.hdr.sgml : 20010319
ACCESSION NUMBER: 0000950129-01-001482
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010316
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ADMINISTAFF INC \DE\
CENTRAL INDEX KEY: 0001000753
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363]
IRS NUMBER: 760479645
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-13998
FILM NUMBER: 1570306
BUSINESS ADDRESS:
STREET 1: 19001 CRESCENT SPRINGS DR
CITY: KINGWOOD
STATE: TX
ZIP: 77339
BUSINESS PHONE: 7133588986
MAIL ADDRESS:
STREET 1: 19001 CRESCENT SPRINGS DR
CITY: KINGWOOD
STATE: TX
ZIP: 77339
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>h85055e10-k.txt
<DESCRIPTION>ADMINISTAFF INC - YEAR ENDED DECEMBER 31, 2000
<TEXT>
<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2000.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee required]
For the transition period from to
---------- ----------
Commission File No. 1-13998
ADMINISTAFF, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0479645
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19001 Crescent Springs Drive
Kingwood, Texas 77339
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (281) 358-8986
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Common Stock, par value $0.01 per share New York Stock Exchange
Rights to Purchase Series A Junior Participating Preferred Stock New York Stock Exchange
(Title of class) (Name of Exchange on Which Registered)
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act: NONE
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
As of March 12, 2001, 27,433,699 shares of the registrant's common
stock, par value $0.01 per share, were outstanding. The aggregate market value
of the common stock held by non-affiliates (based upon the March 12, 2001
closing price of the common stock as reported by the New York Stock Exchange)
was approximately $409 million.
Part III information is incorporated by reference from the proxy
statement for the annual meeting of stockholders to be held May 8, 2001 which
the registrant intends to file within 120 days of the end of the fiscal year.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I
Item 1. Business............................................................ 2
Item 2. Properties.......................................................... 16
Item 3. Legal Proceedings................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders................. 17
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters....................................... 19
Item 6. Selected Financial Data............................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 21
Item 7A. Qualitative and Quantitative Disclosures About Market Risk.......... 36
Item 8. Financial Statements and Supplementary Data......................... 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................... 37
PART III
Item 10. Directors and Executive Officers of the Registrant.................. 38
Item 11. Executive Compensation.............................................. 38
Item 12. Security Ownership of Certain Beneficial Owners and Management ..... 38
Item 13. Certain Relationships and Related Transactions...................... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 39
</TABLE>
<PAGE> 3
PART I
This document contains forward-looking statements within the meaning of
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," "assume" and similar expressions. In the normal course of
business, Administaff, Inc. ("Administaff" or the "Company"), 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
in this Annual Report, or elsewhere, could differ materially from those stated
in such forward-looking statements. Among the factors that could cause actual
results to differ materially are the risks and uncertainties discussed in this
Annual Report, including, without limitation, factors discussed in Item 1,
"Business" and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," including the factors discussed under the
caption "Factors That May Affect Future Results and the Market Price of Common
Stock," beginning on page 32.
ITEM 1. BUSINESS.
GENERAL
Administaff is a professional employer organization ("PEO") that
provides a comprehensive Personnel Management System encompassing a broad range
of services, including benefits and payroll administration, health and workers'
compensation insurance programs, personnel records management, employer
liability management, employee recruiting and selection, performance management
and training and development services. The Company was organized as a
corporation in 1986 and has provided PEO services since inception.
The Company's Personnel Management System is designed to improve the
productivity and profitability of small and medium-sized businesses. It relieves
business owners and key executives of many employer-related administrative and
regulatory burdens and enables them to focus on the core competencies of their
businesses. It also promotes employee performance through human resource
management techniques that improve employee satisfaction. The Company provides
the Personnel Management System by entering into a Client Services Agreement
("CSA"), which establishes a three-party relationship whereby the Company and
client act as co-employers of the employees who work at the client's location
("worksite employees"). Under the CSA, Administaff assumes responsibility for
personnel administration and compliance with most employment-related
governmental regulations, while the client company retains the employees'
services in its business and remains the employer for various other purposes.
The Company charges a comprehensive service fee, which is invoiced concurrently
with the processing of payroll for the worksite employees of the client. The fee
is based upon the gross payroll of each client and the Company's estimated cost
of providing the services included in the Personnel Management System.
Administaff is a leading provider of PEO services, both in terms of the
number of worksite employees and in terms of revenues. The Company, which serves
client companies with worksite employees located throughout the United States,
is currently executing a long-term national expansion strategy targeting
approximately 90 sales offices located in 40 strategically selected markets. As
part of this expansion strategy, the Company opened six new sales offices and
entered two new markets during 2000. As of December 31, 2000, the Company had 31
sales offices located in 17 markets. For the year ended December 31, 2000,
Houston, the Company's original market, accounted for approximately 27% of the
Company's revenues with other Texas markets contributing an additional 23%.
During 2000, revenues grew 33% in the Texas markets and 114% in the non-Texas
markets.
-2-
<PAGE> 4
The Company's national expansion strategy also includes regionalized
data processing for payroll and benefits transactions and localized face-to-face
human resources service capacity. During 2000, the Company relocated and
expanded its service center in Houston and continued to place human resources
and customer service personnel in its sales markets. As of December 31, 2000,
the Company had three service centers, which when fully staffed, will provide
the capacity to serve approximately 100,000 worksite employees. In addition, the
Company has human resources and customer service personnel located in all of its
17 sales markets. The Company expects to open five new sales offices in 2001.
The Company's eBusiness strategy includes three primary initiatives:
Administaff Assistant, bizzport and a best practices human resources site.
Administaff Assistant, the Company's Internet-based service delivery platform,
provides automated, personalized PEO services to clients and worksite employees.
Bizzport is an eCommerce portal designed to provide the Company's clients and
worksite employees with a wide variety of value-added products and services. The
best practices human resources site will seek to extend the Company's brand and
presence as the premier human resources department for small and medium-sized
business by providing a comprehensive human resources information guide on the
web sites of alliance partners. The best practices human resources site is
expected to be launched during 2001.
PEO INDUSTRY
The PEO industry began to evolve in the early 1980's largely in
response to the burdens placed on small and medium-sized employers by an
increasingly complex legal and regulatory environment. While various service
providers were available to assist these businesses with specific tasks, PEOs
emerged as providers of a more comprehensive range of services relating to the
employer/employee relationship. PEO arrangements generally transfer broad
aspects of the employer/employee relationship to the PEO. Because PEOs provide
employee-related services to a large number of employees, they can achieve
economies of scale that allow them to perform employment-related functions more
efficiently, provide employee benefits at a level typically available only to
large corporations with substantial resources and devote more attention to human
resources management.
Growth in the PEO industry has been significant. The Company believes
that the key factors driving demand for PEO services include (i) trends relating
to the growth and productivity of the small and medium-sized business community
in the United States, such as outsourcing and a focus on core competencies, (ii)
the need to provide competitive health care and related benefits to attract and
retain employees, (iii) the increasing costs associated with health and workers'
compensation insurance coverage, workplace safety programs, employee-related
complaints and litigation and (iv) complex regulation of labor and employment
issues and the related costs of compliance, including the allocation of time and
effort to such functions by owners and key executives.
A significant factor in the growth of the PEO industry has been
increasing recognition and acceptance of PEOs and the co-employer relationship
by federal and state governmental authorities. The Company and other industry
leaders, in concert with the National Association of Professional Employer
Organizations ("NAPEO"), have worked with the relevant governmental entities for
the establishment of a regulatory framework that protects clients and employees,
discourages unscrupulous and financially unsound companies, and promotes the
legitimacy and further development of the industry. While 47 states have
recognized PEOs in their employment laws, many states do not explicitly regulate
PEOs. However, 21 states (including Texas) have enacted legislation containing
licensing, registration, or certification requirements and several others are
considering such regulation. Such laws vary from state to state but generally
provide for monitoring the fiscal responsibility of PEOs. State regulation
assists in screening insufficiently capitalized PEO operations and, in the
Company's view, has the effect of legitimizing the PEO industry by resolving
interpretive issues concerning employee status for specific purposes under
applicable state law. The Company has actively supported such regulatory efforts
and is currently licensed or registered in all 21 of these states. The cost of
compliance with these regulations is not material to the Company's financial
position or results of operations.
-3-
<PAGE> 5
PEO SERVICES
The Company serves small and medium-sized business by providing its
Personnel Management System, which encompasses a broad range of services,
including benefits and payroll administration, health and workers' compensation
insurance programs, personnel records management, employer liability management,
employee recruiting and selection, performance management and training and
development services. The Personnel Management System is designed to attract and
retain high-quality employees, while relieving client owners and key executives
of many employer-related administrative and regulatory burdens. Among the
employment-related laws and regulations that may affect a client company are the
following:
<TABLE>
<S> <C>
o Internal Revenue Code (the "Code") o Age Discrimination in Employment Act
(ADEA)
o Federal Income Contribution Act (FICA)
o The Family and Medical Leave Act (FMLA)
o Federal Unemployment Tax Act (FUTA)
o Health Insurance Portability and
o Fair Labor Standards Act (FLSA) Accountability Act (HIPAA)
o Employee Retirement Income Security Act o Drug-Free Workplace Act
(ERISA)
o Occupational Safety and Health Act
o Consolidated Omnibus Budget Reconcilia- (OSHA)
tion Act of 1987 (COBRA)
o Worker Adjustment and Retraining
o Immigration Reform and Control Act Notification Act (WARN)
(IRCA)
o State unemployment and employment
o Title VII (Civil Rights Act of 1964) security laws
o Americans with Disabilities Act (ADA) o State workers' compensation laws
</TABLE>
While these regulations are complex, and in some instances overlapping,
Administaff assists its client companies in achieving compliance with these
regulations by providing services in four primary categories: administrative
functions, benefit plans administration, personnel management and employer
liability management. All of the following services are included in the
Personnel Management System and are available to all client companies.
Administrative Functions. Administrative functions encompass a wide
variety of processing and record keeping tasks, mostly related to payroll
administration and government compliance. Specific examples include payroll
processing, payroll tax deposits, quarterly payroll tax reporting, employee file
maintenance, unemployment claims processing and workers' compensation claims
reporting.
Benefit Plans Administration. The Company's benefit plans include the
following: a group health plan, a dependent care spending account plan, a
worklife program, an educational assistance plan, an adoption assistance
program, group term life insurance coverage, accidental death and dismemberment
insurance coverage, short-term and long-term disability insurance coverage and a
401(k) plan. The group health plan includes medical, dental, vision and prenatal
care, and a prescription drug program. All eligible employees may participate in
the 401(k) plan, while various components of the welfare and fringe benefit
plans are provided to applicable employees based on eligibility provisions
specific to those plans. The Company is responsible for the costs and premiums
associated with these plans, acts as plan administrator of the plans, negotiates
the terms and costs of the plans, maintains the plans in accordance with
applicable federal and state regulations and serves as liaison for the delivery
of such benefits to worksite employees. The Company believes that this variety
and quality of benefit plans are generally not available to employees in its
small and medium-sized business target market and are usually offered only by
larger companies that can spread program costs over a much larger group of
employees. Moreover, the Company believes that the availability of these benefit
plans provide our clients with a competitive advantage that small and
medium-sized businesses are normally unable to attain in the areas of benefits
cost, employee recruiting and employee retention.
-4-
<PAGE> 6
Personnel Management. The Company provides a wide variety of personnel
management services which give its client companies access to resources normally
found only in the human resources departments of large companies. All client
companies receive the Company's comprehensive personnel guide, which sets forth
a systematic approach to administering personnel policies and practices,
including recruiting, discipline and termination procedures. Other human
resources services provided by the Company include drafting and reviewing
personnel policies and employee handbooks, designing job descriptions,
performing prospective employee screening and background investigations,
designing performance appraisal processes and forms, and providing professional
development and issues-oriented training, employee counseling, substance abuse
awareness training, drug testing, outplacement services and compensation
guidance.
Employer Liability Management. Under the CSA, the Company assumes many
of the employment-related responsibilities associated with its administrative
functions, benefit plans administration and personnel management services. For
those employment-related responsibilities that are the responsibility of the
client or that Administaff shares with its clients, the Company can assist its
clients in managing and limiting exposure. This includes first time and ongoing
safety-related risk management reviews, as well as the implementation of safety
programs designed to reduce workers' compensation claims. Administaff also
provides guidance to clients on avoiding liability for discrimination, sexual
harassment and civil rights violations, and participates in termination
decisions to attempt to secure protection from liability on those grounds. When
a claim arises, the Company often assists in the client's defense regardless of
whether the Company has been named directly. The Company employs in-house and
external counsel specializing in several areas of employment law who have broad
experience in disputes concerning the employer/employee relationship and who
provide support to the Company's human resource services specialists. This
support allows Administaff's clients to contest many claims that they might
otherwise have been inclined to settle. The Company also provides employment
practice liability insurance to its clients as part of its comprehensive
service. The Company also monitors changing government regulations and notifies
clients of their potential effect on employer liability.
eBUSINESS SERVICES
The Company's comprehensive eBusiness strategy is designed to add new
revenue streams and extend the Company's brand as the premier human resources
department for small business. The Company also expects its eBusiness services
to positively impact its core PEO services by enhancing the Company's
attractiveness to prospective clients, increasing client retention and reducing
operating costs. The Company expects to continue enhancing each of the following
initiatives, with a focus on additional functionality and service offerings.
Administaff Assistant is the Company's web-based PEO service delivery
platform, which is designed to provide automated, personalized PEO services to
the Company's clients and worksite employees. Administaff Assistant provides a
wide range of functionality, including:
o An online personnel guide;
o Best practices human resource management process maps and process
overviews;
o Printable online human resources forms;
o Customer-specific payroll information and reports;
o Employee information, including online check stubs and pay history
reports;
o Online submission and approval of payroll data;
o Online training;
o Links to benefits providers and other key vendors; and
o Frequently asked questions.
The Company's second major eBusiness initiative, bizzport, was launched
in the second quarter of 2000. bizzport is an eCommerce portal that brings a
wide range of product and service offerings from best-of-class providers to
Administaff clients, worksite employees and their families. The Company's
bizzport offerings include financial services (American Express, Aon, Bank One),
technology solutions (Dell, IBM, Lexmark), communications services (AT&T),
travel services (Continental Airlines), business services (Virtual Growth,
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<PAGE> 7
Works.com, Forrester Research, Oxford Capital, CorporateGifts.com), consumer
products (FTD.COM, Spiegel, Charitygift.com) and employee services (Best Upon
Request, MovingStation). The bizzport site also features the unique Best2Best
client network, where Administaff clients can conduct business with each other.
The third initiative in the Company's eBusiness strategy is a best
practices human resources site that will seek to extend the Company's brand and
presence as the premier human resources department for small and medium-sized
business by providing a comprehensive human resources information guide on the
web sites of alliance partners. This eContent platform will include human
resource process maps, human resources management best practices, discussion of
current events in human resource management, and tips on avoiding common human
resource mistakes. The site is expected to be launched during 2001.
CLIENT SERVICE AGREEMENT
All clients enter into Administaff's Client Service Agreement. The CSA
generally provides for an on-going relationship, subject to termination by the
Company or the client upon 60 to 180 days written notice.
The CSA establishes the Company's comprehensive service fee, which is
subject to periodic adjustments to account for changes in the composition of the
client's workforce and statutory changes that affect the Company's costs. The
CSA also establishes the division of responsibilities between the Company and
the client as co-employers. Pursuant to the CSA, the Company is responsible for
all personnel administration and is liable for purposes of certain
employment-related government regulation. In addition, the Company assumes
liability for payment of salaries and wages of its worksite employees and
responsibility for providing employee benefits to such persons, regardless of
whether the client company makes timely payment of the associated service fee.
The client retains the employees' services and remains liable for the purposes
of certain government regulations, compliance with which requires control of the
worksite or daily supervisory responsibility or is otherwise beyond the
Company's ability to assume. A third group of responsibilities and liabilities
are shared by the Company and the client where such joint responsibility is
appropriate. The specific division of applicable responsibilities under the CSA
is as follows:
Administaff
o Payment of wages and related tax reporting and remittance (state and federal
withholding, FICA, FUTA, state unemployment);
o Workers' compensation compliance, procurement, management and reporting;
o Compliance with COBRA, IRCA, HIPAA and ERISA (for plans sponsored by
Administaff), as well as monitoring changes in other governmental
regulations governing the employer/employee relationship and updating the
client when necessary; and
o Employee benefits administration.
Client
o Payment and related tax reporting and remittance of non-qualified deferred
compensation and equity-based compensation;
o Assignment to, and ownership of, all intellectual property rights;
o Compliance with Section 414(o) of the Code regarding benefit discrimination;
o Compliance with OSHA regulations, EPA regulations, FLSA, WARN and state and
local equivalents and compliance with government contracting provisions;
o Compliance with NLRA, including all organizing efforts and expenses related
to a collective bargaining agreement and related benefits;
o Professional licensing requirements, fidelity bonding and professional
liability insurance; and
o Products produced and/or services provided.
-6-
<PAGE> 8
Joint
o Implementation of policies and practices relating to the employee/employer
relationship; and
o Compliance with all federal, state and local employment laws, including,
but not limited to Title VII of the Civil Rights Act of 1964, ADEA, Title
I of ADA, FMLA, the Consumer Credit Protection Act, and immigration laws
and regulations.
Because the Company is a co-employer with the client company for some
purposes, it is possible that the Company could incur liability for violations
of such laws even if it is not responsible for the conduct giving rise to such
liability. The CSA addresses this issue by providing that the client will
indemnify the Company for liability incurred to the extent the liability is
attributable to conduct by the client. Notwithstanding this contractual right to
indemnification, it is possible that the Company could be unable to collect on a
claim for indemnification and may therefore be ultimately responsible for
satisfying the liability in question. The Company maintains certain general
insurance coverages (including coverages for its clients) to manage its exposure
for these types of claims, and as a result, the costs in excess of insurance
premiums incurred by the Company with respect to this exposure have historically
been insignificant to the Company's operating results.
Clients are required to remit their comprehensive service fees no later
than one day prior to the applicable payroll date by wire transfer or automated
clearinghouse transaction. Although the Company is ultimately liable, as the
employer for payroll purposes, to pay employees for work previously performed,
it retains the ability to terminate the CSA as well as the employees upon
non-payment by a client. This right, the periodic nature of payroll and the
overall quality of the Company's client base have resulted in an excellent
overall collections history.
CUSTOMERS
Administaff provides a value-added, full-service human resources
solution that it believes is most suitable to a specific segment of the small
and medium-sized business community not served by most PEOs. The Company has set
a long-term goal to serve approximately 10% of the overall small and
medium-sized business community.
Administaff serves client companies and worksite employees located
throughout the United States. The Company's client base is broadly distributed
throughout a wide variety of industries including:
o Business services - 25%;
o Finance, insurance and real estate - 16%;
o Medical services - 9%;
o Manufacturing - 8%;
o Engineering, accounting and legal services - 8%;
o Construction - 7%;
o Wholesale trade - 6%;
o Retail trade - 6%;
o Transportation - 4%; and
o Other - 11%.
This diverse client base lowers the Company's exposure to downturns or
volatility in any particular industry. However, the Company's performance could
be affected by general economic conditions within the small and medium-sized
business community. For the year ended December 31, 2000, Houston, the Company's
original market, accounted for approximately 27% of the Company's revenues with
other Texas markets contributing an additional 23%. During 2000, revenues grew
33% in the Texas markets and 114% in the non-Texas markets.
As part of its client selection strategy, the Company does not offer
its services to businesses falling within certain specified SIC codes,
essentially eliminating certain industries that it believes present a higher
risk of employee injury (such as roofing, logging and oil and gas exploration).
All prospective customers are evaluated
-7-
<PAGE> 9
individually on the basis of workers' compensation risk, group medical history,
unemployment history and operating stability.
The Company focuses heavily on client retention. Administaff's client
retention record over the last five years reflects that approximately 80% of
Administaff's clients remain for more than one year, and that the retention rate
improves for clients who remain with Administaff for longer periods. Client
attrition is attributable to a variety of factors, including (i) client
non-renewal due to price factors, (ii) sale, disposition or merger of the client
company, (iii) competition from other PEOs and business services firms, (iv)
termination of the CSA by Administaff resulting from the client's inability to
make timely payments, and (v) client business failure or downsizing.
MARKETING AND SALES
As of December 31, 2000, the Company had 31 sales offices located in 17
markets. The Company is currently executing a long-term national expansion
strategy, which targets approximately 90 sales offices in 40 strategically
selected markets. The Company's sales offices typically consist of six to ten
sales representatives, a district sales manager and an office administrator. The
Company's markets and their respective year of entry are as follows:
<TABLE>
<CAPTION>
Initial
Market Sales Offices Entry Date
- ------ ------------- ----------
<S> <C> <C>
Houston 4 1986
San Antonio 1 1989
Austin 1 1989
Orlando 1 1989
Dallas 3 1993
Atlanta 3 1994
Phoenix 1 1995
Chicago 2 1995
Washington D.C 2 1995
Denver 1 1996
Los Angeles 3 1997
Charlotte 1 1997
St. Louis 1 1998
San Francisco 3 1998
New York 2 1999
Baltimore 1 2000
New Jersey 1 2000
</TABLE>
The 40 markets included in the national expansion plan were identified
using a systematic market evaluation and selection process. The Company
continues to evaluate a broad range of factors in the selection process, using a
market selection model that weights various criteria that the Company believes
are reliable predictors of successful penetration based on its experience. Among
the factors considered are (i) market size, in terms of small and medium-sized
businesses engaged in selected industries that meet the Company's risk profile,
(ii) market receptivity to PEO services, including the regulatory environment
and relevant history with other PEO providers, (iii) existing relationships
within a given market, such as vendor or client relationships, (iv) expansion
cost issues, such as advertising and overhead costs, (v) direct cost issues that
bear on the Company's effectiveness in controlling and managing the cost of its
services, such as workers' compensation and health insurance costs, unemployment
risks and various legal and other factors, (vi) a comparison of the services
offered by Administaff to alternatives available to small and medium-sized
businesses in the relevant market, such as the cost to the target clients of
procuring services directly or through other PEOs and (vii) long-term strategy
issues, such as the general perception of markets and their long-term revenue
growth potential. Each of the Company's expansion markets, beginning with Dallas
in 1993, was selected in this manner.
-8-
<PAGE> 10
The Company's marketing strategy is based on the application of
techniques that have produced consistent and predictable results in the past.
The Company develops a mix of advertising media and a placement strategy
tailored to each individual market. After selecting a market and developing its
marketing mix, but prior to entering the market, the Company engages in an
organized media and public relations campaign to prepare the market for the
Company's entry and to begin the process of generating sales leads. The Company
markets its services through a broad range of media outlets, including radio,
newspapers, periodicals, direct mail and the Internet. The Company employs a
public relations firm in each of its markets as well as advertising consultants
to coordinate and implement its marketing campaigns. The Company has developed
an inventory of proven, successful radio and newsprint advertisements, which are
utilized in this effort.
The Company's organic growth model generates sales leads from five
primary sources: direct sales efforts, advertising, referrals, the American
Express marketing alliance described below and the Internet. These leads result
in initial presentations to prospective clients, and, ultimately, a predictable
number of client census reports. A prospective client's census report reflects
information gathered by the sales representative about the prospect's employees,
including job classification, state of employment, workers' compensation claims
history, health insurance claims history, salary, and desired level of benefits.
This information is entered into the Company's customized bid system, which
applies Administaff's proprietary pricing model to the census data, leading to
the preparation of a bid. Concurrent with this process, the prospective client's
workers' compensation and health insurance histories are evaluated from a risk
management perspective. This prospective client screening process plays a vital
role in controlling the Company's benefits costs and limiting its exposure to
liability. Upon completion of a favorable risk evaluation, the sales
representative presents the Company's bid and attempts to enroll the prospect.
The Company's selling process typically takes approximately 90 days.
In 1998, the Company entered into a Marketing Agreement with American
Express, under which American Express is utilizing its resources to generate
appointments with prospects for the Company's services in certain markets. In
April 2000, the Marketing Agreement was amended to provide for increased
marketing efforts by American Express and the embedding of American Express
services in the Company's bizzport offerings. In addition, the Company and
American Express are working to jointly develop product offerings that enhance
the current PEO services offered by the Company. The Company pays a commission
to American Express based upon the number of worksite employees paid after being
referred to the Company pursuant to the Marketing Agreement and the total number
of worksite employees paid by the Company. In 2000, the Marketing Agreement
produced 27% of the Company's sales leads and 20% of new worksite employees
sold. The Marketing Agreement expires at the end of 2005.
COMPETITION
Administaff provides a value-added, full service human resources
solution that it believes is most suitable to a specific segment of the small
and medium-sized business community not served by most PEOs. This full-service
approach is exemplified by the Company's commitment to service and technology
personnel and tools, which has produced a ratio of corporate staff to worksite
employees (the "staff support ratio") that is higher than average for the PEO
industry. Based on an analysis of the 1997 - 1999 annual NAPEO surveys of the
PEO industry, the Company has successfully leveraged its full-service approach
into significantly higher returns for the Company on a per worksite employee per
month basis. During the three year period from 1997 to 1999, the Company's staff
support ratio averaged 34% higher than the PEO industry average, while gross
profit per worksite employee and operating income per worksite employee exceeded
industry averages by 112% and 474%.
Competition in the PEO industry revolves primarily around quality of
services, breadth of services, choice and quality of benefits packages,
reputation and price. The Company believes that reputation, national presence,
regulatory expertise, financial resources, risk management and information
technology capabilities distinguish leading PEOs from the rest of the industry.
The Company also believes that it competes favorably in these areas.
Due to the differing geographic regions and market segments in which
most PEOs operate, and the relatively low level of market penetration by the
industry, the Company considers its primary competition to be the traditional
in-house provision of employee-related services. The PEO industry is highly
fragmented, and the
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Company believes that it is the largest PEO in the United States in terms of
revenues. The Company's largest national competitors include Staff Leasing, Inc.
and PEO divisions of large business services companies such as Automatic Data
Processing, Inc. and Paychex, Inc. In addition, the Company faces competition
from large regional PEOs in certain areas of the country. As the Company and
other large PEOs expand nationally, the Company expects that competition may
intensify among larger PEOs. In addition, the Company competes to some extent
with fee-for-service providers such as payroll processors and human resource
consultants.
VENDOR RELATIONSHIPS
Administaff provides benefits to its worksite employees under
arrangements with a variety of vendors. Although the Company believes that any
of its benefit contracts could be replaced if necessary, the Company considers
two such contracts to be the most significant elements of the package of
benefits provided to employees.
The Company's primary group health insurance vendor is Aetna U.S.
Healthcare, Inc. ("Aetna"). The Company provides a range of health plan
coverages under the plan, and Administaff's comprehensive fees to its clients
reflect the coverage options provided. The Company initiated insurance coverage
with Aetna in 1989, and the current one-year policy expires on December 31,
2001. The Company's coverage options with Aetna primarily include a PPO
arrangement and an HMO plan. All Aetna coverages are fully insured and require
the Company to fund claims and premiums up to a specified quarterly maximum
amount. Aetna is required to fund all claims and premiums, if any, in excess of
the quarterly maximum amount. These quarterly maximum amounts are adjustable,
based on claims experience, with six months notice by Aetna. While Aetna bears
ultimate legal responsibility for all claims, the Company seeks to minimize the
costs of providing health care coverages through active assistance in the claims
administration and resolution process, because the Company's long-term health
care costs could be affected by its claims experience.
