SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
(Mark One)
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Annual Report Pursuant to Section 13 or 15(d) of the Securities | |
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Exchange Act of 1934 |
For the fiscal year
ended December 31, 2004.
or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities | |
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Exchange Act of 1934 | |
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For the transition period from to |
Commission File No. 1-13998
Administaff, Inc.
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) |
Registrants Telephone Number, Including Area Code: (281) 358-8986 | ||
Securities Registered Pursuant to Section 12(b) of the Act: | ||
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) |
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 þ No o
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 registrants 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. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o
As of February 14, 2005, 25,494,437 shares of the registrants common stock, par value $0.01 per share, were outstanding. As of the end of the registrants most recently completed second quarter, the aggregate market value of the common stock held by non-affiliates (based upon the June 30, 2004 closing price of the common stock as reported by the New York Stock Exchange) was approximately $369 million.
Part III information is incorporated by reference from the proxy statement for the annual meeting of stockholders to be held May 5, 2005, which the registrant intends to file within 120 days of the end of the fiscal year.
TABLE OF CONTENTS
PART I
Unless otherwise indicated, Administaff, the Company, we, our and us are used in
this annual report to refer to the businesses of Administaff, Inc. and its consolidated
subsidiaries. This annual report 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, in an effort to help keep our stockholders and the public informed about our
operations we 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. We base the forward-looking
statements on our current expectations, estimates and projections. We caution you that these
statements are not guarantees of future performance and involve risks, uncertainties and
assumptions that we cannot predict. In addition, we have 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, Managements 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 40.
ITEM 1. BUSINESS.
General
Administaff is a professional employer organization (PEO) that provides a comprehensive
Personnel Management System
SM
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, employee performance
management and employee training and development services to small and medium-sized businesses in
strategically selected markets. We were organized as a corporation in 1986 and have provided PEO
services since inception. In 2003, we formed Administaff Retirement Services, LP, which currently
performs recordkeeping services for defined contribution plans.
Our principal executive offices are located at 19001 Crescent Springs Drive, Kingwood, Texas
77339. Our telephone number at that address is (281) 358-8986 and the Companys website address is
http://www.administaff.com. Our stock is traded on the New York Stock Exchange under the symbol
ASF. Periodic SEC filings, including our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and if applicable, amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available
through our website free of charge as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the SEC.
Our 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, which 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. We provide the Personnel Management
System by entering into a Client Service Agreement (CSA), which establishes a three-party
relationship whereby we and our client act as co-employers of the employees who work at the
clients location (worksite employees). Under the CSA, we assume 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. We charge a comprehensive service fee (comprehensive service fee or gross
billing), which is invoiced concurrently with the processing of payroll for the worksite employees
of the client. The comprehensive service fee consists of the payroll of our worksite employees and
a markup computed as a percentage of the payroll cost of the worksite employees.
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We accomplish the objectives of the Personnel Management System through a High Touch/High Tech
approach to service delivery. In advisory areas, such as recruiting, employee performance
management and employee training, we employ a high touch approach designed to ensure that our
clients receive the personal attention and expertise needed to create a customized human resources
solution. For transactional processing, we employ a high tech approach that provides secure,
convenient information exchange among Administaff, our clients and our worksite employees, creating
efficiencies for all parties. The primary component of the high tech portion of our strategy is
the Employee Service Center (ESC). The ESC is our web-based interactive PEO service delivery
platform, which is designed to provide automated, personalized PEO services to our clients and
worksite employees.
We are the nations leading provider of PEO services in terms of revenues. As of December 31,
2004, we had 38 sales offices in 21 markets, and we paid 81,426 worksite employees in the month of
December. Our long-term strategy is to operate in approximately 90 sales offices located in 40
strategically selected markets. While we are currently planning no new sales offices in 2005, we
intend to resume our national expansion strategy in 2006, subsequent to the utilization of existing
sales office capacity.
Our national expansion strategy also includes regionalized data processing for payroll and
benefits transactions and localized face-to-face human resources service. As of December 31, 2004,
we have four service centers, which when fully staffed will provide the capacity to serve
approximately 160,000 worksite employees. In addition, we have human resources and client service
personnel located in a majority of our 21 sales markets.
PEO Industry
The PEO industry began to evolve in the early 1980s 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. In a PEO arrangement, the PEO assumes broad aspects of the employer/employee
relationship. Because PEOs provide employer-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 a greater variety of employee benefits and devote more attention to human
resources management.
We believe the key factors driving demand for PEO services include:
A significant factor in the development of the PEO industry has been increasing recognition
and acceptance of PEOs and the co-employer relationship by federal and state governmental
authorities. Administaff 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 further development of the industry.
Currently, 25 states have 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 helps to resolve interpretive
issues concerning employee status for specific purposes under applicable state law. We have
actively supported such regulatory efforts and are currently licensed, registered or pursuing
registration in all 25 of these states. The cost of compliance with these regulations is not
material to our financial position or results of operations.
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PEO Services
We serve small and medium-sized businesses by providing our Personnel Management System, which
encompasses a broad range of services, including:
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:
While these regulations are complex, and in some instances overlapping, we assist our client
companies in achieving compliance with these regulations by providing services in four primary
categories:
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:
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Benefit Plans Administration
. We maintain several benefit plans including the following types
of coverage:
The group health plan includes medical, dental, vision, a worklife program and a prescription
drug program. All benefit plans are provided to applicable employees based on eligibility
provisions specific to those plans. We are responsible for the costs and premiums associated with
these plans and act as plan sponsor and administrator of the plans. We negotiate the terms and
costs of the plans, maintain the plans in accordance with applicable federal and state regulations
and serve as liaison for the delivery of such benefits to worksite employees. We believe this
variety and quality of benefit plans are generally not available to employees in our 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. As a result, we believe the
availability of these benefit plans provides our clients with a competitive advantage that small
and medium-sized businesses are typically unable to attain on their own.
Personnel Management
. We provide a wide variety of personnel management services that give
our client companies access to resources normally found only in the human resources departments of
large companies. All client companies have access to our 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 we provide
include:
Employer Liability Management
. Under the CSA, we assume many of the employment-related
responsibilities associated with the administrative functions, benefit plans administration and
personnel management services we provide. For those employment-related responsibilities that are
the responsibility of the client or we share with our clients, we can assist our 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. We also provide guidance to clients for avoiding liability claims for
discrimination, sexual harassment and civil rights violations, and participate in termination
decisions to attempt to minimize liability on those grounds. When a claim arises, we often assist
in our clients defense regardless of whether Administaff has been named directly. We employ
in-house and external counsel, specializing in several areas of employment law, who have broad
experience in disputes concerning the employer/employee relationship and provide support to our
human resources service specialists. As part of our comprehensive service, we also maintain
employment practice liability insurance coverage for our clients, monitor changing government
regulations and notify clients of the potential effect of such changes on employer liability.
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Employee Service Center
SM
.
The Employee Service Center (ESC) is our web-based
interactive PEO service delivery platform, which is designed to provide automated, personalized PEO
content and services to our clients and worksite employees. The ESC provides a wide range of
functionality, including:
The ESC also contains My MarketPlace
SM
, an eCommerce portal that brings a wide
range of product and service offerings from best-of-class providers to our clients, worksite
employees and their families. My Marketplace offerings include:
My MarketPlace also features the unique Best2Best
®
client network, where our
clients can offer their products and services to one another.
Client Service Agreement
All clients enter into Administaffs Client Service Agreement (CSA). The CSA generally
provides for an on-going relationship, subject to termination by Administaff or the client upon 30
to 60 days written notice.
The CSA establishes our comprehensive service fee, which is subject to periodic adjustments to
account for changes in the composition of the clients workforce, employee benefit election changes
and statutory changes that affect our costs. Prior to January 1, 2003, our comprehensive service
fees were typically determined at the outset of the CSA, and remained relatively static throughout
the contract year. If significant changes to the underlying pricing assumptions occurred during a
contract year, the CSA specifically allows us to initiate a manual process to review that specific
clients pricing and adjust it accordingly, based on the rates in effect at the date of the
original contract.
We modified our CSA for new and renewing clients beginning January 1, 2003. Under the
provisions of the modified CSA, clients active in January of any year are obligated to pay the
estimated payroll tax component of the comprehensive service fee in a manner which more closely
reflects the pattern of incurred payroll tax costs. This contractual change coincided with the
implementation of a new pricing and billing system. The impact of new and renewing clients active
under the modified CSA in January 2003, which represented approximately 20% of our client base,
resulted in the partial offset of our historical earnings pattern in 2003. Substantially all
clients were active
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under the modified CSA in January 2004. For those clients, we experienced an offset of our
historical earnings pattern. However, new clients enrolling subsequent to January of any year are
invoiced at a relatively constant rate throughout the remaining portion of the year, resulting in
improved profitability over the course of the year for those clients.
The CSA also establishes the division of responsibilities between Administaff and the client
as co-employers. Pursuant to the CSA, we are responsible for personnel administration and are
liable for certain employment-related government regulations. In addition, we assume liability for
payment of salaries and wages (as well as related payroll taxes) of our worksite employees and
responsibility for providing specified employee benefits to such persons. These liabilities are
not contingent on the prepayment by the client of the associated comprehensive service fee and, as
a result of our employment relationship with each of our worksite employees, we are liable for
payment of salary and wages to the worksite employees and are responsible for providing specified
employee benefits to such persons, regardless of whether the client company pays the associated
comprehensive 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 our ability to assume. A third group of
responsibilities and liabilities are shared by Administaff and the client where such joint
responsibility is appropriate. The specific division of applicable responsibilities under the CSA
is as follows:
Administaff
Client
Joint
Because we are a co-employer with the client company for some purposes, it is possible that we
could incur liability for violations of such laws, even if we are not responsible for the conduct
giving rise to such liability. The CSA addresses this issue by providing that the client will
indemnify us 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 we could be
unable to collect on a claim for indemnification and may therefore be ultimately responsible for
satisfying the liability in question. We maintain certain general insurance coverages (including
coverages for our
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\
clients) to manage our exposure for these types of claims, and as a result, the costs in
excess of insurance premiums we incur with respect to this exposure have historically been
insignificant to our 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 we
are ultimately liable, as the employer for payroll purposes, to pay employees for work previously
performed, we retain the ability to terminate immediately the CSA and associated worksite employees
or to require prepayment, letters of credit or other collateral upon deterioration in a clients
financial condition or upon non-payment by a client. These rights, the periodic nature of payroll
and the overall quality of our client base have resulted in an excellent overall collections
history.
Customers
Administaff provides a value-added, full-service human resources solution we believe is most
suitable to a specific segment of the small and medium-sized business community. We target
successful small businesses with 10 to 2,000 employees, who recognize the advantage in the
strategic use of high-performance human resource practices. We have set a long-term goal to serve
approximately 10% of the overall small and medium sized business community. We serve client
companies and worksite employees located throughout the United States. For the year ended December
31, 2004, Houston, our original market, accounted for approximately 20% of our revenues, with other
Texas markets contributing an additional 19%. By region, our revenue growth over 2003 and revenue
distribution for the year ended December 31, 2004 were as follows:
As part of our client selection strategy, we do not offer our services to businesses falling
within certain specified NAICS (North American Industry Classification System) codes, formerly
known as Standard Industrial Classification codes, essentially eliminating certain industries we
believe present a higher employer risk such as employee injury, high turnover or litigation. All
prospective clients are evaluated individually on the basis of workers compensation risk, group
medical history (where permitted by law), unemployment history, operating stability and human
resource practices. Our client base is broadly distributed throughout a wide variety of industries
including:
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This diverse client base lowers our exposure to downturns or volatility in any particular
industry. However, our performance could be affected by a downturn in one of these industries or
by general economic conditions within the small and medium-sized business community.
We focus heavily on client retention. Administaffs client retention record over the last
five years reflects that approximately 69% of our clients remain for more than one year, and that
the retention rate improves for clients who remain with us for longer periods, up to approximately
81% for clients in their fifth year with Administaff. The resulting average retention rate over
the last five years was 76%. During 2004, our retention rate increased to 75% compared to 71%
during 2003. Client attrition is attributable to a variety of factors, including: (i) client
non-renewal due to price factors; (ii) our termination of the CSA resulting from the clients
non-compliance or inability to make timely payments; (iii) client business failure, sale, merger,
or disposition; and (iv) competition from other PEOs or business services firms.
Marketing and Sales
As of December 31, 2004, we had 38 sales offices located in 21 markets. Our long-term goal is
to operate 90 sales offices in 40 strategically selected markets. Our sales offices typically
consist of six to eight sales representatives, a district sales manager and an office
administrator. To take advantage of economic efficiencies, multiple sales offices may share a
physical location. Administaffs markets and their respective year of entry are as follows:
Our existing and potential future plan was identified using a systematic market evaluation and
selection process. We continue to evaluate a broad range of factors in the selection process,
using a market selection model that weights various criteria we believe are reliable predictors of
successful penetration based on our experience. Among the factors considered are:
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Each of our expansion markets, beginning with Dallas in 1993, was selected in this manner.
Our marketing strategy is based on the application of techniques that have produced consistent
and predictable results in the past. We develop a mix of national and local advertising media and
a placement strategy tailored to each individual market. After selecting a market and developing
our marketing mix, but prior to entering the market, we engage in an organized media and public
relations campaign to prepare the market for our entry and to begin the process of generating sales
leads. We market our services through a broad range of media outlets, including television, radio,
newspapers, periodicals, direct mail and the Internet. We employ a public relations firm in most
of our markets as well as advertising consultants to coordinate and implement our marketing
campaigns. We have developed an inventory of proven, successful television, radio and newsprint
advertisements, which are utilized in this effort. We continuously seek to develop new marketing
approaches and campaigns to capitalize on changes in the competitive landscape for our PEO service
and to more successfully reach our target market.
In March 2004, we entered into a three-year agreement with the Champions Tour to become the
title sponsor of the annual Administaff Small Business Classic professional golf tournament held in
Houston, Texas. In addition, we entered into a three-year arrangement with Arnold Palmer to become
our national spokesperson. Our marketing campaigns use this event and the relationship with Mr.
Palmer as a focal point of our brand marketing efforts.
Our organic growth model generates sales leads from five primary sources: direct sales
efforts, advertising, referrals, marketing alliances and the Internet. These leads result in
initial presentations to prospective clients, and ultimately, a predictable number of client census
reports. A prospective clients census report reflects information gathered by the sales
representative about the prospects employees, including job classification, state of employment,
workers compensation claims history, group medical information (where permitted by law), salary
and desired level of benefits. This information is entered into our customized bid system, which
applies Administaffs proprietary pricing model to the census data, leading to the preparation of a
bid. Concurrent with this process, we evaluate the prospective clients workers compensation,
health insurance, employer practices and financial stability from a risk management perspective.
Upon completion of a favorable risk evaluation, the sales representative presents the bid and
attempts to enroll the prospect. Our selling process typically takes approximately 90 days.
In 1998, we entered into a strategic marketing agreement with American Express, under which
American Express was utilizing its resources and working jointly with us to generate appointments
with prospects for our services from the American Express customer base in certain markets. In
return, we paid a commission to American Express based upon the number of worksite employees paid
after being referred to Administaff pursuant to the Marketing Agreement and the total number of
worksite employees we paid. In 2004, the American Express marketing agreement was mutually
terminated. We currently have several other marketing alliances with companies that target small
businesses, such as Pitney Bowes, MassMutual and Avaya.
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Competition
Administaff provides a value-added, full-service human resources solution we believe is most
suitable to a specific segment of the small and medium-sized business community. This full-service
approach is exemplified by our 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 2001 through 2003 annual
NAPEO surveys of the PEO industry, we have successfully leveraged our full-service approach into
significantly higher returns for Administaff on a per worksite employee per month basis. During
the three-year period from 2001 through 2003, our staff support ratio averaged 50% higher than the
PEO industry average, while gross profit per worksite employee and operating income per worksite
employee exceeded industry averages by 132% and 85%, respectively.
Competition in the PEO industry revolves primarily around quality of services, scope of
services, choice and quality of benefits packages, reputation and price. We believe reputation,
national presence, regulatory expertise, financial resources, risk management and information
technology capabilities distinguish leading PEOs from the rest of the industry. We also believe we
compete 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, we consider our primary competition
to be the traditional in-house provision of human resource services. The PEO industry is highly
fragmented, and we believe Administaff is one of the largest PEOs in the United States. Our
largest national competitors include Gevity HR and PEO divisions of large business services
companies such as Automatic Data Processing, Inc. and Paychex, Inc. In addition, we compete to
some extent with fee-for-service providers such as payroll processors and human resource
consultants and face competition from large regional PEOs in certain areas of the country. As
Administaff and other large PEOs expand nationally, we expect that competition may intensify among
larger PEOs.
Vendor Relationships
Administaff provides benefits to its worksite employees under arrangements with a variety of
vendors. Although we believe that any of our benefit contracts could be replaced if necessary, we
consider two such contracts to be the most significant elements of the package of benefits provided
to employees and the most difficult to replace.
We provide health insurance coverage to our worksite employees through a national network of
carriers including UnitedHealthcare (United), Cigna Healthcare, PacifiCare, Kaiser Permanente,
Blue Cross and Blue Shield of Georgia, Blue Shield of California and Tufts, all of which provide
fully insured policies or service contracts. The policy with United provides the majority, 76%, of
our health insurance coverage and automatically renews on January 1 of each year, subject to
cancellation by either party upon 180 days notice. For a discussion of our contract with United,
please read Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and Estimates Benefits Costs on page 26.
Our workers compensation policy (the 2005 Policy) is currently provided through selected
member insurance companies of American International Group, Inc. (AIG). Under our arrangement
with AIG, we bear the economic burden for the first $1 million layer of claims per occurrence. AIG
bears the economic burden for all claims in excess of such first $1 million layer. The 2005 Policy
is a fully insured policy whereby AIG has the responsibility to pay all claims incurred under the
policy regardless of whether we satisfy our responsibilities. For additional discussion of our
policy with AIG, please read Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations Critical Accounting Policies and Estimates Workers Compensation
Costs on page 27.
Information Technology
Administaff utilizes a variety of information technology capabilities to provide its human
resource services to client companies and worksite employees and for its own administrative and
management information requirements.
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Administaff Information Management System (AIMS), is our proprietary PEO information system
and utilizes both purchased and internally developed software applications. This system manages
transactions and information unique to the PEO industry and to Administaff, including:
Central to the system is a payroll processing system that allows us to process a high volume
of payroll transactions that meet the specific needs of our client companies. Our retirement
services operations are conducted utilizing an industry leading retirement plan administration
application in a third-party hosted environment. We utilize commercially available software for
other business functions such as finance and accounting, sales force activity management, and
customer service issue tracking.
The Employee Service Center is our proprietary web-based PEO service delivery platform. With
its integration into AIMS, the ESC is designed to provide automated, personalized PEO content and
services to our clients and worksite employees. For a description of the functionality provided
through the ESC, please read PEO Services Employee Service Center on page 6.
We have entered into a software licensing agreement to acquire a new Customer Relationship
Management application and will be implementing that application during 2005. This application is
intended to enhance our ability to manage the data and interactions with our customers on a
day-to-day basis and replaces an application originally installed in 1999 for which maintenance and
support is no longer commercially available.
Administaffs primary data center is located at our corporate headquarters in Kingwood, Texas
(a suburb of Houston). Substantially all of our business applications, telecommunications
equipment and network equipment are hosted in this data center. We maintain a disaster recovery
data center in our Dallas service center. This data center is fully equipped with the hardware and
software necessary to run all of our critical business applications and has sufficient capacity to
handle all of our operations for short periods of time, if required. Periodically, we perform
testing to ensure the disaster recovery capabilities remain effective and available.
We have invested substantially in our network infrastructure to ensure appropriate
connectivity exists between our service centers in Atlanta, Dallas, Houston and Los Angeles, our
district sales offices and our corporate offices, and to provide appropriate Internet connectivity
to conduct business through the Employee Service Center. The network infrastructure is provided
through industry standard core network hardware and via high-speed frame-relay and point-to-point
network services provided by multiple vendors.
Industry Regulation
Administaffs operations are affected by numerous federal and state laws relating to tax and
employment matters. By entering into a co-employer relationship with our worksite employees, we
assume 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. Currently, 25 states 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,
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staff leasing and professional employer arrangements are generally synonymous in such contexts
and describe the arrangements we enter with our clients and worksite employees.
As an employer, we are subject to all federal statutes and regulations governing the
employer/employee relationship. Subject to the issues discussed below, we believe that our
operations are in compliance, in all material respects, with all applicable federal statutes and
regulations.
Employee Benefit Plans
We offer various employee benefits plans to eligible employees, including our worksite
employees. These plans include:
Generally, employee benefit plans are subject to provisions of both the Code and 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 individuals work. Among the factors that appear to
have been considered more important by the IRS are:
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 Administaff were found not to be an employer with respect to worksite employees for ERISA
purposes, its plans would not comply with ERISA. Further, as a result of such finding Administaff
and its plans would not enjoy, with respect to worksite employees, the preemption of state laws
provided by ERISA and could be subject to
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varying state laws and regulations, as well as to claims based upon state common laws. Even
if such a finding were made, we believe we would not be materially adversely affected because we
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 Administaff and its worksite employees may also arise under other federal
laws, including other federal income tax laws.
4
01(k)
Plan.
On April 24, 2002, the Internal Revenue Service (IRS) issued Revenue Procedure
2002-21, and on November 11, 2003, issued Revenue Procedure 2003-86, each of which provided
guidance for the operation of defined contribution plans maintained by PEOs that benefit worksite
employees. Each applies to plans in existence on May 12, 2002 and their operation in plan years
beginning after December 31, 2003.
Consistent with the guidance for all periods beginning on or after January 1, 2004, electing
client companies are treated as adopting employers for plan qualification purposes under Code
Section 413(c). On December 31, 2003, participant account balances attributable to worksite
employees associated with client companies who failed to: (i) agree to be treated as an adopting
employer; or (ii) make another valid election in a timely manner, were transferred to the newly
established Administaff Spinoff 401(k) Plan. Additionally, a small number of client companies
chose to transfer attributable participant account balances to other 401(k) plans separately
maintained by the client companies pursuant to the guidance. The Administaff Spinoff 401(k) Plan
was also terminated effective December 31, 2003, subject to IRS approval. Upon receipt of IRS
approval, which was requested on September 15, 2004, all remaining participant account balances in
such plan will be distributed to the participants pursuant to the guidance. Compliance with
Revenue Procedures 2002-21 and 2003-86 requires additional administrative compliance efforts, the
cost of which is expected to be primarily born by the plan and therefore is not expected to have a
material adverse impact on the Companys financial condition or results of operations.
Federal Employment Taxes
As a co-employer, Administaff assumes responsibility and liability for the payment of federal
and state employment taxes with respect to wages and salaries paid to our worksite employees.
There are essentially three types of federal employment tax obligations:
Under these Code sections, employers have the obligation to withhold and remit the employer portion
and, where applicable, the employee portion of these taxes.
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 we believe that we can assume the withholding obligations for worksite
employees, in the event we fail to meet these obligations, the client company may be held
ultimately liable for those obligations. While this interpretive issue has not to our knowledge
discouraged clients from enrolling with Administaff, there can be no assurance that a definitive
adverse resolution of this issue would not do so in the future. These interpretive
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uncertainties may also impact our ability to report employment taxes on our own account rather
than the accounts of our clients.
State Unemployment Taxes
We record our state unemployment (SUI) tax expense based on taxable wages and tax rates
assigned by each state. State unemployment tax rates vary by state and are determined, in part,
based on prior years compensation experience in each state. In addition, states have the ability
under law to increase unemployment tax rates to cover deficiencies in the unemployment tax fund.
Many states have experienced and are experiencing significant increases in unemployment claims due
to depressed economic conditions over the last few years. As a result, our unemployment tax rates
have increased over the last several years and are expected to continue to increase. Some states
have implemented retroactive cost increases. Prior to the receipt of final tax rate notices, we
estimate our expected SUI tax rate in those states for which tax rate notices have not yet been
received.
As a result of the 2001 corporate restructuring, we filed for a transfer of our reserve
account with the Employment Development Department of the State of California (EDD). The EDD
approved our request for transfer of the reserve account in May 2002 and also notified us of our
new contribution rates based upon the approved transfer. In December 2003, we received a Notice of
Duplicate Accounts and Notification of Assessment from the EDD. The notice stated that the EDD was
collapsing the accounts of our subsidiaries into the account of the entity with the highest
unemployment tax rate. The notice also retroactively imposed the higher unemployment insurance
rate on all of our California employees for 2003, resulting in an assessment of $5.6 million. In
January 2004, we filed a petition with an administrative law judge of the California Unemployment
Insurance Appeals Board (ALJ) to protest the notice. Pending a resolution of our protest, in the
fourth quarter of 2003 we accrued and recorded at the higher assessed rate for all of 2003.
In June 2004, we agreed to settle our dispute with the EDD for $3.3 million. Based upon
receipt of written acknowledgement of this agreement, we reduced our accrued payroll tax liability
and payroll tax expense by $2.3 million during the quarter ended June 30, 2004. The settlement was
subject to the final approval by EDDs legal department, the California Attorney Generals office
and the ALJ. In October 2004, the legal department of the EDD verbally indicated they considered
the previously agreed-upon settlement amount to be insufficient and suggested a settlement amount
of $5.2 million. We continued discussions with the State of California, but in February 2005, we
were notified that the EDD had rejected our settlement offer, and the matter will proceed with the
appeals process with the ALJ. If the outcome of the appeals process is unfavorable and we are
assessed additional interest and penalties, we may recognize an increase in our payroll tax expense
in a future period. Conversely, if the outcome of the appeals process is favorable to us, we may
recognize a decrease in our payroll tax expense in a future period. The ultimate outcome of this
matter is not expected to have a material impact on our 2005 unemployment tax rate in California.
For a discussion of the impact of rising unemployment tax rates, please read Managements
Discussion and Analysis of Financial Condition and Results of Operations Factors That May Affect
Future Results and the Market Price of Common Stock Increases in Unemployment Tax Rates on page
42.
State Regulation
While many states do not explicitly regulate PEOs, 25 states have regulations containing
licensing, registration or certification requirements for PEOs, and several others 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. We hold licenses in
Arkansas, Florida, Montana, New Hampshire, New Mexico, Oklahoma, Oregon, South Carolina, Tennessee,
Texas and Vermont. We are registered or certified in Colorado, Illinois, Kentucky, Louisiana,
Maine, Minnesota, Nevada, New Jersey, New York, North Carolina, Rhode Island, Utah and Virginia.
We are applying for registration pursuant to a recently enacted registration statute in Ohio.
Regardless of whether a state has licensing, registration or certification requirements, we must
comply with a number of other state and local regulations that could impact our operations.
Administaff was instrumental in obtaining enactment of PEO legislation in various states, including
Texas, where it faced a number of challenges under state law. We believe that our prior experience
with Texas and other state regulatory authorities will be valuable in surmounting regulatory
obstacles or challenges we may face in the future.
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Corporate Office Employees
We had approximately 1,350 corporate office and sales employees as of December 31, 2004. We
believe our relations with our corporate office and sales employees are good. None of our
corporate office and sales employees are covered by a collective bargaining agreement.
Intellectual Property
Administaff currently has registered trademarks and pending applications for registration.
Although the Administaff mark is the most material trademark to our business, our trademarks as a
whole are also of considerable importance to us. Finally, we have certain copyrights and a pending
patent application for our WebPayroll software program.
ITEM 2. PROPERTIES
.
We believe our current facilities are adequate for the purposes for which they are intended
and they provide sufficient capacity to accommodate our expansion goals. We 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 our long-term service delivery
requirements.
Corporate Headquarters
Our corporate headquarters is located in Kingwood, Texas, in a 327,000 square foot office
campus-style facility. This 28-acre company-owned office campus includes approximately nine acres
of undeveloped land for future expansion. All development and support operations are located in
the Kingwood facility, along with our record retention center and primary data processing center.
Our corporate headquarters secures a $34 million mortgage on the property. For more information
regarding the mortgage, please read Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources on page 37.
Service Centers
We currently have four service centers located in Atlanta, Dallas, Houston, and Los Angeles.
The Atlanta service center, which currently services approximately 23% of our worksite
employee base, is located in a 40,000 square foot leased facility. This facility, which is under
lease until 2014, is designed to service approximately 40,000 worksite employees at full capacity.
The Dallas service center, which currently services approximately 31% of our worksite employee
base, is located in a 40,000 square foot leased facility, which also serves as our backup data
processing 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 Houston service center, which currently services approximately 29% of our worksite
employee base, is located in a 40,000 square foot leased facility. This facility, which is under
lease until 2014, is designed to service approximately 40,000 worksite employees at full capacity.
The Los Angeles service center, which currently services approximately 17% of our worksite
employee base, is located in a 45,000 square foot leased facility. This facility, which is under
lease until 2012, is designed to service approximately 40,000 worksite employees at full capacity.
Sales Offices
As of December 31, 2004, we had sales and service personnel in 27 facilities located in 21
sales markets throughout the United States. All of the facilities are leased facilities, and some
of these facilities are shared by multiple sales offices and/or client service personnel. As of
December 31, 2004, we had 38 sales offices in these 21
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markets. To take advantage of economic efficiencies, multiple sales offices may share a physical
location. Each sales office is typically staffed by six to eight sales representatives, a district
sales manager and an office administrator. In addition, we have placed certain client service
personnel in a majority of our sales markets to provide high-quality, localized service to our
clients in those major markets. We expect to continue placing various client service personnel in
sales markets as a critical mass of clients is attained in each market.
ITEM 3. LEGAL PROCEEDINGS.
Other than as set forth below, we are not a party to any material pending legal proceedings
other than ordinary routine litigation incidental to our business that we believe would not have a
material adverse effect on our financial condition or results of operations.
Aetna Healthcare Litigation
On November 5, 2001, Administaff filed a lawsuit against Aetna Life Insurance Company
(Aetna). We alleged, among other things, that during the third quarter of 2001, Aetna breached
its contract with us. Aetna filed a counterclaim alleging, among other things, that we breached
our contractual obligations to Aetna. On October 30, 2003, a jury returned a verdict in favor of
Administaff, awarding Administaff $15.5 million in compensatory damages. On November 7, 2003, the
court entered a final judgment in favor of Administaff in the amount of $15.5 million, with post
judgment interest at a rate of 1.3% per annum. On December 10, 2003, the court granted Aetnas
motion to reduce the judgment to $10.6 million. Aetna subsequently filed its notice to appeal the
judgment and other rulings of the trial court.
During the first quarter of 2004, Administaff and Aetna executed a settlement agreement.
Under the terms of the agreement, Aetna paid us $8.25 million and both parties released all claims
and agreed to dismiss all court proceedings. The settlement was recorded in other income in our
2004 Consolidated Statements of Operations, and the matter has now been concluded.
Class Action Litigation
On June 13, 2003, a class action lawsuit was filed against Administaff in the United States
District Court for the Southern District of Texas on behalf of purchasers of our common stock
alleging violations of the federal securities laws. After that date, six similar class actions
were filed against Administaff in that court. Those lawsuits also named as defendants certain of
our officers and directors. Those lawsuits generally allege that Administaff and certain of its
officers and directors made false and misleading statements or failed to make adequate disclosures
concerning, among other things: (i) our pricing and billing systems with respect to recalibrating
pricing for clients that experienced a decline in average payroll cost per worksite employee; (ii)
the matching of price and cost for health insurance on new and renewing client contracts; and (iii)
our former method of reporting worksite employee payroll costs as revenue. The complaints sought
unspecified damages, among other remedies. On March 31, 2004, the court entered an order
consolidating all of the cases and appointing Carpenters Pension Trust for South California as
lead plaintiff and Lerach Coughlin Stoia Geller Rudman & Robbins LLP as lead counsel. The lead
plaintiff alleges that its losses are $352,000, although the alleged damages of the purported class
have not been specified.
In May 2004, the lead plaintiff filed its Consolidated Complaint, which amended and
consolidated the seven previously filed cases. In the consolidated complaint, the lead plaintiff
has essentially abandoned the allegations of fraud contained in the initial seven lawsuits.
Through the consolidated complaint, the lead plaintiff now generally asserts, among other things,
that Administaff and certain of its officers and directors fraudulently made false and misleading
statements regarding the cost of its health plan during 2001 and 2002. In June 2004, we filed a
motion to dismiss the consolidated complaint. We believe these claims are without merit and intend
to vigorously defend this litigation. As a result of the uncertainty regarding the outcome of this
matter, no provision has been made in the accompanying consolidated financial statements.
- 17 -
Reliance National Indemnity Co. Bankruptcy Liquidation and Related Litigation
In October 2001, Reliance National Indemnity Co. (Reliance), a former workers compensation
insurance carrier of Administaff, was forced into bankruptcy liquidation. State laws regarding the
handling of the open claims of liquidated insurance carriers vary. Most states have established
funds through guaranty associations to pay such remaining claims. However, the guaranty
associations in some states, including Texas, have asserted that state law returns the liability
for open claims under policies with the liquidated insurance carrier to Administaff. In Texas, we
disputed the right of the guaranty association to be reimbursed for such claims.
On August 1, 2003, we filed a lawsuit against the Texas Property and Casualty Insurance
Guaranty Association (TPCIGA) seeking a declaratory judgment that we are not required to
reimburse TPCIGA for workers compensation benefits paid or to be paid by TPCIGA under our workers
compensation policies with Reliance. On August 15, 2003, TPCIGA filed its answer, denying the
claims asserted as well as filing a counterclaim that TPCIGA is entitled to full reimbursement from
Administaff for workers compensation benefits paid or to be paid by TPCIGA under our workers
compensation policies with Reliance. We estimated that TPCIGAs claim for reimbursement was
approximately $6.8 million. During the fourth quarter of 2003, we paid $1.1 million to settle the
lawsuit, including TPCIGAs claim for reimbursement. The cost of the settlement was reported as a
component of workers compensation expense in our 2003 Consolidated Statement of Operations.
We initially secured $1.8 million in insurance coverage to cover potential claims returned to
Administaff related to our Reliance policies. We submitted the TPCIGA settlement as a claim under
the policy. We collected and recorded a $1.1 million reimbursement during the year ended December
31, 2004. As of December 31, 2004, there was no coverage remaining on the policy. At December 31,
2004, the estimated outstanding claims under our former policies with Reliance totaled
approximately $100,000. We have accrued and recorded our estimate of the outstanding claims as of
December 31, 2004. It is possible that such losses could exceed our estimates, resulting in an
increase to workers compensation expense, which would reduce net income.
State Unemployment Taxes
We record our SUI tax expense based on taxable wages and tax rates assigned by each state.
State unemployment tax rates vary by state and are determined, in part, based on prior years
compensation experience in each state.
In December 2001, as a result of a 2001 corporate reorganization, we filed for a transfer of
our reserve account with the Employment Development Department of the State of California (EDD).
The EDD approved our request for transfer of the reserve account in May 2002 and also notified us
of our new contribution rates based upon the approved transfer. In December 2003, we received a
Notice of Duplicate Accounts and Notification of Assessment from the EDD. The notice stated that
the EDD was collapsing the accounts of our subsidiaries into the account of the entity with the
highest unemployment tax rate. The notice also retroactively imposed the higher unemployment
insurance rate on all our California employees for 2003, resulting in an assessment of $5.6
million. In January 2004, we filed a petition with an administrative law judge of the California
Unemployment Insurance Appeals Board (ALJ) to protest the notice. Pending a resolution of our
protest, in the fourth quarter of 2003 we accrued and recorded at the higher assessed rate for all
of 2003.
In June 2004, we agreed to settle our dispute with the EDD for $3.3 million. Based upon
receipt of written acknowledgement of this agreement, we reduced our accrued payroll tax liability
and payroll tax expense by $2.3 million during the quarter ended June 30, 2004. The settlement was
subject to the final approval by EDDs legal department, the California Attorney Generals office
and the ALJ. In October 2004, the legal department of the EDD verbally indicated they considered
the previously agreed-upon settlement amount to be insufficient and suggested a settlement amount
of $5.2 million. We continued discussions with the State of California, but in February 2005, we
were notified that the EDD had rejected our settlement offer, and the matter will proceed with the
appeals process with the ALJ. If the outcome of the appeals process is unfavorable and we are
assessed additional interest and penalties, we may recognize an increase in our payroll tax expense
in a future period.
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Conversely, if the outcome of the appeals process is favorable, we may recognize a decrease in
our payroll tax expense in a future period. The ultimate outcome of this matter is not expected to
have a material impact on our 2005 unemployment tax rate in California.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders, through solicitation of proxies
or otherwise, during the quarter ended December 31, 2004.
ITEM S-K 401 (b). EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages (as of February 14, 2005) and positions of the
Companys executive officers:
Paul J. Sarvadi has served as Chairman of the Board and Chief Executive Officer since August
2003. Mr. Sarvadi co-founded Administaff in 1986 and served as Vice President and Treasurer of the
Company from its inception in 1986 through April 1987, as Vice President from April 1987 through
1989 and as President and Chief Executive Officer from 1989 to August 2003. Prior to founding
Administaff, Mr. Sarvadi started and operated several small businesses. 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. Mr.
Sarvadi was selected as the 2001 National Ernst & Young Entrepreneur Of The Year
®
for
service industries.
Richard G. Rawson has served as President since August 2003. He served as Executive Vice
President, Administration, Chief Financial Officer and Treasurer from February 1997 to August 2003.
He joined Administaff in 1989 as Senior Vice President, Chief Financial Officer, and Treasurer.
He previously served as a Senior Financial Officer and Controller for several companies in the
manufacturing and seismic data processing industries. Mr. Rawson has served as President, First
Vice President, Second Vice President and Treasurer of NAPEO as well as Chairman of the NAPEO
Accounting Practices Committee.
A. Steve Arizpe has served as Executive Vice President, Client Services and Chief Operating
Officer since August 2003. He joined Administaff in 1989 and has served in a variety of roles,
including Houston Sales Manager, Regional Sales Manager, Vice President of Sales and Executive Vice
President, Client Services. Prior to joining Administaff, Mr. Arizpe served in sales and sales
management roles for two large corporations.
Jay E. Mincks has served as Executive Vice President, Sales and Marketing since January 1999.
Mr. Mincks served as Vice President, Sales and Marketing from February 1997 through January 1999.
He joined Administaff in 1990 and has served in a variety of other roles, including Houston Sales
Manager and Regional Sales Manager for the Western United States. Prior to joining Administaff,
Mr. Mincks served in a variety of positions, including management positions, in the sales and sales
training fields with various large companies.
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John H. Spurgin, II has served as Senior Vice President, Legal, General Counsel and Secretary
since August 2003. He joined Administaff in January 1997 as Vice President, Legal, General Counsel
and Secretary. Prior to joining Administaff, Mr. Spurgin was a partner with the Austin office of
McGinnis, Lochridge & Kilgore, L.L.P., where he served as Administaffs outside counsel for nine
years.
Douglas S. Sharp has served as Vice President, Finance, Chief Financial Officer and Treasurer
since August 2003. He joined Administaff in January 2000 as Vice President, Finance and
Controller. 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 an Audit Manager for
Ernst & Young LLP. Mr. Sharp has served as a member of the Accounting Practices Committee of NAPEO
since January 2002.
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Table of Contents
the focus on growth and productivity of the small and medium-sized business community
in the United States, utilizing outsourcing to concentrate on core competencies;
the need to provide competitive health care and related benefits to attract and
retain employees;
the increasing costs associated with health and workers compensation insurance
coverage, workplace safety programs, employee-related complaints and litigation; and
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.
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benefits and payroll administration;
health and workers compensation insurance programs;
personnel records management;
employer liability management;
employee recruiting and selection;
employee performance management; and
training and development services.
Internal Revenue Code (the Code);
Federal Income Contribution Act (FICA);
Federal Unemployment Tax Act (FUTA);
Fair Labor Standards Act (FLSA);
Employee Retirement Income Security Act, as amended (ERISA);
Consolidated Omnibus Budget Reconciliation Act of 1987 (COBRA);
Immigration Reform and Control Act; (IRCA);
Title VII (Civil Rights Act of 1964);
Americans with Disabilities Act (ADA);
Age Discrimination in Employment Act (ADEA);
The Family and Medical Leave Act (FMLA);
Health Insurance Portability and
Accountability Act (HIPAA);
Drug-Free Workplace Act;
Occupational Safety and Health Act
(OSHA);
Worker Adjustment and Retraining
Notification Act (WARN);
Uniform Services Employment and
Reemployment Rights Act (USERRA);
State unemployment and employment
security laws; and
State workers compensation laws.
administrative functions;
benefit plans administration;
personnel management; and
employer liability management.
payroll processing;
payroll tax deposits;
quarterly payroll tax reporting;
employee file maintenance;
unemployment claims processing; and
workers compensation claims reporting.
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group health coverage;
a health care flexible spending account plan;
an educational assistance program;
an adoption assistance program;
group term life insurance;
universal life insurance coverage;
accidental death and dismemberment insurance coverage;
short-term and long-term disability insurance coverage; and
a 401(k) plan.
drafting and reviewing personnel policies and employee handbooks;
designing job descriptions;
performing prospective employee screening and background investigations;
designing performance appraisal processes and forms;
providing professional development and issues-oriented training;
employee counseling;
substance abuse awareness training;
drug testing;
outplacement services; and
compensation guidance.
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WebPayroll
SM
for the submission and approval of payroll data;
Client-specific payroll information and reports;
Employee information, including online check stubs and pay history reports;
Employee specific benefits content, including summary plan descriptions and enrollment status;
Access to 401K plan information through MyPlansOnline;
Online human resources forms;
Best practices human resource management process maps and process overviews;
An online personnel guide;
e-Learning web-based training;
Online recruiting services through the Administaff Talent Network;
Links to benefits providers and other key vendors; and
Frequently asked questions.
financial services;
technology solutions;
communications services;
travel services;
leisure and entertainment services;
retail services;
gifts and rewards;
insurance services;
real estate services;
research and consulting services; and
other business and consumer products and services.
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Payment of wages and related tax reporting and remittance (local, state and federal withholding, FICA, FUTA, state
unemployment);
Workers compensation compliance, procurement, management and reporting;
Compliance with COBRA, HIPAA and ERISA (for each employee benefit plan sponsored by Administaff only), as well as
monitoring changes in other governmental regulations governing the employer/employee relationship and updating the
client when necessary; and
Employee benefits administration of plans sponsored by Administaff.
Payment, through Administaff, of commissions, bonuses, paid leaves of absence and severance payments;
Payment and related tax reporting and remittance of non-qualified deferred compensation and equity-based compensation;
Assignment to, and ownership of, all client intellectual property rights;
Compliance with OSHA regulations, EPA regulations, FLSA, WARN, USERRA and state and local equivalents and compliance
with government contracting provisions;
Compliance with the National Labor Relations Act (NLRA), including all organizing efforts and expenses related to a
collective bargaining agreement and related benefits;
Professional licensing requirements, fidelity bonding and professional liability insurance;
Products produced and/or services provided; and
COBRA, HIPAA and ERISA compliance for client-sponsored benefit plans.
Implementation of policies and practices relating to the employee/employer relationship; and
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.
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% of
Revenue
Total
Growth
Revenues
15.8%
13.8%
(4.9)%
9.4%
4.4%
14.1%
6.6%
39.1%
18.2%
22.9%
29.1%
0.7%
Finance, insurance and real estate 16%;
Computer and information services 14%;
Management, administration and consulting services 12%;
Medical services 9%;
Manufacturing 9%;
Construction 9%;
Wholesale trade 8%;
Engineering, accounting and legal services 7%;
Retail trade 4%;
Transportation 2%; and
Other 10%.
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Initial
Market
Sales Offices
Entry Date
4
1986
1
1989
1
1989
1
1989
3
1993
3
1994
1
1995
3
1995
2
1995
1
1996
3
1997
1
1997
1
1998
4
1998
2
1999
1
2000
1
2000
1
2001
2
2001
1
2002
1
2002
market size, in terms of small and medium-sized businesses engaged in selected
industries that meet our risk profile;
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market receptivity to PEO services, including the regulatory environment and
relevant history with other PEO providers;
existing relationships within a given market, such as vendor or client relationships;
expansion cost issues, such as advertising and overhead costs;
direct cost issues that bear on our effectiveness in controlling and managing the
cost of our services, such as workers compensation and health insurance costs,
unemployment risks and various legal and other factors;
a comparison of the services we offer 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
long-term strategy issues, such as the general perception of markets and our
estimate of the long-term revenue growth potential of the market.
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worksite employee enrollment;
human resource management;
benefits and defined contribution plan administration;
payroll processing;
client invoicing and collection;
management information and reporting; and
sales bid calculations that are unique to the PEO industry and to Administaff.
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a 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)) maintained consistent with the provisions of Revenue Procedure 2002-21
and 2003-86 (each of which is explained in more detail below);
a cafeteria plan under Code Section 125;
a group health plan which includes medical, dental, vision and worklife programs;
a welfare benefits plan which includes life insurance and disability programs;
a health care flexible spending plan;
an educational assistance program; and
an adoption assistance program.
the employers degree of behavioral control (the extent of instructions, training
and the nature of the work);
the financial control or the economic aspects of the relationship; and
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).
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withholding of income tax requirements governed by Code Section 3401, et seq.;
obligations under FICA, governed by Code Section 3101, et seq.; and
obligations under FUTA, governed by Code Section 3301, et seq.
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Name
Age
Position
48
Chairman of the Board and Chief Executive Officer
56
President
47
Executive Vice President, Client Services and Chief Operating
Officer
51
Executive Vice President, Sales and Marketing
58
Senior Vice President, Legal, General Counsel and Secretary
43
Vice President, Finance, Chief Financial Officer and Treasurer
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PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF SECURITIES.
Price Range of Common Stock
Our common stock is traded on the New York Stock Exchange under the symbol ASF. As of
February 14, 2005, there were 185 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.
Dividend Policy
We have not paid cash dividends on our common stock since our formation. On February 4, 2005,
our Board of Directors declared a $0.07 quarterly dividend per share of common stock for the
holders of record on March 7, 2005. The dividend will be paid on April 1, 2005. The payment of
dividends is made at the discretion of our Board of Directors and depends upon our operating
results, financial condition, capital requirements, general business conditions and such other
factors as our Board of Directors deems relevant.
Issuer Purchases of Equity Securities
The following table provides information about our purchases of Administaff common stock during the
three months ended December 31, 2004:
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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, Managements Discussion
and Analysis of Financial Condition and Results of Operations, on page 23.
(1)
Gross billings of $5.377 billion, $4.829 billion, $4.857 billion, $4.373 billion and
$3.708 billion less worksite employee
(2)
Adjusted to reflect the two-for-one split of the common stock effected on October
16, 2000.
(3)
Gross billings of $5,749, $5,363, $5,234, $5,245 and $4,973 per worksite employee
per month less payroll cost of $4,712,
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion in conjunction with our Consolidated Financial
Statements and related Notes 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 under
Factors that May Affect Future Results and the Market Price of Common Stock on page 40 and the
uncertainties set forth from time to time in our other public reports and filings and public
statements.
Overview
We provide 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, employee performance management, and employee training and development services. Our
overall operating results are largely dependent on the number of worksite employees paid, and can
be measured in terms of revenues, payroll costs, gross profit or operating income per worksite
employee per month. As a result, we often use this unit of measurement in analyzing and discussing
our results of operations.
Our net income from continuing operations increased 28.2% to $19.2 million in 2004 over 2003.
During 2004 we received and recorded $8.25 million, or $5.2 million after taxes, related to a legal
settlement with our former health insurance carrier, Aetna. We ended 2004 with working capital of
$47.5 million, which is a $9 million decline from the end of 2003, despite share repurchases of $17
million and capital expenditures of $8 million during 2004.
One of our key objectives for 2004 was to develop a pricing strategy and manage our direct
costs in such a manner as to produce gross profit of $209 to $215 per worksite employee per month,
while returning to double-digit unit growth levels by the end of 2004. In addition, we sought to
maintain annual operating expenses between $173.5 million and $177.5 million. During 2004, we
achieved all of these key objectives.
Our 2004 average gross profit per worksite employee per month of $211 reflected the effective
execution of our pricing strategy, including moderation of increases in the healthcare allocation
component of the comprehensive service fee, while managing our direct costs to slightly better than
expected levels. Lower 2004 direct costs, particularly benefits costs and workers compensation
costs, were primarily a result of the favorable trends in claims experience. Benefits costs per
participant increased 5.7 % over 2003, lower than our initial forecast of 8-10%. Declines in both
the frequency and severity of workers compensation claims also resulted in lower workers
compensation costs.
We ended 2004 with 81,426 paid worksite employees in December, which represents a 10.5%
increase over December 2003. When we established the goal of returning to double-digit unit
growth, we specifically targeted improvements in both client retention and sales. During 2004, we
experienced a 14% decline in the number of worksite employees lost due to client terminations as
compared to 2003. In addition, we saw a 24% increase in the number of new worksite employees over
2003 related to new client sales.
Operating expenses increased by only 1.6% in 2004 to $175.6 million and are expected to
increase only slightly in 2005, as Administaff plans to leverage the existing infrastructure and
operating expense levels. Capital expenditures totaled $8.1 million in 2004 and are expected to
remain below $10 million in 2005.
- 23 -
Our long-term strategy continues to be aggregating the best small businesses in the United
States on the common platform of our unique human resource service offering, and leveraging the
buying power to provide additional valuable services to clients.
Revenues
We account for our revenues in accordance with Emerging Issues Task Force (EITF) 99-19,
Reporting Revenues Gross as a Principal Versus Net as an Agent.
Our revenues are derived from our
gross billings, which are based on:
In determining the pricing of the markup component of the gross billings, we consider our
estimates of the costs directly associated with our worksite employees, including payroll taxes,
benefits and workers compensation costs, plus an acceptable gross profit margin. We invoice the
gross billings concurrently with each periodic payroll of our worksite employees. Revenues, which
exclude the payroll cost component of gross billings, are recognized ratably over the payroll
period as worksite employees perform their service at the client worksite. We include revenues
that have been recognized but not invoiced in unbilled accounts receivable on our Consolidated
Balance Sheets.
Our revenues are primarily dependent on the number of clients enrolled, the resulting number
of worksite employees paid each period and the number of worksite employees enrolled in our benefit
plans. Because our markup is computed as a percentage of payroll cost, revenues are also affected
by the payroll cost of worksite employees, which can fluctuate based on the composition of the
worksite employee base, inflationary effects on wage levels and differences in the local economies
of our markets.
Direct Costs
The primary direct costs associated with our revenue generating activities are:
Payroll taxes consist of the employers 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 cost. The federal tax rates are defined by federal regulations. State
unemployment tax rates are subject to claim histories and vary from state to state.
Employee benefits costs are comprised primarily of health insurance costs (including dental
and pharmacy costs), but also include costs of other employee benefits such as life insurance,
vision care, disability insurance, education assistance, adoption assistance, a flexible spending
account and a worklife program.
Our gross profit per worksite employee is determined in part by our ability to accurately
estimate and control direct costs and our ability to incorporate changes in these costs into the
gross billings charged to clients, which are subject to contractual arrangements that are typically
renewed annually. Gross profit is also affected by the markup portion of gross billings, which is
calculated based on a percentage of worksite employee payroll cost, and our direct cost structure.
We use gross profit per worksite employee per month as our principal measurement of relative
performance at the gross profit level.
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Operating Expenses
Income Taxes
Administaffs provision for income taxes typically differs from the U.S. statutory rate of
35%, due primarily to state income taxes and non-deductible expenses. 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, software development
costs, prepaid assets and accruals for workers compensation expenses. Changes in these items are
reflected in our financial statements through a deferred income tax provision.
Critical Accounting Policies and Estimates
Administaffs discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial
statements requires our management to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate these estimates, including those related to health
and workers compensation insurance claims experience, state unemployment taxes, client bad debts,
income taxes, property and equipment, and contingent liabilities. We base these estimates on
historical experience and on various other assumptions that management believes to be reasonable
under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates.
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We believe the following accounting policies are critical and/or require significant judgments
and estimates used in the preparation of our consolidated financial statements:
Each reporting period, we record the costs of the United Plan, including paid claims, an
estimate of the change in incurred but not reported (IBNR) claims, taxes and administrative
fees (collectively the Plan Costs) as benefits expense, a direct cost, in the Consolidated
Statements of Operations. We base the estimated IBNR claims upon both (i) a recent level of
monthly paid claims under the plan; and (ii) an estimated lag factor based on recent paid claims
under the plan, to provide for those claims that have been incurred but not yet paid. We
believe that the use of recent claims activity is representative of incurred and paid trends
during the reporting period. The estimated lag factor used to compute IBNR claims involves a
significant level of judgment. Accordingly, an increase (or decrease) in the estimated lag
factor used to compute the IBNR claims would result in a decrease (or increase) in benefits
costs and net income would increase (or decrease) accordingly.
The following table illustrates the sensitivity of changes in the lag factor on our
estimate of total benefit costs of $378 million in 2004:
Under the terms of the contract, United establishes plan participant cash funding rates 90 days
in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter
are greater than the cash funded to United, a deficit in the plan would be incurred and we would
accrue a current liability for the excess costs on our Consolidated Balance Sheet. On the other
hand, if the Plan Costs for the reporting quarter are less than the cash funded to United, a
surplus in the plan would be incurred and we would record a current asset for the excess
premiums on our Consolidated Balance Sheet. During the year ended December 31, 2004, the cash
funded to United exceeded the Plan Costs by approximately $900,000, resulting in an accumulated
cash surplus from the inception of the plan of approximately $10.9 million, which is recorded as
prepaid insurance on our Consolidated Balance Sheet.
As a result of the 2001 corporate restructuring, we filed for a transfer of our reserve account
with the Employment Development Department of the State of California (EDD). The EDD approved
our request for transfer of the reserve account in May 2002 and also notified us of our new
contribution rates based upon the approved transfer. In December 2003, we received a Notice of
Duplicate Accounts and Notification of
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Assessment from the EDD. The notice stated that the EDD was collapsing the accounts of our
subsidiaries into the account of the entity with the highest unemployment tax rate. The notice
also retroactively imposed the higher unemployment insurance rate on all our California
employees for 2003, resulting in an assessment of $5.6 million. In January 2004, we filed a
petition with an administrative law judge of the California Unemployment Insurance Appeals Board
(ALJ) to protest the notice. Pending a resolution of our protest, in the fourth quarter of
2003 we accrued and recorded at the higher assessed rate for all of 2003.
In June 2004, we agreed to settle our dispute with the EDD for $3.3 million. Based upon receipt
of written acknowledgement of this agreement, we reduced our accrued payroll tax liability and
payroll tax expense by $2.3 million during the quarter ended June 30, 2004. The settlement was
subject to the final approval by EDDs legal department, the California Attorney Generals
office and the ALJ. In October 2004, the legal department of the EDD verbally indicated they
considered the previously agreed-upon settlement amount to be insufficient and suggested a
settlement amount of $5.2 million. We continued discussion with the State of California, but in
February 2005, we were notified that the EDD had rejected our settlement offer and that the
matter will proceed with the appeals process with the ALJ. If the outcome of the appeals
process is unfavorable and we are assessed additional interest and penalties, we may recognize
an increase in our payroll tax expense in a future period. Conversely, if the outcome of the
appeals process is favorable, we may recognize a decrease in our payroll tax expense in a future
period. The ultimate outcome of this matter is not expected to have a material impact on our
2005 unemployment tax rate in California.
On September 1, 2003, we obtained a workers compensation policy (2004 Policy), which matured
and was subsequently renewed on September 16, 2004 for the period ending September 30, 2005
(2005 Policy). The policies are with selected member insurance companies of American
International Group, Inc. (AIG). Under our arrangement with AIG, we bear the economic burden
for the first $1 million layer of claims per occurrence. AIG bears the economic burden for all
claims in excess of such first $1 million layer. The policies are fully insured whereby AIG has
the responsibility to pay all claims incurred under the policies regardless of whether we
satisfy our responsibilities.
Because we bear the economic burden of the first $1 million layer of claims per occurrence, such
claims, which are the primary component of our workers compensation costs, are recorded in the
period incurred. Workers compensation insurance includes ongoing healthcare and indemnity
coverage whereby claims are paid over numerous years following the date of injury. Accordingly,
the accrual of related incurred costs in each reporting
- 27 -
period includes estimates, which take into account the ongoing development of claims and
therefore requires a significant level of judgment. Our management estimates our workers
compensation costs by applying an aggregate loss development rate to worksite employee payroll
levels. We employ a third party actuary to estimate the loss development rate, which is
primarily based upon the nature of worksite employees job responsibilities, the location of
worksite employees, the historical frequency and severity of workers compensation claims and an
estimate of future cost trends. Workers compensation cost estimates are discounted to present
value at a rate based upon the U.S. Treasury rates that correspond with the weighted average
estimated claim payout period (the discount rate utilized in 2003 and 2004 averaged 2.0% and
2.8%, respectively) and are accreted over the estimated claim payment period and included as a
component of direct costs in our Consolidated Statements of Operations.
Our claim trends could be greater than or less than our prior estimates, in which case we
would revise our claims estimates and record an adjustment to workers compensation costs in the
period such determination is made. If we were to experience any significant changes in
actuarial assumptions, our loss development rates could increase (or decrease) which would
result in an increase (or decrease) in workers compensation costs and a resulting decrease (or
increase) in net income reported in our Consolidated Statement of Operations.
The following table illustrates the sensitivity of changes in the loss development rate on our
estimate of workers compensation costs totaling $54 million in 2004:
At the beginning of each policy period, the insurance carrier, AIG, establishes monthly funding
requirements comprised of premium costs and funds to be set aside for payment of future claims
(claim funds). The level of claim funds is primarily based upon anticipated worksite employee
payroll levels and expected workers compensation loss rates, as determined by AIG. Monies
funded into the program for incurred claims expected to be paid within one year are recorded as
restricted cash, a short-term asset, while the remainder of claim funds are included in
deposits, a long-term asset in our Consolidated Balance Sheets.
Our estimate of incurred claim costs expected to be paid within one year are recorded as accrued
workers compensation costs and included in short-term liabilities, while our estimate of
incurred claim costs expected to be paid beyond one year are included in long-term liabilities
on our Consolidated Balance Sheets.
As of December 31, 2004, we had restricted cash of $18.5 million and deposits of $52.3 million.
A $13.3 million security deposit related to the 2004 policy is included in deposits. We have
estimated and accrued $41.4 million in incurred workers compensation claim costs, which is net
of $10.5 million in paid claims, as of December 31, 2004.
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loss could be reasonably estimated, we would be required to accrue our estimated loss, which
would reduce net income in the period that such determination was made.
To mitigate this risk, we have established very tight credit policies. We generally require our
clients to pay their comprehensive service fees no later than one day prior to the applicable
payroll date. In addition, we maintain the right to terminate the Client Service Agreement and
associated worksite employees or to require prepayment, letters of credit or other collateral if
a clients financial position deteriorates or if the client does not pay the comprehensive
service fee. As a result of these efforts, losses related to customer nonpayment have
historically been low as a percentage of revenues. However, if our clients financial condition
were to deteriorate rapidly, resulting in nonpayment, our accounts receivable balances could
grow and we could be required to provide for additional allowances, which would decrease net
income in the period that such determination was made.
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New Accounting Pronouncement
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123 (revised 2004),
Share-Based Payment
, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation
. Statement 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees
, and amends FASB Statement No. 95,
Statement of Cash
Flows
. Generally, the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R)
requires
all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative.
Statement 123(R) must be adopted no later than July 1, 2005. Early adoption will be permitted
in periods in which financial statements have not yet been issued. We expect to adopt Statement
123(R) on July 1, 2005.
Statement 123(R) permits public companies to adopt its requirements using one of two methods:
We plan to adopt Statement 123(R) using the modified prospective method.
As permitted by Statement 123, we currently account for share-based payments to employees
using Opinion 25s intrinsic value method and, as such, generally recognize no compensation cost
for employee stock options. Accordingly, the adoption of Statement 123(R)s fair value method will
have a significant impact on our results of operations, although it will have no material impact on
our overall financial position. We cannot predict the impact of our adoption of Statement 123(R)
at this time because it will depend on levels and types of share-based payments granted in the
future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard
would have approximated the impact of Statement 123 as described in the disclosure of pro forma net
income and earnings per share in Note 1 to our consolidated financial statements. Statement 123(R)
also requires the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While we cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees exercise stock options), the amount of
operating cash flows recognized in prior periods for such excess tax deductions were $352,000,
$249,000, and $203,000 in 2004, 2003 and 2002, respectively.
On February 1, 2005, the compensation committee of our Board of Directors approved the
acceleration of vesting of all unvested stock options that have an exercise price greater than our
January 31, 2005 closing market price of $14.59. This accelerated vesting affected approximately
733,000 common stock options with a weighted average exercise price of $18.09. The primary purpose
of the accelerated vesting is to eliminate future compensation expense we would otherwise recognize
in our statement of operations with respect to these accelerated options subsequent to the July 1,
2005 effective date of FASB 123(R). The estimated maximum future expense that is eliminated is
approximately $5.9 million, including $1.5 million in 2005.
On February 1, 2005, the compensation committee of our Board of Directors approved a grant of
302,000 restricted common shares to certain of our employees and officers. The restricted common
shares have a fair value of $14.86 per share and vest over three years. Restricted common shares,
under fixed accounting, are generally measured at fair value on the date of grant based on the
number of shares granted and the quoted price of the
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common stock on the date of the grant. Such value is recognized as compensation expense over the
corresponding vesting period.
Transactions with Related and Other Certain Parties
We do not have any transactions with related parties that we consider material to our results
of operations and/or financial condition.
Results of Operations
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003.
The following table presents certain information related to the Companys results of
operations for the years ended December 31, 2004 and 2003.
Revenues
Our revenues, which represent gross billings net of worksite employee payroll cost, increased
8.8% over 2003 due to a 4.9% increase in revenues per worksite employee per month and a 3.9%
increase in the average number of worksite employees paid per month.
Our
unit growth rate is affected by three primary sources new client sales, client retention
and the net change in existing clients through worksite employee new hires and layoffs. The 3.9%
increase in the average number of worksite employees paid per month during 2004 was due to an
increase in worksite employees from all three sources of paid worksite employees.
- 31 -
The 4.9% increase in revenues per worksite employee per month was primarily due to pricing
increases in the markup portion of our comprehensive service fee.
The following table presents certain information related to the Companys revenues by region
for the years ended December 31, 2004 and 2003.
Gross Profit
Gross profit increased 0.3% to $197.7 million compared to 2003. Gross profit per worksite
employee decreased 3.7% to $211 per month in 2004 versus $219 in 2003. This decrease was primarily
the result of moderating price increases in the health insurance component of the comprehensive
service fee, relative to expected cost increases, over the last half of 2003 and first half of
2004. Our pricing objective is to maintain or improve the gross profit per worksite employee by
increasing revenue per worksite employee to match or exceed changes in our primary direct costs and
our operating costs.
While our revenues per worksite employee per month increased 4.9%, our direct costs, which
primarily include payroll taxes, benefits and workers compensation expenses, increased 7.3% to
$826 per worksite employee per month in 2004 versus $770 in 2003. The primary direct cost
components changed as follows:
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Operating Expenses
The following table presents certain information related to our operating expenses for the
years ended December 31, 2004 and 2003.
Operating expenses increased 1.6% to $175.6 million. Operating expenses per worksite employee
per month decreased 2.1% to $188 in 2004 versus $192 in 2003. The components of operating expenses
changed as follows:
Other Income (Expense)
Other income (expense) increased to $8.6 million in 2004 compared to $196,000 in 2003,
primarily due to the $8.25 million settlement of our dispute with Aetna during 2004. Please read
Note 12 to the consolidated financial statements for a discussion of this matter.
- 33 -
Income Tax Expense
During 2004, we incurred federal and state income tax expense of $11.5 million on pre-tax
income of $30.7 million. Our provision for income taxes differed from the US statutory rate of 35%
primarily due to state income taxes and non-deductible expenses. Our effective income tax rate was
37.5% in the 2004 period compared to 38.8% in the 2003 period. During 2004, we recorded a $213,000
cumulative tax adjustment due to a change in estimate resulting from the favorable impact of our
captive insurance subsidiary on state income tax rates. In 2003 we utilized previously
unrecognized capital loss carryforwards on a $457,000 gain from the sale of an investment.
Net Income From Continuing Operations
Net income from continuing operations for 2004 was $19.2 million, or $0.72 per diluted share,
compared to $15.0 million, or $0.55 per diluted share in 2003. On a per worksite employee per
month basis, net income from continuing operations increased 23.5% to $21 in 2004 versus $17 in
2003.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002.
The following table presents certain information related to our results of operations for the
years ended December 31, 2003 and 2002.
Revenues
Our revenues, which represent gross billings net of worksite employee payroll cost, increased
5.0% over 2002 due to an 8.2% increase in revenues per worksite employee per month partially offset
by a 3.0% decrease in the average number of worksite employees paid per month.
Our
unit growth rate is affected by three primary sources new client sales, client retention
and the net change in existing clients through worksite employee new hires and layoffs. The 3.0%
decrease in the average
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number of worksite employees paid per month during 2003 was primarily related to a decline in
worksite employees from new client sales and lower levels of client retention.
The 8.2% increase in revenues per worksite employee per month was primarily due to pricing
increases in the markup portion of our gross billings. In 2003, worksite employee payroll cost per
month increased as compared to the decrease experienced in 2002.
The following table presents certain information related to our revenues by region for the
years ended December 31, 2003 and 2002.
Gross Profit
Gross profit increased 18.9% to $197.1 million compared to 2002. Gross profit per worksite
employee increased 22.3% to $219 per month in 2003 versus $179 in 2002. This increase was
primarily the result of pricing increases exceeding increases in direct costs, particularly in the
healthcare component of the comprehensive service fee. Our pricing objectives attempt to maintain
or improve the gross profit per worksite employee by increasing revenue per worksite employee to
match or exceed changes in our primary direct costs and our operating costs.
While our revenues per worksite employee per month increased 8.2%, our direct costs, which
primarily include payroll taxes, benefits and workers compensation expenses, increased 4.6% to
$770 per worksite employee per month in 2003 versus $736 in 2002. The primary direct cost
components changed as follows:
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Operating Expenses
The following table presents certain information related to our operating expenses for the
years ended December 31, 2003 and 2002.
Operating expenses increased 4.3% to $172.8 million. Operating expenses per worksite employee
per month increased 7.3% to $192 in 2003 versus $179 in 2002, as worksite employees declined by
3.0%. The components of operating expenses changed as follows:
Other Income (Expense)
Other income (expense) improved from net expense of $1.7 million in 2002 to net other income
of $196,000 in 2003, primarily because we recorded a write-off of our investment in eProsper of
$3.1 million in 2002.
- 36 -
Income Tax Expense
During 2003, we incurred federal and state income tax expense from continuing operations of
$9.5 million on pre-tax income of $24.5 million. Our effective income tax provision differed from
the US statutory rate of 35% primarily due to state income taxes and non-deductible expenses.
Net Income (Loss) From Continuing Operations
Net income from continuing operations for 2003 was $15.0 million, or $0.55 per diluted share,
compared to a net loss of $2.9 million, or $0.11 per diluted share in 2002. On a per worksite
employee per month basis, net income increased 666.7% to $17 in 2003 versus a net loss of $3 in
2002.
Discontinued Operations
During 2003 we incurred a net loss from our discontinued operations, Administaff Financial
Management Services, of $2.1 million versus $1.2 million in 2002. During 2003, we ceased
operations of FMS and incurred after-tax impairment charges of $800,000 related to the write-off of
the assets of FMS.
Non-GAAP Financial Measures
Non-bonus payroll cost is a non-GAAP financial measure that excludes the impact of bonus
payrolls paid to our worksite employees. Bonus payroll cost varies from period to period, but has
no direct impact to our ultimate workers compensation costs under the current program. As a
result, our management refers to non-bonus payroll cost in analyzing, reporting and forecasting our
workers compensation costs. These non-GAAP financial measures are not prepared in accordance with
generally accepted accounting principles (GAAP) and may be different from non-GAAP financial
measures used by other companies. Non-GAAP financial measures should not be considered as a
substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.
We include these non-GAAP financial measures because we believe they are useful to investors in
allowing for greater transparency related to the costs incurred under our current workers
compensation program. Please review the reconciliation of the non-GAAP financial measures used to
their most directly comparable GAAP financial measures as provided in the table below.
Liquidity and Capital Resources
We periodically evaluate our liquidity requirements, capital needs and availability of
resources in view of, among other things, our expansion plans, debt service requirements and other
operating cash needs. To meet short- and long-term liquidity requirements, including payment of
direct and operating expenses and repaying debt, we rely primarily on cash from operations.
However, we have in the past sought, and may in the future seek, to raise additional capital or
take other steps to increase or manage our liquidity and capital resources. We had $109.7 million
in cash and cash equivalents and marketable securities at December 31, 2004, of which approximately
$57.0 million was payable in early January 2005 for withheld federal and state income taxes,
employment taxes and other
- 37 -
payroll deductions. At December 31, 2004, we had working capital of
$47.5 million compared to $56.0 million at December 31, 2003. We
currently believe that our cash on hand, marketable securities and cash flows from operations
will be adequate to meet our liquidity requirements for the remainder of 2005. We will rely on
these same sources, as well as public and private debt or equity financing, to meet our longer-term
liquidity and capital needs.
Cash Flows From Operating Activities
Our cash flows from operating activities in 2004 decreased $45.7 million from 2003 to $10.5
million. Our primary source of cash from operations is the comprehensive service fee and payroll
funding we collect from our clients. The level of cash and cash equivalents, and thus our reported
cash flows from operating activities are significantly impacted by various external and internal
factors, which are reflected in part by the changes in our balance sheet accounts. These include
the following:
- 38 -
Cash Flows From Investing Activities
Capital expenditures totaled $8.1 million in 2004 and consisted primarily of computer hardware
and software. Capital expenditures for computer hardware and software included costs associated
with purchasing software licenses and computer hardware to enhance the performance and stability of
our technology infrastructure.
We expect a consistent level of capital expenditures in 2005 and therefore have budgeted
approximately $10 million.
Cash Flows Used In Financing Activities
Cash flows used in financing activities were $21.4 million during 2004. These cash flows were
primarily related to $17.2 million of treasury stock purchases and the repayment of $5.8 million of
our term notes and capital lease obligations.
On December 20, 2002, we entered into a $36 million mortgage agreement that matures in January
2008. The proceeds were used to repay our outstanding balance under our revolving credit
agreement, which expired in December 2002. The mortgage bears interest at a variable rate equal to
the greater of (a) 4.5%; or (b) the 30-day LIBOR rate (2.3% at December 31, 2004) plus 2.9%. The
mortgage is secured by real estate and related fixtures located at Administaffs headquarters in
Kingwood, Texas. Monthly principal and interest payments are approximately $230,000, with the
remaining balance due upon maturity. The mortgage provides for prepayment penalties, as a
percentage of the outstanding principal balance, ranging from 5% down to 1% during the first four
years of the term. There is no prepayment penalty during the final year of the mortgage.
In October 2002, we entered into a $3.8 million capital lease arrangement to finance the
purchase of office furniture. The assets under capital lease were capitalized using an effective
interest rate of 7.5%. The current monthly lease payments are $58,000 per month over the
seven-year lease term.
In October 2002, we obtained a $4.5 million term loan bearing interest at the one-month
commercial paper rate plus 3.1% (4.53% at September 30, 2004). The loan was secured by our
aircraft and repaid in November 2004.
Our borrowings in 2002 primarily related to the financing of the construction and furnishing
of our corporate headquarters. We do not anticipate any significant borrowings over the next
several years.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments as of
December 31, 2004 and the effect they are expected to have on our liquidity and capital resources
(in thousands):
- 39 -
Other Matters
On February 4, 2005, the board of directors declared a quarterly dividend of $0.07 per share
of common stock to holders of record on March 7, 2005. The dividend will be paid on April 1, 2005.
On February 1, 2005, the compensation committee of the board of directors approved accelerated
vesting of all unvested stock options that have an exercise price greater than our January 31, 2005
closing market price of $14.59. This accelerated vesting affected approximately 733,000 common
stock options with a weighted average exercise price of $18.09. The primary purpose of the
accelerated vesting is to eliminate future compensation expense we would otherwise recognize in our
income statement with respect to these accelerated options subsequent to the July 1, 2005 effective
date of FASB Statement No. 123(R) (FASB 123(R)). The estimated maximum future expense that is
eliminated is approximately $5.9 million, including $1.5 million in 2005.
On February 1, 2005, the compensation committee of the board of directors approved a grant of
302,000 restricted common shares to certain employees and officers pursuant to our 2001 Incentive
Plan. The restricted common shares have a fair value of $14.86 per share and vest over three
years. Restricted common shares, under fixed accounting, are generally measured at fair value on
the date of grant based on the number of shares granted and the quoted price of the common stock.
Such value is recognized as compensation expense over the corresponding vesting period.
Seasonality, Inflation and Quarterly Fluctuations
Historically, our earnings pattern has included losses in the first quarter followed by
improved profitability in subsequent quarters throughout the year. This pattern was due to the
effects of employment-related taxes, which are based on each employees cumulative earnings up to
specified wage levels, causing employment-related taxes to be highest in the first quarter and then
decline over the course of the year. Because our revenues related to each employee were generally
earned and collected at a relatively constant rate throughout each year, payment of such tax
obligations had a substantial impact on our financial condition and results of operations during
the first six months of each year. Other factors that affect direct costs could have mitigated or
enhanced this trend.