The Company's workers' compensation policy is currently provided by
Lumbermens Mutual Casualty Company, a unit of Kemper Insurance Companies. Since
November 1994, the Company has been covered under a guaranteed cost plan whereby
premiums are paid for complete coverage of all claims under the policy. The
current policy expires on September 30, 2001.
INFORMATION TECHNOLOGY
The Company has developed state-of-the-art information technology
capable of meeting the demands of payroll and related processing for the
Company's worksite employees, satisfying the Company's administrative and
management information needs, providing productivity enhancement tools to the
Company's corporate staff and providing web-based access to certain tools and
data. While the Company utilizes commercially available software for standard
business functions such as finance and accounting, it has developed a
proprietary professional employer information system for the delivery of its
primary services. This system manages data relating to worksite employee
enrollment, human resource management, benefits administration, payroll
processing, management information, and sales bid calculations that are unique
to the PEO industry and to Administaff. Central to the system is a payroll
processing system that allows the Company to process a high volume of payroll
transactions that meet the customized needs of its client companies.
AIMS (Administaff Information Management System), the Company's
proprietary PEO information system, is in its fifth generation. Deployed during
the third quarter of 2000, the new release includes improved processing speed, a
comprehensive payroll tax calculation system based on a third-party tax
information database, enhanced integration with Administaff Assistant, increased
reporting capabilities, and simplified operational user interfaces. The software
has been developed using Informix, a relational database and programming
language, Power Builder, an object oriented client/server development system,
and state-of-the-art web development tools. The software is designed to provide
high volume, professional employer services utilizing a combination of on-line
and background processing capabilities that can be readily expanded to handle
additional processing needs. The system is accessed through a graphical user
interface engineered to maximize both the quality of Administaff's services and
the efficiency with which they are delivered.
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Administaff Assistant is the Company's web-based PEO service delivery
platform, which is designed to provide automated, personalized PEO services to
the Company's clients and worksite employees. Administaff Assistant provides a
wide range of functionality, including:
o An online personnel guide;
o Best practices human resource management process maps and process
overviews;
o Printable online human resources forms;
o Customer-specific payroll information and reports;
o Employee information, including online check stubs and pay history
reports;
o Online submission and approval of payroll data;
o Online training;
o Links to benefits providers and other key vendors; and
o Frequently asked questions.
The Company's primary information processing facility is located at the
Company's corporate headquarters in Kingwood, Texas (a suburb of Houston) with
secondary processing facilities located at the Company's service centers in
Houston, Dallas and Atlanta. The Dallas facility acts as a disaster recovery
facility for the Company, capable of handling all of the Company's operations
for short periods of time.
The Company has invested substantially in its technology and network
infrastructure. Service centers, district sales offices and corporate offices
are connected to the corporate data center by high-speed frame-relay and
point-to-point network services utilizing Nortel Networks' gigabit technology.
The network backbone is fiber-based and utilizes traffic leveling and advanced
diagnostic capabilities for optimal performance. This network infrastructure
provides fast, reliable communication throughout the Company's nationwide
presence. With the implementation of video conferencing and voice-over-IP during
2000, the Company has further leveraged this infrastructure to converge voice,
data and video over a single, integrated, national telecommunications network.
The Company's principal computing platforms are Compaq/NT and IBM RISC 6000/AIX
servers, and IBM and Dell workstations. The Company utilizes RISC 6000 servers
for database services and Compaq/NT servers for file and other services.
INDUSTRY REGULATION
The Company's operations are affected by numerous federal and state
laws relating to tax and employment matters. By entering into a co-employer
relationship with its worksite employees, the Company assumes certain
obligations and responsibilities of an employer under these federal and state
laws. Because many of these federal and state laws were enacted prior to the
development of nontraditional employment relationships, such as PEOs, temporary
employment and outsourcing arrangements, many of these laws do not specifically
address the obligations and responsibilities of nontraditional employers. While
47 states have recognized PEOs in their employment laws, many states do not
explicitly regulate PEOs. However, 21 states (including Texas) have passed laws
that have licensing, registration or certification requirements for PEOs, and
several others are considering such regulation.
Certain federal and state statutes and regulations use the terms
"employee leasing" or "staff leasing" to describe the arrangement among a PEO
and its clients and worksite employees. The terms "employee leasing," "staff
leasing" and "professional employer arrangements" are generally synonymous in
such contexts and describe the arrangements entered into by the Company, its
clients and worksite employees.
As an employer, the Company is subject to all federal statutes and
regulations governing the employer-employee relationship. Subject to the issues
discussed below, the Company believes that its operations are in compliance in
all material respects with all applicable federal statutes and regulations.
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EMPLOYEE BENEFIT PLANS
The Company offers various employee benefit plans to its employees,
including its worksite employees. The Company maintains these employee benefit
plans as "single-employer" plans rather than "multiple-employer" plans. These
plans include the 401(k) Plan (a profit-sharing plan with a cash or deferred
arrangement ("CODA") under Code Section 401(k) and an employer matching
contribution feature under Code Section 401(m)); a cafeteria plan under Code
Section 125; a group welfare benefits plan which includes medical, dental,
vision, life insurance, disability and worklife programs; a dependent care plan;
an educational assistance plan; and an adoption assistance program. Generally,
employee benefit plans are subject to provisions of both the Internal Revenue
Code and the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
Employer Status. In order to qualify for favorable tax treatment under
the Code, the plans must be established and maintained by an employer for the
exclusive benefit of its employees. Generally, an entity is an "employer" of
individuals for federal employment tax purposes if an employment relationship
exists between the entity and the individuals under the common law test of
employment. In addition, the officers of a corporation are deemed to be
employees of that corporation for federal employment tax purposes. The common
law test of employment, as applied by the IRS, involves an examination of
approximately 20 factors to ascertain whether an employment relationship exists
between a worker and a purported employer. Generally, the test is applied to
determine whether an individual is an independent contractor or an employee for
federal employment tax purposes and not to determine whether each of two or more
companies is a "co-employer." Substantial weight is typically given to the
question of whether the purported employer has the right to direct and control
the details of an individual's work. Among the factors which appear to be
considered more important by the IRS are (1) the employer's degree of behavioral
control (the extent of instructions, training and the nature of the work), (2)
the financial control or the economic aspects of the relationship, and (3) the
intended relationship of the parties (whether employee benefits are provided,
whether any contracts exist, whether services are ongoing or for a project,
whether there are any penalties for discharge/termination, and the frequency of
the business activity).
In 1992, the Company applied for and received a favorable determination
from the IRS regarding the qualified status of the 401(k) Plan. In that
application, the Company disclosed to the IRS that the Company is involved in
the business of leasing employees to recipient companies and that the 401(k)
Plan covered worksite employees who satisfied the plan's eligibility
requirements. However, the statement that the 401(k) Plan covered worksite
employees does not necessarily resolve the issue of who is the employer of those
employees for purposes of the 401(k) Plan.
The Company amended and restated the 401(k) Plan on December 15, 1994.
Among other amendments, the Company added the matching contribution feature
under Code Section 401(m) to the 401(k) Plan. In March 1995, the Company
submitted the amended and restated 401(k) Plan to the IRS for a determination on
its continued tax qualified status. The Company supplemented this filing with
additional information on October 22, 1996, September 15, 1998, June 25, 1999
and October 9, 2000. The amended and restated 401(k) Plan is currently under
review by the IRS. An IRS finding that the 401(k) Plan document merits tax
qualified status is a determination as to form only and would not preclude a
subsequent disqualification based on the Plan's operation.
Separate from the IRS' review of the pending determination request, the
Company's 401(k) Plan is currently under audit for the 1993 plan year, although
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. One issue that has arisen from these audits is the Industry
Issue (whether a PEO can be a co-employer of worksite employees, including
officers and owners of client companies, for various purposes under the Code,
including participation in the PEO's 401(k) plan). NAPEO and the Company are
cooperating with the IRS in this study of the PEO industry. With respect to the
401(k) Plan audit, the IRS Houston District has sought technical advice (the
"Technical Advice Request") from the IRS National Office. A copy of the
Technical Advice Request and the Company's response has been sent to the IRS
National Office for review. The Technical Advice Request contains the
conclusions of the IRS Houston District with respect to the 1993 plan year that
the 401(k) Plan
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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. The Industry Issue
identified by the Market Segment Group study also was referred to the National
Office. If the Market Segment Group study were to reach a conclusion that is
adverse to the PEO industry, there is an administrative procedure available to
appeal that conclusion. In addition to working with the Market Segment Group
study, NAPEO is actively engaged in policy discussions with both the Treasury
Department and with members of Congress in an effort to reduce the likelihood of
unfavorable conclusions and to procure favorable legislation.
The Company does not know whether the National Office will address the
Technical Advice Request independently of the Industry Issue. The Company is not
able to predict either the timing or the nature of any final decision that may
be reached by the IRS 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. Further, the Company is unable to predict whether the
Treasury Department will issue a policy statement with respect to its position
on the issues or, if issued, whether such a statement would be favorable to the
Company. The Company intends to vigorously pursue a favorable resolution of the
issues through one or more of the following methods: the audit-Technical Advice
Request, the Market Segment Group study process, regulatory and legislative
efforts, and, if necessary, legal action. If, however, any of these processes
were to conclude that a PEO is not a co-employer of its worksite employees and
such conclusion were to ultimately prevail, worksite employees could not
continue to make salary deferral contributions to the 401(k) Plan or to the
Company's cafeteria plan or continue to participate in certain other employee
benefit plans of the Company as they currently exist. The Company believes that,
although unfavorable to the Company, a prospective application by the IRS of
such an adverse conclusion (that is, one applicable only to periods after the
conclusion by the IRS is finalized) would not have a material adverse effect on
its financial position or results of operations, as the Company could continue
to make available similar benefit programs to its worksite employees at
comparable costs to the Company. However, if the IRS National Office adopts the
conclusions of the IRS Houston District and any such conclusions were applied
retroactively to disqualify the 401(k) Plan for 1993 and subsequent years,
employees' vested account balances under the 401(k) Plan would become taxable,
the Company would lose its tax deductions to the extent its matching
contributions were not vested, the 401(k) Plan's trust would become a taxable
trust and the Company would be subject to liability with respect to its failure
to withhold applicable taxes with respect to certain contributions and trust
earnings. Further, the Company would be subject to liability, including
penalties, with respect to its cafeteria plan for the failure to withhold and
pay taxes applicable to salary deferral contributions by employees, including
worksite employees. In such a scenario, the Company also would face the risk of
client dissatisfaction and potential litigation. A retroactive application by
the IRS of an adverse conclusion could have a material adverse effect on the
Company's financial position and results of operations. While the Company
believes that a retroactive disqualification is unlikely, there can be no
assurance as to the ultimate resolution of these issues by the IRS.
ERISA Requirements. Employee pension and welfare benefit plans are also
governed by ERISA. ERISA defines "employer" as "any person acting directly as an
employer, or indirectly in the interest of an employer, in relation to an
employee benefit plan." ERISA defines the term "employee" as "any individual
employed by an employer." The United States Supreme Court has held that the
common law test of employment must be applied to determine whether an individual
is an employee or an independent contractor under ERISA. A definitive judicial
interpretation of "employer" in the context of a PEO or employee leasing
arrangement has not been established.
If the Company were found not to be an employer for ERISA purposes, its
plans would not comply with ERISA. Further, as a result of such finding the
Company and its plans would not enjoy, with respect to worksite employees, the
preemption of state laws provided by ERISA and could be subject to varying state
laws and regulations, as well as to claims based upon state common laws. Even if
such a finding were made, the Company believes it would not be materially
adversely affected because it could continue to make available similar benefits
at comparable costs.
In addition to ERISA and the Code provisions discussed herein, issues
related to the relationship between the Company and its worksite employees may
also arise under other federal laws, including other federal income tax laws.
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Possible Multiple Employer Plan Treatment. On February 11, 2000, the
U.S. Department of Labor ("DOL") issued regulations requiring that multiple
employer welfare agreements ("MEWAs") file an annual return disclosing certain
information (the "Form M-1"). In general, a MEWA is defined broadly to include
any employee welfare benefit plan or other arrangement that is established or
maintained for the purpose of offering or providing medical benefits to the
employees of two or more employers (including one or more self-employed
individuals). The DOL's definition of what constitutes a MEWA can be construed
so broadly that the regulations had to expressly exempt insurance companies and
specified collectively bargained plans from the filing requirements. Without the
exemption, these entities were concerned that they might be categorized as MEWAs
and be required to file the Form M-1.
The Company's philosophy is that it has established itself, by
agreement with its clients, as the employer for purposes of sponsoring its group
health plan. Consistent with this philosophy, the Company's group health plan is
structured as a single employer plan. The Company, however, is concerned that
given the breadth of the DOL's MEWA definition, the DOL could take the position
that its group health plan is a MEWA. Given the breadth of the M-1 filing
requirement, Administaff chose to make a protective filing on Company letterhead
of the information requested in the Form M-1 to the DOL for the 1999 plan year,
while maintaining the position that its group health plan was not a MEWA.
FEDERAL EMPLOYMENT TAXES
As a co-employer, the Company assumes responsibility and liability for
the payment of federal and state employment taxes with respect to wages and
salaries paid to worksite employees. There are essentially three types of
federal employment tax obligations: (i) withholding of income tax requirements
governed by Code Section 3401, et seq.; (ii) obligations under FICA, governed by
Code Section 3101, et seq.; and (iii) obligations under FUTA, governed by Code
Section 3301, et seq. Under these Code sections, employers have the obligation
to withhold and remit the employer portion and, where applicable, the employee
portion of these taxes. The Market Segment Group discussed above is examining,
among other issues, whether PEOs, such as the Company, are employers of worksite
employees under the Code provisions applicable to federal employment taxes and,
consequently, responsible for payment of employment taxes on wages and salaries
paid to such worksite employees.
Code Section 3401, which applies to federal income tax withholding
requirements, contains an exception to the general common law test applied to
determine whether an entity is an "employer" for purposes of federal income tax
withholding. Section 3401(d)(1) states that if the person for whom services are
rendered does not have control of the payment of wages, the "employer" for this
purpose is the person having control of the payment of wages. The Treasury
regulations issued under Section 3401(d)(1) state that a third party can be
deemed to be the employer of workers under this section for income tax
withholding purposes where the person for whom services are rendered does not
have legal control of the payment of wages. While Section 3401(d)(1) has been
examined by several courts, its ultimate scope has not been delineated.
Moreover, the IRS has to date relied extensively on the common law test of
employment in determining liability for failure to comply with federal income
tax withholding requirements.
Accordingly, while the Company believes that it can assume the
withholding obligations for worksite employees, in the event the Company fails
to meet these obligations the client company may be held jointly and severally
liable therefor. While this interpretive issue has not to the Company's
knowledge discouraged clients from enrolling with the Company, there can be no
assurance that a definitive adverse resolution of this issue would not do so in
the future. These interpretive uncertainties may also impact the Company's
ability to report employment taxes on its own account rather than for the
accounts of its clients.
STATE REGULATION
While many states do not explicitly regulate PEOs, 21 states (including
Texas) have passed laws that have licensing, registration or certification
requirements for PEOs, and several states are considering such regulation. Such
laws vary from state to state but generally provide for monitoring the fiscal
responsibility of PEOs, and in some cases codify and clarify the co-employment
relationship for unemployment, workers' compensation and other
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purposes under state law. The Company holds licenses in Arkansas, Florida,
Montana, New Hampshire, New Mexico, Oregon, South Carolina, Tennessee, Texas,
Utah, Vermont, Virginia and West Virginia. The Company is registered or
certified in Colorado, Illinois, Kentucky, Maine, Massachusetts, Minnesota,
Nevada, and Rhode Island. Regardless of whether a state has licensing,
registration or certification requirements, the Company faces a number of other
state and local regulations that could impact its operations. The Company was
instrumental in obtaining enactment of PEO legislation in Texas, where it faced
a number of challenges under state law, and believes that its prior experience
with Texas regulatory authorities will be valuable in surmounting regulatory
obstacles or challenges it may face in the future.
CORPORATE OFFICE EMPLOYEES
The Company had approximately 1,100 corporate office and sales
employees as of December 31, 2000. The Company believes that its relations with
its corporate office and sales employees are good. None of the Company's
corporate office and sales employees are covered by a collective bargaining
agreement.
INTELLECTUAL PROPERTY
The Company currently has registered trademarks and pending
applications for registration. Although the Administaff mark is the most
material to the Company's business, the Company's trademarks as a whole are also
of considerable importance to the Company.
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ITEM 2. PROPERTIES.
The Company believes that its current facilities are adequate for the
purposes for which they are intended and that they provide sufficient capacity
to accommodate the Company's short-term expansion plan. The Company will
continue to evaluate the need for additional facilities based on the rate of
growth in worksite employees, the geographic distribution of the worksite
employee base and the Company's long-term service delivery requirements.
CORPORATE HEADQUARTERS
The Company's corporate headquarters are located in Kingwood, Texas, in
a 130,000 square foot campus-style facility. This facility, which includes 30
acres of undeveloped land for future expansion, is company-owned. All corporate
operations are housed in the Kingwood facility, along with the Company's record
retention center and primary data processing center. The Company expects to
begin the expansion of its corporate headquarters in 2001 with the construction
of a 170,000 square foot office building and parking garage. This expansion is
expected to be completed in the fourth quarter of 2002.
SERVICE CENTERS
The Company currently has three service centers located in Houston,
Dallas and Atlanta. The Houston service center, which services approximately 35%
of the Company's worksite employee base, was relocated to a 40,000 square foot
leased facility during the third quarter of 2000. This facility, which is under
lease until 2010, is designed to service approximately 20,000 worksite employees
at full capacity.
The Dallas service center, which currently services approximately 40%
of the Company's worksite employee base, is located in a 40,000 square foot
leased facility, which also serves as the Company's backup data processing
center and disaster recovery center. This facility, which is under lease until
2008, is designed to service approximately 40,000 worksite employees at full
capacity.
The Atlanta service center, which currently services approximately 25%
of the Company's worksite employee base, is located in a 40,000 square foot
leased facility. This facility, which is under lease until 2009, is designed to
service approximately 40,000 worksite employees at full capacity.
The Company's fourth service center is currently under construction.
Located in Los Angeles, this 45,000 square foot leased facility will provide the
capacity to service approximately 40,000 worksite employees when fully staffed.
The Los Angeles service center is expected to be completed by the end of the
third quarter of 2001.
SALES OFFICES
The Company currently has 31 sales offices located in 17 markets
throughout the United States. All sales offices are located in leased
facilities, and some of these facilities are shared by multiple sales offices
and/or client service personnel. Each sales office is typically staffed by six
to 10 sales representatives, a district sales manager and an office
administrator. In addition, the Company has placed certain client service
personnel in all of its 17 sales markets to provide high-quality, localized
service to its clients in those major markets. The Company expects to continue
placing various client service personnel in its sales markets as a critical mass
of clients is attained in each market.
ITEM 3. 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 condition or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the quarter ended December
31, 2000.
ITEM S-K 401 (b). EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages (as of February 28,
2001) and positions of the Company's executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Paul J. Sarvadi......................... 44 President and Chief Executive Officer
Richard G. Rawson....................... 52 Executive Vice President of Administration, Chief Financial Officer
and Treasurer
A. Steve Arizpe......................... 43 Executive Vice President of Client Services
Jay E. Mincks........................... 47 Executive Vice President of Sales and Marketing
Randall H. McCollum..................... 56 Vice President of eCommerce Development
Samuel G. Larson........................ 39 Vice President of Enterprise Project Management
Douglas S. Sharp........................ 39 Vice President of Finance and Controller
John H. Spurgin, II..................... 54 Vice President of Legal, General Counsel and Secretary
</TABLE>
Paul J. Sarvadi, President, Chief Executive Officer co-founded
Administaff in 1986. Mr. Sarvadi attended Rice University and the University of
Houston prior to starting and operating several small companies. Mr. Sarvadi has
served as President of NAPEO and was a member of its Board of Directors for five
years. He also served as President of the Texas Chapter of NAPEO for three of
the first four years of its existence. In 1995, Mr. Sarvadi was selected as
Houston's Entrepreneur of the Year for service industries.
Richard G. Rawson, Executive Vice President of Administration, Chief
Financial Officer and Treasurer, joined Administaff in 1989. He previously
served as a Senior Financial Officer and Controller for several companies in the
manufacturing and seismic data processing industries. Mr. Rawson is Immediate
Past President and is on the Executive Committee of the Board of Directors of
NAPEO. He has previously served NAPEO as Chairman of the Accounting Practices
Committee as well as Treasurer, Second Vice President and First Vice President.
Mr. Rawson is also a member of the Financial Executives Institute. He has a
Bachelor of Business Administration degree in Finance from the University of
Houston.
A. Steve Arizpe, Executive Vice President of Client Services, joined
Administaff in 1989. Since that time, Mr. Arizpe has served as Houston Sales
Manager, Regional Sales Manager, and Vice President of Sales. Prior to joining
Administaff, Mr. Arizpe served in sales and sales management roles for two large
corporations and has more than 18 years of management and sales experience.
Jay E. Mincks, Executive Vice President of Sales and Marketing, joined
Administaff in 1990. Since that time, Mr. Mincks has served as Houston Sales
Manager, Regional Sales Manager for the Western United States, and Vice
President of Sales & Marketing. Prior to joining Administaff, Mr. Mincks served
in a variety of positions, including management, in the sales and sales training
fields with various large companies.
Randall H. McCollum, Vice President of eCommerce Development, joined
Administaff in August 1997. Prior to being promoted to his present position in
August 1999, he served as director of strategic alliances. Prior to joining
Administaff, Mr. McCollum served as vice president and division general manager
for Neiman Marcus. He also managed sales operations for Tiffany & Co. and Xerox
Corporation, among others. Mr. McCollum has a Bachelor of Science degree and a
Master of Education degree from Lamar University.
Samuel G. Larson, Vice President of Enterprise Project Management,
joined Administaff in August 1994. From May 1997 to January 2000, he served as
Vice President of Finance. Prior to joining Administaff, Mr. Larson
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served as Controller for a small, publicly held company, as Financial Reporting
Manager for NL Industries, Inc., and as an Audit Manager with Ernst & Young,
LLP.
Douglas S. Sharp, Vice President of Finance and Controller, joined
Administaff in January 2000. From July 1994 until he joined Administaff, Mr.
Sharp served as Chief Financial Officer for Rimkus Consulting Group, Inc. Prior
to that, he served as Controller for a small, publicly held company, as
Controller for a large software company, and as Audit Manager for Ernst & Young,
LLP.
John H. Spurgin, II, Vice President of Legal, General Counsel and
Secretary, joined Administaff in January 1997. Prior to joining Administaff, Mr.
Spurgin was a partner with the Austin office of McGinnis, Lochridge & Kilgore,
L.L.P., where he served as Administaff's outside counsel for over nine years.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the New York Stock Exchange
under the symbol "ASF". As of February 28, 2001, there were 114 holders of
record of the common stock. This number does not include stockholders for whom
shares were held in "nominee" or "street name." The following table sets forth
the high and low sales prices for the common stock as reported on the New York
Stock Exchange composite transactional tape. These amounts have been adjusted to
reflect the two-for-one split of the common stock effected on October 16, 2000
in the form of a stock dividend.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
2000
First Quarter $21.38 $10.38
Second Quarter 33.22 17.06
Third Quarter 44.56 24.81
Fourth Quarter 43.00 22.30
1999
First Quarter $17.25 $ 6.06
Second Quarter 8.94 5.56
Third Quarter 8.66 7.16
Fourth Quarter 15.38 7.19
</TABLE>
DIVIDEND POLICY
The Company has not paid cash dividends on its common stock since its
formation and does not anticipate declaring or paying dividends on its common
stock in the foreseeable future. The Company expects that it will retain all
available earnings generated by the Company's operations for the development and
growth of its business. Any future determination as to the payment of dividends
will be made at the discretion of the Board of Directors of the Company and will
depend upon the Company's operating results, financial condition, capital
requirements, general business conditions and such other factors as the Board of
Directors deems relevant.
-19-
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data set forth below should be read
in conjunction with the Consolidated Financial Statements and accompanying Notes
and Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ------------- ---------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues .................................. $3,708,531 $2,260,743 $1,683,063 $1,213,620 $ 899,596
Gross profit .............................. 138,534 89,528 68,610 51,269 37,856
Operating income .......................... 22,234 10,559(1) 11,201 9,346(2) 6,477
Net income ................................ 16,900 9,358(1) 9,123 7,439(2) 2,603(3)
Basic net income per share(4) ............. $ 0.62 $ 0.34(1) $ 0.32 $ 0.28(2) $ 0.12(3)
Diluted net income per share(4) ........... $ 0.58 $ 0.34(1) $ 0.31 $ 0.27(2) $ 0.12(3)
BALANCE SHEET DATA:
Working capital ........................... $ 51,179 $ 35,792 $ 52,475 $ 46,611 $ 4,629
Total assets .............................. 242,817 147,698 142,799 109,455 48,376
Total debt ................................ -- -- -- -- 4,603
Total stockholders' equity ................ 105,510 80,468 86,857 63,763 13,292
STATISTICAL DATA:
Average number of worksite employees
paid per month during period ........... 62,140 42,479 34,819 26,907 22,234
Gross payroll per worksite
employee per month(5) ................... $ 3,830 $ 3,360 $ 3,083 $ 2,855 $ 2,562
Gross profit per worksite
employee per month ...................... $ 186 $ 176 $ 164 $ 159 $ 142
Operating income per worksite
employee per month(6) ................... $ 30 $ 24 $ 27 $ 33 $ 24
</TABLE>
- ----------
(1) For the year ended December 31, 1999, operating income, net income and
basic and diluted earnings per share would have been $12.0 million,
$9.4 million, $0.34 and $0.34, excluding the impact of two unrelated,
non-recurring items. See Notes 1 and 10 of the Notes to Consolidated
Financial Statements and Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(2) For the year ended December 31, 1997, operating income, net income and
basic and diluted net income per share would have been $10.7 million,
$8.3 million, $0.31 and $0.30, excluding the impact of a non-recurring
bad debt charge.
(3) For the year ended December 31, 1996, net income and basic and diluted
net income per share would have been $3.8 million, $0.18 and $0.17,
excluding the impact of a non-recurring item. See Note 10 of Notes to
Consolidated Financial Statements and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(4) Adjusted to reflect the two-for-one split of the common stock effected
on October 16, 2000.
(5) Excludes bonus payroll of worksite employees not subject to the
Company's normal service fee.
(6) Results for the years ended December 31, 1999 and 1997 have been
adjusted for non-recurring items as noted above.
-20-
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Annual Report. Historical results
are not necessarily indicative of trends in operating results for any future
period.