We modified our Client Service Agreement (CSA) for new and renewing clients beginning
January 1, 2003. Under the provisions of the modified CSA, clients active in January of any year
are obligated to pay the estimated payroll tax component of the comprehensive service fee in a
manner which more closely reflects the pattern of incurred payroll tax costs. This contractual
change coincided with the implementation of a new pricing and billing system. The impact of new
and renewing clients active under the modified CSA in January 2003, which represented approximately
20% of our client base, has resulted in the partial offset of our historical earnings pattern in
2003. Substantially all clients were active under the modified CSA in January 2004. For those
clients, we experienced an offset of our historical earnings pattern. However, based on
contractual arrangements, new clients enrolling subsequent to January of any year are invoiced at a
relatively constant rate throughout the remaining portion of the year, resulting in improved
profitability over the course of the year for those clients.
We believe the effects of inflation have not had a significant impact on our results of
operations or financial condition.
Factors That May Affect Future Results and the Market Price of Common Stock
Liability for Worksite Employee Payroll and Benefits Costs
Under the CSA, we become a co-employer of worksite employees and assume the obligations to pay
the salaries, wages and related benefits costs and payroll taxes of such worksite employees. We
assume such obligations as a principal, not as an agent of the client company. Our obligations
include responsibility for:
- 40 -
If a client company does not pay us, or if the costs of benefits we provide to worksite employees
exceed the fees a client company pays us, our ultimate liability for worksite employee payroll and
benefits costs could have a material adverse effect on our financial condition or results of
operations.
Increases in Health Insurance Premiums and Workers Compensation Costs
Maintaining health and workers compensation insurance plans that cover worksite employees is
a significant part of our business. Our primary health insurance contract expires on December 31,
2005, and automatically renews each year, subject to cancellation by either party upon 180 days
notice. The current workers compensation contract expires on September 30, 2005. In the event we
are unable to secure replacement contracts on competitive terms, significant disruption to our
business could occur.
Health insurance premiums and workers compensation costs are in part determined by our claims
experience and comprise a significant portion of our direct costs. We employ extensive risk
management procedures in an attempt to control our claims incidence and structure our benefits
contracts to provide as much cost stability as possible. However, if we experience a sudden and
unexpected large increase in claim activity, our health insurance costs or workers compensation
insurance costs could increase. Contractual arrangements with our clients limit our ability to
incorporate such increases into service fees, 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 our financial condition or results of operations.
We experienced a 5.7% increase in benefits costs per covered employee during 2004 and expect
an 8% to 10% increase in 2005. We experienced a 13.6% decline in workers compensation costs as a
percentage of non-bonus payroll. Please read Results of Operations
Gross Profit Workers
Compensation Costs on page 32. However, we expect a 2% to 5% increase in 2005. While our results
of operations may be impacted to some degree in future periods by the healthcare and workers
compensation cost increases or decreases and our contractual pricing constraints, we do not expect
this situation to have a material adverse effect on our financial position.
We provide health insurance coverage to our worksite employees through a national network of
carriers including UnitedHealthcare (United), Cigna Healthcare, PacifiCare, Kaiser Permanente,
Blue Cross and Blue Shield of Georgia, Blue Shield of California and Tufts, all of which provide
fully insured policies. The policy with United provides the majority of our health insurance
coverage. Pursuant to the terms of our contract with United, within 195 days after contract
termination, a final accounting of the plan will be performed and we will receive a refund for any
accumulated surplus or will be liable for any accumulated deficit in the plan, up to the amount of
our then-outstanding security deposit with United, which is $17.5 million as of December 31, 2004.
As a result of these contractual terms, we account for this plan using a partially self-funded
insurance accounting model.
Each reporting period, we record the costs of the United Plan, including paid claims, an
estimate of the change in incurred but not reported (IBNR) claims, taxes and administrative fees
(collectively the Plan Costs) as benefits expense, a direct cost, in the Consolidated Statements
of Operations. The estimated IBNR claims are based upon both (i) a recent level of monthly paid
claims under the plan; and (ii) an estimated lag factor based on recent paid claims under the plan,
to provide for those claims that have been incurred but not yet paid. We believe that the use of
recent claims activity is representative of incurred and paid trends during the reporting period.
Our estimated lag factor used to compute IBNR claims involves a significant level of judgment.
Accordingly, an increase (or decrease) in the estimated lag factor used to compute the IBNR claims
would result in a decrease (or increase) in benefits costs and net income would increase (or
decrease) accordingly.
In 2003, facing continued capital constraints and a series of downgrades from various rating
agencies, our former workers compensation insurance carrier for the two-year period ending
September 2003, Lumbermens
- 41 -
Mutual
Casualty Company, a unit of Kemper Insurance Companies (Kemper), made the decision to
substantially cease underwriting operations and voluntarily entered into run-off. A run-off
is the professional management of an insurance companys discontinued, distressed or nonrenewed
lines of insurance and associated liabilities outside of a judicial proceeding. In the event the
run-off process is not successful and Kemper is forced into bankruptcy or a similar proceeding,
most states have established guaranty funds to pay remaining claims. However, the guarantee
associations in some states, including Texas, have asserted that state law returns the liability
for open claims under such policies to the insured, as we experienced when another former insurance
carrier, Reliance National Indemnity Co., declared bankruptcy in 2001. In that case, the Texas
state guaranty association asserted that it was entitled to full reimbursement from us for workers
compensation benefits paid by the association. Although we settled that dispute within the limits
of insurance coverage we had secured to cover potential claims returned to us related to the
Reliance policies, if one or more states were to assert that liability for open claims with Kemper
should be returned to us, we may be required to make a payment to the state covering estimated
claims attributable to us. Any such payment would reduce net income, which may have a material
adverse effect on net income in the reported period.
On September 1, 2003, we obtained a workers compensation policy (2004 Policy), which
matured and was subsequently renewed commencing on September 16, 2004 until September 30, 2005
(2005 Policy) with selected member insurance companies of American International Group, Inc.
(AIG). Under our arrangement with AIG, we bear the economic burden for the first $1 million
layer of claims per occurrence. AIG bears the economic burden for all claims in excess of such
first $1 million layer. The 2004 Policy is a fully insured policy whereby AIG has the
responsibility to pay all claims incurred under the policy regardless of whether we satisfy our
responsibilities.
Because we bear the economic burden of the first $1 million layer of claims per occurrence,
such claims, which are the primary component of our workers compensation costs, are recorded in
the period incurred. Workers compensation insurance includes ongoing healthcare and indemnity
coverage whereby claims are paid over numerous years following the date of injury. Accordingly,
the accrual of related incurred costs in each reporting period includes estimates, which take into
account the ongoing development of claims and therefore requires a significant level of judgment.
Our management estimates our workers compensation costs by applying an aggregate loss development
rate to worksite employee payroll levels. We employ a third party actuary to estimate our loss
development rate, which is primarily based upon the nature of worksite employees job
responsibilities, the location of worksite employees, the historical frequency and severity of
workers compensation claims and an estimate of future cost trends. Workers compensation cost
estimates are discounted to present value at a rate based upon the U.S. Treasury rates that
correspond with the weighted average estimated claim payout period (the discount rate utilized in
2003 and 2004 averaged 2.0% and 2.8%, respectively) and are accreted over the estimated claim
payment period and included as a component of direct costs in our Consolidated Statements of
Operations.
Our claim trends could be greater than or less than our prior estimates, in which case we
would revise our claims estimates and record an adjustment to workers compensation costs in the
period we determine that the claims trends are higher or lower than our estimates. If we were to
experience any significant changes in actuarial assumptions, our loss development rates could
increase (or decrease) which would result in an increase (or decrease) in workers compensation
costs and a resulting decrease (or increase) in net income reported in our Consolidated Statement
of Operations.
In conjunction with entering into the 2004 Policy, we formed a wholly owned captive insurance
subsidiary (the Captive). We recognize the Captive as an insurance company for federal income
tax purposes, with respect to our consolidated federal income tax return. In the event the
Internal Revenue Service (IRS) were to determine that the Captive does not qualify as an
insurance company, we could be required to make accelerated income tax payments to the IRS that we
otherwise would have deferred until future periods.
Increases in Unemployment Tax Rates
We record our state unemployment tax expense based on taxable wages and tax rates assigned by
each state. State unemployment tax rates vary by state and are determined, in part, based on prior
years compensation experience in each state. Should our claim experience increase, our
unemployment tax rates could increase. In addition, states have the ability under law to increase
unemployment tax rates to cover deficiencies in the unemployment tax fund. Many states have
experienced and are experiencing significant increases in unemployment
- 42 -
claims due to depressed
economic conditions over the last few years. As a result, our unemployment tax rates have
increased over the last several years
and are expected to continue to increase. Some states have implemented retroactive cost increases.
Contractual arrangements with our clients limit our ability to incorporate such increases into
service fees, 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 our financial condition
or results of operations.
As a result of the 2001 corporate restructuring, we filed for a transfer of our reserve
account with the EDD. The EDD approved our request for transfer of our reserve account in May 2002
and also notified us of our new contribution rates based upon the approved transfer. In December
2003, we received a Notice of Duplicate Accounts and Notification of Assessment from the EDD. The
notice stated that the EDD was collapsing the accounts of our subsidiaries into the account of the
entity with the highest unemployment tax rate. The notice also retroactively imposed the higher
unemployment insurance rate on all our California employees for 2003, resulting in an assessment of
$5.6 million. In January 2004, we filed a petition with an administrative law judge of the
California Unemployment Insurance Appeals Board (ALJ) to protest the notice. Pending a
resolution of our protest, in the fourth quarter of 2003 we accrued and recorded at the higher
assessed rate for all of 2003.
In June 2004, we agreed to settle our dispute with the EDD for $3.3 million. Based upon
receipt of written acknowledgement of this agreement, we reduced our accrued payroll tax liability
and payroll tax expense by $2.3 million during the quarter ended June 30, 2004. The settlement was
subject to the final approval by EDDs legal department, the California Attorney Generals office
and the ALJ. In October 2004, the legal department of the EDD verbally indicated they considered
the previously agreed-upon settlement amount to be insufficient and suggested a settlement amount
of $5.2 million. We continued discussion with the State of California, but in February 2005, we
were notified that the EDD had rejected our settlement offer and the matter will proceed with the
appeals process with the ALJ. If the outcome of the appeals process is unfavorable and we are
assessed additional interest and penalties, we may recognize an increase in our payroll tax expense
in a future period. Conversely, if the outcome of the appeals process is favorable to us, we may
recognize a decrease in our payroll tax expense in a future period. The ultimate outcome of this
matter is not expected to have a material impact on the Companys 2005 unemployment tax rate in
California.
Need to Renew or Replace Client Companies
Our standard CSA can be cancelled by us or the client with 30 to 60 days notice. Accordingly,
the short-term nature of the CSA makes us vulnerable to potential cancellations by existing
clients, which could materially and adversely affect our financial condition and results of
operations. In addition, our results of operations are dependent in part upon our ability to
retain or replace our client companies upon the termination or cancellation of the CSA. Our client
attrition rate was approximately 25% in 2004. There can be no assurance that the number of
contract cancellations will continue at these levels or increase in the future.
Competition and New Market Entrants
The PEO industry is highly fragmented. Many PEOs have limited operations and fewer than 1,000
worksite employees, but there are several industry participants that are comparable to our size.
We also encounter competition from fee for service companies such as payroll processing firms,
insurance companies and human resource consultants. Several of our competitors are PEO divisions
of large business services companies, such as Automatic Data Processing, Inc. and Paychex, Inc.
Such companies have substantially greater resources than Administaff. Accordingly, the PEO
divisions of such companies may be able to provide their PEO services at more competitive prices
than we may be able to offer. Moreover, we expect that as the PEO industry grows and its
regulatory framework becomes better established, well-organized competition with greater resources
than us may enter the PEO market, possibly including large fee for service companies currently
providing a more limited range of services.
- 43 -
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. Our CSA establishes the contractual division of
responsibilities between Administaff and our clients for various personnel management matters,
including compliance with and liability under various governmental regulations. However, because
we act as a co-employer, we may be subject to liability for violations of these or other laws
despite these contractual provisions, even if we do not participate in such violations. Although
the CSA provides that the client is to indemnify us for any liability attributable to the clients
conduct, we 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
our agents, which may subject us to liability for the actions of such worksite employees.
We maintain certain general insurance coverages (including coverages for our clients) to
manage our exposure for these types of claims, and as a result, the costs in excess of insurance
premiums we incur with respect to this exposure have historically been insignificant to our
operating results.
Federal, State and Local Regulation
As a major employer, our operations are affected by numerous federal, state and local laws and
regulations relating to labor, tax and employment matters. By entering into a co-employer
relationship with employees assigned to work at client company locations, we assume certain
obligations and responsibilities of an employer under these laws. However, many of these laws
(such as 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 we operate
have not addressed the PEO relationship for purposes of compliance with applicable state laws
governing the employer/employee relationship. Any adverse application of these other federal or
state laws to the PEO relationship with our worksite employees could have a material adverse effect
on our results of operations or financial condition.
While many states do not explicitly regulate PEOs, 25 states 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 we generally support
licensing regulation because it serves to validate the PEO relationship, we may not be able to
satisfy licensing requirements or other applicable regulations for all states. In addition, there
can be no assurance that we will be able to renew our licenses in all states.
4
01(k)
Recordkeeping Services
On October 1, 2003, we began performing recordkeeping services for the Administaff 401(k) Plan
(Plan), and on December 31, 2003, began performing such services for the Administaff Spinoff
401(k) Plan and Administaff Corporate 401(k) Plan. In addition, we began to offer such services to
certain other defined contribution plans, which are sponsored and maintained by PEO and non-PEO
clients (Other Plans). Historically, we have contracted with a third party administrator to
provide a majority of the recordkeeping functions associated with the Plan and have not offered any
significant services with respect to Other Plans. Failure to manage this new service effectively
could have a material adverse effect on our financial condition and results of operations.
- 44 -
Geographic Market Concentration
While we have sales offices in 21 markets, our Houston and Texas (including Houston) markets
accounted for approximately 20% and 39%, respectively, of our revenues for the year ended December
31, 2004. Accordingly, while we have a goal of expanding in our current and future markets outside
of Texas, for the foreseeable future, a significant portion of our revenues may be subject to
economic factors specific to Texas (including Houston).
Potential Client Liability for Employment Taxes
Under the CSA, we assume sole responsibility and liability for paying federal employment taxes
imposed under the Code with respect to wages and salaries we pay our worksite employees. There are
essentially three types of federal employment tax obligations:
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 we have 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 us. Accordingly, in the event that we fail to
meet our tax withholding and payment obligations, the client company may be held jointly and
severally for those obligations. While this interpretive issue has not, to our knowledge,
discouraged clients from enrolling with Administaff, a definitive adverse resolution of this issue
may discourage clients from enrolling in the future.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
We are primarily exposed to market risks from fluctuations in interest rates and the effects
of those fluctuations on the market values of our cash equivalent short-term investments, our
available-for-sale marketable securities, and our long-term debt. 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.
We attempt to limit our exposure to interest rate risk primarily through diversification and
low investment turnover. Our marketable securities are currently managed by two professional
investment management companies, each of which is guided by our investment policy. Our investment
policy is designed to maximize after-tax interest income while preserving our principal investment.
As a result, our marketable securities consist primarily of short and intermediate-term debt
securities.
As of December 31, 2004, our available-for-sale marketable securities included an investment
in a mutual fund that holds corporate debt securities with maturities up to 18 months. The
amortized cost basis, fair market value and 30-day yield of this investment was $11.4 million,
$11.2 million and 2.39%, respectively, at December 31, 2004. The following table presents
information about our available-for-sale marketable securities, excluding the mutual fund
investment, as of December 31, 2004 (dollars in thousands):
- 45 -
Our mortgage loan includes variable interest rates, and as a result, our total cost of
borrowing under the agreement is also subject to interest rate risk. As of December 31, 2004 we
had borrowed $33.7 million under the agreement with an interest rate of 5.2%. At December 31,
2004, the fair market value of our variable rate borrowing approximated the carrying value. The
following table summarizes principal maturities of our variable interest rate mortgage as of
December 31, 2004 (dollars in thousands):
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.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under
the supervision and with the participation of management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were effective as
of December 31, 2004.
- 46 -
Design and Evaluation of Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of
managements assessment of the design and effectiveness of our internal controls as part of this
Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Ernst & Young, LLP, our
independent registered public accounting firm, also attested to, and reported on, managements
assessment of the effectiveness of internal control over financial reporting. Managements report
and the independent registered public accounting firms attestation report are included in our 2004
Consolidated Financial Statements on pages F-3 and F-4 under the captions entitled Managements
Report on Internal Control Over Financial Reporting and Report of Independent Registered Public
Accounting Firm on Internal Control Over Financial Reporting and are incorporated herein by
reference.
There has been no change in our internal controls over financial reporting that occurred
during the three months ended December 31, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
- 47 -
2004
High
Low
$
18.45
$
14.06
18.18
14.37
16.59
9.38
15.50
10.31
$
7.50
$
4.42
10.57
5.10
13.31
8.53
18.10
8.80
Total Number of
Shares Purchased
Maximum Number of
Total Number
as Part of Publicly
Shares that May Yet Be
of Shares
Average Price Paid
Announced
Purchased Under the
Period
Purchased
(1)
per Share
Program
(2)
Program
(2)
$
1,247,477
1,247,477
1,247,477
$
1,247,477
Table of Contents
(1)
Our board of directors has approved the repurchase of up to an aggregate amount of
8,000,000 shares of Administaff common stock, of which 6,752,523 shares had been
repurchased as of December 31, 2004. During the three months ended December 31, 2004, we
did not purchase shares of our common stock.
(2)
Unless terminated earlier by resolution of the board of directors, the repurchase
program will expire when we have repurchased all shares authorized for repurchase under the
repurchase program.
Year ended December 31,
2004
2003
2002
2001
2000
(in thousands, except per share and statistical data)
$
969,527
$
890,859
$
848,416
$
720,219
$
598,291
197,694
197,105
165,790
165,015
138,534
22,131
24,274
67
18,539
22,234
19,210
14,985
(2,921
)
10,357
16,900
(2,121
)
(1,160
)
19,210
12,864
(4,081
)
10,357
16,900
$
0.72
$
0.55
$
(0.11
)
$
0.36
$
0.58
$
47,500
$
56,032
$
41,238
$
36,609
$
51,179
354,638
348,071
315,164
274,003
242,817
36,539
42,362
44,169
13,500
126,529
122,634
116,349
122,935
105,510
77,936
75,036
77,334
69,480
62,140
$
1,037
$
989
$
914
$
864
$
802
$
211
$
219
$
179
$
198
$
186
$
24
$
27
$
$
22
$
30
payroll cost
of $4.407 billion, $3.938 billion, $4.009
billion, $3.653 billion and $3.110 billion, respectively.
$4,373, $4,320, $4,381 and $4,171 per worksite employee
per month, respectively.
Table of Contents
Table of Contents
the payroll cost of our worksite employees; and
a markup computed as a percentage of the payroll cost.
employment-related taxes (payroll taxes);
costs of employee benefit plans; and
workers compensation claim costs.
Table of Contents
Salaries, wages and payroll taxes
Salaries, wages and payroll taxes are primarily a function of the number of
corporate employees and their associated average pay and any additional incentive compensation. Our corporate
employees primarily include client services, sales and marketing, benefits, legal, finance, information technology and
administrative support personnel.
General and administrative expenses
Our general and administrative expenses primarily include:
rent expenses related to our service centers and sales offices;
outside professional service fees related to legal, consulting and accounting services;
administrative costs, such as postage, printing and supplies;
employee travel expenses; and
repairs and maintenance costs associated with our facilities and technology infrastructure.
Commissions
Commission expense primarily consists of amounts paid to sales personnel and to American Express.
Commissions for sales personnel are based on a percentage of revenue generated by such personnel and commissions paid
to American Express were paid in accordance with our former Marketing Agreement. The Marketing Agreement was mutually
terminated in December 2004.
Advertising
- Advertising expense primarily consists of media advertising and other business promotions in our current
and anticipated sales markets, including the Administaff Small Business Classic sponsorship and endorsement fees paid
to Arnold Palmer.
Depreciation and amortization
Depreciation and amortization expense is primarily a function of our capital
investments in corporate facilities, service centers, sales offices and technology infrastructure.
Table of Contents
Benefits costs
- We provide health insurance coverage to our worksite employees through a
national network of carriers including UnitedHealthcare (United), Cigna Healthcare,
PacifiCare, Kaiser Permanente, Blue Cross and Blue Shield of Georgia, Blue Shield of
California and Tufts, all of which provide fully insured policies. The policy with United
provides the majority of our health insurance coverage. Pursuant to the terms of our contract
with United, within 195 days after contract termination, a final accounting of the plan will
be performed and we will receive a refund for any accumulated surplus or will be liable for
any accumulated deficit in the plan, up to the amount of our then-outstanding security deposit
with United, which is $17.5 million as of December 31, 2004. As a result of these contractual
terms, we account for this plan using a partially self-funded insurance accounting model.
Change
in
Log Factor
Change
in
Benefits Costs
(in thousands)
Change in
Net Income
(in thousands)
(5
)%
$(1,421)
$ 888
(2.5
)%
(711)
444
2.5
%
711
(444)
5
%
1,421
(888)
State unemployment taxes
- We record our state unemployment (SUI) tax expense based on
taxable wages and tax rates assigned by each state. State unemployment tax rates vary by
state and are determined, in part, based on prior years compensation experience in each
state. We must estimate our expected SUI tax rate in those states for which tax rate notices
have not yet been received. In determining these estimates, we take into account the expected
payroll levels and unemployment claim history for such states.
Table of Contents
Workers compensation costs
- Our workers compensation insurance policy for the two-year
period ending September 30, 2003 (2003 Policy) was a guaranteed-cost policy under which
premiums were paid for full-insurance coverage of all claims incurred during the policy
period. This policy also contained a dividend feature for each policy year, under which we
were entitled to a refund of a portion of our premiums if, four years after the end of the
policy year, claims paid by the insurance carrier for the policy year were less than an amount
set forth in the policy. In accordance with EITF Topic D-35,
FASB Staff Views on EITF No.
93-6, Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming
Enterprises,
we estimated the amount of refund, if any, that had been earned under the
dividend feature, based on the actual claims incurred to date and a factor used to develop
those claims to an estimate of the ultimate cost of the incurred claims during that policy
year. If our estimates were to indicate that an additional dividend had been earned, we would
record a receivable for the amount of that dividend and decrease our workers compensation
insurance expense, which would increase net income in the period that such determination was
made. On the other hand, if our estimates were to indicate that the amount of any recorded
dividend receivable had been reduced due to greater than anticipated claim developments, we
would reduce our receivable and increase our workers compensation insurance expense, which
would reduce net income in the period that such determination was made. In May 2003, our
workers compensation carriers rating was downgraded by A.M. Best Co. (Best) from a B or
fair rating to a C++ or marginal rating. In June 2003, Best further downgraded the
carrier to a D or poor rating. Bests rating represents an opinion on the insurers
financial strength and ability to meet its ongoing obligations to its policyholders. As a
result of these downgrades, we elected to accelerate the termination of our contract from
September 30, 2003 to September 1, 2003. In addition, we recorded a charge of $2.5 million in
the second quarter of 2003 to write-off the dividend receivable from our workers compensation
carrier due to the uncertainty of the carriers ultimate ability to pay this dividend.
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Change in Workers
Change in
Change in Loss
Compensation Costs
Net Income
Development Rate
(in thousands
)
(in thousands)
(5
)%
$(2,000)
$1,250
2.5
)%
(1,000)
625
2.5
%
1,000
(625)
5
%
2,000
(1,250)
Contingent liabilities
- We accrue and disclose contingent liabilities in our consolidated
financial statements in accordance with Statement of Financial Accounting Standards (SFAS)
No. 5,
Accounting for Contingencies
. SFAS No. 5 requires accrual of contingent liabilities
that are considered probable to occur and that can be reasonably estimated. For contingent
liabilities that are considered reasonably possible to occur, financial statement disclosure
is required, including the range of possible loss if it can be reasonably determined. We have
disclosed in our audited financial statements several issues that we believe are reasonably
possible to occur, although we cannot determine the range of possible loss in all cases. See
Note 12 to our consolidated financial statements. As these issues develop, we will continue
to evaluate the probability of future loss and the potential range of such losses. If such
evaluation were to determine that a loss was probable and the
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Deferred taxes
- We have recorded a valuation allowance to reduce
our deferred tax assets to the amount that is more likely than not
to be realized. While we have considered future taxable income
and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, our ability to
realize our deferred tax assets could change from our current
estimates. If we determine that we would be able to realize our
deferred tax assets in the future in excess of the net recorded
amount, an adjustment to reduce the valuation allowance would
increase net income in the period that such determination is made.
Likewise, should we determine that we will not be able to realize
all or part of our net deferred tax assets in the future, an
adjustment to increase the valuation allowance would reduce net
income in the period such determination is made.
Allowance for doubtful accounts
- We maintain an allowance for
doubtful accounts for estimated losses resulting from the
inability of our customers to pay their comprehensive service
fees. We believe that the success of our business is heavily
dependent on our ability to collect these comprehensive service
fees for several reasons, including:
the fact that we are at risk for the payment of our direct costs and worksite employee
payroll costs regardless of whether our clients pay their comprehensive service fees;
the large volume and dollar amount of transactions we process; and
the periodic and recurring nature of payroll, upon which the comprehensive service fees are based.
Property and equipment
- Our property and equipment relate primarily to our facilities and
related improvements, furniture and fixtures, computer hardware and software and capitalized
software development costs. These costs are depreciated or amortized over the estimated
useful lives of the assets. If we determine that the useful lives of these assets will be
shorter than we currently estimate, our depreciation and amortization expense could be
accelerated, which would decrease net income in the periods of such a determination. In
addition, we periodically evaluate these costs for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets
. If events or circumstances were
to indicate that any of our long-lived assets might be impaired, we would analyze the
estimated undiscounted future cash flows to be generated from the applicable asset. In
addition, we would record an impairment loss, which would reduce net income, to the extent
that the carrying value of the asset exceeded the fair value of the asset. Fair value is
generally determined using an estimate of discounted future net cash flows from operating
activities or upon disposal of the asset. During 2003 we ceased operations of Administaff
Financial Management Services, Inc. (FMS) and recorded an after-tax impairment charge of
approximately $800,000 related to the write down of assets of FMS. As a result, FMS is being
reported as a discontinued operation in accordance with SFAS No. 144.
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1.
A modified prospective method in which compensation cost is recognized beginning with
the effective date: (a) based on the requirements of Statement 123(R) for all share-based
payments granted after the effective date; and (b) based on the requirements of Statement
123 for all awards granted to employees prior to the effective date of Statement 123(R)
that remain unvested on the effective date.
2.
A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for purposes of pro forma disclosures
either: (a) all prior periods presented; or (b) prior interim periods of the year of
adoption.
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Year ended December 31,
2004
2003
% change
(in thousands, except per share and statistical data)
$
969,527
$
890,859
8.8
%
197,694
197,105
0.3
%
175,563
172,831
1.6
%
22,131
24,274
(8.8
)%
8,605
196
19,210
14,985
28.2
%
0.72
0.55
30.9
%
77,936
75,036
3.9
%
$
1,037
$
989
4.9
%
211
219
(3.7
)%
188
192
(2.1
)%
24
27
(11.1
)%
21
17
23.5
%
(1)
Gross billings of $5,749 and $5,363 per worksite employee per month less payroll
cost of $4,712 and $4,373 per worksite employee per month, respectively.
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Year ended December 31,
Year ended December 31,
2004
2003
% change
2004
2003
(in thousands)
(% of total revenue)
$
134,124
$
115,872
15.8
%
13.8
%
13.0
%
90,657
95,293
(4.9
)%
9.4
%
10.7
%
137,184
131,416
4.4
%
14.1
%
14.8
%
378,901
355,283
6.6
%
39.1
%
39.8
%
222,209
187,996
18.2
%
22.9
%
21.1
%
6,452
4,999
29.1
%
0.7
%
0.6
%
$
969,527
$
890,859
8.8
%
100.0
%
100.0
%
Payroll tax costs
Payroll taxes increased $33 per worksite
employee per month. Payroll taxes as a percentage of payroll cost
increased to 7.41% in 2004 from 7.23% in 2003. The increase was a
result of higher weighted average state unemployment tax rates in
2004 compared to 2003, offset in part by the $2.3 million, or
0.05% of payroll cost, reduction of payroll tax expense related to
the settlement discussions with the state of California in the
second quarter of 2004. In addition, during 2003, we recorded a
$3.9 million, or 0.10% of payroll cost, reduction in payroll taxes
due to the receipt of our final 2002 and 2003 unemployment tax
rates from the Texas Workforce Commission. Furthermore, we
accrued $5.6 million, or 0.14% of payroll cost, in additional
payroll taxes in 2003 related to an unemployment tax assessment
from the Employment Development Department of the State of
California. Please read Critical Accounting Policies and
Estimates State Unemployment Taxes on page 26 for a detailed
discussion of our accounting for payroll taxes.
Benefits costs
The cost of health insurance and related employee
benefits increased $24 per worksite employee per month over 2003,
due to a 5.7% increase in the cost per covered employee and an
increase in the percentage of worksite employees covered under our
health insurance plan to 71.1% in 2004 versus 70.7% in 2003.
Please read Critical Accounting Policies and Estimates
Benefits Costs on page 26 for a discussion of our accounting for
health insurance costs.
Workers compensation costs
Workers compensation costs
decreased $5 per worksite employee per month, and decreased to
1.35% of non-bonus payroll cost in 2004 from 1.56% in 2003. In
2004, we collected and recorded a $1.1 million, or 0.03% of
non-bonus payroll cost, reimbursement from an insurance carrier
related to a 2003 workers compensation settlement with the State
of Texas. During 2003, we incurred (i) a $2.5 million, or 0.07%
of non-bonus payroll cost, charge related to our former workers
compensation dividend receivable due to collectibility concerns;
and (ii) approximately $2.0 million, or 0.06% of non-bonus payroll
cost, in
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workers
compensation costs related to contract termination costs associated with our former policy and
state surcharges relating to policies dating back to 1999, which were assessed by various states
and passed through to Administaff through our previous carrier. Please read Critical
Accounting Policies and Estimates Workers Compensation Costs on page 27 for a discussion of
our accounting for workers compensation costs.
Year ended December 31,
Year ended December 31,
2004
2003
% change
2004
2003
% change
(in thousands)
(per worksite employee per month)
$
88,298
$
82,802
6.6
%
$
94
$
92
2.2
%
49,283
50,033
(1.5
)%
53
55
(3.6
)%
10,447
10,656
(2.0
)%
11
12
(8.3
)%
10,021
8,581
16.8
%
11
10
10.0
%
17,514
20,759
(15.6
)%
19
23
(17.4
)%
$
175,563
$
172,831
1.6
%
$
188
$
192
(2.1
)%
Salaries, wages and payroll taxes of corporate and sales staff increased 6.6%, or $2 per worksite employee per month
compared to 2003. The increase is primarily due to a 2.7% increase in headcount and a 3.6% increase in average pay,
offset by a $1.3 million decrease in incentive compensation and $1.5 million decrease in capitalized software
development costs in 2004.
General and administrative expenses decreased 1.5%, or $2 per worksite employee per month compared to 2003. The
decrease is primarily due to higher legal fees in the 2003 period associated with the legal dispute with Aetna and
lower consulting costs, offset by higher corporate insurance and repairs and maintenance costs in 2004.
Commissions expense decreased 2.0% or $1 per worksite employee per month compared to 2003.
Advertising costs increased 16.8% or $1 per worksite employee as compared to 2003, due primarily to sponsorship costs
associated with the Administaff Small Business Classic professional golf tournament held in October 2004 in Houston,
Texas.
Depreciation and amortization expense decreased 15.6% and $4 on a per worksite employee basis versus 2003 as the effect
of certain fixed assets becoming fully amortized more than offset the incremental depreciation and amortization expense
related to the 2004 capital additions.
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Year ended December 31,
2003
2002
% change
(in thousands, except per share and statistical data)
$
890,859
$
848,416
5.0
%
197,105
165,790
18.9
%
172,831
165,723
4.3
%
24,274
67
36,129.9
%
196
(1,747
)
111.2
%
14,985
(2,921
)
613.0
%
0.55
(0.11
)
600.0
%
75,036
77,334
(3.0
)%
$
989
$
914
8.2
%
219
179
22.3
%
192
179
7.3
%
27
17
(3
)
666.7
%
(1)
Gross billings of $5,363 and $5,234 per worksite employee per month less payroll
cost of $4,373 and $4,320 per worksite employee per month, respectively.
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Year ended December 31,
Year ended December 31,
2003
2002
% change
2003
2002
(in thousands)
(% of total revenue)
$
115,872
$
101,097
14.6
%
13.0
%
11.9
%
95,293
92,480
3.0
%
10.7
%
10.9
%
131,416
123,901
6.1
%
14.8
%
14.6
%
355,283
360,622
(1.5
)%
39.8
%
42.5
%
187,996
164,221
14.5
%
21.1
%
19.3
%
4,999
6,095
(18.0
)%
0.6
%
0.8
%
$
890,859
$
848,416
5.0
%
100.0
%
100.0
%
Payroll tax costs
Payroll taxes increased $3 per worksite
employee per month. Payroll taxes as a percentage of payroll cost
decreased to 7.23% in 2003 from 7.25% in 2002. During 2003, we
recorded a $3.9 million, or 0.10% of payroll cost, reduction in
payroll taxes due to the receipt of our final 2002 and 2003
unemployment tax rates from the Texas Workforce Commission. We
accrued $5.6 million, or 0.14% of payroll cost, in additional
payroll taxes in 2003 related to an unemployment tax assessment
from the Employment Development Department of the State of
California. Please read Critical Accounting Policies and
Estimates State Unemployment Taxes on page 26 for a detailed
discussion of our accounting for payroll taxes.
Benefits costs
The cost of health insurance and related employee
benefits increased $17 per worksite employee per month over 2002,
due to a 8.1% increase in the cost per covered employee and a
decrease in the percentage of worksite employees covered under our
health insurance plan to 70.7% in 2003 versus 73.0% in 2002.
Please read Critical Accounting Policies and Estimates Benefits
Costs on page 26 for a discussion of the Companys accounting for
health insurance costs.
Workers compensation costs
Workers compensation costs
increased $14 per worksite employee per month, and increased to
1.56% of non-bonus payroll cost in 2003 from 1.23% in 2002. Due
to the deterioration of the financial condition of our former
insurance carrier in 2003, as evidenced by rating downgrades, we
recorded a $2.5 million, or 0.07% of non-bonus payroll cost,
charge in 2003 related to the write-off of the workers
compensation dividend, earned and initially recorded in 2002.
Additionally, during 2003 we incurred approximately $2.0 million,
or 0.06% of non-bonus payroll cost, in costs related to the
termination of our
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contract with our former insurance carrier and
state surcharges relating to policies dating back to 1999, which were assessed by various states
and passed through to Administaff through our previous carrier. Please read Critical
Accounting Policies and Estimates Workers Compensation Costs on page 27 for a discussion of
our accounting for workers compensation costs.
Year ended December 31,
Year ended December 31,
2003
2002
% change
2003
2002
% change
(in thousands)
(per worksite employee per month)
$
82,802
$
74,989
10.4
%
$
92
$
81
13.6
%
50,033
50,172
(0.3
)%
55
54
1.9
%
10,656
12,127
(12.1
)%
12
13
(7.7
)%
8,581
7,138
20.2
%
10
8
25.0
%
20,759
21,297
(2.5
)%
23
23
$
172,831
$
165,723
4.3
%
$
192
$
179
7.3
%
Salaries, wages and payroll taxes of corporate and sales staff
increased 10.4%, or $11 per worksite employee per month. The
increase is primarily due to an accrual related to our 2003
incentive compensation plan and the increased compensation costs
to staff the new retirement services business. The average number
of corporate employees during 2003 remained flat as compared to
the 2002 average. The average base pay of corporate employees
during 2003 increased 3.2%.
General and administrative expenses decreased 0.3%, or $1 per
worksite employee per month compared to 2002.
Commissions expense decreased 12.1% or $1 per worksite employee
per month compared to 2002 due to the decline in paid worksite
employees in 2003 as compared to 2002.
Advertising costs increased 20.2% or $2 per worksite employee as
compared to 2002 due to increased marketing efforts focused on
lead generation.
Depreciation and amortization expense decreased 2.5% and remained
constant on a per worksite employee basis versus 2002 as the
effect of certain fixed assets becoming fully amortized more than
offset the incremental depreciation and amortization expense
related to the 2003 capital additions.
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Year ended December 31,
2004
2003
% Change
$
4,407,063
$
3,938,021
11.9
%
392,909
330,903
18.7
%
$
4,014,154
$
3,607,118
11.3
%
$
4,712
$
4,373
7.8
%
420
367
14.4
%
$
4,292
$
4,006
7.1
%
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Timing of customer payments / payrolls
We typically collect our
comprehensive service fee, along with the clients payroll
funding, from clients at least one day prior to the payment of
worksite employee payrolls. Therefore, the date of the last day
of a reporting period has a substantial impact on our reporting of
operating cash flows. For example, many worksite employees are
paid on Fridays; therefore, operating cash flows decline in the
reporting periods, which end on a Friday, such as in 2004, when
client prepayments were $11.2 million and accrued worksite
employee payroll was $59.3 million. However, for those reporting
periods which end on a Wednesday, such as in 2003, when customer
prepayments were $31.8 million and accrued worksite employee
payroll was $65.5 million, our cash flows are higher due to the
collection of the comprehensive service fee and clients payroll
funding prior to processing the large number worksite employees
payrolls two days subsequent to year-end.
Medical plan funding
Our healthcare contract with United
establishes participant cash funding rates 90 days in advance of
the beginning of a reporting quarter. Therefore, changes in the
participation level of the United Plan have a direct impact on our
operating cash flows. In addition, changes to the funding rates,
which are solely determined by United based primarily upon recent
claim history and anticipated cost trends, also have a significant
impact on our operating cash flows. Since inception of the United
Plan in January 2002, cash funded to United has exceeded Plan
Costs resulting in a $10.9 million surplus, which is reflected as
a current asset on our Consolidated Balance Sheet at December 31,
2004.
Workers compensation plan funding
Under our arrangement with
AIG, we make monthly payments to AIG comprised of premium costs
and funds to be set aside for payment of future claims (claim
funds). These pre-determined amounts are stipulated in our
agreement with AIG, and are based primarily on anticipated
worksite employee payroll levels and workers compensation loss
rates during the policy year. Changes in payroll levels from that
which was anticipated in the arrangement with AIG can result in
changes in the amount of the cash payments to AIG, which will
impact our reporting of operating cash flows. Our claim funds
paid to AIG, based upon anticipated worksite employee payroll
levels and workers compensation loss rates, net of claims paid,
were $42.4 million in 2004 and $15.1 million for the four months
under the new plan in 2003, respectively. This compares to our
estimate of workers compensation loss costs of $29.4 million and
$12.0 million in 2004 and 2003, respectively.
Operating results
Our net income has a significant impact on our
operating cash flows. Our net income increased to $19.2 million
in 2004 from $12.9 million in 2003. Please read
Results of
Operations Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003
on page 31. During 2004, we executed a
settlement agreement with Aetna Life Insurance Company resulting
in our receipt of $8.25 million in settlement proceeds in the
first quarter of 2004. Please read Note 12 to the Consolidated
Financial Statements.
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Less than
More than
Total
1 Year
1-3 Years
3-5 Years
5 Years
$
38,530
$
2,844
$
5,315
$
30,371
$
3,334
695
1,390
1,249
50,774
9,395
17,146
11,420
12,813
11,745
5,098
5,637
480
530
41,423
18,800
9,682
8,076
4,865
$
145,806
$
36,832
$
39,170
$
51,596
$
18,208
(1)
The table includes purchase obligations associated with non-cancelable contracts
individually greater than $100,000.
(2)
The current portion of these liabilities is also included. For more information,
please read Critical Accounting Policies and Estimates Workers Compensation Costs on
page 27.
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payment of the salaries and wages for work performed by worksite employees,
regardless of whether the client company timely pays us the associated service fee;
and
providing benefits to worksite employees even if our costs to provide such
benefits exceed the fees the client company pays us.
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income tax withholding requirements;
obligations under the Federal Income Contribution Act (FICA); and
obligations under the Federal Unemployment Tax Act (FUTA).
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Principal
Average
Maturities
Interest Rate
$
450
1.6
%
783
5.0
%
1,665
5.1
%
2,000
5.1
%
1,640
5.1
%
9,665
2.8
%
$
16,203
3.6
%
$
16,756
Principal
Maturities
$
1,147
1,158
1,070
30,371
$
33,746
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Some of 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 I
Directors (For Terms Expiring at the 2008 Annual Meeting),
Directors Remaining in Office,
and Section 16(a) Beneficial Ownership Reporting Compliance in our 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).
Code of Business Conduct and Ethics
Our Board of Directors adopted our Code of Business Conduct and Ethics (the Code of Ethics),
which meets the requirements of Rule 303.A of the New York Stock Exchange Listed Company Manual and
Item 406 of Regulation S-K. You can access our Code of Ethics on the Corporate Governance page of
our website at
www.administaff.com.
Any stockholder who so requests may obtain a printed copy of
the Code of Ethics from Administaff. Changes in and waivers to the Code of Ethics for the
Companys directors, executive officers and certain senior financial officers will be posted on our
Internet website within five business days and maintained for at least twelve months.
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 AND RELATED STOCKHOLDER
MATTERS.
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 and
Proposal Number 2 Approval of the 2001 Incentive Plan,
as amended and restated Equity
Compensation Plan Information 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.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is incorporated by reference to the information set
forth under the caption Proposal Number 3: Ratification and Appointment of Independent Public
Accountants Fees of Ernst & Young LLP and
Finance, Risk Management and Audit Committee
Pre-Approval Policy for Audit and Non-Audit Services in the Administaff Proxy Statement.
- 48 -
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
- 49 -
- 50 -
- 51 -
(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 Registrants Registration Statement on Form S-1 (No.
33-96952)).
3.2
Bylaws, as amended on March 7, 2001 (incorporated by
reference to Exhibit 3.2 to the Registrants Form 10-K filed for the year
ended December 31, 2000).
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 Registrants Form 8-A filed on
February 4, 1998).
4.1
Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants form 8-A/A
filed on August 9, 1999).
4.7
Form of Rights Certificate (incorporated by reference to
Exhibit 3 to the Registrants Form 8-A filed on February 4, 1998).
4.8
Amended and Restated Rights Agreement effective as of April
19, 2003 between Administaff, Inc. and Mellon Investor Services LLC, as
Rights Agent (incorporated by reference to Exhibit 1 to the Registrants Form
8-A/A filed on May 16, 2003).
4.9
Amendment No. 1 to Amended and Restated Rights Agreement
dated as of August 21, 2003 between Administaff, Inc. and Mellon Investor
Services LLC, as Rights Agent (incorporated by reference to Exhibit 1 to the
Registrants Form 8A/A filed on August 22, 2003).
4.10
Amendment No. 2 to Amended and Restated Rights Agreement
dated as of February 24, 2004 between Administaff, Inc. and Mellon Investor
Services LLC, as Rights Agent (incorporated by reference to Exhibit 4.10 to
the Registrants Form 10-K for the year ended December 31, 2003).
Table of Contents
10.1
Administaff, Inc. 1997 Incentive Plan (incorporated by
reference to Exhibit 99.1 to the Registrants Registration Statement on Form
S-8 (No. 333-85151)).
10.2
First Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.2 to the Registrants Registration
Statement on Form S-8 (No. 333-85151)).
10.3
Second Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.3 to the Registrants Registration
Statement on Form S-8 (No. 333-85151)).
10.4
Third Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.4 to the Registrants Registration
Statement on Form S-8 (No. 333-85151)).
10.5
Fourth Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.5 to the Registrants Registration
Statement on Form S-8 (No. 333-85151)).
10.6
Administaff, Inc. 2001 Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Registrants Form 10-Q filed for the quarter
ended March 31, 2001).
10.7*
Form of Incentive Stock Option Agreement (1997 Plan).
10.8*
Form of Incentive Stock Option Agreement (2001 Plan 3 year vesting).
10.9*
Form of Incentive Stock Option Agreement (2001 Plan 5 year vesting).
10.10*
Form of Director Stock Option Agreement (Initial Grant).
10.11*
Form of Director Stock Option Agreement (Annual Grant).
10.12*
Form of Restricted Stock Agreement.
10.13
Administaff, Inc. Nonqualified Stock Option Plan (incorporated
by reference to Exhibit 99.6 to the Registrants Registration Statement on Form
S-8 (No. 333-85151)).
10.14
First Amendment to Administaff, Inc. Nonqualified Stock Option
Plan, effective August 7, 2001 (incorporated by reference to Exhibit 10.8 to
the Registrants Form 10-K for the year ended December 31, 2002).
10.15
Second Amendment to Administaff, Inc. Nonqualified Stock
Option Plan, effective January 28, 2003 (incorporated by reference to Exhibit
10.9 to the Registrants Form 10-K for the year ended December 31, 2002).
10.16
Administaff, Inc. Amended and Restated Employee Stock Purchase
Plan effective April 1, 2002 (incorporated by reference to Exhibit 10.10 to the
Registrants Form 10-K for the year ended December 31, 2002).
10.17
First Amendment to Administaff, Inc. Amended and Restated
Employee Stock Purchase Plan, effective July 31, 2002 (incorporated by
reference to Exhibit 10.11 to the Registrants Form 10-K for the year ended
December 31, 2002).
10.18
Second Amendment to Administaff, Inc. Amended and Restated
Employee Stock Purchase Plan, effective August 15, 2003 (incorporated by
reference to Exhibit 10.12 to the Registrants Form 10-K for the year ended
December 31, 2003).
10.19
Board of Directors Compensation Arrangements (incorporated by reference to
Form 8-K dated February 7, 2005).
10.20
Promissory Note dated December 20, 2002 executed by
Administaff Services, L.P, payable to General Electric Capital Business Asset
Funding Corporation (incorporated by reference to Exhibit 10.18 to the
Registrants Form 10-K for the year ended December 31, 2002).
10.21
Guaranty dated December 20, 2002 by Administaff, Inc. in favor
of General Electric Capital Business Asset Funding Corporation (incorporated by
reference to Exhibit 10.19 to the Registrants Form 10-K for the year ended
December 31, 2002).
10.22
Commercial Deed of Trust, Security Agreement, Assignment of
Leases and Rents, and Fixture Filing, dated December 20, 2002, executed by
Administaff Services, L.P. in favor of General Electric Capital Business Asset
Funding Corporation (incorporated by reference to Exhibit 10.20 to the
Registrants Form 10-K for the year ended December 31, 2002).
10.23
Minimum Premium Financial Agreement by and between Administaff
of Texas, Inc. and United Healthcare Insurance Company, Hartford, Connecticut
(incorporated by reference to Exhibit 10.3 to the Registrants Form 10-Q for
the quarter ended June 30, 2002).
Table of Contents
10.24
Minimum Premium Administrative Services Agreement by and
between Administaff of Texas, Inc. and United Healthcare Insurance Company,
Hartford, Connecticut (incorporated by reference to Exhibit 10.4 to the
Registrants Form 10-Q for the quarter ended June 30, 2002).
10.25
Amended and Restated Security Deposit Agreement by and
between Administaff of Texas, Inc. and United Healthcare Insurance Company,
Hartford, Connecticut (incorporated by reference to Exhibit 10.5 to the
Registrants Form 10-Q for the quarter ended June 30, 2002).
10.26*
Amendment to Various Agreements Between United Healthcare Insurance Company
and Administaff of Texas, Inc.
10.27*
Houston Service Center Operating Lease Amendment.
21.1*
Subsidiaries of Administaff, Inc.
23.1*
Consent of Independent Registered Public Accounting Firm.
24.1*
Powers of Attorney.
31.1*
Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
*
Filed herewith.
Management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
Table of Contents
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 February 22, 2005.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of Administaff, Inc. in the capacities indicated on
February 22, 2005:
- 52 -
ADMINISTAFF, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
ADMINISTAFF, INC.
By
:
/s/ Douglas S. Sharp
Douglas S. Sharp
Vice President, Finance
Chief Financial Officer and Treasurer
Signature
Title
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)
President and Director
Vice President, Finance
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Director
Director
Director
Director
Director
Director
Table of Contents
F-2
F-3
F-4
F-5
F-7
F-8
F-9
F-11
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheets of Administaff, Inc. as of
December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders
equity and cash flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (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, 2004
and 2003, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2004, in conformity with United States generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Administaff, Inc.s internal control over
financial reporting as of December 31, 2004, based on criteria
established in
Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 17, 2005 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Houston, Texas
F-2
MANAGEMENTS REPORT ON INTERNAL CONTROL
The Company has assessed the effectiveness of its internal control over financial reporting as
of December 31, 2004 based on criteria established by
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO Framework)
.
The Companys management is responsible for establishing and maintaining adequate internal controls
over financial reporting. The Companys independent registered public accountants that audited the
Companys financial statements as of December 31, 2004 have issued an attestation report on
managements assessment of the Companys internal control over financial reporting, which appears
on page F-4.
Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that: (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of the inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies and procedures may
deteriorate.
The Companys assessment of the effectiveness of its internal control over financial reporting
included testing and evaluating the design and operating effectiveness of its internal controls.
In managements opinion, the Company has maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in the COSO Framework
.
F-3
Administaff, Inc.
February 17, 2005
Table of Contents
/s/ Douglas S. Sharp
Douglas S. Sharp
Vice President, Finance
Chief Financial Officer and Treasurer
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control, that Administaff, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Administaff, Inc.s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Administaff, Inc. maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, Administaff, Inc. maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria
.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Administaff, Inc. as of
December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders
equity and cash flows for each of the three years in the period ended December 31, 2004 of
Administaff, Inc. and our report dated February 17, 2005 expressed an unqualified opinion thereon.
Ernst & Young LLP
Houston, Texas
F-4
Administaff, Inc.
February 17, 2005
Table of Contents
ADMINISTAFF, INC.
ASSETS
December 31, | ||||||||
2004 | 2003 | |||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 81,740 | $ | 104,728 | ||||
Restricted cash
|
18,511 | 4,584 | ||||||
Marketable securities
|
27,950 | 23,989 | ||||||
Accounts receivable:
|
||||||||
Trade
|
610 | 5,752 | ||||||
Unbilled
|
65,149 | 53,033 | ||||||
Other
|
1,451 | 2,959 | ||||||
Prepaid insurance
|
14,428 | 22,554 | ||||||
Other current assets
|
3,981 | 7,468 | ||||||
Income taxes receivable
|
489 | | ||||||
Deferred income taxes
|
| 3,423 | ||||||
|
||||||||
Total current assets
|
214,309 | 228,490 | ||||||
|
||||||||
Property and equipment:
|
||||||||
Land
|
2,920 | 2,920 | ||||||
Buildings and improvements
|
57,005 | 55,465 | ||||||
Computer hardware and software
|
50,765 | 49,822 | ||||||
Software development costs
|
18,622 | 18,699 | ||||||
Furniture and fixtures
|
28,412 | 27,997 | ||||||
Vehicles and aircraft
|
5,725 | 6,090 | ||||||
|
||||||||
|
163,449 | 160,993 | ||||||
Accumulated depreciation
|
(94,392 | ) | (82,224 | ) | ||||
|
||||||||
Total property and equipment, net
|
69,057 | 78,769 | ||||||
|
||||||||
Other assets:
|
||||||||
Deposits
healthcare
|
18,329 | 18,314 | ||||||
Deposits
workers compensation
|
52,264 | 21,357 | ||||||
Other assets
|
679 | 1,141 | ||||||
|
||||||||
Total other assets
|
71,272 | 40,812 | ||||||
|
||||||||
Total assets
|
$ | 354,638 | $ | 348,071 | ||||
|
F-5
ADMINISTAFF, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands)
LIABILITIES AND STOCKHOLDERS EQUITY
December 31, | ||||||||
2004 | 2003 | |||||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 2,380 | $ | 4,319 | ||||
Payroll taxes and other payroll deductions payable
|
64,471 | 65,310 | ||||||
Accrued worksite employee payroll cost
|
59,277 | 65,503 | ||||||
Accrued health insurance costs
|
1,991 | 6,559 | ||||||
Accrued workers compensation costs
|
19,349 | 5,489 | ||||||
Accrued corporate payroll and commissions
|
11,031 | 10,299 | ||||||
Other accrued liabilities
|
6,430 | 5,599 | ||||||
Income taxes payable
|
| 7,520 | ||||||
Deferred income taxes
|
231 | | ||||||
Current portion of long-term debt
|
1,649 | 1,860 | ||||||
|
||||||||
Total current liabilities
|
166,809 | 172,458 | ||||||
|
||||||||
Noncurrent liabilities:
|
||||||||
Long-term debt
|
34,890 | 40,502 | ||||||
Accrued workers compensation costs
|
22,912 | 7,417 | ||||||
Deferred income taxes
|
3,498 | 5,060 | ||||||
|
||||||||
Total noncurrent liabilities
|
61,300 | 52,979 | ||||||
|
||||||||
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 60,000
|
||||||||
Shares issued - 30,839 at December 31, 2004 and 2003, respectively
|
309 | 309 | ||||||
Additional paid-in capital
|
101,623 | 101,681 | ||||||
Treasury
stock, at cost 5,362 and 4,120 shares
at December 31, 2004 and 2003, respectively
|
(63,925 | ) | (48,795 | ) | ||||
Accumulated other comprehensive loss, net of tax
|
(127 | ) | | |||||
Retained earnings
|
88,649 | 69,439 | ||||||
|
||||||||
Total stockholders equity
|
126,529 | 122,634 | ||||||
|
||||||||
Total liabilities and stockholders equity
|
$ | 354,638 | $ | 348,071 | ||||
|
See accompanying notes.
F-6
ADMINISTAFF, INC.
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Revenues (gross billings of $5.377 billion, $4.829 billion and
$4.857 billion less worksite employee payroll cost of
$4.407 billion, $3.938 billion, and $4.009 billion, respectively)
|
$ | 969,527 | $ | 890,859 | $ | 848,416 | ||||||
|
||||||||||||
Direct costs:
|
||||||||||||
Payroll taxes, benefits and workers compensation costs
|
771,833 | 693,754 | 682,626 | |||||||||
|
||||||||||||
|
||||||||||||
Gross profit
|
197,694 | 197,105 | 165,790 | |||||||||
|
||||||||||||
Operating expenses:
|
||||||||||||
Salaries, wages and payroll taxes
|
88,298 | 82,802 | 74,989 | |||||||||
General and administrative expenses
|
49,283 | 50,033 | 50,172 | |||||||||
Commissions
|
10,447 | 10,656 | 12,127 | |||||||||
Advertising
|
10,021 | 8,581 | 7,138 | |||||||||
Depreciation and amortization
|
17,514 | 20,759 | 21,297 | |||||||||
|
||||||||||||
|
175,563 | 172,831 | 165,723 | |||||||||
|
||||||||||||
Operating income
|
22,131 | 24,274 | 67 | |||||||||
|
||||||||||||
Other income (expense):
|
||||||||||||
Interest income
|
2,449 | 1,910 | 1,772 | |||||||||
Interest expense
|
(2,093 | ) | (2,176 | ) | (437 | ) | ||||||
Write-off of investments
|
| | (3,354 | ) | ||||||||
Other, net
|
8,249 | 462 | 272 | |||||||||
|
||||||||||||
|
8,605 | 196 | (1,747 | ) | ||||||||
|
||||||||||||
Income (loss) before income tax expense
|
30,736 | 24,470 | (1,680 | ) | ||||||||
Income tax expense
|
11,526 | 9,485 | 1,241 | |||||||||
|
||||||||||||
Net income (loss) from continuing operations
|
$ | 19,210 | $ | 14,985 | $ | (2,921 | ) | |||||
|
||||||||||||
Discontinued operations:
|
||||||||||||
Loss from discontinued operations
|
| (3,264 | ) | (1,917 | ) | |||||||
Income tax expense (benefit)
|
| (1,143 | ) | (757 | ) | |||||||
|
||||||||||||
Net loss from discontinued operations
|
| (2,121 | ) | (1,160 | ) | |||||||
|
||||||||||||
Net income (loss)
|
$ | 19,210 | $ | 12,864 | $ | (4,081 | ) | |||||
|
||||||||||||
|
||||||||||||
Basic net income (loss) per share of common stock:
|
||||||||||||
Income (loss) from continuing operations
|
$ | 0.74 | $ | 0.56 | $ | (0.11 | ) | |||||
Loss from discontinued operations
|
| (0.08 | ) | (0.04 | ) | |||||||
|
||||||||||||
Basic net income (loss) per share of common stock
|
$ | 0.74 | $ | 0.48 | $ | (0.15 | ) | |||||
|
||||||||||||
|
||||||||||||
Diluted net income (loss) per share of common stock:
|
||||||||||||
Income (loss) from continuing operations
|
$ | 0.72 | $ | 0.55 | $ | (0.11 | ) | |||||
Loss from discontinued operations
|
| (0.08 | ) | (0.04 | ) | |||||||
|
||||||||||||
Diluted net income (loss) per share of common stock
|
$ | 0.72 | $ | 0.47 | $ | (0.15 | ) | |||||
|
See accompanying notes.
F-7
ADMINISTAFF, INC.
Accumulated | ||||||||||||||||||||||||||||
Common Stock | Additional | Other | ||||||||||||||||||||||||||
Issued | Paid-In | Treasury | Comprehensive | Retained | ||||||||||||||||||||||||
Shares | Amount | Capital | Stock | Income (Loss) | Earnings | Total | ||||||||||||||||||||||
Balance at December 31, 2001
|
30,776 | $ | 308 | $ | 95,114 | $ | (33,467 | ) | $ | 324 | $ | 60,656 | $ | 122,935 | ||||||||||||||
Purchase of treasury stock, at cost
|
| | | (17,088 | ) | | | (17,088 | ) | |||||||||||||||||||
Exercise of common stock
purchase warrant
|
| | 6,952 | 6,205 | | | 13,157 | |||||||||||||||||||||
Sale of common stock to Administaff
Employee Stock Purchase Plan
|
4 | | 109 | | | | 109 | |||||||||||||||||||||
Sale of treasury stock to Administaff
Employee Stock Purchase Plan
|
| | (724 | ) | 1,185 | | | 461 | ||||||||||||||||||||
Exercise of stock options
|
59 | 1 | 742 | | | | 743 | |||||||||||||||||||||
Income tax benefit from
exercise of stock options
|
| | 203 | | | | 203 | |||||||||||||||||||||
Other
|
| | (81 | ) | 162 | | | 81 | ||||||||||||||||||||
Change in unrealized gain on
marketable securities (net of tax):
|
||||||||||||||||||||||||||||
Unrealized gain
|
| | | | 23 | | 23 | |||||||||||||||||||||
Realized gain
|
| | | | (194 | ) | | (194 | ) | |||||||||||||||||||
Net loss
|
| | | | | (4,081 | ) | (4,081 | ) | |||||||||||||||||||
|
||||||||||||||||||||||||||||
Comprehensive loss
|
(4,252 | ) | ||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Balance at December 31, 2002
|
30,839 | $ | 309 | $ | 102,315 | $ | (43,003 | ) | $ | 153 | $ | 56,575 | $ | 116,349 | ||||||||||||||
Purchase of treasury stock, at cost
|
| | | (8,233 | ) | | | (8,233 | ) | |||||||||||||||||||
Sale of treasury stock to Administaff
Employee Stock Purchase Plan
|
| | (322 | ) | 848 | | | 526 | ||||||||||||||||||||
Exercise of stock options
|
| | (466 | ) | 1,343 | | | 877 | ||||||||||||||||||||
Income tax benefit from
exercise of stock options
|
| | 249 | | | | 249 | |||||||||||||||||||||
Other
|
| | (95 | ) | 250 | | | 155 | ||||||||||||||||||||
Change in unrealized gain (loss) on
marketable securities (net of tax):
|
||||||||||||||||||||||||||||
Unrealized loss
|
| | | | (109 | ) | | (109 | ) | |||||||||||||||||||
Realized gain
|
| | | | (44 | ) | | (44 | ) | |||||||||||||||||||
Net income
|
| | | | | 12,864 | 12,864 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
Comprehensive income
|
| | | | | | 12,711 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
Balance at December 31, 2003
|
30,839 | $ | 309 | $ | 101,681 | $ | (48,795 | ) | | $ | 69,439 | $ | 122,634 | |||||||||||||||
Purchase of treasury stock, at cost
|
| | | (17,153 | ) | | | (17,153 | ) | |||||||||||||||||||
Sale of treasury stock to Administaff
Employee Stock Purchase Plan
|
| | 80 | 363 | | | 443 | |||||||||||||||||||||
Exercise of stock options
|
| | (511 | ) | 1,522 | | | 1,011 | ||||||||||||||||||||
Income tax benefit from
exercise of stock options
|
| | 352 | | | | 352 | |||||||||||||||||||||
Other
|
| | 21 | 138 | | | 159 | |||||||||||||||||||||
Change in unrealized gain (loss) on
marketable securities (net of tax):
|
||||||||||||||||||||||||||||
Unrealized loss
|
| | | | (114 | ) | | (114 | ) | |||||||||||||||||||
Realized gain
|
| | | | (13 | ) | | (13 | ) | |||||||||||||||||||
Net income
|
| | | | | 19,210 | 19,210 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
Comprehensive income
|
| | | | | | 19,083 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
Balance at December 31, 2004
|
30,839 | $ | 309 | $ | 101,623 | $ | (63,925 | ) | $ | (127 | ) | $ | 88,649 | $ | 126,529 | |||||||||||||
|
See accompanying notes.
F-8
ADMINISTAFF, INC.
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Cash flows from operating activities:
|
||||||||||||
Net income (loss)
|
$ | 19,210 | $ | 12,864 | $ | (4,081 | ) | |||||
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
|
||||||||||||
Depreciation and amortization
|
17,770 | 22,185 | 21,857 | |||||||||
Write-off of investments
|
| | 3,354 | |||||||||
Deferred income taxes
|
2,168 | (3,018 | ) | 77 | ||||||||
Bad debt expense
|
463 | 494 | 1,139 | |||||||||
Loss (gain) on disposition of assets
|
59 | (467 | ) | (268 | ) | |||||||
Changes in operating assets and liabilities:
|
||||||||||||
Restricted cash
|
(13,927 | ) | (4,584 | ) | | |||||||
Accounts receivable
|
(5,929 | ) | 20,237 | (7,654 | ) | |||||||
Prepaid insurance
|
8,126 | (4,645 | ) | (10,165 | ) | |||||||
Other current assets
|
3,487 | 1,949 | (5,948 | ) | ||||||||
Other assets
|
(30,637 | ) | (17,886 | ) | (12,623 | ) | ||||||
Accounts payable
|
(1,939 | ) | 1,250 | (1,263 | ) | |||||||
Payroll taxes and other payroll deductions payable
|
(839 | ) | 8,082 | 7,420 | ||||||||
Accrued worksite employee payroll expense
|
(6,226 | ) | (4,173 | ) | 6,826 | |||||||
Accrued health insurance costs
|
(4,568 | ) | 744 | 4,489 | ||||||||
Accrued workers compensations costs
|
29,355 | 12,811 | (2,114 | ) | ||||||||
Accrued corporate payroll
and other accrued liabilities
|
1,563 | 2,879 | 2,067 | |||||||||
Income taxes payable/receivable
|
(7,657 | ) | 7,421 | 16 | ||||||||
|
||||||||||||
Total adjustments
|
(8,731 | ) | 43,279 | 7,210 | ||||||||
|
||||||||||||
Net cash provided by operating activities
|
10,479 | 56,143 | 3,129 | |||||||||
|
||||||||||||
Cash flows from investing activities:
|
||||||||||||
Marketable securities:
|
||||||||||||
Purchases
|
(21,644 | ) | (25,779 | ) | (15,499 | ) | ||||||
Proceeds from maturities
|
453 | 6,645 | 23,436 | |||||||||
Proceeds from dispositions
|
16,912 | 9,612 | 25,130 | |||||||||
Cash received (exchanged) for note receivable
|
| 2,709 | (2,983 | ) | ||||||||
Property and equipment:
|
||||||||||||
Purchases
|
(8,114 | ) | (8,651 | ) | (38,425 | ) | ||||||
Proceeds from dispositions
|
289 | 275 | 148 | |||||||||
Proceeds from the sale of / (investments in) other companies
|
| 457 | (500 | ) | ||||||||
|
||||||||||||
Net cash used in investing activities
|
(12,104 | ) | (14,732 | ) | (8,693 | ) |
F-9
ADMINISTAFF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Cash flows from financing activities:
|
||||||||||||
Purchase of treasury stock
|
$ | (17,153 | ) | $ | (8,233 | ) | $ | (17,088 | ) | |||
Proceeds from the exercise of common
stock purchase warrants
|
| | 13,157 | |||||||||
Proceeds from sale of common stock to the
employee stock purchase plan
|
443 | 526 | 570 | |||||||||
Proceeds from the exercise of stock options
|
1,011 | 877 | 743 | |||||||||
Long-term debt and short-term borrowings:
|
||||||||||||
Borrowings under long-term debt agreements
|
| | 40,500 | |||||||||
Net borrowings under revolving line of credit
|
| | (13,500 | ) | ||||||||
Deferred financing costs
|
| | (689 | ) | ||||||||
Principal repayments on long-term debt
and capital lease obligations
|
(5,823 | ) | (1,807 | ) | (105 | ) | ||||||
Collection of (loans) to employees
|
| | 694 | |||||||||
Other
|
159 | 155 | 81 | |||||||||
|
||||||||||||
Net cash provided by (used in) financing activities
|
(21,363 | ) | (8,482 | ) | 24,363 | |||||||
|
||||||||||||
|
||||||||||||
Net increase (decrease) in cash and cash equivalents
|
(22,988 | ) | 32,929 | 18,799 | ||||||||
Cash and cash equivalents at beginning of year
|
104,728 | 71,799 | 53,000 | |||||||||
|
||||||||||||
Cash and cash equivalents at end of year
|
$ | 81,740 | $ | 104,728 | $ | 71,799 | ||||||
|
||||||||||||
|
||||||||||||
Supplemental disclosures:
|
||||||||||||
Cash paid for income taxes
|
$ | 19,877 | $ | 5,072 | $ | 663 | ||||||
Cash paid for interest
|
$ | 1,964 | $ | 2,053 | $ | 209 |
Noncash Investing and Financing Activities:
During 2002, the Company entered into a long-term capital lease agreement to finance the purchase of office furniture with a purchase price of $3.8 million.
See accompanying notes.
F-10
ADMINISTAFF, INC.
1. Accounting Policies
Description of Business
Administaff, Inc. (the Company) is a professional employer organization (PEO). As a PEO, the Company provides a bundled comprehensive service for its clients in the area of personnel management. The Company provides its comprehensive service through its Personnel Management System, which encompasses a broad range of human resource functions, including payroll and benefits administration, health and workers compensation insurance programs, personnel records management, employer liability management, employee recruiting and selection, employee performance management, and employee training and development.
The Company provides its comprehensive service by entering into a co-employment relationship with its clients, under which the Company and its clients each take responsibility for certain portions of the employer-employee relationship. The Company and its clients designate each partys responsibilities through its Client Services Agreement (CSA), under which the Company becomes the employer of its worksite employees for most administrative and regulatory purposes.
As a co-employer of its worksite employees, the Company assumes most of the rights and obligations associated with being an employer. The Company enters into an employment agreement with each worksite employee, thereby maintaining a variety of employer rights, including the right to hire or terminate employees, the right to evaluate employee qualifications or performance, and the right to establish employee compensation levels. Typically, the Company only exercises these rights in consultation with its clients or when necessary to ensure regulatory compliance. The responsibilities associated with the Companys role as employer include the following obligations with regard to its worksite employees: (i) to compensate its worksite employees through wages and salaries; (ii) to pay the employer portion of payroll-related taxes; (iii) to withhold and remit (where applicable) the employee portion of payroll-related taxes; (iv) to provide employee benefit programs; and (v) to provide workers compensation insurance coverage.
In addition to its assumption of employer status for its worksite employees, the Companys comprehensive service also includes other human resource functions for its clients to support the effective and efficient use of personnel in their business operations. To provide these functions, the Company maintains a significant staff of professionals trained in a wide variety of human resource functions, including employee training, employee recruiting, employee performance management, employee compensation, and employer liability management. These professionals interact and consult with clients on a daily basis to help identify each clients service requirements and to ensure that the Company is providing appropriate and timely personnel management services.
The Company provides its comprehensive service to small and medium-sized businesses in strategically selected markets throughout the United States. During 2004, 2003 and 2002, revenues from the Companys Texas markets represented 39%, 40% and 43% of the Companys total revenues, respectively.
Revenue and Direct Cost Recognition
The Company accounts for its revenues in accordance with EITF 99-19, Reporting Revenues Gross as a Principal Versus Net as an Agent. The Companys revenues are derived from its gross billings, which are based on (i) the payroll cost of its worksite employees; and (ii) a markup computed as a percentage of the payroll cost. The gross billings are invoiced concurrently with each periodic payroll of its worksite employees. Revenues are
F-11
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recognized ratably over the payroll period as worksite employees perform their service at the client worksite. Revenues that have been recognized but not invoiced are included in unbilled accounts receivable on the Companys Consolidated Balance Sheets.
In determining the pricing of the markup component of the gross billings, the Company takes into consideration its estimates of the costs directly associated with its worksite employees, including payroll taxes, benefits and workers compensation costs, plus an acceptable gross profit margin. As a result, the Companys operating results are significantly impacted by the Companys ability to accurately estimate, control and manage its direct costs relative to the revenues derived from the markup component of the Companys gross billings.
Consistent with its revenue recognition policy, the Companys direct costs do not include the payroll cost of its worksite employees. The Companys direct costs associated with its revenue generating activities are comprised of all other costs related to its worksite employees, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers compensation insurance costs.
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 .
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 accounting principles generally accepted in the United States 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.
Concentrations of Credit Risk
Financial instruments that could potentially subject the Company to concentration of credit risk include accounts receivable.
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.
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, 2004 and 2003, all of the Companys 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
F-12
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Company follows
its investment managers methods of determining the cost basis in computing realized gains and
losses on the sale of its available-for-sale securities, which includes both the specific
identification and average cost methods. Realized gains and losses are included in other income
(expense).
Property and Equipment
Property and equipment are recorded at cost and are 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:
5-30 years
2-5 years
3-5 years
5-7 years
10 years
5 years
Software development costs relate primarily to the Companys proprietary professional employer information system and its Internet-based service delivery platform, the Employee Service Center, 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 long-lived assets for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that an impairment loss be recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed to not be recoverable. If events or circumstances were to indicate that any of the Companys long-lived assets might be impaired, the Company would analyze the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, the Company would record an impairment loss to the extent that the carrying value of the asset exceeded the fair value of the asset. Fair value is generally determined using an estimate of discounted future net cash flows from operating activities or upon disposal of the asset.
Health Insurance Costs
The Company provides health insurance coverage to its worksite employees through a national network of carriers including UnitedHealthcare (United), Cigna Healthcare, PacifiCare, Kaiser Permanente, Blue Cross and Blue Shield of Georgia, Blue Shield of California and Tufts, all of which provide fully insured policies or service contracts. The policy with United provides the majority of the Companys health insurance coverage. Pursuant to the terms of the Companys annual contract with United, within 195 days after contract termination, a final accounting of the plan will be performed and the Company will receive a refund for any accumulated surplus or will be liable for any accumulated deficit in the plan, up to the amount of the Companys then-outstanding security deposit with United. As a result of these contractual terms, the Company accounts for this plan using a partially self-funded insurance accounting model.
Each reporting period, the Company records the costs of the United Plan, including paid claims, an estimate of the change in incurred but not reported (IBNR) claims, taxes and administrative fees (collectively the Plan Costs) as benefits expense in the Consolidated Statements of Operations. The estimated IBNR claims are based upon both (i) a recent average level of paid claims under the plan; and (ii) an estimated lag factor, to provide for those claims which have been incurred but not yet paid.
Under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the cash funded to United, a deficit in
F-13
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the plan would be incurred and the Company would accrue a current liability for the excess costs on its Consolidated Balance Sheet. On the other hand, if the Plan Costs for the reporting quarter are less than the cash funded to United, a surplus in the plan would be incurred and the Company would record a current asset for the excess premiums on its Consolidated Balance Sheet. During the year ended December 31, 2004, the cash funded to United exceeded the Plan Costs by approximately $900,000, resulting in an accumulated cash surplus from the inception of the plan of approximately $10.9 million, which is recorded as prepaid insurance on the Companys Consolidated Balance Sheet.
As of December 31, 2003, the Companys security deposit with United totaled $25 million. In January 2004, the security deposit was reduced to $17.5 million, at which time the $7.5 million security deposit reduction plus accrued interest was returned to the Company. Accordingly, as of December 31, 2003, the Company has recorded, on its Consolidated Balance Sheet, a long-term deposit of $17.5 million and prepaid insurance of $7.5 million relating to the portion returned to the Company in January 2004. As of December 31, 2004, the security deposit remained at $17.5 million.