The statements contained in this Annual Report that are not historical
facts are forward-looking statements that involve a number of risks and
uncertainties. The actual results of the future events described in such
forward-looking statements in this Annual Report could differ materially from
those stated in such forward-looking statements. Among the factors that could
cause actual results to differ materially are the risks and uncertainties
discussed in this Item 7 and the uncertainties set forth from time to time in
the Company's other public reports and filings and public statements.
OVERVIEW
Administaff provides a comprehensive Personnel Management System that
encompasses a broad range of services, including benefits and payroll
administration, health and workers' compensation insurance programs, personnel
records management, employer liability management, employee recruiting and
selection, performance management, and training and development services. The
Company's overall operating results are largely dependent on the number of
worksite employees paid and can be measured in terms of revenues or costs per
worksite employee per month. As a result, the Company often uses this unit of
measurement in analyzing and discussing its results of operations.
In addition to the ongoing sales of the Company's principal PEO
services and the servicing of its client base, the Company currently has several
strategic initiatives in progress, which, while supporting the Company's
long-term plans, have increased the level of operating expenses for the near
term. The Company believes that these initiatives will provide long-term
benefits, including worksite employee unit growth, enhanced client retention,
new and incremental revenue streams and increased internal operational
efficiencies. The initiatives include:
o Sales and Service Expansion - The Company is currently executing a
long-term national expansion strategy targeting approximately 90 sales
offices located in 40 markets. The plan calls for continuous expansion with
approximately one new sales office opening each quarter. To support this
expansion, the Company plans to open additional service centers as
warranted by the growth in the number of clients and worksite employees in
different regions of the country. In addition, the Company is expanding its
service capacity by placing service personnel in its sales markets as the
number of clients and worksite employees grows in each market.
As of December 31, 2000, the Company had 31 sales offices located in 17
markets, three service centers located in Houston, Dallas and Atlanta, and
371 service personnel located in 17 markets, including 278 located in the
three service centers.
o Telecommunications and Network Upgrade - The Company has significantly
upgraded and modified its telecommunications and network infrastructure to
allow for enhanced communications among its sales offices, service centers
and corporate offices.
o eBusiness Strategy - The Company has implemented and continues to enhance a
comprehensive eBusiness strategy comprised of three primary components:
Administaff Assistant, bizzport and a best practices human resources site.
Administaff Assistant, the Company's Internet-based service delivery
platform, provides automated, personalized PEO services to clients and
worksite employees. Bizzport is an eCommerce portal designed to provide the
Company's clients and worksite employees with a wide variety of value-added
products and services. The best practices human resources site will seek to
extend the Company's brand and presence as the premier human resources
department for small and medium-sized business by providing a comprehensive
-21-
<PAGE> 23
human resources information guide on the web sites of alliance partners.
The site is expected to be launched during 2001.
o Software Development - During 2000, the Company implemented the fifth
generation of its proprietary PEO information system. Other software
development projects ancillary to this system are expected to continue in
2001.
In addition to the expenses associated with these strategic
initiatives, the Company continues to be affected by the ongoing IRS audit of
the Company's 401(k) plan and IRS Employee Leasing Market Segment Study. For a
discussion of these matters, see "Employee Benefit Plans" beginning on page 12.
Revenues
The Company's revenues are derived from its comprehensive service fees,
which are based upon each employee's gross pay and a mark-up computed as a
percentage of the gross pay. The comprehensive service fees are invoiced
concurrently with each periodic payroll of its worksite employees. The Company's
revenues are primarily dependent on the number of clients enrolled, the
resulting number of employees paid each period, the gross payroll of these
employees and the number of employees enrolled in benefit plans.
Direct Costs
The Company's primary direct costs are (i) the salaries and wages of
worksite employees ("payroll cost"); (ii) employment-related taxes ("payroll
taxes"); (iii) employee benefit plan premiums; and (iv) workers' compensation
insurance premiums. Payroll costs of worksite employees are affected by the
composition of the worksite employee base, inflationary effects on wage levels
and differences in the local economies of the Company's markets. Changes in
payroll costs generally have a proportionate impact on the Company's revenues.
Payroll taxes consist of the employer's portion of Social Security and
Medicare taxes under FICA, federal unemployment taxes and state unemployment
taxes. Payroll taxes are generally paid as a percentage of payroll. The federal
tax rates are defined by the appropriate federal regulations. State unemployment
tax rates are subject to claims histories and vary from state to state.
Employee benefit costs are comprised primarily of health insurance
costs, but also include costs of other employee benefits such as life insurance,
vision care, dental insurance, disability insurance, prescription card,
education assistance, adoption assistance, a dependent care spending account and
a worklife program.
Workers' compensation costs include premiums, administrative costs and
claims-related expenses under the Company's workers' compensation program. Since
November 1994, the Company has been insured under a guaranteed cost program
under which premiums are paid for full insurance coverage of all accident claims
occurring during the policy period. The current policy expires on September 30,
2001.
The Company's gross profit per worksite employee is determined in part
by its ability to accurately estimate and control direct costs and its ability
to incorporate changes in these costs into the comprehensive service fees
charged to clients, which are subject to contractual arrangements. Gross profit,
measured as a percentage of revenue, is also affected by the comprehensive
service fees and direct cost structure. However, worksite employee payroll cost
is the largest component of both revenues and direct costs and, as a result,
changes in the level of payroll cost per worksite employee can cause
fluctuations in this statistic that are not necessarily indicative of relative
performance from period to period. As a result, the Company uses gross profit
per worksite employee per month as its principal measurement of the relative
performance at the gross profit level.
-22-
<PAGE> 24
Operating Expenses
As a result of the strategic initiatives referred to above, operating
expenses have increased significantly during the last several years. The types
of operating expenses affected by each of the initiatives are as follows:
o Sales and Service Expansion
- general and administrative expenses associated with
establishing and maintaining sales offices and service
centers;
- compensation expense for additional sales and service staff;
- travel expense associated with maintaining a national sales
and service presence; and
- depreciation expense associated with capitalized costs of
facilities, furniture, equipment and computer hardware and
software.
o Telecommunications and Infrastructure Upgrade
- compensation expense of additional technology staff;
- consulting expense associated with design and selection of
technology products;
- ongoing maintenance costs of network hardware and software;
- ongoing data and voice transmission service costs; and
- depreciation expense associated with capitalized costs of
network hardware and software.
o eBusiness Initiatives
- compensation expense of service, technology and support staff
for Administaff Assistant, bizzport and the best practices
human resources site;
- consulting expense associated with the planning and
development of these initiatives;
- travel, legal and compensation expenses associated with
obtaining alliance partners to participate in bizzport and the
best practices human resources site;
- depreciation and amortization expenses associated with
computer hardware and software used for, and the development
costs of, Administaff Assistant, bizzport and the best
practices human resources site; and
- ongoing maintenance costs of hardware and software associated
with Administaff Assistant, bizzport and the best practices
human resources site.
o Software Development - Amortization of capitalized software costs,
including those related to the Company's proprietary PEO information
system.
In addition, the Company has incurred travel and legal expenses associated
with the IRS 401(k) plan audit and the IRS Employee Leasing Market Study.
Income Taxes
The Company's provision for income taxes typically differs from the
U.S. statutory rate of 34% due primarily to state income taxes and tax-exempt
interest income. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities used for
financial reporting purposes and the amounts used for income tax purposes.
Significant items resulting in deferred income taxes include depreciation and
amortization, software development costs, accrued state income taxes, client
list acquisition costs and the allowance for uncollectible accounts receivable.
Changes in these items are reflected in the Company's financial statements
through the Company's deferred income tax provision.
-23-
<PAGE> 25
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999.
The following table presents certain information related to the
Company's results of operations for the years ended December 31, 2000 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2000 1999 % CHANGE
------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C>
Revenues.................................................. $ 3,708,531 $ 2,260,743 64.0%
Gross profit.............................................. 138,534 89,528 54.7%
Operating expenses........................................ 116,300 78,969 47.3%
Operating income.......................................... 22,234 10,559 110.6%
Other income.............................................. 4,380 3,653 19.9%
Net income................................................ 16,900 9,358 80.6%
Diluted net income per share of common stock.............. 0.58 0.34 70.6%
STATISTICAL DATA:
Average number of worksite employees paid per month....... 62,140 42,479 46.3%
Fee revenue per worksite employee per month............... $ 4,623 $ 4,084 13.2%
Fee payroll cost per worksite employee per month.......... 3,830 3,360 14.0%
Gross mark-up per worksite employee per month............. 793 724 9.5%
Gross profit per worksite employee per month.............. 186 176 5.7%
Operating expenses per worksite employee per month........ 156 155 0.6%
Operating income per worksite employee per month.......... 30 21 42.9%
Net income per worksite employee per month................ 23 18 27.8%
</TABLE>
REVENUES
The Company's revenues increased 64.0% over 1999 due to a 46.3%
increase in the average number of worksite employees paid per month accompanied
by a 13.2% increase in the 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 general strength of the U.S.
economy during the second half of 1999 and the first three quarters of 2000 was
also a contributing factor. Revenues from markets opened prior to 1993 (the
commencement of the Company's national expansion plan) increased 30% over 1999,
while revenues from markets opened after 1993 increased 98%. Revenues from the
state of Texas represented 50% 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 addition of clients with worksite employees
that had a higher average base pay than the existing client base; (iii) the
attrition of clients with worksite employees that had a lower average base pay
than the existing client base; and (iv) further penetration of markets with
generally higher wage levels, such as San Francisco, New York and Washington,
D.C.
GROSS PROFIT
Gross profit increased 54.7% over 1999 due primarily to the 46.3%
increase in the average number of worksite employees paid per month accompanied
by a 5.7% increase in gross profit per worksite employee per month. Gross profit
per worksite employee increased to $186 per month in 2000 versus $176 in 1999,
reflecting effective execution of the Company's pricing strategy. The Company's
pricing objectives attempt to maintain or
-24-
<PAGE> 26
improve the gross profit per worksite employee by increasing gross mark-up per
worksite employee to match or exceed changes in (i) its primary direct costs;
and (ii) its operating costs associated with enhancements in the Company's
comprehensive service offering.
Gross mark-up per worksite employee per month increased 9.5% to $793 in
2000 versus $724 in 1999. Approximately 55% of the $69 increase in gross mark-up
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 mark-up per employee was
related to other increases in the Company's comprehensive service fees,
including approximately $3 per worksite employee related to a mid-1999 change in
the method used to calculate service fees for clients who experience turnover
within their workforce.
Payroll taxes increased $40 per worksite employee per month, primarily
due to the increased average payroll cost per worksite employee. The overall
cost of payroll taxes as a percentage of payroll cost was 7.34% in 2000 versus
7.19% in 1999. This increase was primarily the result of the Company's
accelerating unit growth during the first three quarters of 2000, which caused a
larger proportion of the Company's payroll to be subject to payroll taxes later
in the year.
The cost of health insurance and related employee benefits increased
$14 per worksite employee per month over 1999 due to a 3.0% increase in the cost
per covered employee and a slight increase in the percentage of worksite
employees covered under the Company's health insurance plan to 69.7% in 2000
versus 67.8% in 1999.
Workers' compensation costs increased $5 per worksite employee per
month, but decreased slightly to 1.22% of fee payroll cost in 2000 from 1.25% in
1999.
Gross profit, measured as a percentage of revenue, declined to 3.74% in
2000 from 3.96% in 1999. 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 years ended December 31, 2000 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------ --------------------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS) (PER WORKSITE EMPLOYEE PER MONTH)
<S> <C> <C> <C> <C> <C> <C>
Salaries, wages and payroll taxes $ 54,477 $ 36,690 48.5% $ 73 $ 72 1.4%
General and administrative expenses 35,426 23,219 52.6% 48 45 6.7%
Commissions 9,278 6,429 44.3% 12 13 (7.7)%
Advertising 5,117 4,090 25.1% 7 8 (12.5)%
Depreciation and amortization 12,002 7,103 69.0% 16 14 14.3%
Write-off of software
development costs -- 1,438 (100.0)% -- 3 (100.0)%
-------- -------- -------- --------
Total operating expenses $116,300 $ 78,969 47.3% $ 156 $ 155 0.6%
======== ======== ======== ========
</TABLE>
Operating expenses increased 47.3% over 1999 as a result of the 46.3%
growth in the average number of worksite employees paid per month by the
Company, combined with the effects of the previously mentioned strategic
initiatives, all of which comprise investments in the Company's sales, service
and technology infrastructure. Operating expenses per worksite employee per
month increased 0.6% to $156 in 2000 versus $155 in 1999.
-25-
<PAGE> 27
Operating expenses in 1999 included a non-recurring $1.4 million
($920,000 net of tax) write-off of certain capitalized software development
costs. This write-off was the result of a periodic evaluation of all software
development projects, which included a review of costs incurred, estimated costs
to complete, estimated maintenance costs and the availability of alternative
software packages. Upon completion of this evaluation, the Company determined
that the projects would be terminated and that the costs associated with two
projects should be written off. The majority of the costs written off related to
efforts to customize an electronic document management system to meet the
Company's physical records management needs. Excluding the impact of this
charge, operating expenses in 2000 increased 50.0% over 1999, and increased to
$156 per worksite employee per month in 2000 from $152 in 1999.
Salaries, wages and payroll taxes of corporate and sales staff
increased to $73 per worksite employee per month in 2000 versus $72 in 1999. The
ratio of worksite employees to corporate employees improved to 65 in 2000 from
58 in 1999. This improvement was partially offset by an average increase in
gross pay per corporate employee of 6.3% over 1999. In addition, incentive
compensation as a percentage of corporate employee gross pay increased to 11.2%
in 2000 versus 3.5% in 1999 due to the Company's strong financial performance.
General and administrative expenses increased $3 per worksite employee
per month over 1999. The increase resulted from increased travel expenses
associated with the Company's expanding national presence, increased outside
labor and recruiting costs associated with the Company's accelerated growth rate
and increased consulting expenses associated with the development and rollout of
new technology projects.
Depreciation and amortization expense increased $2 per worksite
employee per month as a result of the increased capital expenditures placed in
service in 1999 and 2000, including (i) the implementation of the fifth
generation of the Company's proprietary PEO information system; (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; (iii) the opening
of new sales offices; (iv) the expansion and relocation of the Houston service
center and the opening of the Atlanta service center; and (v) the expansion of
corporate headquarters.
Commissions expense declined slightly on a per worksite employee per
month basis due to lower sales agency commissions. Advertising costs declined
slightly per worksite employee per month, as four of the Company's six new
offices opened in 2000 were located in existing sales markets, which provided
advertising efficiencies.
OTHER INCOME
Other income increased 19.9% to $4.4 million in 2000. Interest income
increased 72.9% to $4.4 million in 2000 from $2.6 million in 1999, due to a
higher level of cash and marketable securities resulting from the Company's
strong financial performance and an increase in the average interest rate
related to interest-bearing investments. This increase was partially offset by
the effect of a prior year non-recurring gain from the Company's settlement of a
401(k) plan issue with the Internal Revenue Service.
The Company's provision for income taxes differed from the U.S.
statutory rate of 34% in 2000 due primarily to state income taxes and tax-exempt
interest income.
NET INCOME
Net income for 2000 was $16.9 million, or $0.58 per diluted share
compared to $9.4 million, or $0.34 per diluted share in 1999. These results
reflect the two-for-one stock split effected on October 16, 2000. On a per
worksite employee per month basis, net income increased 27.8% to $23 in 2000
versus $18 in 1999.
-26-
<PAGE> 28
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
The following table presents certain information related to the
Company's results of operations for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 % CHANGE
------------ ------------ --------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C>
Revenues.................................................. $ 2,260,743 $ 1,683,063 34.3%
Gross profit.............................................. 89,528 68,610 30.5%
Operating expenses........................................ 78,969 57,409 37.6%
Operating income.......................................... 10,559 11,201 (5.7)%
Other income.............................................. 3,653 3,417 6.9%
Net income................................................ 9,358 9,123 2.6%
Diluted net income per share of common stock.............. 0.34 0.31 9.7%
STATISTICAL DATA:
Average number of worksite employees paid per month....... 42,479 34,819 22.0%
Fee revenue per worksite employee per month............... $ 4,084 $ 3,756 8.7%
Fee payroll cost per worksite employee per month.......... 3,360 3,083 9.0%
Gross mark-up per worksite employee per month............. 724 673 7.6%
Gross profit per worksite employee per month.............. 176 164 7.3%
Operating expenses per worksite employee per month........ 155 137 13.1%
Operating income per worksite employee per month.......... 21 27 (22.2)%
Net income per worksite employee per month................ 18 22 (18.2)%
</TABLE>
REVENUES
The Company's revenues increased 34.3% over 1998 due to a 22.0%
increase in the average number of worksite employees paid per month accompanied
by an 8.7% increase in the 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. Revenues from markets opened prior to
1993 (the commencement of the Company's national expansion plan) increased 14%
over 1998, while revenues from markets opened after 1993 increased 63%. Revenues
from the state of Texas represented 61% of the Company's total revenues, and
Houston, the Company's original market, represented 36% of the total.
The 8.7% increase in fee revenue per worksite employee per month
directly related to the 9.0% increase in fee payroll cost per worksite employee
per month, reflecting (i) compensation increases within the Company's existing
worksite employee base; (ii) the addition of clients with worksite employees
that had a higher average base pay than the existing client base; (iii) the
attrition of clients with worksite employees that had a lower average base pay
than the existing client base; and (iv) the penetration of markets with
generally higher wage levels, such as San Francisco, New York and Washington,
D.C.
GROSS PROFIT
Gross profit increased 30.5% over 1998 due primarily to the 22.0%
increase in the average number of worksite employees paid per month accompanied
by a 7.3% increase in gross profit per worksite employee per month. Gross profit
per worksite employee increased to $176 per month in 1999 from $164 per month in
1998, 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 changes in the gross mark-up per worksite employee.
-27-
<PAGE> 29
Gross mark-up per worksite employee per month increased 7.6% to $724 in
1999 from $673 in 1998. Approximately 43% of the $51 increase in gross mark-up
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 mark-up per employee was
related to 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, including approximately $4 per worksite employee related to a change in
the method used to calculate service fees for clients who experience turnover
within their workforce.
Payroll taxes increased $23 per worksite employee per month, primarily
due to the increased average payroll cost per worksite employee. The overall
cost of payroll taxes as a percentage of payroll cost was 7.2% in 1999 versus
7.3% in 1998.
The cost of health insurance and related employee benefits increased
$12 per worksite employee per month over 1998 due to a 3.1% increase in the cost
per covered employee and a slight increase in the percentage of worksite
employees covered under the Company's health insurance plan to 67.8% in 1999
from 66.4% in 1998.
Workers' compensation costs increased $5 per worksite employee per
month, and increased slightly to 1.25% of payroll cost in 1999 from 1.20% in
1998, primarily due to higher bonus and other year-end compensation of worksite
employees, some of which is subject to workers' compensation insurance premiums.
Gross profit, measured as a percentage of revenue, declined to 3.96% in
1999 from 4.08% in 1998. 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 years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------- ---------------------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- ------- ------- --------
(IN THOUSANDS) (PER WORKSITE EMPLOYEE PER MONTH)
<S> <C> <C> <C> <C> <C> <C>
Salaries, wages and payroll taxes $36,690 $26,522 38.3% $ 72 $ 63 14.3%
General and administrative expenses 23,219 17,474 32.9% 45 42 7.1%
Commissions 6,429 5,968 7.7% 13 14 (7.1)%
Advertising 4,090 3,740 9.4% 8 9 (11.1)%
Depreciation and amortization 7,103 3,705 91.7% 14 9 55.6%
Write-off of software
development costs 1,438 -- 100.0% 3 -- 100.0%
------- ------- ------- ------- ------- ------
Total operating expenses $78,969 $57,409 37.6% $ 155 $ 137 13.1%
======= ======= ======= ======= ======= ======
</TABLE>
Operating expenses increased 37.6% over 1998 as a result of the 22.0%
growth in the average number of worksite employees paid per month by the
Company, combined with the effects of the previously mentioned strategic
initiatives, all of which comprise investments in the Company's sales, service
and technology infrastructure. Operating expenses per worksite employee per
month increased 13.1% to $155 in 1999 from $137 in 1998.
Operating expenses in 1999 included a non-recurring $1.4 million
($920,000 net of tax) write-off of certain capitalized software development
costs. This write-off was the result of a periodic evaluation of all software
development projects, which included a review of costs incurred to date,
estimated costs to complete, estimated maintenance costs, and the availability
of alternative software packages. Upon completion of this evaluation, the
Company determined that the projects would be terminated and that the costs
associated with two projects should be
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<PAGE> 30
written off. The majority of the costs written off related to efforts to
customize an electronic document management system to meet the Company's
physical records management needs. Excluding the impact of this charge,
operating expenses increased 35.1% over 1998, and increased to $152 per worksite
employee per month in 1999 from $137 in 1998.
Salaries, wages and payroll taxes of corporate and sales staff
increased to $72 per worksite employee per month in 1999 from $63 in 1998.
Approximately $6 of this increase was the result of a 25.9% increase in
corporate and sales staff, combined with an 8.0% increase in the average salary
per employee. The remaining increase was related to higher payroll tax rates and
the adoption of an employer matching contribution feature in the Company's
401(k) retirement plan. The 25.9% increase in corporate and sales staff was
devoted largely to supporting the Company's strategic initiatives, including a
23% increase in sales and sales support staff in the district sales offices, a
23% increase in service personnel, predominantly located in the Company's
service centers and sales markets, a 90% increase in technology staff and newly
formed departments devoted to the Company's eBusiness initiatives.
General and administrative expenses increased $3 per worksite employee
per month over 1998. The increase resulted from (i) hardware and software
maintenance fees and communications costs associated with the Company's Internet
development, national technology platform and other technology initiatives; (ii)
higher legal and accounting fees associated with corporate activities such as
the ongoing 401(k) plan audit, corporate entity changes and eBusiness alliance
contract negotiations; and (iii) higher rent expense due to recent openings of
sales offices in St. Louis, San Francisco and New York, and the new Dallas and
Atlanta service centers.
Depreciation and amortization expense increased $5 per worksite
employee as a result of the increased capital expenditures placed in service in
1998 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
include both internal software development costs and externally purchased
software; (iii) the opening of new sales offices; (iv) the expansion and
relocation of the Dallas service center and the opening of the Atlanta service
center; and (v) the expansion of corporate headquarters.
Commissions expense declined slightly on a per worksite employee per
month basis due to lower sales agency commissions. Advertising costs also
declined slightly per worksite employee, as the Company was able to increase its
advertising coverage while incurring lower rates for much of its radio
advertising. In addition, the Company utilized resources available through its
marketing agreement with American Express to generate leads and appointments for
its sales representatives.
OTHER INCOME
Interest income decreased 23.3% to $2.6 million in 1999 from $3.3
million in 1998, due to a lower level of cash and marketable securities
resulting from the repurchase of shares of the Company's common stock under the
repurchase program approved by the Company's Board of Directors in January 1999.
In addition, the average interest rate related to interest-bearing investments
declined slightly as the Company shifted a higher portion of its marketable
securities into tax-exempt securities.
During the fourth quarter of 1999, the Company entered into a Closing
Agreement on Final Determination Covering Specific Matters with the Internal
Revenue Service, settling nondiscrimination testing issues involving the
Company's 401(k) plan for certain prior plan years. The actual amount of the
settlement was substantially lower than the original estimate and accrual made
in 1996, resulting in a non-recurring gain of $932,000 ($852,000 net of income
tax effect) in the fourth quarter of 1999. This gain included the impact of an
adjusted amount recoverable from the Company's former third-party record keeper
pursuant to a 1996 agreement, under which the record keeper agreed to reimburse
the Company for a portion of its settlement of the nondiscrimination testing
issues.
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<PAGE> 31
The Company's provision for income taxes, which included the effects of
the non-recurring gain from settlement of the 401(k) testing issues, differed
from the U.S. statutory rate of 34% in 1999 due primarily to certain portions of
the final settlement and original accrual being non-deductible for income tax
purposes. In addition, the Company's provision for income taxes differs from the
U.S. statutory rate due to state income taxes and tax-exempt interest income in
both years.
NET INCOME
Net income for 1999 was $9.4 million, or $0.34 per diluted share
compared to $9.1 million, or $0.31 per diluted share in 1998. The 1999 results
included the effects of two unrelated, non-recurring items: (i) a $932,000 gain
($852,000 net of income tax effect) associated with the settlement of
nondiscrimination testing issues related to the ongoing audit of the Company's
401(k) plan for amounts less than the amount originally accrued for such issues
in 1996; and (ii) a $1.4 million ($920,000 net of income tax effect) write-off
of software development costs incurred on projects which are not expected to be
completed. Excluding the effects of these items, the 1999 net income and diluted
earnings per share were also $9.4 million and $0.34.
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 $108.7 million in cash and cash equivalents and
marketable securities at December 31, 2000, of which approximately $57.9 million
was payable in early January 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 December 31, 2000, the Company
had working capital of $51.2 million compared to $35.8 million at December 31,
1999. The increase in working capital was primarily the result of $32.4 million
in net income adjusted for non-cash items and $10.1 million in proceeds,
including income tax benefit, related to the exercise of employee stock options.
These increases were partially offset by the use of funds for capital
expenditures of $20.2 million, and investments in other companies totaling $5.8
million.
CASH FLOWS FROM OPERATING ACTIVITIES
The Company's cash flows from operating activities in 2000 increased
$56.8 million to $74.6 million primarily due to an $11.9 million increase in net
income adjusted for non-cash items to $32.4 million in 2000 and a $36.4 million
increase in payroll taxes and other payroll deductions payable related to the
timing of payroll tax payments surrounding the December 31 payroll periods of
each year. The timing and amount 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.
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<PAGE> 32
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, including software development costs, totaled $
20.2 million in 2000. The level of capital expenditures incurred in the past
three years has been significantly higher than the periods prior to 1998 and has
related directly to the Company's strategic initiatives and national expansion.
Capital expenditures in 2000 can be summarized as follows (in millions):
<TABLE>
<S> <C>
Computer hardware and software $ 6.6
Software development costs 4.8
Furniture and fixtures 4.9
Buildings and improvements 3.0
Vehicles 0.9
-------
Total $ 20.2
=======
</TABLE>
Capital expenditures for computer hardware and software included the
costs of application software directly related to the ongoing development of (i)
the Company's eBusiness initiatives and proprietary PEO information system; (ii)
the costs of network and telecommunications infrastructure required to support
the national technology platform; (iii) the costs of desktop workstations for
new employees in the corporate offices, sales offices and service centers; and
(iv) the cost of software for various corporate needs.
Capitalized software development costs primarily included (i) $1.7
million related to the development of the fifth generation of the Company's
proprietary PEO information system; (ii) $1.3 million related to functionality
enhancements to Administaff Assistant; (iii) $0.5 million related to the
development and subsequent enhancement of bizzport; and (iv) $0.5 million
related to the development of online client census and sales bid functionality.
Capital expenditures for furniture and fixtures, building improvements
and vehicles were largely related to equipping and furnishing six new sales
offices, a new service center in Houston and expansion to accommodate growth in
the number of corporate employees at the Company's corporate offices and in
existing markets.