Workers Compensation Costs
The Companys workers compensation insurance policy for the two-year period ending September 30, 2003 was a guaranteed-cost policy (2003 Policy) under which premiums were paid for full-insurance coverage of all claims incurred during the policy period. This policy also contained a dividend feature for each policy year, under which the Company was entitled to a refund of a portion of its premiums if, four years after the end of the policy year, claims paid by the insurance carrier for any policy year were less than an amount set forth in the policy. In accordance with EITF Topic D-35, FASB Staff Views on EITF No. 93-6, Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises, the Company estimated the amount of refund, if any, that had been earned under the dividend feature, based on the actual claims incurred to date and a factor used to develop those claims to an estimate of the ultimate cost of the incurred claims during that policy year. In May 2003, the Companys workers compensation carriers rating was downgraded by A.M. Best Co. (Best) from a B or fair rating to a C++ or marginal rating. In June 2003, Best further downgraded the carrier to a D or poor rating. Bests rating represents an opinion on the insurers financial strength and ability to meet its ongoing obligations to its policyholders. As a result of these downgrades, the Company elected to accelerate the termination of its contract from September 30, 2003 to September 1, 2003. In addition, the Company recorded a charge of $2.5 million in 2003 to write-off its dividend receivable from its workers compensation carrier due to the uncertainty of the carriers ultimate ability to pay this dividend.
On September 1, 2003, the Company obtained a workers compensation policy (2004 Policy), which matured and was subsequently renewed on September 16, 2004 for the period ending September 30, 2005 (2005 Policy). The policies are with selected member insurance companies of American International Group, Inc. (AIG). Under its arrangement with AIG, the Company bears the economic burden for the first $1 million layer of claims per occurrence. AIG bears the economic burden for all claims in excess of such first $1 million layer. The policies are fully insured whereby AIG has the responsibility to pay all claims incurred under the policies regardless of whether the Company satisfies its responsibilities.
Because the Company bears the economic burden of the first $1 million layer of claims per occurrence, such claims, which are the primary component of the Companys workers compensation costs, are recorded in the period incurred. Workers compensation insurance includes ongoing healthcare and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment. The Company estimates its workers compensation costs by applying an aggregate loss development rate to worksite employee payroll levels. The Company employs a third party actuary to estimate its loss development rate, which is primarily based upon the nature of worksite employees job responsibilities, the location of worksite employees, the historical frequency and severity of workers compensation claims and an estimate of future cost trends. Workers compensation cost estimates are discounted to present value at a rate based upon the US Treasury rates that correspond with the weighted average estimated claim payout period (the discount rate utilized in 2003 and 2004 averaged 2.0% and 2.8%, respectively) and are accreted
F-14
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
over the estimated claim payment period and included as a component of direct costs in the Companys Consolidated Statements of Operations.
The following table provides the activity and balances related to incurred but not reported workers compensation claims for the years ended December 31, 2004 and 2003 (in thousands):
Year ended | Year ended | |||||||
2004 | 2003 | |||||||
Beginning balance
|
$ | 12,000 | $ | | ||||
Accrued claims
|
43,087 | 13,529 | ||||||
Present value discount
|
(3,871 | ) | (844 | ) | ||||
Paid claims
|
(9,793 | ) | (685 | ) | ||||
|
||||||||
Ending balance
|
$ | 41,423 | $ | 12,000 | ||||
|
||||||||
|
||||||||
Current portion of accrued claims
|
$ | 18,511 | $ | 4,583 | ||||
Long-term portion of accrued claims
|
22,912 | 7,417 | ||||||
|
||||||||
|
$ | 41,423 | $ | 12,000 | ||||
|
At the beginning of each policy period, the insurance carrier, AIG, establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (claim funds). The level of claim funds is primarily based upon anticipated worksite employee payroll levels and expected workers compensation loss rates, as determined by AIG. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits, a long-term asset in the Companys Consolidated Balance Sheets.
The Companys estimate of incurred claim costs expected to be paid within one year are recorded as accrued workers compensation costs and included in short-term liabilities, while its estimate of incurred claim costs expected to be paid beyond one year are included in long-term liabilities on the Companys Consolidated Balance Sheets.
As of December 31, 2004, the Company had restricted cash of $18.5 million and deposits of $52.3 million. Included in deposits is a $13.3 million security deposit related to the 2004 policy. The Company has estimated and accrued $41.4 million in incurred workers compensation claim costs, which is net of $10.5 million in paid claims, as of December 31, 2004.
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. The carrying amount of the Companys marketable securities and long-term debt approximate fair value due to the stated interest rates approximating market rates.
Stock-Based Compensation
At December 31, 2004, the Company has three stock-based employee compensation plans, which are described more fully in Note 9. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees , and related interpretations. No stock-based compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation , to stock-based employee compensation.
F-15
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(in thousands) | ||||||||||||
Net income (loss), as reported
|
$ | 19,210 | $ | 12,864 | $ | (4,081 | ) | |||||
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects
|
(2,530 | ) | (5,800 | ) | (9,253 | ) | ||||||
|
||||||||||||
Pro forma net income (loss)
|
$ | 16,680 | $ | 7,064 | $ | (13,334 | ) | |||||
|
||||||||||||
|
||||||||||||
Net income (loss) per share:
|
||||||||||||
Basic as reported
|
$ | 0.74 | $ | 0.48 | $ | (0.15 | ) | |||||
Basic pro forma
|
$ | 0.64 | 0.26 | $ | (0.48 | ) | ||||||
Diluted as reported
|
$ | 0.72 | $ | 0.47 | $ | (0.15 | ) | |||||
Diluted pro forma
|
$ | 0.62 | $ | 0.26 | $ | (0.48 | ) |
The fair value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions:
Year ended December 31,
2004
2003
2002
3.4
%
3.0
%
3.8
%
0.0
%
0.0
%
0.0
%
0.90
0.92
0.86
5.0
5.0
5.0
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 Companys 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 Companys opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Employee Savings Plan
The Company matches 50% of an eligible worksite employees eligible contributions and 100% of eligible corporate employees contributions, both up to 6% of the employees eligible compensation with immediate vesting. During 2004, 2003 and 2002, the Company made employer-matching contributions of $13,521,000, $10,854,000 and $11,434,000, respectively. Of these contributions, $10,658,000, $8,494,000 and $9,244,000 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
F-16
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
amounts of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2004 presentation.
New Accounting Pronouncement
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment , which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation . Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees , and amends FASB Statement No. 95, Statement of Cash Flows . Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Statement 123(R) must be adopted no later than July 1, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt Statement 123(R) on July 1, 2005.
Statement 123(R) permits public companies to adopt its requirements using one of two methods:
1. | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date; and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. | |||
2. | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented; or (b) prior interim periods of the year of adoption. |
The Company plans to adopt Statement 123(R) using the modified prospective method.
As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair value method will have a significant impact on the Companys results of operations, although it will have no material impact on the Companys overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to the Companys consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $352,000, $249,000, and $203,000 in 2004, 2003 and 2002, respectively.
F-17
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Accounts Receivable
The Companys accounts receivable is primarily composed of trade receivables and unbilled receivables. The Companys trade receivables, which represent outstanding gross billings to clients, are reported net of allowance for doubtful accounts of $604,000 and $647,000 as of December 31, 2004 and 2003, respectively. The Company establishes an allowance for doubtful accounts based on managements assessment of the collectibility of specific accounts and by making a general provision for other potentially uncollectible amounts.
The Company makes an accrual at the end of each accounting period for its obligations
associated with the earned but unpaid wages of its worksite employees and for the accrued gross
billings associated with such wages. These accruals are included in accrued worksite employee
payroll cost and unbilled accounts receivable; however, these amounts are presented net in the
Consolidated Statements of Operations. The Company generally requires that clients 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. Customer prepayments directly attributable to unbilled
accounts receivable have been netted against such receivables as the gross billings have been
earned and the payroll cost has been incurred, thus the Company has the legal right of offset for
these amounts. As of December 31, 2004 and 2003, unbilled accounts receivable consisted of the
following:
2004
2003
(in thousands)
$
59,277
$
65,503
17,025
19,324
(11,153
)
(31,794
)
$
65,149
$
53,033
3. Marketable Securities
The following is a summary of the Companys available-for-sale marketable securities as of
December 31, 2004 and 2003:
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
(in thousands)
$
11,360
$
$
(166
)
$
11,194
753
753
16,040
18
(55
)
16,003
$
28,153
$
18
$
(221
)
$
27,950
$
11,132
$
$
(54
)
$
11,078
8,266
62
(12
)
8,316
4,253
5
(1
)
4,257
338
1
(1
)
338
$
23,989
$
68
$
(68
)
$
23,989
F-18
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 2004, 2003 and 2002, the Companys realized gains and losses recognized on sales of available-for-sales marketable securities are as follows:
Net | ||||||||||||
Realized | ||||||||||||
Realized | Realized | Gains | ||||||||||
Gains | Losses | (Losses) | ||||||||||
(in thousands) | ||||||||||||
2004
|
$ | 64 | $ | (43 | ) | $ | 21 | |||||
2003
|
78 | (7 | ) | 71 | ||||||||
2002
|
354 | (33 | ) | 321 |
As of December 31, 2004, the contractual maturities of the Companys marketable securities
were as follows:
Amortized
Estimated
Cost
Fair Value
(in thousands)
$
11,809
$
11,644
6,211
6,207
881
878
9,252
9,221
$
28,153
$
27,950
4. Deposits
In December 2001, the Company made a cash security deposit of $15.0 million with its primary health insurance carrier, United. During 2002, the Company made two additional deposits of $5.0 million each with United. In January 2004, $7.5 million of the security deposit plus accrued interest was returned to the Company and was included as a component of prepaid insurance in the Companys Consolidated Balance Sheet at December 31, 2003. At December 31, 2004, $17.5 million is included as a component of deposits healthcare. In the event of a default or termination of the Companys contract with United or the reduction of the Companys current ratio below 0.60, United may draw against the security deposit to collect any unpaid health insurance premiums or any accumulated deficit in the Plan.
As of December 31, 2004, the Company also had $52.3 million of workers compensation long-term deposits, including $13.3 million of collateral and $39.0 million of claim deposits with the Companys workers compensation carrier, AIG. See Note 1.
5. Investments
During 2000, the Company purchased convertible preferred stock of Virtual Growth, Inc. (VGI) for a total cost of approximately $3.2 million. During 2001, the Company purchased an additional $319,000 of convertible preferred stock and made loans to VGI totaling $224,000. In December 2001, VGI filed for bankruptcy protection. As a result of the filing, the Company wrote-off its investments in VGI as of that date totaling $3.8 million.
Subsequent to December 2001, the Company purchased substantially all of the assets of VGI through bankruptcy proceedings for a total cost of $1.6 million. The Company established a subsidiary, FMS, to provide outsourcing accounting and bookkeeping services using the assets acquired from VGI. During 2003, the Company ceased operations of FMS and incurred after tax asset impairment charges of $800,000 to write off the assets of
F-19
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FMS. FMS operating results are included in discontinued operations in the accompanying Consolidated Statements of Operations. Revenues were immaterial to the Consolidated Statements of Operations.
During 2000, the Company purchased 500,000 shares of convertible preferred stock of eProsper, Inc. (eProsper) for $2.5 million. In 2002, the Company made an additional $500,000 investment in convertible preferred stock of eProsper. The Company has accounted for this investment using the cost method. Under the cost method, the Company periodically evaluates the realizability of this investment based on its review of the investees financial condition, financial results, financial projections and availability of additional financing sources. In December 2002, the Company determined that the fair value of its investment in eProsper had declined below its carrying value, for reasons that were other than temporary, resulting in the Company writing-off its entire investment totaling approximately $3.1 million. During 2003, the Company collected $457,000 from the sale of its investment in eProsper, which is included as a component of other income in the accompanying Consolidated Statements of Operations.
6. Debt Obligations
The Companys debt obligations consist of the following:
December 31,
2004
2003
(in thousands)
$
33,746
$
34,880
4,221
2,793
3,261
$
36,539
$
42,362
1,649
1,860
$
34,890
$
40,502
Maturities of long-term debt at December 31, 2004 are summarized as follows (in thousands):
$
1,649
1,700
1,653
30,999
538
$
36,539
Mortgage Loan
On December 20, 2002, the Company entered into a $36 million mortgage agreement (Mortgage) that matures in January 2008. The proceeds were used to repay the Companys outstanding balance under its revolving credit agreement. The Mortgage bears interest at a variable rate equal to the greater of (a) 4.5%; or (b) the 30-day LIBOR rate (2.3% at December 31, 2004) plus 2.9%. The Mortgage is secured by the Companys real estate and related fixtures located at Administaffs headquarters in Kingwood, Texas, which has a net book value of $40.3 million at December 31, 2004. Monthly principal and interest payments are approximately $230,000, with the remaining balance due upon maturity. The Mortgage provides for prepayment penalties as a percentage of the outstanding principal balance, ranging from 5% down to 1% during the first four years of the term. There is no prepayment penalty during the final year of the Mortgage.
F-20
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Term Loan
In October 2002, the Company entered into a $4.5 million term loan agreement that matures in October 2012 and bears interest at the one-month commercial paper rate plus 3.1% (4.53% at September 30, 2004). The loan was secured by the Companys aircraft and was repaid in November 2004.
Capital Lease Obligations
In October 2002, the Company entered into a capital lease arrangement to finance the purchase of office furniture. The assets under capital lease were capitalized using an effective interest rate of 7.5%. The current monthly lease payments are $58,000 per month over the seven-year lease term. As of December 31, 2004 and 2003, the capitalized cost and accumulated depreciation under the capital lease arrangement were $3.8 million and $1.2 million, and $3.8 million and $656,000, respectively. Depreciation of the capitalized lease costs is included in depreciation and amortization in the Consolidated Statements of Operations.
Revolving Line of Credit
On June 25, 2002, the Company entered into a six-month, $30 million revolving credit agreement, replacing its former $21 million line of credit (collectively, the Credit Agreements), which expired in December 2002. The proceeds of the Credit Agreements were used to finance the construction of the Companys new corporate headquarters facility. In December 2002, the Company repaid the outstanding balance of the revolving line of credit with the proceeds from the Mortgage. During 2002, the Company capitalized interest expense of $371,000 incurred under the Credit Agreements.
F-21
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. 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:
December 31,
2004
2003
(in thousands)
$
(6,023
)
$
(250
)
(2,876
)
(3,647
)
(667
)
(1,552
)
(9,566
)
(5,449
)
3,057
2,767
2,109
2,248
1,791
554
531
274
231
254
76
128
288
8,220
6,088
(2,383
)
(2,276
)
5,837
3,812
$
(3,729
)
$
(1,637
)
$
(231
)
$
3,423
(3,498
)
(5,060
)
$
(3,729
)
$
(1,637
)
The components of income tax expense from continuing operations are as follows:
Year ended December 31,
2004
2003
2002
(in thousands)
$
9,066
$
11,115
$
554
292
1,388
610
9,358
12,503
1,164
1,680
(2,632
)
59
488
(386
)
18
2,168
(3,018
)
77
$
11,526
$
9,485
$
1,241
In 2004, 2003 and 2002, income tax benefits of $352,000, $249,000 and $203,000, 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-22
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 from continuing operations is as follows:
Year ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(in thousands) | ||||||||||||
Expected income tax expense at 35%
|
$ | 10,758 | $ | 8,565 | $ | (588 | ) | |||||
State income taxes, net of federal benefit
|
429 | 688 | 518 | |||||||||
Nondeductible expenses
|
486 | 375 | 262 | |||||||||
Tax-exempt interest income
|
(142 | ) | | (20 | ) | |||||||
Valuation allowance against long-term capital loss carry-forward
|
(32 | ) | (160 | ) | 1,069 | |||||||
Other, net
|
27 | 17 | | |||||||||
|
||||||||||||
Reported total income tax expense from continuing operations
|
$ | 11,526 | $ | 9,485 | $ | 1,241 | ||||||
|
The income tax rate for the year ended December 31, 2004 was 37.5%. During the period the Company recorded a $213,000 cumulative tax adjustment due to a change in estimate resulting from the favorable impact of the Companys captive insurance subsidiary on state income tax rates.
As a result of the write-off of the investments in eProsper and VGI, the Company has capital loss carryforwards totaling $5.8 million that will expire during 2006 and 2007, but can only be used to offset future capital gains. The Company has recorded a valuation allowance of $2.1 million and $2.3 million in 2004 and 2003, respectively, against these related deferred tax assets as it is uncertain that the Company will be able to utilize the capital loss carryforwards prior to their expiration. In addition, the Company has incurred net operating losses at the subsidiary level for state income tax purposes totaling $4.2 million ($274,000 tax effected) that expire from 2008 to 2023. The Company has recorded a valuation allowance of $274,000 at December 31, 2004, as it is uncertain if it will be able to utilize the net operating loss carryforward in these entities.
8. Stockholders Equity
In 1998, the Company entered into a Securities Purchase Agreement with American Express Travel Related Services Company, Inc. (American Express) whereby the Company issued warrants to purchase 4,131,030 shares of common stock to American Express with exercise prices ranging from $20 to $40 per share and terms ranging from three to seven years. In February and November 2001, American Express exercised 800,000 and 273,729 common stock purchase warrants at $20.00 and $25.00 per share, respectively. In March 2002, American Express exercised 526,271 common stock purchase warrants at $25.00. As of December 31, 2004, American Express had 931,030 warrants remaining at an exercise price of $40 which are scheduled to expire in March 2005.
The Companys Board of Directors (the Board) has authorized a program to repurchase up to 8,000,000 shares of the Companys 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. During 2004, 2003 and 2002, the Company repurchased 1,411,000, 1,373,252 and 726,271 shares at a cost of $17.2 million, $8.2 million and $17.1 million, respectively. As of December 31, 2004, the Company had repurchased 6,752,523 shares under this program at a total cost of approximately $82.8 million, including 2,612,523 shares repurchased from American Express. As a result, the Company has the authorization to repurchase an additional 1,247,477 shares.
At December 31, 2004, 20 million shares of preferred stock were authorized and were designated as Series A Junior Participating Preferred Stock that is reserved for issuance on exercise of preferred stock purchase rights under Administaffs Share Purchase Rights Plan (the Rights Plan). Each issued share of the Companys common stock has
F-23
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
one-half of a preferred stock purchase right attached to it. No preferred shares have been issued and the rights are not currently exercisable. The Rights Plan expires on February 9, 2008.
9. Employee Incentive Plans
The Administaff, Inc. 1997 Incentive Plan, as amended, and the 2001 Incentive Plan (collectively, the Incentive Plans) provide 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 4,465,914 shares of common stock of the Company are authorized to be issued under the Incentive Plans. At December 31, 2004, 177,510 and 360,830 shares of common stock were available for future grants under the 1997 and 2001 Incentive Plans, respectively. 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 Incentive Plans also permit stock awards, phantom stock awards, stock appreciation rights, performance units, other stock-based awards and cash awards, all of which may or may not be subject to the achievement of one or more performance objectives. The purposes of the Incentive Plans generally are to retain and attract persons of training, experience and ability to serve as employees of the Company and its subsidiaries and to serve as non-employee directors of the Company, to encourage the sense of proprietorship of such persons and to stimulate the active interest of such persons in the development and financial success of the Company and its subsidiaries. The Incentive Plans are 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 Board has granted limited authority to the Chief Executive Officer of the Company regarding the granting of stock options to employees who are not officers. The Company may at any time amend or terminate the Incentive Plans. However, no amendment that would impair the rights of any participant, with respect to outstanding grants, can be made without the participants prior consent. Stockholder approval of amendments to the Incentive Plans is necessary only when required by applicable law or stock exchange rules.
The Administaff Nonqualified Stock Option Plan (the Nonqualified Plan) provides for options to purchase shares of the Companys common stock that 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, 2004, 511,916 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 Plans. 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.
F-24
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following summarizes stock option activity and related information:
Year ended December 31, | ||||||||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Exercise | Exercise | Exercise | ||||||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||||||||||
Outstanding beginning of year
|
5,039 | $ | 18.56 | 4,986 | $ | 19.77 | 4,276 | $ | 21.99 | |||||||||||||||
Granted
|
861 | 13.69 | 594 | 7.70 | 1,117 | 12.25 | ||||||||||||||||||
Exercised
|
(127 | ) | 7.96 | (114 | ) | 7.73 | (59 | ) | 12.59 | |||||||||||||||
Cancelled
|
(351 | ) | 19.38 | (427 | ) | 20.53 | (348 | ) | 23.15 | |||||||||||||||
|
||||||||||||||||||||||||
Outstanding end of year
|
5,422 | $ | 17.98 | 5,039 | $ | 18.56 | 4,986 | $ | 19.77 | |||||||||||||||
|
||||||||||||||||||||||||
Exercisable end of year
|
3,567 | $ | 20.66 | 3,242 | $ | 21.55 | 2,454 | $ | 20.44 | |||||||||||||||
|
||||||||||||||||||||||||
Weighted average fair value of
options granted during year
|
$ | 9.79 | $ | 5.54 | $ | 8.48 |
The following summarizes information related to stock options outstanding at December 31, 2004:
Options Outstanding
Options Exercisable
Weighted Average
Weighted
Weighted Average
Weighted
Remaining
Average
Remaining
Average
Contractual
Exercise
Contractual
Exercise
Range of Exercise Prices
Shares
Life (Years)
Price
Shares
Life (Years)
Price
(share amounts in thousands)
1,336
6.4
$
7.15
778
5.0
$
7.44
1,165
7.9
12.96
333
5.4
13.36
1,696
6.1
18.34
1,423
5.6
18.57
601
6.4
24.15
412
6.2
24.20
624
5.7
43.58
621
5.7
43.61
5,422
6.6
$
17.98
3,567
5.5
$
20.66
10. Earnings (Loss) Per Share
The numerator used in the calculations of both basic and diluted net income (loss) per share
for all periods presented was net income (loss). The denominator for each period presented was
determined as follows:
Year ended December 31,
2004
2003
2002
(in thousands)
26,096
26,821
27,890
763
432
26,859
27,253
27,890
F-25
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Options and warrants to purchase 4,148,000, 5,866,000 and 7,327,000 shares of common stock were not included in the diluted net income (loss) per share calculation for 2004, 2003 and 2002, respectively, because their inclusion would have been anti-dilutive.
11. Leases
The Company leases various office facilities, furniture, equipment and vehicles under
capital and operating lease arrangements, some of which contain rent escalation clauses. 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 $9,700,000, $8,179,000 and
$10,222,000 in 2004, 2003 and 2002, respectively. At December 31, 2004, future minimum rental
payments under noncancelable operating and capital leases are as follows (in thousands):
Operating
Capital
Leases
Leases
$
9,395
$
695
8,984
695
8,162
695
6,323
695
5,097
554
12,813
$
50,774
$
3,334
541
2,793
502
$
2,291
12. Commitments and Contingencies
The Company enters into non-cancelable fixed purchase and service obligations in the ordinary
course of business. These arrangements primarily consist of software service contracts and
advertising commitments. At December 31, 2004, future non-cancelable purchase and service
obligations greater than $100,000 were as follows (in thousands):
$
5,098
4,334
1,303
290
190
530
$
11,745
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, except as set forth below, management believes the final outcome of such litigation will not have a material adverse effect on the Companys financial position or results of operations.
F-26
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aetna Healthcare Litigation
On November 5, 2001, the Company filed a lawsuit against Aetna Life Insurance Company (Aetna). The Company alleged, among other things, that during the third quarter of 2001, Aetna breached its contract with the Company. Aetna filed a counterclaim alleging, among other things, that the Company breached its contractual obligations to Aetna. On October 30, 2003, a jury returned a verdict in favor of the Company, awarding the Company $15.5 million in compensatory damages. On November 7, 2003, the court entered a final judgment in favor of Administaff in the amount of $15.5 million, with post judgment interest at a rate of 1.3% per annum. On December 10, 2003, the court granted Aetnas motion to reduce the judgment to $10.6 million. Aetna subsequently filed its notice to appeal the judgment and other rulings of the trial court.
During the first quarter of 2004, the Company and Aetna executed a settlement agreement. Under the terms of the agreement, Aetna paid $8.25 million to the Company and both parties released all claims and agreed to dismiss all court proceedings. The settlement is recorded in other income in the Companys 2004 Consolidated Statements of Operations. This matter has now been concluded.
Class Action Litigation
On June 13, 2003, a class action lawsuit was filed against the Company in the United States District Court for the Southern District of Texas on behalf of purchasers of the Companys common stock alleging violations of the federal securities laws. After that date, six similar class actions were filed against the Company in that court. Those lawsuits also named as defendants certain of the Companys officers and directors. Those lawsuits generally allege that the Company and certain of its officers and directors made false and misleading statements or failed to make adequate disclosures concerning, among other things: (i) the Companys pricing and billing systems with respect to recalibrating pricing for clients that experienced a decline in average payroll cost per worksite employee; (ii) the matching of price and cost for health insurance on new and renewing client contracts; and (iii) the Companys former method of reporting worksite employee payroll costs as revenue. The complaints sought unspecified damages, among other remedies. On March 31, 2004, the court entered an order consolidating all of the cases and appointing Carpenters Pension Trust for South California as lead plaintiff and Lerach Coughlin Stoia Geller Rudman & Robbins LLP as lead counsel. The lead plaintiff alleges that its losses are $352,000, although the alleged damages of the purported class have not been specified.
In May 2004, the lead plaintiff filed its Consolidated Complaint, which amended and consolidated the seven previously filed cases. In the Consolidated Complaint, the lead plaintiff has essentially abandoned the allegations of fraud contained in the initial seven lawsuits. Through the Consolidated Complaint, the lead plaintiff now generally asserts, among other things, that the Company and certain of its officers and directors fraudulently made false and misleading statements regarding the cost of its health plan during 2001 and 2002. In June 2004, the Company filed a motion to dismiss the Consolidated Complaint. The Company believes these claims are without merit and intends to vigorously defend this litigation. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the accompanying consolidated financial statements.
Reliance National Indemnity Co. Bankruptcy Liquidation and Related Litigation
In October 2001, Reliance National Indemnity Co. (Reliance), a former workers compensation insurance carrier of the Company, was forced into bankruptcy liquidation. State laws regarding the handling of the open claims of liquidated insurance carriers vary. Most states have established funds through guaranty associations to pay such remaining claims. However, the guaranty associations in some states, including Texas, have asserted that state law returns the liability for open claims under policies with the liquidated insurance carrier to the Company. In Texas, the Company disputed the right of the guaranty association to be reimbursed for such claims.
F-27
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On August 1, 2003, the Company filed a lawsuit against the Texas Property and Casualty Insurance Guaranty Association (TPCIGA) seeking a declaratory judgment that the Company is not required to reimburse TPCIGA for workers compensation benefits paid or to be paid by TPCIGA under the Companys workers compensation policies with Reliance. On August 15, 2003, TPCIGA filed its answer, denying the claims asserted by the Company as well as filing a counterclaim that TPCIGA is entitled to full reimbursement from the Company for workers compensation benefits paid or to be paid by TPCIGA under the Companys workers compensation policies with Reliance. Administaff estimated that TPCIGAs claim for reimbursement was approximately $6.8 million. During the fourth quarter of 2003, the Company paid $1.1 million to settle the lawsuit, including TPCIGAs claim for reimbursement. The cost of the settlement has been reported as a component of workers compensation expense in the Companys 2003 Consolidated Statement of Operations.
The Company initially secured $1.8 million in insurance coverage to cover potential claims returned to the Company related to its Reliance policies. Administaff submitted the TPCIGA settlement as a claim under the policy. The Company collected and recorded at $1.1 million reimbursement during the year ended December 31, 2004. As of December 31, 2004, there was no coverage remaining on the policy. At December 31, 2004, the estimated outstanding claims under the Companys former policies with Reliance totaled approximately $100,000. The Company has accrued and recorded its estimate of the outstanding claims as of December 31, 2004. It is possible that such losses could exceed the Companys estimates, resulting in an increase to workers compensation expense, which would reduce net income.
State Unemployment Taxes
The Company records its state unemployment (SUI) tax expense based on taxable wages and tax rates assigned by each state. State unemployment tax rates vary by state and are determined, in part, based on prior years compensation experience in each state. Prior to the receipt of final tax rate notices, the Company estimates its expected SUI tax rate in those states for which tax rate notices have not yet been received.
In December 2001, as a result of the 2001 corporate reorganization, the Company filed for a transfer of its reserve account with the Employment Development Department of the State of California (EDD). The EDD approved the Companys request for transfer of its reserve account in May 2002 and also notified the Company of its new contribution rates based upon the approved transfer. In December 2003, the Company received a Notice of Duplicate Accounts and Notification of Assessment (Notice) from the Employment Development Department of the State of California (EDD). The Notice stated that the EDD was collapsing the accounts of the Companys subsidiaries into the account of the entity with the highest unemployment tax rate. The Notice also retroactively imposed the higher unemployment insurance rate on all the Companys California employees for 2003, resulting in an assessment of $5.6 million. In January 2004, the Company filed a petition with an administrative law judge of the California Unemployment Insurance Appeals Board (ALJ) to protest the Notice. Pending a resolution of its protest, in the fourth quarter of 2003 the Company accrued and recorded at the higher assessed rate for all of 2003.
In June 2004, the Company agreed to settle its dispute with the EDD for $3.3 million (Settlement). Based upon receipt of written acknowledgement of this agreement, the Company reduced its accrued payroll tax liability and payroll tax expense by $2.3 million during the quarter ended June 30, 2004. The Settlement was subject to the final approval by EDDs legal department, the California Attorney Generals office and the ALJ. In October 2004, the legal department of the EDD verbally indicated they considered the previously agreed-upon settlement amount to be insufficient and suggested a settlement amount of $5.2 million. The Company and the State of California continued discussions, but in February 2005, the Company was notified that the EDD had rejected the Companys settlement offer and that the matter will proceed with the appeals process with the ALJ. If the outcome of the appeals process is unfavorable and the company is assessed additional interest and penalties, the Company may recognize an increase in its payroll tax expense in a future period. Conversely, if the outcome of the appeals
F-28
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
process is favorable to the Company, the Company may recognize a decrease in its payroll tax expense in a future period.
13. Quarterly Financial Data (Unaudited)
Quarter ended | ||||||||||||||||
March 31 | June 30 | Sept. 30 | Dec. 31 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Year ended December 31, 2004:
|
||||||||||||||||
|
||||||||||||||||
Revenues
|
$ | 252,047 | $ | 232,892 | $ | 235,865 | $ | 248,723 | ||||||||
Gross profit
|
50,034 | 48,545 | 47,672 | 51,443 | ||||||||||||
Operating income
|
7,166 | 4,499 | 5,091 | 5,375 | ||||||||||||
Net income
|
9,238 | (1) | 2,811 | 3,612 | 3,549 | |||||||||||
Basic net income per share
|
0.35 | 0.11 | 0.14 | 0.14 | ||||||||||||
Diluted net income per share
|
0.33 | 0.10 | 0.14 | 0.14 | ||||||||||||
|
||||||||||||||||
Year ended December 31, 2003:
|
||||||||||||||||
|
||||||||||||||||
Revenues
|
$ | 225,520 | $ | 219,226 | $ | 217,849 | $ | 228,264 | ||||||||
Gross profit
|
35,981 | 46,822 | 56,578 | 57,724 | ||||||||||||
Operating income (loss)
|
(6,568 | ) | 2,747 | 13,778 | 14,317 | |||||||||||
Net income (loss)
|
(4,361 | ) | 1,713 | 7,476 | 8,036 | |||||||||||
Basic net income (loss) per share
|
(0.16 | ) | 0.06 | 0.28 | 0.30 | |||||||||||
Diluted net income (loss) per share
|
(0.16 | ) | 0.06 | 0.28 | 0.29 | |||||||||||
|
||||||||||||||||
Year ended December 31, 2002:
|
||||||||||||||||
|
||||||||||||||||
Revenues
|
$ | 195,958 | $ | 204,966 | $ | 218,069 | $ | 229,423 | ||||||||
Gross profit
|
30,453 | 36,377 | 46,746 | 52,214 | ||||||||||||
Operating income (loss)
|
(9,651 | ) | (5,393 | ) | 6,489 | 8,622 | ||||||||||
Net income (loss)
|
(5,704 | ) | (3,164 | ) | 3,779 | 1,008 | ||||||||||
Basic net income (loss) per share
|
(0.20 | ) | (0.11 | ) | 0.14 | 0.04 | ||||||||||
Diluted net income (loss) per share
|
(0.20 | ) | (0.11 | ) | 0.14 | 0.04 |
14. Subsequent Events
On February 4, 2005, the board of directors declared a quarterly dividend of $0.07 per share of common stock to holders of record on March 7, 2005. The dividend will be paid on April 1, 2005.
On February 1, 2005, the compensation committee of the board of directors approved accelerated vesting of all unvested stock options that have an exercise price greater than the Companys January 31, 2005 closing market price of $14.59. This accelerated vesting will affect approximately 733,000 common stock options with a weighted average exercise price of $18.09. The primary purpose of the accelerated vesting is to eliminate future compensation expense the Company would otherwise recognize in its income statement with respect to these accelerated options subsequent to the July 1, 2005 effective date of FASB Statement No. 123(R). The estimated maximum future expense that is eliminated is approximately $5.9 million, including $1.5 million in 2005.
F-29
ADMINISTAFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On February 1, 2005, the compensation committee approved a grant of 302,000 restricted common shares to certain employees and officers of the Company pursuant to the Companys 2001 Incentive Plan. The restricted common shares have a fair value of $14.86 per share and vest over three years. Restricted common shares, under fixed accounting, are generally measured at fair value on the date of grant based on the number of shares granted and the quoted price of the common stock. Such value is recognized as compensation expense over the corresponding vesting period.
F-30
Index to Exhibits
Exhibit
Description
Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Registrants Registration Statement on Form S-1 (No.
33-96952)).
Bylaws, as amended on March 7, 2001 (incorporated by
reference to Exhibit 3.2 to the Registrants Form 10-K filed for the year
ended December 31, 2000).
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 Registrants Form 8-A filed on
February 4, 1998).
Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Registrants Registration Statement on Form
S-1 (No. 33-96952)).
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 Registrants Form 8-A filed on
February 4, 1998).
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 Registrants Form 10-K
for the year ended December 31, 1999).
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 Registrants Form 8-A/A
filed on May 19, 1999).
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 Registrants Form 8-A/A
filed on August 9, 1999).
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 Registrants form 8-A/A
filed on August 9, 1999).
Form of Rights Certificate (incorporated by reference to
Exhibit 3 to the Registrants Form 8-A filed on February 4, 1998).
Amended and Restated Rights Agreement effective as of April
19, 2003 between Administaff, Inc. and Mellon Investor Services LLC, as
Rights Agent (incorporated by reference to Exhibit 1 to the Registrants Form
8-A/A filed on May 16, 2003).
Amendment No. 1 to Amended and Restated Rights Agreement
dated as of August 21, 2003 between Administaff, Inc. and Mellon Investor
Services LLC, as Rights Agent (incorporated by reference to Exhibit 1 to the
Registrants Form 8A/A filed on August 22, 2003).
Amendment No. 2 to Amended and Restated Rights Agreement
dated as of February 24, 2004 between Administaff, Inc. and Mellon Investor
Services LLC, as Rights Agent (incorporated by reference to Exhibit 4.10 to
the Registrants Form 10-K for the year ended December 31, 2003).
Table of Contents
Exhibit
Description
Administaff, Inc. 1997 Incentive Plan (incorporated by
reference to Exhibit 99.1 to the Registrants Registration Statement on Form
S-8 (No. 333-85151)).
First Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.2 to the Registrants Registration
Statement on Form S-8 (No. 333-85151)).
Second Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.3 to the Registrants Registration
Statement on Form S-8 (No. 333-85151)).
Third Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.4 to the Registrants Registration
Statement on Form S-8 (No. 333-85151)).
Fourth Amendment to the Administaff, Inc. 1997 Incentive Plan
(incorporated by reference to Exhibit 99.5 to the Registrants Registration
Statement on Form S-8 (No. 333-85151)).
Administaff, Inc. 2001 Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Registrants Form 10-Q filed for the quarter
ended March 31, 2001).
Form of Incentive Stock Option Agreement (1997 Plan).
Form of Incentive Stock Option
Agreement (2001 Plan 3 year vesting).
Form of Incentive Stock Option
Agreement (2001 Plan 5 year vesting).
Form of Director Stock Option Agreement (Initial Grant).
Form of Director Stock Option Agreement (Annual Grant).
Form of Restricted Stock Agreement.
Administaff, Inc. Nonqualified Stock Option Plan (incorporated
by reference to Exhibit 99.6 to the Registrants Registration Statement on Form
S-8 (No. 333-85151)).
First Amendment to Administaff, Inc. Nonqualified Stock Option
Plan, effective August 7, 2001 (incorporated by reference to Exhibit 10.8 to
the Registrants Form 10-K for the year ended December 31, 2002).
Second Amendment to Administaff, Inc. Nonqualified Stock
Option Plan, effective January 28, 2003 (incorporated by reference to Exhibit
10.9 to the Registrants Form 10-K for the year ended December 31, 2002).
Administaff, Inc. Amended and Restated Employee Stock Purchase
Plan effective April 1, 2002 (incorporated by reference to Exhibit 10.10 to the
Registrants Form 10-K for the year ended December 31, 2002).
First Amendment to Administaff, Inc. Amended and Restated
Employee Stock Purchase Plan, effective July 31, 2002 (incorporated by
reference to Exhibit 10.11 to the Registrants Form 10-K for the year ended
December 31, 2002).