The Company expects a comparable level of capital expenditures in 2001
with a budget of approximately $21 million, which is primarily composed of
continued software development, computer hardware and software costs and
continued expansion of sales offices and service centers to accommodate the
ongoing growth of the Company. In addition, the Company will begin an expansion
to its corporate headquarters in 2001, with an expected completion date in the
fourth quarter of 2002 and a total expected cost of approximately $24 million.
Net purchases of marketable securities during 2000 primarily
represented the investment of excess funds in longer-term, higher-yielding
securities.
Investments in other companies during the 2000 period consisted of
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 for 2000 primarily included
proceeds from the exercise of employee stock options, partially offset by the
use of $2.6 million to repurchase 100,000 shares of the Company's common stock.
OTHER MATTERS
The Company had net deferred tax liabilities of $6.4 million at
December 31, 2000, versus $4.5 million at December 31, 1999. This increase is
due primarily to differences between the book and tax basis of software
development costs, prepaid commissions and depreciation.
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<PAGE> 33
SEASONALITY, INFLATION AND QUARTERLY FLUCTUATIONS
Historically, the Company's earnings pattern has included losses in the
first quarter followed by improved profitability in subsequent quarters
throughout the year. This pattern is due to the effects of employment-related
taxes which are based on each employee's cumulative earnings up to specified
wage levels, causing employment-related taxes to be highest in the first quarter
and then decline over the course of the year. Since the Company's revenues
related to each employee are generally earned and collected at a relatively
constant rate throughout each year, payment of such 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
AUDIT OF THE COMPANY'S 401(k) PLAN; IRS EMPLOYEE LEASING MARKET SEGMENT
GROUP
The Company's 401(k) plan is currently under audit by 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 for
the purpose of identifying specific compliance issues prevalent in certain
segments of the PEO industry. Approximately 70 PEOs, including the Company, have
been randomly selected by the IRS for audit pursuant to this program. One issue
that has arisen from these audits is whether a PEO can be a co-employer of
worksite employees, including officers and owners of client companies, for
various purposes under the Internal Revenue Code of 1986, as amended (the
"Code"), including participation in the PEO's 401(k) plan. For a discussion of
the issues being considered by the Market Segment Group, see Item 1, "Business -
Industry Regulation". With respect to the 401(k) plan audit, the IRS Houston
District has sought technical advice (the "Technical Advice Request") from the
IRS National Office about whether participation in the 401(k) plan by worksite
employees, including officers of client companies, violates the exclusive
benefit rule under the Code because they are not employees of the Company. A
copy of the Technical Advice Request and the Company's response have been sent
to the IRS National Office for review. The Technical Advice Request contains the
conclusions of the IRS Houston District with respect to the 1993 plan year that
the 401(k) plan should be disqualified because it covers worksite employees who
are not employees of the Company. The Company's response refutes the conclusions
of the IRS Houston District. With respect to the Market Segment Group study, the
issue of whether a PEO and a client company may be treated as co-employers of
worksite employees for certain federal tax purposes (the "Industry Issue") has
also been referred to the IRS National Office.
The Company does not know whether the National Office will address the
Technical Advice Request independently of the Industry Issue. 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. Should the IRS conclude that the Company is not a
"co-employer" of worksite employees for purposes of the Code, worksite employees
could not continue to make salary deferral contributions to the 401(k) plan or
pursuant to the Company's cafeteria plan or continue to participate in certain
other employee benefit plans of the Company. The Company believes that, although
unfavorable to the Company, a prospective application of such a conclusion (that
is, one applicable only to periods after the conclusion by the IRS is finalized)
would not have a material adverse effect on its financial position or results of
operations, as the Company could continue to make available comparable benefit
programs to its client companies at comparable costs to the Company. However, if
the IRS National Office adopts the conclusions of the IRS Houston District set
forth in the Technical Advice Request and any such conclusions were applied
retroactively to disqualify the 401(k) plan for 1993 and subsequent years,
employees' vested account balances under the 401(k) plan would become taxable,
the Company would lose its tax deductions to the extent its matching
contributions were not vested, the 401(k) plan's trust would become a taxable
trust and the Company
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<PAGE> 34
would be subject to liability with respect to its failure to withhold applicable
taxes with respect to certain contributions and trust earnings. Further, the
Company would be subject to liability, including penalties, with respect to its
cafeteria plan for the failure to withhold and pay taxes applicable to salary
deferral contributions by employees, including worksite employees. In such a
scenario, the Company also would face the risk of client dissatisfaction and
potential litigation. A retroactive application by the IRS of an adverse
conclusion resulting in disqualification of the 401(k) plan would have a
material adverse effect on the Company's financial position and results of
operations.
EXPENSES ASSOCIATED WITH EXPANSION
The Company's past operating results have been affected by the
Company's long-term national sales and service expansion. In many cases, the
costs of this expansion have been incurred in advance of the anticipated growth
in worksite employees (the primary driver of the Company's revenues). The
Company expects to continue to incur substantial additional operating expenses
in the foreseeable future as a result of continuing national expansion. See page
23 for a discussion of the types of expenses incurred in this expansion.
ESTIMATED COSTS AND EFFECTIVENESS OF CAPITAL PROJECTS AND INVESTMENTS
IN INFRASTRUCTURE
The Company currently has several strategic initiatives in progress,
which have significantly increased the level of capital expenditures and related
depreciation expense incurred over the past several years. These capital
expenditures have been, and will continue to be, primarily associated with the
expansion and upgrade of the Company's technology and telecommunications
infrastructure, Internet service delivery capabilities, and corporate
headquarters, sales and service facilities. There can be no assurances that the
Company's cost to complete these projects will be as estimated or that the
ultimate effectiveness of such projects will provide the necessary operating
efficiencies required to offset the resulting increases in depreciation and
amortization expense which accompany these expenditures. In addition, the
Company may require additional capital resources to fund these and future
capital expenditure requirements.
ESTIMATED COSTS AND EFFECTIVENESS OF eBUSINESS STRATEGY
While the Company believes that its comprehensive eBusiness strategy
will ultimately lead to increased profitability through new revenue streams,
operating expense savings and higher client retention, there can be no
assurances that losses or diminished profitability will not be incurred in
future periods as a result of these initiatives.
Among the factors which could affect the success of the Company's
eBusiness strategy are (i) the Internet connectivity and computer literacy of
the Company's clients; (ii) the willingness of clients to accept an electronic
service delivery platform; (iii) the Company's ability to identify, negotiate
and integrate agreements with strategic partners; (iv) the attraction of clients
and worksite employees to bizzport; (v) the effective generation of revenues
from the eBusiness initiatives, particularly bizzport; (vi) unanticipated
development costs related to the eBusiness initiatives; and (vii) the Company's
ability to control or reduce operating expenses as a result of the eBusiness
initiatives, particularly the development of Administaff Assistant.
INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES AND WORKERS'
COMPENSATION RATES
Health insurance premiums, state unemployment taxes and workers'
compensation rates are in part determined by the Company's claims experience and
comprise a significant portion of the Company's direct costs. The Company
employs extensive risk management procedures in an attempt to control its claims
incidence and structures its benefits contracts to provide as much cost
stability as possible. However, should the Company experience a large increase
in claim activity, its unemployment taxes, health insurance premiums or workers'
compensation insurance rates could increase. The Company's ability to
incorporate such increases into service fees to clients is constrained by
contractual arrangements with clients, which could result in a delay before such
increases could be reflected in service fees. As a result, such increases could
have a material adverse effect on the Company's financial condition or results
of operations.
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<PAGE> 35
FAILURE TO MANAGE GROWTH
The Company has experienced significant growth and expects such growth
to continue for the foreseeable future. As described under the above caption
"Expenses Associated with Expansion," the costs associated with the Company's
sales and service expansion have been significant. Accordingly, the Company's
expansion plan may place a significant strain on the Company's management,
financial, operating and technical resources. Failure to manage this growth
effectively could have a material adverse effect on the Company's financial
condition or results of operations.
POTENTIAL IMPAIRMENT OF INVESTMENTS IN OTHER COMPANIES
The Company has made investments totaling $5.8 million in Virtual
Growth, Inc. and eProsper, Inc., both of which are in the early stages of
development. These companies are likely to require additional capital in the
future. If these companies are unable to raise sufficient additional capital to
continue as going concerns, or if they raise capital at lower valuation levels
than those at the time Administaff made its investments, Administaff's
investments in those companies could become impaired. In that event, Administaff
would be required to write-off all or a portion of those investments. Although
Administaff does not believe that such an impairment would materially affect its
consolidated financial position, an impairment would likely reduce Administaff's
net income materially in the period in which the impairment occurred.
LIABILITY FOR WORKSITE EMPLOYEE PAYROLL AND BENEFITS COSTS
Under the Client Service Agreement ("CSA"), the Company becomes a
co-employer of worksite employees and assumes the obligations to pay the
salaries, wages and related benefit costs and payroll taxes of such worksite
employees. The Company assumes such obligations as a principal, not merely as an
agent of the client company. The Company's obligations include responsibility
for (i) payment of the salaries and wages for work performed by worksite
employees, regardless of whether the client company makes timely payment to the
Company of the associated service fee; and (ii) providing benefits to worksite
employees even if the costs incurred by Administaff to provide such benefits
exceed the fees paid by the client company. If a client company does not pay the
Company or if the costs of benefits provided to worksite employees exceeds the
fees paid by a client company, the Company's ultimate liability for worksite
employee payroll and benefits costs could have a material adverse effect on its
financial condition or results of operations.
FEDERAL, STATE AND LOCAL REGULATION
As a major employer, the Company's operations are affected by numerous
federal, state and local laws relating to labor, tax and employment matters. By
entering into a co-employer relationship with employees assigned to work at
client company locations, the Company assumes certain obligations and
responsibilities of an employer under these laws. However, many of these laws
(such as the Employee Retirement Income Security Act ("ERISA") and federal and
state employment tax laws) do not specifically address the obligations and
responsibilities of non-traditional employers such as PEOs, and the definition
of "employer" under these laws is not uniform. In addition, many of the states
in which the Company operates have not addressed the PEO relationship for
purposes of compliance with applicable state laws governing the
employer/employee relationship. If these other federal or state laws are
ultimately applied to the Company's PEO relationship with its worksite employees
in a manner adverse to the Company, such an application could have a material
adverse effect on the Company's results of operations or financial condition.
While many states do not explicitly regulate PEOs, 21 states (including
Texas) have passed laws that have licensing or registration requirements for
PEOs, and several other states are considering such regulation. Such laws vary
from state to state, but generally provide for monitoring the fiscal
responsibility of PEOs, and in some cases codify and clarify the co-employment
relationship for unemployment, workers' compensation and other purposes under
state law. While the Company generally supports licensing regulation because it
serves to validate the PEO
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<PAGE> 36
relationship, there can be no assurance that the Company will be able to satisfy
licensing requirements or other applicable regulations for all states. In
addition, there can be no assurance that the Company will be able to renew its
licenses in all states.
LOSS OF BENEFIT PLANS
The maintenance of health and workers' compensation insurance plans
that cover worksite employees is a significant part of the Company's business.
The current health and workers' compensation contracts are provided by vendors
with whom the Company has an established relationship, and on terms that the
Company believes to be favorable. While the Company believes that replacement
contracts could be secured on competitive terms without causing significant
disruption to the Company's business, there can be no assurance in this regard.
The current health and workers' compensation contracts expire on December 31,
2001 and September 30, 2001, respectively.
NEED TO RENEW OR REPLACE CLIENT COMPANIES
The Company's standard CSA is subject to cancellation on 60 days notice
by either the Company or the client. Accordingly, the short-term nature of the
CSA makes the Company vulnerable to potential cancellations by existing clients,
which could materially and adversely affect the Company's financial condition
and results of operations. In addition, the Company's results of operations are
dependent in part upon the Company's ability to retain or replace its client
companies upon the termination or cancellation of the CSA. Historically,
approximately 20% of the Company's clients have remained clients for less than
one year and there can be no assurance that the number of contract cancellations
will not increase in the future.
MARKETING AGREEMENT WITH AMERICAN EXPRESS
The Company has entered into a Marketing Agreement with American
Express to jointly market the Company's services to American Express'
substantial small and medium-sized business customer base across the country.
Under the terms of the Marketing Agreement, American Express is utilizing its
resources to generate appointments with prospects for the Company's services. In
addition, the Company and American Express are working to jointly develop
product offerings that enhance the current PEO services offered by the Company.
The Company believes that the agreement will enhance its ability to increase its
base of worksite employees and clients; however, there can be no assurances to
that effect. Among the factors that could cause the effectiveness of the
Marketing Agreement to be less than anticipated are the ability of American
Express to set qualified appointments, the Company's ability to make timely
presentations to all of the appointments set by American Express and the
Company's ability to convert those appointments into sales.
LIABILITIES FOR CLIENT AND EMPLOYEE ACTIONS
A number of legal issues remain unresolved with respect to the
co-employment arrangement between a PEO and its worksite employees, including
questions concerning the ultimate liability for violations of employment and
discrimination laws. The Administaff CSA establishes the contractual division of
responsibilities between the Company and its clients for various personnel
management matters, including compliance with and liability under various
governmental regulations. However, because the Company acts as a co-employer,
the Company may be subject to liability for violations of these or other laws
despite these contractual provisions, even if it does not participate in such
violations. Although the CSA provides that the client is to indemnify the
Company for any liability attributable to the conduct of the client, the Company
may not be able to collect on such a contractual indemnification claim and thus
may be responsible for satisfying such liabilities. In addition, worksite
employees may be deemed to be agents of the Company, subjecting the Company to
liability for the actions of such worksite employees.
GEOGRAPHIC MARKET CONCENTRATION
While the Company has sales offices in 17 markets, 13 of these
represent expansion markets pursuant to the Company's national expansion plan.
The Company's Houston and Texas (including Houston) markets
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<PAGE> 37
accounted for approximately 27% and 50%, respectively, of the Company's revenue
for the year ended December 31, 2000. Accordingly, while a primary aspect of the
Company's strategy is expansion in its current and future markets outside of
Texas, for the foreseeable future, a significant portion of the Company's
revenues may be subject to economic factors specific to Texas (including
Houston). While the Company believes that its market expansion plans will
eventually lessen this risk in addition to generating significant revenue
growth, there can be no assurance that the Company will be able to duplicate in
other markets the revenue growth and operating results experienced in its Texas
(including Houston) markets.
COMPETITION AND NEW MARKET ENTRANTS
The PEO industry is highly fragmented. Many of these PEOs have limited
operations and fewer than 1,000 worksite employees, but there are several
industry participants that are comparable in size to the Company. The Company
also encounters competition from "fee for service" companies such as payroll
processing firms, insurance companies and human resource consultants. In
addition, several of the Company's PEO competitors have recently been acquired
by large business services companies, such as Automatic Data Processing, Inc.
Such companies have substantially greater resources and provide a broader range
of services than the Company. Accordingly, the PEO divisions of such companies
may be able to provide more services at more competitive prices than may be
offered by the Company. Moreover, the Company expects that as the PEO industry
grows and its regulatory framework becomes better established, well-organized
competition with greater resources than the Company may enter the PEO market,
possibly including large "fee for service" companies currently providing a more
limited range of services.
POTENTIAL CLIENT LIABILITY FOR EMPLOYMENT TAXES
Pursuant to the CSA, the Company assumes sole responsibility and
liability for the payment of federal employment taxes imposed under the Code
with respect to wages and salaries paid to its worksite employees. There are
essentially three types of federal employment tax obligations: (i) income tax
withholding requirements; (ii) obligations under the Federal Income Contribution
Act ("FICA"); and (iii) obligations under the Federal Unemployment Tax Act
("FUTA"). Under the Code, employers have the obligation to withhold and remit
the employer portion and, where applicable, the employee portion of these taxes.
Most states impose similar employment tax obligations on the employer. While the
CSA provides that the Company has sole legal responsibility for making these tax
contributions, the IRS or applicable state taxing authority could conclude that
such liability cannot be completely transferred to the Company. Accordingly, in
the event the Company fails to meet its tax withholding and payment obligations,
the client company may be held jointly and severally liable therefor. While this
interpretive issue has not, to the Company's knowledge, discouraged clients from
enrolling with the Company, there can be no assurance that a definitive adverse
resolution of this issue would not do so in the future.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is primarily exposed to market risks from fluctuations in
interest rates and the effects of those fluctuations on the market values of its
cash equivalent short-term investments and its available-for-sale marketable
securities. The cash equivalent short-term investments consist primarily of
overnight investments, which are not significantly exposed to interest rate
risk, except to the extent that changes in interest rates will ultimately affect
the amount of interest income earned on these investments. The
available-for-sale marketable securities are subject to interest rate risk
because these securities generally include a fixed interest rate. As a result,
the market values of these securities are affected by changes in prevailing
interest rates.
The Company attempts to limit its exposure to interest rate risk
primarily through diversification and low investment turnover. The Company's
marketable securities are currently managed by three professional investment
management companies, each of whom is guided by the Company's investment policy.
The Company's investment policy is designed to maximize after-tax interest
income while preserving its principal investment. As a result, the Company's
marketable securities consist primarily of short and intermediate-term debt
securities.
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<PAGE> 38
As of December 31, 2000, the Company's available-for-sale marketable
securities include an investment in a mutual fund, which holds corporate debt
securities with maturities ranging up to 18 months. The amortized cost basis,
fair market value and 30-day yield of this investment was $13.0 million, $13.1
million and 6.3% at December 31, 2000. The following table presents information
about the Company's remaining available-for-sale marketable securities as of
December 31, 2000 (dollars in thousands):
<TABLE>
<CAPTION>
Principal Average
Maturities Interest Rate
---------- -------------
<S> <C> <C>
2001 $17,820 6.3%
2002 5,280 5.3%
2003 645 6.0%
2004 1,632 5.5%
2005 200 7.9%
------- ---
Total $25,577 6.1%
======= ===
Fair Market Value $25,827
=======
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item 8 is contained in a separate
section of this Annual Report. See "Index to Consolidated Financial Statements"
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-37-
<PAGE> 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference to
the information set forth under the captions "Proposal Number 1: Election of
Directors - Nominees - Class III Directors (For Terms Expiring at the 2004
Annual Meeting)," "- Directors Remaining in Office," and "- Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
report (the "Administaff Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to
the information set forth under the captions "Proposal Number 1: Election of
Directors - Director Compensation" and "--Executive Compensation" in the
Administaff Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to
the information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Administaff Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to
the information set forth under the caption "Proposal Number 1: Election of
Directors - Certain Relationships and Related Transactions" in the Administaff
Proxy Statement. See also Note 3 to the Consolidated Financial Statements.
-38-
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements of the Company
The Consolidated Financial Statements listed by the
Registrant on the accompanying Index to Consolidated
Financial Statements (see page F-1) are filed as part of
this Annual Report.
(a) 2. Financial Statement Schedules
The required information is included in the Consolidated
Financial Statements or Notes thereto.
(a) 3. List of Exhibits
3.1 Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (No. 33-96952)).
3.2* Bylaws, as amended on March 7, 2001.
3.3 Certificate of Designations of Series A Junior
Participating Preferred Stock of Administaff, Inc.
Dated February 4, 1998 (incorporated by reference to
Exhibit 2 to the Registrant's Form 8-A filed on
February 4, 1998).
4.1 Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-1 (No. 33-96952)).
4.2 Rights Agreement dated as of February 4, 1998, between
Administaff, Inc. and Harris Trust and Savings Bank, as
Rights Agent (incorporated by reference to Exhibit 1 to
the Registrant's Form 8-A filed on February 4, 1998).
4.3 Amendment No. 1 to Rights Agreement dated as of March
9, 1998 between Administaff, Inc. and Harris Trust and
Savings Bank, as Rights Agent (incorporated by
reference to Exhibit 4.3 to the Registrant's Form 10-K
for the year ended December 31, 1999).
4.4 Amendment No. 2 to Rights Agreement dated as of May 14,
1999 between Administaff, Inc. and Harris Trust and
Savings Bank, as Rights Agent (incorporated by
reference to Exhibit 2 to the Registrant's Form 8-A/A
filed on May 19, 1999).
4.5 Amendment No. 3 to Rights Agreement dated as of July
22, 1999 between Administaff, Inc. and Harris Trust and
Savings Bank, as Rights Agent (incorporated by
reference to Exhibit 1 to the Registrant's Form 8-A/A
filed on August 9, 1999).
4.6 Amendment No. 4 to Rights Agreement dated as of August
2, 1999 between Administaff, Inc. and Harris Trust and
Savings Bank, as Rights Agent (incorporated by
reference to Exhibit 2 to the Registrant's form 8-A/A
filed on August 9, 1999).
4.7 Form of Rights Certificate (incorporated by reference
to Exhibit 3 to the Registrant's Form 8-A filed on
February 4, 1998).
4.8 Securities Purchase Agreement between Administaff, Inc.
and American Express Travel Related Services Company,
Inc., dated January 27, 1998 and the Letter Agreement
between Administaff, Inc. and American Express Travel
Related Services Company, Inc., dated March 10, 1998
amending the Securities Purchase Agreement
(incorporated by reference to Exhibit 4.2 to the
Registrant's Form 10-Q for the quarter ended March 31,
1998).
4.9 Registration Rights Agreement between Administaff, Inc.
and American Express Travel Related Services Company,
Inc., dated March 10, 1998 (incorporated by reference
to Exhibit 4.3 to the Registrant's Form 10-Q for the
quarter ended March 31, 1998).
4.10 Warrant Agreement between Administaff, Inc. and
American Express Travel Related Services Company, Inc.,
dated March 10, 1998 (incorporated by reference to
Exhibit 4.4 to the Registrant's Form 10-Q for the
quarter ended March 31, 1998).
-39-
<PAGE> 41
4.11 Warrant Certificate No. 2 for American Express Travel
Related Services Company, Inc. (incorporated by
reference to Exhibit 4.6 to the Registrant's Form 10-Q
for the quarter ended March 31, 1998).
4.12 Warrant Certificate No. 3 for American Express Travel
Related Services Company, Inc. (incorporated by
reference to Exhibit 4.7 to the Registrant's Form 10-Q
for the quarter ended March 31, 1998).
4.13 Warrant Certificate No. 4 for American Express Travel
Related Services Company, Inc. (incorporated by
reference to Exhibit 4.8 to the Registrant's Form 10-Q
for the quarter ended March 31, 1998).
4.14 Warrant Certificate No. 5 for American Express Travel
Related Services Company, Inc. (incorporated by
reference to Exhibit 4.9 to the Registrant's Form 10-Q
filed for the quarter ended March 31, 1998).
10.1 Third Amended and Restated Promissory Note in the
amount of $693,694.75 among Administaff, Inc., Richard
G. Rawson, Dawn Rawson, and RDKB Rawson LP, dated as of
March 6, 2000, amending and restating a Promissory Note
dated June 22, 1995 (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-K for the year
ended December 31, 1999).
10.2 Second Amended and Restated Promissory Note in the
amount of $300,000 among Administaff, Inc., Richard G.
Rawson, Dawn Rawson, and RDKB Rawson LP, dated as of
July 13, 1998, amending and restating a Promissory Note
dated April 11, 1996 (incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-K for the year
ended December 31, 1998).
10.3 Second Amended and Restated Security Agreement-Pledge
among Administaff, Inc., Richard G. Rawson, Dawn
Rawson, and RDKB Rawson LP, dated as of July 13, 1998,
pursuant to which the collateral securing the
promissory notes included in Exhibits 10.1 and 10.2 is
pledged (incorporated by reference to Exhibit 10.3 to
the Registrant's form 10-K for the year ended December
31, 1998).
10.4** Administaff, Inc. 1997 Incentive Plan (incorporated by
reference to Exhibit 99.1 to the Registrant's
Registration Statement on Form S-8 (No. 333-85151)).
10.5** First Amendment to the Administaff, Inc. 1997 Incentive
Plan (incorporated by reference to Exhibit 99.2 to the
Registrant's Registration Statement on Form S-8 (No.
333-85151)).
10.6** Second Amendment to the Administaff, Inc. 1997
Incentive Plan (incorporated by reference to Exhibit
99.3 to the Registrant's Registration Statement on Form
S-8 (No. 333-85151)).
10.7** Third Amendment to the Administaff, Inc. 1997 Incentive
Plan (incorporated by reference to Exhibit 99.4 to the
Registrant's Registration Statement of Form S-8 (No.
333-85151)).
10.8** Fourth Amendment to the Administaff, Inc. 1997
Incentive Plan (incorporated by reference to Exhibit
99.5 to the Registrant's Registration Statement of Form
S-8 (No. 333-85151)).
10.9 Administaff, Inc. Nonqualified Stock Option Plan
(incorporated by reference to Exhibit 99.6 to the
Registrant's Registration Statement on Form S-8 (No.
333-85151)).
10.10 Administaff, Inc. 1997 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 99.1 to the
Registrant's form S-8 (No. 333-36363)).
10.11 Marketing Agreement between American Express Travel
Related Services Company, Inc., Administaff, Inc.,
Administaff Companies, Inc. and Administaff of Texas,
Inc. dated March 10, 1998 (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-Q for the
quarter ended March 31, 1998).
10.12 First Amendment to the Marketing Agreement between
American Express Travel Related Services Company, Inc.,
Administaff, Inc., Administaff Companies, Inc. and
Administaff of Texas, Inc., dated November 17, 1998
(incorporated by reference to Exhibit 10.12 to the
Registrant's Form 10-K for the year ended December 31,
1998)).
10.13 Second Amendment to the Marketing Agreement between
American Express Travel Related Services Company, Inc.
and Administaff, Inc., Administaff Companies, Inc. and
-40-
<PAGE> 42
Administaff of Texas, Inc., dated April 11, 2000
(incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended June 30,
2000).
21.1* Subsidiaries of Administaff, Inc.
23.1* Consent of Independent Auditors.
- ----------
* Filed herewith
** Management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
(b) Reports on Form 8-K
None.
-41-
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Administaff, Inc. has duly caused this report to be signed
in its behalf by the undersigned, thereunto duly authorized, on March 16, 2001.
ADMINISTAFF, INC.
By: /s/ RICHARD G. RAWSON
--------------------------------------
Richard G. Rawson
Executive Vice President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities indicated
on March 16, 2001:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ PAUL J. SARVADI President, Chief Executive Officer and
- ------------------------------------- Director
Paul J. Sarvadi (Principal Executive Officer)
/s/ RICHARD G. RAWSON Executive Vice President, Chief Financial
- ------------------------------------- Officer, Treasurer and Director
Richard G. Rawson (Principal Financial Officer)
/s/ DOUGLAS S. SHARP Vice President, Finance and Controller
- ------------------------------------- (Principal Accounting Officer)
Douglas S. Sharp
* Director
- -------------------------------------
Linda Fayne Levinson
* Director
- -------------------------------------
Paul S. Lattanzio
* Director
- -------------------------------------
Jack M. Fields, Jr.
* Director
- -------------------------------------
Michael W. Brown
* Director
- -------------------------------------
Steven Alesio
</TABLE>
* By John H. Spurgin, II, attorney-in-fact
-42-
<PAGE> 44
ADMINISTAFF, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999................F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.........................................F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998.........................................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.........................................F-7
Notes to Consolidated Financial Statements..................................F-9
</TABLE>
F-1
<PAGE> 45
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Administaff, Inc.