Second Amendment to Administaff, Inc. Amended and Restated
Employee Stock Purchase Plan, effective August 15, 2003 (incorporated by
reference to Exhibit 10.12 to the Registrants Form 10-K for the year ended
December 31, 2003).
Board of Directors Compensation Arrangements (incorporated by reference to
Form 8-K dated February 7, 2005).
Promissory Note dated December 20, 2002 executed by
Administaff Services, L.P, payable to General Electric Capital Business Asset
Funding Corporation (incorporated by reference to Exhibit 10.18 to the
Registrants Form 10-K for the year ended December 31, 2002).
Guaranty dated December 20, 2002 by Administaff, Inc. in favor
of General Electric Capital Business Asset Funding Corporation (incorporated by
reference to Exhibit 10.19 to the Registrants Form 10-K for the year ended
December 31, 2002).
Commercial Deed of Trust, Security Agreement, Assignment of
Leases and Rents, and Fixture Filing, dated December 20, 2002, executed by
Administaff Services, L.P. in favor of General Electric Capital Business Asset
Funding Corporation (incorporated by reference to Exhibit 10.20 to the
Registrants Form 10-K for the year ended December 31, 2002).
Minimum Premium Financial Agreement by and between Administaff
of Texas, Inc. and United Healthcare Insurance Company, Hartford, Connecticut
(incorporated by reference to Exhibit 10.3 to the Registrants Form 10-Q for
the quarter ended June 30, 2002).
Table of Contents
Exhibit
Description
Minimum Premium Administrative Services Agreement by and
between Administaff of Texas, Inc. and United Healthcare Insurance Company,
Hartford, Connecticut (incorporated by reference to Exhibit 10.4 to the
Registrants Form 10-Q for the quarter ended June 30, 2002).
Amended and Restated Security Deposit Agreement by and
between Administaff of Texas, Inc. and United Healthcare Insurance Company,
Hartford, Connecticut (incorporated by reference to Exhibit 10.5 to the
Registrants Form 10-Q for the quarter ended June 30, 2002).
Amendment to Various Agreements Between United Healthcare Insurance Company
and Administaff of Texas, Inc.
Houston Service Center Operating Lease Amendment.
Subsidiaries of Administaff, Inc.
Consent of Independent Registered Public Accounting Firm.
Powers of Attorney.
Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
*
Filed herewith.
Management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
EXHIBIT 10.7
ADMINISTAFF, INC. INCENTIVE PLAN
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT between Administaff, Inc., a Delaware corporation ("Company"), and __________ ("Optionee").
WITNESSETH:
WHEREAS, the Compensation Committee of the Board of Directors of the Company has approved the grant of Options to employees of the Company and its subsidiaries pursuant to the Administaff, Inc. 1997 Incentive Plan ("Plan"); and
WHEREAS, the Optionee is an employee of the Company or one of its subsidiaries and has been selected to receive Options under the Plan;
NOW, THEREFORE, in consideration of the above premises, the Company and the Optionee agree as follows:
I. GRANT OF INCENTIVE STOCK OPTIONS
Subject to the terms and conditions set forth herein, the Optionee is hereby awarded _______ Options to purchase ________ shares of Common Stock of the Company. For purposes of this Agreement, the Date of Grant of the Options is _________.
II. OPTION PRICE
Each Option granted above shall have an Option Price of ___________ ($_____), which is equal to the Market Value per Share of a share of Common Stock as of the Date of Grant.
III. RESTRICTED RIGHTS
Options covered by this Agreement may not be exercised after the earlier of (a) ten (10) years after the Date of Grant, or (b) three months following the date the Optionee's employment with the Company and its subsidiaries terminates for any reason, (except for death or disability, in which case "one year" shall be substituted for "three months" (the "Expiration Date"). For purposes of this Article III, disability shall mean a physical or mental impairment (a) which causes a Participant to be unable to perform the normal duties for an Employer as determined by the Committee in its sole discretion; and (b) which is expected either to result in death (or blindness) or to last for a continuous period of at least twelve (12) months. The Committee may require that the Participant be examined by a physician or physicians selected by the Committee. In any case, the term of
the Option cannot extend for a period longer than that permitted for the Option to qualify as an "Incentive Stock Option" under Section 422 of the Internal Revenue Code.
The Optionee may exercise only those Options which are vested. Options granted under this Agreement become vested on each anniversary of the Date of Grant in accordance with the following table:
Total Total Vesting Date % Vested Number Vested ------------ -------- ------------- |
Subject to the terms of the Plan, in the event the Optionee shall cease to be an employee of the Company and its subsidiaries for any reason, including death, no further Options will become vested after the date the Optionee ceased to be an employee and all Options that are not vested on the date the Optionee ceases to be an employee shall be automatically forfeited and canceled on such date. The Optionee may exercise any vested Options prior to the Expiration Date.
In the event the Optionee dies, the legal representative of the Optionee's estate or beneficiary, as the case may be, may exercise the vested Options prior to the Expiration Date.
Neither the Optionee nor any other person entitled to exercise the Options under the terms of the Plan shall be, or have any of the rights or privileges of, a stockholder of the Company in respect of any shares of Common Stock issuable on exercise of the Option, unless and until the Option Price for such shares has been paid in full.
IV. EXERCISE AND PAYMENT
Subject to the limitations set forth in this Agreement, the Optionee may
exercise the Options by delivering written notice to the Company stating the
number of shares being purchased (but not less than ten (10) shares), and the
notice shall be accompanied by payment in full of the purchase price for such
shares, which payment may be (1) in cash or by check payable and acceptable to
the Company; (2) by tendering to the Company shares of Stock owned by the
Optionee for at least six months, if acquired pursuant to a Company stock
option, and having an aggregate Market Value Per Share as of the date of
exercise and tender that is not greater than the full Option Price for the
shares with respect to which the Option is being exercised and by paying any
remaining amount of the Option Price as provided in (1) above, provided that the
Committee may, upon confirming that the Optionee owns the number of shares being
tendered, authorize the issuance of a new certificate for the number of shares
being acquired pursuant to the exercise of the Option less the number of shares
being tendered upon the exercise and return to the Optionee (or not require
surrender of) the certificate for the shares being tendered upon the exercise;
(3) by the Optionee delivering to the Company a properly executed exercise
notice together with irrevocable instructions to a broker to promptly deliver to
the Company cash or a check payable and acceptable to the Company to pay the
Option Price and any required tax withholding amounts; provided that in the
event the Optionee chooses to pay the Option Price and withholding taxes as
provided above, the Optionee and the broker shall comply with
such procedures and enter into such agreements as the Committee may prescribe as a condition of such payment procedure; or (4) by a combination of such methods of payment.
Promptly after the Company's receipt of the written notice of election to exercise provided for in this Article IV, and Optionee's payment in full of the Option Price (and satisfaction of any applicable withholding taxes), the Company shall deliver or cause to be delivered to the Optionee certificates for the whole number of shares with respect to which the Option is being exercised by the Optionee. Shares shall be registered in the name of the Optionee. If any law or regulation of the Securities and Exchange Commission or of any other federal or state governmental body having jurisdiction shall require the Company or the Optionee to take any action prior to issuance to the Optionee of the shares of Common Stock specified in the written notice of election to exercise, or if any listing agreement between the Company and any national securities exchange requires such shares to be listed prior to issuance, the date for the delivery of such shares shall be adjourned until the completing of such action and/or such listing.
In no event shall the Company be required to issue fractional shares upon the exercise of any portion of the Option.
V. DISPOSITIONS OF STOCK
The Optionee shall be required to promptly notify the Company if the Optionee disposes of any Common Stock acquired through the exercise of an Option granted hereunder either (a) within two (2) years from the Date of Grant or (b) within one (1) year after the transfer of such Common Stock to the Optionee. The Optionee shall also be required to disclose in his notice to the Company the amount of consideration realized upon such disposition.
VI. GENERAL
ADMINISTRATION: Administration of this Agreement will be governed by the terms and conditions set forth in the Plan. That document is incorporated in this Agreement in its entirety. In the event of any conflict between the Plan and this Agreement, the terms of the Plan shall control.
NO TRANSFER: The Options are not transferable by the Optionee other than by will or the laws of descent and distribution and, during the Optionee's lifetime may be exercised only by the Optionee.
NOTICES: Every notice or other communication relating to the Agreement
shall be in writing, and shall be mailed to or delivered to the party for whom
it is intended at such address as may from time to time be designated by such
party. Unless and until some other address is so designated, all notices or
communications by the Optionee to the Company shall be mailed to Administaff,
Inc., 19001 Crescent Springs Drive, Kingwood, Texas 77339-3802, Attention:
President. All notices by the Company to the Optionee may be delivered to the
Optionee personally or may be mailed to the Optionee at the address shown on the
records of the Company.
ENTIRE AGREEMENT; BINDING EFFECT: This Agreement contains the entire understanding between the parties with respect to the subject matter hereof, and supersedes any and all prior written or oral agreements between the parties with respect to the subject matter hereof. There are no representations, agreements, arrangements, or understanding, either written or oral, between or among the parties with respect to the subject matter hereof which
are not set forth in this Agreement. This Agreement is binding upon the Optionee's spouse, heirs, executors and personal representatives with respect to all provisions hereof.
GOVERNING LAW: This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas.
WITHHOLDING: The Company shall deduct from any payment of any kind due to the Optionee, any federal, state or local taxes of any kind required by law to be withheld with respect to the exercise of the Options or require the Optionee to remit an additional amount in cash or its equivalent to pay for such withholding.
INTERPRETATION: This Agreement is subject in all respects to the terms of the Plan, and in the event that any provision of the Agreement shall be inconsistent with the terms of the Plan, then the terms of the Plan shall govern. Any question of interpretation arising under this Agreement shall be determined by the Committee and its determinations shall be final and conclusive upon all parties in interest.
SEVERABILITY: If any term, provision, covenant, or condition of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, or unenforceable for any reason, such as invalidity, illegality, or unenforceability shall not affect any of the other terms, provisions, covenants, or conditions of this Agreement, each of which shall be binding and enforceable.
DEFAULT: In the event that an Option granted hereunder is subsequently determined not to satisfy the requirements of Section 422 of the Code, then such Option(s) shall remain in effect as a non-qualified stock option(s) under the Plan.
COUNTERPARTS: This Agreement may be executed in one or more counterparts, each counterpart of which will be regarded for all purposes as an original.
TERMS: All terms used herein that are defined in the Plan shall have the meanings set forth in the Plan unless otherwise provided herein.
ADMINISTAFF, INC.
By: __________________________
Paul J. Sarvadi, President
Date: ________________________
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THIS AGREEMENT IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED OPTIONS OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT
INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee hereby accepts this Agreement subject to all of the terms and provisions thereof. Optionee has reviewed this Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of the Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Chief Executive Officer upon any questions arising under this Agreement. Optionee further agrees to notify the Company upon any change in his/her residence address as reflected in the Company's records.
OPTIONEE:
Date: ________________________
Please PRINT the information requested below. This information is needed for statement and tax documentation mailings.
Home Address: ________________________________________________________ (Street) (Apt.) ________________________________________________________ (City) (State) (Zip Code) Telephone No.: __________________________ (Area Code and Number) Social Security No: __________________________ |
EXHIBIT 10.8
ADMINISTAFF, INC. 2001 INCENTIVE PLAN
EMPLOYEE INCENTIVE STOCK OPTION AWARD AGREEMENT (3 YEAR VESTING)
This Award Agreement between Administaff, Inc. (the "Company"), and _______________________ (the "Optionee"), an employee of the Company, regarding a right (the "Option") awarded to the Optionee on _______________________ (the "Grant Date") to purchase from the Company up to, but not exceeding in the aggregate, ______ shares of Common Stock (as defined in the Administaff, Inc. 2001 Incentive Plan (the "Plan")) at $___ per share (the "Exercise Price"), which is the Fair Market Value of an Option Share as of the Grant Date, such number of shares and such price per share being subject to adjustment as provided in Section 13 of the Plan, and further subject to the following terms and conditions:
1. RELATIONSHIP TO PLAN. This Option is intended to be an incentive stock option within the meaning of the Internal Revenue Service Code (the "Code") Section 422. To the extent the limitations of Section 422(d) of the Code are exceeded, with respect to such excess portion, the Option is intended to be a nonqualified stock option within the meaning of Code Section 83. This Option is subject to all of the terms, conditions and provisions of the Plan and administrative interpretations thereunder, if any, which have been adopted by the Committee thereunder and are in effect on the date hereof. Except as defined herein, capitalized terms shall have the same meanings ascribed to them under the Plan. For purposes of this Award Agreement:
(a) "DISABILITY" shall mean a physical or mental impairment (a) which causes a Participant to be unable to perform the normal duties for an Employer as determined by the Committee in its sole discretion; and (b) which is expected either to result in death (or blindness) or to last for a continuous period of at least twelve (12) months. The Committee may require that the Participant be examined by a physician or physicians selected by the Committee.
(b) "EMPLOYMENT" shall mean employment with the Company or any of its Subsidiaries.
(c) "OPTION SHARES" shall mean the shares of Common Stock covered by this Award Agreement.
2. EXERCISE SCHEDULE.
(a) The Option hereby granted shall become vested and exercisable
in three (3) cumulative annual installments, with 33.33% of the Option
Shares becoming vested and exercisable on the first (1st) anniversary of
the Grant Date, 66.66% of the Option Shares becoming exercisable on the
second (2nd) anniversary of the Grant Date, and 100% of the Option Shares
becoming exercisable on the third (3rd) anniversary of the Grant Date. No
fractional Option Shares shall become vested and exercisable on the first
(1st) or second (2nd)
anniversary of the Grant Date. The Optionee must be in continuous Employment from the Grant Date through the date of exercisability of each installment in order for the Option to become exercisable with respect to additional Option Shares on each such date.
b) The Option hereby granted shall become 100% vested and exercisable, irrespective of the limitations set forth in subsection (a) above, provided that the Optionee has been in continuous Employment since the Grant Date, upon a Change in Control.
3. TERMINATION OF OPTION. The Option hereby granted shall terminate and be of no force and effect with respect to any shares of Common Stock not previously purchased by the Optionee upon the first to occur of:
(a) the tenth (10th) anniversary of the Grant Date;
(b) with respect to
(i) the portion of the Option exercisable upon termination, the expiration of (A) one (1) year following the Optionee's termination of Employment due to death or Disability; or (B) the three (3) months following the date the Optionee's termination of Employment for any other reason; and/or
(ii) the portion of the Option not exercisable upon termination, the date of the Optionee's termination of Employment.
4. EXERCISE OF OPTION. Subject to the limitations set forth
herein and in the Plan, the Option may be exercised by written notice provided
to the Company as set forth in Section 6 of this Award Agreement. Such written
notice shall (a) state the number of shares of Common Stock with respect to
which the Option is being exercised (no less than ten (10) shares), and (b) be
accompanied by a wire transfer, cashier's check, cash or money order payable to
Administaff, Inc., in the full amount of the purchase price for any Option
Shares being acquired and any appropriate withholding taxes, or by other
consideration in the form and manner approved by the Committee pursuant to
Section 9 of the Plan.
Notwithstanding anything to the contrary contained herein, the Optionee agrees that he will not exercise the Option granted pursuant hereto, and that the Company will not be obligated to issue any Option Shares pursuant to this Award Agreement, if the exercise of the Option or the issuance of such shares would constitute a violation by the Optionee or by the Company of any provision of any law or regulation of any governmental authority or any stock exchange or transaction quotation system.
If any law or regulation requires the Company to take any action with respect to the shares specified in such notice, the time for delivery thereof, which would otherwise be as promptly as possible, shall be postponed for the period of time necessary to take such action.
In no event shall the Company be required to issue fractional shares upon the exercise of any portion of the Option.
5. DISPOSITIONS OF STOCK. The Optionee shall be required to promptly notify the Company if the Optionee disposes of any Common Stock acquired through the exercise of the Option either (a) within two (2) years from the Grant Date or (b) within one (1) year after the transfer of such Common Stock to the Optionee. The Optionee shall also be required to disclose in his notice to the Company the amount of consideration realized upon such disposition.
6. NOTICES. Notice of exercise of the Option must be made in the following manner, using an approved exercise notice provided by the Company and which may be amended from time to time:
(a) by United States mail, postage prepaid, to Administaff, Inc.,
19001 Crescent Springs Drive, Kingwood, Texas 77339-3802, Attention:
Investor Relations Administrator, in which case the date of exercise shall
be the postmark date; or
(b) by hand delivery or otherwise to Administaff, Inc., 19001 Crescent Springs Drive, Kingwood, Texas 77339-3802, Attention: Investor Relations Administrator, in which case the date of exercise shall be the date when receipt is acknowledged by the Company.
Notwithstanding the foregoing, in the event that the address of the Company is changed prior to the date of any exercise of this Option, notice of exercise shall instead be made pursuant to the foregoing provisions at the Company's current address.
Any other notices provided for in this Award Agreement or in the Plan shall be given in writing and shall be deemed effectively delivered or given upon receipt or, in the case of notices delivered by the Company to the Optionee, five (5) days after deposit in the United States mail, postage prepaid, addressed to the Optionee at the address specified at the end of this Award Agreement or at such other address as the Optionee hereafter designates by written notice to the Company.
7. ASSIGNMENT OF OPTION. The Optionee's rights under the Plan and this Award Agreement are personal; no assignment or transfer of the Optionee's rights under and interest in this Option may be made by the Optionee other than by will or by the laws of descent and distribution or by a qualified domestic relations order; and this Option is exercisable during his lifetime only by the Optionee, or in the case of an
Optionee who is mentally incapacitated, this option shall be exercisable by his guardian or legal representative.
Notwithstanding the foregoing, subject to approval by the Committee in its sole discretion, other than with respect to Incentive Stock Options, the Option is transferable by the Optionee to (a) the spouse, children or grandchildren (including adopted and stepchildren and grandchildren) of the Optionee ("Immediate Family Members"), (b) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (c) a partnership or partnerships in which such Immediate Family Members and, if applicable, the Optionee are the only partners. Subsequent transfers of a transferred Option shall be prohibited except by will or the laws of descent and distribution, unless such transfers are made to the original Optionee or a person to whom the original Optionee could have made a transfer in the manner described herein. No transfer shall be effective unless and until written notice of such transfer is provided to the Committee, in the form and manner prescribed by the Committee. Following transfer, the Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, and except as otherwise provided herein, the term "Optionee" shall be deemed to refer to the transferee. The consequences of termination of Service shall continue to be applied with respect to the original Optionee, following which the Options shall be exercisable by the transferee only to the extent and for the periods specified in the Plan and this Award Agreement.
After the death of the Optionee, exercise of the Option shall be permitted only by the Optionee's executor or the personal representative of the Optionee's estate and only to the extent that the Option was exercisable on the date of the Optionee's death.
8. STOCK CERTIFICATES. Certificates representing the Common Stock issued pursuant to the exercise of the Option will bear all legends required by law and necessary or advisable to effectuate the provisions of the Plan and this Option. The Company may place a "stop transfer" order against shares of the Common Stock issued pursuant to the exercise of this Option until all restrictions and conditions set forth in the Plan or this Award Agreement and in the legends referred to in this Section 8 have been complied with.
9. WITHHOLDING. No certificates representing shares of Common Stock purchased hereunder shall be delivered to or in respect of an Optionee unless the amount of all federal, state and other governmental withholding tax requirements imposed upon the Company with respect to the issuance of such shares of Common Stock has been remitted to the Company or unless provisions to pay such withholding requirements have been made to the satisfaction of the Committee pursuant to Section 14 of the Plan. The Committee may make such provisions as it may deem appropriate for the withholding of any taxes that it determines is required in connection with this Option.
10. SUCCESSORS AND ASSIGNS. This Award Agreement shall bind and inure to the benefit of and be enforceable by the Optionee, the Company and their respective permitted successors and assigns (including personal representatives, heirs and legatees), except that the Optionee may not assign any rights or obligations under this Award Agreement except to the extent and in the manner expressly permitted herein.
11. NO EMPLOYMENT GUARANTEED. No provision of this Award Agreement shall confer any right upon the Optionee to continued Employment with the Company or any Subsidiary.
12. ENTIRE AGREEMENT; BINDING EFFECT: This Award Agreement shall cover all shares of Common Stock acquired by the Optionee pursuant to this Award Agreement, including any community and/or separate property interest owned by the Optionee's spouse in said shares. All terms, conditions and limitations on transferability imposed under this Award Agreement upon shares acquired by the Optionee shall apply to any interest of the Optionee's spouse in such shares. This Award Agreement contains the entire understanding between the parties with respect to the subject matter hereof, and supersedes any and all prior written or oral agreements between the parties with respect to the subject matter hereof. There are no representations, agreements, arrangements, or understanding, either written or oral, between or among the parties with respect to the subject matter hereof which are not set forth in this Award Agreement. This Award Agreement is binding upon the Optionee's heirs, executors and personal representatives with respect to all provisions hereof.
13. INTERPRETATION: This Award Agreement is subject in all respects to the terms of the Plan, and in the event that any provision of the Award Agreement shall be inconsistent with the terms of the Plan, then the terms of the Plan shall govern. Any question of interpretation arising under this Award Agreement shall be determined by the Committee and its determinations shall be final and conclusive upon all parties in interest.
14. SEVERABILITY: If any term, provision, covenant, or condition of this Award Agreement is held by a court of competent jurisdiction to be invalid, illegal, or unenforceable for any reason, such invalidity, illegality, or unenforceability shall not affect any of the other terms, provisions, covenants, or conditions of this Award Agreement, each of which shall be binding and enforceable.
15. GOVERNING LAW. This Award Agreement shall be governed by, construed and enforced in accordance with the laws of the State of Texas.
ADMINISTAFF, INC.
Dated: _____________________ By: ______________________________ Name: Paul J. Sarvadi Title: Chairman of the Board and Chief Executive Officer |
ACKNOWLEDGEMENT AND ACCEPTANCE BY THE OPTIONEE
I, _______________________, the undersigned Optionee, hereby acknowledge that I have received a copy of the Administaff, Inc. 2001 Incentive Plan and that I will consult
with and rely upon only my own tax, legal and financial advisors regarding the consequences and risks of the Award. I hereby agree to and accept the foregoing Award Agreement, subject to the terms and provisions of the Plan and administrative interpretations thereof referred to above.
______________________________________ __________________________________ Optionee's Signature Date Optionee's Address: ______________________________________ ______________________________________ ______________________________________ |
EXHIBIT 10.9
ADMINISTAFF, INC. 2001 INCENTIVE PLAN
EMPLOYEE INCENTIVE STOCK OPTION AWARD AGREEMENT
This Award Agreement between Administaff, Inc. (the "Company"), and _______________________ (the "Optionee"), an employee of the Company, regarding a right (the "Option") awarded to the Optionee on _______________________ (the "Grant Date") to purchase from the Company up to, but not exceeding in the aggregate, ______ shares of Common Stock (as defined in the Administaff, Inc. 2001 Incentive Plan (the "Plan")) at $___ per share (the "Exercise Price"), which is the Fair Market Value of an Option Share as of the Grant Date, such number of shares and such price per share being subject to adjustment as provided in Section 13 of the Plan, and further subject to the following terms and conditions:
1. RELATIONSHIP TO PLAN. This Option is intended to be an incentive stock option within the meaning of the Internal Revenue Service Code (the "Code") Section 422. To the extent the limitations of Section 422(d) of the Code are exceeded, with respect to such excess portion, the Option is intended to be a nonqualified stock option within the meaning of Code Section 83. This Option is subject to all of the terms, conditions and provisions of the Plan and administrative interpretations thereunder, if any, which have been adopted by the Committee thereunder and are in effect on the date hereof. Except as defined herein, capitalized terms shall have the same meanings ascribed to them under the Plan. For purposes of this Award Agreement:
(a) "DISABILITY" shall mean a physical or mental impairment (a) which causes a Participant to be unable to perform the normal duties for an Employer as determined by the Committee in its sole discretion; and (b) which is expected either to result in death (or blindness) or to last for a continuous period of at least twelve (12) months. The Committee may require that the Participant be examined by a physician or physicians selected by the Committee.
(b) "EMPLOYMENT" shall mean employment with the Company or any of its Subsidiaries.
(c) "OPTION SHARES" shall mean the shares of Common Stock covered by this Award Agreement.
2. EXERCISE SCHEDULE.
(a) The Option hereby granted shall become vested and exercisable
in five (5) cumulative annual installments, with 20% of the Option Shares
becoming vested and exercisable on the first (1st) anniversary of the
Grant Date, 40% of the Option Shares becoming exercisable on the second
(2nd) anniversary of the Grant Date, 60% of the Option Shares becoming
exercisable on the third (3rd) anniversary of the Grant Date, 80% of the
Option Shares becoming exercisable on the fourth (4th) anniversary of the
Grant Date, and 100% of the Option Shares becoming exercisable on the
fifth (5th) anniversary of the Grant Date. No fractional Option Shares
shall become vested and exercisable on the first (1st), second (2nd),
third (3rd) or fourth (4th) anniversary of the Grant Date. The
Optionee must be in continuous Employment from the Grant Date through the date of exercisability of each installment in order for the Option to become exercisable with respect to additional Option Shares on each such date.
b) The Option hereby granted shall become 100% vested and exercisable, irrespective of the limitations set forth in subsection (a) above, provided that the Optionee has been in continuous Employment since the Grant Date, upon a Change in Control.
3. TERMINATION OF OPTION. The Option hereby granted shall terminate and be of no force and effect with respect to any shares of Common Stock not previously purchased by the Optionee upon the first to occur of:
(a) the tenth (10th) anniversary of the Grant Date;
(b) with respect to
(i) the portion of the Option exercisable upon termination, the expiration of (A) one (1) year following the Optionee's termination of Employment due to death or Disability; or (B) the three (3) months following the date the Optionee's termination of Employment for any other reason; and/or
(ii) the portion of the Option not exercisable upon termination, the date of the Optionee's termination of Employment.
4. EXERCISE OF OPTION. Subject to the limitations set forth
herein and in the Plan, the Option may be exercised by written notice provided
to the Company as set forth in Section 6 of this Award Agreement. Such written
notice shall (a) state the number of shares of Common Stock with respect to
which the Option is being exercised (no less than ten (10) shares), and (b) be
accompanied by a wire transfer, cashier's check, cash or money order payable to
Administaff, Inc., in the full amount of the purchase price for any Option
Shares being acquired and any appropriate withholding taxes, or by other
consideration in the form and manner approved by the Committee pursuant to
Section 9 of the Plan.
Notwithstanding anything to the contrary contained herein, the Optionee agrees that he will not exercise the Option granted pursuant hereto, and that the Company will not be obligated to issue any Option Shares pursuant to this Award Agreement, if the exercise of the Option or the issuance of such shares would constitute a violation by the Optionee or by the Company of any provision of any law or regulation of any governmental authority or any stock exchange or transaction quotation system.
If any law or regulation requires the Company to take any action with respect to the shares specified in such notice, the time for delivery thereof, which would
otherwise be as promptly as possible, shall be postponed for the period of time necessary to take such action.
In no event shall the Company be required to issue fractional shares upon the exercise of any portion of the Option.
5. DISPOSITIONS OF STOCK. The Optionee shall be required to promptly notify the Company if the Optionee disposes of any Common Stock acquired through the exercise of the Option either (a) within two (2) years from the Grant Date or (b) within one (1) year after the transfer of such Common Stock to the Optionee. The Optionee shall also be required to disclose in his notice to the Company the amount of consideration realized upon such disposition.
6. NOTICES. Notice of exercise of the Option must be made in the following manner, using an approved exercise notice provided by the Company and which may be amended from time to time:
(a) by United States mail, postage prepaid, to Administaff, Inc.,
19001 Crescent Springs Drive, Kingwood, Texas 77339-3802, Attention:
Investor Relations Administrator, in which case the date of exercise shall
be the postmark date; or
(b) by hand delivery or otherwise to Administaff, Inc., 19001 Crescent Springs Drive, Kingwood, Texas 77339-3802, Attention: Investor Relations Administrator, in which case the date of exercise shall be the date when receipt is acknowledged by the Company.
Notwithstanding the foregoing, in the event that the address of the Company is changed prior to the date of any exercise of this Option, notice of exercise shall instead be made pursuant to the foregoing provisions at the Company's current address.
Any other notices provided for in this Award Agreement or in the Plan shall be given in writing and shall be deemed effectively delivered or given upon receipt or, in the case of notices delivered by the Company to the Optionee, five (5) days after deposit in the United States mail, postage prepaid, addressed to the Optionee at the address specified at the end of this Award Agreement or at such other address as the Optionee hereafter designates by written notice to the Company.
7. ASSIGNMENT OF OPTION. The Optionee's rights under the Plan and this Award Agreement are personal; no assignment or transfer of the Optionee's rights under and interest in this Option may be made by the Optionee other than by will or by the laws of descent and distribution or by a qualified domestic relations order; and this Option is exercisable during his lifetime only by the Optionee, or in the case of an Optionee who is mentally incapacitated, this option shall be exercisable by his guardian or legal representative.
Notwithstanding the foregoing, subject to approval by the Committee in its sole discretion, other than with respect to Incentive Stock Options, the Option is transferable by the Optionee to (a) the spouse, children or grandchildren (including adopted and stepchildren and grandchildren) of the Optionee ("Immediate Family Members"), (b) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (c) a partnership or partnerships in which such Immediate Family Members and, if applicable, the Optionee are the only partners. Subsequent transfers of a transferred Option shall be prohibited except by will or the laws of descent and distribution, unless such transfers are made to the original Optionee or a person to whom the original Optionee could have made a transfer in the manner described herein. No transfer shall be effective unless and until written notice of such transfer is provided to the Committee, in the form and manner prescribed by the Committee. Following transfer, the Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, and except as otherwise provided herein, the term "Optionee" shall be deemed to refer to the transferee. The consequences of termination of Service shall continue to be applied with respect to the original Optionee, following which the Options shall be exercisable by the transferee only to the extent and for the periods specified in the Plan and this Award Agreement.
After the death of the Optionee, exercise of the Option shall be permitted only by the Optionee's executor or the personal representative of the Optionee's estate and only to the extent that the Option was exercisable on the date of the Optionee's death.
8. STOCK CERTIFICATES. Certificates representing the Common Stock issued pursuant to the exercise of the Option will bear all legends required by law and necessary or advisable to effectuate the provisions of the Plan and this Option. The Company may place a "stop transfer" order against shares of the Common Stock issued pursuant to the exercise of this Option until all restrictions and conditions set forth in the Plan or this Award Agreement and in the legends referred to in this Section 8 have been complied with.
9. WITHHOLDING. No certificates representing shares of Common Stock purchased hereunder shall be delivered to or in respect of an Optionee unless the amount of all federal, state and other governmental withholding tax requirements imposed upon the Company with respect to the issuance of such shares of Common Stock has been remitted to the Company or unless provisions to pay such withholding requirements have been made to the satisfaction of the Committee pursuant to Section 14 of the Plan. The Committee may make such provisions as it may deem appropriate for the withholding of any taxes that it determines is required in connection with this Option.
10. SUCCESSORS AND ASSIGNS. This Award Agreement shall bind and inure to the benefit of and be enforceable by the Optionee, the Company and their respective permitted successors and assigns (including personal representatives, heirs and legatees), except that the Optionee may not assign any rights or obligations under this Award Agreement except to the extent and in the manner expressly permitted herein.
11. NO EMPLOYMENT GUARANTEED. No provision of this Award Agreement shall confer any right upon the Optionee to continued Employment with the Company or any Subsidiary.
12. ENTIRE AGREEMENT; BINDING EFFECT: This Award Agreement shall cover all shares of Common Stock acquired by the Optionee pursuant to this Award Agreement, including any community and/or separate property interest owned by the Optionee's spouse in said shares. All terms, conditions and limitations on transferability imposed under this Award Agreement upon shares acquired by the Optionee shall apply to any interest of the Optionee's spouse in such shares. This Award Agreement contains the entire understanding between the parties with respect to the subject matter hereof, and supersedes any and all prior written or oral agreements between the parties with respect to the subject matter hereof. There are no representations, agreements, arrangements, or understanding, either written or oral, between or among the parties with respect to the subject matter hereof which are not set forth in this Award Agreement. This Award Agreement is binding upon the Optionee's heirs, executors and personal representatives with respect to all provisions hereof.
13. INTERPRETATION: This Award Agreement is subject in all respects to the terms of the Plan, and in the event that any provision of the Award Agreement shall be inconsistent with the terms of the Plan, then the terms of the Plan shall govern. Any question of interpretation arising under this Award Agreement shall be determined by the Committee and its determinations shall be final and conclusive upon all parties in interest.
14. SEVERABILITY: If any term, provision, covenant, or condition of this Award Agreement is held by a court of competent jurisdiction to be invalid, illegal, or unenforceable for any reason, such invalidity, illegality, or unenforceability shall not affect any of the other terms, provisions, covenants, or conditions of this Award Agreement, each of which shall be binding and enforceable.
15. GOVERNING LAW. This Award Agreement shall be governed by, construed and enforced in accordance with the laws of the State of Texas.
ADMINISTAFF, INC.
Dated: _______________________________ By: ______________________________ Name: Paul J. Sarvadi Title: Chairman of the Board and Chief Executive Officer |
ACKNOWLEDGEMENT AND ACCEPTANCE BY THE OPTIONEE
I, _______________________, the undersigned Optionee, hereby acknowledge that I have received a copy of the Administaff, Inc. 2001 Incentive Plan and that I will consult with and rely upon only my own tax, legal and financial advisors regarding the consequences and
risks of the Award. I hereby agree to and accept the foregoing Award Agreement, subject to the terms and provisions of the Plan and administrative interpretations thereof referred to above.
______________________________________ __________________________________ Optionee's Signature Date Optionee's Address: ______________________________________ ______________________________________ ______________________________________ |
EXHIBIT 10.10
ADMINISTAFF, INC. 2001 INCENTIVE PLAN
INITIAL DIRECTOR AWARD AGREEMENT
This Award Agreement between Administaff, Inc. (the "Company"), and _______________________ (the "Optionee"), a member of the Board of Directors of the Company (the "Board"), regarding a right (the "Option") awarded to the Optionee on _______________________ (the "Grant Date") to purchase from the Company up to, but not exceeding in the aggregate, 7,500 shares of Common Stock (as defined in the Administaff, Inc. 2001 Incentive Plan (the "Plan")) at $_______ per share (the "Exercise Price"), which is equal to the Fair Market Value of an Option Share as of the Grant Date, such number of shares and such price per share being subject to adjustment as provided in Section 13 of the Plan, and further subject to the following terms and conditions:
1. RELATIONSHIP TO PLAN. This Option is intended to be a nonqualified stock option within the meaning of the Internal Revenue Code (the "Code") Section 83. This Option is subject to all of the terms, conditions and provisions of the Plan and administrative interpretations thereunder, if any, which have been adopted by the Committee thereunder and are in effect on the date hereof. Except as defined herein, capitalized terms shall have the same meanings ascribed to them under the Plan. For purposes of this Award Agreement:
(a) "OPTION SHARES" shall mean the shares of Common Stock covered by this Award Agreement.
(b) "SERVICE" shall mean service as a member of the Board.
2. EXERCISE SCHEDULE
(a) The Option hereby granted shall become vested and exercisable in three (3) cumulative annual installments, with 33.33% of the Option Shares becoming vested and exercisable on the first (1st) anniversary of the Grant Date, 66.66% of the Option Shares becoming vested and exercisable on the second (2nd) anniversary of the Grant Date, and 100% of the Option Shares becoming vested and exercisable on the third (3rd) anniversary of the Grant Date. The Optionee must be in continuous Service from the Grant Date through the date of exercisability in order for an Option to become 100% vested and exercisable with respect to additional Option Shares on each such date.
(b) The Option hereby granted shall become 100% vested and exercisable, irrespective of the limitations set forth in subsection (a) above, provided that the Optionee has been in continuous Service since the Grant Date, upon (i) a Change in Control, or (ii) the occurrence of the Optionee's termination of Service due to death or Disability.
3. TERMINATION OF OPTION. The Option hereby granted shall terminate and be of no force and effect with respect to any shares of Common Stock not previously purchased by the Optionee upon the first to occur of:
(a) the tenth (10th) anniversary of the Grant Date;
(b) with respect to
(i) the portion of the Option exercisable upon termination of Service, the expiration of (A) three (3) months following the Optionee's termination of Service for Cause or (B) three (3) years following the Optionee's termination of Service for any other reason; and/or
(ii) the portion of the Option not exercisable upon termination of Service, the date of the Optionee's termination of Service.
4. EXERCISE OF OPTION. Subject to the limitations set forth herein and in the Plan, the Option may be exercised by written notice provided to the Company as set forth in Section 5 of this Award Agreement. Such written notice shall (a) state the number of shares of Common Stock with respect to which the Option is being exercised and (b) be accompanied by a wire transfer, cashier's check, cash or money order payable to Administaff, Inc., in the full amount of the purchase price for any Option Shares being acquired and any appropriate withholding taxes, or by other consideration in the form and manner approved by the Committee pursuant to Section 9 of the Plan.
Notwithstanding anything to the contrary contained herein, the Optionee agrees that he will not exercise the Option granted pursuant hereto, and that the Company will not be obligated to issue any Option Shares pursuant to this Award Agreement, if the exercise of the Option or the issuance of such shares would constitute a violation by the Optionee or by the Company of any provision of any law or regulation of any governmental authority or any stock exchange or transaction quotation system.
If any law or regulation requires the Company to take any action with respect to the shares specified in such notice, the time for delivery thereof, which would otherwise be as promptly as possible, shall be postponed for the period of time necessary to take such action.
In no event shall the Company be required to issue fractional shares upon the exercise of any portion of the Option.
5. NOTICES. Notice of exercise of the Option must be made in the following manner, using an approved exercise notice form provided by the Company and which may be amended from time to time:
(a) by United States mail, postage prepaid, to Administaff, Inc., 19001 Crescent Springs Drive, Kingwood, Texas, 77339-3802, Attention: Investor Relations Administrator, in which case the date of exercise shall be the postmark date; or
(b) by hand delivery or otherwise to Administaff, Inc., 19001 Crescent Springs Drive, Kingwood, Texas, 77339-3802, Attention: Investor Relations Administrator, in which case the date of exercise shall be the date when receipt is acknowledged by the Company.
Notwithstanding the foregoing, in the event that the address of the Company is changed prior to the date of any exercise of this Option, notice of exercise shall instead be made pursuant to the foregoing provisions at the Company's current address.
Any other notices provided for in this Award Agreement or in the Plan shall be given in writing and shall be deemed effectively delivered or given upon receipt or, in the case of notices delivered by the Company to the Optionee, five (5) days after deposit in the United States mail, postage prepaid, addressed to the Optionee at the address specified at the end of this Award Agreement or at such other address as the Optionee hereafter designates by written notice to the Company.
6. ASSIGNMENT OF OPTION. The Optionee's rights under the Plan and this Award Agreement are personal; no assignment or transfer of the Optionee's rights under and interest in this Option may be made by the Optionee other than by will or by the laws of descent and distribution or by a qualified domestic relations order; and this Option is exercisable during his lifetime only by the Optionee, or in the case of an optionee who is mentally incapacitated, this Option shall be exercisable by his guardian or legal representative.
Notwithstanding the foregoing, subject to approval by the Committee in its sole discretion, the Option is transferable by the Optionee to (a) the spouse, children or grandchildren (including adopted and stepchildren and grandchildren) of the Optionee ("Immediate Family Members"), (b) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (c) a partnership or partnerships in which such Immediate Family Members and, if applicable, the Optionee are the only partners. Subsequent transfers of a transferred Option shall be prohibited except by will or the laws of descent and distribution, unless such transfers are made to the original Optionee or a person to whom the original Optionee could have made a transfer in the manner described herein. No transfer shall be effective unless and until written notice of such transfer is provided to the Committee, in the form and manner prescribed by the Committee. Following transfer, the Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, and except as otherwise provided herein, the term "Optionee" shall be deemed to refer to the transferee. The
consequences of termination of Service shall continue to be applied with respect to the original Optionee, following which the Options shall be exercisable by the transferee only to the extent and for the periods specified in the Plan and this Award Agreement.
After the death of the Optionee, unless the Option has been transferred as permitted above, exercise of the Option shall be permitted only by the Optionee's executor or the personal representative of the Optionee's estate (or by his assignee, in the event of a permitted assignment) and only to the extent that the Option was exercisable on the date of the Optionee's death.
7. STOCK CERTIFICATES. Certificates representing the Common Stock issued pursuant to the exercise of the Option will bear all legends required by law and necessary or advisable to effectuate the provisions of the Plan and this Option. The Company may place a "stop transfer" order against shares of the Common Stock issued pursuant to the exercise of this Option until all restrictions and conditions set forth in the Plan or this Award Agreement and in the legends referred to in this Section 7 have been complied with.
8. WITHHOLDING. No certificates representing shares of Common Stock purchased hereunder shall be delivered to or in respect of an Optionee unless the amount of all federal, state and other governmental withholding tax requirements imposed upon the Company with respect to the issuance of such shares of Common Stock has been remitted to the Company or unless provisions to pay such withholding requirements have been made to the satisfaction of the Committee pursuant to Section 14 of the Plan. The Committee may make such provisions as it may deem appropriate for the withholding of any taxes that it determines is required in connection with this Option.
9. SUCCESSORS AND ASSIGNS. This Award Agreement shall bind and inure to the benefit of and be enforceable by the Optionee, the Company and their respective permitted successors and assigns (including personal representatives, heirs and legatees), except that the Optionee may not assign any rights or obligations under this Award Agreement except to the extent and in the manner expressly permitted herein.
10. NO SERVICE GUARANTEED. No provision of this Award Agreement shall confer any right upon the Optionee to continued Service as a member of the Board.
11. ENTIRE AGREEMENT; BINDING EFFECT: This Award Agreement shall cover all shares of Common Stock acquired by the Optionee pursuant to this Award Agreement, including any community and/or separate property interest owned by the Optionee's spouse in said shares. All terms, conditions and limitations on transferability imposed under this Award Agreement upon shares acquired by the Optionee shall apply to any interest of the Optionee's spouse in such shares. This Award Agreement contains the entire understanding between the parties with respect to the subject matter hereof, and supersedes any and all prior written or oral agreements between the parties with respect to the subject matter hereof. There are no representations, agreements, arrangements, or understanding, either written or oral, between or among the parties with respect to the subject matter hereof which are not set forth in this Award Agreement. This Award Agreement is
binding upon the Optionee's heirs, executors and personal representatives with respect to all provisions hereof.
12. INTERPRETATION: This Award Agreement is subject in all respects to the terms of the Plan, and in the event that any provision of the Award Agreement shall be inconsistent with the terms of the Plan, then the terms of the Plan shall govern. Any question of interpretation arising under this Award Agreement shall be determined by the Committee and its determinations shall be final and conclusive upon all parties in interest.
13. SEVERABILITY: If any term, provision, covenant, or condition of this Award Agreement is held by a court of competent jurisdiction to be invalid, illegal, or unenforceable for any reason, such invalidity, illegality, or unenforceability shall not affect any of the other terms, provisions, covenants, or conditions of this Award Agreement, each of which shall be binding and enforceable.
14. GOVERNING LAW. This Award Agreement shall be governed by, construed and enforced in accordance with the laws of the State of Texas.
ADMINISTAFF, INC.
Dated __________________________ By _______________________________________ Name: Paul J. Sarvadi Title: President and Chief Executive Officer |
ACKNOWLEDGEMENT AND ACCEPTANCE BY THE OPTIONEE
I, _______________________, the undersigned Optionee, hereby acknowledge that I have received a copy of the Administaff, Inc. 2001 Incentive Plan and that I will consult with and rely upon only my own tax, legal and financial advisors regarding the consequences and risks of the Award. I hereby agree to and accept the foregoing Award Agreement, subject to the terms and provisions of the Plan and administrative interpretations thereof referred to above.
________________________________ ____________________________________ Optionee's Signature Date Optionee's Address: ________________________________ ________________________________ ________________________________ |
EXHIBIT 10.11
ADMINISTAFF, INC. 2001 INCENTIVE PLAN
ANNUAL DIRECTOR AWARD AGREEMENT
This Award Agreement between Administaff, Inc. (the "Company"), and _______________________ (the "Optionee"), a member of the Board of Directors of the Company (the "Board"), regarding a right (the "Option") awarded to the Optionee on _______________________ (the "Grant Date") to purchase from the Company up to, but not exceeding in the aggregate, 5,000 shares of Common Stock (as defined in the Administaff, Inc. 2001 Incentive Plan (the "Plan")) at $_______ per share (the "Exercise Price"), which is equal to the Fair Market Value of an Option Share as of the Grant Date, such number of shares and such price per share being subject to adjustment as provided in Section 13 of the Plan, and further subject to the following terms and conditions:
1. RELATIONSHIP TO PLAN. This Option is intended to be a nonqualified stock option within the meaning of the Internal Revenue Service Code (the "Code") Section 83. This Option is subject to all of the terms, conditions and provisions of the Plan and administrative interpretations thereunder, if any, which have been adopted by the Committee thereunder and are in effect on the date hereof. Except as defined herein, capitalized terms shall have the same meanings ascribed to them under the Plan. For purposes of this Award Agreement:
(a) "OPTION SHARES" shall mean the shares of Common Stock covered by this Award Agreement.
(b) "SERVICE" shall mean service as a member of the Board.
2. EXERCISE SCHEDULE. The Option hereby granted is 100% vested and exercisable as of the Grant Date.
3. TERMINATION OF OPTION. The Option hereby granted shall terminate and be of no force and effect with respect to any shares of Common Stock not previously purchased by the Optionee upon the first to occur of:
(a) the tenth (10th) anniversary of the Grant Date; or
(b) the expiration of (i) three (3) months following the Director's termination of Service for Cause, or (ii) three (3) years following the Director's termination of Service for any other reason.
4. EXERCISE OF OPTION. Subject to the limitations set forth herein and in the Plan, the Option may be exercised by written notice provided to the Company as set forth in Section 5 of this Award Agreement. Such written notice shall (a) state the number of shares of Common Stock with respect to which the Option is being exercised, and (b) be accompanied by a wire transfer, cashier's check, cash or money order payable to Administaff, Inc., in the full amount of the purchase price for any Option Shares being acquired and any appropriate
withholding taxes, or by other consideration in the form and manner approved by the Committee pursuant to Section 9 of the Plan.
Notwithstanding anything to the contrary contained herein, the Optionee agrees that he will not exercise the Option granted pursuant hereto, and that the Company will not be obligated to issue any Option Shares pursuant to this Award Agreement, if the exercise of the Option or the issuance of such shares would constitute a violation by the Optionee or by the Company of any provision of any law or regulation of any governmental authority or any stock exchange or transaction quotation system.
If any law or regulation requires the Company to take any action with respect to the shares specified in such notice, the time for delivery thereof, which would otherwise be as promptly as possible, shall be postponed for the period of time necessary to take such action.
In no event shall the Company be required to issue fractional shares upon the exercise of any portion of the option.
5. NOTICES. Notice of exercise of the Option must be made in writing in the following manner, using an approved exercise notice form provided by the Company and which may be amended from time to time:
(a) by United States mail, postage prepaid, to Administaff, Inc.,
19001 Crescent Springs Drive, Kingwood, Texas 77339-3802, Attention:
Investor Relations Administrator, in which case the date of exercise shall
be the postmark date; or
(b) by hand delivery or otherwise to Administaff, Inc., 19001 Crescent Springs Drive, Kingwood, Texas 77339-3802, Attention: Investor Relations Administrator, in which case the date of exercise shall be the date when receipt is acknowledged by the Company.
Notwithstanding the foregoing, in the event that the address of the Company is changed prior to the date of any exercise of this Option, notice of exercise shall instead be made pursuant to the foregoing provisions at the Company's current address.
Any other notices provided for in this Award Agreement or in the Plan shall be given in writing and shall be deemed effectively delivered or given upon receipt or, in the case of notices delivered by the Company to the Optionee, five (5) days after deposit in the United States mail, postage prepaid, addressed to the Optionee at the address specified at the end of this Award Agreement or at such other address as the Optionee hereafter designates by written notice to the Company.
6. ASSIGNMENT OF OPTION. The Optionee's rights under the Plan and this Award Agreement are personal; no assignment or transfer of the Optionee's rights under and interest in this Option may be made by the Optionee other than by will or by the laws of descent and distribution or by a qualified domestic relations order; and this Option is exercisable during his lifetime only by the Optionee, or in the case of an optionee who is mentally incapacitated, this Option shall be exercisable by his guardian or legal representative.
Notwithstanding the foregoing, subject to approval by the Committee in its sole discretion, the Option is transferable by the Optionee to (a) the spouse, children or grandchildren (including adopted and stepchildren and grandchildren) of the Optionee ("Immediate Family Members"), (b) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (c) a partnership or partnerships in which such Immediate Family Members and, if applicable, the Optionee are the only partners. Subsequent transfers of a transferred Option shall be prohibited except by will or the laws of descent and distribution, unless such transfers are made to the original Optionee or a person to whom the original Optionee could have made a transfer in the manner described herein. No transfer shall be effective unless and until written notice of such transfer is provided to the Committee, in the form and manner prescribed by the Committee. Following transfer, the Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, and except as otherwise provided herein, the term "Optionee" shall be deemed to refer to the transferee. The consequences of termination of Service shall continue to be applied with respect to the original Optionee, following which the Options shall be exercisable by the transferee only to the extent and for the periods specified in the Plan and this Award Agreement.
After the death of the Optionee, unless the Option has been transferred as permitted above, exercise of the Option shall be permitted only by the Optionee's executor or the personal representative of the Optionee's estate (or by his assignee, in the event of a permitted assignment) and only to the extent that the Option was exercisable on the date of the Optionee's death.
7. STOCK CERTIFICATES. Certificates representing the Common Stock issued pursuant to the exercise of the Option will bear all legends required by law and necessary or advisable to effectuate the provisions of the Plan and this Option. The Company may place a "stop transfer" order against shares of the Common Stock issued pursuant to the exercise of this Option until all restrictions and conditions set forth in the Plan or this Award Agreement and in the legends referred to in this Section 7 have been complied with.
8. WITHHOLDING. No certificates representing shares of Common Stock purchased hereunder shall be delivered to or in respect of an Optionee unless the amount of all federal, state and other governmental withholding tax requirements imposed upon the Company with respect to the issuance of such shares of Common Stock has been remitted to the Company or unless provisions to pay such withholding requirements have been made to the satisfaction of the Committee pursuant to Section 14 of the Plan. The Committee may make such provisions as it may deem appropriate for the withholding of any taxes that it determines is required in connection with this Option.
9. SUCCESSORS AND ASSIGNS. This Award Agreement shall bind and inure to the benefit of and be enforceable by the Optionee, the Company and their respective permitted successors and assigns (including personal representatives, heirs and legatees), except that the Optionee may not assign any rights or obligations under this Award Agreement except to the extent and in the manner expressly permitted herein.
10. NO SERVICE GUARANTEED. No provision of this Award Agreement shall confer any right upon the Optionee to continued Service as a member of the Board.
11. ENTIRE AGREEMENT; BINDING EFFECT: This Award Agreement shall cover all shares of Common Stock acquired by the Optionee pursuant to this Award Agreement, including any community and/or separate property interest owned by the Optionee's spouse in said shares. All terms, conditions and limitations on transferability imposed under this Award Agreement upon shares acquired by the Optionee shall apply to any interest of the Optionee's spouse in such shares. This Award Agreement contains the entire understanding between the parties with respect to the subject matter hereof, and supersedes any and all prior written or oral agreements between the parties with respect to the subject matter hereof. There are no representations, agreements, arrangements, or understanding, either written or oral, between or among the parties with respect to the subject matter hereof which are not set forth in this Award Agreement. This Award Agreement is binding upon the Optionee's heirs, executors and personal representatives with respect to all provisions hereof.
12. INTERPRETATION: This Award Agreement is subject in all respects to the terms of the Plan, and in the event that any provision of the Award Agreement shall be inconsistent with the terms of the Plan, then the terms of the Plan shall govern. Any question of interpretation arising under this Award Agreement shall be determined by the Committee and its determinations shall be final and conclusive upon all parties in interest.
13. SEVERABILITY: If any term, provision, covenant, or condition of this Award Agreement is held by a court of competent jurisdiction to be invalid, illegal, or unenforceable for any reason, such invalidity, illegality, or unenforceability shall not affect any of the other terms, provisions, covenants, or conditions of this Award Agreement, each of which shall be binding and enforceable.
14. GOVERNING LAW. This Award Agreement shall be governed by, construed and enforced in accordance with the laws of the State of Texas.
ADMINISTAFF, INC.
Dated: _____________________ By:___________________________ Name: Paul J. Sarvadi Title: Chairman of the Board and Chief Executive Officer |
ACKNOWLEDGEMENT AND ACCEPTANCE BY THE OPTIONEE
I, _______________________, the undersigned Optionee, hereby acknowledge that I have received a copy of the Administaff, Inc. 2001 Incentive Plan and that I will consult with and rely upon only my own tax, legal and financial advisors regarding the consequences and risks of the Award. I hereby agree to and accept the foregoing Award Agreement, subject to the terms and provisions of the Plan and administrative interpretations thereof referred to above.
_________________________ _________________________ Optionee's Signature Date Optionee's Address: _________________________ _________________________ |
EXHIBIT 10.12
ADMINISTAFF, INC. 2001 INCENTIVE PLAN
RESTRICTED STOCK AGREEMENT
This Restricted Stock Agreement ("Agreement") is between ADMINISTAFF, INC. (the "Company") and (the "Grantee"), an employee of the Company or one of its Subsidiaries, regarding an award ("Award") of ____________ shares of Common Stock (as defined in the ADMINISTAFF, INC. 2001 INCENTIVE PLAN (the "Plan"), such Common Stock comprising this Award referred to herein as "Restricted Stock") awarded to the Grantee on February 1, 2005 (the "Award Date"), such number of shares subject to adjustment as provided in Section 13 of the Plan, and further subject to the following terms and conditions:
1. RELATIONSHIP TO PLAN. This Award is subject to all of the terms, conditions and provisions of the Plan and administrative interpretations thereunder, if any, which have been adopted by the Committee thereunder and are in effect on the date hereof. Except as defined herein, capitalized terms shall have the same meanings ascribed to them under the Plan.
2. VESTING SCHEDULE.
(a) The Award hereby granted shall become vested in three (3) cumulative annual installments, with one-third (1/3) of the Restricted Stock becoming vested on the first (1st) anniversary of the Award Date, another one-third (1/3) becoming vested on the second (2nd) anniversary of the Award Date, and the remaining one-third (1/3) becoming vested on the third (3rd) anniversary of the Award Date.
(b) All shares of Restricted Stock subject to this Award shall vest, irrespective of the limitations set forth in subparagraph (a) above, provided that the Grantee has been in continuous Employment since the Award Date, upon the occurrence of:
(i) a Change in Control or
(ii) the Grantee's termination of Employment by reason of death or Disability.
(c) For purposes of this Agreement:
(i) "Disability" means physical or mental impairment (a) which
causes a Grantee to be unable to perform the normal duties for an
Employer as determined by the Committee in its sole discretion; and
(b) which is expected either to result in death (or blindness) or to
last for a continuous period of at least twelve (12) months. The
Committee may require that the Grantee be examined by a physician or
physicians selected by the Committee.
(ii) "Employment" means employment with the Company or any of its Subsidiaries.
3. FORFEITURE OF AWARD. Except as provided in any other written agreement between the Grantee and the Company, if the Grantee's Employment terminates other than by reason of death or Disability, all unvested Restricted Stock as of the termination date shall be forfeited.
4. ESCROW OF SHARES. During the period of time between the Award Date and the earlier of the date the Restricted Stock vests or is forfeited (the "Restriction Period"), the Restricted Stock shall be registered in the name of the Grantee and held in escrow by the Company, and the Grantee agrees, upon the Company's written request, to provide a stock power endorsed by the Grantee in blank. If any certificate is issued during the Restriction Period, it shall bear a legend as provided by the Company, conspicuously referring to the terms, conditions and restrictions described in this Agreement. Upon termination of the Restriction Period, a certificate representing such shares shall be delivered upon written request to the Grantee as promptly as is reasonably practicable following such termination.
5. CODE SECTION 83(b) ELECTION. The Grantee shall be permitted to make an election under Code Section 83(b), to include an amount in income in respect of the Award of Restricted Stock in accordance with the requirements of Code Section 83(b).
6. DIVIDENDS AND VOTING RIGHTS. The Grantee is entitled to receive all dividends and other distributions made with respect to Restricted Stock registered in his name and is entitled to vote or execute proxies with respect to such registered Restricted Stock, unless and until the Restricted Stock is forfeited.
7. DELIVERY OF SHARES. The Company shall not be obligated to deliver any shares of Common Stock if counsel to the Company determines that such sale or delivery would violate any applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Common Stock is listed or quoted. The Company shall in no event be obligated to take any affirmative action in order to cause the delivery of shares of Common Stock to comply with any such law, rule, regulation or agreement.
8. NOTICES. Unless the Company notifies the Grantee in writing of a different procedure, any notice or other communication to the Company with respect to this Award shall be in writing and shall be:
(a) by registered or certified United States mail, postage prepaid, to Administaff, Inc., Attn: Corporate Secretary, 19001 Crescent Springs Drive, Kingwood, Texas 77339; or
(b) by hand delivery or otherwise to Administaff, Inc., Attn:
Corporate Secretary, 19001 Crescent Springs Drive, Kingwood, Texas 77339.
Notwithstanding the foregoing, in the event that the address of the Company is changed prior to the date of any exercise of this Award, notice of exercise shall instead be made pursuant to the foregoing provisions at the Company's then current address.
Any notices provided for in this Agreement or in the Plan shall be given in writing and shall be deemed effectively delivered or given upon receipt or, in the case of notices delivered by the Company to the Grantee, five days after deposit in the United States mail, postage prepaid, addressed to the Grantee at the address specified at the end of this Agreement or at such other address as the Grantee hereafter designates by written notice to the Company.
9. ASSIGNMENT OF AWARD. Except as otherwise permitted by the Committee, the Grantee's rights under the Plan and this Agreement are personal; no assignment or transfer of the Grantee's rights under and interest in this Award may be made by the Grantee other than by will or by the laws of descent and distribution or by a qualified domestic relations order, and this Award is payable during his lifetime only to the Grantee, or in the case of a grantee who is mentally incapacitated, this Award shall be payable to his guardian or legal representative.
10. PAYMENT OF PAR VALUE. The Company's obligation to deliver the shares of Restricted Stock to Grantee upon the vesting of such shares shall be subject to the payment in full of the requisite par value per share of the shares of Restricted Stock prior to such issuance (collectively, the "Par Value"). If the Company has not received from Grantee cash, a check or other available funds for the full amount of the Par Value by 5:00 P.M. Central Standard Time within thirty (30) days after the Award Date, or Grantee has not made by that date such other provision for the payment of the Par Value in form satisfactory to the Committee or Board in its sole discretion, the Company shall pay the Par Value of the shares of Restricted Stock on behalf of Grantee and will report the amount of such payment as income to Grantee for the taxable period of Grantee during which the shares of Restricted Stock are granted. Grantee acknowledges and agrees that he shall be responsible for the payment of any and all federal, state and local taxes on such income if the Company pays the Par Value on behalf of Grantee.
11. WITHHOLDING. The Company's obligation to deliver shares of Restricted Stock to the Grantee upon the vesting of such shares shall be subject to the satisfaction of all applicable federal, state and local income and employment tax withholding requirements (the "Required Withholding"). The Company shall withhold from the Restricted Stock that would otherwise have been delivered to the Grantee the number of shares necessary to satisfy the Grantee's Required Withholding, and deliver the remaining whole shares of Restricted Stock to the Grantee, unless the Grantee has made arrangements with the Company for the Grantee to deliver to the Company cash, a check or other available funds for the full amount of the Required Withholding by 5:00 p.m. Central Standard Time on the date the shares of Restricted Stock become vested. The amount of the Required Withholding and the number of shares of Restricted Stock to be withheld by the Company, if applicable, to satisfy the Grantee's Required Withholding, shall be based on the Fair Market Value of the shares of vested Restricted Stock on the date prior to the applicable date of vesting.
12. STOCK CERTIFICATES. Certificates representing the Common Stock issued pursuant to the Award will bear all legends required by law and necessary or advisable to effectuate the provisions of the Plan and this Award. The Company may place a "stop transfer" order against shares of the Common Stock issued pursuant to this Award until all restrictions and conditions set forth in the Plan or this Agreement and in the legends referred to in this Section 12 have been complied with.
13. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of and be enforceable by the Grantee, the Company and their respective permitted successors and assigns (including personal representatives, heirs and legatees), except that the Grantee may not assign any rights or obligations under this Agreement except to the extent and in the manner expressly permitted in Section 9 of this Agreement.
14. NO EMPLOYMENT GUARANTEED. No provision of this Agreement shall confer any right upon the Grantee to continued Employment with the Company or any Subsidiary.
15. CODE SECTION 409A COMPLIANCE. If any provision of this Agreement would result in the imposition of an excise tax under Section 409A of the Code and related regulations and Treasury pronouncements ("Section 409A"), that provision will be reformed to avoid imposition of the excise tax and no action taken to comply with Section 409A shall be deemed to impair a benefit under this Agreement.
16. GOVERNING LAW. This Agreement shall be governed by, construed, and enforced in accordance with the laws of the State of Texas.
17. AMENDMENT. Except as set forth herein, this Agreement cannot be modified, altered or amended except by an agreement, in writing, signed by both the Company and the Grantee.
ADMINISTAFF, INC.
Award Date: February 1, 2005 By: _____________________________ _ Name: Paul J. Sarvadi Title: Chairman of the Board and Chief Executive Officer |
The Grantee hereby accepts the foregoing Restricted Stock Agreement, subject to the terms and provisions of the Plan and administrative interpretations thereof referred to above.
GRANTEE:
Exhibit 10.26
*** INDICATES MATERIAL HAS BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. A COMPLETE COPY OF THIS AGREEMENT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
AMENDMENT TO VARIOUS AGREEMENTS BETWEEN UNITED
HEALTHCARE INSURANCE COMPANY AND ADMINISTAFF OF TEXAS, INC.
WHEREAS, United HealthCare Insurance Company ("United HealthCare") and Administaff of Texas, Inc. ("Administaff") entered into certain agreements establishing a minimum premium arrangement ("Minimum Premium Arrangement") for the provision of medical and dental benefits to Administaff Inc.'s employees; and
WHEREAS, those agreements were the Security Deposit Agreement (effective December 21, 2001), the Minimum Premium Administrative Services Agreement ("MP Services Agreement") (effective January 1, 2002), and the Minimum Premium Financial Agreement ("MP Financial Agreement") (effective January 1, 2002); and
WHEREAS, United HealthCare and Administaff have agreed to amend the Agreements;
NOW THEREFORE, the Security Deposit Agreement, the MP Services Agreement and MP Financial Agreement are amended as follows effective as of the dates indicated below:
The Security Deposit Agreement
1. Section 1 of the Security Deposit Agreement is amended to delete the third sentence and substitute the following:
Effective December 31, 2003, the required Security Deposit shall be Seventeen Million, Five Hundred Thousand and No/100 Dollars ($17,500,000). On or before January 31, 2004, United HealthCare shall remit to Administaff the excess of the actual Security Deposit as of December 31, 2003 over the required $17,500,000.
2. Effective June 20, 2003, Section 1 of the Security Deposit Agreement is amended to add the following as a new paragraph at the end of Section 1.
Upon Administaff's request, United HealthCare and Administaff will negotiate in good faith the terms of an agreement under which a premium stabilization reserve or its equivalent ("PSR") held by United HealthCare would be substituted for all or some of the Security Deposit provided for herein. Any such PSR would, when combined with the remaining Security Deposit, if any, provide United HealthCare the same overall level of risk protection as the Security Deposit existing at the time of such PSR negotiation.
The MP Financial Agreement
1. Effective April 1, 2002, section 1(s) of the MP Financial Agreement is amended by adding the following sentence at the end:
The additions, deletions and substitutions agreed to by the Employer and the Company shall be reflected on Exhibit D.
2. Effective January 1, 2004, the MP Financial Agreement is amended by adding a new section 2(e) to provide as follows:
(e) Removal of Dental Benefits. Effective January 1, 2004, the Agreement
shall not include or provide dental benefits under the Minimum
Premium Arrangement, and shall be construed to be so amended,
including the following changes: (i) the definition of "Health
Benefits" in section 1(i) shall not include dental benefits, (ii)
the Maximum Monthly Employer Benefit Obligation described in section
1(m) shall be calculated without including the Dental Policy, (iii)
"Policy" as defined in section 1(s) shall not include the Dental
Policy or any other policy providing dental benefits to Employees,
(iv) "Non-MP Policy as defined in section 1(p) shall not include the
Dental Policy or any other policy providing dental benefits to
Employees, and (v) the MP Premium described in section 3(a) shall be
calculated without including the Dental Policy. The Company shall
cause the dental benefits to be so removed in a manner consistent
with funding and accounting actions required upon termination of the
Agreement as set forth in Exhibit A, including the Company's (I)
funding of dental claims incurred under the Dental Policy prior to
January 1, 2004, but paid on or after such date, (II) issuance of a
final accumulated surplus/deficit accounting with respect to the
Dental Policy as a Final Termination Review within 195 calendar days
of December 31, 2003, and (III) adjustment of the IBNR Reserve in a
manner consistent with the Final Termination Review with respect to
the Dental Policy; provided that the Company shall issue an
accumulated surplus/deficit accounting with respect to the Dental
Policy as an Initial Termination Review by February 15, 2004.
(f) After December 31, 2003, the Dental Policy (or any policy providing dental benefits) shall not be included in any determination of Accumulated Surplus or Accumulated Deficit or in any Initial or Final Termination Review required under Exhibit A, except for the Initial and Final Termination Reviews with respect to the Dental Policy described in section 2(e).
3. Section 1(m) of the MP Financial Agreement is amended effective January 1, 2003, by deleting the provisions of section 1(m) in their entirety and substituting the following provision:
(m) "Maximum Monthly Employer Benefit Obligation" for an Arrangement
Month shall be the amount determined in Exhibit D hereto. The
Maximum Monthly Employer Benefit Obligation for an Arrangement Month
(other than the first Arrangement Month of an Arrangement Quarter)
shall be increased by the amount by which the Maximum Employer
Benefit Obligation in the prior Arrangement Month exceeded the
Health Benefits Paid in that Month.
4. Section 3(a) of the MP Financial Agreement is amended effective January 1, 2003, by deleting the provisions of section 3(a) in their entirety and substituting the following:
(a) MP Premium. The MP Premium for the Policies for the Arrangement Month shall be the amount determined pursuant to Exhibit D hereto. The MP premium is due on the first day of the Arrangement Month to which it applies. As provided in section 1(v) of the Agreement, the MP Premium may include any adjustments authorized in Exhibit E of the MP Administrative Services Agreement in respect of previous Arrangement Months including any additions, terminations or changes in coverage not known at the beginning of the Arrangement Month to which such MP Premium applies.
5. Effective January 1, 2004, Exhibit A to the MP Financial Agreement is amended by deleting section 1 and substituting the following:
The Policies. The Employer has entered into a Minimum Premium Arrangement covering certain of the Company's insurance policies or HMOs. The Arrangement covers those Policies identified in section 1(s) of the Agreement. The Company has also issued Non-MP Policies to the Employer which policies are not subject to the Minimum Premium Arrangement; these policies are identified in Exhibit B.
6. Effective January 1, 2004, Exhibit A to the MP Financial Agreement is amended by adding a new Appendix II, and by deleting the first sentence in section 2.a and substituting the following:
A monthly composite rate for the Policies and the Non-MP Policies collectively ("Monthly Payable Rate") is established for each Arrangement Quarter as provided in this Exhibit A, and effective January 1, 2004, as further provided in Appendix II to this Exhibit.
7. Effective January 1, 2004, Exhibit A to the MP Financial Agreement is amended by adding the following provisions after the first paragraph of section 4.a:
In addition, effective January 1, 2004, in setting the Monthly Payable Rate, the Company shall take into account an Accumulated Deficit or Accumulated Surplus no earlier than the first Arrangement Quarter beginning 90 days after the
Quarterly Review. In the case of an Accumulated Deficit, the Company shall recover such Accumulated Deficit over no fewer than *** successive Arrangement Quarters beginning at least 90 days after the Quarterly Review; provided, however, that if the Accumulated Deficit as of the end of an Arrangement Quarter that is the subject of the Quarterly Review exceeds *** of the "Aggregate Premiums" for such Arrangement Quarter, the Company may recover such Accumulated Deficit over fewer than *** Arrangement Quarters. For this purpose, "Aggregate Premiums" for an Arrangement Quarter shall be the product of (A) the Monthly Payable Rate for such quarter, (B) the number of Employees covered under the Policies and Non-MP Policies as of the 15th of the last month of the preceding Arrangement Quarter, and (C) three (3).
8. Effective October 1, 2003, section 6.h of Exhibit A to the MP Financial Agreement is amended by deleting the second and third sentences thereof and substituting the following sentence:
The Expense Percentage for the Policies and the Non-MP Policies is set forth in Exhibit D to the Agreement.
9. Effective January 1, 2003, the MP Financial Agreement is amended by adding new Exhibit D, attached hereto.
MP Services Agreement
1. Effective January 1, 2004, the MP Services Agreement is amended by deleting section 6(b)(iii) and substituting the following:
except as provided in Exhibit F to the Agreement, each Employee is offered concurrently no more than *** option in addition to the Company's dental benefit plan (where offered);
2. Effective January 1, 2004, section 6 of the MP Services Agreement is amended to add the following sentence at the end of subsection (b).
For purposes of this section (6)(b), "the Plan" shall mean the plan of benefits provided by the Employer under both the Policies and the Non-MP Policies.
3. Effective January 1, 2004, the MP Services Agreement is amended by deleting section 8(b) and substituting the following:
In the event that a state or other jurisdiction, in accordance with existing or future law, imposes upon the Company the duty to act as agent for collection of any Tax imposed on the Plan or the Employer or with respect to any aspect of the Plan, a Policy, a Non-MP Policy, the MP Financial Agreement, or the Agreement, the Employer will pay over any such amount to the Company when requested to do so by the Company, subject to receipt by the Employer from the Company of
prompt notice concerning such matter and exercise by the Employer of its rights as stated under subsection 8(a) above.
4. Effective January 1, 2004, Exhibit F of the MP Services Agreement is amended to add the following to the end of section A:
For purposes of this Exhibit F, "Employees" shall include employees of the Employer covered under Non-MP Policies as well as the Policies.
5. Effective June 20, 2003, Exhibit F of the MP Services Agreement is amended by adding the following new section 8:
8. Process for Considering Alternative Vendors in Special Markets
a. Effective January 1, 2004, the special procedures for alternate vendors described in this section 8 shall apply to the following markets ("Special Markets"):
i. ***
ii. ***
iii. ***
iv. ***
v. ***
vi. ***
b. The Employer and the Company shall discuss in detail whether and upon what terms the offering of vendors other than the Company ("Alternate Vendors") in the Special Markets would be a viable alternative to the current approach in any or all of the Special Markets, including but not limited to, the following:
i. pricing, product and other competitive information;
ii. the specific advantages expected to be gained from offering an Alternate Vendor;
iii. the anticipated process and terms for introducing and offering an Alternate Vendor's product, including price, contribution, product and benefit plan design differences, and employee vs Client selection process; and
iv. whether some combination of different or additional Company offerings would best serve the Employer,
c. Following these discussions, the Employer may offer an Alternate Vendor in a Special Market without regard to notice and cure provisions of section 5 of this Exhibit F. Any vendor changes made by the Employer pursuant to this section shall be memorialized in an amendment to this Exhibit F. Taking into account the discussions with the Employer, the Company's existing offerings, and the size and product distribution of the existing membership in the Special Market, the Company shall elect one of the following:
i. Continue to offer to the Employer an *** and/or *** option at the Client level. (All co-employees of a Client would be offered ***.);
ii. Continue to offer to the Employer an *** and/or *** option at the employee level, where Clients may elect more ***.
iii. Discontinue offering any option to the Employer in the Special Market.
d. If the Employer offers one or more Alternate Vendors in a Special Market, this change in product offering may result in changes in the Monthly Payable Rate, Quoted Premiums or premiums of Non-MP Policies; provided however that any such rate or premium change for a Special Market would not be effective before the later of (i) the date the Alternate Vendor's coverage becomes effective and (ii) the first of the month following 30 days advance written notice of such rate or premium change by the Company to the Employer.