We have audited the accompanying consolidated balance sheets of
Administaff, Inc. as of December 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Administaff, Inc. at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Houston, Texas
February 9, 2001
F-2
<PAGE> 46
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................... $ 69,733 $ 25,451
Marketable securities ......................... 38,953 30,717
Accounts receivable:
Trade ...................................... 7,311 1,578
Unbilled ................................... 57,084 31,286
Other ...................................... 820 1,342
Prepaid expenses .............................. 6,785 8,332
Deferred income tax benefit ................... 694 --
--------- ---------
Total current assets ....................... 181,380 98,706
Property and equipment:
Land .......................................... 2,920 2,920
Buildings and improvements .................... 14,242 11,222
Computer hardware and software ................ 28,679 22,232
Software development costs .................... 11,556 7,075
Furniture and fixtures ........................ 18,756 13,886
Vehicles ...................................... 1,863 1,386
--------- ---------
78,016 58,721
Accumulated depreciation ...................... (25,649) (14,347)
--------- ---------
Total property and equipment ............... 52,367 44,374
Other assets:
Notes receivable from employees ............... 994 994
Other assets .................................. 8,076 3,624
--------- ---------
Total other assets ......................... 9,070 4,618
--------- ---------
Total assets ............................... $ 242,817 $ 147,698
========= =========
</TABLE>
F-3
<PAGE> 47
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Current liabilities:
Accounts payable ....................................... $ 1,496 $ 2,787
Payroll taxes and other payroll deductions payable ..... 57,919 21,518
Accrued worksite employee payroll expense .............. 57,354 31,367
Other accrued liabilities .............................. 10,819 5,737
Deferred income taxes .................................. -- 141
Income taxes payable ................................... 2,613 1,364
--------- ---------
Total current liabilities ........................ 130,201 62,914
Noncurrent liabilities:
Deferred income taxes .................................. 7,106 4,316
--------- ---------
Total noncurrent liabilities ..................... 7,106 4,316
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.01 per share:
Shares authorized - 20,000
Shares issued and outstanding - none ................ -- --
Common stock, par value $0.01 per share:
Shares authorized - 120,000
Shares issued - 30,435 and 29,817
at December 31, 2000 and 1999, respectively ...... 304 298
Additional paid-in capital ............................. 75,378 65,061
Treasury stock, at cost - 3,015 and 2,919 shares
at December 31, 2000 and 1999, respectively ...... (20,643) (18,072)
Accumulated other comprehensive income (loss) .......... 172 (218)
Retained earnings ...................................... 50,299 33,399
--------- ---------
Total stockholders' equity ....................... 105,510 80,468
--------- ---------
Total liabilities and stockholders' equity ....... $ 242,817 $ 147,698
========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 48
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues ......................................... $ 3,708,531 $ 2,260,743 $ 1,683,063
Direct costs:
Salaries and wages of worksite employees ..... 3,110,240 1,887,231 1,399,126
Benefits and payroll taxes ................... 459,757 283,984 215,327
----------- ----------- -----------
Gross profit ..................................... 138,534 89,528 68,610
Operating expenses:
Salaries, wages and payroll taxes ............ 54,477 36,690 26,522
General and administrative expenses .......... 35,426 23,219 17,474
Commissions .................................. 9,278 6,429 5,968
Advertising .................................. 5,117 4,090 3,740
Depreciation and amortization ................ 12,002 7,103 3,705
Write-off of software development costs ...... -- 1,438 --
----------- ----------- -----------
116,300 78,969 57,409
----------- ----------- -----------
Operating income ................................. 22,234 10,559 11,201
Other income:
Interest income .............................. 4,430 2,562 3,341
Other, net ................................... (50) 1,091 76
----------- ----------- -----------
4,380 3,653 3,417
----------- ----------- -----------
Income before income tax expense ................. 26,614 14,212 14,618
Income tax expense ............................... 9,714 4,854 5,495
----------- ----------- -----------
Net income ....................................... $ 16,900 $ 9,358 $ 9,123
=========== =========== ===========
Basic net income per share of common stock ....... $ 0.62 $ 0.34 $ 0.32
=========== =========== ===========
Diluted net income per share of common stock ..... $ 0.58 $ 0.34 $ 0.31
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 49
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
ISSUED ADDITIONAL OTHER
--------------------- PAID-IN TREASURY COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL STOCK INCOME (LOSS) EARNINGS TOTAL
--------- --------- ---------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 28,442 $ 284 $ 50,528 $ (1,998) $ 31 $ 14,918 $ 63,763
Purchase of treasury stock, at cost -- -- -- (6,101) -- -- (6,101)
Sale of units consisting of
common stock and common
stock purchase warrants, net
of issuance costs of $146 800 8 11,464 6,116 -- -- 17,588
Exercise of common stock
purchase warrants 281 3 632 -- -- -- 635
Exercise of stock options 196 2 865 -- -- -- 867
Income tax benefit from
exercise of stock options -- -- 575 -- -- -- 575
Other -- -- 81 15 -- -- 96
Change in unrealized gain
on marketable securities -- -- -- -- 311 -- 311
Net income -- -- -- -- -- 9,123 9,123
---------
Comprehensive income 9,434
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 29,719 297 64,145 (1,968) 342 24,041 86,857
Purchase of treasury stock, at cost -- -- -- (16,132) -- -- (16,132)
Sale of common stock put warrant -- -- 119 -- -- -- 119
Exercise of stock options 98 1 643 -- -- -- 644
Income tax benefit from
exercise of stock options -- -- 95 -- -- -- 95
Other -- -- 59 28 -- -- 87
Change in unrealized gain (loss)
on marketable securities -- -- -- -- (560) -- (560)
Net income -- -- -- -- -- 9,358 9,358
---------
Comprehensive income 8,798
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 29,817 298 65,061 (18,072) (218) 33,399 80,468
Purchase of treasury stock, at cost -- -- -- (2,581) -- -- (2,581)
Sale of common stock put warrant -- -- 125 -- -- -- 125
Exercise of stock options 618 6 5,689 -- -- -- 5,695
Income tax benefit from
exercise of stock options -- -- 4,437 -- -- -- 4,437
Other -- -- 66 10 -- -- 76
Change in unrealized gain (loss)
on marketable securities -- -- -- -- 390 -- 390
Net income -- -- -- -- -- 16,900 16,900
---------
Comprehensive income 17,290
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 2000 30,435 $ 304 $ 75,378 $ (20,643) $ 172 $ 50,299 $ 105,510
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 50
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................... $ 16,900 $ 9,358 $ 9,123
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................. 11,969 7,604 4,239
Write-off of software development costs ................... -- 1,438 --
Deferred income taxes ..................................... 1,955 1,586 2,748
Bad debt expense .......................................... 1,475 699 575
Loss (gain) on disposition of assets ...................... 81 (182) (75)
Changes in operating assets and liabilities:
Accounts receivable .................................... (32,484) (8,855) (5,559)
Prepaid expenses ....................................... 1,547 (5,863) (884)
Other assets ........................................... 1,282 808 (3,074)
Accounts payable ....................................... (1,291) 232 1,134
Payroll taxes and other payroll deductions payable ..... 36,401 (5,089) 7,417
Accrued worksite employee payroll expense .............. 25,987 12,206 1,008
Other accrued liabilities .............................. 5,082 989 (1,129)
Income taxes payable/receivable ........................ 5,686 2,885 (1,580)
-------- -------- --------
Total adjustments ................................... 57,690 8,458 4,820
-------- -------- --------
Net cash provided by operating activities ........... 74,590 17,816 13,943
Cash flows from investing activities:
Marketable securities:
Purchases ................................................. (27,310) (13,459) (49,019)
Proceeds from dispositions ................................ 19,466 31,517 25,282
Property and equipment:
Purchases ................................................. (15,445) (13,848) (17,918)
Investment in software development costs .................. (4,769) (5,166) (2,499)
Proceeds from dispositions ................................ 224 165 86
Investments in other companies ............................... (5,789) -- --
-------- -------- --------
Net cash used in investing activities ............... (33,623) (791) (44,068)
</TABLE>
F-7
<PAGE> 51
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from the sale of units consisting of
common stock and common stock purchase warrants ...... $ -- $ -- $ 17,588
Purchase of treasury stock .............................. (2,581) (16,132) (6,101)
Proceeds from the sale of common stock put warrants ..... 125 119 --
Proceeds from the exercise of common
stock purchase warrants .............................. -- -- 635
Proceeds from the exercise of stock options ............. 5,695 644 867
Loans to employees ...................................... -- 187 --
Other ................................................... 76 87 96
-------- -------- --------
Net cash provided by (used in) financing activities 3,315 (15,095) 13,085
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... 44,282 1,930 (17,040)
Cash and cash equivalents at beginning of year ............. 25,451 23,521 40,561
-------- -------- --------
Cash and cash equivalents at end of year ................... $ 69,733 $ 25,451 $ 23,521
======== ======== ========
Supplemental disclosures:
Cash paid for income taxes .............................. $ 2,073 $ 383 $ 4,326
</TABLE>
See accompanying notes.
F-8
<PAGE> 52
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ACCOUNTING POLICIES
Description of Business
Administaff, Inc. ("the Company") is a professional employer
organization ("PEO") that provides a comprehensive Personnel Management System
encompassing 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. During
2000, 1999 and 1998, revenues from the Company's Texas markets represented 50%,
61% and 72% of the Company's total revenues, respectively.
Segment Reporting
The Company operates in one reportable segment under the Statement of
Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of
an Enterprise and Related Information due to its centralized structure.
Principles of Consolidation
The consolidated financial statements include the accounts of
Administaff, Inc. and its wholly owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
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.
Cash and Cash Equivalents
Cash and cash equivalents include bank deposits and short-term
investments with original maturities of three months or less at the date of
purchase.
Concentrations of Credit Risk
Financial instruments that could potentially subject the Company to
concentration of credit risk include accounts receivable. The Company generally
requires clients to pay invoices for service fees no later than one day prior to
the applicable payroll date. As such, the Company generally does not require
collateral.
F-9
<PAGE> 53
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Marketable Securities
The Company accounts for marketable securities in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. The
Company determines the appropriate classification of all marketable securities
as held-to-maturity, available-for-sale or trading at the time of purchase and
re-evaluates such classification as of each balance sheet date. At December 31,
2000 and 1999, all of the Company's investments in marketable securities were
classified as available-for-sale, and as a result, were reported at fair value.
Unrealized gains and losses are reported as a component of accumulated other
comprehensive income (loss) in stockholders' equity. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
from the date of purchase to maturity. Such amortization is included in interest
income as an addition to or deduction from the coupon interest earned on the
investments. The cost of investments sold is based on the average cost method,
and realized gains and losses are included in other income (expense).
Property and Equipment
Property and equipment is recorded at cost and is depreciated over the
estimated useful lives of the related assets using the straight-line method. The
estimated useful lives of property and equipment for purposes of computing
depreciation are as follows:
<TABLE>
<S> <C>
Buildings and improvements............................ 5-30 years
Computer hardware and software........................ 2-5 years
Software development costs............................ 3-5 years
Furniture and fixtures................................ 5-7 years
Vehicles.............................................. 5 years
</TABLE>
Software development costs relate primarily to the Company's
proprietary professional employer information system and its Internet-based
service delivery platform, Administaff Assistant, and are accounted for in
accordance with Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The Company
periodically evaluates its capitalized software development costs for impairment
in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of. During the fourth quarter of 1999, the
Company wrote off $1,438,000 related to two terminated projects after evaluating
the costs incurred to date, expected cost of completion, expected maintenance
costs and the availability of alternative software packages.
PEO Service Fees and Worksite Employee Payroll Costs
The Company's revenues consist of service fees paid by its clients
under its Client Service Agreements. In consideration for payment of such
service fees, the Company agrees to pay the following direct costs associated
with the worksite employees: (i) salaries and wages; (ii) employment-related
taxes; (iii) employee benefit plan premiums; and (iv) workers' compensation
insurance premiums. The Company accounts for PEO service fees and the related
direct payroll costs using the accrual method. Under the accrual method, PEO
service fees relating to worksite employees with earned but unpaid wages at the
end of each period are recognized as unbilled revenues and the related direct
payroll costs for such wages are accrued as a liability during the period in
which wages are earned by the worksite employee. Subsequent to the end of each
period, such wages are paid and the related PEO service fees are billed.
Unbilled receivables at December 31, 2000 and 1999 are net of prepayments
received prior to year-end of $5,716,000 and $3,338,000, respectively.
During 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition. Additionally, the
Emerging Issues Task Force ("EITF") reached a consensus during 2000 on
F-10
<PAGE> 54
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. The
Company evaluated its revenue recognition policies, and the effect of adopting
SAB 101 and the EITF resulted in no revisions to the Company's previous
recognition policies. In accordance with the EITF, the Company is at risk for
the payment of its direct costs, whether or not the Company's clients pay the
Company on a timely basis or at all, and the Company assumes a significant
amount of other risks and liabilities as a co-employer of its worksite
employees, and therefore, is deemed to be a principal in its personnel
management services.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable and
accounts payable approximate their fair values due to the short-term maturities
of these instruments.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements with
employees under the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees.
Employee Savings Plan
Effective January 1, 1999, the Company amended the employer matching
contribution and vesting features of its 401(k) plan. The Company matches 50% of
an eligible worksite employee's contributions and 100% of an eligible corporate
employee's contributions, both up to 6% of the employee's eligible compensation.
In addition, for active employees on or after January 1, 1999, the vesting
schedule for employer matching contributions was changed from five-year graded
vesting to immediate vesting. During 2000, 1999 and 1998, the Company made
employer-matching contributions of $7,433,000, $4,646,000 and $ 2,805,000,
respectively. Of these contributions, $6,019,000, $3,761,000 and $2,805,000 were
made on behalf of worksite employees. The remainder represents employer
contributions made on behalf of corporate employees.
Advertising
The Company expenses all advertising costs as incurred.
Income Taxes
The Company uses the liability method in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax carrying amounts of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
2000 presentation.
2. MARKETABLE SECURITIES
As of December 31, 2000, the Company's investments in marketable
securities consisted of debt securities with maturities ranging from 91 days to
five years from the date of purchase. Approximately 34.4% of the marketable
securities mature within one year of the balance sheet date. However, all of the
Company's marketable securities are available to fund the Company's current
operations.
F-11
<PAGE> 55
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the Company's available-for-sale
marketable securities as of December 31, 2000 and 1999:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 2000:
Fixed income mutual funds .............. $ 13,025 $ 101 $ -- $ 13,126
Obligations of state and local
government agencies ................ 11,873 11 -- 11,884
Commercial paper ....................... 8,277 -- (4) 8,273
U.S. corporate debt securities ......... 3,761 29 -- 3,790
U.S. Treasury securities and obligations
of U.S. government agencies ........ 1,845 35 -- 1,880
-------- -------- -------- --------
$ 38,781 $ 176 $ (4) $ 38,953
======== ======== ======== ========
December 31, 1999:
Fixed income mutual funds .............. $ 1,763 $ -- $ (14) $ 1,749
Obligations of state and local
government agencies ................ 21,953 -- (125) 21,828
U.S. corporate debt securities ......... 4,487 -- (41) 4,446
U.S. Treasury securities and obligations
of U.S. government agencies ........ 2,732 -- (38) 2,694
-------- -------- -------- --------
$ 30,935 $ -- $ (218) $ 30,717
======== ======== ======== ========
</TABLE>
For the years ended December 31, 2000, 1999 and 1998, net realized gains
(losses) on sales of available-for-sale marketable securities were $(31,000),
$92,000 and $72,000, respectively.
3. NOTES RECEIVABLE FROM EMPLOYEES
In June 1995, an officer and director of the Company exercised options
to purchase 897,334 shares of common stock at a price of $0.375 per share. The
purchase price was paid in cash by the officer. In connection with the exercise,
the Company entered into a loan agreement with the officer, whereby the Company
paid certain federal income tax withholding requirements related to the stock
option exercise on behalf of the officer in the amount of $694,000. The loan
agreement called for an additional amount to be advanced to the officer in the
event the ultimate tax liability resulting from the exercise exceeded the
statutory withholding requirements. In April 1996, the Company loaned the
officer an additional $300,000 relating to this transaction. The loans are
repayable on June 22, 2002, and April 11, 2001, respectively, accrue interest at
6.83% and are secured by 48,982 shares of the Company's common stock.
4. OTHER ASSETS
During 2000, the Company made equity investments in two privately-held
development stage companies. The Company purchased 5,864,566 shares of
convertible preferred stock of Virtual Growth, Inc. ("VGI"), along with 219,512
detachable preferred stock purchase warrants, for a total cost of $3 million.
The VGI preferred stock purchase warrants carry a strike price of $2.05 per
share and a term of seven years. The VGI preferred stock is convertible into an
equal number of shares of VGI common stock, subject to antidilution provisions.
The Company also received 600,000 common stock purchase warrants from VGI with
exercise prices ranging from $10 to $45 per share and terms of two to four
years. In addition, the Company purchased 500,000 shares of convertible
preferred
F-12
<PAGE> 56
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock of eProsper, Inc. ("eProsper") for $2.5 million. The eProsper preferred
stock is convertible into an equal number of shares of eProsper common stock,
subject to antidilution provisions. The Company has accounted for each of these
investments using the cost method.
5. INCOME TAXES
Deferred taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities used for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the net deferred tax assets and net deferred tax liabilities as
reflected on the balance sheet are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
2000 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Software development costs ...................... $(3,623) $(2,427)
Depreciation and amortization ................... (3,026) (1,193)
Prepaid commissions ............................. (824) (1,072)
------- -------
Total deferred tax liabilities ............... (7,473) (4,692)
Deferred tax assets:
Uncollectible accounts receivable ............... 584 57
State income taxes .............................. 326 14
Other ........................................... 151 164
------- -------
Total deferred tax assets .................... 1,061 235
------- -------
Net deferred tax liabilities ....................... $(6,412) $(4,457)
======= =======
Net current deferred tax assets (liabilities) ...... $ 694 $ (141)
Net noncurrent deferred tax liabilities ............ (7,106) (4,316)
------- -------
$(6,412) $(4,457)
======= =======
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense:
Federal ......................................... $ 6,584 $ 2,776 $ 1,964
State ........................................... 1,175 492 783
------- ------- -------
Total current income tax expense ............. 7,759 3,268 2,747
Deferred income tax expense:
Federal ......................................... 1,627 1,339 2,379
State ........................................... 328 247 369
------- ------- -------
Total deferred income tax expense ............ 1,955 1,586 2,748
------- ------- -------
Total income tax expense ........................ $ 9,714 $ 4,854 $ 5,495
======= ======= =======
</TABLE>
In 2000, 1999 and 1998, income tax benefits of $4,437,000, $95,000 and
$575,000, respectively, resulting from deductions relating to nonqualified stock
option exercises and disqualifying dispositions of certain employee incentive
stock options were recorded as increases in stockholders' equity.
F-13
<PAGE> 57
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of income tax expense computed at U.S. federal
statutory tax rates to the reported income tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected income tax expense at 34% ........... $ 9,049 $ 4,832 $ 4,970
State income taxes, net of federal benefit ... 985 488 887
Nondeductible expenses ....................... 180 126 91
Tax-exempt interest income ................... (234) (348) (453)
Other, net ................................... (266) (244) --
------- ------- -------
Reported total income tax expense ............ $ 9,714 $ 4,854 $ 5,495
======= ======= =======
</TABLE>
6. STOCKHOLDERS' EQUITY
On October 16, 2000, the Company effected a two-for-one stock split 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.
In 1999, the Company's Board of Directors (the "Board") authorized a
program to repurchase up to four million shares of the Company's outstanding
common stock. The purchases are to be made from time to time in the open market
or directly from stockholders at prevailing market prices based on market
conditions or other factors. As of December 31, 2000, the Company had
repurchased 2,342,000 shares at a total cost of approximately $18.7 million,
including 289,200 shares purchased from affiliates of Mr. Lang Gerhard, a
greater than 10% shareholder, in a private transaction for approximately $2.3
million.
In January 1998, the Company entered into a Securities Purchase
Agreement with American Express Travel Related Services Company, Inc. ("American
Express") whereby the Company sold units consisting of 1,386,252 shares of its
common stock (586,252 shares from Treasury Stock) and warrants to purchase an
additional 4,131,030 shares of common stock to American Express for a total
purchase price of $17.7 million. The warrants have exercise prices ranging from
$20 to $40 per share and terms ranging from three to seven years. Subsequent to
December 31, 2000, American Express exercised 800,000 common stock purchase
warrants at $20.00 per share. In addition, the Company repurchased 800,000
shares of its common stock from American Express at $24.46 per share.
In March 1998, the Company repurchased 300,000 shares of common stock
from three stockholders, two of whom were officers of the Company and one who
was a director of the Company at the time of the purchase, for a total cost of
$3.1 million.
7. EMPLOYEE INCENTIVE PLAN
The Administaff, Inc. 1997 Incentive Plan, as amended (the "Incentive
Plan"), provides for options and other stock-based awards that may be granted to
eligible employees and non-employee directors of the Company or its
subsidiaries. An aggregate of 2,965,914 shares of common stock of the Company
are authorized to be issued under the Incentive Plan. At December 31, 2000,
284,041 shares of common stock were available for future grants under the
Incentive Plan. All awards previously granted to employees under the Incentive
Plan have been stock options, primarily intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code (the
"Code"). The purpose of the Incentive Plan is to promote the interests of the
Company by encouraging employees of the Company and its subsidiaries and the
non-employee directors of the Company to acquire or increase their equity
interests in the Company and to provide a means whereby such persons may develop
a sense of proprietorship and personal involvement in the development and
financial success of the Company, and
F-14
<PAGE> 58
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to encourage them to remain with and devote their best efforts to the business
of the Company, thereby advancing the interests of the Company and its
stockholders. The Incentive Plan is administered by the Compensation Committee
of the Board of Directors (the "Committee"). The Committee has the power to
determine which eligible employees will receive awards, the timing and manner of
the grant of such awards, the exercise price of stock options (which may not be
less than market value on the date of grant), the number of shares and all of
the terms of the awards. The Committee has granted limited authority to the
President of the Company regarding the granting of stock options. The Board of
Directors may at any time terminate or amend the Incentive Plan, provided that
no such amendment may adversely affect the rights of optionees with regard to
outstanding options. Stockholder approval of an amendment to the Incentive Plan
is necessary only when required by applicable law or stock exchange rules.
Effective July 27, 1999, the Company adopted the Administaff
Nonqualified Stock Option Plan (the "Nonqualified Plan"). The Nonqualified Plan
provides that options to purchase shares of the Company's common stock may be
granted to employees who are not officers. An aggregate of 3,600,000 shares of
common stock of the Company are authorized to be issued under the Nonqualified
Plan. At December 31, 2000, 1,895,736 shares of common stock were available for
future grants under the Nonqualified Plan. The purpose of the Nonqualified Plan
is similar to that of the Incentive Plan. The Nonqualified Plan is administered
by the Chief Executive Officer of the Company (the "CEO"). The CEO has the power
to determine which eligible employees will receive stock option rights, the
timing and manner of the grant of such rights, the exercise price (which may not
be less than market value on the grant date), the number of shares and all of
the terms of the options. The Committee may at any time terminate or amend the
Nonqualified Plan, provided that no such amendment may adversely affect the
rights of optionees with regard to outstanding options.
The following summarizes stock option activity and related information:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year ..... 2,244 $ 9.79 1,440 $10.97 1,310 $ 8.17
Granted ......................... 1,894 31.15 1,040 7.88 396 16.79
Exercised ....................... (618) 9.23 (98) 6.63 (196) 4.41
Canceled ........................ (87) 12.74 (138) 10.04 (70) 9.84
------ ------ ------ ------ ------ ------
Outstanding - end of year ........... 3,433 $21.58 2,244 $ 9.79 1,440 $10.97
====== ====== ====== ====== ====== ======
Exercisable - end of year ........... 746 $10.38 570 $ 9.85 396 $ 8.56
====== ====== ====== ====== ====== ======
Weighted average fair value of
options granted during year $19.17 $ 4.67 $ 8.81
====== ====== ======
</TABLE>
F-15
<PAGE> 59
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes information related to stock options
outstanding at December 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ -----------------------------
WEIGHTED WEIGHTED
REMAINING AVERAGE REMAINING AVERAGE
LIFE EXERCISE LIFE EXERCISE
RANGE OF EXERCISE PRICES SHARES (YEARS) PRICE SHARES (YEARS) PRICE
- ------------------------ ------ ---------- -------- ------ --------- --------
(SHARE AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
$ 6.75 to $15.00 1,286 7.5 $ 8.60 606 7.1 $ 8.70
$15.00 to $20.00 1,114 8.9 19.05 107 7.8 16.28
$20.00 to $30.00 173 9.2 25.08 33 8.2 22.18
$30.00 to $43.69 860 9.7 43.57 -- -- --
------ ----- ------- ----- ----- -------
Total 3,433 8.6 $ 21.58 746 7.2 $ 10.38
====== ===== ======= ===== ===== =======
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its stock-based compensation arrangements
because, as discussed below, the alternative fair value accounting provided for
under SFAS No. 123, Accounting for Stock-Based Compensation, requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, no compensation expense has been recognized because
the exercise price of the Company's employee stock options has equaled the
market price of the underlying stock on the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method prescribed by SFAS
No. 123. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate......................... 6.2% 5.5% 5.2%
Expected dividend yield......................... 0.0% 0.0% 0.0%
Expected volatility............................. 0.68 0.65 0.54
Weighted average expected life (in years)....... 5.0 5.0 5.0
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the Company's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information, as if the Company had accounted for its employee stock
options granted subsequent to December 31, 1994 under the fair value method
prescribed by SFAS No. 123, follows:
F-16
<PAGE> 60
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income (in thousands) .............. $ 11,360 $ 7,370 $ 8,070
Pro forma diluted earnings per share ............. $ 0.39 $ 0.28 $ 0.28
</TABLE>
8. EARNINGS PER SHARE
The numerator used in the calculations of both basic and diluted
earnings per share for all periods presented was net income. The denominator for
each period presented was determined as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Denominator:
Basic earnings per share - weighted average shares outstanding ...... 27,188 27,462 28,760
Effect of dilutive securities:
Common stock purchase warrants - treasury stock method ........... 379 -- 14
Common stock options - treasury stock method ..................... 1,368 128 592
------ ------ ------
1,747 128 606
------ ------ ------
Diluted earnings per share - weighted average shares
outstanding plus effect of dilutive securities ................... 28,935 27,590 29,366
====== ====== ======
</TABLE>
9. OPERATING LEASES
The Company leases various office facilities, furniture and equipment
under operating leases. Most of the leases contain purchase and/or renewal
options at fair market and fair rental value, respectively. Rental expense
relating to all operating leases was $4,446,000, $2,915,000 and $1,827,000 in
2000, 1999 and 1998, respectively. At December 31, 2000, future minimum rental
payments under noncancelable operating leases are as follows (in thousands):
<TABLE>
<S> <C>
2001............................................... $ 6,426
2002............................................... 6,262
2003............................................... 5,821
2004 .............................................. 5,456
2005 and thereafter................................ 18,080
---------
$ 42,045
=========
</TABLE>
10. 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
F-17
<PAGE> 61
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
segments of the PEO industry. Approximately 70 PEOs, including the Company, have
been randomly selected by the IRS for audit pursuant to this program. Two
primary issues have arisen from these audits.