UNITED HEALTHCARE ADMINISTAFF OF INSURANCE COMPANY TEXAS, INC. By: /s/ Simeon Schindelman By: /s/ Richard Rawson ------------------------------ ----------------------------- Authorized Signature Authorized Signature Name: Simeon Schindelman Name: Richard Rawson Title: President, Small Business Title: President Date:11/9/04 Date: December 3, 2004 |
EXHIBIT A
APPENDIX II
METHODOLOGY FOR ESTABLISHING MONTHLY PAYABLE RATES
1. Paragraph 2 of Exhibit A of the MP Financial Agreement provides that the
Company will establish for each Arrangement Quarter the Monthly Payable
Rate, a monthly *** rate for the Policies and the Non-MP Policies
collectively (for purposes of this Appendix II, the "MPR"), which rate
will then be used to establish the monthly premiums for the Policies and
Non-MP Policies. Certain components of the Company's methodology for
determining the MPR for an Arrangement Quarter are reflected in a rate
calculation worksheet that is provided by the Company to the Employer when
the Company communicates the new MPR to the Employer pursuant to section
4.a of Exhibit A ("Rate Calculation Worksheet"),
2. Effective for the Arrangement Quarter beginning January 1, 2004, the methodology used by the Company for establishing the MPR shall include the following components:
a. In estimating future PEPM claims, the Company shall utilize (i) the claims paid in the *** months preceding the month in which the MPR is established, and (ii) the covered Employee headcount for the *** month period beginning two months before the *** month period used in item (i) (such two-month earlier period hereinafter referred to as the "Base Period"). For example, assuming the MPR for the second Arrangement Quarter of 2004 is established by the Company in December 2003, the Company would use the paid claims experience from *** through ***, and the covered Employee headcount for the period *** through ***.
b. Any adjustment to the MPR due to changes in health cost risk factors shall be actuarially justifiable (i.e., using credible database and tools agreed upon by Employer and Company). The Company's tabular data used to make the adjustments shall be documented and discussed in the
Rate Calculation Worksheet, and the Company shall not change such tabular data more frequently than annually.
c. The Company shall apply rate adjustments to reflect changes in the following health cost risk factors between the Base Period and the Arrangement Quarter for which the MPR is being developed. (Continuing the example from subparagraph (a), the base period is *** through *** and Arrangement Quarter for which the MPR is being developed is the second Arrangement Quarter of 2004.)
i. Age
ii. Gender distribution
iii. Family size distribution
iv. Geographic distribution
v. Enrollment distribution by plan type (HMO, PPO, etc)
vi. Plan design changes
d. In estimating future PEPM claims, the Company shall apply cost change trend factors for medical claims and prescription drug claims separately. In addition, the trend period will be the period between the mid-point of the Base Period and the mid-point of the Arrangement Quarter for which the MPR is being developed.
e. The Company shall establish trend factors based on a reasonable assessment of risk and cost changes in projecting future medical and prescription drug claims. The Company shall limit the change in trend factors used to project medical and prescription drug claims to an increase of *** above the trend factors used to establish the Monthly Payable Rate for the prior Arrangement Quarter. This change in trend factor limitation will not be applicable if:
(i) the Employer modifies its management practices such that, for the Arrangement Month in which the
trend factor is established, there has been (a) more than a *** increase in the number of Clients (as defined in the MP Services Agreement) with less than *** enrollees over the number of such Clients in the last month of the immediately preceding Arrangement Quarter, or (b) more than a *** increase in the number of COBRA enrollees over the number of COBRA enrollees covered in the last month of the immediately preceding Arrangement Quarter , or
(ii) for the Arrangement Month in which the trend factor is established, the age/gender factor has increased more than *** over the factor for the last month of the immediately preceding Arrangement Quarter.
In the event the threshold in any of the conditions listed in (i) or (ii) above is exceeded, the trend factors used to project medical and prescription drug claims may be increased up to *** above the trend factors used in the immediately preceding Rate Calculation Worksheet.
f. The Company shall reflect administration, profit/risk charge, and premium tax as separate items in the Rate Calculation Worksheet.
3. The Company may change the rate setting methodology described in this Appendix II upon 180 days notice to the Employer.
4. The Company shall report to the Employer in detail on the establishment of the MPR in the Rate Calculation Worksheet.
EXHIBIT B - NON-MP POLICIES
The insurance policies, HMO contracts and similar arrangements on the following list are considered "Non-MP Policies" for purposes of the Agreement. Such list shall be deemed modified by the Current Policy List provided by the Company as part of the Quarterly Review, unless the Employer objects within 30 calendar days of receipt.
UNET POLICY NUMBER MARKET EFFECTIVE DATE TERMINATION DATE -------------------------------------------------------------------------------------------------- Select HMO - Downstate New York 701648AA ACTIVE 01/01/02 701648AB COBRA 01/01/02 701648B ACTIVE w/o Dental 01/01/04 701648BQ COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Select HMO - New Jersey 701648AC ACTIVE 01/01/02 701648AD COBRA 01/01/02 701648BR ACTIVE w/o Dental 01/01/04 701648BS COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Select HMO - Illinois 701648AE ACTIVE 01/01/02 701648AF COBRA 01/01/02 701648BT ACTIVE w/o Dental 01/01/04 701648BU COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Select HMO - Texas 701648AG ACTIVE 01/01/02 12/31/03 701648AH COBRA 01/01/02 12/31/03 -------------------------------------------------------------------------------------------------- Select HMO - Upstate New York 701648BJ ACTIVE 01/01/02 701648BK COBRA 01/01/02 701648DS ACTIVE w/o Dental 01/01/04 701648DT COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Florida 701648AI ACTIVE 01/01/02 701648AJ COBRA 01/01/04 -------------------------------------------------------------------------------------------------- |
UNET POLICY NUMBER MARKET EFFECTIVE DATE TERMINATION DATE -------------------------------------------------------------------------------------------------- 701648BZ ACTIVE w/o Dental 01/01/04 701648C COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Arizona 701648AP ACTIVE 01/01/02 701648AT COBRA 01/01/02 701648CS ACTIVE w/o Dental 01/01/04 701648CT COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Ohio 701648AX ACTIVE 01/01/02 701648BA COBRA 01/01/02 701648CU ACTIVE w/o Dental 01/01/04 701648CV COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Georgia 701648BB ACTIVE 01/01/02 701648BC COBRA 01/01/02 701648CY ACTIVE w/o Dental 01/01/04 701648CZ COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Kentucky 701648BD ACTIVE 01/01/02 701648BE COBRA 01/01/02 701648D ACTIVE w/o Dental 01/01/04 701648DL COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Texas 701648BF ACTIVE 01/01/02 701648BG COBRA 01/01/02 701648DN ACTIVE w/o Dental 01/01/04 701648DP COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Utah 701648BL ACTIVE 01/01/02 701648BN COBRA 01/01/02 701648DU ACTIVE w/o Dental 01/01/04 701648DV COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Missouri -------------------------------------------------------------------------------------------------- |
UNET POLICY NUMBER MARKET EFFECTIVE DATE TERMINATION DATE -------------------------------------------------------------------------------------------------- 701648BP ACTIVE 01/01/02 701648BX COBRA 01/01/02 701648DX ACTIVE w/o Dental 01/01/04 701648DY COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Arkansas 701648CA ACTIVE 01/01/02 701648CB COBRA 01/01/02 HMO Choice - Arkansas 701648DZ ACTIVE w/o Dental 01/01/04 701648E COBRA w/o Dental 01/01/04 ------------------------------------------------------------- ------------------------------------ Choice HMO - Mississippi 701648CC ACTIVE 01/01/02 701648CD COBRA 01/01/02 701648EA ACTIVE w/o Dental 01/01/04 701648EB COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - District of Columbia 701648CG ACTIVE 01/01/02 701648CH COBRA 01/01/02 701648EE ACTIVE w/o Dental 01/01/04 701648EF COBRA w/o Dental 01/01/04 ---------------------------------------------------------------- --------------------------------- Choice HMO - Virginia 701648CI ACTIVE 01/01/02 701648CJ COBRA 01/01/02 701648EG ACTIVE w/o Dental 01/01/04 701648EH COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Tennessee 701648CE ACTIVE 01/01/02 701648CF COBRA 01/01/02 701648EC ACTIVE w/o Dental 01/01/04 701648ED COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Louisiana 701648BH ACTIVE 01/01/02 701648BI COBRA 01/01/02 -------------------------------------------------------------------------------------------------- |
-------------------------------------------------------------------------------------------------- UNET POLICY NUMBER MARKET EFFECTIVE DATE TERMINATION DATE -------------------------------------------------------------------------------------------------- 701648DQ ACTIVE w/o Dental 01/01/04 701648DR COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Colorado 701648AK ACTIVE 01/01/02 701648AN COBRA 01/01/02 701648CQ ACTIVE w/o Dental 01/01/04 701648CR ACTIVE w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Alabama 701648CN ACTIVE 01/01/02 701648CP COBRA 01/01/02 701648EK ACTIVE w/o Dental 01/01/04 701648EL COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Select EPO - Wisconsin 701648DI ACTIVE & COBRA 01/01/02 701648DI ACTIVE & COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Fairfax VA 701648CK ACTIVE 01/01/02 701648CL COBRA 01/01/02 701648EI ACTIVE w/o Dental 01/01/04 701648EJ COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Select EPO - South Carolina 701648DH ACTIVE & COBRA 01/01/02 701648DH ACTIVE & COBRA 01/01/04 w/o Dental -------------------------------------------------------------------------------------------------- Choice HMO - Iowa 701648AS ACTIVE 02/01/03 701648AU COBRA 02/01/03 701648EQ ACTIVE w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- |
UNET POLICY NUMBER MARKET EFFECTIVE DATE TERMINATION DATE -------------------------------------------------------------------------------------------------- 701648ER COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- Choice HMO - Rhode Island 701648AV ACTIVE 05/01/03 701648AY COBRA 05/01/03 701648ES ACTIVE w/o Dental 01/01/04 701648ET COBRA w/o Dental 01/01/04 -------------------------------------------------------------------------------------------------- 701648AZ Choice EPO - Indiana ACTIVE & COBRA 08/01/03 -------------------------------------------------------------------------------------------------- |
PRIME EFFECTIVE TERMINATION POLICY # POLICYHOLDER DATE DATE ---------- -------------- ----------- ----------- 247936 *** 1/1/2002 247974 *** 1/1/2002 5/28/2003 247977 *** 1/1/2002 3/1/2002 247989 *** 1/1/2002 5/27/2003 247996 *** 1/1/2002 9/1/2002 248003 *** 1/1/2002 3/1/2003 248006 *** 1/1/2002 1/22/2002 248026 *** 1/1/2002 248030 *** 1/1/2002 248035 *** 1/1/2002 1/1/2002 248041 *** 1/1/2002 2/1/2004 248056 *** 1/1/2002 1/11/2002 248063 *** 1/1/2002 1/1/2004 248110 *** 1/1/2002 248128 *** 1/1/2002 248131 *** 1/1/2002 10/1/2003 248133 *** 1/1/2002 248135 *** 1/1/2002 2/22/2002 248144 *** 1/1/2002 8/15/2003 248151 *** 1/1/2002 8/1/2002 |
PRIME EFFECTIVE TERMINATION POLICY # POLICYHOLDER DATE DATE -------- ------------ --------- ----------- 248163 *** 1/1/2002 1/1/2002 248165 *** 1/1/2002 7/1/2002 248180 *** 1/1/2002 6/1/2002 248197 *** 1/1/2002 11/1/2002 248208 *** 1/1/2002 6/16/2002 248241 *** 1/1/2002 248263 *** 1/1/2002 11/22/2002 248271 *** 1/1/2002 248291 *** 1/1/2002 3/4/2003 248306 *** 1/1/2002 5/1/2003 248314 *** 1/1/2002 9/4/2002 248324 *** 1/1/2002 248325 *** 1/1/2002 5/31/2002 248339 *** 1/1/2002 9/8/2003 248346 *** 1/1/2002 248352 *** 1/1/2002 3/30/2002 248370 *** 1/1/2002 6/1/2002 248371 *** 1/1/2002 4/28/2002 248372 *** 1/1/2002 248373 *** 1/1/2002 2/25/2002 248374 *** 1/1/2002 248375 *** 1/1/2002 248376 *** 1/1/2002 11/1/2002 248379 *** 1/1/2002 5/31/2002 248382 *** 1/1/2002 248384 *** 1/1/2002 248388 *** 1/1/2002 248390 *** 1/1/2002 6/26/2002 248396 *** 1/1/2002 4/15/2003 248399 *** 1/1/2002 248404 *** 1/1/2002 7/1/2002 248405 *** 1/1/2002 248407 *** 1/1/2002 12/2/2002 248408 *** 1/1/2002 248409 *** 1/1/2002 248410 *** 1/1/2002 7/1/2002 248411 *** 1/1/2002 248412 *** 1/1/2002 3/1/2002 248413 *** 1/1/2002 6/1/2003 248414 *** 1/1/2002 248415 *** 1/1/2002 248416 *** 1/1/2002 248417 *** 1/1/2002 6/12/2003 |
PRIME EFFECTIVE TERMINATION POLICY # POLICYHOLDER DATE DATE -------- ------------ --------- ----------- 248418 *** 1/1/2002 248421 *** 1/1/2002 6/1/2002 248429 *** 1/1/2002 248433 *** 1/1/2002 1/1/2002 248442 *** 1/1/2002 248457 *** 1/1/2002 1/1/2003 248463 *** 1/1/2002 10/26/2002 248466 *** 1/1/2002 248473 *** 1/1/2002 248474 *** 1/1/2002 6/15/2002 248478 *** 1/1/2002 8/8/2002 248480 *** 1/1/2002 248486 *** 1/1/2002 248494 *** 1/1/2002 4/1/2003 248495 *** 1/1/2002 7/1/2002 248497 *** 1/1/2002 248501 *** 1/1/2002 248516 *** 1/1/2002 1/1/2003 248519 *** 1/1/2002 248521 *** 1/1/2002 1/1/2003 248524 *** 1/1/2002 10/16/2002 248528 *** 1/1/2002 248532 *** 1/1/2002 2/1/2003 250136 *** 1/1/2002 7/1/2002 250197 *** 1/7/2002 7/1/2003 250201 *** 1/1/2002 250656 *** 1/1/2002 6/1/2003 250657 *** 1/1/2002 1/1/2003 250658 *** 2/1/2002 250659 *** 2/1/2002 2/1/2004 250660 *** 1/1/2002 250669 *** 2/15/2002 12/9/2002 252657 *** 3/1/2002 252926 *** 3/1/2002 6/1/2002 253683 *** 3/4/2002 3/18/2002 253774 *** 3/1/2002 2/19/2003 253775 *** 3/1/2002 253778 *** 2/27/2002 8/28/2002 254553 *** 4/1/2002 5/21/2002 254678 *** 4/1/2002 5/31/2002 254741 *** 4/1/2002 255675 *** 4/1/2002 10/9/2002 255701 *** 4/1/2002 |
PRIME EFFECTIVE TERMINATION POLICY # POLICYHOLDER DATE DATE -------- ------------ --------- ----------- 255709 *** 4/1/2002 4/1/2002 256410 *** 2/4/2002 2/4/2002 256498 *** 2/4/2002 8/12/2002 256505 *** 4/1/2002 1/2/2004 257668 *** 4/15/2002 5/2/2003 261873 *** 6/1/2002 262606 *** 7/1/2002 1/1/2003 262614 *** 6/1/2002 262616 *** 6/1/2002 262666 *** 6/1/2002 3/6/2003 263961 *** 6/7/2002 8/1/2002 264562 *** 7/1/2002 264565 *** 7/1/2002 266459 *** 7/28/2002 5/2/2004 266473 *** 7/28/2002 267825 *** 9/1/2002 3/3/2004 268747 *** 9/1/2002 1/15/2004 271606 *** 10/1/2002 1/1/2003 272924 *** 11/1/2002 5/1/2003 273651 *** 10/16/2002 274488 *** 11/20/2002 1/1/2003 277124 *** 1/1/2003 278257 *** 12/1/2002 279171 *** 1/1/2003 7/1/2003 279197 *** 1/6/2003 2/12/2004 279225 *** 12/15/2002 4/15/2003 281742 *** 1/1/2003 282005 *** 1/1/2003 12/1/2003 282007 *** 1/1/2003 282062 *** 1/6/2003 3/1/2004 286373 *** 2/1/2003 288802 *** 3/1/2003 3/2/2004 303058 *** 7/1/2003 303075 *** 5/1/2003 303083 *** 5/1/2003 310924 *** 5/22/2003 311776 *** 8/11/2003 314764 *** 7/1/2003 314770 *** 7/1/2003 315038 *** 7/1/2003 4/1/2004 326974 *** 9/1/2003 334639 *** 9/14/2003 338429 *** 10/1/2003 |
PRIME EFFECTIVE TERMINATION POLICY # POLICYHOLDER DATE DATE -------- ------------ --------- ----------- 345349 *** 9/1/2003 348740 *** 10/1/2003 3/1/2004 348746 *** 10/1/2003 3/1/2004 353316 *** 11/1/2003 369064 *** 1/1/2004 378384 *** 1/1/2004 1/1/2004 391528 *** 3/1/2004 395396 *** 3/1/2004 399283 *** 2/16/2004 400182 *** 2/16/2004 420189 *** 5/3/2004 421616 *** 6/1/2004 250579 *** 1/16/2002 5/1/2002 250671 *** 1/22/2002 3/4/2002 251016 *** 1/13/2002 256129 *** 3/1/2002 7/1/2002 256904 *** 1/1/2002 6/1/2002 256960 *** 3/20/2002 6/1/2002 257422 *** 3/26/2002 6/1/2002 257424 *** 4/9/2002 4/9/2002 259230 *** 4/2/2002 11/1/2002 259740 *** 4/14/2002 7/9/2002 260298 *** 4/2/2002 8/2/2002 260303 *** 4/16/2002 7/16/2002 263976 *** 4/3/2002 6/26/2002 265506 *** 6/20/2002 3/24/2003 265510 *** 6/1/2002 11/1/2002 265515 *** 6/1/2002 9/21/2002 265560 *** 6/1/2002 10/12/2002 268687 *** 7/1/2002 7/1/2002 268689 *** 8/8/2002 11/1/2002 268694 *** 7/24/2002 11/24/2002 269888 *** 8/1/2002 8/1/2002 269896 *** 8/1/2002 8/1/2002 269898 *** 8/1/2002 8/1/2002 269899 *** 7/18/2002 11/17/2002 274864 *** 10/15/2002 4/15/2003 274873 *** 10/16/2002 1/13/2003 274875 *** 10/16/2002 12/1/2002 274880 *** 10/16/2002 11/16/2002 274914 *** 10/16/2002 11/16/2002 275044 *** 9/12/2002 11/30/2002 280221 *** 12/1/2002 3/1/2003 |
PRIME EFFECTIVE TERMINATION POLICY # POLICYHOLDER DATE DATE -------- ------------ --------- ----------- 280224 *** 11/1/2002 2/1/2003 280225 *** 1/1/2003 7/1/2003 280327 *** 12/4/2002 6/4/2004 281701 *** 1/1/2003 10/3/2003 282549 *** 12/10/2002 2/10/2004 283649 *** 11/20/2002 2/20/2004 286556 *** 12/27/2002 9/1/2003 288804 *** 1/21/2003 6/4/2004 293814 *** 2/1/2003 5/27/2003 293891 *** 2/27/2003 12/1/2003 310933 *** 5/1/2003 11/1/2003 315060 *** 6/12/2003 7/1/2003 315099 *** 6/12/2003 10/1/2003 315132 *** 6/2/2003 10/1/2003 343286 *** 8/21/2003 12/17/2003 355898 *** 9/15/2003 360528 *** 9/1/2003 2/1/2004 373490 *** 11/11/2003 375159 *** 12/3/2003 386745 *** 2/1/2004 388711 *** 11/26/2003 1/1/2004 390767 *** 2/1/2004 390903 *** 2/6/2004 390937 *** 1/7/2004 397824 *** 3/3/2004 397852 *** 3/3/2004 397859 *** 3/3/2004 397876 *** 3/3/2004 397881 *** 3/3/2004 5/4/2004 398067 *** 3/3/2004 398089 *** 3/15/2004 398122 *** 3/3/2004 398159 *** 3/3/2004 406144 *** 2/19/2004 421429 *** 4/16/2004 421796 *** 5/6/2004 |
EXHIBIT D - POLICIES, RATES AND FACTORS
I. The definition of "Policy" for purposes of section 1(s) shall be as follows:
- Effective January 1, 2002:
(i) Policy No. 701648 (Medical DA, DB, DC, DD, CX, DK)("Medical Policy")
(ii) Policy No. 701648 (Dental DA)("Dental Policy")
- Effective April 1, 2002:
(i) Policy No. 701648 (Medical DA, DB, DC, DD, CX, DK)("Medical Policy")
(iii) Policy No. 701648 (Dental DA)("Dental Policy")
- Effective January 1, 2003:
(i) Policy No. 701648 (Medical DA, DC, DD, CX, DK, AQ, AR)("Medical Policy")
(ii) Policy No. 701648 (Dental DA)("Dental Policy")
- Effective January 1, 2004:
(i) Policy No. 701648 (Medical DA, DC, DD, CX, DK, AQ, AR)("Medical Policy")
II. The "Maximum Monthly Employer Benefit Obligation" shall be the sum of the following:
- Effective January 1, 2003:
- *** of the Quoted Premium for each Medical Policy
- *** of the Quoted Premium for each Dental Policy
- Effective October 1, 2003:
- *** of the Quoted Premium for each Medical Policy
- *** of the Quoted Premium for each Dental Policy
- Effective January 1, 2004:
- *** of the Quoted Premium for each Medical Policy
- Not applicable for any dental policy issued by the Company to the Employer
III. The "MP Premium" shall be the sum of the following:
- Effective January 1, 2003:
- *** of the Quoted Premium for each Medical Policy
- *** of the Quoted Premium for each Dental Policy
- Effective October 1, 2003:
- *** of the Quoted Premium for each Medical Policy
- *** of the Quoted Premium for each Dental Policy
- Effective January 1, 2004:
- *** of the Quoted Premium for each Medical Policy
- Not applicable for any dental policy issued by the Company to the Employer
IV. Effective October 1, 2003, the "Expense Percentage" shall be *** for the Dental Policies, the Medical Policies and the Non-MP Policies providing
medical or dental benefits.
EXHIBIT 10.27
SECOND AMENDMENT TO LEASE
This Second Amendment to Lease ("Second Amendment") is entered into by and between Midway Interwood Partners, L.P., a Texas limited partnership ("Landlord") and Administaff Services, L.P., a Delaware limited partnership ("Tenant"), as of the date hereinafter set forth.
WITNESSETH:
WHEREAS, Landlord and Tenant entered into that certain Lease Agreement executed as of January 20, 2000 (as amended, modified, restated or supplemented, the "Lease") concerning space leased in the building commonly known as The Offices at Interwood (the "Building"), and the land upon which the Building is located, all as more particularly described therein.
WHEREAS, unless otherwise defined herein, all capitalized terms used in this Second Amendment shall have the meaning thereto as defined in the Lease; and
WHEREAS, the parties hereto desire to amend the Lease to, among other things, extend the term of the lease and modify the rent schedule.
NOW, THEREFORE, for and in consideration of the premises, Ten Dollars ($10.00) in hand paid, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree to amend the Lease as follows:
1. Section 1.1(a) of the Lease is hereby deleted in its entirety and the following is substituted in place thereof:
"(a) Premises: (i) 40,000 net rentable square feet (37,301 net usable square feet multiplied times a 1.07236 add-on factor), located on the first floor of the Building as identified in Exhibit "A" (the "FIRST FLOOR PREMISES" which is inclusive of 5,362 net rentable square feet (5,000 net usable square feet multiplied times a 1.07236 add-on factor, that was previously referred to as the Daycare Premises); and (ii) 11,978 net rentable square feet (10,685 net usable square feet multiplied times a 1.1210 add-on factor), located on the second floor of the Building as identified in Exhibit "A" (the "SECOND FLOOR PREMISES"). |
2. Section 1.1(f) of the Lease is hereby deleted in its entirety and the following is substituted in place thereof:
"(f) Term: Commencing on the September 25, 2000 and expiring on September 30, 2014."
3. Section 1.1(i) of the Lease is hereby deleted in its entirety and the following is substituted in place thereof:
"(i) Tenant's Share: The ratio that the total net rentable area of the Premises bears to the total net rentable area of the Building."
4. Section 1.1(l) of the Lease is amended by adding the following provision as follows:
"The base rent up through and including September 30, 2004 shall be the Base Rent as provided for in the lease. Base rent per net rentable square foot for the remaining term of the Lease shall be as follows:
1) Base rent per square foot per annum of net rentable area of the First Floor Premises shall be as follows:
October 1, 2004 - September 30, 2009: $19.12 October 1, 2009 - September 30, 2014: $20.59
2) Base rent per square foot per annum of net rentable area of the Second Floor Premises shall be as follows:
October 1, 2004 - September 30, 2009: $20.62 October 1, 2009 - September 30, 2014: $22.09"
5. Section 1.1(n) of the Lease is hereby deleted in its entirety and the following is substituted in place thereof:
"(n) Expense Stop: $5.00 per net rentable square foot of the First Floor Premises. $6.50 per net rentable square foot of the Second Floor Premises." |
6. Section 1.1 of the Lease is hereby amended by adding the following provision as follows:
"(t) Additional
Improvement Allowance: Landlord shall make available to Tenant with an additional allowance of Twenty-Thousand Dollars ($20,000.00) to be used by Tenant for improvements to the Premises, in accordance with Article 9 of the Lease, prior to the expiration of the Lease Term. Upon Tenant's election to use any portion of such allowance, Tenant shall provide to Landlord |
documentation regarding the improvements made to the Premises, stating the itemized costs of such improvements. Landlord shall have a period of thirty (30) days from its receipt of Tenant's documentation to reimburse Tenant. Any unused portion of the Additional Improvement Allowance remaining at the end of the Lease Term shall be the property of the Landlord." |
7. Section 5.1, paragraph 1 is hereby deleted in its entirety and the following is substituted in place thereof:
"Section 5.1 Tenant shall pay to Landlord, on a per square foot basis, as Additional Rent, for each calendar year or fractional calendar year during the Term, the amount ("Tenant's Operating Costs Payment"), if any, that Tenant's Share of Operating Costs exceeds the Expense Stop. Tenant's Operating Costs Payment shall be calculated and paid as follows:"
8. Section 5.2(a)(iii)(2) is hereby deleted in its entirety.
9. Paragraph 5 of Exhibit "B" to the Lease which was added by the First Amendment to the Lease is hereby deleted in its entirety.
10. Exhibit "A-1" to the Lease which was added by the First Amendment to the Lease is hereby deleted in its entirety.
11. Exhibit "A-2" to the Lease which was added by the First Amendment to the Lease is hereby deleted in its entirety.
12. Landlord hereby acknowledges that Tenant has removed its outdoor playground equipment from the Outdoor Premises. Landlord hereby releases Tenant from any further obligation to repair the area of the Outdoor Premises where Tenant's outdoor playground equipment was removed.
13. Preservation of the Lease. Except as specifically modified by the terms of this Second Amendment, all of the terms, provisions, covenants, warranties, and agreements contained in the Lease shall remain in full force and effect (any irreconcilable conflicts or inconsistencies between the terms of this Second Amendment and the Lease shall by governed and controlled by this Second Amendment).
14. Counterparts. This Second Amendment may be executed in two or more counterparts, and it shall not be necessary that any one of the counterparts be executed by all of the parties hereto. Each fully or partially executed counterpart shall be deemed an original, but all such counterparts taken together shall constitute but one and the same instrument.
15. Parties in Interest. The terms and provisions of this Second Amendment shall be binding upon and shall inure to the benefit of the personal representatives, successors and permitted assigns of the parties.
16. Entire Agreement. This Second Amendment contains the entire understanding between the parties and any prior understanding and agreements between them respecting the within subject matter.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK EXECUTION PAGE TO FOLLOW]
IN WITNESS WHEREOF, Landlord and Tenant have set their hands and seals hereunto and have caused this Second Amendment to be executed by duly authorized officers thereof, as of September 30, 2004.
LANDLORD:
MIDWAY INTERWOOD PARTNERS, L.P.
a Texas limited partnership
By: MIDWAY INTERWOOD, INC.
a Texas corporation, its General Partner
By:/s/ E.R. Sanford ------------------------------ Name: E.R. Sanford II Title: Executive Vice President TENANT: APPROVED ADMINISTAFF SERVICES, L.P. LEGAL______________ /s/ [ILLEGIBLE] By: Administaff of Texas, Inc. ------------------- its General Partner 10/20/2004 By:/s/ Douglas S. Sharp ------------------------------- Douglas S. Sharp Vice President, Finance, Chief Financial Officer & Treasurer |
Contract No. 2890
EXHIBIT 21.1
SUBSIDIARIES OF ADMINISTAFF, INC.
- Administaff of Texas, Inc., a Delaware corporation and wholly owned subsidiary of Administaff, Inc.
- Administaff Enterprises, Inc., a Texas corporation and wholly owned subsidiary of Administaff of Texas, Inc.
- Administaff Financial Management Services, 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 Captive Insurance Companies Limited, a Bermuda corporation and wholly owned subsidiary of Administaff Partnerships Holding, Inc.
- Administaff Retirement 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.
- 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.
- Administaff Partnerships Holding II, Inc., a Delaware corporation and wholly owned subsidiary of Administaff Services, L.P.
- Administaff GP, Inc., a Delaware corporation and wholly owned subsidiary of Administaff Services, L.P.
- Administaff Client Services, L.P., a Delaware limited partnership, with Administaff GP, Inc. being a 1% general partner and Administaff Partnerships Holding II, Inc. being a 99% limited partner.
- Administaff Companies, Inc., a Delaware corporation and wholly owned subsidiary of Administaff of Texas, Inc.
- Administaff Partnerships Holding III, Inc., a Delaware corporation and wholly owned subsidiary of Administaff Companies, Inc.
- Administaff Companies II, L.P., a Delaware limited partnership, with Administaff Companies, Inc. being a 1% general partner and Administaff Partnerships Holding III, Inc. being a 99% limited partner.
- Administaff Insurance Services, L.L.C., a Delaware limited liability
corporation and wholly owned subsidiary of Administaff Companies II, L.P.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Forms S-8) pertaining to the Administaff, Inc. 2001 Incentive Plan (333-66344), Administaff, Inc. Non-Qualified Stock Option Plan (333-85151; 333-66342), Administaff, Inc. 1997 Employee Stock Purchase Plan (333-36363) and the Administaff, Inc. 1997 Incentive Plan (333-34041; 333-85151) of our reports dated February 17, 2005, with respect to the consolidated financial statements of Administaff, Inc., Administaff Inc. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Administaff Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2004.
ERNST & YOUNG LLP
Houston, Texas
February 21, 2005
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, in his capacity as a director of Administaff, Inc., a Delaware corporation (the "Company") appoints PAUL J. SARVADI, DOUGLAS S. SHARP and JOHN H. SPURGIN, II and each of them, severally, as his true and lawful attorney or attorneys-in-fact and agent or agents, each of whom shall be authorized to act with or without the other, with full power of substitution and resubstitution, to execute, in his capacity as a director of the Company, and to file or cause to be filed, with the Securities and Exchange Commission, the Company's Annual Report on Form 10-K for the year ended December 31, 2004 and any and all amendments thereto as said attorneys or any of them shall deem necessary or incidental in connection therewith, and all materials required by the Securities Exchange Act of 1934, as amended, with full power and authority to each of said attorneys-in-fact and agents to do and perform in the name and on behalf of the undersigned, each and every act and thing whatsoever that is necessary, appropriate or advisable in connection with any or all the above-described matters and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and a gents or any of them or their substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ Michael W. Brown ---------------------------- 2-7-05 Michael W. Brown ------ Date |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, in his capacity as a director of Administaff, Inc., a Delaware corporation (the "Company") appoints PAUL J. SARVADI, DOUGLAS S. SHARP and JOHN H. SPURGIN, II and each of them, severally, as his true and lawful attorney or attorneys-in-fact and agent or agents, each of whom shall be authorized to act with or without the other, with full power of substitution and resubstitution, to execute, in his capacity as a director of the Company, and to file or cause to be filed, with the Securities and Exchange Commission, the Company's Annual Report on Form 10-K for the year ended December 31, 2004 and any and all amendments thereto as said attorneys or any of them shall deem necessary or incidental in connection therewith, and all materials required by the Securities Exchange Act of 1934, as amended, with full power and authority to each of said attorneys-in-fact and agents to do and perform in the name and on behalf of the undersigned, each and every act and thing whatsoever that is necessary, appropriate or advisable in connection with any or all the above-described matters and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and a gents or any of them or their substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ Eli Jones --------------------- 2/1/05 Eli Jones ------ Date |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, in his capacity as a director of Administaff, Inc., a Delaware corporation (the "Company") appoints PAUL J. SARVADI, DOUGLAS S. SHARP and JOHN H. SPURGIN, II and each of them, severally, as his true and lawful attorney or attorneys-in-fact and agent or agents, each of whom shall be authorized to act with or without the other, with full power of substitution and resubstitution, to execute, in his capacity as a director of the Company, and to file or cause to be filed, with the Securities and Exchange Commission, the Company's Annual Report on Form 10-K for the year ended December 31, 2004 and any and all amendments thereto as said attorneys or any of them shall deem necessary or incidental in connection therewith, and all materials required by the Securities Exchange Act of 1934, as amended, with full power and authority to each of said attorneys-in-fact and agents to do and perform in the name and on behalf of the undersigned, each and every act and thing whatsoever that is necessary, appropriate or advisable in connection with any or all the above-described matters and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and a gents or any of them or their substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ Austin P. Young --------------------- 2/1/05 Austin P. Young ------ Date |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, in his capacity as a director of Administaff, Inc., a Delaware corporation (the "Company") appoints PAUL J. SARVADI, DOUGLAS S. SHARP and JOHN H. SPURGIN, II and each of them, severally, as his true and lawful attorney or attorneys-in-fact and agent or agents, each of whom shall be authorized to act with or without the other, with full power of substitution and resubstitution, to execute, in his capacity as a director of the Company, and to file or cause to be filed, with the Securities and Exchange Commission, the Company's Annual Report on Form 10-K for the year ended December 31, 2004 and any and all amendments thereto as said attorneys or any of them shall deem necessary or incidental in connection therewith, and all materials required by the Securities Exchange Act of 1934, as amended, with full power and authority to each of said attorneys-in-fact and agents to do and perform in the name and on behalf of the undersigned, each and every act and thing whatsoever that is necessary, appropriate or advisable in connection with any or all the above-described matters and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and a gents or any of them or their substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ Paul S. Lattanzio ---------------------------- 2/1/05 Paul S. Lattanzio ------ Date |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, in his capacity as a director of Administaff, Inc., a Delaware corporation (the "Company") appoints PAUL J. SARVADI, DOUGLAS S. SHARP and JOHN H. SPURGIN, II and each of them, severally, as his true and lawful attorney or attorneys-in-fact and agent or agents, each of whom shall be authorized to act with or without the other, with full power of substitution and resubstitution, to execute, in his capacity as a director of the Company, and to file or cause to be filed, with the Securities and Exchange Commission, the Company's Annual Report on Form 10-K for the year ended December 31, 2004 and any and all amendments thereto as said attorneys or any of them shall deem necessary or incidental in connection therewith, and all materials required by the Securities Exchange Act of 1934, as amended, with full power and authority to each of said attorneys-in-fact and agents to do and perform in the name and on behalf of the undersigned, each and every act and thing whatsoever that is necessary, appropriate or advisable in connection with any or all the above-described matters and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and a gents or any of them or their substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ Jack M. Fields ---------------------------- 2/1/05 Jack M. Fields, Jr. ------ Date |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, in his capacity as a director of Administaff, Inc., a Delaware corporation (the "Company") appoints PAUL J. SARVADI, DOUGLAS S. SHARP and JOHN H. SPURGIN, II and each of them, severally, as his true and lawful attorney or attorneys-in-fact and agent or agents, each of whom shall be authorized to act with or without the other, with full power of substitution and resubstitution, to execute, in his capacity as a director of the Company, and to file or cause to be filed, with the Securities and Exchange Commission, the Company's Annual Report on Form 10-K for the year ended December 31, 2004 and any and all amendments thereto as said attorneys or any of them shall deem necessary or incidental in connection therewith, and all materials required by the Securities Exchange Act of 1934, as amended, with full power and authority to each of said attorneys-in-fact and agents to do and perform in the name and on behalf of the undersigned, each and every act and thing whatsoever that is necessary, appropriate or advisable in connection with any or all the above-described matters and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and a gents or any of them or their substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ Gregory E. Petsch -------------------------- 2-1-2005 Gregory E. Petsch -------- Date |
EXHIBIT 31.1
CERTIFICATION
I, Paul J. Sarvadi, certify that:
1. I have reviewed this annual report on Form 10-K of Administaff, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 22, 2005 /s/ Paul J. Sarvadi -------------------------------------------------- Paul J. Sarvadi Chairman of the Board and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, Douglas S. Sharp, certify that:
1. I have reviewed this annual report on Form 10-K of Administaff, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 22, 2005 /s/ Douglas S. Sharp -------------------------------------- Douglas S. Sharp Vice President of Finance, Chief Financial Officer and Treasurer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Administaff, Inc. (the "Company") on Form 10-K for the period ending December 31, 2004 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, I, Paul J. Sarvadi, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Paul J. Sarvadi ------------------------------------------------- Paul J. Sarvadi Chairman of the Board and Chief Executive Officer Date: February 22, 2005 |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Administaff, Inc. (the "Company")
on Form 10-K for the period ending December 31, 2004 (the "Report"), as filed
with the Securities and Exchange Commission on the date hereof, I, Douglas S.
Sharp, Vice President of Finance, Chief Financial Officer and Treasurer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge,
that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Douglas S. Sharp ---------------------------------------------------------------- Douglas S. Sharp Vice President of Finance, Chief Financial Officer and Treasurer Date: February 22, 2005 |