The first issue involves the Company's rights under 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.
The Company does not know whether the IRS National Office will address
the Technical Advice Request independently of the Industry Issue. Should the IRS
conclude that the Company is not a "co-employer" of worksite employees for
purposes of the Code, worksite employees could not continue to make salary
deferral contributions to the 401(k) plan or pursuant to the Company's cafeteria
plan or continue to participate in certain other employee benefit plans of the
Company. The Company believes that, although unfavorable to the Company, a
prospective application of such a conclusion (that is, one applicable only to
periods after the conclusion by the IRS is finalized) would not have a material
adverse effect on its financial position or results of operations, as the
Company could continue to make available comparable benefit programs to its
client companies at comparable costs to the Company. However, if the IRS
National Office adopts the conclusions of the IRS Houston District set forth in
the Technical Advice Request and any such conclusions were applied retroactively
to disqualify the 401(k) plan for 1993 and subsequent years, employees' vested
account balances under the 401(k) plan would become taxable, the Company would
lose its tax deductions to the extent its matching contributions were not
vested, the 401(k) plan's trust would become a taxable trust and the Company
would be subject to liability with respect to its failure to withhold applicable
taxes with respect to certain contributions and trust earnings. Further, the
Company would be subject to liability, including penalties, with respect to its
cafeteria plan for the failure to withhold and pay taxes applicable to salary
deferral contributions by employees, including worksite employees. In such a
scenario, the Company also would face the risk of client dissatisfaction and
potential litigation. While the Company is not able to predict either the timing
or the nature of any final decision that may be reached with respect to the
401(k) plan audit or with respect to the Technical Advice Request or the Market
Segment Group study and the ultimate outcome of such decisions, the Company
believes that a retroactive application of an unfavorable determination is
unlikely. The Company also believes that a prospective application of an
unfavorable determination would not have a material adverse effect on the
Company's consolidated financial position or results of operations.
The second issue involved nondiscrimination test results for certain
prior plan years. The Technical Advice Request issued during the 1993 401(k)
plan year audit concluded that the plan should be disqualified because the plan
failed to satisfy a nondiscrimination test related to contributions and failed
to provide evidence that it satisfied an alternative nondiscrimination test.
Separately, the Company notified the IRS of operational issues related to
nondiscrimination test results for the 1991 through 1995 plan years. With
respect to the 1995 plan year, the Company caused the 401(k) plan to refund the
required excess contributions and earnings thereon to the affected participants,
and the Company paid the excise tax associated with this correction during 1996.
All remaining nondiscrimination testing issues were settled during 1999, when
the Company and the IRS entered into a Closing Agreement on Final Determination
Covering Specific Matters (the "Closing Agreement"). Under the terms of the
Closing Agreement, the Company agreed to make a contribution to the 401(k) plan
on behalf of certain participants in an aggregate amount of approximately
$831,000. The settlement amount, which was remitted to the 401(k) plan in
January 2000, represented the amount necessary to bring the plan into compliance
with the nondiscrimination tests for all years covered, plus
F-18
<PAGE> 62
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
calculated earnings on such contributions. The Company also agreed to pay a
penalty of $70,000. Further, the IRS agreed and determined that the 401(k) plan
will not be treated as disqualified for the 1992, 1993 and 1994 plan years.
The amount of the settlement was significantly lower than the amount
originally estimated and accrued by the Company in 1996. As a result, the
Company recorded a gain of $952,000 during 1999 as a component of other income.
This gain includes the impact of the Company's adjusted amount recoverable from
its third-party record keeper pursuant to a 1996 agreement, under which the
record keeper agreed to reimburse the Company for a portion of its settlement of
the nondiscrimination testing issues.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Year ended December 31, 2000:
Revenues ............................... $ 755,545 $ 864,450 $ 962,039 $1,126,497
Gross profit ........................... 20,705 31,342 40,067 46,420
Operating income (loss) ................ (4,699) 3,480 10,573 12,880
Net income (loss) ...................... (2,471) 2,800 7,415 9,156
Basic net income (loss) per share ...... (0.09) 0.10 0.27 0.33
Diluted net income (loss) per share .... (0.09) 0.10 0.25 0.31
Year ended December 31, 1999:
Revenues ............................... $ 475,853 $ 505,683 $ 562,812 $ 716,395
Gross profit ........................... 13,555 19,919 26,191 29,863
Operating income (loss) ................ (4,062) 1,801 6,389 6,431
Net income (loss) ...................... (2,058) 1,515 4,387 5,514
Basic net income (loss) per share ...... (0.07) 0.06 0.16 0.21
Diluted net income (loss) per share .... (0.07) 0.06 0.16 0.20
Year ended December 31, 1998:
Revenues ............................... $ 362,396 $ 393,643 $ 431,511 $ 495,513
Gross profit ........................... 11,173 16,326 20,037 21,074
Operating income (loss) ................ (2,048) 2,613 5,252 5,384
Net income (loss) ...................... (742) 2,163 3,786 3,916
Basic net income (loss) per share ...... (0.03) 0.07 0.13 0.13
Diluted net income (loss) per share .... (0.03) 0.07 0.13 0.13
</TABLE>
F-19
<PAGE> 63
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Registrant's Registration Statement on Form
S-1 (No. 33-96952)).
3.2* Bylaws, as amended on March 7, 2001.
3.3 Certificate of Designations of Series A Junior Participating
Preferred Stock of Administaff, Inc. Dated February 4, 1998
(incorporated by reference to Exhibit 2 to the Registrant's
Form 8-A filed on February 4, 1998).
4.1 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-1 (No. 33-96952)).
4.2 Rights Agreement dated as of February 4, 1998, between
Administaff, Inc. and Harris Trust and Savings Bank, as Rights
Agent (incorporated by reference to Exhibit 1 to the
Registrant's Form 8-A filed on February 4, 1998).
4.3 Amendment No. 1 to Rights Agreement dated as of March 9, 1998
between Administaff, Inc. and Harris Trust and Savings Bank,
as Rights Agent (incorporated by reference to Exhibit 4.3 to
the Registrant's Form 10-K for the year ended December 31,
1999).
4.4 Amendment No. 2 to Rights Agreement dated as of May 14, 1999
between Administaff, Inc. and Harris Trust and Savings Bank,
as Rights Agent (incorporated by reference to Exhibit 2 to the
Registrant's Form 8-A/A filed on May 19, 1999).
4.5 Amendment No. 3 to Rights Agreement dated as of July 22, 1999
between Administaff, Inc. and Harris Trust and Savings Bank,
as Rights Agent (incorporated by reference to Exhibit 1 to the
Registrant's Form 8-A/A filed on August 9, 1999).
4.6 Amendment No. 4 to Rights Agreement dated as of August 2, 1999
between Administaff, Inc. and Harris Trust and Savings Bank,
as Rights Agent (incorporated by reference to Exhibit 2 to the
Registrant's form 8-A/A filed on August 9, 1999).
4.7 Form of Rights Certificate (incorporated by reference to
Exhibit 3 to the Registrant's Form 8-A filed on February 4,
1998).
4.8 Securities Purchase Agreement between Administaff, Inc. and
American Express Travel Related Services Company, Inc., dated
January 27, 1998 and the Letter Agreement between Administaff,
Inc. and American Express Travel Related Services Company,
Inc., dated March 10, 1998 amending the Securities Purchase
Agreement (incorporated by reference to Exhibit 4.2 to the
Registrant's Form 10-Q for the quarter ended March 31, 1998).
4.9 Registration Rights Agreement between Administaff, Inc. and
American Express Travel Related Services Company, Inc., dated
March 10, 1998 (incorporated by reference to Exhibit 4.3 to
the Registrant's Form 10-Q for the quarter ended March 31,
1998).
4.10 Warrant Agreement between Administaff, Inc. and American
Express Travel Related Services Company, Inc., dated March 10,
1998 (incorporated by reference to Exhibit 4.4 to the
Registrant's Form 10-Q for the quarter ended March 31, 1998).
</TABLE>
<PAGE> 64
<TABLE>
<S> <C>
4.11 Warrant Certificate No. 2 for American Express Travel Related
Services Company, Inc. (incorporated by reference to Exhibit
4.6 to the Registrant's Form 10-Q for the quarter ended March
31, 1998).
4.12 Warrant Certificate No. 3 for American Express Travel Related
Services Company, Inc. (incorporated by reference to Exhibit
4.7 to the Registrant's Form 10-Q for the quarter ended March
31, 1998).
4.13 Warrant Certificate No. 4 for American Express Travel Related
Services Company, Inc. (incorporated by reference to Exhibit
4.8 to the Registrant's Form 10-Q for the quarter ended March
31, 1998).
4.14 Warrant Certificate No. 5 for American Express Travel Related
Services Company, Inc. (incorporated by reference to Exhibit
4.9 to the Registrant's Form 10-Q filed for the quarter ended
March 31, 1998).
10.1 Third Amended and Restated Promissory Note in the amount of
$693,694.75 among Administaff, Inc., Richard G. Rawson, Dawn
Rawson, and RDKB Rawson LP, dated as of March 6, 2000,
amending and restating a Promissory Note dated June 22, 1995
(incorporated by reference to Exhibit 10.1 to the Registrant's
Form 10-K for the year ended December 31, 1999).
10.2 Second Amended and Restated Promissory Note in the amount of
$300,000 among Administaff, Inc., Richard G. Rawson, Dawn
Rawson, and RDKB Rawson LP, dated as of July 13, 1998,
amending and restating a Promissory Note dated April 11, 1996
(incorporated by reference to Exhibit 10.2 to the Registrant's
Form 10-K for the year ended December 31, 1998).
10.3 Second Amended and Restated Security Agreement-Pledge among
Administaff, Inc., Richard G. Rawson, Dawn Rawson, and RDKB
Rawson LP, dated as of July 13, 1998, pursuant to which the
collateral securing the promissory notes included in Exhibits
10.1 and 10.2 is pledged (incorporated by reference to Exhibit
10.3 to the Registrant's form 10-K for the year ended December
31, 1998).
10.4** Administaff, Inc. 1997 Incentive Plan (incorporated by
reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8 (No. 333-85151)).
10.5** First Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.2 to the Registrant's
Registration Statement on Form S-8 (No. 333-85151)).
10.6** Second Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.3 to the Registrant's
Registration Statement on Form S-8 (No. 333-85151)).
10.7** Third Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.4 to the Registrant's
Registration Statement of Form S-8 (No. 333-85151)).
10.8** Fourth Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.5 to the Registrant's
Registration Statement of Form S-8 (No. 333-85151)).
10.9 Administaff, Inc. Nonqualified Stock Option Plan (incorporated
by reference to Exhibit 99.6 to the Registrant's Registration
Statement on Form S-8 (No. 333-85151)).
10.10 Administaff, Inc. 1997 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 99.1 to the Registrant's
form S-8 (No. 333-36363)).
10.11 Marketing Agreement between American Express Travel Related
Services Company, Inc., Administaff, Inc., Administaff
Companies, Inc. and Administaff of Texas, Inc. dated March 10,
1998 (incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended March 31, 1998).
10.12 First Amendment to the Marketing Agreement between American
Express Travel Related Services Company, Inc., Administaff,
Inc., Administaff Companies, Inc. and Administaff of Texas,
Inc., dated November 17, 1998 (incorporated by reference to
Exhibit 10.12 to the Registrant's Form 10-K for the year ended
December 31, 1998)).
10.13 Second Amendment to the Marketing Agreement between American
Express Travel Related Services Company, Inc. and Administaff,
Inc., Administaff Companies, Inc. and
</TABLE>
<PAGE> 65
<TABLE>
<S> <C>
Administaff of Texas, Inc., dated April 11, 2000 (incorporated
by reference to Exhibit 10.1 to the Registrant's Form 10-Q for
the quarter ended June 30, 2000).
21.1* Subsidiaries of Administaff, Inc.
23.1* Consent of Independent Auditors.
</TABLE>
- ----------
* Filed herewith
** Management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.2
<SEQUENCE>2
<FILENAME>h85055ex3-2.txt
<DESCRIPTION>BYLAWS, AS AMENDED
<TEXT>
<PAGE> 1
EXHIBIT 3.2
AMENDED BYLAWS
OF
ADMINISTAFF, INC.
Dated: March 7, 2001
1
<PAGE> 2
INDEX
<TABLE>
<S> <C>
ARTICLE I
OFFICES
Section 1.1 Principal Office ...........................................-5-
Section 1.2 Registered Office ..........................................-5-
Section 1.3 Other Offices ..............................................-5-
ARTICLE II
STOCKHOLDERS ...........................................................-5-
Stockholders' Meetings .................................................-5-
Section 2.1 Annual Meeting .............................................-5-
Section 2.2 Special Meetings ...........................................-5-
Section 2.3 Notice of Meetings and Adjourned Meetings ..................-6-
Section 2.4 Voting Lists ...............................................-6-
Section 2.5 Quorum .....................................................-7-
Section 2.6 Adjourned Meetings .........................................-7-
Section 2.7 Organization; Agenda .......................................-7-
Section 2.8 Voting .....................................................-7-
Section 2.9 Shares Held or Controlled by the Corporation ...............-8-
Section 2.10 Voting by Certain Persons or Entities .....................-8-
Section 2.11 Voting of Shares Subject to Joint Power ...................-8-
Section 2.12 Proxies ...................................................-9-
Section 2.13 Authorization of Proxies ..................................-9-
Section 2.14 Stockholders Entitled to Vote ............................-10-
Section 2.15 Order of Business ........................................-10-
Section 2.16 Inspectors of Election ...................................-10-
Section 2.17 Action by Written Consent ................................-11-
Section 2.18 Notice of Stockholder Nominees ...........................-11-
Section 2.19 Stockholder Proposals ....................................-12-
ARTICLE III
DIRECTORS .............................................................-12-
Section 3.1 Management ................................................-12-
Section 3.2 Number and Term ...........................................-13-
Section 3.3 Nominations ...............................................-13-
Section 3.4 Quorum and Manner of Action ...............................-13-
Section 3.5 Vacancies .................................................-13-
Section 3.6 Subject to Rights of Holders of Preferred Stock ...........-14-
Section 3.7 Resignations ..............................................-14-
Section 3.8 Removals ..................................................-15-
Section 3.9 Annual Meetings ...........................................-15-
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
Section 3.10 Regular Meetings .........................................-15-
Section 3.11 Special Meetings .........................................-15-
Section 3.12 Organization of Meetings .................................-15-
Section 3.13 Presumption of Assent ....................................-15-
Section 3.14 Place of Meetings ........................................-16-
Section 3.15 Compensation of Directors ................................-16-
Section 3.16 Action by Unanimous Written Consent ......................-16-
Section 3.17 Participation in Meetings by Telephone ...................-16-
ARTICLE IV
COMMITTEES OF THE BOARD ...............................................-16-
Section 4.1 Executive Committee .......................................-16-
Section 4.2 Other Committees ..........................................-17-
Section 4.3 Term.......................................................-17-
Section 4.4 Committee Changes; Removal ................................-17-
Section 4.5 Alternate Members .........................................-17-
Section 4.6 Rules and Procedures ......................................-17-
Section 4.7 Presumption of Assent .....................................-18-
Section 4.8 Resignations ..............................................-18-
Section 4.9 Vacancies .................................................-18-
Section 4.10 Telephone Meetings .......................................-18-
Section 4.11 Action Without Meeting ...................................-18-
Section 4.12 Limitations on Authority .................................-19-
ARTICLE V
OFFICERS ..............................................................-19-
Section 5.1 Number and Title ..........................................-19-
Section 5.2 Term of Office; Vacancies .................................-19-
Section 5.3 Removal of Elected Officers ...............................-19-
Section 5.4 Resignations ..............................................-19-
Section 5.5 The Chairman of the Board .................................-20-
Section 5.6 Chief Executive Officer ...................................-20-
Section 5.7 President .................................................-20-
Section 5.8 Vice Presidents ...........................................-21-
Section 5.9 Secretary .................................................-21-
Section 5.10 Assistant Secretaries ....................................-22-
Section 5.11 Treasurer ................................................-22-
Section 5.12 Assistant Treasurers .....................................-22-
Section 5.13 Controller ...............................................-22-
Section 5.14 Subordinate Officers .....................................-23-
Section 5.15 Salaries and Compensation ................................-23-
</TABLE>
3
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE VI
INDEMNIFICATION .......................................................-23-
Section 6.1 Indemnification of Directors and Officers .................-23-
Section 6.2 Survival ..................................................-25-
Section 6.3 Amendment .................................................-25-
Section 6.4 Definitions ...............................................-26-
ARTICLE VII
CAPITAL STOCK .........................................................-26-
Section 7.1 Certificates of Stock .....................................-26-
Section 7.2 Legends ...................................................-27-
Section 7.3 Lost Certificates .........................................-27-
Section 7.4 Transfer Regulations ......................................-27-
Section 7.5 Fixing Date for Determination of
Stockholders of Record for Certain Purposes ...............-27-
Section 7.6 Dividends .................................................-28-
Section 7.7 Registered Stockholders ...................................-28-
Section 7.8 Transfer of Stock .........................................-28-
ARTICLE VIII
MISCELLANEOUS PROVISIONS ..............................................-28-
Section 8.1 Corporate Seal ............................................-28-
Section 8.2 Fiscal Year ...............................................-28-
Section 8.3 Checks, Drafts, Notes .....................................-29-
Section 8.4 Notice and Waiver of Notice ...............................-29-
Section 8.5 Examination of Books and Records ..........................-29-
Section 8.6 Voting Upon Shares Held by the Corporation ................-29-
Section 8.7 Reserves ..................................................-30-
Section 8.8 Corporate Contracts and Instruments .......................-30-
Section 8.9 Attestation ...............................................-30-
Section 8.10 Invalid Provisions .......................................-30-
Section 8.11 Headings .................................................-30-
Section 8.12 References to Gender/Number ..............................-30-
ARTICLE IX
AMENDMENTS ............................................................-30-
Section 9.1 Amendment .................................................-30-
</TABLE>
4
<PAGE> 5
ADMINISTAFF, INC.
BYLAWS
ARTICLE I
OFFICES
SECTION 1.1 PRINCIPAL OFFICE. The principal office of the Corporation shall be
in Kingwood, Montgomery County, Texas.
SECTION 1.2 REGISTERED OFFICE. The registered office and registered agent of the
Corporation required to be maintained in the State of Delaware by the General
Corporation Law of the State of Delaware shall be as designated from time to
time by the appropriate filing by the Corporation in the office of the Secretary
of State of the State of Delaware.
SECTION 1.3 OTHER OFFICES. The Corporation may also have offices at such other
places, both within and without the State of Delaware, as the Board of Directors
may from time to time determine or as the business of the Corporation may
require.
ARTICLE II
STOCKHOLDERS' MEETINGS
SECTION 2.1 ANNUAL MEETING. The annual meeting of the holders of shares of each
class or series of stock as are entitled to notice thereof and to vote thereat
pursuant to applicable law and the Certificate of Incorporation for the purpose
of electing directors and transacting such other proper business as may come
before it shall be held each calendar year. Each annual meeting shall be held on
such date (no later than 13 months after the date of the last annual meeting of
Stockholders) as shall be designated by the Board of Directors and stated in the
notice or waivers of notice of such meeting. Furthermore, the annual meeting
shall be held at such time and at such place, within or without the State of
Delaware, as may be designated by the Board of Directors.
SECTION 2.2 SPECIAL MEETINGS. In addition to such special meetings as are
provided by law or the Certificate of Incorporation, special meetings of the
holders of any class or series or of all classes or series of the Corporation's
stock for any purpose or purposes, may be called at any time by the Board of
Directors and may be held on such day, at such time and at such place, within or
without the State of Delaware, as shall be designated by the Board of Directors.
Any person or group of persons who owns, beneficially and of record, not less
than 25 percent of the outstanding shares of common stock, par value $0.01 per
share, of the Corporation may call a special meeting for any proper purpose, by
notice delivered to the Secretary setting forth the action(s) proposed to be
taken at such special meeting. Except as provided in the immediately preceding
sentence, stockholders of the Corporation may not call a special meeting.
5
<PAGE> 6
SECTION 2.3 NOTICE OF MEETINGS AND ADJOURNED MEETINGS. Except as otherwise
provided by law, written notice of any meeting of Stockholders shall be given
either by personal delivery or by mail to each Stockholder of record entitled to
vote thereat. Notice of each meeting shall be in such form as is approved by the
Board of Directors and shall state the date, place and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. If the Corporation's books or stock transfer records do not contain
an address for any Stockholder, notice to such Stockholder shall be deemed to
have been given if sent by first-class mail or telecommunication to the
Corporation's principal executive office or if published at least once in a
newspaper of general circulation in the county where such principal executive
office is located. If any notice addressed to a Stockholder at the address of
such stockholder appearing on the books or stock transfer records of the
Corporation is returned to the Corporation because the postal service is unable
to deliver such notice to the address marked thereon, all further notices to
such Stockholder at such address shall be deemed to have been duly given without
further mailing if the same shall be available to such stockholder upon written
demand of such stockholder at the principal executive office of the corporation
for a period of one year from the date of the giving of such notice. Unless
otherwise provided by law, such written notice shall be given not less than 10
nor more than 60 days before the date of the meeting. Except when a Stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the grounds that the meeting is
not lawfully called or convened, presence in person or by proxy of a Stockholder
shall constitute a waiver of notice of such meeting. Further, a written waiver
of any notice required by law or by these Bylaws, signed by the person entitled
to notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Except as otherwise provided by law, the business that may
be transacted at any such meeting shall be limited to and consist of the purpose
or purposes stated in such notice. If a meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the adjournment is for more than 30 days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each Stockholder of record entitled
to vote at the meeting.
SECTION 2.4 VOTING LISTS. The officer or agent having charge of the stock
transfer books for shares of the Corporation shall make, at least 10 days before
each meeting of the Stockholders, a complete list of Stockholders entitled to
vote at such meeting or any adjournment thereof, arranged in alphabetical order,
with the address of each and the number of shares held by each, which list, for
a period of 10 days prior to such meeting, shall be kept on file either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held, and such list shall be subject to inspection by
the Stockholders at any time during usual business hours. Such list shall also
be produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any Stockholder for the duration of the meeting.
The original stock transfer books shall be prima-facie evidence as to who are
the Stockholders entitled to examine such list or transfer books or to vote at
any meeting of Stockholders.
6
<PAGE> 7
SECTION 2.5 QUORUM. Except as otherwise provided by law or by the Certificate of
Incorporation, the holders of a majority of the Corporation's stock issued and
outstanding and entitled to vote at a meeting, present in person or represented
by proxy, without regard to class or series, shall constitute a quorum at all
meetings of the Stockholders for the transaction of business. If a quorum is
present at any meeting of Stockholders, such quorum shall be deemed continuously
present throughout such meeting notwithstanding the withdrawal of Stockholders
sufficient to leave less than a quorum and the remaining Stockholders may
continue to transact business until adjournment. If, however, such quorum shall
not be present or represented at any meeting of the Stockholders, the holders of
a majority of such shares of stock, present in person or represented by proxy,
may adjourn any meeting from time to time without notice other than announcement
at the meeting, except as otherwise required by these Bylaws, until a quorum
shall be present or represented or, if no Stockholder entitled to vote is
present at such meeting, the chairman of such meeting or any officer of the
Corporation may adjourn such meeting from time to time until a quorum shall be
present. Notwithstanding anything in these Bylaws to the contrary, the chairman
of any meeting of Stockholders shall have the right, acting in his sole
discretion, to adjourn such meeting at any time and from time to time. At any
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally called.
SECTION 2.6 ADJOURNED MEETINGS. When a meeting of Stockholders is adjourned to
another time or place, unless otherwise provided by these Bylaws, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken; provided, however,
that if an adjournment is for more than 30 days or if, after an adjournment, a
new record date is fixed for the adjourned meeting a notice of the adjourned
meeting shall be given to each Stockholder entitled to vote thereat. At any
adjourned meeting at which a quorum shall be present in person or by proxy, the
Stockholders entitled to vote thereat may transact any business which might have
been transacted at the meeting as originally noticed.
SECTION 2.7 ORGANIZATION; AGENDA. Meetings of the Stockholders shall be presided
over by the Chairman of the Board of Directors, if one shall be elected, or in
his absence, by the President or by any Vice President, or, in the absence of
any of such officers, by a chairman to be chosen by a majority of the
Stockholders entitled to vote at the meeting who are present in person or by
proxy. The Secretary, or, in his absence, any Assistant Secretary or any person
appointed by the individual presiding over the meeting, shall act as secretary
at meetings of the Stockholders.
SECTION 2.8 VOTING. (a) Each Stockholder of record, as determined pursuant to
Section 2.14, who is entitled to vote in accordance with the terms of the
Certificate of Incorporation and in accordance with the provisions of these
Bylaws, shall, except to the extent specified in the Certificate of
Incorporation or any resolution adopted by the Board of Directors to establish
any series of Preferred Stock of the Corporation, be entitled to one vote, in
person or by proxy, for each share of stock registered in his name on the books
of the Corporation.
(b) No stockholder shall have any right of cumulative voting.
7
<PAGE> 8
(c) A holder of a share shall be treated as being present at a meeting
if the holder of such share is (i) present in person at the meeting or (ii)
represented at the meeting by a valid proxy, whether the instrument granting
such proxy is marked as casting a vote or abstaining, is left blank or does not
empower such proxy to vote with respect to some or all matters to be voted upon
at the meeting.
(d) If a quorum is determined to exist at a meeting, action on a matter
(other than the election of directors and except as specified in the final
sentence of this Section 2.8(d)) shall be approved if the votes cast in favor of
the matter exceed the votes cast opposing the matter. Directors of the
Corporation shall be elected by a plurality of the votes cast. In determining
the number of votes cast, shares abstaining from voting or not voted on a matter
will not be treated as votes cast. The provisions of this paragraph will govern
with respect to all votes of stockholders except as otherwise provided for in
the General Corporation Law of the State of Delaware (the "DGCL"), the
Certificate of Incorporation or these Bylaws.
SECTION 2.9 SHARES HELD OR CONTROLLED BY THE CORPORATION. Shares of the
Corporation's capital stock that are owned by the Corporation or by another
corporation of which a majority of such corporation's shares entitled to vote in
the election of directors of such corporation is held, directly or indirectly,
by the Corporation shall neither be entitled to vote nor counted for purposes of
determining if a quorum is present at a meeting of the Corporation's
stockholders.
SECTION 2.10 VOTING BY CERTAIN PERSONS OR ENTITIES. Shares of the Corporation's
capital stock held in the name of another corporation (whether domestic or
foreign) may be voted by such officer, agent or proxy as the bylaws of such
other corporation may prescribe or, in the absence of such provision, as the
board of directors of such other corporation may determine. Shares held in the
name of a deceased person may be voted by the executor or administrator of such
deceased person, either in person or by proxy. Shares held in the name of a
guardian, conservator or trustee may be voted by such fiduciary, either in
person or by proxy, but no fiduciary shall be entitled to vote shares held in
such fiduciary capacity without a transfer of such shares into the name of such
fiduciary. Shares held in the name of a receiver may be voted by such receiver.
A stockholder whose shares are pledged shall be entitled to vote such shares,
unless in the transfer by the pledgor on the books of the Corporation he has
expressly empowered the pledgee to vote thereon, in which case only the pledgee
(or his proxy) may represent the stock and vote thereon.
SECTION 2.11 VOTING OF SHARES SUBJECT TO JOINT POWER. If shares of the
Corporation's capital stock are held of record in the name of two or more
persons (whether fiduciaries, partners, joint tenants, tenants in common,
tenants by the entirety or otherwise) or if two or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect:
(i) if only one such person votes the shares, such person's
act binds all persons in whose name such shares are held;
8
<PAGE> 9
(ii) if more than one such person votes the shares, the act of
the majority so voting binds all persons in whose name such shares are held; and
(iii) if more than one such person votes the shares but the
vote is evenly split on any particular matter, each faction may vote the
securities in question proportionately or any person voting the shares or a
beneficiary (if any) may apply to the Delaware Court of Chancery or such other
court as may have jurisdiction to appoint an additional person to act with the
person so voting the shares, which shall then be voted as determined by a
majority of such persons and the person so appointed by the court.
SECTION 2.12 PROXIES. Every Stockholder entitled to vote at any Stockholders'
meeting may authorize another person or persons to act for him by proxy duly
appointed by instrument in writing subscribed by such Stockholder and executed
not more than three years prior to the meeting, unless the proxy provides for a
longer period. A duly executed proxy shall be irrevocable if it states that it
is irrevocable and if, and only so long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A Stockholder's attendance at
any meeting, when such Stockholder has theretofore given a proxy, shall not have
the effect of revoking such proxy unless such Stockholder shall in writing so
notify the Secretary of the meeting prior to the voting of the proxy. Unless
otherwise provided by law, no vote on the election of directors or any question
brought before the meeting need be by ballot unless the chairman of the meeting
shall determine that it shall be by ballot or the holders of a majority of the
shares of stock present in person or by proxy and entitled to participate in
such vote shall so demand. In a vote by ballot, each ballot shall state the
number of shares voted and the name of the Stockholder or proxy voting. Except
as otherwise provided by law, by the Certificate of Incorporation or these
Bylaws, all elections of directors and all other matters before the Stockholders
shall be decided by the vote of the holders of a majority of the shares of stock
present in person or by proxy at the meeting and entitled to vote in the
election or on the question. In the election of directors, votes may not be
cumulated.
SECTION 2.13 AUTHORIZATION OF PROXIES. Without limiting the manner in which a
Stockholder may authorize another person or persons to act for him as proxy, the
following are valid means of granting such authority. A Stockholder may execute
a writing authorizing another person or persons to act for him as proxy.
Execution may be accomplished by the Stockholder or his authorized officer,
director, employee or agent signing such writing or causing his or her signature
to be affixed to such writing by any reasonable means including, but not limited
to, by facsimile signature. A Stockholder may also authorize another person or
persons to act for him as proxy by transmitting or authorizing the transmission
of a telegram, cablegram or other means of electronic transmission to the person
who will be the holder of the proxy or to a proxy solicitation firm, proxy
support service organization or like agent duly authorized by the person who
will be the holder of the proxy to receive such transmission, provided that any
such telegram, cablegram or other means of electronic transmission must either
set forth or be submitted with information from which it can be determined that
the telegram, cablegram or other electronic transmission was authorized by the
Stockholder. If it is determined that such telegrams, cablegrams or other
electronic transmissions are valid, the inspectors or, if there are no
inspectors, such other persons making that determination shall specify the
information upon
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which they relied. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this section may
be substituted or used in lieu of the original writing or transmission for any
and all purposes for which the writing or transmission could be used, provided
that such copy, facsimile telecommunication or other reproduction shall be a
complete reproduction of the entire original writing or transmission.
SECTION 2.14 STOCKHOLDERS ENTITLED TO VOTE. The Board of Directors may fix a
date not more than 60 days nor less than 10 days prior to the date of any
meeting of Stockholders as a record date for the determination of the
Stockholders entitled to notice of and to vote at such meeting and any
adjournment thereof, and in such case such Stockholders and only such
Stockholders as shall be Stockholders of record on the date so fixed shall be
entitled to notice of and to vote at, such meeting and any adjournment thereof
notwithstanding any transfer of any stock on the books of the Corporation after
such record date fixed as aforesaid.
SECTION 2.15 ORDER OF BUSINESS. The order of business at each meeting of
Stockholders shall be as determined by the chairman of the meeting. In addition,
subject to the DGCL, the Certificate of Incorporation and these Bylaws, the
chairman of the meeting may establish such regulations for the manner of voting
and the conduct of discussion at any meetings of the Corporation's Stockholders
as such chairman determines to be necessary or appropriate. In advance of any
meeting of the Corporation's Stockholders, the Corporation's Board of Directors
may adopt an agenda for such meeting, adherence to which the chairman of the
meeting may enforce.
SECTION 2.16 INSPECTORS OF ELECTION. (a) Before any meeting of Stockholders, the
Board of Directors may, and if required by law shall, appoint one or more
persons to act as inspectors of election at such meeting or any adjournment
thereof. If any person appointed as inspector fails to appear or fails or
refuses to act, the chairman of the meeting may, and if required by law or
requested by any Stockholder entitled to vote or his proxy shall, appoint a
substitute inspector. If no inspectors are appointed by the Board of Directors,
the chairman of the meeting may, and if required by law or requested by any
Stockholder entitled to vote or his proxy shall, appoint one or more inspectors
at the meeting. Notwithstanding the foregoing, inspectors shall be appointed
consistent with Section 231 of the DGCL.
(b) Inspectors may include individuals who serve the Corporation in
other capacities (including as officers, employees, agents or representatives);
provided, however, that no director or candidate for the office of director
shall act as an inspector. Inspectors need not be Stockholders.
(c) The inspectors shall (i) determine the number of shares of capital
stock of the Corporation outstanding and the voting power of each, the number of
shares represented at the meeting, the existence of a quorum and the validity
and effect of proxies and ballots, (ii) certify their determination of the
number of shares represented at the meeting and their count of all votes and
ballots and (iii) receive votes or ballots, hear and determine all challenges
and questions arising in connection with the right to vote, count and tabulate
all votes and ballots, determine the results and perform such acts as are proper
to conduct the election or vote with fairness to all
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Stockholders. On request of the chairman of the meeting, the inspectors shall
make a report in writing of any challenge, request or matter determined by them
and shall execute a certificate of any fact found by them. The inspectors shall
have such other duties as may be prescribed by Section 231 of the DGCL
SECTION 2.17 ACTION BY WRITTEN CONSENT. No action required or permitted to be
taken by the Stockholders shall be taken except at an annual or special meeting
with prior notice and a vote. No action may be taken by the Stockholders by
written consent.
SECTION 2.18 NOTICE OF STOCKHOLDER NOMINEES. Only persons who are nominated in
accordance with the procedures set forth in this Section 2.18 shall be eligible
for election as directors of the Corporation. Nominations of persons for
election to the Board of Directors of the Corporation may be made at a meeting
of the Corporation's Stockholders (a) by or at the direction of the Board of
Directors or (b) by any Stockholder of the Corporation entitled to vote for the
election of directors at such meeting who complies with the procedures set forth
in this Section 2.18. All nominations by Stockholders shall be made pursuant to
timely notice in proper written form submitted to the Secretary of the
Corporation. To be timely, a Stockholders' notice shall be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 120 days nor more than 150 days in advance of the first anniversary of
the date of the Corporation's proxy statement released to Stockholders in
connection with the previous year's annual meeting of Stockholders; provided,
however, that if no annual meeting was held in the previous year or the date of
the annual meeting of Stockholders has been changed by more than 30 calendar
days from the date contemplated at the time of mailing of the preceding year's
proxy statement, the notice must be received by the Corporation at least 90 days
prior to the date the Corporation intends to distribute its proxy statement with
respect to such meeting. To be in proper written form, such Stockholder's notice
to the Secretary shall set forth in writing (a) as to each person whom such
Stockholder proposes to nominate for election or re-election as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended, including, without limitation, such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected; and (b) as to such Stockholder (i) the name and address, as they appear
on the Corporation's books, of such Stockholder, (ii) the class and number of
shares of the Corporation's capital stock that are beneficially owned by such
Stockholder and (iii) a description of all agreements, arrangements or
understandings between such Stockholder and each such person that such
Stockholder proposes to nominate as a director and any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made by such Stockholder. At the request of the Board of Directors,
any person nominated by the Board of Directors for election as a director shall
furnish to the Secretary of the Corporation that information required to be set
forth in a Stockholder's notice of nomination which pertains to the nominee. No
person shall be eligible for election as a director unless nominated in
accordance with the procedures set forth in these Bylaws of the Company. The
chairman of the Stockholder's meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by these Bylaws of the
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Company, and if he shall so determine, he shall announce such determination to
the meeting and the defective nomination shall be disregarded.
SECTION 2.19 STOCKHOLDER PROPOSALS. At any special meeting of the Corporation's
Stockholders, only such business shall be conducted as shall have been brought
before the meeting by or at the direction of the Board of Directors, and, in the
case of a special meeting of Stockholders called by a Stockholder or
Stockholders in accordance with the second sentence of Section 2.2 of these
Bylaws, as may be specified in the notice delivered to the Secretary to call
such special meeting. At any annual meeting of the stockholders, only such
business shall be conducted as shall have been brought before the meeting (a) by
or at the direction of the Board of Directors or (b) by any Stockholder who
complies with the procedures set forth in this Section 2.19. For business
properly to be brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in proper written form to the
Secretary of the Corporation. To be timely, a Stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 120 days nor more than 150 days in advance of the
first anniversary of the date of the Corporation's proxy statement released to
Stockholders in connection with the previous year's annual meeting of
Stockholders; provided, however, that if no annual meeting was held in the
previous year or the date of the annual meeting of Stockholders has been changed
by more than 30 calendar days from the date contemplated at the time of mailing
of the preceding year's proxy statement, the notice must be received by the
Corporation at least 90 days prior to the date the Corporation intends to
distribute its proxy statement with respect to such meeting. To be in proper
written form, such Stockholder's notice to the Secretary shall set forth in
writing as to each matter such Stockholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the Corporation's books, of
such Stockholder, (c) the class and number of shares of the Corporation's stock
which are beneficially owned by such Stockholder and (d) any material interest
of such Stockholder in such business. Notwithstanding anything in these Bylaws
to the contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 2.19. The chairman of
an annual stockholder's meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 2.19, and, if he should so
determine, he shall so announce such determination to the meeting and any such
business not properly brought before the meeting shall not be transacted.
ARTICLE III
DIRECTORS
SECTION 3.1 MANAGEMENT. The property, affairs and business of the Corporation
shall be managed by or under the direction of the Board of Directors which may
exercise all powers of the Corporation and do all lawful acts and things as are
not by law, by the Certificate of Incorporation or by these Bylaws directed or
required to be exercised or done by the Stockholders.
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SECTION 3.2 NUMBER AND TERM. The number of directors may be fixed from time to
time by resolution of the Board of Directors adopted by the affirmative vote of
a majority of the members of the entire Board of Directors, but shall consist of
not less than three nor more than 15 members, one-third of whom shall be elected
each year by the Stockholders except as provided in Section 3.5. Directors need
not be Stockholders. No decrease in the number of directors shall have the
effect of shortening the term of office of any incumbent director. The directors
need not be stockholders nor residents of the State of Delaware. Each director
must have attained 21 years of age.
SECTION 3.3 NOMINATIONS. (a) Notwithstanding anything in these Bylaws to the
contrary, only persons who are nominated in accordance with the procedures
hereinafter set forth in this Section 3.3 or Sections 2.18 or 3.5 shall be
eligible for election as directors of the Corporation.
(b) Each notice given by a Stockholder as contemplated by Section 2.18
shall set forth the information required by Section 2.18, in addition to any
other information or matters required by the Certificate of Incorporation. The
right of a Stockholder to nominate a person for election or reelection to the
Board of Directors shall be subject to such conditions, restrictions and
limitations as may be imposed by the Certificate of Incorporation.
SECTION 3.4 QUORUM AND MANNER OF ACTION. At all meetings of the Board of
Directors a majority of the total number of directors holding office shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may be otherwise specifically provided by
law, by the Certificate of Incorporation or by these Bylaws. When the Board of
Directors consists of one director, the one director shall constitute a majority
and a quorum. A meeting of the Board of Directors at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
directors; provided, however, that no action of the remaining directors shall
constitute the act of the Board of Directors unless the action is approved by at
least a majority of the required quorum for the meeting or such greater number
of directors as shall be required by applicable law, by the Certificate of
Incorporation or by these Bylaws. If at any meeting of the Board of Directors
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum is obtained, and no further
notice thereof need be given other than by announcement at such adjourned
meeting. The act of a majority of the directors present at any meeting of the
Board of Directors at which there is a quorum shall be the act of the Board of
Directors unless by express provision of law, the Certificate of Incorporation
or these Bylaws a different vote is required, in which case such express
provision shall govern and control. Attendance by a director at a meeting shall
constitute a waiver of notice of such meeting except where a director attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business on the ground that the meeting is not
lawfully called or convened.
SECTION 3.5 VACANCIES. Except as otherwise provided by law and the Certificate
of Incorporation:
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(a) in case any vacancy shall occur on the Board of Directors because
of death, resignation or removal, such vacancy may be filled by a majority of
the directors remaining in office (though less than a quorum), and the director
so appointed shall serve for the unexpired term of his predecessor or until his
successor is elected and qualified or until his earlier death, resignation or
removal. If there are no directors then in office, an election of directors may
be held in the manner provided by applicable law.
(b) any newly-created directorship resulting from any increase in the
number of directors constituting the whole Board of Directors may be filled by a
majority of the directors then in office (though less than a quorum), and the
director so appointed shall be assigned to such class of directors as such
majority directors shall determine. Each director so appointed shall hold office
for the remaining term of the class to which he is assigned and until his
successor is elected and qualified or until his earlier death, resignation or
removal.
(c) except as expressly provided in the DGCL, the Certificate of
Incorporation or these Bylaws, Stockholders shall not have any right to fill
vacancies on the Board of Directors, including newly-created directorships.
(d) if, as a result of a disaster or emergency (as determined in good
faith by the then remaining directors), it becomes impossible to ascertain
whether or not vacancies exist on the Board of Directors and a person is or
persons are elected by the directors, who in good faith believe themselves to be
a majority of the remaining directors, to fill a vacancy or vacancies that such
remaining directors in good faith believe exists, then the acts of such person
or persons who are so elected as directors shall be valid and binding upon the
Corporation and the Stockholders, although it may subsequently develop that at
the time of the election (i) there was in fact no vacancy or vacancies existing
on the Board of Directors or (ii) the directors who so elected such person or
persons did not in fact constitute a majority of the remaining directors.
SECTION 3.6 SUBJECT TO RIGHTS OF HOLDERS OF PREFERRED STOCK. Notwithstanding the
foregoing provisions of this Article III, if the resolutions of the Board of
Directors creating any class or series of preferred stock of the Corporation
entitle the holders of such preferred stock, voting separately by class or
series, to elect additional directors under specified circumstances, then all
provisions of such resolutions relating to the nomination, election, term of
office, removal, filling of vacancies and other features of such directorships
shall, as to such directorships, govern and control over any conflicting
provisions of this Article III, and such directors so elected need not be
divided into classes pursuant to this Article III unless expressly provided by
the provisions of such resolutions.
SECTION 3.7 RESIGNATIONS. A director may resign at any time upon written notice
of resignation to the Corporation, delivered to the Secretary. Any resignation
shall be effective immediately unless a certain effective date is specified
therein, in which event it will be effective upon such date and acceptance of
any resignation shall not be necessary to make it effective if an effective time
is specified therein.
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SECTION 3.8 REMOVALS. Any director or the entire Board of Directors may be
removed only by vote of the Stockholders and only for cause, and another person
or persons may be elected to serve for the remainder of his or their term, by
the holders of a majority of the shares of the Corporation entitled to vote in
the election of directors. Stockholders may not remove any director without
cause. In case any vacancy so created shall not be filled by the Stockholders at
such meeting, such vacancy may be filled by the directors as provided in Section
3.5.
SECTION 3.9 ANNUAL MEETINGS. The annual meeting of the Board of Directors shall
be held, if a quorum be present, immediately following each annual meeting of
the Stockholders at the place such meeting of Stockholders took place, for the
purpose of organization and transaction of any other business that might be
transacted at a regular meeting thereof, and no notice of such meeting shall be
necessary. If a quorum is not present, such annual meeting may be held at any
other time or place that may be specified in a notice given in the manner
provided in Section 3.11 for special meetings of the Board of Directors or in a
waiver of notice thereof.
SECTION 3.10 REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held without notice at such time and place, within or without the State of
Delaware, as shall from time to time be determined by the Board of Directors.
Except as otherwise provided by applicable law, any business may be transacted
at any regular meeting of the Board of Directors.
SECTION 3.11 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by the President or by the Secretary on the written request of one-third
of the members of the whole Board of Directors stating the purpose or purposes
of such meeting. Notices of special meetings, if mailed, shall be mailed to each
director not later than two days before the day the meeting is to be held or if
otherwise given in the manner permitted by the Bylaws, not later than the day
before such meeting. Neither the business to be transacted at, nor the purpose
of, any special meeting need be specified in any notice or written waiver of
notice unless so required by the Certificate of Incorporation or by the Bylaws
and unless limited by law, the Certificate of Incorporation or by these Bylaws,
any and all business may be transacted at a special meeting.
SECTION 3.12 ORGANIZATION OF MEETINGS. At any meeting of the Board of Directors,
business shall be transacted in such order and manner as such Board of Directors
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present at any meeting at which there is a
quorum, except as otherwise provided by these Bylaws or required by law. The
Board of Directors shall cause regular minutes of its proceedings to be kept and
shall cause same to be placed in the minute book of the Corporation.
SECTION 3.13 PRESUMPTION OF ASSENT. A director who is present at a meeting of
the Board of Directors at which action on any matter is taken shall be presumed
to have assented to such action unless his dissent shall be entered in the
minutes of the meeting or unless he shall file his written dissent to such
action with the person acting as secretary of the meeting before the adjournment
thereof or shall forward any dissent by certified or registered mail to the
Secretary immediately after the adjournment of the meeting. Such right to
dissent shall not apply to any director who voted in favor of such action.
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SECTION 3.14 PLACE OF MEETINGS. The Board of Directors may hold their meetings
and have one or more offices, and keep the books of the Corporation, within or
without the State of Delaware, at any office or offices of the Corporation, or
at any other place as they may from time to time by resolution determine.
SECTION 3.15 COMPENSATION OF DIRECTORS. The Board of Directors shall have the
authority to fix, and from time to time to change, the compensation of
directors. Each director shall be entitled to reimbursement from the corporation
for his reasonable expenses incurred in attending meetings of the Board of
Directors (or any committee thereof) and meetings of the Stockholders. Nothing
contained in these Bylaws shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
SECTION 3.16 ACTION BY UNANIMOUS WRITTEN CONSENT. Unless otherwise restricted by
the DGCL, the Certificate of Incorporation or these Bylaws, any action required
or permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if prior to such action all
members of the Board of Directors or of such committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or the committee.
SECTION 3.17 PARTICIPATION IN MEETINGS BY TELEPHONE. Unless otherwise restricted
by the Certificate of Incorporation or these Bylaws, members of the Board of
Directors or of any committee thereof may participate in a meeting of such Board
of Directors or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and participation in a meeting in such manner shall
constitute presence in person at such meeting.
ARTICLE IV
COMMITTEES OF THE BOARD
SECTION 4.1 EXECUTIVE COMMITTEE. The Board of Directors may, by resolution or
resolutions passed by a majority of the whole Board of Directors, designate one
or more Directors to constitute an Executive Committee which during the
intervals between meetings of the Board of Directors and subject to Section
4.12, shall have and may exercise, in such manner as it shall deem to be in the
best interests of the Corporation, all the powers of the Board of Directors in
the management of the business and affairs of the Corporation, except in those
cases where the authority of the Board of Directors is specifically denied to
the Executive Committee by the DGCL, the Certificate of Incorporation or these
Bylaws, or as reserved to the Board of Directors, or as delegated by the Board
of Directors to another committee of the Board of Directors, and may authorize
the seal of the Corporation to be affixed to all papers that may require it. The
Executive Committee shall consist of not less than two directors, the exact
number to be determined from time to time by the affirmative vote of a majority
of the whole Board of Directors. None of the members of the Executive Committee
need be an officer of the Corporation. Meetings of the Executive Committee may
be called at any time by the Chairman of the Board on not less than one day's
notice to each member given orally or in writing, which
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notice shall specify the time, place and purpose of the meeting. The designation
of an Executive Committee or other committee and the delegation thereto of
authority shall not operate to relieve the Board of Directors, or any member
thereof, of any responsibility imposed upon it or him by law.
SECTION 4.2 OTHER COMMITTEES. The Board of Directors may, by resolution adopted
by a majority of the whole Board of Directors, establish additional standing or
special committees of the Board of Directors, each of which shall consist of one
or more directors (the exact number to be determined from time to time by the
Board of Directors) and, subject to Section 4.12, shall have such powers and
functions as may be delegated to it by the Board of Directors. No member of any
additional committee need be an officer of the Corporation.
SECTION 4.3 TERM. Each member of a committee of the Board of Directors shall
serve as such until the earliest of (i) his death, (ii) the expiration of his
term as a director, (iii) his resignation as a member of such committee or as a
director and (iv) his removal as a member of such committee or as a director.
SECTION 4.4 COMMITTEE CHANGES; REMOVAL. The Board of Directors shall have the
power at any time to fill vacancies in, to change the membership of and to
abolish any committee of the Board of Directors; provided, however, that no such
action shall be taken in respect of the Executive Committee unless approved by a
majority of the whole Board of Directors.
SECTION 4.5 ALTERNATE MEMBERS. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. If no alternate members
have been so appointed or each such alternate committee member is absent or
disqualified, the committee member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any absent or disqualified member.
SECTION 4.6 RULES AND PROCEDURES. (a) The Board of Directors may, by resolution
adopted by a majority of the whole Board of Directors, designate one member of
each committee as chairman of such committee. If a chairman is not so designated
for any committee, the members thereof shall designate a chairman.
(b) Each committee may adopt its own rules (not inconsistent with these
Bylaws or with any specific direction as to the conduct of its affairs as shall
have been given by the Board of Directors) governing the time, place and method
of holding its meetings and the conduct of its proceedings and shall meet as
provided by such rules.
(c) If a committee is comprised of an odd number of members, a quorum
shall consist of a majority of that number. If a committee is comprised of an
even number of members, a quorum shall consist of one-half of that number. If a
committee is comprised of two members, a quorum shall consist of both members.
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(d) Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when requested.
(e) Unless otherwise provided by these Bylaws or by the rules adopted
by any committee, notice of the time and place of each meeting of such committee
shall be given to each member of such committee as provided in these Bylaws with
respect to notices of special meetings of the Board of Directors.
SECTION 4.7 PRESUMPTION OF ASSENT. A member of a committee of the Board of
Directors who is present at a meeting of such committee at which action on any
matter is taken shall be presumed to have assented to such action unless his
dissent shall be entered in the minutes of the meeting or unless he shall file
his written dissent to such action with the person acting as secretary of the
meeting before the adjournment thereof or shall forward any dissent by certified
or registered mail to the Secretary of the Corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to any member
who voted in favor of such action.
SECTION 4.8 RESIGNATIONS. Any committee member may resign at any time by giving
written notice to the Board of Directors or the Secretary. Such resignation
shall take effect at the date of receipt of such notice or at any later time
specified therein. Acceptance of such resignation shall not be necessary to make
it effective if an effective time is specified therein.
SECTION 4.9 VACANCIES. The Board of Directors may designate one or more of its
members as alternate members of any committee who may replace any absent or
disqualified member at any meeting of such committee. If no alternate members
have been appointed, the committee member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any absent or disqualified member. The Board of
Directors shall have the power at any time to fill vacancies in, to change the
membership of, and to dissolve, any committee.
SECTION 4.10 TELEPHONE MEETINGS. Members of any committee designated by the
Board of Directors may participate in or hold a meeting by use of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation in a meeting
pursuant to this Section 4.10 shall constitute presence in person at such
meeting, except where a person participates in the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
SECTION 4.11 ACTION WITHOUT MEETING. Any action required or permitted to be
taken at a meeting of any committee designated by the Board of Directors may be
taken without a meeting if a consent in writing, setting forth the action so
taken, is signed by all the members of the committee and filed with the minutes
of the committee proceedings. Such consent shall have the same force and effect
as a unanimous vote at a meeting.
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SECTION 4.12 LIMITATIONS ON AUTHORITY. Unless otherwise provided in the DGCL or
the Certificate of Incorporation, any committee of the Board of Directors, to
the extent provided in the resolution or resolutions establishing such
committee, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the Corporation's business and affairs, but no
such committee shall have the power or authority to (i) approve or adopt, or
recommend to the Stockholders, any action or matter expressly required by the
DGCL to be submitted to the Stockholders for approval or (ii) adopt, amend or
repeal any Bylaws.
ARTICLE V
OFFICERS
SECTION 5.1 NUMBER AND TITLE. (a) The elected officers of the Corporation shall
be chosen by the Board of Directors and shall be a President, a Vice President,
a Secretary and a Treasurer. The Board of Directors may also choose a Chairman
of the Board, who must be a member of the Board of Directors, a Chief Executive
Officer, and additional Vice Presidents (including one or more Senior Vice
Presidents and one or more Executive Vice Presidents), Assistant Secretaries
and/or Assistant Treasurers and a Controller. One person may hold any two or
more of these offices, but no officer shall execute any instrument in more than
one capacity if such instrument is required by law or any act of the Corporation
to be executed or countersigned by two or more officers. None of the officers
need be a Stockholder or a resident of the State of Delaware. No officer (other
than the Chairman of the Board, if any) need be a director.
(b) The Board of Directors may delegate to the Chairman of the Board
(if any) and/or the Chief Executive Officer the power to appoint one or more
employees of the Corporation as divisional or departmental vice presidents and
fix their duties as such appointees. However, no such divisional or departmental
vice presidents shall be considered an officer of the Corporation, the officers
of the Corporation being limited to those officers elected by the Board of
Directors.
SECTION 5.2 TERM OF OFFICE; VACANCIES. So far as is practicable, all elected
officers shall be elected by the Board of Directors at the annual meeting of the
Board of Directors in each year, and except as otherwise provided in this
Article V, shall hold office until the next such meeting of the Board of
Directors in the subsequent year and until their respective successors are
elected and qualified or until their earlier resignation or removal. All
appointed officers shall hold office at the pleasure of the Board of Directors.
If any vacancy shall occur in any office, the Board of Directors may elect or
appoint a successor to fill such vacancy for the remainder of the term.
SECTION 5.3 REMOVAL OF ELECTED OFFICERS. Any elected officer may be removed at
any time, with or without cause, by affirmative vote of a majority of the whole
Board of Directors, at any regular meeting or at any special meeting called for
such purpose.
SECTION 5.4 RESIGNATIONS. Any officer may resign at any time upon written notice
of resignation to the President, Secretary or Board of Directors of the
Corporation. Any resignation shall be effective immediately unless a date
certain is specified for it to take effect, in which event it shall be effective
upon such date, and acceptance of any resignation shall not be
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necessary to make it effective, irrespective of whether the resignation is
tendered subject to such acceptance. Any such resignation is without prejudice
to the rights, if any, of the Corporation under any contract to which the
officer may be a party.
SECTION 5.5 THE CHAIRMAN OF THE BOARD. The Chairman of the Board (if any) shall
have all powers and shall perform all duties incident to the office of Chairman
of the Board and such other powers and duties as may be prescribed by the Board
of Directors or these Bylaws. The Chairman of the Board, if present, shall
preside at all meetings of the Board of Directors and of the Stockholders.
SECTION 5.6 CHIEF EXECUTIVE OFFICER. (a) The Chief Executive Officer shall be
the chief executive officer of the Corporation and, subject to the supervision,
direction and control of the Board of Directors and the Chairman of the Board
(if any), shall have general supervision, direction and control of the business
and officers of the Corporation with all such powers as may be reasonably
incident to such responsibilities. The Chief Executive Officer shall implement
the general directives, plans and policies formulated by the Board of Directors
and shall further have such duties, responsibilities and authorities as may be
assigned to him by the Board of Directors. The Chief Executive Officer shall
have the general powers and duties of management usually vested in the chief
executive officer of a corporation.
(b) During the time of any vacancy in the office of Chairman of the
Board or in the event of the absence or disability of the Chairman of the Board,
the Chief Executive Officer shall have the duties and powers of the Chairman of
the Board unless otherwise determined by the Board of Directors. In the absence
of the Chairman of the Board, if one be elected, the Chief Executive Officer
shall preside at meetings of the Stockholders and Board of Directors and shall
be ex officio a member of all standing committees. During the time of any
vacancy in the office of President or in the event of the absence or disability
of the President, the Chief Executive Officer shall have the duties and powers
of the President unless otherwise determined by the Board of Directors. In no
event shall any third party having any dealings with the Corporation be bound to
inquire as to any facts required by the terms of this Section 5.6 for the
exercise by the Chief Executive Officer of the powers of the Chairman of the
Board or the President.
SECTION 5.7 PRESIDENT. (a) The President shall be the chief operating officer of
the Corporation and, subject to the supervision, direction and control of the
Chief Executive Officer and the Board of Directors, shall manage the day-to-day
operations of the Corporation. He shall have the general powers and duties of
management usually vested in the chief operating officer of a corporation and
such other powers and duties as may be assigned to him by the Board of
Directors, the Chief Executive Officer or these Bylaws. The President may sign,
with any other proper officer, certificates for shares of the Corporation and
any deeds, bonds, mortgages, contracts and other documents which the Board of
Directors has authorized to be executed, except where required by law to be
otherwise signed and executed and except where the signing and execution thereof
shall be expressly delegated by the Board of Directors or these Bylaws, to some
other officer or agent of the Corporation. In the absence of the President, his
duties shall be performed and his authority may be exercised by the Chief
Executive Officer or a Vice
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President of the Corporation as may have been designated by the President with
the right reserved to the Board of Directors to designate or supersede any
designation so made.
(b) During the time of any vacancy in the offices of the Chairman of
the Board and Chief Executive Officer or in the event of the absence or
disability of the Chairman of the Board and the Chief Executive Officer, the
President shall have the duties and powers of the Chief Executive Officer unless
otherwise determined by the Board of Directors. In no event shall any third
party having any dealings with the Corporation be bound to inquire as to any
facts required by the terms of this Section 5.7 for the exercise by the
President of the powers of the Chief Executive Officer.
SECTION 5.8 VICE PRESIDENTS. The several Vice Presidents (if any), which may
include one or more persons designated as Senior Vice Presidents and one or more
persons designated as Executive Vice Presidents, shall have such powers and
duties as may be assigned to them by these Bylaws and as may from time to time
be assigned to them by the Board of Directors, the Chief Executive Officer or
President and may sign, with any other proper officer, certificates for shares
of the Corporation. In the absence or disability of the President, the Vice
Presidents, if any, in order of their rank as fixed by the Board of Directors,
or if not ranked, the Vice President designated by the President, shall perform
all the duties of the President as chief operating officer of the Corporation,
and when so acting shall have all the powers of, and be subject to all the
restrictions upon, the President as chief executive officer of the Corporation.
In no event shall any third party having dealings with the Corporation be bound
to inquire as to any facts required by the terms of this Section 5.7 for the
exercise by any Vice President of the powers of the President as chief executive
officer of the Corporation. The Vice Presidents shall have such other powers and
perform such other duties as from time to time may be assigned to them by the
Board of Directors, the Chief Executive Officer or the President.
SECTION 5.9 SECRETARY. (a) The Secretary shall keep or cause to be kept, at the
principal office of the Corporation or such other place as the Board of
Directors may order, a book of minutes of all meetings and actions of the Board
of Directors, committees of the Board of Directors and Stockholders, with the
time and place of holding, whether regular or special, and, if special, how
authorized, the notice thereof given, the names of those present at meetings of
the Board of Directors and committees thereof, the number of shares present or
represented at Stockholders' meetings and the proceedings thereof.
(b) The Secretary shall keep, or cause to be kept, at the principal
office of the Corporation or at the office of the Corporation's transfer agent
or registrar, a share register, or a duplicate share register, showing the names
of all Stockholders and their addresses, the number and classes of shares held
by each, the number and date of certificates issued for the same and the number
and date of cancellation of every certificate surrendered for cancellation.
(c) The Secretary shall give, or cause to be given, notice of all
meetings of the Stockholders and of the Board of Directors required by these
Bylaws or by law to be given, and he shall keep the seal of the Corporation, if
one be adopted, in safe custody, and shall have such
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other powers and perform such other duties as may be prescribed by the Board of
Directors, the Chairman of the Board (if any), the Chief Executive Officer, the
President or these Bylaws.
(d) The Secretary may affix the seal of the Corporation, if one is
adopted, to any instrument contracts of the Corporation requiring same.
SECTION 5.10 ASSISTANT SECRETARIES. Each Assistant Secretary (if any) shall have
such powers and duties as may be assigned to him by the Board of Directors, the
Chairman of the Board (if any), the Chief Executive Officer or the President or
the Secretary. In the absence or disability of the Secretary, the Assistant
Secretary designated by the President (or, in the absence of such designation,
the Assistant Secretary designated by the Secretary) shall perform the duties
and exercise the powers of the Secretary during the period of such absence or
disability. In no event shall any third party having dealings with the
Corporation be bound to inquire as to any facts required by the terms of this
Section 5.10 for the exercise by any Assistant Secretary of the powers of the
Secretary under these Bylaws.
SECTION 5.11 TREASURER. The Treasurer shall have the custody of and be
responsible for the corporate funds and securities, shall keep full and accurate
accounts of receipts and disbursements in the books belonging to the Corporation
and shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors. He shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the President and the Board of Directors, at its regular
meetings, or when the Board of Directors so requires, an account of all his
transactions as Treasurer and of the financial condition of the Corporation and
he shall perform all other duties incident to the position of Treasurer, or as
may be prescribed by the Board of Directors or the President. If required by the
Board of Directors, he shall give the Corporation a bond in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
SECTION 5.12 ASSISTANT TREASURERS. Each Assistant Treasurer (if any) shall have
the usual powers and duties pertaining to his office, together with such other
powers and duties as may be assigned to him by the Board of Directors, the Chief
Executive Officer, the President or the Treasurer. In case of the absence or
disability of the Treasurer, the Assistant Treasurer designated by the President
(or, in the absence of such designation, the Assistant Treasurer designated by
the Treasurer) shall perform the duties and exercise the powers of the Treasurer
during the period of such absence or disability. In no event shall any third
party having dealings with the Corporation be bound to inquire as to any facts
required by the terms of this Section 5.12 for the exercise by any Assistant
Treasurer of the powers of the Treasurer under these Bylaws.
SECTION 5.13 CONTROLLER. The Controller (if any) shall be the principal
accounting officer of the Corporation. In addition to his duties as the
principal accounting officer, the Controller shall
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have such other powers and duties as may be assigned to him by the Board of
Directors, the Chief Executive Officer, the President, or the Chief Financial
Officer.
SECTION 5.14 SUBORDINATE OFFICERS. The Board of Directors may (a) appoint such
other subordinate officers and agents as it shall deem necessary who shall hold
their offices for such terms, have such authority and perform such duties as the
Board of Directors may from time to time determine, or (b) delegate to any
committee or officer the power to appoint any such subordinate officers or
agents.
SECTION 5.15 SALARIES AND COMPENSATION. The salary or other compensation of
officers shall be fixed from time to time by the Board of Directors. The Board
of Directors may delegate to any committee or officer the power to fix from time
to time the salary or other compensation of subordinate officers and agents
appointed in accordance with the provisions of Section 5.14.
ARTICLE VI
INDEMNIFICATION
SECTION 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) The Corporation, to the maximum extent permitted from time to time
under the laws of the State of Delaware (i) shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was, at any time prior to or during
which this Article VI is in effect, a director or officer of the Corporation, or
is or was, at any time prior to or during which this Article VI is in effect,
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan and (ii) upon a determination by the Board of Directors that
indemnification is appropriate, the Corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was, at any time prior to or during
which this Article VI is in effect, an employee or agent of the Corporation or
at the request of the Corporation was serving as an employee or agent of another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan, in the case of (i) and (ii) against reasonable expenses (including
attorneys' fees), judgments, fines, penalties, amounts paid in settlement and
other liabilities actually and reasonably incurred by such person in connection
with such action, suit or proceeding if such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that such person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with
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respect to any criminal action or proceeding, had reasonable cause to believe
that his conduct was unlawful.
(b) The Corporation, to the maximum extent permitted from time to time
under the laws of the State of Delaware (i) shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that such person is or was, at any
time prior to or during which this Article VI is in effect, a director or
officer of the Corporation, or is or was, at any time prior to or during which
this Article VI is in effect, serving at the request of the Corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise and (ii) upon a determination by the Board of Directors that
indemnification is appropriate, the Corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that such person is or was, at any
time prior to or during which this Article VI is in effect, an employee or agent
of the Corporation or at the request of the Corporation was serving as an
employee or agent of another corporation, partnership, joint venture, trust,
other enterprise or employee benefit plan, in the case of (i) and (ii) against
expenses (including attorneys' fees), actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation; provided, that no
indemnification shall be made under this sub-section (b) in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Delaware Court
of Chancery, or other court of appropriate jurisdiction, shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity of such expenses which the Delaware Court of Chancery, or other court
of appropriate jurisdiction, shall deem proper.
(c) Any indemnification under sub-sections (a) or (b) (unless ordered
by the Delaware Court of Chancery or other court of appropriate jurisdiction)
shall be made by the Corporation only as authorized in the specific case upon a
determination that indemnification of such person is proper in the circumstances
because he has met the applicable standard of conduct set forth in sub-sections
(a) and (b). Such determination shall be made (1) by the Board of Directors by a
majority vote of a quorum consisting of directors not parties to such action,
suit or proceeding; or (2) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent legal
counsel, in written opinion, selected by the Board of Directors; or (3) by the
Stockholders. In the event a determination is made under this sub-section (c)
that the director, officer, employee or agent has met the applicable standard of
conduct as to some matters but not as to others, amounts to be indemnified may
be reasonably prorated.
(d) Expenses incurred by a person who is or was a director or officer
of the Corporation in appearing at, participating in or defending any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, shall be paid by the Corporation at
reasonable intervals in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay such
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amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized by this Article VI. In addition,
the Corporation shall pay or reimburse expenses incurred by any person who is or
was a director or officer of the Corporation in connection with such person's
appearance as a witness or other participant in a proceeding in which such
person or the Corporation is not a named party to such proceeding, provided that
such appearance or participation is on behalf of the Corporation or by reason of
his capacity as a director or officer, or former director or officer of the
Corporation. Such expenses incurred by other employees and agents of the
Corporation and other persons eligible for indemnification under this Article VI
may be paid upon such terms and conditions, if any, as the Board of Directors
deems appropriate.
(e) If in a suit or proceeding for indemnification required under this
Article VI of a director or officer, or former director or officer, of the
Corporation or any of its affiliates, a court of competent jurisdiction
determines that such person is entitled to indemnification under this Article
VI, the court shall award, and the Corporation shall pay, to such person the
expenses incurred in securing such judicial determination.
(f) It is the intention of the Corporation to indemnify the persons
referred to in this Article VI to the fullest extent permitted by law and with
respect to any action, suit or proceeding arising from events which occur at any
time prior to or during which this Article VI is in effect. The indemnification
and advancement of expenses provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be or become entitled under any law, the Certificate
of Incorporation, these Bylaws, agreement, the vote of Stockholders or
disinterested directors or otherwise, or under any policy or policies of
insurance purchased and maintained by the Corporation on behalf of any such
person, both as to action in his official capacity and as to action in another
capacity while holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such person.
(g) The indemnification provided by this Article VI shall be subject to
all valid and applicable laws, and, in the event this Article VI or any of the
provisions hereof or the indemnification contemplated hereby are found to be
inconsistent with or contrary to any such valid laws, the latter shall be deemed
to control and this Article VI shall be regarded as modified accordingly, and,
as so modified, to continue in full force and effect.
SECTION 6.2 SURVIVAL. The provisions of this Article VI shall continue as to any
person who has ceased to be a director, officer, employee or agent of the
Corporation and shall inure to the benefit of the estate, executors,
administrators, heirs, legatees and devisees of any person entitled to
indemnification under this Article VI.
SECTION 6.3 AMENDMENT. No amendment, modification or repeal of this Article VI
or any provision hereof shall in any manner terminate, reduce or impair the
right of any past, present or future director, officer, employee or agent of the
Corporation to be indemnified by the Corporation, nor the obligation of the
Corporation to indemnify any such director, officer,
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employee or agent, under and in accordance with the provisions of this Article
VI as in effect immediately prior to such amendment, modification or repeal with
respect to claims arising, in whole or in part, from a state of facts extant on
the date of, or relating to matters occurring prior to, such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
SECTION 6.4 DEFINITIONS. For purposes of this Article VI, (i) reference to any
person shall include the estate, executors, administrators, heirs, legatees and
devisees of such person, (ii) "employee benefit plan" and "fiduciary" shall be
deemed to include, but not be limited to, the meaning set forth, respectively,
in sections 3(3) and 21 (A) of the Employee Retirement Income Security Act of
1974, as amended, (iii) references to the judgments, fines and amounts paid or
owed in settlement or rendered or levied shall be deemed to encompass and
include excise taxes required to be paid pursuant to applicable law in respect
of any transaction involving an employee benefit plan and (iv) references to the
Corporation shall be deemed to include any predecessor corporation or entity and
any constituent corporation or entity absorbed in a merger, consolidation or
other reorganization of or by the Corporation which, if its separate existence
had continued, would have had power and authority to indemnify its directors,
officers, employees, agents and fiduciaries so that any person who was a
director, officer, employee, agent or fiduciary of such predecessor or
constituent corporation or entity, or served at the request of such predecessor
or constituent corporation or entity as a director, officer, employee, agent or
fiduciary of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, shall stand in the same position under the
provisions of this Article VI with respect to the Corporation as such person
would have with respect to such predecessor or constituent corporation or entity
if its separate existence had continued.
ARTICLE VII
CAPITAL STOCK
SECTION 7.1 CERTIFICATES OF STOCK. Certificates of stock shall be issued to each
Stockholder certifying the number of shares owned by him in the Corporation and
shall be in a form not inconsistent with the Certificate of Incorporation and as
approved by the Board of Directors. The certificates shall be signed by the
Chairman of the Board, the President or a Vice President and by the Secretary or
an Assistant Secretary, or the Treasurer or an Assistant Treasurer and may be
sealed with the seal of the Corporation or a facsimile thereof. Any or all of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
If the Corporation shall be authorized to issue more than one
(1) class of stock or more than one (1) series of any class, the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
Corporation shall issue to
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represent such class or series of stock, provided that, except as otherwise
provided by statute, in lieu of the foregoing requirements, there may be set
forth on the face or back of the certificate which the Corporation shall issue
to represent such class or series of stock, a statement that the Corporation
will furnish without charge to each Stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
SECTION 7.2 LEGENDS. The Board of Directors shall have the power and authority
to provide that certificates representing shares of stock of the Corporation
bear such legends and statements (including, without limitation, statements
relating to the powers, designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or restrictions
of the shares represented by such certificates) as the Board of Directors deems
appropriate in connection with the requirements of federal or state securities
laws or other applicable laws.
SECTION 7.3 LOST CERTIFICATES. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the owner of such certificate, or his legal
representative. When authorizing the issuance of a new certificate, the Board of
Directors may in its discretion, as a condition precedent to the issuance
thereof, require the owner, or his legal representative, to give a bond in such
form and substance with such surety as it may direct, to indemnify the
Corporation against any claim that may be made on account of the alleged loss,
theft or destruction of such certificate or the issuance of such new
certificate.
SECTION 7.4 TRANSFER REGULATIONS. The Board of Directors shall have the power
and authority to make all such rules and regulations as they may deem expedient
concerning the issue, transfer and registration or the replacement of
certificates for shares of stock of the Corporation. The Board of Directors may
(i) appoint and remove transfer agents and registrars of transfers and (ii)
require all stock certificates to bear the signature of any such transfer agent
and/or any such registrar of transfers.
SECTION 7.5 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD FOR CERTAIN
PURPOSES.
(a) In order that the Corporation may determine the Stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of capital stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than 60 days prior to the date of payment of such dividend or other
distribution or allotment of such rights or the date when any such rights in
respect of any change, conversion or exchange of stock may be exercised or the
date of such other action. In such a case, only Stockholders of record on the
date so fixed shall be entitled to receive any such dividend or other
distribution or allotment of rights or to exercise such rights or for any other
purpose, as the case may be, notwithstanding any transfer of any stock on the
books of the Corporation after any such record date fixed as aforesaid.
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(b) If no record date is fixed, the record date for determining
Stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
SECTION 7.6 DIVIDENDS. Subject to the provisions of the Certificate of
Incorporation, if any, and except as otherwise provided by law, the directors
may declare dividends upon the capital stock of the Corporation as and when they
deem it to be expedient. Such dividends may be paid in cash, in property or in
shares of the Corporation's capital stock. Before declaring any dividend the
directors may set apart out of the funds of the Corporation available for
dividends such sum or sums as the directors from time to time in their
discretion think proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends, or for such other purposes as the
directors shall determine to be conducive to the interests of the Corporation
and the directors may modify or abolish any such reserve in the manner in which
it was created. A director shall be fully protected in relying in good faith
upon the books of account of the Corporation or statements prepared by any of
its officers as to the value and amount of the assets, liabilities or net
profits of the Corporation or any other facts pertinent to the existence and
amount of surplus or other funds from which dividends might properly be
declared.
SECTION 7.7 REGISTERED STOCKHOLDERS. Except as expressly provided by law, the
Certificate of Incorporation and these Bylaws, the Corporation shall be entitled
to treat registered Stockholders as the only holders and owners in fact of the
shares standing in their respective names and the Corporation shall not be bound
to recognize any equitable or other claim to or interest in such shares on the
part of any other person, regardless of whether it shall have express or other
notice thereof.
SECTION 7.8 TRANSFER OF STOCK. Transfers of shares of the capital stock of the
Corporation shall be made only on the books of the Corporation by the registered
owners thereof, or by their legal representatives or their duly authorized
attorneys. Upon any such transfers the old certificates shall be surrendered to
the Corporation by the delivery thereof to the person in charge of the stock
transfer books and ledgers, by whom they shall be canceled and new certificates
shall thereupon be issued.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
SECTION 8.1 CORPORATE SEAL. If one be adopted, the corporate seal shall have
inscribed thereon the name of the Corporation and shall be in such form as may
be approved by the Board of Directors. Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any manner reproduced.
SECTION 8.2 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
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SECTION 8.3 CHECKS, DRAFTS, NOTES. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by such officer or officers, agent or agents of
the Corporation, and in such manner as shall from time to time be determined by
resolution (whether general or special) of the Board of Directors or may be
prescribed by any officer or officers, or any officer and agent jointly,
thereunto duly authorized by the Board of Directors.
SECTION 8.4 NOTICE AND WAIVER OF NOTICE. Whenever notice is required to be given
to any director or Stockholder under the provisions of applicable law, the
Certificate of Incorporation or of these Bylaws it shall not be construed to
only mean personal notice, rather, such notice may also be given (i) in writing,
by mail, postage prepaid, addressed to such Stockholder, director or committee
member at his address as it appears on the books or (in the case of a
stockholder) the stock transfer records of the Corporation or (ii) by any other
method permitted by law (including, but not limited to, overnight courier
service , telegram, telex or telecopier). Any notice required or permitted to be
given by mail shall be deemed to be delivered and given at the time when the
same is deposited in the United States mail as aforesaid. Any notice required or
permitted to be given by overnight courier service shall be deemed to be
delivered and given one business day after delivery to such service with all
charges prepaid and addressed as aforesaid. Any notice required or permitted to
be given by telegram, telex or telecopy shall be deemed to be delivered and
given at the time transmitted with all charges prepaid and addressed as
aforesaid. Notice to directors may also be given by telegram, cable or other
form of recorded communication, by personal delivery or by telephone. Whenever
notice is required to be given under any provision of law, the Certificate of
Incorporation or these Bylaws, a waiver thereof in writing, by telegraph, cable
or other form of recorded communication, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting at the beginning of the meeting, to
the transaction of any business on the ground that the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Stockholders, directors, or members of
a committee of directors need be specified in any written waiver of notice
unless so required by the Certificate of Incorporation or these Bylaws.
SECTION 8.5 EXAMINATION OF BOOKS AND RECORDS. The Board of Directors shall
determine from time to time whether, and if allowed, when and under what
conditions and regulations the accounts and books of the Corporation (except
such as may by statute be specifically opened to inspection) or any of them
shall be open to inspection by the Stockholders, and the Stockholders' rights in
this respect are and shall be restricted and limited accordingly.
SECTION 8.6 VOTING UPON SHARES HELD BY THE CORPORATION. Unless otherwise
provided by law or by the Board of Directors, the Chairman of the Board of
Directors, if one shall be elected, or the President, if a Chairman of the Board
of Directors shall not be elected, acting on behalf of the Corporation, shall
have full power and authority to attend and to act and to vote at any meeting of
Stockholders of any corporation in which the Corporation may hold stock and, at
any such meeting, shall possess and may exercise any and all of the rights and
powers incident to the
29
<PAGE> 30
ownership of such stock which, as the owner thereof, the Corporation might have
possessed and exercised, if present. The Board of Directors by resolution from
time to time may confer like powers upon any person or persons.
SECTION 8.7 RESERVES. There may be created by the Board of Directors, out of
funds of the Corporation legally available therefor, such reserve or reserves as
the Board of Directors from time to time, in its absolute discretion, considers
proper to provide for contingencies, to equalize dividends or to repair or
maintain any property of the Corporation, or for such other purpose as the Board
of Directors shall consider beneficial to the Corporation, and the Board of
Directors may thereafter modify or abolish any such reserve in its absolute
discretion.
SECTION 8.8 CORPORATE CONTRACTS AND INSTRUMENTS. Subject always to the specific
directions of the Board of Directors, the Chairman of the Board (if any), the
President, any Vice President, the Secretary or the Treasurer may enter into
contracts and execute instruments in the name and on behalf of the Corporation.
The Board of Directors and, subject to the specific directions of the Board of
Directors, the Chairman of the Board (if any), the Chief Executive Officer or
the President may authorize one or more officers, employees or agents of the
Corporation to enter into any contract or execute any instrument in the name of
and on behalf of the Corporation, and such authority may be general or confined
to specific instances.
SECTION 8.9 ATTESTATION. With respect to any deed, deed of trust, mortgage or
other instrument executed by the Corporation through its duly authorized officer
or officers, the attestation to such execution by the Secretary or an Assistant
Secretary of the Corporation shall not be necessary to constitute such deed,
deed of trust, mortgage or other instrument a valid and binding obligation of
the Corporation unless the resolutions, if any, of the Board of Directors
authorizing such execution expressly state that such attestation is necessary.
SECTION 8.10 INVALID PROVISIONS. If any part of these Bylaws shall be invalid or
inoperative for any reason, the remaining parts, so far as is possible and
reasonable, shall remain valid and operative.
SECTION 8.11 HEADINGS. The headings used in these Bylaws have been inserted for
administrative convenience only and shall not limit or otherwise affect any of
the provisions of these Bylaws.
SECTION 8.12 REFERENCES TO GENDER/NUMBER. Whenever in these Bylaws the singular
number is used, the same shall include the plural where appropriate. Words of
any gender used in these Bylaws shall include the other gender where
appropriate.
ARTICLE IX
AMENDMENTS
SECTION 9.1 AMENDMENT. Except as otherwise expressly provided in the Certificate
of Incorporation, the directors, by the affirmative vote of a majority of the
entire Board of Directors
30
<PAGE> 31
and without the assent or vote of the Stockholders, may at any meeting, provided
the substance of the proposed amendment shall have been stated in the notice of
the meeting, make, repeal, alter, amend or rescind any of these Bylaws. The
Stockholders shall not make, repeal, alter, amend or rescind any of the
provisions of these Bylaws except by the holders of not less than 80% of the
total voting power of all shares of stock of the Corporation entitled to vote in
the election of directors, considered for purposes of this Article IX as one
class.
31
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>3
<FILENAME>h85055ex21-1.txt
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF ADMINISTAFF, INC.
- - Administaff of Texas, Inc., a Delaware corporation and wholly owned
subsidiary of Administaff, Inc.
- - Administaff Companies, Inc., a Delaware corporation and wholly owned
subsidiary of Administaff of Texas, Inc.
- - Administaff Partnerships Holding, Inc., a Delaware corporation and
wholly owned subsidiary of Administaff of Texas, Inc.
- - Administaff Enterprises, Inc., a Delaware corporation and wholly owned
subsidiary of Administaff of Texas, Inc.
- - Administaff Services L.P., a Delaware limited partnership, with
Administaff of Texas, Inc. being a 1% general partner and Administaff
Partnerships Holding, Inc. being a 99% limited partner.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>4
<FILENAME>h85055ex23-1.txt
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
<TEXT>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8) pertaining to the Administaff, Inc. Nonqualified Stock Option Plan,
Administaff, Inc. 1997 Employee Stock Purchase Plan and the Administaff, Inc.
1997 Incentive Plan of our report dated February 9, 2001, with respect to the
consolidated financial statements of Administaff, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 2000.
ERNST & YOUNG LLP
Houston, Texas
March 16, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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